Warren Buffett's Letter to Shareholders 2009

Sunday, February 28th, 2010

War­ren Buf­fett shares his let­ter to share­hold­ers just ahead of this year's Annual Gen­eral Meet­ing of Berk­shire Hathaway.

Berk­shire Hath­away Annual Report — via BRK
War­ren Buffett's Let­ters to Share­hold­ers — via BRK

Here are some of this year's nuggets. Buf­fett dis­cusses how he and Char­lie Munger, apply Charlie's think­ing to investing.

• Char­lie and I avoid busi­nesses whose futures we can't eval­u­ate, no mat­ter how excit­ing their prod­ucts may be. In the past, it required no bril­liance for peo­ple to fore­see the fab­u­lous growth that awaited such indus­tries as autos (in 1910), air­craft (in 1930) and tele­vi­sion sets (in 1950). But the future then also included com­pet­i­tive dynam­ics that would dec­i­mate almost all of the com­pa­nies enter­ing those indus­tries. Even the sur­vivors tended to come away bleeding.

• Just because Char­lie and I can clearly see dra­matic growth ahead for an indus­try does not mean we can judge what its profit mar­gins and returns on cap­i­tal will be as a host of com­peti­tors bat­tle for supremacy. At Berk­shire we will stick with busi­nesses whose profit pic­ture for decades to come seems rea­son­ably pre­dictable. Even then, we will make plenty of mistakes.

• We will never become depen­dent on the kind­ness of strangers. Too-big-to-fail is not a fall­back posi­tion at Berk­shire. Instead, we will always arrange our affairs so that any require­ments for cash we may con­ceiv­ably have will be dwarfed by our own liq­uid­ity. More­over, that liq­uid­ity will be con­stantly refreshed by a gusher of earn­ings from our many and diverse businesses.

• When the finan­cial sys­tem went into car­diac arrest in Sep­tem­ber 2008, Berk­shire was a sup­plier of liq­uid­ity and cap­i­tal to the sys­tem, not a sup­pli­cant. At the very peak of the cri­sis, we poured $15.5 bil­lion into a busi­ness world that could oth­er­wise look only to the fed­eral gov­ern­ment for help. Of that, $9 bil­lion went to bol­ster cap­i­tal at three highly-regarded and previously-secure Amer­i­can busi­nesses that needed — with­out delay - our tan­gi­ble vote of con­fi­dence. The remain­ing $6.5 bil­lion sat­is­fied our com­mit­ment to help fund the pur­chase of Wrigley, a deal that was com­pleted with­out pause while, else­where, panic reigned.

• We pay a steep price to main­tain our pre­mier finan­cial strength. The $20 billion-plus of cash– equiv­a­lent assets that we cus­tom­ar­ily hold is earn­ing a pit­tance at present. But we sleep well.

• We tend to let our many sub­sidiaries oper­ate on their own, with­out our super­vis­ing and mon­i­tor­ing them to any degree. That means we are some­times late in spot­ting man­age­ment prob­lems and that both oper­at­ing and cap­i­tal deci­sions are occa­sion­ally made with which Char­lie and I would have dis­agreed had we been con­sulted. Most of our man­agers, how­ever, use the inde­pen­dence we grant them mag­nif­i­cently, reward­ing our con­fi­dence by main­tain­ing an owner– ori­ented atti­tude that is invalu­able and too sel­dom found in huge orga­ni­za­tions. We would rather suf­fer the vis­i­ble costs of a few bad deci­sions than incur the many invis­i­ble costs that come from deci­sions made too slowly — or not at all — because of a sti­fling bureaucracy.

• With our acqui­si­tion of BNSF, we now have about 257,000 employ­ees and lit­er­ally hun­dreds of dif­fer­ent oper­at­ing units. We hope to have many more of each. But we will never allow Berk­shire to become some mono­lith that is over­run with com­mit­tees, bud­get pre­sen­ta­tions and mul­ti­ple lay­ers of man­age­ment. Instead, we plan to oper­ate as a col­lec­tion of separately-managed medium– sized and large busi­nesses, most of whose decision-making occurs at the oper­at­ing level. Char­lie and I will limit our­selves to allo­cat­ing cap­i­tal, con­trol­ling enter­prise risk, choos­ing man­agers and set­ting their compensation.

• We make no attempt to woo Wall Street. Investors who buy and sell based upon media or ana­lyst com­men­tary are not for us. Instead we want part­ners who join us at Berk­shire because they wish to make a long-term invest­ment in a busi­ness they them­selves under­stand and because it's one that fol­lows poli­cies with which they con­cur. If Char­lie and I were to go into a small ven­ture with a few part­ners, we would seek indi­vid­u­als in sync with us, know­ing that com­mon goals and a shared des­tiny make for a happy busi­ness "mar­riage" between own­ers and man­agers. Scal­ing up to giant size doesn't change that truth.

• To build a com­pat­i­ble share­holder pop­u­la­tion, we try to com­mu­ni­cate with our own­ers directly and infor­ma­tively. Our goal is to tell you what we would like to know if our posi­tions were reversed. Addi­tion­ally, we try to post our quar­terly and annual finan­cial infor­ma­tion on the Inter­net early on week­ends, thereby giv­ing you and other investors plenty of time dur­ing a non-trading period to digest just what has hap­pened at our multi-faceted enter­prise. (Occa­sion­ally, SEC dead­lines force a non-Friday dis­clo­sure.) These mat­ters sim­ply can't be ade­quately sum­ma­rized in a few para­graphs, nor do they lend them­selves to the kind of catchy head­line that jour­nal­ists some­times seek.

• Last year we saw, in one instance, how sound-bite report­ing can go wrong. Among the 12,830 words in the annual let­ter was this sen­tence: "We are cer­tain, for exam­ple, that the econ­omy will be in sham­bles through­out 2009 — and prob­a­bly well beyond — but that con­clu­sion does not tell us whether the mar­ket will rise or fall." Many news orga­ni­za­tions reported — indeed, blared — the first part of the sen­tence while mak­ing no men­tion what­so­ever of its end­ing. I regard this as ter­ri­ble jour­nal­ism: Mis­in­formed read­ers or view­ers may well have thought that Char­lie and I were fore­cast­ing bad things for the stock mar­ket, though we had not only in that sen­tence, but also else­where, made it clear we weren't pre­dict­ing the mar­ket at all. Any investors who were mis­led by the sen­sa­tion­al­ists paid a big price: The Dow closed the day of the let­ter at 7,063 and fin­ished the year at 10,428.

• Given a few expe­ri­ences we've had like that, you can under­stand why I pre­fer that our com­mu­ni­ca­tions with you remain as direct and unabridged as possible.

The com­plete let­ter is avail­able here.

Tags: American Businesses, Annual General Meeting, Berkshire Hathaway, Brilliance, Brk, Business World, Cardiac Arrest, Charlie Munger, Competitive Dynamics, Competitors Battle, Dramatic Growth, Fallback Position, Gusher, Img Src, Kindness Of Strangers, Letter To Shareholders, liquidity, Nuggets, Openx, Profit Margins, Random Number, Supplicant, Television Sets, Warren Buffett
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David Fuller (Fullermoney): Concentrate Long-term Investments in Low-Risk Countries

Sunday, February 28th, 2010

“There has been a great deal of dis­cus­sion in the finan­cial press about whether Greece will suc­cess­fully nav­i­gate the cri­sis it now finds itself in, if the Euro­zone will sur­vive a sov­er­eign debt default should one occur and if there is a risk of con­ta­gion for coun­tries such as the UK, Japan and the US. These are all impor­tant ques­tions which we will have defin­i­tive answers for in the com­ing months and years but to my mind there is a more impor­tant ques­tion that needs to be addressed first.

“All the issues fac­ing these gov­ern­ments are in essence related to a prob­lem with too much debt and lever­age and not enough tax receipts to pay it down. The ques­tions so far have focused on how one coun­try or another might sur­vive this cri­sis but from the per­spec­tive of a judge at an inter­na­tional beauty con­test do we want to invest in these coun­tries at all since there are plenty more where these prob­lems are rel­a­tively minor if they exist at all?

“Com­mod­ity pro­duc­ers such as Aus­tralia and Canada have come through this cri­sis com­par­a­tively unharmed. Most of the oth­ers are pri­mar­ily in the so-called emerg­ing mar­kets. Brazil is now a net cred­i­tor, China has the biggest for­eign cur­rency reserves in the world. Large num­bers of coun­tries in Latin Amer­ica and Asia run trade sur­pluses. If we look at the world with a broader per­spec­tive we see clearly where risk and lever­age are concentrated.

“The out­come of the major chal­lenges fac­ing the US, UK, Euro­zone and Japan are cru­cial because of the effect they have on the global mar­ket. How­ever, we do not have to invest in the debt, cur­ren­cies or equi­ties of these coun­tries. Oth­ers are bet­ter equipped to deal with these issues from a posi­tion of strength. They have shown to be cred­i­ble man­agers of their economies in a truly test­ing era and it is surely in these coun­tries one should con­cen­trate long-term investments.”

Source: David Fuller, Fuller­money, Feb­ru­ary 24, 2010.

Tags: Brazil, Canadian Market, Commodity Producers, Contagion, Countries In Latin America, Creditor, Currency Reserves, David Fuller, Debt Default, Definitive Answers, Emerging Markets, Eurozone, Foreign Currency, Fullermoney, Global Market, International Beauty Contest, Large Numbers, Leverage, Sovereign Debt, Tax Receipts, Term Investments, Trade Surpluses
Posted in Brazil, Canadian Market, Markets | Comments Off

Index Summary and U.S. Equity Highlights

Sunday, February 28th, 2010

Index Sum­mary

• The major mar­ket indices were mixed this week. The Dow Jones Indus­trial Index fell 0.74 per­cent. The S&P 500 Stock Index declined 0.42 per­cent, while the Nas­daq Com­pos­ite fin­ished 0.25 per­cent lower.
• Barra Growth under­per­formed Barra Value as Barra Value fin­ished 0.08 per­cent lower while Barra Growth fell 0.76 per­cent. The Rus­sell 2000 closed the week with a loss of 0.48 percent.
• The Hang Seng Com­pos­ite fin­ished higher by 3.36 per­cent; Tai­wan was down 0.08 per­cent and the Kospi advanced 0.04 percent.
• The 10-year Trea­sury bond yield closed at 3.62 per­cent, down 16 basis points for the week.

Domes­tic Equity Market

The fig­ure shows the per­for­mance of each sec­tor in the S&P 500 Index for the week. The best-performing sec­tor was finan­cials, up 1.5 per­cent. Other top-performing sec­tors included con­sumer dis­cre­tion and indus­tri­als. Mate­ri­als, util­i­ties and energy underperformed.

Key­Corp was the best-performing stock within the finan­cials sec­tor, up 5 per­cent. The other top-five per­form­ers were Bank of Amer­ica, JP Mor­gan Chase, BB&T and PNC Finan­cial Ser­vices Group.

Strengths

• The retail apparel group was the best-performing group for the week, up 5 per­cent. The two largest mem­bers of the group, TJX Com­pa­nies and The Gap, both reported quar­terly earn­ings in excess of the ana­lyst con­sen­sus esti­mate. They also both issued pos­i­tive guid­ance for their respec­tive fis­cal years.
• The man­aged health­care group out­per­formed, ris­ing 5 per­cent. Late Fri­day of the last week, the fed­eral agency that admin­is­ters government-run med­ical insur­ance pro­grams announced an almost 4 per­cent increase for the base­line pay­ment rate of Medicare Advan­tage plans for next year.
• The diver­si­fied sup­ply ser­vices group was among the out­per­form­ers, gain­ing 5 per­cent. The group was led by Iron Moun­tain. The records man­age­ment com­pany reported earn­ings above the con­sen­sus esti­mate and raised its rev­enue guid­ance for 2010. The com­pany also announced a $150 mil­lion stock buy­back pro­gram and ini­ti­ated a cash dividend.

Weak­nesses

• The spe­cial con­sumer ser­vices group was the worst per­former led down 18 per­cent by its only mem­ber, H&R Block Inc. The tax pre­parer said 2010 results will be lower than expected. It believes indus­try tax return fil­ings are down due to the reces­sion and sus­tained, high lev­els of unem­ploy­ment, with more peo­ple turn­ing to do-it-yourself ser­vices due to the weak economy.
• The fer­til­izer & agri­cul­tural chem­i­cals group was the second-worst per­former, falling 8 per­cent. Mon­santo, the group’s largest mem­ber, reaf­firmed its earn­ings guid­ance for 2010 at an indus­try con­fer­ence this week but infor­ma­tion in the pre­sen­ta­tion caused some bro­ker­age ana­lysts to lower earn­ings estimates.
• The home­build­ing group was among the under­per­form­ers, drop­ping 5 per­cent. On Wednes­day the Com­merce Depart­ment reported that new home sales fell 1.2 per­cent in Jan­u­ary from Decem­ber to a sea­son­ally adjusted annual sales pace of 309,000, below the con­sen­sus esti­mate. The results were prob­a­bly affected by poor win­ter weather in January.

Oppor­tu­ni­ties

• There may be an oppor­tu­nity for gain in M&A (merger & acqui­si­tion) trans­ac­tions in 2010. Cor­po­rate liq­uid­ity is high with over 10 per­cent of cor­po­rate assets in cash and short-term invest­ments, a record high for at least the last forty years, thereby pro­vid­ing the means to pur­sue acquisitions.

Threats

• Should investors’ expec­ta­tions for an improv­ing econ­omy not come to fruition on a rea­son­able time frame, it could be a threat to stock prices.
• As gov­ern­ments around the world begin to wind down the mon­e­tary and fis­cal stim­u­lus pro­grams put in place dur­ing the eco­nomic cri­sis, it will likely present a head­wind for stocks.

Tags: 10 Year Treasury, 10 Year Treasury Bond, Analyst Consensus, Consensus Estimate, Dow Jones Industrial, Dow Jones Industrial Index, Financial Services Group, Index Summary, Jp Morgan, Jp Morgan Chase, Major Market Indices, Medical Insurance Programs, Nasdaq Composite, Performing Group, Pnc Financial Services, Pnc Financial Services Group, Quarterly Earnings, Revenue Guidance, Tjx Companies, Treasury Bond Yield
Posted in Markets, US Stocks | Comments Off

Economy and Bond Market Highlights

Sunday, February 28th, 2010

The Econ­omy and Bond Market

Con­sumer con­fi­dence took a dive this month, high­light­ing the frag­ile nature of the eco­nomic recov­ery. Most of the eco­nomic news out this week from con­sumer con­fi­dence, to hous­ing and con­cerns regard­ing Euro­pean sta­bil­ity had a neg­a­tive bias to it.

Strengths

• Fed Chair­man Bernanke reit­er­ated his view that record low inter­est rates would be main­tained for some time while the econ­omy recov­ers from the recession.
• Fourth-quarter GDP, fueled by busi­ness spend­ing, was revised higher to 5.9 per­cent from 5.7 percent.
• The Con­gres­sional Bud­get Office (CBO) esti­mated the emer­gency fis­cal stim­u­lus cre­ated more than 2 mil­lion jobs and boosted the econ­omy more than many had expected.

Weak­nesses

• New home sales hit a new record low, falling to just 309,000 annu­al­ized units.
• Exist­ing home sales were also weak, falling 7.2 per­cent in January.
• Weekly ini­tial job­less claims rose to 496,000 and hit the high­est level in three months. This is a sign the eco­nomic recov­ery remains uneven.

Oppor­tu­ni­ties

• If finan­cial mar­kets are a good mech­a­nism for dis­count­ing the future, the future appears rel­a­tively robust. The mar­kets have been able to shake off bad news rel­a­tively eas­ily this week, prob­a­bly a good sign for the eco­nomic recovery.

Threats

• If one of the euro­zone coun­tries were to seri­ously threaten default, the whole euro­zone sys­tem comes into ques­tion and threat­ens global finan­cial stability.

Tags: Bad News, Bond Market, Bonds, Congressional Budget Office, Consumer Confidence, Economic News, Economic Recovery, European Stability, Eurozone Countries, Existing Home Sales, Fed Chairman Bernanke, Financial Markets, Fiscal Stimulus, Fourth Quarter, Fragile Nature, Global Financial Stability, Initial Jobless Claims, Low Interest Rates, Negative Bias, Quarter Gdp, Recession
Posted in Bonds, Markets | Comments Off

Gold Market Highlights (February 28, 2010)

Sunday, February 28th, 2010

Gold Mar­ket

For the week, spot gold closed at $1,117.60 per ounce down $1.60 or 0.14 per­cent. Gold equi­ties, as mea­sured by the XAU Gold & Sil­ver Index (XAU) fell 1.85 per­cent for the week. The U.S. Trade-Weighted Dol­lar Index (DXY) fell 0.36 percent.

Strengths

• Gold and equi­ties were able to rebound as Fed­eral Reserve Chair­man Ben Bernanke appeared before Con­gress and reaf­firmed that short-term inter­est rates would remain low for an extended period of time and pre­dicted the eco­nomic recov­ery would remain slow.
• Des­jardins Secu­ri­ties said cop­per stock­piles in China are declin­ing swiftly and that many in the mar­ket are wrong in think­ing that spec­u­la­tion, rather than fun­da­men­tal demand, has under­pinned imports of cop­per into China. The com­pany also said fun­da­men­tal demand far exceeds gen­eral expectations.
• The Bom­bay Bul­lion Asso­ci­a­tion said India’s gold imports in Feb­ru­ary are most likely between 30–35 tonnes. This is at least a 280 per­cent increase year-over-year when com­pared to 2009 imports of 7.9 tonnes dur­ing the month of February.

Weak­nesses

• Weaker-than-expected con­sumer con­fi­dence and new home sales reports set the mood ear­lier in the week as traders and investors remained on the sidelines.
• Investors remain risk averse after rat­ings agency Fitch down­graded Greece’s largest banks ahead of Greece’s 10-year bond auc­tion. Gold has been under pres­sure as of late due to a strength­en­ing dol­lar pri­mar­ily due to a weak­en­ing euro.
• The National Energy Reg­u­la­tor of South Africa has approved Eskom’s 28 per­cent tar­iff increases in 2010 and nearly 26 per­cent the next two years. With the South African econ­omy is still in recov­ery mode, tar­iff increases on power util­ity will impact min­ing and the wider economy.

Oppor­tu­ni­ties

• Plat­inum Guild Inter­na­tional has released a report stat­ing young women are spurring demand for plat­inum jew­elry demand in China. The report states that two-thirds of plat­inum jew­elry buy­ers in China are women between 18 and 34 years old.
• The Finan­cial Times reported the Lon­don Met­als Exchange will be launch­ing deriv­a­tives con­tracts on cobalt and molyb­de­num. The new offer­ings come as investor appetite for com­modi­ties con­tin­u­ally increases as strong con­sump­tion in China dri­ves demand and higher prices.
• JPMor­gan said the dol­lar may fall against Japan’s cur­rency to as low as 87 yen as investors reduce bets that the Fed­eral Reserve will fur­ther tighten mon­e­tary pol­icy in the near future.

Threats

• The Com­modi­ties and Futures Trad­ing Com­mis­sion (CFTC) will dis­cuss posi­tion lim­its for gold, sil­ver and cop­per futures mar­kets next month.
• America’s third largest bank recently noti­fied cus­tomers that effec­tive April 1, 2010, they reserve the right to require seven days advance notice before per­mit­ting a with­drawal from all check­ing accounts.
• In efforts to ease the hous­ing débâ­cle, the Obama Admin­is­tra­tion may ban all fore­clo­sures on home loans unless they have been screened and rejected by the government’s Home Afford­able Mod­i­fi­ca­tion Program.

Tags: Bond Auction, Commodities, Consumer Confidence, Dollar Index, Dxy, Economy Opportunities, Energy Regulator, Federal Reserve Chairman, Federal Reserve Chairman Ben Bernanke, Fundamental Demand, Gold, Gold Bullion, Gold Equities, Gold Imports, Gold Market, India, Jewelry Buyers, Platinum Guild International, Platinum Jewelry, Recovery Mode, Report States, Silver Index Xau, South African Economy, Spot Gold
Posted in Commodities, India, Markets, Silver | Comments Off

Energy and Natural Resources Market Highlights (February 28, 2010)

Sunday, February 28th, 2010

Energy and Nat­ural Resources Market

Strengths

• The Baker Hughes weekly rig count climbed by 28 rigs in the United States to a 52-week high of 1,373 drilling rigs.
• U.S. crude steel out­put totalled 1.66 mil­lion short tons last week, up 0.9 per­cent, with mills oper­at­ing at an aver­age capa­bil­ity uti­liza­tion rate of 68.6 per­cent. This was the high­est weekly total since late-October 2008.
• Global steel pro­duc­tion increased by 2.1 per­cent on a sequen­tial basis to 109.2 mil­lion met­ric tons for the month of Jan­u­ary or the equiv­a­lent of 1.286 bil­lion met­ric tons annu­al­ized. This is com­pared with 107.0 mil­lion met­ric tons dur­ing the month of Decem­ber or 1.259 bil­lion met­ric tons on an annu­al­ized basis.

Weak­nesses

• A key lead­ing indi­ca­tor of non-residential con­struc­tion in the domes­tic mar­ket, the Amer­i­can Insti­tute of Archi­tects (AIA) Billings Index declined to a read­ing of 42.5 for Jan­u­ary from 45.4 in December.

Oppor­tu­ni­ties

• Bloomberg news reported Indian Finance Min­is­ter Pranab Mukher­jee said that the coun­try will spend about $1.1 bil­lion on expand­ing elec­tric­ity capac­ity in the year end­ing March 2011. It also plans to intro­duce a coal reg­u­la­tory author­ity. Over 75 per­cent of the country’s elec­tric­ity is pow­ered by coal.
• China Indus­try news reported that China will likely add another 85 gigawatts of installed power gen­er­a­tion this year to bring the country’s total to about 950 gigawatts by year-end.

Threats

• South African state-owned power gen­er­a­tor Eskom has been granted per­mis­sion to annu­ally raise elec­tric­ity prices by 25 per­cent over a three-year period, fol­low­ing pro­tracted negotiations.

Tags: American Institute Of Architects, Baker Hughes, Billion Metric Tons, Capability Utilization Rate, China Industry, Commodities, Crude Steel, Drilling Rigs, Electricity Prices, energy, Eskom, Gigawatts, Global Steel, India, Indian Finance Minister, Institute Of Architects, Leading Indicator, Market Strengths, Million Metric Tons, Natural Resources, oil, Pranab Mukherjee, Rig Count, Sequential Basis, Steel Output
Posted in India, Markets | Comments Off

Emerging Markets Highlights (February 28, 2010)

Sunday, February 28th, 2010

Emerg­ing Markets

Strengths

• Taiwan’s GDP grew 9.2 per­cent year-over-year in the fourth quar­ter of 2009, exit­ing a reces­sion which started in late 2008. Not only were exports and invest­ment on the rise, but pri­vate con­sump­tion reg­is­tered the strongest quar­terly increase in the last 20 years.
• Thailand’s fourth quar­ter GDP rose 5.8 per­cent from a year ear­lier, accel­er­at­ing from a 2.7 per­cent con­trac­tion dur­ing the third quar­ter. The change came as pri­vate con­sump­tion and gov­ern­ment spend­ing more than off­set still ane­mic invest­ment con­strained by polit­i­cal uncertainty.
• Jan­u­ary wire­less data for Brazil indi­cated net addi­tions of 1.6 mil­lion and a 16 per­cent year-over-year increase in total sub­scriber base. Vivo accounted for 43 per­cent of new sub­scriber addi­tions, fol­lowed by Claro (América Móvil) with 25 per­cent and Tele­com Italia Mobile with 24 per­cent. Brazil wire­less pen­e­tra­tion cur­rently stands at 92 per­cent com­pared with 76 per­cent in Mex­ico, 116 per­cent in Argentina, 98 per­cent in Chile, 81 per­cent in Colom­bia and 68 per­cent in Peru.
• Unem­ploy­ment in Brazil rose to 7.2 per­cent dur­ing Jan­u­ary, up from 6.8 per­cent in Decem­ber due to a sea­sonal effect but was bet­ter than the mar­ket expected.
• Accord­ing to Troika Dia­log met­als and min­ing ana­lysts, Russ­ian gold min­ing com­pa­nies boast out­put growth that is among the high­est on the global land­scape, while appear­ing attrac­tive on val­u­a­tion grounds.

Weak­nesses

• Ini­tial pub­lic offer­ings launched by Chi­nese com­pa­nies in the U.S. dur­ing the fourth quar­ter declined 4.8 per­cent on aver­age in the first month of trad­ing. The loss dete­ri­o­rated to 6.7 per­cent for IPOs in Jan­u­ary and Feb­ru­ary, the longest slump in five years, as investor con­tin­ued to trim risk expo­sure and sen­ti­ment remained weak.
• Results from Brazil­ian toll road oper­a­tor Com­pan­hia de Con­cessões Rodoviárias (CCR) came in weaker than antic­i­pated due to higher costs.
• Mur­ray and Roberts, the largest engi­neer­ing firm from South Africa, pro­vided a murky out­look for its oper­a­tions. While the com­pany was pos­i­tive about its long-term out­look, its short-term future is foggy—particularly with respect to oper­a­tions in the Mid­dle East.
• Price expec­ta­tions for res­i­den­tial build­ings in Czech Repub­lic remain stag­nant even after a sig­nif­i­cant reces­sion, accord­ing to Citi research. The chart shows real­ized prices sig­nif­i­cantly below offer prices, while expec­ta­tions from a busi­ness sur­vey point to fur­ther weakness.

Oppor­tu­ni­ties

• Expanded urban­iza­tion and regional devel­op­ment are expected to be con­firmed as a major pol­icy focus in China in the upcom­ing annual ple­nary ses­sion of the National People’s Con­gress. Sup­port­ive poli­cies may be cre­ated to empower local gov­ern­ments to develop infra­struc­ture and attract cap­i­tal because of the role urban­iza­tion plays in pro­mot­ing con­sump­tion. Indeed, even global lux­ury brands have spread their pres­ence beyond coastal China into sec­ond– and third– tier cities to posi­tion for tomorrow’s growth.

• As uncer­tainty related to global pol­icy actions in both the devel­oped and emerg­ing worlds con­tin­ues to rise, Rus­sia could become a spot of rel­a­tive sta­bil­ity, accord­ing to Bank Credit Ana­lyst research. The chart shows that equity val­u­a­tions are still low com­pared with the emerg­ing mar­ket universe.

Threats

• Domes­tic sugar prices in China have been on the rise so far this year as drought in south­ern China affected cane pro­duc­tion. There are also news reports about labor short­ages, espe­cially in the Pearl River Delta area where some migrant work­ers chose not to return to work after the Chi­nese New Year because of unat­trac­tive wages com­pared with inland regions. There could be infla­tion going for­ward if these devel­op­ments persist.
• Although an announce­ment of higher bank reserve require­ments in Brazil had been expected, some mar­ket par­tic­i­pants may view it as ambigu­ous with respect to the impact on the banks’ top and bot­tom lines. We do not expect a detri­men­tal impact on the prof­itabil­ity of Brazil’s banks because they will still be earn­ing inter­est on the reserves at the SELIC rate—the overnight lend­ing rate set by Brazil’s cen­tral bank.
• Polit­i­cal ten­sions in Turkey have esca­lated this week fol­low­ing new arrests related to an alleged 2003 mil­i­tary coup against the rul­ing Jus­tice and Devel­op­ment party. The uncer­tainty related to the out­come of a likely ref­er­en­dum on con­tro­ver­sial judi­ciary reform may also con­tribute to fur­ther mar­ket volatility.

Tags: Brazil, Ccr, Chinese Companies, Contraction, Emerging Markets, Engineering Firm, Fourth Quarter, Global Landscape, Gold Mining Companies, Initial Public Offerings, Political Uncertainty, Private Consumption, Quarter Gdp, Quarterly Increase, Risk Exposure, Russia, Seasonal Effect, Subscriber Base, Telecom Italia, Telecom Italia Mobile, Toll Road, Troika Dialog
Posted in Brazil, Infrastructure, Markets, Outlook, US Stocks | Comments Off

Changing as Markets Change

Sunday, February 28th, 2010

By Frank Holmes
CEO and Chief Invest­ment Offi­cer

I had the chance to lis­ten to a promi­nent MIT finance pro­fes­sor talk about how mar­ket par­tic­i­pants make their deci­sions, and I came away think­ing that his big-brain ideas val­i­date the approach that we’ve been using for years.

Andrew Lo, the MIT pro­fes­sor, has devel­oped what he calls the “adap­tive mar­kets hypoth­e­sis” (AMH) as a more sophis­ti­cated frame­work than the long-standing “effi­cient mar­kets hypoth­e­sis” (EMH).

I won’t go into a lot of detail, but the EMH assumes that all mar­ket par­tic­i­pants act ratio­nally at all times, and that all avail­able infor­ma­tion is imme­di­ately reflected in mar­ket prices.

In Lo’s AMH, mar­ket par­tic­i­pants are not always per­fectly ratio­nal, he says – they often make bad deci­sions. They learn from those bad deci­sions and, dri­ven by com­pe­ti­tion, the sur­vivors con­stantly inno­vate. Those who don’t adapt don’t last.

At U.S. Global, we have long viewed mar­kets as “com­plex adap­tive systems”—they are made up of many mov­ing parts that are inter­con­nected across a global net­work, and they learn from expe­ri­ences and change accordingly.

In our case, we use a matrix of top-down macro mod­els and bottom-up micro stock selec­tion mod­els to deter­mine weight­ing in coun­tries, sec­tors and indi­vid­ual secu­ri­ties. We believe gov­ern­ment poli­cies are a pre­cur­sor to change, and as a result, we keep tabs on the fis­cal and mon­e­tary poli­cies of the G-7 and what we call the “E-7” — the world’s devel­op­ing nations by population.

We also focus on his­tor­i­cal and socioe­co­nomic cycles, and we apply both sta­tis­ti­cal and fun­da­men­tal mod­els to iden­tify com­pa­nies with supe­rior growth and value met­rics. We over­lay these explicit knowl­edge mod­els with the tacit knowl­edge obtained by domes­tic and global travel for first-hand obser­va­tion of local and geopo­lit­i­cal con­di­tions, as well as spe­cific com­pa­nies and projects.

Dur­ing his San Anto­nio visit, Lo con­trasted “fear and greed” with “ratio­nal think­ing” – the for­mer being reac­tive and emo­tional, while the lat­ter is mea­sured and oppor­tunis­tic. We use oscil­la­tors, like the one above show­ing gold and the dol­lar, to help us deter­mine when fear or greed may be tak­ing hold in a market.

I’m a big believer in glob­al­iza­tion, urban­iza­tion and major tech­no­log­i­cal break­throughs as key dri­vers of change in the world. These fac­tors have an enor­mous impact on infra­struc­ture cre­ation around the world, which in turn greatly affects com­modi­ties demand.

Back in the early 1970s, when gold resumed free-trading sta­tus in the U.S., China and India were both inward-looking and had very small eco­nomic foot­prints – now their eco­nomic engines are lift­ing tens of mil­lions of peo­ple into middle-class pros­per­ity each year.

“I'd be a bum on the street with a tin cup if the mar­kets were always effi­cient,” War­ren Buf­fett once said. In other words, oppor­tu­ni­ties come to those (like us) who are able to nav­i­gate increas­ingly com­plex markets.

Tags: Amh, Bad Decisions, Chief Investment Officer, Commodities, Complex Adaptive Systems, Efficient Markets Hypothesis, Explicit Knowledge, Finance Professor, Fiscal And Monetary Policies, Frank Holmes, Fundamental Models, Hand Observation, India, Individual Securities, Knowledge Models, Macro Models, Market Participants, Micro Stock, Selection Models, Specific Companies, Stock Selection, Tacit Knowledge
Posted in Commodities, India, Infrastructure, Markets | Comments Off

David Darst — Robert Kessler — Interview Transcript (Feb. 19)

Sunday, February 28th, 2010

Con­nie Mack recently inter­viewed David Darst, chief invest­ment strate­gist for Mor­gan Stan­ley Smith Bar­ney, and Robert Kessler, head of Kessler Invest­ment Advi­sors, which runs port­fo­lios for insti­tu­tional investors and gov­ern­ments around the world. This is a MUST view/read inter­view. The com­plete tran­script follows.

CM: David Darst is known as a mas­ter of the art of asset allo­ca­tion. He is the chief invest­ment strate­gist for Mor­gan Stan­ley Smith Bar­ney. David is also a teacher and pro­lific author, and his lat­est book is The Lit­tle Book that Saves Your Assets . And it’s great to have you both here. Thanks so much for join­ing us on Wealth­Track.
Robert Kessler, U.S. Trea­suries, you make your liv­ing in invest­ing and man­ag­ing port­fo­lios of U.S. Trea­suries, and as long as I’ve known you, they have been den­i­grated by most of the com­pe­ti­tion except in this most recent period when every­one rushed to Trea­suries, but now the naysay­ers are back again. So why are they wrong again about Treasuries?

ROBERT KESSLER: It’s not a ques­tion of being wrong or right. A Trea­sury is really a bench­mark to almost every other asset class. So as a bench­mark, you can’t be wrong or right about a bench­mark. It’s just sim­ply mat­ter of spread between what other asset classes are sell­ing at. So in the Trea­sury mar­ket, we’re lucky enough to be able to have a choice of overnight Trea­suries, which is cash, or longer-term Trea­suries. And longer term Trea­suries are really based on whether you believe infla­tion is going to be an issue or whether dis­in­fla­tion will be an issue.
So right now we’re in what we call a credit cri­sis. We’re in a credit reces­sion. And dur­ing credit peri­ods of time, you don’t want to own risk assets, and if you don’t want to own risk assets, you want to go to some­thing that has very lit­tle risk, which is a Trea­sury. Now the ques­tion becomes: do you own Trea­suries as bills overnight or do you really believe that rates are going to come down because there’s very lit­tle infla­tion in the world? So since we believe rates will come down because there is very lit­tle infla­tion, then Trea­suries become very attractive.

CONSUELO MACK: All right. So let me stop you there and we’re going to fol­low up on that in a cou­ple of min­utes. David Darst, as a global strate­gist first and as an asset allo­ca­tor sec­ond, how do you view this?

DAVID DARST: It’s a great point because really, infla­tion is a mon­e­tary phe­nom­e­non. We have a big war going on between this mon­e­tary phe­nom­e­non called infla­tion poten­tial down the road.

CONSUELO MACK: Right.

DAVID DARST: And defla­tion is a credit phe­nom­e­non. And right now credit is con­tract­ing. The lat­est month fig­ure for Decem­ber showed it con­tracted, con­sumer credit, Con­suelo, by $2.5 bil­lion. That’s 11 months in a row the gov­ern­ment has been keep­ing these num­bers since 1943. It’s never con­tracted for 11 months in a row. So right now we have this epic, titanic strug­gle between the defla­tion phe­nom­e­non, credit con­tract­ing and the infla­tion phe­nom­e­non, which is the gov­ern­ment attempt­ing to pump up the money sup­ply, add liq­uid­ity to the sys­tem, which peo­ple, makes them worry about infla­tion down the road. So we feel that maybe Trea­sury bonds, Trea­sury secu­ri­ties, you can have them in the port­fo­lio right now, you need to have a lit­tle offense as well as a lit­tle defense. Trea­sury secu­ri­ties are a defen­sive invest­ment in our opin­ion. Last two years ago they were up 20%. They were up 20% in 2008 when the stock mar­ket went down 37%. Last year, ten-year Trea­suries lost 9.9% on a total return basis.
I’m very recep­tive. For a per­son basi­cally to say stay away from Trea­suries means they think inter­est rates are going to rise. That means the con­sumer is going to come back. That means that credit is going to stop con­tract­ing and we’re going to worry about infla­tion. But over the next 12 months, I’m not so sure those things are going to be an issue, Consuelo.

CONSUELO MACK: So short term at any rate, next 12 months, Trea­suries are prob­a­bly a good place to be defensive.

DAVID DARST: I think you can have some in the port­fo­lio. We are under­weight. We are under­weight. Nor­mal is 16%. We’re 7%. That’s our largest sin­gle under­weight. We are very under­weight because we’re wor­ried about the health of sov­er­eign credit finance about the con­di­tion of the U.S., the U.K., the Euro­pean com­mu­nity and so forth, the con­di­tion of these finances. So much money has been issued.

CONSUELO MACK: Okay. How do you answer that argu­ment because, in fact, as you know, that most peo­ple who are look­ing at U.S. Trea­suries are say­ing, we’ve got a record deficit; we have to finance that record deficit. If we are basi­cally hav­ing to sell a lot of Trea­sury bonds, that is going to mean that the value of the dol­lar of our secu­ri­ties is going to go down. And then, in fact, that means that it’s going to be infla­tion­ary for the U.S. So how do you respond to that argu­ment? Why aren’t you wor­ried about the size of the deficit and what we have to finance being inflationary?

ROBERT KESSLER: Let me answer two ques­tions. The first ques­tion is this con­cept of the deficit. There is this con­stant talk of deficits lead to infla­tion. We don’t really have any indi­ca­tion that that’s true. In the Depres­sion in the United States, we had huge deficits, of course, and we had no infla­tion. We had defla­tion. Japan has gone through 20 years now of deficits that are far, far higher than ours, and they have defla­tion. So we don’t know any­thing about the infla­tion side of it. What’s really impor­tant is that if peo­ple can’t raise prices and there’s an awful lot of excess capac­ity in the world and wages are going down and unem­ploy­ment keeps stay­ing kind of sticky at these very, very high lev­els, it’s very dif­fi­cult to have infla­tion.
And so there is no infla­tion. That’s not our issue. The real issue is– tele­vi­sion was inter­est­ing today because not only are we deal­ing with Greece, Greece is very inter­est­ing because we’re bail­ing out Greece and bail­ing out per­haps Por­tu­gal next, but we’re prob­a­bly going to bail out New Jer­sey after that. Because New Jer­sey just announced today that they’re run­ning into a huge deficit, too.

CONSUELO MACK: As are a lot of states.

ROBERT KESSLER: As are a lot of states. So we have states hav­ing prob­lems, low­er­ing wages, fir­ing peo­ple; very, very dif­fi­cult to raise prices and con­se­quently, very dif­fi­cult to have inflation.

CONSUELO MACK: All right. So you think we’re defla­tion­ary. You think the credit con­trac­tion you think which is extra­or­di­nary is actu­ally, we’re in the begin­ning stages of it. You’re not think­ing a year down the road, you’re think­ing for infla­tion, you’re think­ing, what three, four, five...

ROBERT KESSLER: It sounds like I’m being very pessimistic.

CONSUELO MACK: You’re a bond person.

ROBERT KESSLER: No, no but I don’t want to be pes­simistic. We just got back from the Mid­dle East. I have to tell you, not only is every­thing for rent in the Mid­dle East, not only are build­ings com­pletely unoc­cu­pied, but banks, since we deal with banks, banks right now are doing one trade. They’re doing what we call a carry trade, mean­ing they’re buy­ing their sov­er­eign debt, either U.S. sov­er­eign debt or their sov­er­eign debt short term and they’re car­ry­ing it at very low cost.

CONSUELO MACK: Because they can bor­row it at very low cost.

ROBERT KESSLER: Because they can bor­row at very low cost, as is JP Mor­gan in the United States and as is Mor­gan Stan­ley and every­one else. So the fact of the mat­ter is when peo­ple say we’re in a bear mar­ket in Trea­suries, it’s ridicu­lous. Last year, even though David is cor­rect, the ten-year Trea­sury was down 9%. The fact of the mat­ter is we made more money last year in two-year Trea­suries than any year I can think of because every­one was car­ry­ing a two-year Trea­sury at zero and get­ting a point. Now, in bank talk...

CONSUELO MACK: So they were bor­row­ing at lower than 2% and then they were buy­ing the two years... So they made?

ROBERT KESSLER: They do it at a very high lever­age level because they don’t need to do very much with a cap­i­tal ques­tion. So the fact of the mat­ter is you have this bull mar­ket going on and yet every­one is say­ing, any­thing but Trea­suries. Tell that to JP Morgan.

CONSUELO MACK: Right. So David, not to com­pletely focus on Trea­suries, but as far as asset allo­ca­tion, you said that your biggest under­weight is U.S. Trea­suries right now.

DAVID DARST: It’s sov­er­eign credit, Consuelo.

CONSUELO MACK: Across the board.

DAVID DARST: It would include U.K., it would include Canada, it would include Europe.

CONSUELO MACK: And the rea­son for that is what?

DAVID DARST: Well, the sov­er­eign... we believe there’s so much issuance of sov­er­eign debt; we do believe that the bal­ance sheet of the Fed has bal­looned from $900 bil­lion to $2.2 tril­lion. We do see the deficits as being quite large on out into the future. And we do believe that these tril­lion dol­lar and tril­lion and a half dol­lar deficits are going to have to be bought and to entice peo­ple, which will cause higher inter­est rates. So that’s why Mor­gan Stanley’s econ­o­mists have a big out-of-consensus call, which Robert is very famil­iar with. And by the way, the word Robert means bright fame. His name means bright fame. Now Robert is famil­iar with this– Mor­gan Stan­ley is expect­ing 5.5%. And every con­ver­sa­tion I get into, I have to argue we think that infla­tion fears will be higher towards the end of 2011. We see all this slack. But there’s con­cern. Sup­ply, which you men­tioned, that is the excess issuance by the Trea­sury, and also the Fed, and I know there’s a lot of dis­agree­ment over this, we expect them to begin their exit strat­egy later this year, sec­ond half of this year.

CONSUELO MACK: And exit strat­egy could mean rais­ing the fed­eral funds rate?

DAVID DARST: Higher short-term inter­est rates, and that means we think higher long-term inter­est rates. We take a lit­tle bit of respect­ful issue with Robert Kessler’s bril­liance over here. But we believe the essence of our under­weight ver­sus sov­er­eign debt is because of enor­mous sup­ply and people’s con­cern. Infla­tion is the biggest... The biggest infla­tions of all times have all come from fight­ing defla­tion. In the 1946 to 1949 period in Ger­many, in com­mu­nist China, in the 1920s and 1923 period of Weimar Ger­many, the biggest infla­tions have all come from fight­ing deflation.

CONSUELO MACK: So what’s inter­est­ing is the com­mon ground is here. Right now we are fight­ing defla­tion, which is actu­ally pos­i­tive at least for the next 12 months, pos­si­bly for...

DAVID DARST: Steroids, finan­cial steroids. Mark McGuire has admit­ted to it and the Fed is tak­ing finan­cial steroids.

ROBERT KESSLER: Let me be a lit­tle con­trary for a second.

CONSUELO MACK: For a second?

ROBERT KESSLER: All right, for 30 sec­onds. The fact of the mat­ter is we talk about this exit strat­egy all the time about the Fed. I’m into the entrance strat­egy. I am try­ing to fig­ure out how we’re going to help out 8.5 mil­lion peo­ple who don’t have jobs. It’s prob­a­bly closer to 17 mil­lion because that’s really a more cor­rect figure.

CONSUELO MACK: The ones who have been dis­cour­aged and not look­ing for jobs anymore.

ROBERT KESSLER: Why we’re talk­ing about exit strate­gies is very, very dis­con­cert­ing to me.

CONSUELO MACK: Because the Fed is actu­ally. Bernanke is talk­ing about it, right.

ROBERT KESSLER: What we’re talk­ing about again is Wall Street and the bank­ing indus­try. When you get to, excuse me, the mid­dle of the United States, at least where I live.

DAVID DARST: Right, you live in Denver.

ROBERT KESSLER: In Den­ver. Peo­ple don’t have a clue to what JP Mor­gan is doing or Mor­gan Stan­ley is doing. What they’re look­ing for is their job, and when some­one says, excuse me, I think it will be a good idea to raise inter­est rates, they can’t even bor­row money; not only can’t they bor­row money, no one will lend them any money. So they’re really...

CONSUELO MACK: Like the credit con­trac­tion you were talk­ing about.

ROBERT KESSLER: So the issue is why are we talk­ing about exit­ing the strategy?

DAVID DARST: The rea­son we’re talk­ing about exit strat­egy is psy­cho­log­i­cal. It’s the use of Shake­spearean lan­guage and words to try to divert peo­ple from wor­ry­ing about the debase­ment of the cur­rency, inter­nally and exter­nally. And that’s why he’s say­ing it. And I agree with you. I don’t see rates jack­ing way up very quickly. This is going to be grad­ual, but we went from $900 bil­lion Fed bal­ance sheet to $2.2 tril­lion. And it is very, very impor­tant.
Sarkozy, dur­ing the last four weeks– open­ing speech at the World Eco­nomic Forum said that in 2011 France is going to be head of the G7 and the G20 and he says his number-one agenda item is to cre­ate a new world mon­e­tary sys­tem, a new sys­tem with­out the United States dol­lar as the pri­mary reserve cur­rency. The rea­son they talk about exit strat­egy, Robert, is to keep peo­ple from going to this new currency.

CONSUELO MACK: So how con­cerned are you about the fact that the dol­lar could be replaced as the reserve currency?

ROBERT KESSLER: First of all, for a sec­ond I’m going to rep­re­sent Main Street as opposed to Wall Street, and Main Street doesn’t have a clue to what we’re talk­ing about.

CONSUELO MACK: Right.

ROBERT KESSLER: Believe me. This all gets very, very com­pli­cated to talk about.

CONSUELO MACK: And our view­ers are investors.

ROBERT KESSLER: They’re investors, so my answer to all of this is the United States will con­tinue to be the reserve cur­rency. There’s noth­ing wrong with the dol­lar. Every­one will put money into the dol­lar, as we’re doing today. Today is a very, very good exam­ple. We had a 30-year auc­tion today. What was excit­ing about it, even though it didn’t go over very big as an auc­tion, didn’t go well, but what was excit­ing about it is 23% of the auc­tion was bought by Amer­i­cans. What we call direct investors.

CONSUELO MACK: We’ve seen a trend here where the direct investors, Amer­i­cans are buy­ing more and more of their Trea­sury securities.

ROBERT KESSLER: And so when you look at the Amer­i­can dol­lar, as you can look at the Japan­ese yen– the rea­son the yen has stayed strong for so long is because the Japan­ese sup­port their own country.

DAVID DARST: Inter­nal sav­ings, financing.

ROBERT KESSLER: And in the United States, we are begin­ning to do the same thing. And so even though we have a deficit, if we’re will­ing to pay for it, then frankly there’s noth­ing so ter­ri­ble about the deficit.

DAVID DARST: Your legion of view­ers in the aggre­gate have 25% stocks, 25% their home and 7% bonds. That’s why, as you’ve pointed out on the show, Con­suelo, over the nine months from March through Decem­ber, they, we all put $315 bil­lion net into bond funds and ETFs, $35 bil­lion into non-U.S. stocks and minus $24 bil­lion into U.S. stocks. So there has been this trend. 1982, the aver­age baby boomer, the median age was 25 years old. Today it’s the reverse of the dig­its– 52 years old. Peo­ple have been killed by the dot com melt­down, the hous­ing price melt­down and the finan­cial stock melt­down and that want to set aside some money. So your point is an excel­lent point, Robert. They want to put this money and maybe some of the buy­ers will be U.S. households.

ROBERT KESSLER: Let me add one more statistic.

CONSUELO MACK: Very quickly because we have to get to the One Investment.

ROBERT KESSLER: The sta­tis­tic being, that if Amer­i­cans begin to invest in Trea­suries the way they have in the past, then there would be no deficit. There would be sim­ply no deficit.

DAVID DARST: We’re sit­ting on $8 tril­lion of cash right now. And they need only $1.5 tril­lion, but we need higher rates, Robert, to entice us to take it out of the cookie jar and the mat­tress and put it in Treasuries.

CONSUELO MACK: So one quick ques­tion for you, David Darst, and this is put your asset allo­ca­tion hat on again. What are you over­weight­ing, in a minute or less?

DAVID DARST: We’re over­weight­ing cor­po­rate credit to sum­ma­rize quickly. That would be high yield bonds, and high grade bonds.

CONSUELO MACK: Because of the yield.

DAVID DARST: The yield is more attrac­tive. We are over­weight in real estate invest­ment trust, which have a nice yield to them.

CONSUELO MACK: Right.

DAVID DARST: We’re over­weight in emerg­ing mar­ket stocks and Cana­dian stocks, Aus­tralian stocks, and in small cap stocks. They have basi­cally taken a lit­tle gas in the first part of this year. We think that’s a pause, a healthy, needed cor­rec­tion that we will believe as the economies grow around the world– we just jacked up our China fore­cast to above 10% for this year– and we think prob­a­bly world growth will sur­prise to the up side. Maybe that’s why yields will sur­prise to the up side, too. Inter­est rates.

CONSUELO MACK: Very inter­est­ing. And so let’s go to the One Invest­ment for our investor view­ers out there, and Robert Kessler, guess what you’re recommending.

ROBERT KESSLER: A quick comment.

CONSUELO MACK: Yes.

ROBERT KESSLER: A quick com­ment. I am so weary of peo­ple who wear white suits and rec­om­mend emerg­ing mar­kets. Now, David’s not.

DAVID DARST: White suits?

ROBERT KESSLER: White suits.

DAVID DARST: Tom Wolf.

ROBERT KESSLER: Right.

CONSUELO MACK: I don’t under­stand that.

ROBERT KESSLER: Con­se­quently, what I’m say­ing is I think you want to be in every­thing that is risk-averse. And there­fore I would sug­gest that a Trea­sury, whether it’s overnight money or it’s ten or a 30-year Trea­sury, I think the ten year will prob­a­bly out­per­form every­thing this year, and that’s a way-out kind of a call, but I do think that rates are going to sub­stan­tially come down, and they do usu­ally the sec­ond or third year after a reces­sion, and since we’re only a year into this, we have a long ways to go, and I think you’ll see the ten-year Trea­sury prob­a­bly back at 2% range or lower. And that’s a big move.

CONSUELO MACK: Wow. And David Darst, you’re think­ing defen­sive action, too.

DAVID DARST: I am, Con­suelo. Proc­ter & Gam­ble (PG), which I’ve rec­om­mended on the show before– they have 23 prod­ucts with over $1 bil­lion in annual sales, and they have 20 prod­ucts in addi­tion with over $500 mil­lion in annual sales. They just changed lead­ers. Robert McDon­ald takes over from A.G. Lafley. McDon­ald has been with them for 29 years. He sold Fol­gers Cof­fee. He’s sell­ing off the pharma area to focus on per­sonal care, on house­hold prod­ucts and human well-being, okay. We see three bil­lion peo­ple every day out of six bil­lion in the world that are touched by a Proc­ter & Gam­ble product.

CONSUELO MACK: Wow.

DAVID DARST: He wants it to go up to four bil­lion. Only 30% of their rev­enues are out­side the U.S. and Europe. Stock sales are 14 times last year’s earn­ings. It yields 2.9%. They’ve not been buy­ing stocks in a year and a half. They’ve just begun to buy stocks, and the last thing is it was only up 1% last year with its lag to mar­ket. It went down less than the mar­ket. It went down 14 in ‘08 when it went 37 down, up 1% last year. We think this is a com­pany that’s been a defen­sive stock about to go on the offense.

CONSUELO MACK: So we have a diver­si­fied port­fo­lio right here between the two of you. Robert Kessler from Kessler Invest­ment Advi­sors, thank you so much for com­ing in from Den­ver and from New York, it’s great to have you regard­less, David Darst from Mor­gan Stan­ley Smith Bar­ney, thanks so much for join­ing us.
At the con­clu­sion of every Wealth­Track, we tried to leave you with one action to take to build and pro­tect your wealth over the long-term, as well. This week we’re revis­it­ing a retire­ment income theme that we and many of our guests have empha­sized over the years. This week’s Action Point is: lock in some retire­ment income for life.
How do you do that? The Obama admin­is­tra­tion recently came out in sup­port of annu­ities as a tool to deliver a form of “guar­an­teed life­time income.” Specif­i­cally, Pres­i­dent Obama has called for a change in fed­eral rules to allow adding annu­ities to 401(k) retire­ment plans.
Until that becomes a real­ity, one way to assure a sta­ble flow of income that you can count on for life is to buy the sim­plest, plain vanilla ver­sion, an imme­di­ate fixed annu­ity, also known as a sin­gle pre­mium imme­di­ate annu­ity. You turn over a one-time pay­ment to an insur­ance com­pany, and it in turn will pro­vide you with a pre­dictable and guar­an­teed monthly income as long as you live. To make sure it’s there, that it is as long as you live, only work with life insur­ance com­pa­nies that have the high­est credit rat­ings, and don’t put all your eggs in one bas­ket.
The finan­cial advi­sors we have talked to rec­om­mend invest­ing only a por­tion, no more than one-third of your retire­ment assets, in annu­ity prod­ucts, and also rec­om­mend con­sider stag­ger­ing the amount you put in over a num­ber of years, so you can adjust your income stream as you need it. To get an idea of what kind of monthly income a given amount will return, go to immediateannuities.com for a quote.
Now what trou­bles many peo­ple about these imme­di­ate fixed annu­ities is that you might die before you have recov­ered your invest­ment, your heirs don’t get any ben­e­fit, and infla­tion can eat away at the value of the income stream. So the insur­ance indus­try, in its infi­nite wis­dom, has responded with vari­a­tions on imme­di­ate annu­ities that address these con­cerns. The trade­off is the adjust­ments reduce the monthly income. Annu­ities are not right for every­one, but as a vehi­cle to cre­ate your own guar­an­teed pen­sion plan for life, an imme­di­ate fixed annu­ity is def­i­nitely worth con­sid­er­ing.
That con­cludes this edi­tion of Wealth­Track. Join us for one of our Great Investors series next week. I’ll sit down with Steven Romick, port­fo­lio man­ager of the FPA Cres­cent Fund, a final­ist for Morningstar’s Domes­tic Equity Fund Man­ager of the Decade award. In the mean­time, to watch this pro­gram again, please go to our web­site, wealthtrack.com. Start­ing Mon­day, you can see it as stream­ing video or a pod­cast. Thank you for vis­it­ing with us. And make the week ahead a prof­itable and a pro­duc­tive one.

Source: Con­suelo Mack, Wealth­Track, Feb­ru­ary 19, 2010
http://www.wealthtrack.com/transcript_02-19–2010.php

Tags: Asset Allocation, asset class, Asset Classes, Bonds, Canadian Market, Chief Investment Strategist, Connie Mack, Credit Crisis, David Darst, Disinflation, Emerging Markets, ETF, ETFs, Institutional Investors, Interview Transcript, Kessler Investment Advisors, Morgan Stanley, Naysayers, Prolific Author, Recession, Robert Kessler, Smith Barney, Stanley Smith, Treasuries, Treasury Market
Posted in Bonds, Canadian Market, ETFs, Markets, US Stocks | Comments Off

WealthTrack: Romick's Contrarian Views

Sunday, February 28th, 2010

This week on Wealth­track, Con­suelo Mack sits down with Steven Romick, the founder and port­fo­lio man­ager of the five star FPA Cres­cent Fund. Romick’s con­trar­ian views and go any­where, invest in any­thing style have put him in the top one per­cent of all money man­agers over the last decade and earned him a final­ist slot for Morningstar’s new “Fund Man­ager of the Decade Award”.

Note: The tran­script of this inter­view is not avail­able yet, but will be posted here as soon as it arrives.

Source: Wealth­track, Feb­ru­ary 25, 2010.

Tags: Consuelo Mack, Contrarian Views, Crescent, Decade Award, Five Star, Last Decade, Money Managers, Morningstar, Portfolio Manager, Wealthtrack
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Words from the (Investment) Wise (February 28, 2010)

Sunday, February 28th, 2010

As investors vac­il­lated about the impact of devel­op­ments in Greece, together with the uncer­tainty of strong fourth-quarter eco­nomic data pos­si­bly not car­ry­ing over to the first quar­ter, stock mar­kets expe­ri­enced two sharp sell-offs and two rebound ral­lies, limp­ing to small gains on Fri­day but end­ing the week mod­estly down.

Renewed fears over Greece’s debt woes, dis­ap­point­ing Ger­man busi­ness con­fi­dence sta­tis­tics and lower-than-expected US con­sumer con­fi­dence data tem­pered investor opti­mism for risky assts, trig­ger­ing haven demand for gov­ern­ment bonds and the Japan­ese yen.

Fed Chair­man Ben Bernanke pro­vided some sup­port for stock mar­kets on Wednes­day by indi­cat­ing in his tes­ti­mony to the US House Finan­cial Ser­vices Com­mit­tee that the fed fund rate will remain at excep­tion­ally low lev­els for an extended period. How­ever, the flip side of the coin is his gloomy pic­ture of the econ­omy still bat­tling high unem­ploy­ment and a weak hous­ing sector.

“Greece hasn’t got­ten so much press since 146 BC when the Romans took over,” said Paul Kas­riel (North­ern Trust). In news after the close of the mar­kets, the Finan­cial Times reported: “Germany’s biggest banks are look­ing at a res­cue plan for Greece under which they would buy Greek debt backed by finan­cial guar­an­tees from Berlin. One senior Ger­man bank offi­cial said seri­ous thought was being given to a plan for the Ger­man gov­ern­ment, work­ing through KfW, its devel­op­ment bank, to issue guar­an­tees to banks that bought Greek debt.”

Source:  Patrick Blower, Guardian

The past week’s per­for­mance of the major asset classes is sum­ma­rized in the chart below — a set of num­bers indi­cat­ing that a degree of risk aver­sion has crept back into finan­cial mar­kets. Inter­est­ingly, unlike equi­ties, both investment-grade and high-yield cor­po­rate bonds ended the week in the black. “We believe investors can cap­ture attrac­tive yields and excess spread in the high-yield mar­ket with rel­a­tively low default risk,” Andrew Jes­sop, high-yield port­fo­lio man­ager at Pimco, said in a note on the company’s web­site (via Mon­eyNews).

Source: StockCharts.com

A sum­mary of the move­ments of major global stock mar­kets for the past week and var­i­ous other mea­sure­ment peri­ods is given in the table below.

It was essen­tially a flat week, with the MSCI World Index declin­ing by 0.1%, but the MSCI Emerg­ing Mar­kets Index man­ag­ing to eke out a pos­i­tive return of 0.3%. With the Chi­nese return­ing from the lunar hol­i­day, Hong Kong (+3.6%) put in one of the bet­ter per­for­mances among impor­tant mar­kets, whereas main­land China (+1.1%) also closed the week in the black.

Notwith­stand­ing the huge rally since the March lows, only the Chile Stock Mar­ket Gen­eral Index has been able to reclaim its 2007 pre-crisis peak and is now trad­ing 9.4% higher. Mex­ico could be the next coun­try to elim­i­nate the bear mar­ket losses.

Click here or on the table below for a larger image.

Top per­form­ers among stock mar­kets this week were Ukraine (+4.5%), Greece (+3.7%), Hong Kong (+3.6%), Cyprus (+3.2%) and Thai­land (+3.0%). At the bot­tom end of the per­for­mance rank­ings, coun­tries included Turkey (‑6.8%), Malta (-5.7%), Aus­tria (-5.2%), Argentina (-4.9%) and Latvia (-4.2%). Turkey suf­fered from ten­sions between the gov­ern­ment and the mil­i­tary. Debt-ridden Euro­pean coun­tries such as Italy (-3.2%), Spain (-3.2%), Ire­land (-3.2%) and Por­tu­gal (-2.1%) fea­tured strongly at the bot­tom end of the per­for­mance ranking.

Of the 96 stock mar­kets I keep on my radar screen, 33% recorded gains, 60% showed losses and 7% remained unchanged. The per­for­mance map below tells the past week’s some­what bear­ish story.

Emergin­vest world mar­kets heat map

Source: Emergin­vest (Click here to access a com­plete list of global stock mar­ket movements.)

Eight of the ten eco­nomic sec­tors of the S&P 500 Index closed lower for the week, with Finan­cials and Con­sumer Dis­cre­tionary the only two sec­tors not under water. (Who would have guessed the Con­fer­ence Board’s Con­sumer Con­fi­dence Index would fall to its low­est level since July 2009 on Tuesday?)

Source: US Global Investors — Weekly Investor Alert, Feb­ru­ary 26, 2010.

John Nyaradi (Wall Street Sec­tor Selec­tor) reports that as far as exchange-traded funds (ETFs) are con­cerned, the win­ners for the week included Van­guard Extended Dura­tion Trea­sury (EDV) (+4.3%), iShares MSCI Thai­land (THD) (+3.9%) and Cur­ren­cyShares Japan­ese Yen (FXY) (+3.1%).

At the bot­tom end of the per­for­mance rank­ings, ETFs included iShares MSCI Turkey (TUR) (-8.8%), Claymore/MAC Global Solar Energy (TAN) (-7.2%) and United States Nat­ural Gas (UNG) (down 5.1%).

Refer­ring to a reg­u­la­tory report released on Tues­day by the Fed­eral Deposit Insur­ance Corp (FDIC), the quote du jour this week comes from Addi­son Wig­gin, co-author of Finan­cial Reck­on­ing Day Fall­out and The New Empire of Debt. He said in a col­umn on The Daily Reck­on­ing site: “The FDIC is even more broke than it was three months ago. The fund the FDIC uses to ‘insure’ your bank account went $20.9 bil­lion in the red dur­ing the fourth quar­ter of 2009. That’s more than twice the deficit reported when the fund first entered neg­a­tive ter­ri­tory in the pre­vi­ous quar­ter. Incred­i­bly, the FDIC is still try­ing to reas­sure us that all is well because it’s col­lect­ing three years of advance pay­ments on the annual assess­ments paid by its mem­ber banks. The fees total $45 bil­lion — barely twice the amount of the cur­rent deficit. Yeah, we feel better.

“On top of that, the FDIC’s list of ‘prob­lem banks’ grew dur­ing the fourth quar­ter from 552 to 702. That’s the high­est num­ber since 1993 (when, we pre­sume, more inde­pen­dently owned banks were around, so it’s worse than it sounds). Hmmm, let’s see. The num­ber grew 27% in just one quar­ter. At this pace, every bank in the coun­try will be on the prob­lem list by the fourth quar­ter of 2012. Another tid­bit from the FDIC’s report: Bank lend­ing last year dropped at the biggest clip since 1942. Of course, in that year, the entire econ­omy was shift­ing to a war foot­ing. So it’s safe to say what we’re see­ing now is another unprece­dented post­war occurrence.”

Next, a quick tex­tual analy­sis of my week’s read­ing. This is a way of visu­al­iz­ing word fre­quen­cies at a glance. “Bank”, “debt”, “econ­omy”, “Fed”, “rate” and “mar­ket” all fea­tured promi­nently, but it was some­what sur­pris­ing to see “China” com­mand­ing more media men­tions than “Greece”.

The major moving-average lev­els for the bench­mark US indices, the BRIC coun­tries and South Africa (where I am based in Cape Town when not trav­el­ing) are given in the table below. With the excep­tion of the Dow Jones Trans­porta­tion Index, the Nas­daq Com­pos­ite Index and the Rus­sell 2000 Index, the indices in the table are all trad­ing below their 50-day mov­ing aver­ages, but all the indices are still above their respec­tive key 200-day mov­ing aver­ages. How­ever, a red light is start­ing to flash regard­ing the Shang­hai Com­pos­ite Index, which is within strik­ing dis­tance (20 basis points) of this key sup­port line.

Click here or on the table below for a larger image.

Com­ment­ing on the tech­ni­cal pic­ture of the S&P 500, Kevin Lane (Fusion IQ) said: “The Index hit minor resis­tance a few trad­ing ses­sions back near the 1,112 level. Until this level is taken out the near-term direc­tional bias remains neu­tral. Lower down, the key level to watch is in the 1,072 area. This sup­port level rep­re­sents a much more sig­nif­i­cant uptrend line and if vio­lated would sug­gest a big­ger correction.

“Sen­ti­ment indi­ca­tors are neu­tral at present, which is a pos­i­tive, while mar­ket breadth remains a mixed bag. Clearly the recent trad­ing activ­ity sug­gests volatil­ity will be more present in day-to-day trad­ing than over the past few months.”

On the topic of charts, when con­sid­er­ing S&P 500 monthly data, going back to 1998, three momentum-type oscil­la­tors (RSI, MACD and ROC) all still sig­nal a bull­ish trend (see chart below). Accord­ing to Yahoo Finance — Tech Ticker, Barry Ritholtz (The Big Pic­ture) is not as bull­ish as he was last March when he called the mar­ket bot­tom, but is stick­ing with stocks. “The easy thing to do now would be to go to cash,” he said, “[But] I rarely find the easy trade is the one that makes you money.” (Inci­den­tally, the long-term chart for US gov­ern­ment bonds is in bear­ish mode.)

Source: StockCharts.com

David Rosen­berg, chief econ­o­mist and strate­gist of Gluskin Sheff & Asso­ciates, said: “Let’s face it, the sur­prise two months into the year is that the stock mar­ket is down more than 1% and 10-year Trea­sury yields are also down 20bps. It is still early in the year to be sure but it also seems clear that the eco­nomic data are start­ing to show some fragility. The S&P 500 has done lit­tle more than hover around the 1,100 mark now for six months in what can only be clas­si­fied as a major top­ping for­ma­tion. The VIX index is at 20, not 40; mar­ket vane sen­ti­ment is closer to 60 than 30; the US dol­lar is strong, not weak; poli­cies are mov­ing tighter, not eas­ier; and the gov­ern­ment is now aim­ing to cur­tail the banks whereas a year ago it was all about sav­ing them.

“With a V-shaped earn­ings recov­ery already priced in and eco­nomic houses, like Macro­Eco­nomic Advi­sors, call­ing for 4% GDP growth for 2010, it cer­tainly is dif­fi­cult to high­light where the upside sur­prises for the mar­ket are going to be.”

From across the pond, David Fuller (Fuller­money) adds the fol­low­ing per­spec­tive: “Do we have a real cri­sis today? It is real enough for South­ern Euro­pean coun­tries and obvi­ously height­ens sov­er­eign debt con­cerns from Greece to the USA via the UK, but is this another global cri­sis? I do not think so, at least not yet although the OECD coun­tries’ prob­lems are far from resolved.

“The loss of upside momen­tum by most stock mar­kets and many com­modi­ties, includ­ing pre­cious met­als, clearly indi­cates that global investors have reduced lever­aged expo­sure in the last three months. Whether this is a nor­mal cor­rec­tion (our pre­vi­ously stated 40% pos­si­bil­ity) or likely to become a self-feeding and more sig­nif­i­cant pull­back (also a 40% pos­si­bil­ity) is hard to gauge, but action near the 200-day mov­ing aver­ages will be reveal­ing. Even in the lat­ter instance, I do not think the global eco­nomic back­ground jus­ti­fies a resump­tion of bear mar­kets (20% pos­si­bil­ity), which were dis­count­ing near-depression con­di­tions between 4Q 2008 and 1Q 2009.”

I side with Fuller on his con­clu­sion, but am also cog­nizant of the 12-month momen­tum of the S&P 500 nar­rowly track­ing the US GDP-weighted PMI (see graph below). Cur­rent lev­els of the S&P 500 indi­cate the mar­ket is expect­ing a GDP-weighted PMI in excess of 60.0 vs a cur­rent level of 52.3. If the S&P 500 main­tains its cur­rent lev­els around 1,100, the 12-month momen­tum will drop to 39% at the end of March and 27% at the end of April this year. Even this drop in momen­tum requires the GDP-weighted PMI to rise to 55 and higher. Although not impos­si­ble, it seems improb­a­ble given the sub-par eco­nomic recov­ery. It can there­fore be deduced that the US equity mar­ket is some­what over­priced even if the GDP-weighted PMI should improve to 55. Under­stand­ably, Marc Faber sug­gests (via a Finan­cial Times inter­view) “investors should make 2010 the year of ‘cap­i­tal preservation’”.

Source: Plexus Asset Man­age­ment (based on data from I-Net Bridge).

For more dis­cus­sion on the econ­omy and finan­cial mar­kets, see my recent posts “Mon­tier: Was it all just a bad dream? Or, ten lessons not learnt“, “Barry Ritholtz sticks with stocks, espe­cially emerg­ing mar­kets“, “Q4 earn­ings in per­spec­tive“, “Face to face with Marc Faber” and “Is the credit malaise really over?” (And do make a point of lis­ten­ing to Don­ald Coxe’s web­cast of Feb­ru­ary 26, which can be accessed from the side­bar of the Invest­ment Post­cards site.)

Twit­ter and Face­book
I reg­u­larly post short com­ments (max­i­mum 140 char­ac­ters) on top­i­cal eco­nomic and mar­ket issues, web links and graphs on Twit­ter. For those read­ers not doing so already, you can fol­low my “tweets” by click­ing here. You may also con­sider join­ing me as a friend on Face­book.

Econ­omy
“Busi­ness sen­ti­ment has improved markedly since hit­ting bot­tom about a year ago. This improve­ment has been about the same across the globe, with South Amer­i­cans some­what more opti­mistic and North Amer­i­cans some­what less so,” accord­ing to the results of the lat­est Sur­vey of Busi­ness Con­fi­dence of the World by Moody’s Economy.com. Busi­nesses are most upbeat when respond­ing to broader ques­tions about cur­rent con­di­tions and the out­look into this sum­mer, but remain cau­tious when respond­ing to spe­cific ques­tions regard­ing the strength of sales, pric­ing, inven­to­ries and hir­ing.

Source: Moody’s Economy.com

Mean­while, the Ifo Busi­ness Sur­vey for indus­try and trade in Ger­many clouded over some­what in Feb­ru­ary. For the first time in ten months, the busi­ness cli­mate index has not risen, blam­ing espe­cially the sit­u­a­tion in retail­ing, which expe­ri­enced a set­back in Feb­ru­ary. On the whole, the firms have assessed their cur­rent busi­ness sit­u­a­tion some­what more unfa­vor­ably than in the pre­vi­ous month.

Source: Ifo Busi­ness Sur­vey, Feb­ru­ary 23, 2010.

A snap­shot of the week’s rather mixed US eco­nomic reports is pro­vided below. (Click on the dates to see North­ern Trust’s assess­ment of the var­i­ous data releases.)

Fri­day, Feb­ru­ary 26
• Exist­ing home sales and inven­to­ries dis­ap­point
• Minor revi­sions of Q4 real GDP

Thurs­day, Feb­ru­ary 25
• Have durable goods orders and ship­ments turned the cor­ner?
• Total con­tin­u­ing claims remain at ele­vated level

Wednes­day, Feb­ru­ary 24
• Chair­man Bernanke repeats “Fed fund rate to remain excep­tion­ally low for an extended period”
• Sales of new homes post new record low
• As Greece goes, so goes the US?

Tues­day, Feb­ru­ary 23
• Con­sumer con­fi­dence slips in Feb­ru­ary
• Case-Shiller Home Price Index records sev­enth monthly gain

Mon­day, Feb­ru­ary 22
• Fed’s Yellen under­scores that remov­ing mon­e­tary accom­mo­da­tion now is inap­pro­pri­ate
• Chicago Fed Index advances in January

Refer­ring to Fed Chair­man Bernanke’s tes­ti­mony, Asha Ban­ga­lore (North­ern Trust) said: “The most impor­tant mes­sage from Chair­man Bernanke’s tes­ti­mony is that the fed­eral fund rate will be held at 0%-0.25% for an extended period. In light of the higher dis­count rate (0.75% vs. 0.50%) announced on Feb­ru­ary 18, 2010, mar­ket par­tic­i­pants obtained con­fir­ma­tion from the Chair­man that the change in the dis­count rate was a removal of emer­gency accom­mo­da­tion put in place to address the finan­cial cri­sis and not a sign of tight­en­ing of the mon­e­tary pol­icy stance.”

“I don’t think the Fed dares increase the fed fund or pol­icy rate in the face of unem­ploy­ment at double-digit type of lev­els. This is more of a tech­ni­cal maneu­ver,” Bill Gross of Pimco told Reuters (via Mon­eyNews).

In related news, the Trea­sury said on Tues­day that it would bol­ster its Sup­ple­men­tary Financ­ing Pro­gram by sell­ing $200 bil­lion in short-term debt and stor­ing the pro­ceeds at the cen­tral bank, thereby help­ing the Fed remove reserves from the finan­cial system.

Sum­ma­riz­ing the growth out­look, Ban­ga­lore said: “Going for­ward, the US econ­omy is pre­dicted to show mod­er­ate growth in the first three quar­ters of 2010 and strong growth in the final three months of 2010, with the vir­tu­ous cycle of real and finan­cial recov­ery work­ing together to lift eco­nomic growth.”

Bespoke high­lights a daily Life Eval­u­a­tion Poll con­ducted by Gallup.com and Health­ways in which par­tic­i­pants are asked whether they are “thriv­ing”, “strug­gling” or “suffering”. As shown below, 56% now say they’re thriv­ing, while 41% say they’re strug­gling (3% are suf­fer­ing, which is not shown on the chart). ”These read­ings are at just about the widest spread we’ve seen since the mar­kets’ recov­ery began,” remarked Bespoke.

Source: Bespoke, Feb­ru­ary 26, 2010.

Week’s eco­nomic reports
Click here for the week’s econ­omy in pic­tures, cour­tesy of Jake of Econom­Pic Data.

Source: Yahoo Finance, Feb­ru­ary 26, 2010.

Click here for a sum­mary of Wells Fargo Secu­ri­ties’ weekly eco­nomic and finan­cial commentary.

Next week sees inter­est rate announce­ments by the Bank of Eng­land (BoE) and the Euro­pean Cen­tral Bank (ECB) (Thurs­day, March 4). In addi­tion, US eco­nomic data reports for the week include the following:

Mon­day, March 1
• Per­sonal income
• Per­sonal spend­ing
• PCE prices
• Con­struc­tion spend­ing
• ISM Man­u­fac­tur­ing Index

Tues­day, March 2
• Auto sales
• Truck sales

Wednes­day, March 3
• Chal­lenger job cuts
• ADP employ­ment
• ISM Ser­vices Index
• Fed’s Beige Book

Thurs­day, March 4
• Job­less claims
• Pro­duc­tiv­ity
• Fac­tory orders
• Pend­ing home sales

Fri­day, March 5
• Non­farm pay­rolls
• Con­sumer credit

Mar­kets
The per­for­mance chart obtained from the Wall Street Jour­nal Online shows how dif­fer­ent global finan­cial mar­kets per­formed dur­ing the past week.

Source:Wall Street Jour­nal Online, Feb­ru­ary 26, 2010.

Final words

Sam Sto­vall, chief invest­ment strate­gist for Stan­dard & Poor’s Equity Research Ser­vices, said: “If every­one is fore­cast­ing some­thing, then you know it won’t come true.” (Hat tip: Charles Kirk.) Let’s hope the news items and quotes from mar­ket com­men­ta­tors included in the “Words from the Wise” review will assist read­ers of Invest­ment Post­cards in guard­ing against pop­u­lar (and often wrong) mar­ket views.

That’s the way it looks from Cape Town with its sun-drenched days.

Did you enjoy this post? If so, click here to sub­scribe to updates to Invest­ment Post­cards from Cape Town by e-mail.

Source: Adam Zyglis, Comics.com

Real World Eco­nom­ics Review Blog: Greenspan, Fried­man and Sum­mers win Dyna­mite Prize in Eco­nom­ics
“Alan Greenspan has been judged the econ­o­mist most respon­si­ble for caus­ing the Global Finan­cial Cri­sis. He and 2nd and 3rd place fin­ish­ers Mil­ton Fried­man and Larry Sum­mers, have won the first — and hope­fully last — Dyna­mite Prize in Economics.

“They have been judged to be the three econ­o­mists most respon­si­ble for the Global Finan­cial Cri­sis. More fig­u­ra­tively, they are the three econ­o­mists most respon­si­ble for blow­ing up the global economy.

“More than 7,500 peo­ple voted — most of whom were econ­o­mists them­selves — from the 11,000 sub­scribers to the real world eco­nom­ics review. With a max­i­mum of three votes per voter, a total of 18,531 votes were cast.

“This blog estab­lished the prize in response to attempts by econ­o­mists to evade respon­si­bil­ity for the cri­sis by call­ing it an unpre­dictable, ‘Black Swan’ event. In real­ity, the pub­lic per­cep­tion that eco­nomic the­o­ries and poli­cies helped cause the cri­sis is correct.”

Source: Real World Eco­nom­ics Review Blog, Feb­ru­ary 22, 2010.

BCA Research: Sow­ing the seeds of the next fis­cal cri­sis?
“Mush­room­ing gov­ern­ment indebt­ed­ness has reemerged to the fore­front as a major issue. “Global pol­i­cy­mak­ers learned from the volatil­ity dur­ing the first half of the 20th cen­tury: when faced with an adverse eco­nomic shock, the nat­ural ten­dency for a mod­ern econ­omy with lever­age is to deflate and undergo an Austrian-style cleans­ing process. Thus, there is an incen­tive for author­i­ties to reflate each time eco­nomic and finan­cial prob­lems break out, encour­ag­ing a fur­ther buildup of debt and lever­age in the econ­omy (i.e. push today’s prob­lems for­ward to the next generation).

“We have coined this the Debt Super­cy­cle. Unfor­tu­nately, the dra­matic increase in the pol­icy response needed to end the cur­rent reces­sion sug­gests that the Debt Super­cy­cle is near­ing an end. In fact, we would argue that the house­hold sec­tor in the US, UK, and many parts of the euro area have already moved beyond their nat­ural debt ceil­ings, due in part by lax bank lend­ing stan­dards in recent years.

“Given that author­i­ties have reached the limit of their abil­ity to con­vince house­holds to take on more lever­age, gov­ern­ments have instead been forced to lever­age them­selves to pre­vent a defla­tion­ary eco­nomic adjust­ment. In addi­tion, the nature of the syn­chro­nized global down­turn meant that sub­stan­tial cur­rency depre­ci­a­tion was not a viable refla­tion option for pol­i­cy­mak­ers. As such, mon­e­tary and fis­cal pol­icy had to do the heavy lift­ing. Siz­able deficits were a nec­es­sary evil if author­i­ties wanted to avoid a sus­tained period of debt-deflation.”

Source: BCA Research — Daily Insights, Feb­ru­ary 26, 2010.

David Fuller (Fuller­money): Con­cen­trate long-term invest­ments in low risk coun­tries
“There has been a great deal of dis­cus­sion in the finan­cial press about whether Greece will suc­cess­fully nav­i­gate the cri­sis it now finds itself in, if the Euro­zone will sur­vive a sov­er­eign debt default should one occur and if there is a risk of con­ta­gion for coun­tries such as the UK, Japan and the US. These are all impor­tant ques­tions which we will have defin­i­tive answers for in the com­ing months and years but to my mind there is a more impor­tant ques­tion that needs to be addressed first.

“All the issues fac­ing these gov­ern­ments are in essence related to a prob­lem with too much debt and lever­age and not enough tax receipts to pay it down. The ques­tions so far have focused on how one coun­try or another might sur­vive this cri­sis but from the per­spec­tive of a judge at an inter­na­tional beauty con­test do we want to invest in these coun­tries at all since there are plenty more where these prob­lems are rel­a­tively minor if they exist at all?

“Com­mod­ity pro­duc­ers such as Aus­tralia and Canada have come through this cri­sis com­par­a­tively unharmed. Most of the oth­ers are pri­mar­ily in the so-called emerg­ing mar­kets. Brazil is now a net cred­i­tor, China has the biggest for­eign cur­rency reserves in the world. Large num­bers of coun­tries in Latin Amer­ica and Asia run trade sur­pluses. If we look at the world with a broader per­spec­tive we see clearly where risk and lever­age are concentrated.

“The out­come of the major chal­lenges fac­ing the US, UK, Euro­zone and Japan are cru­cial because of the effect they have on the global mar­ket. How­ever, we do not have to invest in the debt, cur­ren­cies or equi­ties of these coun­tries. Oth­ers are bet­ter equipped to deal with these issues from a posi­tion of strength. They have shown to be cred­i­ble man­agers of their economies in a truly test­ing era and it is surely in these coun­tries one should con­cen­trate long-term investments.”

Source: David Fuller, Fuller­money, Feb­ru­ary 24, 2010.

Finan­cial Times: Experts eye pos­si­ble Greek bail-out
“As Greece bat­tles to stop its pub­lic finances from drown­ing in debt, tech­ni­cal experts in euro­zone cap­i­tals are already look­ing at the shape of a pos­si­ble bail-out — despite a cho­rus of gov­ern­ments insist­ing that no plans for such a move exist.

“Even Berlin has become so wor­ried about the sta­bil­ity of the euro — and of Ger­man banks hold­ing Greek debt — that offi­cials have begun ton­ing down Germany’s “No finan­cial aid for Greece” mantra.

“One senior Ger­man offi­cial said Berlin and other euro­zone gov­ern­ments were pre­pared to lend Athens money or buy its sov­er­eign bonds, should the Greek admin­is­tra­tion run into trou­ble rolling over debt on the markets.

“Lorenzo Bini Smaghi, of the Euro­pean Cen­tral Bank’s exec­u­tive board, told Ital­ian tele­vi­sion that it was ‘pos­si­ble that money will be needed’ to help Greece. But it would be a sum ‘much more lim­ited’ than the fig­ure of about €20bn ($27bn) dis­cussed by euro­zone offi­cials this month.

“Athens has about €20bn in debt com­ing due in April and May, which will need to be refi­nanced. Euro­zone nations hope that cur­rent Greek reforms will con­vince investors to buy its bonds — with the euro­zone only cov­er­ing any shortfall.

“Ger­man offi­cials have said any fund­ing gap the zone might have to fill could well prove ‘quite small’. Berlin might push for the sym­bol­ism of all euro nations chip­ping in mod­est amounts to meet this short­fall, accord­ing to these officials.

“A tried-and-tested allo­ca­tion key under con­sid­er­a­tion for this approach is based on the gross domes­tic prod­uct and population-weighted share­hold­ings of the Euro­pean Cen­tral Bank. By this mea­sure, Berlin would cover 28 per cent of Greece’s fund­ing gap, Paris 21 per cent and Rome 18.

“The big­ger the Greek fund­ing need, how­ever, the more this would strain other bud­gets also under pres­sure in Italy, Spain, Por­tu­gal and Ire­land. For this rea­son, a French offi­cial said help­ing Athens could yet be voluntary.

“In a sign that any help would be decided in an ad hoc man­ner, a Ger­man offi­cial said mea­sures would be agreed ‘on a case-by-case basis’. It would be up to each coun­try to decide for itself how to struc­ture its contributions.”

Source: Ger­rit Wies­mann and Peggy Hollinger, Finan­cial Times, Feb­ru­ary 23, 2010.

The Wall Street Jour­nal: Greek debt cri­sis — Athens choked by gen­eral strike
“A mas­sive gen­eral strike to protest EU-mandated aus­ter­ity mea­sures closed banks, gov­ern­ment offices and post offices, crip­pling the Greek cap­i­tal on Wednes­day. The Wall Street Journal’s Andy Jor­dan reports from the streets of Athens.”

Source: The Wall Street Jour­nal, Feb­ru­ary 24, 2010.

Mar­tinKro­n­i­cle: Greece and Cal­i­for­nia death match
“The spreads between Greece/German bunds and California/30-yr Trea­suries are widen­ing. Investors are demand­ing more for car­ry­ing the risk. The down­grade in CA paper yes­ter­day will give the Greek bonds a run for their Drachmas …

“Accord­ing to a Reuters report, the spread between 10-year Greek gov­ern­ment bonds and the bench­mark Euro zone Ger­man bunds has risen to an 11-month high of 298 bps, up from 265 the day before. The high is 300 bps set about a year ago. The equiv­a­lent for Span­ish bonds is trad­ing at 81 bps pre­mium over Ger­man bunds.

“Accord­ing to an arti­cle in Bloomberg, the spreads between CA debt and the 30-year bond are also widen­ing and PIMCO was quoted as say­ing that the CA debt cri­sis is headed back to dis­as­ter levels.

“Bloomberg: ‘A tax­able Cal­i­for­nia bond that matures in 2039 traded today for an aver­age yield of 7.79 per­cent in blocks of more than $1 mil­lion, the high­est since Decem­ber 28, accord­ing to Munic­i­pal Secu­ri­ties Rule­mak­ing Board data. That opened a gap of 3.15 per­cent­age points between California’s bond and 30-year Trea­suries, accord­ing to Bloomberg data.’

“Yikes …!

“Add to that the fact that S&P down­graded California’s debt rat­ing to AA– from AA … not that I hold S&P in any esteem — I don’t. But the fact is that CA will now have to pay higher coupon pay­ments on the issuance of new debt thanks to the down­grade. They deserved it.”

Source: Mar­tinKro­n­i­cle, Feb­ru­ary 24, 2010.

Finan­cial Times: Gold­man role in Greek cri­sis probed
“The US cen­tral bank is look­ing into Gold­man Sachs’s role in arrang­ing con­tentious deriv­a­tives trades for Greece, which helped the coun­try to mas­sage its pub­lic finances, Ben Bernanke, chair­man of the Fed­eral Reserve, revealed on Thursday.

“‘We are look­ing into a num­ber of ques­tions relat­ing to Gold­man Sachs and other com­pa­nies and their deriv­a­tives arrange­ments with Greece,’ Mr Bernanke said, appar­ently refer­ring to Greek cur­rency trans­ac­tions struc­tured by Goldman.

“Tes­ti­fy­ing before Con­gress, Mr Bernanke also responded to con­cerns that insta­bil­ity in mar­kets for Greek debt and other secu­ri­ties has been height­ened by trad­ing in other deriv­a­tives, known as credit default swaps, which com­pen­sate investors in case of default.

“Mr Bernanke said default swaps are ‘prop­erly used as hedg­ing instru­ments’ and that ‘using these instru­ments in a way that inten­tion­ally desta­bilises a com­pany or a coun­try is counterproductive’.

“The Secu­ri­ties and Exchange Com­mis­sion is ‘exam­in­ing poten­tial abuses and desta­bil­is­ing effects related to the use of credit default swaps and other opaque finan­cial prod­ucts and prac­tices’, said a spokesman.

“Sep­a­rately, Phil Angelides, chair­man of the US Finan­cial Cri­sis Inquiry Com­mis­sion, told the Finan­cial Times he was con­cerned about the prac­tice of cre­at­ing secu­ri­ties and ‘fully bet­ting against them’ — and about Goldman’s role in par­tic­u­lar. Gold­man declined to comment.”

Source: Alan Rappe­port, Tom Braith­waite and David Oak­ley, Finan­cial Times, Feb­ru­ary 25, 2010.

Finan­cial Times: Bernanke sig­nals US rates to be kept low
“US inter­est rates will remain at excep­tion­ally low lev­els for an ‘extended period’ in spite of the ‘nascent’ eco­nomic recov­ery, Ben Bernanke, chair­man of the Fed­eral Reserve, told Con­gress on Wednesday.

“Mr Bernanke painted a gloomy pic­ture of the econ­omy, still strug­gling with high unem­ploy­ment and a weak hous­ing mar­ket. Infla­tion­ary pres­sures, the main dri­ver of tighter mon­e­tary pol­icy, were likely to remain ’sub­dued’, he said.

“Fac­ing law­mak­ers for the first time in his sec­ond term as Fed chair­man, he told the House finan­cial ser­vices com­mit­tee: ‘The Fed­eral Open Mar­ket com­mit­tee con­tin­ues to antic­i­pate that eco­nomic con­di­tions — includ­ing low rates of resource util­i­sa­tion, sub­dued infla­tion trends and sta­ble infla­tion expec­ta­tions — are likely to war­rant excep­tion­ally low lev­els of the fed­eral funds rate for an extended period.’

“The insis­tence that rate rises are months away will damp fears that last week’s increase in the dis­count rate — at which com­mer­cial banks can bor­row emer­gency cash from the cen­tral bank — from 0.5 per cent to 0.75 per cent her­alds a swifter tight­en­ing of mon­e­tary policy.

“Fed offi­cials, includ­ing Mr Bernanke, have indi­cated it was sim­ply a move to unwind emer­gency liq­uid­ity mea­sures put in place dur­ing the cri­sis, as a result of improv­ing con­di­tions in the finan­cial mar­kets, and not a tight­en­ing move. Gold­man Sachs econ­o­mists said it was ‘crys­tal clear’ the Fed did not antic­i­pate rais­ing rates soon.

“Nev­er­the­less, the Fed this month began to lay out its vision for the sequence of mea­sures that it expects to take to with­draw reserves from the finan­cial sys­tem once the eco­nomic recov­ery is suf­fi­ciently strong. Although the econ­omy grew at an annu­alised rate of 5.7 per cent in the fourth quar­ter of 2009, econ­o­mists are expect­ing the pace of growth to slow over the course of the year. The Fed is expect­ing growth of 3 per cent to 3.5 per cent this year.

“‘A sus­tained recov­ery will depend on con­tin­ued growth in pri­vate sec­tor final demand for goods and ser­vices,’ said Mr Bernanke.

“Mr Bernanke also addressed the fall­out from the finan­cial cri­sis. He said the US cen­tral bank would step up sur­veil­lance of finan­cial insti­tu­tions and agreed that con­gres­sional inves­ti­ga­tors should be allowed to audit the emer­gency facil­i­ties put in place dur­ing the crisis.”

Source: James Politi, Finan­cial Times, Feb­ru­ary 24, 2010.

Mon­eyNews: Pimco — Fed move isn’t start of tight­en­ing cycle
“The Fed­eral Reserve’s sur­prise move on Thurs­day to raise the inter­est rate it charges banks for emer­gency loans does not mean that a full-fledged tight­en­ing cycle has begun, the man­ager of Pimco, the world’s biggest bond fund, told Reuters.

“‘I don’t think it’s the begin­ning, really, of a tight­en­ing from the stand­point of mon­e­tary pol­icy,’ Bill Gross told Reuters soon after the Fed’s decision.

“‘I don’t think it is the begin­ning of an increase in the fed funds rate or in terms of inter­est on reserves that has been dis­cussed as well.’

“The US cen­tral bank took pains to draw the dis­tinc­tion between the dis­count rate and its tar­get for the overnight inter­bank rate, its main mon­e­tary pol­icy tool. That rate remains unchanged near zero per­cent as a frag­ile US eco­nomic recov­ery strug­gles to gain traction.

“‘Like the clo­sure of a num­ber of extra­or­di­nary credit pro­grams ear­lier this month, these changes are intended as a fur­ther nor­mal­iza­tion of the Fed­eral Reserve’s lend­ing facil­i­ties,’ the Fed said in a statement.

“‘The mod­i­fi­ca­tions are not expected to lead to tighter finan­cial con­di­tions for house­holds and busi­nesses and do not sig­nal any change in the out­look for the econ­omy or for mon­e­tary pol­icy,’ it said.

“‘I don’t think the Fed dares increase the fed funds or pol­icy rate in the face of unem­ploy­ment at double-digit type of lev­els. This is more of a tech­ni­cal maneu­ver,’ said Gross.

Source: Mon­eyNews, Feb­ru­ary 19, 2010.

Finan­cial Times: Fed efforts boosted by Treasury’s $200 bil­lion debt plan
“The Fed­eral Reserve’s abil­ity to drain excess liq­uid­ity from the finan­cial sys­tem received a boost on Tues­day when the Trea­sury revived a plan to sell $200bn in short-term debt and store the pro­ceeds at the cen­tral bank.

“The move comes as the Fed lays the ground­work to shrink its bal­ance sheet in prepa­ra­tion for the time when the econ­omy is suf­fi­ciently strong to require a tight­en­ing of mon­e­tary policy.

“By bol­ster­ing its Sup­ple­men­tary Financ­ing Pro­gramme, the Trea­sury would help the Fed remove $200bn in reserves from the finan­cial sys­tem. Some econ­o­mists said that this would help bring the Fed’s main inter­est rate closer to the upper end of its cur­rent 0–0.25 per cent target.

“‘This move does mean there will be $200bn fewer reserves in the bank­ing sys­tem, which could pro­vide a lit­tle bit of lift to the effec­tive fed funds rate,’ said Michael Fer­oli of JPMor­gan. ‘As such, it could be seen as a first step in putting the Fed in posi­tion to raise rates.’

“How­ever, the move was described as a ‘purely tech­ni­cal adjust­ment in liq­uid­ity’ by Joseph Abate of Bar­clays Cap­i­tal. He said: ‘The $200bn worth of reserves drained … is unlikely to have a notice­able effect on the effec­tive funds rate, which remains locked under 15 basis points.’

“The Fed did not com­ment on the move, but Ben Bernanke, chair­man, could address the issue when he faces Con­gress on Wednes­day. The Trea­sury pro­gramme was intro­duced dur­ing the cri­sis to help the Fed bet­ter man­age its bal­ance sheet.

“It had been wound down since last Sep­tem­ber, when the government’s bor­row­ing capac­ity ran up against the US debt ceil­ing. Con­gress recently agreed to raise the debt ceil­ing to $1,900bn, mak­ing it pos­si­ble to revive the programme.”

Source: James Politi, Finan­cial Times, Feb­ru­ary 24, 2010.

TheStreet.com: Stiglitz says beware of dou­ble dip
“Joseph Stiglitz, Nobel prize win­ning econ­o­mist and the author of Freefall, says the worst effects of the credit cri­sis may be behind us, but the Amer­i­can econ­omy remains highly vul­ner­a­ble to a dou­ble dip recession.”

Source: TheStreet.com, Feb­ru­ary 24, 2010.

Asha Ban­ga­lore (North­ern Trust): Minor revi­sions of Q4 real GDP
“Real gross domes­tic prod­uct grew at an annual rate 5.9% in the fourth quar­ter of 2009, slightly higher than the pre­vi­ously reported increase of 5.7%. Upward revi­sions of inven­to­ries, exports, struc­tures, and equip­ment and soft­ware more than off­set down­ward revi­sions of con­sumer spend­ing, gov­ern­ment spend­ing, and res­i­den­tial invest­ment expen­di­tures to yield a higher head­line read­ing com­pared with the advance estimate.

“At the cost of reit­er­at­ing, the fourth quar­ter head­line GDP num­ber is large but not strong because real final sales increased only 1.9% in the fourth quar­ter, while inven­to­ries accounted for nearly sev­enty per­cent of the increase in real GDP dur­ing the fourth quarter.

“Going for­ward, the US econ­omy is pre­dicted to show mod­er­ate growth in the first three quar­ters of 2010 and strong growth in the final three months of 2010, with vir­tu­ous cycle of real and finan­cial recov­ery work­ing together to lift eco­nomic growth.”

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

Asha Ban­ga­lore (North­ern Trust): Total con­tin­u­ing claims remain at ele­vated level
“Ini­tial job­less claims rose 22,000 to 496,000 in the week ended Feb­ru­ary 20. Essen­tially, ini­tial job­less claims estab­lished a bot­tom in Jan­u­ary and have once again resumed an upward trend, which is very wor­ri­some. Con­tin­u­ing claims, which lag ini­tial claims by one week, were vir­tu­ally steady at 4.617 mil­lion and the insured unem­ploy­ment rate was unchanged at 3.5%.

“Total con­tin­u­ing claims, inclu­sive of claims under spe­cial pro­grams, fell slightly to 10.29 mil­lion dur­ing the week ended Feb­ru­ary 6 from 10.56 mil­lion in the prior week. Total con­tin­u­ing claims have risen 3.95 mil­lion over the past year. The labor mar­ket remains the biggest con­cern of the FOMC, com­pet­ing closely with the hous­ing market.”

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

Clus­ter­stock: The unem­ploy­ment chart you’ll love and hate
“Here’s an unem­ploy­ment chart you’ll both love and hate, from Citi’s Steven Wieting.

“As shown below, since 1980, employ­ment (in red) has fallen after cor­po­rate prof­its (in black) have risen, and vice versa. The rela­tion­ship is very clear.

“Prob­lem is, there’s about a one-year lag between the two trends. This high­lights what should sim­ply make sense — com­pa­nies hire peo­ple once they see prof­its rebound­ing, and more impor­tantly once they believe that adding more peo­ple will lead to higher prof­its. Still, this fact of eco­nom­ics isn’t fun for the unemployed.

“But here’s the good news. Given the recent rebound in cor­po­rate prof­its the US has already expe­ri­enced, there is a very high chance that employ­ment will get bet­ter over the com­ing twelve months. One can’t stress enough the fact that employ­ment is a lag­ging indicator.”

Source: Vin­cent Fer­nando and Kamelia Angelova, Clus­ter­stock — Busi­ness Insider), Feb­ru­ary 25, 2010.

Finan­cial Times: US sen­ate moves ahead on $15 bil­lion jobs bill
“The US Sen­ate on Mon­day voted to move for­ward on a $15 bil­lion jobs bill pro­posed by Harry Reid, leader of the Demo­c­ra­tic major­ity in the Senate.

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

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

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

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

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

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

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

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

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

Source: Stan­dard and Poors’, Feb­ru­ary 23, 2010.

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

Source: VisualE­co­nom­ics, Feb­ru­ary 23, 2010.

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

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

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

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

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

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

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

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

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

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

Source: Finan­cial Times, Feb­ru­ary 22, 2010.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“China will unload more debt as the ‘euro scare’ con­tin­ues, he said.

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

“‘I am sur­prised China has not dropped more,’ Rogers told CNBC.

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

“‘The US should be wor­ried about every­one light­en­ing up — not just China,’ Rogers said.

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

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

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

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

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

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

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

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

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

“‘In that envi­ron­ment, many investors believe equi­ties could con­tinue to under­per­form high-yield’ bonds, he said.”

Source: Mon­eyNews, Feb­ru­ary 24, 2010.

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

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

Source: Bespoke, Feb­ru­ary 22, 2010.

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

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

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

Source: Bespoke, Feb­ru­ary 22, 2010.

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

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

Source: Bespoke, Feb­ru­ary 24, 2010.

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

Source: Bespoke, Feb­ru­ary 24, 2010.

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

Source: Bespoke, Feb­ru­ary 19, 2010.

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

Source: Bespoke, Feb­ru­ary 19, 2010.

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

“‘There is every rea­son to believe the US is in a strong recov­ery, and Asia is in a very strong recov­ery,’ he says.

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

“‘A lit­tle weak­ness in the euro is prob­a­bly good for Euro­pean exports and for the Euro­pean economy.’

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

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

“Biggs also approves of China’s steps to deflate its credit bubble.

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

“So what does all this mean for stocks?

“‘On bal­ance, … I’m pretty bull­ish here,’ Biggs said.”

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

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

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

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

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

Source: BCA Research, Feb­ru­ary 25, 2010.

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

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

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

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

“‘The sur­vival of Greece would still leave the future of the euro in question.’

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

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

Source: Mon­eyNews, Feb­ru­ary 22, 2010.

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

Source: Bespoke, Feb­ru­ary 26, 2010.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“‘We think gold is going all the way back up to $1,227.’

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“Pur­chas­ing man­agers’ indices on Fri­day showed that Ger­man man­u­fac­tur­ing ‘grew strongly’ in Feb­ru­ary, he added.”

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

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

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

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

Source: Nation­wide, Feb­ru­ary 26, 2010.

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

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

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

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

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

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

Click here for the full article.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Finan­cial Times, Feb­ru­ary 24, 2010.

Tags: Ben Bernanke, Biggest Banks, Bill Gross, Brazil, BRIC, BRICs, Business Confidence, Canadian Market, Commodities, Consumer Confidence Data, David Rosenberg, Debt Woes, Default Risk, Emerging Markets, energy, ETF, ETFs, Excess Spread, Fed Fund Rate, Financial Guarantees, Financial Services Committee, German Bank, Gold, Gold Bullion, Government Bonds, High Yield Corporate Bonds, House Financial Services Committee, India, Investor Optimism, Japanese Yen, Natural Gas, Natural Resources, Paul Kasriel, Quarter Stock, Risk Aversion, Risk Equities, Russia, Sell Offs
Posted in Brazil, Canadian Market, Commodities, Emerging Markets, Energy & Natural Resources, ETFs, India, Markets, Outlook, Silver | Comments Off

India — Markets give thumbs up to Budget 2010

Friday, February 26th, 2010

Mar­kets give thumbs up to Bud­get 2010

Cour­tesy of Equitymaster.com

The Union Bud­get 2010 brought some cheers to the Indian mar­kets, which had been reel­ing under fear for the past few days with respect to the government's stim­u­lus with­drawal. How­ever, the Finance Min­is­ter did not tin­ker much with the stim­u­lus but for par­tially rolling back some excise duty ben­e­fits. How­ever, much of this seemed in line with what the mar­kets had been expect­ing. Any­ways, realty, auto, and met­als stocks led today's gains.

The BSE Sen­sex and NSE Nifty closed with gains of around 175 points (1.1%) and 65 points (1.4%) respec­tively. Mid and small cap stocks also closed with gains. The BSE Mid­cap and BSE Small­cap indices closed higher by 1.5% and 1.1% respec­tively. On the broader BSE, one stock lost today for every two that closed in the positive.

Among other key Asian mar­kets, while China closed mar­gin­ally in the red, Hong Kong (up 1%) and Japan (up 0.2%) were among the gain­ers. Euro­pean mar­kets have opened today on a pos­i­tive note.

Apart from just a small roll­back of the stim­u­lus, one of the key rea­sons for today's gains was the clear roadmap announced by the gov­ern­ment with respect to reduc­ing its fis­cal deficit over the next 3–4 years. As against an esti­mated fig­ure of 6.9% and 5.5% of GDP in FY10 and FY11 respec­tively, the rolling tar­gets for fis­cal deficit are pegged at 4.8% and 4.1% for FY12 and FY13 respec­tively. Also, as the Bud­get notes, tak­ing into account the var­i­ous other financ­ing items for fis­cal deficit, the actual net mar­ket bor­row­ing of the gov­ern­ment in FY11 would be around Rs 3,450 bn, which would leave enough space to meet the credit needs of the pri­vate sector.

Auto stocks gained strongly today, Key gain­ers here included Bajaj Auto, Tata Motors, and Ashok Ley­land. A lower than expected roll­back of excise duty seem­ingly enthused investors in these stocks. Then there was the low­er­ing of per­sonal income taxes that we believe might fos­ter increased spend­ing by con­sumers on dis­cre­tionary items like auto­mo­biles. But for the increase in the ad val­orem com­po­nent of excise duty on large cars and multi-utility vehi­cles by 2% points to 22%, today's was a pos­i­tive bud­get for the auto sec­tor as a whole. We also believe that the exten­sion of R&D ben­e­fits will encour­age more invest­ments in the sec­tor and will make it com­pet­i­tive in the long run.

Realty stocks were amongst the biggest gain­ers on the broader mar­kets today. The BSE-realty index closed up by almost 3%. Key gain­ers here included HDIL, DLF, and Unitech. These gains were on the back of some relief pro­vided by the Bud­get to real estate com­pa­nies. As the Finance Min­is­ter announced, with a view to pro­vide one time interim relief to the hous­ing and real estate sec­tor that was impacted by the global reces­sion, the gov­ern­ment has allowed pend­ing projects to be com­pleted within a period of five years instead of four years for claim­ing a deduc­tion on their prof­its. The Bud­get has also pro­posed to relax the norms for built-up area of shops and other com­mer­cial estab­lish­ments in hous­ing projects to enable basic facil­i­ties for their res­i­dents. The realty firms couldn't have asked for more!

This is given that these com­pa­nies have already been amongst the biggest ben­e­fi­cia­ries of the government's fis­cal stim­u­lus pro­gramme that has helped them restruc­ture their strained bal­ance sheets. The inter­est­ing thing is that these realty com­pa­nies have come back to their greedy ways by not low­er­ing prop­erty prices by keep­ing them arti­fi­cially inflated through hoard­ing. Some like Deepak Parekh of HDFC have come out heav­ily on these com­pa­nies' tac­tics. But now, given that the Finance Min­is­ter has allowed them some more time to relax, real estate com­pa­nies and their investors are mak­ing merry.

Key India Bud­get Highlights

Cour­tesy of L&T Mutual Funds, India, here are the bud­getary high­lights for FY11.

• Total expen­di­ture pro­posed for FY11 stands at Rs.1108749 cr (US$239.6-billion) up by 8.6%. Plan expen­di­ture up by 15%. Non plan expen­di­ture up by 6%.Fiscal Deficit esti­mated at 5.5% for FY11 (from 6.9%FY10), 4.8% in FY12 and 4.1% in FY13.Direct tax pro­pos­als in form of lower income tax slabs would lead to a loss of Rs.26,000cr. (US$5.6-billion)
• Indi­rect tax pro­pos­als would lead to a gain of Rs.46,500 cr. (US$9.8-billion)
• Total tax rev­enue and other receipts would lead to Rev­enue Gain of Rs.20,500cr. (US$4.4-billion)
• Cor­po­rate Tax: MAT increased from 15% to 18%
• Sur­charge on cor­po­rate tax reduced from 10% to 7.5%.
• Need to review stim­u­lus, move to fis­cal pru­dence, says FM
• Par­tial with­drawal of fis­cal stim­u­lus mea­sures through roll back of excise duties
• Excise duty on all non oil prod­ucts increased from 8% to 10%.
• GST and DTC to be intro­duced together by April 2011.
• Ser­vice Tax rate retained at 10%
• Sub­sidy to oil com­pa­nies to be given in cash and included in bud­getary estimates.
• Sub­sidy on Fer­tilis­ers to be reduced.
• Divest­ment receipts expected to be more than Rs.25,000 cr (US$5.39375-billion) in FY10. Dis­in­vest­ment tar­gets for FY11 to the tune of Rs. 40000 crs. (US$8.63-billion)
• To pro­vide Rs 165 bln (US$3.58-billion) to PSU (Pub­lic Sec­tor Under­tak­ing, or State-run) banks
• Infra­struc­ture spend­ing pegged at Rs. 1,73,552 crs (US$37.4-billion), which is 46% of plan outlay.
• Net bor­row­ing for FY11 set at Rs 3,45,000 cr (US$74.4-billion) ; Gross bor­row­ing at Rs 4,57,000 cr (US$98.6-billion)

Equity View

• Hike in excise duty has been on expected lines.
• Increase in MAT would impact some corporates.
• Increase in tax slabs for indi­vid­u­als will give more in hand of con­sumers, key pos­i­tive as it would enhance consumption.
• Hike in petrol prices by ~Rs. 2.50 on account of increase in duties would lead to infla­tion spike in near term.
• Over­all we believe bud­get would push higher con­sump­tion and over period pri­vate capex would pick up. Econ­omy would thrive with­out the require­ment of large gov­ern­ment expen­di­ture over medium term.

Fixed Income View

• Net bor­row­ing num­ber of Rs 3.45 lakh crores (US$74.4-billion) a rea­son­able num­ber. Bond mar­kets expected to take it positively.
• How­ever divest­ment and 3G auc­tion rev­enue esti­mates on higher side for FY11. There could be risk of not meet­ing these tar­gets as planned. Risk of fis­cal deficit slip­page (increas­ing from bud­geted 5.5%) exists.
• Dis­con­tin­u­ing prac­tice of issu­ing bonds for oil and fer­til­izer com­pa­nies and giv­ing cash a pos­i­tive fis­cal con­sol­i­da­tion mea­sure. Will reduce inter­est bur­den in the long run.
• Fuel price hike due to increase in duties lead to infla­tion­ary effect and neg­a­tive for bonds
• Con­tin­ued sup­port to PSU banks through cap­i­tal infu­sion to help main­tain their credit qual­ity for issuance of CDs and Bonds.

Tags: Ascii, Ashok, Ashok Leyland, Asian Markets, Auto Stocks, Bill Gross, Bse Sensex, Cambria, Div, Emerging Markets, Enough Space, European Markets, Excise Duty, Finance Minister, Fiscal Deficit, Font Definitions, Font Format, Footer, Gainers, India, India Markets, Indian Markets, Lt, Midcap, Mso, Orphan, Panose, Paper Source, Personal Income Taxes, Pitch, Props, Rollback, Sans Serif, Small Cap Stocks, Smallcap, Stimulus, Style Definitions, Style Name, Style Type, Tata Motors, Theme Font, Times New Roman, Union Budget
Posted in Emerging Markets, Energy & Natural Resources, India, Infrastructure, Markets | Comments Off

Why Do Smart People Make Dumb Decisions,
and other Weekend Reads

Friday, February 26th, 2010

Here are our week­end read­ing selec­tions for your read­ing plea­sure. Enjoy!

Have a great weekend!

We Can All Fight Can­cer Better

At age 31, my life took a sud­den turn. I was an ambi­tious physi­cian and neu­ro­science researcher who rev­eled in dis­cov­ery and glit­ter­ing sci­ence projects. Then, slip­ping into a brain scan­ner one evening in place of a sub­ject who hadn't shown up, I was sud­denly stripped of my white-coat sta­tus and thrown into the gray world of patients: That evening, I dis­cov­ered that I had brain cancer.

Love pou­tine? Try it with bacon, eggs or steak

If french fries smoth­ered in brown gravy and topped off with cheese sounds like a plate of heaven to you, then you'll love Sam Zien's take on this Cana­dian favorite. Here, the chef who's also known as "Sam the Cook­ing Guy" shares two vari­a­tions that have steak, bacon, eggs and more greasy goodness.

What Your Pee Is Telling You

It's a sub­ject that rarely comes up in con­ver­sa­tion, but your pee could actu­ally hold the key to your health. Gas­troen­terol­o­gist Dr. Anish Sheth, co-author of What's My Pee Telling Me?, breaks down what look­ing into the toi­let bowl might reveal.

Why Do Smart Peo­ple Make Dumb Decisions?

Meet my friend Bart. Every day on his job, Bart is entrusted with mil­lions of dol­lars of other people's money, and he han­dles it well. He got his Ph.D. in elec­tri­cal engi­neer­ing from Stan­ford and is a gen­uinely gifted fel­low. He's also fit, healthy, and well-rounded.

Stressed Out Or Wor­ried? Unleash Your Inner Zorba The Greek!

It is hard to imag­ine any­one in today's world who is not famil­iar with the story (or at least the name) of Zorba the Greek. Based on the novel writ­ten by Nikos Kazantza­kis, who is arguably Greece's most impor­tant author and philoso­pher of the 20th Cen­tury, the film made "Zorba" a house­hold name and brought global recog­ni­tion to the exten­sive and pro­found work of Kazantza­kis (he also wrote The Last Temp­ta­tion of Christ).

Ben­e­fits of Vir­gin Coconut Oil

Although coconut oil's rep­u­ta­tion suf­fered a great deal in the 80's and 90's due to its high sat­u­rated fatty acid con­tent and the widely pro­moted belief that sat­u­rated fatty acids are bad for health, today, lead­ing sci­en­tists, nutri­tion­ists, and doc­tors agree that sat­u­rated fatty acids are needed for opti­mal health, and that eat­ing coconut oil can help your health in many ways.

Don't poo-poo tech­nique: Fecal trans­plant can cure super­bug, doc­tors say

A con­tro­ver­sial new treat­ment, which involves the trans­plan­ta­tion of human waste, can treat cases of C. dif­fi­cile infection. But only a hand­ful of physi­cians in Canada under­take the messy procedure.

Canada Med­ical Pro­ce­dure: Fecal Trans­plant Saves Lives

Squea­mish doc­tors afraid to use fecal ene­mas to treat a deadly gut infec­tion could be putting people's lives at risk, warns a local emer­gency physi­cian who stud­ies immunology.

Tak­ing a nap can make your smarter

The lat­est study, from the Uni­ver­sity of Cal­i­for­nia at Berke­ley, sug­gests that the brain may need sleep to process short-term mem­o­ries, cre­at­ing space for learn­ing new facts

How iChat Can Save Your Relationship

My hus­band and I rarely have huge argu­ments. We used to be much more fiery when we first got together. How­ever, when we do have a good old "barny" I always find that he is much bet­ter at it than me. Maybe because I grew up with par­ents who rarely argued in front of us. Of course they did every now and again, but gen­er­ally they were a solid team. My father's phi­los­o­phy was to stick up for my mother, whether she was right or wrong. His loy­alty was admirable, even though at numer­ous times it was to our detri­ment. My par­ents have been together now for over 45 years and are still in love with each other.

Retired Super­heroes Keep Kick­ing

At some point, the iconic super­heroes of your child­hood grow old, too. Sure, you wouldn't nec­es­sar­ily expect to see Won­der Woman smok­ing like a chim­ney or Bat­man sport­ing sil­very sprouts of chin hair from atop his motor­ized chair on wheels, but that's life, right?

Change Your Brain, Change Your Body

Why is it so hard to lose weight? Have you ever won­dered why the diets you've tried never seem to work even though they helped your best friend, hus­band, or neigh­bor lose weight? Have you ever got­ten so irri­ta­ble and emo­tional on a diet that your spouse threat­ened to divorce you? Believe me, I have seen this hap­pen, and it is far more com­mon than you might imagine.

Must Boomer Babes Face An Empty Next?

There are a strik­ing num­ber of sim­i­lar­i­ties between ado­les­cence and mid­dle age: you would be sur­prised how 50 has become the new 15. The biggest dif­fer­ence, how­ever, in these key tran­si­tional life peri­ods is that when we get past the acne, peer pres­sure, and inse­cu­rity issues of the first one, there is much to look for­ward to. Free­dom! A career! Mak­ing a fam­ily! Did I men­tion freedom?

Great Recipe — Hoisin-Glazed Black Cod with Bok Choy

Beta carotene, fiber, and omega-3 fatty acids are respon­si­ble for keep­ing your heart healthy. Here's a col­lec­tion of recipes packed with those essen­tial nutri­ents to keep your ticker tick­ing strong.

Tags: Anish, Brain Cancer, Brown Gravy, Canadian Market, Co Author, Dumb Decisions, French Fries, Global Recognition, Gray World, Household Name, Kazantzakis, Last Temptation Of Christ, Profound Work, Reading Pleasure, Reading Selections, Sam Zien, Science Projects, Sheth, Temptation Of Christ, Toilet Bowl, Zorba The Greek
Posted in Canadian Market, Energy & Natural Resources, Markets, Silver | Comments Off

The Cycle of Deflation: Impediments to Debt Relief

Friday, February 26th, 2010

The post below is a guest con­tri­bu­tion by Marty Weiner of Com­stock Part­ners, the highly regarded invest­ment man­ager run by Charles Minter.

We have been strong believ­ers in the defla­tion theme since we have been writ­ing these reports begin­ning in early 2000 (and even before).  We are attach­ing a chart depict­ing the “Cycle of Defla­tion” which you should print out and refer to as you read this comment.

As you can see by the chart, the typ­i­cal defla­tion starts with sav­ings and invest­ment which pro­duces strong sus­tain­able growth in the econ­omy.  How­ever, when “greed” gets added into the equa­tion, things some­times change into non-sustainable growth.  This is what hap­pened in the late 1900’s when the dot com bub­ble mania con­vinced every man woman and adult child to believe that they were all sup­posed to be multi mil­lion­aires.  They became so jeal­ous of their neigh­bors who boasted about all the money they made in the mar­ket, that they also jumped into the mar­ket by buy­ing such things as Inter­net Cap­i­tal Group, CMGI, Iomega, JDS Uniphase, and many oth­ers of the same ilk which are now worthless.

The unrav­el­ing started tak­ing place in 2000 and it looked to us like the Amer­i­can pub­lic came to their senses.  We expected to have a sig­nif­i­cant reces­sion where Amer­i­cans could rebuild their bal­ance sheets as the cycle of defla­tion took hold.  But,  instead the Fed low­ered inter­est rates to 1% and kept them there for a year caus­ing the pub­lic to again become jeal­ous of their neigh­bors mak­ing thou­sands and mil­lions of dol­lars on their homes. And also, believe it or not, the hous­ing bub­ble brought about another bub­ble in the stock mar­ket. We couldn’t believe our eyes!!!

After the hous­ing bub­ble burst, the stock mar­ket also col­lapsed caus­ing a finan­cial cri­sis “heard ’round the world”.  Then, we were sure the mar­kets and econ­omy would fall to lev­els that would repair bal­ance sheets of the house­hold sec­tor and allow the econ­omy to get back to the tried and true sav­ings and pro­duc­tive invest­ment that built this great coun­try.  We still need to repair the house­hold bal­ance sheets that were, and still are, in the worst shape since than the Great Depres­sion.  What will it take to get to the debt repay­ments and debt defaults (see the last stage of The Cycle of Defla­tion) that has to take place before a sus­tained recov­ery can be accomplished?

We under­stood that the stock mar­ket was extremely over­sold in March of 2009 and that there had to be a rally.  But we found the 70% to 80% rally which occurred to be incred­u­lous.  The mar­ket is up so far from the lows in March now that they have dis­counted a V shaped recov­ery.  We have to won­der if the pub­lic and finan­cial insti­tu­tions will ever learn.

We are now in the “com­pet­i­tive deval­u­a­tion” part of the cycle of defla­tion and we should be get­ting close to repair­ing the bal­ance sheets that are so out of line with his­tory.  But, there is a stum­bling block to the nor­mal com­pet­i­tive deval­u­a­tions that typ­i­cally take place. In the past, a coun­try that incurred too much debt just did what they could to devalue their cur­rency in order to export their way out of the dilemma by export­ing their goods and ser­vices to their trad­ing partners.

Now, how­ever, it is not so sim­ple.  The Chi­nese have linked their cur­rency to ours, so as we debase our cur­rency, one of our major trad­ing partner’s cur­rency is also declin­ing and China becomes the major ben­e­fi­ciary of the debase­ment of our dol­lar. Because of this peg (and the Euro tied to 22 coun­tries) the typ­i­cal method of debas­ing the cur­rency of debt laden coun­tries (or coun­tries that just want to get even) have swung down in “The Cycle of Defla­tion” past com­pet­i­tive deval­u­a­tions to “beg­gar thy neigh­bor” poli­cies.  We explained many times that “beggar-thy-neighbor” poli­cies essen­tially go much fur­ther than just cur­rency debase­ment, but actu­ally do what­ever a coun­try has to do to pro­tect its jobs and its econ­omy.  This means “dump­ing” goods and ser­vices on their trad­ing part­ners (sell­ing  goods and ser­vices below cost and sub­si­dized by the gov­ern­ment), increas­ing tar­iffs, and any­thing else in its power to help the econ­omy at their trad­ing part­ners’ expense.

A per­fect exam­ple of this lies in the recent accu­sa­tions from China that the U.S. has been “dump­ing” chicken prod­ucts into the Chi­nese mar­ket.  It at first threat­ened impos­ing heavy trade duties on U.S. chicken com­pa­nies, and just recently China did impose the heavy duties.  They imposed duties of 64.5% on Sander­son Farms, 80.5% on Pilgrim’s Pride, and 43% on Tyson Foods which just hap­pens to be an active investor in China.   These types of “beggar-thy-neighbor” poli­cies are an exten­sion of the past poli­cies they have used to sup­port exports. But now they feel that they have to go fur­ther since China now accounts for 9% of global exports.  Ear­lier this month China filed a com­pli­ant to the World Trade Orga­ni­za­tion against the Euro­pean Union tar­iffs on imports of Chi­nese shoes.  “The dol­lar peg of the rin­minbi has put addi­tional pres­sure on lower end Asian exporters.  This has led to charges of unfair trade from across Asia,” said Jamie Mezl, exec­u­tive vice pres­i­dent of the Asia Soci­ety.  Even nations in Africa and the Mid­dle East are com­plain­ing.  “When we look at the real­ity on the ground we find that there is some­thing akin to a Chi­nese inva­sion of the African con­ti­nent,” Libyan For­eign Min­is­ter Musa Kusa said in November.

China’s exports were helped enor­mously by repeg­ging their ren­minbi to the dol­lar in mid 2008.  Their exports got a fur­ther boost once the dol­lar started falling from March of 2009 by about 10%.  Now that the dol­lar has started up they could be close to revers­ing that deci­sion.  Despite all the hoopla of China try­ing to slow down their growth, the above poli­cies don’t sup­port that at all.  The Chi­nese total debt to GDP is very dif­fi­cult to quan­tify, but with the enor­mous stim­u­lus under­taken last year ($550 bil­lion) and gov­ern­ment sup­ported bank lend­ing ($1.3 tril­lion), we know they are not in great shape.

Amer­ica has retal­i­ated by impos­ing puni­tive tar­iffs (as much as 99%) on Chi­nese tires and tubu­lar steel (used in oil and gas wells).  The Chi­nese gov­ern­ment weighed in by con­demn­ing the U.S. tar­iffs as an “abuse of protectionism”.

These exam­ples of Chi­nese actions illus­trate how dif­fi­cult it is now for debt rid­den coun­tries to sim­ply devalue their cur­rency in order to export their way out of the dilemma. And just think about the sit­u­a­tion in Europe, where this prob­lem is exac­er­bated by 22 fold, since they now have 22 coun­tries tied to one currency.

The prob­lem is not con­fined to Amer­ica, Asia, and Africa-Look at what is tak­ing place in Greece presently.  In the past, a coun­try like Greece that over indulged and got caught with their “hands in the cookie jar,” would just debase their cur­rency in order to export their way out of the prob­lem.  But, now that their cur­rency is tied to the Euro like 22 other of its trad­ing part­ners, they don’t have the same option as they did in the past to bail them­selves out.

In sum­mary, due to the debt related prob­lems many coun­tries world­wide are strug­gling to help their own economies at the expense of their trad­ing part­ners.  In the past this has been accom­plished by debas­ing their cur­ren­cies in order to export their goods and ser­vices.  Because of cur­rency pegs and one cur­rency used by 22 coun­tries (Euro Zone), this means of debt relief is not as eas­ily accom­plished.  The next stage of the Cycle of Defla­tion is the much more oner­ous “beggar-thy-neighbor” poli­cies in order to sup­port the economies of debt bur­dened coun­tries.  This is not good news and could have the same effect for the global economies as Smoot Haw­ley did (a bill in 1929 that became law in 1930 which raised the tar­iffs on the U.S’s. major trad­ing part­ners).   There­fore, the main prob­lem of reduc­ing the debt of major economies through­out the world is even more com­pli­cated and makes us even more con­vinced that the sec­u­lar bear mar­ket that started in 2000 is still intact.

Source: Com­stock Part­ners, Feb­ru­ary 25, 2010.

Tags: Adult Child, Balance Sheets, Bubble Mania, Cmgi, Debt Relief, Financial Crisis, Household Sector, Housing Bubble, Ilk, Impediments, Internet Capital Group, Investment Manager, Iomega, Jds Uniphase, Man Woman, Millionaires, Minter, Oil Sands, Stock Market, Sustainable Growth, Weiner
Posted in Energy & Natural Resources, Markets | Comments Off

Technical Talk: Expect More Volatility for Equities

Friday, February 26th, 2010

The com­ments below were pro­vided by Kevin Lane of Fusion IQ.

As seen from the chart below, the S&P 500 Index hit minor resis­tance a few trad­ing ses­sions back near the 1,112 level (red line and red arrow). Until this level is taken out the near-term direc­tional bias remains neutral.

Lower down, the key level to watch is in the 1,072 area (lower green line). This line rep­re­sents a much more sig­nif­i­cant uptrend line and if vio­lated would sug­gest a big­ger correction.

Sen­ti­ment indi­ca­tors are neu­tral at present, which is a pos­i­tive, while mar­ket breadth remains a mixed bag.

Clearly the recent trad­ing activ­ity sug­gests volatil­ity will be more present in day-to-day trad­ing than over the past few months.

Source: Kevin Lane, Fusion IQ, Feb­ru­ary 25, 2010.

Tags: Day Trading, Directional Bias, Fusion, Iq, Kevin Lane, Market Breadth, Red Arrow, Red Line, Resistance, Sentiment Indicators, Trading Sessions, Uptrend Line, Volatility
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The Problem of Persistence

Friday, February 26th, 2010

By Michael Nairne, Tacita Capital

On Jan­u­ary 1, 2000, Jim Smith invested with Man­ager X. Jim had done his home­work: he had com­pared Man­ager X's per­for­mance over the prior decade against the rel­e­vant bench­mark. Although Man­ager X stum­bled in 1990, his returns had beaten the S&P 500 every year after that. This out­per­for­mance is illus­trated in the fol­low­ing graph. $1.00 invested with Man­ager X on Jan­u­ary 1, 1990 was worth $7.05 on Decem­ber 31, 1999 (see green), far in excess of the $5.32 earned by the S&P 500 (see red).

Jim had dug even deeper and reviewed sev­eral years of ana­lysts' reports. They were unan­i­mous. Man­ager X's per­for­mance war­ranted a role as core equity hold­ing. Jim also hired his own finan­cial ana­lyst to ana­lyze Manager's X's per­for­mance from a risk–adjusted per­spec­tive. Again, Man­ager X came through with fly­ing colours. Although his returns were more volatile than the S&P 500, his higher returns more than com­pen­sated for the bumpier ride. With his home­work done, Jim con­fi­dently selected Man­ager X as his core U.S. equity man­ager and allo­cated him a size­able por­tion of his portfolio.

Fast for­ward to Decem­ber 31, 2009, and Jim is rue­fully assess­ing the results of his selec­tion deci­sion. Although Man­ager X's per­for­mance had out­stripped the S&P 500 through the first half of the decade, he suf­fered mas­sive losses in the mar­ket melt­down. Every $1.00 Jim invested with Man­ager X in 2000 was worth 72 cents (see green) at the end of the decade, more than 20% less than the 91 cents yielded by the S&P 500 (see red).

Ana­lysts' reports now say this man­ager is too volatile to be a core hold­ing. Jim's own finan­cial ana­lyst ran the num­bers and now con­cludes that Man­ager X's recent risk-adjusted per­for­mance is poor. Jim won­ders where he went wrong.

Jim's expe­ri­ence high­lights the crit­i­cal ques­tion of per­sis­tence in man­ager per­for­mance – whether a manager's past per­for­mance is pre­dic­tive of his or her future per­for­mance. Cer­tainly, con­sid­er­ing the avalanche of media arti­cles on top win­ning funds and the end­less sales pitches to investors trum­pet­ing "best in class" man­agers, one would assume that there is some rea­son­able level of per­sis­tence in performance.

For­tu­nately, we can gar­ner insights based on empir­i­cal evi­dence, not puffery. Over the past half a cen­tury, there have been over 100 aca­d­e­mic stud­ies on the ques­tion of per­sis­tence in man­aged money per­for­mance. In 2003, the Fund Man­age­ment Research Cen­tre under­took a sweep­ing review of 49 of the most recent or robust of these stud­ies from the U.S., U.K. and Aus­tralia in a report
to the Aus­tralian Secu­ri­ties and Invest­ment Commission.

The report's major con­clu­sions pro­vide seri­ous investors with some clear answers:

1. Good past per­for­mance is, at best, an unre­li­able and weak pre­dic­tor of future good per­for­mance over the medium to long-run. Approx­i­mately 50 per­cent of the stud­ies found no cor­re­la­tion at all between good past per­for­mance and good future per­for­mance. Where per­sis­tence was found, it tended to be short–term, i.e. only one to two years.
2. In those stud­ies that found some level of per­sis­tence in pos­i­tive per­for­mance, the out­per­for­mance tended to be small and in many cases, would be swamped by the cost of swap­ping between funds.

The report's authors hypoth­e­sized some rea­sons for the lack of per­sis­tence in past per­for­mance – style cycli­cal­ity; the ero­sion of com­pet­i­tive advan­tage as man­agers bat­tle it out for bet­ter staff and meth­ods, and; the neg­a­tive impact of large cap­i­tal inflows on out­per­form­ing managers.

The impli­ca­tions for investors are clear. An analy­sis of past per­for­mance alone is not suf­fi­cient for the selec­tion of an invest­ment man­ager. The chance of a given out­per­form­ing man­ager repeat­ing this per­for­mance is almost ran­dom. An investor might as well use a dart­board if he or she is select­ing man­agers solely on past return numbers.

If active man­agers are to be used in a port­fo­lio, exten­sive inves­ti­ga­tion far beyond a sim­ple review of past per­for­mance is required. A recent study, for exam­ple, sug­gests that analy­sis of a manager's port­fo­lio hold­ings and the extent of their devi­a­tion from the bench­mark as well as his­toric returns might point the way to man­agers who are more likely to exhibit pos­i­tive per­for­mance per­sis­tence. How­ever, once adjusted for style, size and momen­tum fac­tors, much of this pos­i­tive per­for­mance dis­ap­pears and hence, more research is needed to val­i­date these findings.

Finally, since man­agers as a group under­per­form the mar­ket by their fees and costs, the absence of pos­i­tive per­for­mance per­sis­tence by active man­agers in gen­eral sug­gests that low cost, tax effi­cient index funds should form the core of a port­fo­lio and that active man­agers, if included, should be used in a satel­lite role. Jim Smith wishes he had taken this approach in 2000.

Feb­ru­ary 25, 2010

www.tacitacapital.com

Tacita Cap­i­tal Inc. ("Tacita") is a pri­vate, inde­pen­dent fam­ily office and invest­ment coun­selling firm that spe­cial­izes in pro­vid­ing inte­grated wealth advi­sory and port­fo­lio man­age­ment ser­vices to fam­i­lies of afflu­ence. We under­stand the chal­lenges of afflu­ence and apply the lead­ing research and best prac­tices of top finan­cial aca­d­e­mics and indus­try prac­ti­tion­ers in assist­ing our clients to reach their goals.

Tacita research has been pre­pared with­out regard to the indi­vid­ual finan­cial cir­cum­stances and objec­tives of per­sons who receive it and is not intended to replace indi­vid­u­ally tai­lored invest­ment advice. The asset classes/securities/instruments/strategies dis­cussed may not be suit­able for all investors and cer­tain investors may not be eli­gi­ble to pur­chase or par­tic­i­pate in some or all of them. The appro­pri­ate­ness of a par­tic­u­lar invest­ment or strat­egy will depend on an investor's indi­vid­ual cir­cum­stances and objec­tives. Tacita rec­om­mends that investors inde­pen­dently eval­u­ate par­tic­u­lar invest­ments and strate­gies, and encour­ages investors to seek the advice of a finan­cial advisor.

Tacita research is pre­pared for infor­ma­tional pur­poses. Nei­ther the infor­ma­tion nor any opin­ion expressed con­sti­tutes a solic­i­ta­tion by Tacita for the pur­chase or sale of any secu­ri­ties or finan­cial prod­ucts. This research is not intended to pro­vide tax, legal, or account­ing advice and read­ers are advised to seek out qual­i­fied pro­fes­sion­als that pro­vide advice on these issues for their indi­vid­ual circumstances.

Tacita research is based on pub­lic infor­ma­tion. Tacita makes every effort to use reli­able, com­pre­hen­sive infor­ma­tion, but we make no rep­re­sen­ta­tion that it is accu­rate or com­plete. We have no oblig­a­tion to inform any par­ties when opin­ions, esti­mates or infor­ma­tion in Tacita research changes.

All invest­ments involve risk includ­ing loss of prin­ci­pal. The value of and income from invest­ments may vary because of changes in inter­est rates or for­eign exchange rates, secu­ri­ties prices or mar­ket indexes, oper­a­tional or finan­cial con­di­tions of com­pa­nies or other fac­tors. There may be time lim­i­ta­tions on the exer­cise of options or other rights in secu­ri­ties trans­ac­tions. Past per­for­mance is not nec­es­sar­ily a guide to future per­for­mance. Esti­mates of future per­for­mance are based on assump­tions that may not be real­ized. Man­age­ment fees and expenses are asso­ci­ated with investing.

Tags: Benchmark, Core Equity, Critical Question, December 31, Equity Manager, Financial Analyst, Flying Colours, Homework, January 1, Jim Smith, Manager Performance, Manager X, Market Meltdown, Massive Losses, Outperformance, Persistence, Selection Decision, Sizeable Portion, Tacita
Posted in Markets, US Stocks | Comments Off

Barry Ritholtz Sticks with Stocks, Especially Emerging Markets

Friday, February 26th, 2010

“As long as the Fed is going to make money free … it’s hard to find a short,” said blog­ger and FusionIQ CEO Barry Ritholtz. Accord­ing to Yahoo Finance — Tech Ticker, he is not as bull­ish as he was last March when he called the mar­ket bot­tom, but Ritholtz is stick­ing with stocks. “The easy thing to do now would be to go to cash,” he said, “[But] I rarely find the easy trade is the one that makes you money.”

Ritholtz is now favor­ing emerg­ing mar­kets that will with­stand a weak US econ­omy, includ­ing the likes of South Korea, Brazil, Tai­wan and Singapore.

Source: Yahoo Finance — Tech Ticker, Feb­ru­ary 25, 2010.

Tags: Barry Ritholtz, Blogger, Brazil, Ceo, Economy, Emerging Markets, Market Bottom, Money, Singapore, South Korea, Stocks, Taiwan, Yahoo, Yahoo Finance
Posted in Brazil, Markets | Comments Off

Montier: Was it all just a bad dream? Or, ten lessons not learnt

Friday, February 26th, 2010

James Mon­tier, a mem­ber of GMO’s Asset Allo­ca­tion Team, exam­ines whether we learned any­thing from the mar­ket declines of 2008 and early 2009. In this paper — his first since join­ing GMO from Société Générale — he out­lines ten of the lessons he believes not to have been learned.

Here is the open­ing paragraph:

“It appears as if the mar­ket declines of 2008 and early 2009 are being treated as noth­ing more than a bad dream, as if the invest­ment indus­try has gone right back to busi­ness as usual. This extreme brevity of finan­cial mem­ory is breath­tak­ing. Surely, we should attempt to look back and learn some­thing from the mis­takes that gave rise to the worst period in mar­kets since the Great Depres­sion. In an effort to engage in exactly this kind of learn­ing expe­ri­ence, I have put together my list of the top ten lessons we seem to have failed to learn. So let’s dive in!”

And the ten lessons:

Les­son 1: Mar­kets aren’t efficient.

Les­son 2: Rel­a­tive per­for­mance is a dan­ger­ous game.

Les­son 3: The time is never different.

Les­son 4: Val­u­a­tion matters.

Les­son 5: Wait for the fat pitch.

Les­son 6: Sen­ti­ment matters.

Les­son 7: Lever­age can’t make a bad invest­ment good, but it can make a good invest­ment bad!

Les­son 8: Over-quantification hides real risk.

Les­son 9: Macro matters.

Les­son 10: Look for sources of cheap insurance.

Click here for the full report. (Click through from the link next to Montier’s pic­ture. Please note that a short reg­is­tra­tion is required.)

Tags: Asset Allocation, Bad Dream, Brevity, Cheap Insurance, Dangerous Game, Gmo, Great Depression, Investment Industry, James Montier, Learning Experience, Lesson 1, Leverage, Memory, Paragraph, Pitch, Quantification, Relative Performance, Sentiment, Societe Generale, Valuation Matters
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Japan — GDP – exports — manufacturing – autos – Toyota

Thursday, February 25th, 2010

For­get the Euro­zone for just a minute. Japan’s prob­lems are big: Toy­ota is a major exporter/employer. Last year 48% of all new stan­dard pas­sen­ger vehi­cles sold in Japan were Toy­otas (or its Lexus brand). The WSJ arti­cle describes Toyota’s sta­tus in Japan as the following:

In short, Toy­ota is to Japan what Gen­eral Motors Corp., in its hey­day, was to Amer­ica. And for a belea­guered coun­try that has suf­fered a series of insti­tu­tional blows in recent months — the col­lapse of the long-ruling polit­i­cal party, the bank­ruptcy of its cham­pion national air­line, a renewed bout of defla­tion — the global humil­i­a­tion of Toy­ota may be the most psy­cho­log­i­cally dam­ag­ing blow of all.

Psy­cho­log­i­cal blow, what about an explicit eco­nomic blow! Toy­ota is cer­tain to drag the only Asian G7 econ­omy down, since auto exports are big in aggre­gate export income.

Japan’s sin­gle largest export cat­e­gory in Decem­ber was, of course, man­u­fac­tur­ing: 22% of total exports. And a huge 14% of the total value of exports in Decem­ber came from motor vehi­cles (auto sales, that is — sep­a­rate from parts).

The Japan­ese econ­omy grew 1.14% in Q4 2009 with a huge 0.67% con­tri­bu­tion from exports. The sec­ond major con­trib­u­tor was pri­vate con­sump­tion, which added 0.39%. Going for­ward, con­sump­tion and export con­tri­bu­tions are likely to wane from the major Toy­ota recall cam­paign that is under way.

First the direct export chan­nel will prob­a­bly crum­ble as demand for Toy­ota cars derails. Sec­ond, there will be a lagged labor mar­ket effect. Sure, work­ers will be needed to address the recalls; but the loss in hours stem­ming from a drop in sales is likely to be much larger, and the net jobs effect negative.

Toy­ota is a major employer in Japan that cur­rently has 320,808 employ­ees and has already shut­tered doors (at least tem­porar­ily) in other coun­tries. It’s only a mat­ter of time before the effect hits the home labor market.

This is big. I wouldn’t be sur­prised if the IMF down­graded its fore­cast of Japan based solely on Toyota’s misstep.

Source: Rebecca Wilder, News N Eco­nom­ics, Feb­ru­ary 22, 2010.

Tags: Auto Exports, Auto Sales, Autos Toyota, Collapse, Eurozone, Export Channel, Export Income, General Motors Corp, Heyday, Japan Gdp, Japanese Economy, Matter Of Time, National Airline, Passenger Vehicles, Private Consumption, Q4, Toyota Cars, Toyota Japan, Toyota Recall, Wsj Article
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Marc Faber: Face-to-Face

Thursday, February 25th, 2010

Marc Faber, edi­tor of the Gloom, Boom and Doom Report, sits down with Ben McLan­na­han, Asia Lex Writer of the Finan­cial Times, to dis­cuss a vari­ety of per­ti­nent eco­nomic and invest­ment top­ics. In short, he sug­gests investors should make 2010 the year of “cap­i­tal preservation”.

Part 1: Warns of par­tial US debt default
Faber says irra­tional mon­e­tary pol­icy means there are asset-class bub­bles form­ing some­where, only we don’t know exactly where yet.

Click here or on the image below the view Part 1 of the interview.

Part 2: Fore­casts neg­a­tive US real inter­est rates
Faber says stocks won’t reach new highs this year.

Click here to view Part 2 of the interview.

Part 3: On gold and China’s eco­nomic slow­down
Faber pre­dicts Asian stocks will under­per­form this year because of China’s inevitable eco­nomic slow­down and sug­gests accu­mu­lat­ing gold and shift­ing more money to India and Japan.

Click here to view Part 3 of the interview.

Part 4: On the year of “cap­i­tal preser­va­tion”
Faber says global investors should make 2010 the year of “cap­i­tal preservation”.

Click here to view Part 4 of the interview.

Source:  Ben McLan­na­han, Finan­cial Times (here, here, here and here), Feb­ru­ary 23, 2010.

Tags: Asia, Asian Stocks, Boom, Bubbles, Capital Investors, Capital Preservation, China, China Economic, Debt Default, Doom, Economic Slowdown, Face To Face, Financial Times, Global Investors, Gloom Boom And Doom Report, India, interest rates, Interview Source, Japan, Lex, Marc Faber, Monetary Policy, New Highs
Posted in Canadian Market, China, Emerging Markets, India, Markets | Comments Off