Stephanie Pomboy: Here Comes QE3

Monday, October 31st, 2011

Stephanie Pom­boy, pres­i­dent of Macro­Mavens, a macro­eco­nom­ics research firm, says (at Barron’s 2011 Art of Suc­cess­ful Invest­ing con­fer­ence) that the Fed­eral Reserve needs to keep huff­ing and puff­ing until the wealth effect starts to cre­ate jobs.

Source: Barron’s, Octo­ber 29, 2011.

Tags: Barron, Federal Reserve, Jobs, Macromavens, Qe3, Stephanie Pomboy, Wealth Effect
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Bill Gross: Investment Outlook (October 31, 2011) — "Pennies From Heaven"

Monday, October 31st, 2011

Pen­nies from Heaven

by William H. Gross, PIMCO

• Once inter­est rates inch close to zero and dis­counted future cash flows are ele­vated in price, it’s dif­fi­cult to gen­er­ate much more return if eco­nomic growth doesn’t follow.
• Equity mar­kets should be dom­i­nated by div­i­dend yields and the return of cap­i­tal via share buy­backs, as opposed to growth.
• In fixed income assets, we sug­gest that port­fo­lios should avoid longer dated issues where infla­tion pre­mi­ums dom­i­nate performance.

Rank­ing right up there with the myths about Santa Claus and the tooth fairy is the leg­end that pen­nies fall from heaven. This can’t be true, a pri­ori, because God wouldn’t save pen­nies – nobody does! I know this for a fact because every week­end when Sue and I walk the neigh­bor­hood there is a fresh sup­ply just wait­ing to be picked up on the black­top. Here a penny, there a penny, every­where a penny penny. Per­haps, I fig­ure, it rained cop­per last night instead of H2O but no, they’re just on the street, lying there like a bunch of cig­a­rette butts that some­one obvi­ously didn’t want to bother with. I will. As a mat­ter of fact Sue and I com­pete for them. “Just think,” she said after beat­ing me to the first on a three penny walk the other day, “there might be twenty or thirty thou­sand of these just lying around the street in this coun­try right now. Think of all the good luck some­one could be hav­ing.” And that of course is why some­one should believe in pen­nies instead of the tooth fairy. They bring good luck: more than horse­shoes, four-leaf clovers, or even bet­ting on birth­dates when you’re play­ing Lotto. Very, very lucky!

​There’s a the­ory that your luck depends on whether the penny is found heads or tails up. I’ve never been able to actu­ally cor­re­late that sta­tis­ti­cally. The com­pe­ti­tion is so fierce between Sue and I that the posi­tion of the penny goes unob­served as we push each other out of the way to be the offi­cial finder and there­fore dis­penser of the day’s good luck. When Sue gets there first she rather smugly hands the penny to me for safe keep­ing – her shorts hav­ing no pock­ets and all. I accept it reluc­tantly, all the while scour­ing the area for what might have been a “shower” of cop­per­heads from some non­be­liever the night before.

This brings up an inter­est­ing ques­tion. If some­one throws away a penny, is it bad luck? I’m not sure but I’m not risk­ing it in any case. Those “Give a Penny, Take a Penny” con­tain­ers near your local merchant’s cash reg­is­ter should be totally avoided. Giv­ing a penny comes so close to throw­ing away a penny on the street that it ranks right up there with black cats, cracked mir­rors and walk­ing under lad­ders. In addi­tion to pen­nies, I have advice on nick­els, dimes and quar­ters that you might find lying along the road. Don’t touch ‘em. First and fore­most, they don’t bring you any luck, and sec­ond of all they have bil­lions of germs all over them. I’ve never been keen on cooties in any form or fash­ion. I might risk it for pen­nies, but I’m not about to pick up quar­ters no mat­ter how prof­itable. Besides, how could any of you think that sil­ver coated coins would be lying in the street in the first place? Accord­ing to the effi­cient mar­ket the­ory, some­one must already have picked them up. Find and save pen­nies. Very…very lucky!

Speak­ing of luck, the invest­ment ques­tion du jour should be “can you solve a debt cri­sis with more debt?” Penny or no penny. Pol­i­cy­mak­ers have been striv­ing to answer it in the affir­ma­tive ever since Lehman 2008 with an assorted array of bazookas and pop­guns: 0% inter­est rates, sequen­tial QEs with a twist, and of course now the EU grand plan with its var­i­ous ini­tia­tives involv­ing debt write-offs for Greece, bank recap­i­tal­iza­tions for Euroland depos­i­to­ries and the lever­ag­ing of their rather unique “EFSF” which requires 17 sep­a­rate votes each and every time an amend­ment is required. What a way to run a rail­road. Still, investors hold to the premise that once a grand plan is in place in Euroland and for as long as the U.S., U.K. and Japan can play scrab­ble with the 10-point “Q” let­ter, then the mar­kets are their oys­ter. Not being one to cast pearls before swine or lit­tle Euroland PIGS for that mat­ter, I would ten­ta­tively agree with one huge qual­i­fier:
As long as these poli­cies gen­er­ate growth.

Growth is the elixir that seems to make every ache, pain or seri­ous ail­ment go away. Sov­er­eign debt too high? Just grow your way out of it. Unem­ploy­ment rates hit­ting his­tor­i­cal peaks? Growth pro­duces jobs. Stock mar­kets depressed? Noth­ing a lot of growth wouldn’t cure. But growth is the com­mod­ity that the world is short of at the moment, as shown in Chart 1. No coun­try has enough of it – not even China – and many of the devel­oped coun­tries (specif­i­cally in Euroland) seem to be shrink­ing into reces­sion.

The lack of growth, as explained in prior Out­looks over the past few years, is struc­tural as opposed to cycli­cal, and there­fore rel­a­tively immune to inter­est rate or con­sump­tion stim­u­la­tive fis­cal poli­cies. 1) Glob­al­iza­tion, 2) tech­no­log­i­cal inno­va­tion, and 3) an aging global demo­graphic have all com­bined to dampen pol­icy adjust­ment post Lehman and will inex­orably con­tinue to work their black magic going for­ward. To defeat this mis­un­der­stood struc­tural voodoo, coun­tries would have to mint pen­nies by the bil­lions, pre­tend to lose them, and then incred­i­bly find them strewn all across their city streets like some global Easter egg hunt. Not gonna hap­pen.
The sit­u­a­tion, of course, is com­pounded now by high debt lev­els and gov­ern­ment spend­ing that always used to restart capitalism’s pri­vate engine. How­ever, as econ­o­mists Rogoff & Rein­hart have shown in their his­toric text, This Time Is Dif­fer­ent, sov­er­eign debt at 80–90% of GDP acts as a bar­rier to growth. Because debt ser­vice and inter­est rate spreads start to rise at these debt lev­els, a greater and greater per­cent­age of a nation’s out­put must nec­es­sar­ily be diverted to cred­i­tors who in turn become leery of rein­vest­ing in a slow­ing econ­omy. The vir­tu­ous cir­cle becomes vicious in its reflex­ive counter reac­tion, spi­ral­ing into a debt/liquidity trap á la Japan’s lost decades if not stopped in time.

Tags: Bill Gross, Birthdates, Blacktop, Bonds, Cash Flows, Cigarette Butts, Dividend Yields, Fixed Income, Gross Investment, Growth Doesn, Horseshoes, Investment Outlook, Leaf Clovers, Matter Of Fact, October 31, Outlook, Pennies From Heaven, Penny Penny, Return Of Capital, Santa Claus, Tooth Fairy, William H Gross
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Monetary Policy: Week in Review (October 30, 2011)

Monday, October 31st, 2011

The arti­cle below comes cour­tesy of Cen­tral Bank News, an author­i­ta­tive source on mon­e­tary pol­icy developments.

The past week in mon­e­tary pol­icy saw 15 cen­tral banks announce inter­est rate deci­sions. Those that increased inter­est rates were: India +25bps to 8.50%, and Mon­go­lia +50bps to 12.25%, while those that decreased inter­est rates were: The Gam­bia –100bps to 14.00%, Sierra Leone –300bps to 20.00%, and Geor­gia –25bps to 7.25%. Also announced was Angola’s cen­tral bank set­ting its new bench­mark inter­est rate at 10.50%. The cen­tral banks that held inter­est rates unchanged were: Israel 3.00%, Canada 1.00%, Hun­gary 6.00%, New Zealand 2.50%, Japan 0–0.10%, Rus­sia 8.25%, Namibia 6.00%, Swe­den 2.00%, and Colom­bia 4.50%. Also in the news was the Bank of Japan announc­ing a 5 tril­lion yen addi­tion to its quan­ti­ta­tive eas­ing program.

With just two months left in the year this week’s sum­mary chart shows a good rep­re­sen­ta­tion of mon­e­tary pol­icy this year. The key word of course is diver­sity. On the one hand there is devel­oped mar­kets with unusu­ally low inter­est rates (and low growth and low infla­tion pres­sures). While on the other hand is the emerg­ing and devel­op­ing mar­kets with much higher inter­est rates (and rel­a­tively higher growth rates and infla­tion­ary pres­sures). Even within devel­op­ing economies there is diver­sity in the tra­jec­tory of inter­est rates as some begin to feel the pinch of pol­icy tight­en­ing, paired with the dete­ri­o­rat­ing out­look in west­ern economies, and in par­tic­u­lar the ongo­ing sov­er­eign debt issues in Europe (short-term crisis-containment mea­sures notwithstanding).

Some of the key quotes from the mon­e­tary pol­icy mak­ers are included below:

• Reserve Bank of India (increased rate 25bps to 8.50%): “both infla­tion and infla­tion expec­ta­tions remain high. Infla­tion is broad-based, and is above the com­fort level of the Reserve Bank. We expect these lev­els to per­sist for two more months. There are poten­tial risks of expec­ta­tions becom­ing unhinged in the event of a pre-mature change in the pol­icy stance. How­ever, reas­sur­ingly, momen­tum indi­ca­tors, par­tic­u­larly the de-seasonalised quarter-on-quarter head­line and core infla­tion mea­sures, indi­cate mod­er­a­tion. This is con­sis­tent with the pro­jec­tion that infla­tion will decline begin­ning Decem­ber 2011.”
• Bank of Japan (added 5 tril­lion to QE): “some more time will be needed to con­firm that price sta­bil­ity is in sight and due atten­tion is needed for the risk that the eco­nomic and price out­look will fur­ther dete­ri­o­rate depend­ing on devel­op­ments in global finan­cial mar­kets and over­seas economies. While steadily imple­ment­ing its deci­sion in August to enhance mon­e­tary eas­ing, espe­cially through the pur­chase of finan­cial assets, the Bank deemed it nec­es­sary to fur­ther enhance mon­e­tary eas­ing so as to ensure a suc­cess­ful tran­si­tion to a sus­tain­able growth path with price stability.”
• Cen­tral Bank of Rus­sia (held rate at 8.25%): “Con­sid­er­ing recent domes­tic and inter­na­tional macro­eco­nomic devel­op­ments and the effect of the mon­e­tary pol­icy mea­sures, imple­mented in recent months, the Bank of Rus­si­a­judged that the cur­rent level of money mar­ket inter­est rates is appro­pri­ate to bal­ance the infla­tion­ary risks and the risks of eco­nomic growth slow­down in the near­est future”
• Bank of Mon­go­lia (increased rate 50bps to 12.25%): “The rapid expan­sion of bud­get expense, cash hand-out from the Human Devel­op­ment Fund and the high increase in loans are con­tribut­ing to higher demand. This sharp increase in demand builds the pres­sure on core infla­tion even the total sup­ply and the real capac­ity of econ­omy have not added on yet. The con­sec­u­tive growth in prices of non-food prod­ucts from the begin­ning of 2011 and the cur­rent stand in yoy 11.3% prove that the increase of total demand is bring­ing the growth of core price.”
• Riks­bank (held rate at 2.00%): “The dif­fi­cul­ties in resolv­ing the pub­lic finance cri­sis in Europe has led to increased uncer­tainty regard­ing the future. In Swe­den, growth is expected to be slightly weaker in the com­ing period. At the same time, infla­tion­ary pres­sure is low. The Exec­u­tive Board of the Riks­bank has there­fore decided to hold the repo rate unchanged at 2 per cent and to wait to increase it until some­time next year.”
• Bank of Canada (held at 1.00%): “The global econ­omy has slowed markedly as sev­eral down­side risks to the pro­jec­tion out­lined in the Bank’s July Mon­e­tary Pol­icy Report (MPR) have been real­ized. Finan­cial mar­ket volatil­ity has increased and there has been a gen­er­al­ized retrench­ment from risk-taking across global mar­kets. The com­bi­na­tion of ongo­ing delever­ag­ing by banks and house­holds, increased fis­cal aus­ter­ity and declin­ing busi­ness and con­sumer con­fi­dence is expected to restrain growth across the advanced economies. The Bank now expects that the euro area—where these dynam­ics are most acute—will expe­ri­ence a brief recession.”
• Reserve Bank of New Zealand (held rate at 2.50%): “Given the ongo­ing global eco­nomic and finan­cial risks, it remains pru­dent to con­tinue to keep the OCR on hold at 2.5 per­cent for now. How­ever, if global devel­op­ments have only a mild impact on the New Zealand econ­omy, it is likely that grad­u­ally increas­ing pres­sure on domes­tic resources will require future OCR increases.”

Look­ing at the cen­tral bank cal­en­dar, next week will be a very inter­est­ing week in cen­tral bank­ing with the very impor­tant US Fed­eral Reserve and Euro­pean Cen­tral Bank both announc­ing mon­e­tary pol­icy deci­sions. All eyes will be focused on whether the US FOMC announces or hints at any fur­ther quan­ti­ta­tive eas­ing; mean­while peo­ple will be watch­ing to see if the new ECB pres­i­dent, Mario Draghi, decides to cut the inter­est rate or pro­vide any other sup­port­ive mea­sures to aid the fal­ter­ing Euro­zone economies.

Source: Cen­tral Bank News, Octo­ber 29, 2011.

Tags: Bank News, Bank Of India, Bank Of Japan, Benchmark Interest Rate, Canadian Market, Central Banks, Containment Measures, Debt Issues, Developing Economies, India, Inflation Expectations, Inflation Pressures, Inflationary Pressures, Interest Rate Decisions, Low Interest Rates, Outlook, Policy Developments, Reserve Bank Of India, S Central, Sovereign Debt, Sweden 2, Term Crisis, Western Economies
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"Risk-On" is the Flavour of October

Monday, October 31st, 2011

It is fas­ci­nat­ing how finan­cial mar­kets moved from risk-off in Sep­tem­ber to risk-on in Octo­ber. As shown in the chart below, cour­tesy of Arthur Hill of StockCharts.com, one can mea­sure investors’ sen­ti­ment by com­par­ing the line charts of four ETFs. “The S&P 500 ETF (SPY) and US Oil Fund (USO) rise when risk is ‘on’, while the 20+ year Bond ETF (TLT) and US Dol­lar Fund (UUP) rise when risk is ‘off’. SPY and USO bot­tomed and surged as TLT and UUP peaked and plunged,” shows Hill.

Source: Arthur Hill, StockCharts.com, Octo­ber 28, 2011.

Tags: Amp, Arthur Hill, Dollar Fund, ETF, Financial Markets, Flavour, Hill Source, Investors, Line Charts, risk, Sentiment, Spy, Stockcharts, Stocks, Tlt, Uso, Uup
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Whipsaw Traps (Hussman)

Monday, October 31st, 2011

Whip­saw Traps

Octo­ber 30, 2011

by John P. Huss­man, Ph.D., Huss­man Funds

Last week was a scorch­ing "risk-on" week for the mar­kets, as a puta­tive "solu­tion" to Europe's debt prob­lems and a pos­i­tive print for third-quarter GDP con­vinced investors that all press­ing eco­nomic con­cerns have van­ished. We observed very lit­tle expan­sion of trad­ing vol­ume, which is char­ac­ter­is­tic of mar­kets where short sell­ers are forced to cover while exist­ing hold­ers raise their offers and reduce their size. For our part, Thurs­day was dif­fi­cult, as our largely defen­sive hold­ings were clearly out-of-favor, bank stocks (which we con­tinue to avoid) shot higher on short cov­er­ing, and option volatil­ity declined as investors aban­doned the desire to defend against losses.

I sup­pose it's need­less to say that we shared nei­ther the market's enthu­si­asm nor its con­fi­dence in the sud­den view that every­thing has been fixed (more on that below). At the same time, as I noted last week, spec­u­la­tion can take on a life of its own when there is a pause in fresh con­cerns, so we're not inclined to "fight" the recent advance by rais­ing our line of defense (which would expend option pre­mium on higher-strike put options). The ben­e­fit of hold­ing the exist­ing line is that we won't get another crush in near-the-money option pre­mium if the mar­ket advances fur­ther (which has con­tributed to a few per­cent of dis­com­fort in recent weeks). The down­side is that a sharp rever­sal lower won't ben­e­fit us much until the mar­ket loss exceeds about 3–5%. So we remain defen­sive here, but as a con­ces­sion to the spec­u­la­tive incli­na­tions of investors, we are not putting up a con­trar­ian fight.

Beyond that, how­ever, we don't have the evi­dence here to estab­lish a mate­r­ial pos­i­tive expo­sure or "go long" — at least not at present. Cur­rent mar­ket con­di­tions clus­ter among a set of his­tor­i­cal obser­va­tions that might best be char­ac­ter­ized as a "whip­saw trap." Though last week's rally trig­gered sev­eral widely-followed trend-following sig­nals (for exam­ple, a break through the 200-day mov­ing aver­age on the S&P 500), the broader ensem­ble of data sug­gests a high like­li­hood of a failed rally. In this par­tic­u­lar bucket of his­tor­i­cal obser­va­tions, less than 30% of them enjoyed an upside follow-through over the next 6 weeks. Some recent exam­ples from this bucket include the weeks ended 11/3/00, 12/7/01 and 2/1/08. These were points that fol­lowed snap-back ral­lies that were actu­ally good sell­ing oppor­tu­ni­ties in what turned out to be vio­lent bear mar­ket declines.

That said, about 30% of the obser­va­tions in the cur­rent bucket did enjoy a pos­i­tive follow-through. So while the expected return/risk pro­file of the mar­ket remains neg­a­tive here, we have to be some­what more ten­ta­tive about tak­ing a "hard" defen­sive posi­tion. As always, we'll respond to new evi­dence as it arrives.

On the ques­tion­able ben­e­fits of a lever­aged EFSF

With respect to Europe's per­ceived "solu­tion" to its debt cri­sis, the 50% write-down of Greek debt is appro­pri­ate, but it's not clear that this includes a write­down of Greek oblig­a­tions to "offi­cial" hold­ers such as other Euro­pean gov­ern­ments and agen­cies. If not, it's unclear whether the write­down is really deep enough to allow Greece to avoid fur­ther debt prob­lems sev­eral years out.

Like­wise, I sus­pect that investors are cel­e­brat­ing var­i­ous "head­line" fig­ures (such as "1 tril­lion euros") with­out much under­stand­ing of what they are cheer­ing about. The Euro­pean Finan­cial Sta­bil­ity Facil­ity (EFSF) is a Lux­em­bourg cor­po­ra­tion to which Euro­pean states have com­mit­ted 440 bil­lion euros of back­ing, beyond which the EFSF must issue its own bonds to investors in order to make loans (not grants) to recip­i­ent coun­tries or banks. There are two basic options that the EFSF con­tem­plates for "lever­ag­ing" its 440 bil­lion euros (which will actu­ally prob­a­bly be closer to 250 bil­lion for all of Europe after amounts needed for Greece and bank recap­i­tal­iza­tions). One is to issue "credit enhance­ments" or "par­tial pro­tec­tion cer­tifi­cates" that would be sold along with the new debt of Euro­pean gov­ern­ments, where the cer­tifi­cates would pro­vide first-loss pro­tec­tion of say, 20% of face value. Alter­na­tively, the EFSF could con­struct a "spe­cial pur­pose vehi­cle" or SPV in each given coun­try — basi­cally an invest­ment com­pany formed to buy Euro­pean debt — where the EFSF would "pro­vide the equity tranche of the vehi­cle and hence absorb the first pro­por­tion of losses incurred by the vehicle."

So to start with, the EFSF is not actu­ally an oper­at­ing "bailout fund" at present — it's a shell cor­po­ra­tion with a busi­ness plan and a cer­tain amount of promised cap­i­tal — not yet in hand — from Euro­pean gov­ern­ments, in search of addi­tional fund­ing from pri­vate investors. Its intended busi­ness is to a) par­tially insure Euro­pean debt, using cap­i­tal from Euro­pean gov­ern­ments, which these gov­ern­ments will obtain by issu­ing debt to investors, or b) to pur­chase Euro­pean debt out­right, by issu­ing EFSF debt to investors, lever­ag­ing cap­i­tal obtained from Euro­pean gov­ern­ments, which these gov­ern­ments will obtain by issu­ing debt to investors.

In effect, Euro­pean lead­ers have announced "We have agreed to solve our debt prob­lem, lever­ag­ing money we do not have, to cre­ate a fund, which will then bor­row sev­eral times that amount, in order to buy enor­mous amounts of new debt that we will need to issue."

As Jens Wei­d­mann, the Pres­i­dent of the Ger­man Bun­des­bank objected about this plan last week, "It is tied to higher risks of losses and to increased shar­ing of risks. The way they are con­structed, the lever­ag­ing instru­ments are not too dif­fer­ent from those which were partly respon­si­ble for cre­at­ing the cri­sis, because they con­cealed risks."

More­over, the ben­e­fit to pri­vate investors is sus­pect. The basic idea of lever­ag­ing the EFSF is to pro­vide enough "credit enhance­ment" to make Euro­pean debt attrac­tive. What is the value of that credit enhance­ment? Well, if the expected recov­ery rate is 80% or more, and the prob­a­bil­ity of default is fairly low, then the insur­ance (a promise to take "first loss" of 20%) isn't really needed in the first place. If you do the math, the expected effect on yields is some­thing on the order of 1–2% on 1 year debt, and a frac­tion of a per­cent for longer dated debt. Unfor­tu­nately, when the insur­ance really is needed (assum­ing more typ­i­cal recov­ery rates around 50% and default prob­a­bil­i­ties higher than 15% or so), a 20% first-loss pro­vi­sion does lit­tle but reduce an extremely high inter­est rate to a lower, but still intol­er­a­bly high inter­est rate. Given debt-to-GDP ratios of 100% or more, that pro­tec­tion does noth­ing to avoid cer­tain default except to delay it for a small num­ber of years.

Tags: Bank stocks, Bonds, Concession, Current Market, Debt Problems, Downside, Economic Concerns, GDP, Hussman Funds, Inclinations, Losses, Money Option, Option Volatility, Quarter Gdp, Rally, Short Covering, Short Sellers, Signals, Speculation, Traps, Whipsaw
Posted in Bonds, Brazil, Markets | Comments Off

How China Drives the Global Economy

Monday, October 31st, 2011

How China Dri­ves the Global Economy

By Frank Holmes, CEO and Chief Invest­ment Offi­cer
U.S. Global Investors

Unless investors get spooked over the week­end, the S&P 500 Index will post its second-best month since the post-World War II era, accord­ing to a report pub­lished today by GaveKal Research. The last time mar­kets ral­lied so strongly, Ger­ald Ford had recently moved into the White House and Muham­mad Ali “rum­bled in the jun­gle” with George Foreman.

A few weeks back, we noted that Citigroup’s Panic/Euphoria model sig­naled an extremely neg­a­tive sen­ti­ment level, indi­cat­ing that higher equity prices should fol­low. Read: Can Mar­kets Find the Road Back to Pos­i­tive Territory?

Other con­trar­ian sig­nals that can often be used as a guide when investor sen­ti­ment swings to extremes are cover sto­ries reflect­ing bull­ish or bear­ish sen­ti­ment. A cur­rent exam­ple is the Octo­ber 31 edi­tion of TIME mag­a­zine, which fea­tures “The China Bub­ble” with a photo com­par­ing China’s econ­omy to the del­i­cate nature of a blown-up piece of bub­ble gum. In addi­tion to the Euro­pean debt cri­sis and the “Occupy” move­ment, the media has latched onto the slow­down in China. How­ever, many con­trar­ian investors find these types of mag­a­zine cov­ers sig­nal a pos­si­ble attrac­tive entry point.

We’ve stated many times we don’t believe the Chi­nese econ­omy is a bub­ble, but that does not mean a sig­nif­i­cant slow­down wouldn’t affect the global econ­omy, espe­cially nat­ural resources. This is because China’s eco­nomic trans­for­ma­tion over the past few decades has cast the coun­try into the fore­front of demand. PIRA Energy Group says that, in 1990, China’s share of oil and GDP was less than 5 per­cent; its share of world energy was just under 10 per­cent. Since then, China’s share of energy, GDP and oil has risen dra­mat­i­cally, with each expected to be approx­i­mately 28 per­cent, 21 per­cent and 16 per­cent, respec­tively, by 2025.

Despite the moon­shot tra­jec­tory of China’s 20-year growth, Bern­stein Research says the coun­try still has a lot of catch­ing up to do to reach the level of the devel­oped world. Take oil con­sump­tion, for exam­ple, where China’s con­sump­tion of 2.5 bar­rels per capita in 2010 is still very low com­pared with the 22.1 bar­rels per capita that the U.S. con­sumed. Bern­stein esti­mates the growth in con­sump­tion will increase to 3.6 bar­rels per capita in 2020, this amount is only a frac­tion of the con­sump­tion in the U.S. and half of Europe’s.

Look­ing out over the next five years, a por­tion of China’s oil demand will come from trans­porta­tion fuels. Bern­stein thinks the coun­try is at an “inflex­ion point” and the demand for cars and the fuels nec­es­sary to make them go should grow “more quickly than GDP.” Dur­ing the last 10 years, the num­ber of vehi­cles has grown at an annual rate of 17 per­cent, and since 2007, more new vehi­cles are on the roads than “put on to the roads over the [pre­vi­ous] 30 years,” states Bernstein.

Although car sales have slowed in recent months because of the government’s mon­e­tary tight­en­ing poli­cies and the end­ing of a stim­u­lus pro­gram for car buy­ers, the long-term desire for auto-mobility remains. Bern­stein expects the num­ber of vehi­cles to dou­ble in China, from 78 mil­lion to 155 mil­lion units over the next five years.

While demand in China plays catch-up to the devel­oped world, devel­oped world com­pa­nies are tap­ping this resource to find growth. These are com­pa­nies such as Cater­pil­lar, which reported a “record-breaking third quar­ter” this week, with sales and rev­enues increas­ing in every part of the world. Most notably, the indus­trial bell­wether saw a 38-percent jump in sales and rev­enues in the Asia-Pacific region.

Dur­ing the company’s con­fer­ence call, CEO Doug Ober­hel­man said that he sup­ported the actions taken by the Chi­nese author­i­ties to slow its econ­omy. In his view, this was “the best thing that could have hap­pened to the con­struc­tion equip­ment indus­try.” He thought China was pre­vi­ously grow­ing at an unsus­tain­able pace, and now this slow­down is “extremely healthy” in the long-term, he added.

Health can be a rel­a­tive term when com­par­ing equi­ties. Right now, China appears to be a “healthy” place to invest com­pared to U.S. stocks. Bloomberg data shows that com­pa­nies in the MSCI China Index had a higher rev­enue per share, a higher earn­ings per share, a higher div­i­dend yield and a lower price-to-earnings ratio than the stocks in the S&P 500 Index.

China’s econ­omy is expected to grow by 9.1 per­cent this year and 8.4 per­cent next year, accord­ing to Bar­clays Cap­i­tal. This is quite sig­nif­i­cant when you con­sider that the global econ­omy is antic­i­pated to grow at a much slower pace of 3.7 per­cent in 2011 and 2012. While our invest­ment team con­tin­ues to closely mon­i­tor China’s eco­nomic health, it appears that the com­pa­nies in the coun­try still have some room to grow.

Tags: Bearish Sentiment, Bubble Gum, Chief Investment Officer, Chinese Economy, Contrarian Investors, Debt Crisis, Delicate Nature, Economic Transformation, Frank Holmes, Gerald Ford, Global Economy, Investor Sentiment, Muhammad Ali, Negative Sentiment, Pira Energy Group, Time Magazine, Time Markets, U S Global Investors, World Energy, World War Ii
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U.S. Equity Market Cheat Sheet (October 31, 2011)

Monday, October 31st, 2011

U.S. Equity Mar­ket Cheat Sheet (Octo­ber 31, 2011)

The domes­tic stock mar­ket as mea­sured by the S&P 500 Index was 3.78 per­cent higher this week, dri­ven by improv­ing investor sen­ti­ment as Euro­pean lead­ers put forth a pack­age of mea­sures intended to rework their bailout fund, recap­i­tal­ize Euro­pean banks and reduce Greece’s debt.

All ten sec­tors of the S&P 500 increased. The best-performing sec­tor for the week was mate­ri­als, which increased 7.87 per­cent. Other top-three sec­tors were finan­cials and energy. Con­sumer sta­ples was the worst per­former, up only 0.22 per­cent. Other bottom-three per­form­ers were util­i­ties and con­sumer discretion.

Within the mate­ri­als sec­tor, the best-performing stock was Allegheny Tech­nolo­gies, up 23.79 per­cent. Other top-five per­form­ers were Cliffs Nat­ural Resources, U.S. Steel Corp., Freeport-McMoRan Cop­per & Gold and AK Steel.

Strengths

• The real estate ser­vices group was the best-performing group for the week, up 24 per­cent on the strength of its only mem­ber, CBRE Group. The com­pany, for­merly known as CB Richard Ellis Group, reported earn­ings in-line with the con­sen­sus esti­mate and rev­enue above the con­sen­sus. The stock had been weak recently due to investor con­cern over poten­tial weak­ness in com­mer­cial real estate due to a poten­tially slow­ing econ­omy. How­ever, the stock surged this week as investor sen­ti­ment improved.
• The coal & con­sum­able fuel group gained 18 per­cent, with all three group mem­bers con­tribut­ing to the gain. Con­sol Energy reported quar­terly earn­ings and sales above the con­sen­sus esti­mates. Peabody Energy reported results roughly in-line with the consensus.
• The diver­si­fied met­als & min­ing group out­per­formed, up 17 per­cent. The group was led by its largest mem­ber, Freeport-McMoRan Cop­per & Gold, which ben­e­fited from higher cop­per and gold prices dur­ing the week.

Weak­nesses

• House­hold appli­ances was the worst-performing group for the week, down 10 per­cent on weak­ness of the group’s only mem­ber, Whirlpool. The appli­ances man­u­fac­turer reported earn­ings and rev­enue below the con­sen­sus estimate.
• The per­sonal prod­ucts group lost 7 per­cent on weak­ness in mem­ber Avon Prod­ucts, which reported quar­terly sales and earn­ings below the con­sen­sus estimate.
• The inter­net retail group under­per­formed, down 6 per­cent, led down by mem­bers Amazon.com and Net­flix. Ama­zon reported earn­ings below the con­sen­sus esti­mate. Net­flix, on the other hand, beat esti­mates on earn­ings, but dis­closed that the com­pany had lost 800,000 sub­scribers dur­ing the third quar­ter due to a price increase. The com­pany also guided fourth quar­ter earn­ings well below ana­lyst expectations.

Oppor­tu­ni­ties

• There may be an oppor­tu­nity for gain in M&A (merger & acqui­si­tion) trans­ac­tions in 2011. Cor­po­rate liq­uid­ity is high, thereby pro­vid­ing the means to pur­sue acquisitions.

Threats

• A mid-cycle slow­down in the domes­tic econ­omy would be neg­a­tive for stocks.
• An esca­la­tion in con­cerns over sov­er­eign debt oblig­a­tions in Europe would be neg­a­tive for stocks.

Tags: Allegheny Technologies, Cb Richard Ellis, Consensus Estimate, Consol Energy, Consumer Staples, Domestic Stock Market, Ellis Group, Estate Services Group, European Banks, Freeport Mcmoran, Freeport Mcmoran Copper, Fuel Group, Gold, Gold Prices, Household Appliances, Investor Concern, Investor Sentiment, Materials Sector, Peabody Energy, Performing Group, Quarterly Earnings
Posted in ETFs, Gold, Markets | Comments Off

The Economy and Bond Market Cheat Sheet (October 31, 2011)

Monday, October 31st, 2011

The Econ­omy and Bond Mar­ket Cheat Sheet (Octo­ber 31, 2011)

Trea­sury yields were higher this week as Euro­pean lead­ers reached an agree­ment in prin­ci­ple to recap­i­tal­ize the region’s banks, address the Greek debt sit­u­a­tion and expand the Euro­pean Finan­cial Sta­bil­ity Facil­ity. This agree­ment largely removed the threat of another full-blown finan­cial cri­sis and money shifted back toward riskier assets.

Another piece of good news that sup­ported riskier assets this week was the release of third quar­ter GDP data. GDP rose 2.5 per­cent in the third quar­ter, match­ing expec­ta­tions but also qui­et­ing some crit­ics expect­ing the U.S. to fall back into a recession.

Strengths

• The res­o­lu­tion of the imme­di­ate cri­sis in Europe was the most sig­nif­i­cant pos­i­tive event this week.
• GDP rose 2.5 per­cent in the third quar­ter as con­sumer spend­ing rose 2.4 percent.
• Sep­tem­ber durable goods orders, exclud­ing the volatile trans­porta­tion sec­tor, rose 1.7 per­cent. This is the largest rise six months.

Weak­nesses

• Con­sumer con­fi­dence fell to the low­est level since March 2009, which was the bot­tom of the global finan­cial cri­sis. Con­cerns sur­round­ing jobs and real incomes drove the sur­vey down.
• Global news flow con­tin­ues to point toward an eco­nomic slow­down as U.K. fac­tory orders fell to the low­est level this year, the Bank of Canada sharply reduced its fourth quar­ter GDP fore­cast and expec­ta­tions are for growth to slow below four per­cent in Brazil next year.
• Infla­tion risks remain as the Reserve Bank of India raised inter­est rates by 25 basis points due to stub­bornly high inflation.

Oppor­tu­ni­ties

• With the Euro­pean news behind us for the time being, investors will refo­cus on eco­nomic data such as next week’s ISM man­u­fac­tur­ing report, the Fed­eral Reserve Open Mar­ket Com­mit­tee (FOMC) meet­ing and Octo­ber unem­ploy­ment data.

Threats

• While the cur­rent Euro­pean plan to deal with the cri­sis is a pos­i­tive step for­ward, many details still need to be worked out. More­over, the plan does not deal with poten­tial prob­lems in other Euro­pean coun­tries such as Por­tu­gal, Spain and Italy.

Tags: Bank Of Canada, Bank Of India, Brazil, Canadian Market, Consumer Confidence, Debt Situation, Durable Goods Orders, Economic Slowdown, European Leaders, European News, Gdp Data, Gdp Forecast, Global Financial Crisis, India, Inflation Risks, Ism Manufacturing, K Factory, Open Market Committee, Quarter Gdp, Real Incomes, Reserve Bank Of India, Treasury Yields, Unemployment Data
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Gold Market Cheat Sheet (October 31, 2011)

Monday, October 31st, 2011

Gold Mar­ket Cheat Sheet (Octo­ber 31, 2011)

This visual shows the rise of div­i­dends in the gold sec­tor. Both New­mont and Eldo­rado have sweet­ened their div­i­dends recently by link­ing them to the gold price. New­mont will pay an extra $0.35 per share should the gold price rise above $1,700 an ounce. Sim­i­larly, Eldo­rado has promised to increase its div­i­dend by 50 per­cent should the gold price aver­age $1,500 to $1,649 an ounce.

For the week, spot gold closed at $1,743.75, up $101.37 per ounce, or 6.17 per­cent. Gold stocks, as mea­sured by the NYSE Arca Gold Min­ers Index, rose 12.18 per­cent. The U.S. Trade-Weighted Dol­lar Index slid 1.71 per­cent for the week.

Strengths

• With another event­ful week, the per­for­mance for our gold-oriented funds was in line with the bench­marks and peers. Sil­ver led the pre­cious met­als up 17 per­cent for the week, while gold gained 6 per­cent. In the sil­ver space, Sabina Gold & Sil­ver surged 38 per­cent and Sil­ver Wheaton gained 24 per­cent. Gold stocks gained about 12 per­cent on aver­age, roughly twice the lift in bul­lion, which reflects pos­i­tively upon putting money to work in the stocks.
• Other note­wor­thy gains for the week among stocks were seen from CB Gold, up 172 per­cent, and Jaguar Min­ing, which gained 41 per­cent. CB Gold recently announced pos­i­tive drill results and sold a 10 per­cent stake in the com­pany to Lumina Cap­i­tal for $10 mil­lion on Thurs­day. CB Gold was not alone in the news for the Colom­bian space, with IAMGOLD announc­ing that it would spend around $23 mil­lion buy­ing minor­ity stakes in three Colombian-focused explo­ration com­pa­nies: Bell­haven Cop­per & Gold, Tolima Gold, and Colom­bia Crest Gold.
• Indian demand for gold remains strong despite increas­ing prices for the pre­cious metal. India’s fes­ti­val of lights brought a healthy amount of buy­ing into the mar­ket while traders noted that peo­ple pre­ferred to pur­chase gold coins this time instead of spend­ing on jewelry.

Weak­nesses

• Agnico-Eagle’s share price this week con­tin­ues to reflect a neg­a­tive sen­ti­ment from last week’s write off of Goldex, Agnico-Eagle’s lowest-grade oper­at­ing mine. The stock is down 27 per­cent over the past 20 days despite report­ing a record nine-month gold pro­duc­tion of 757,668 ounces com­pared to 731,138 ounces in 2010.
• Agnico-Eagle’s pro­duc­tion growth per share has out­paced both Bar­rick Gold and New­mont Min­ing for the most recent quar­ter while its peers both have neg­a­tive pro­duc­tion growth per share over the trail­ing year. In addi­tion, Agnico-Eagle’s aver­age gold equiv­a­lent grade rel­a­tive to Bar­rick and New­mont is 192 per­cent and 230 per­cent higher, respec­tively. This implies there is more cer­tainty that a dol­lar of rev­enue will fall to the bot­tom line as profit with Agnico.
• Argentina issued a pres­i­den­tial decree on Wednes­day stat­ing that the coun­try will require all oil, gas and min­ing com­pa­nies to repa­tri­ate export rev­enue. For the most part, share prices for com­pa­nies with Argen­tinean expo­sure were pun­ished more than the news would jus­tify. This pro­vided an oppor­tu­nity to buy on the per­ceived bad news and take a hand­some profit the fol­low­ing day. Pres­i­dent Cristina Fer­nan­dez won a land­slide re-election days ear­lier and has ini­ti­ated a strong move to put a brakes on dwin­dling cen­tral bank reserves. Freez­ing money from leav­ing the coun­try would also stop any new invest­ment from com­ing in, thus com­pound­ing the problem.

Oppor­tu­ni­ties

• With clar­ity com­ing from a debt agree­ment reached at the EU sum­mit this week, com­modi­ties surged with the good news and the U.S. dol­lar con­tin­ued to lose ground against the euro. The trend of a weaker dol­lar is likely to be a con­tin­ued theme over the next month as the mar­ket begins to focus on debt issues here in the U.S. The Con­gres­sional super com­mit­tee, which is charged with fig­ur­ing out how to cut $1 tril­lion or so from the fed­eral bud­get over the next decade, appears to be at an impasse.
• In the mid­dle of earn­ings sea­son, Min­ing­Weekly high­lighted that min­ing M&A activ­ity could pick up in the fourth quar­ter, as com­pa­nies have been report­ing higher lev­els of cash than in the past. This is mainly attrib­ut­able to the increase in the price of gold. Ernst & Young says that, “cashed up com­pa­nies [may] take advan­tage of recent declines in val­u­a­tions.” M&A activ­ity dropped 6 per­cent dur­ing the first three quar­ters of 2011, as mar­kets were react­ing to spec­u­la­tion regard­ing China’s slow eco­nomic growth. Recently announced takeovers include: Agnico-Eagle buy­ing Greyd Resources, New Gold acquir­ing Sil­ver Quest Resources, and Endeav­our adding Adamus Resources to its port­fo­lio. With recent evi­dence of M&A activ­ity in the indus­try, there may well be more to come.
• Bar­rick and New­mont announced on Wednes­day a div­i­dend increase for the fourth quar­ter as the price of gold increased cash lev­els for both of the world-leading gold pro­duc­ers. Bar­rick and New­mont increased their div­i­dends by 25 and 17 per­cent, respec­tively. New­mont recently unveiled its plan to link div­i­dend pay­ments to the gold price in April (see chart above), and has since increased it in Sep­tem­ber. The com­pany has pledged a $0.20 per share increase for each $100 an ounce rise in the real­ized price of gold. Eldo­rado Gold has also announced an enhanced div­i­dend pol­icy that links its pay­out to the gold price and the num­ber of ounces sold. It is antic­i­pated that its next pay­out will be 67 per­cent higher.

Threats

• Julius Malema led hun­dreds of South African young black youth on a march to the Johan­nes­burg Stock Exchange on Thurs­day to peti­tion for the gov­ern­ment to do more to tackle chronic unem­ploy­ment sti­fling the continent’s biggest econ­omy. The Youth League demanded the State take 60 per­cent con­trol of the mines and all min­eral pro­cess­ing plants sit­u­ated close. The nation­al­iza­tion of South African mines was one of the group’s requests handed over in a mem­o­ran­dum to the South Africa’s Cham­ber of Mines.
• Aus­tralia final­ized details of its antic­i­pated 30 per­cent min­ing tax and aims to intro­duce leg­is­la­tion into par­lia­ment as soon as pos­si­ble, Mineweb reported. The tax is to be imposed on large iron ore and coal mines, which prin­ci­pally export their prod­ucts to China. It has been fore­casted that the min­ing tax will raise $7.7 bil­lion (Aus­tralian) in its first two years and $535 bil­lion by 2035 for the government’s pen­sion system.
• The fail­ure of social­is­tic poli­cies in Europe, whereby coun­tries bor­row to finance gov­ern­ment pay­rolls, is still falling on deaf ears. In the U.S., Sen­a­tor Harry Reid noted that it is more impor­tant to pro­tect gov­ern­ment jobs ver­sus pri­vate sec­tor jobs. This is quite ironic con­sid­er­ing that the U.S. Bureau of Labor Sta­tis­tics shows gov­ern­ment work­ers cur­rently have the low­est unem­ploy­ment rate of any indus­try or class at 4.7 per­cent. Mean­while, the national unem­ploy­ment rate is run­ning at 9.1 percent.

Tags: Bullion, Cheat Sheet, Commodities, Dollar Index, Exploration Companies, Festival Of Lights, Gold, Gold Coins, Gold Market, Gold Miners, Gold Price, Gold Sector, gold stocks, Iamgold, India, Lumina, Minority Stakes, Newmont, Nyse Arca, Precious Metal, precious metals, Silver Wheaton, Spot Gold
Posted in Commodities, Gold, India, Markets | Comments Off

Energy and Natural Resources Market Cheat Sheet (October 31, 2011)

Monday, October 31st, 2011

Energy and Nat­ural Resources Mar­ket Cheat Sheet (Octo­ber 31, 2011)

Strengths

• The com­modi­ties com­plex, includ­ing indus­trial met­als and crude oil, gained across the board as mar­kets wel­comed a deal by the euro­zone lead­ers this week. West Texas Inter­me­di­ate (WTI) crude oil gained nearly 7 per­cent and cop­per jumped more than 14 per­cent this week as investors’ risk appetite exploded. Commodity-related equi­ties also ral­lied which drove gains in the Global Resources Fund (PSPFX).
• Mac­quarie Research high­lighted that U.S. durable goods orders, exclud­ing trans­porta­tion equip­ment, rose 1.7 per­cent in Sep­tem­ber. This was greater than the con­sen­sus expec­ta­tion and is the strongest read­ing in the last six months.
• Sco­tia­bank noted that cop­per inven­to­ries in Asia are falling at a rate of 50,000 tonnes per week, cre­at­ing upward pres­sure on the cop­per price. The rapid decline means there’s poten­tial for zero inven­to­ries by Christmas.
• Ris­ing oil prices have led to a rise in cor­po­rate earn­ings for energy com­pa­nies. Major pro­duc­ers includ­ing Exxon Mobil, Royal Dutch Shell and France’s Total reported strong earn­ings results for the third quar­ter this week. Both Exxon Mobil and Royal Dutch Shell reported earn­ings 40 per­cent greater than a year ago, while Total’s profit rose 13 per­cent over the same time period, accord­ing to Resource Invest­ing News.

Weak­nesses

• Despite pos­i­tive num­bers across the board for the week, the Aler­ian MLP Index and the Baltic Dry Ships Index were lag­gards in the sec­tor. How­ever, each saw pos­i­tive gains, up 3.1 per­cent and 3.8 per­cent, respectively.
• A Mac­quarie report this week noted that the lat­est Steel­Bench­marker assess­ment by World Steel Dynam­ics has again high­lighted the pres­sures fac­ing the steel indus­try. The bench­mark World Export hot rolled coil (HRC) price fell 4.2 per­cent over the past 14 days to $656 per tonne, the low­est since Decem­ber 2010.
• Non-OPEC oil sup­ply out­ages have been run­ning twice the level seen in 2010. Fur­ther evi­dence of the supply-side dete­ri­o­ra­tion was seen in the extremely poor set of August num­bers for U.K. domes­tic pro­duc­tion. At 808,000 bar­rels per day, total pro­duc­tion is at its low­est lev­els since 1978.

Oppor­tu­ni­ties

• Data com­piled by Bloomberg this month shows that traders have ris­ing bull­ish expec­ta­tions for the agri­cul­ture sec­tor. Options traders are snatch­ing up pro­tec­tion against declines in agri­cul­tural stocks at the fastest rate in four years. Puts to sell the Mar­ket Vec­tors Agribusi­ness ETF out­num­ber calls by more than 2-to-1, the largest dis­crep­ancy in almost a year. Over the past month, $2.7 mil­lion has been invested in the agribusi­ness ETF, second-most among all U.S.-listed global equity ETFs.
• China will be report­ing its Octo­ber HSBC Man­u­fac­tur­ing Pur­chas­ing Man­agers Index (PMI) on Mon­day, Octo­ber 31. The flash PMI announced this past Mon­day showed expan­sion in the Chi­nese man­u­fac­tur­ing sec­tor for the first time since mid-summer and the coun­try con­tributed more than half of global incre­men­tal oil demand for the month of Sep­tem­ber, accord­ing to the Finan­cial Express. An accel­er­ated PMI could have a mean­ing­ful effect on commodities.
• A short­fall in diesel fuel sup­ply is spread­ing across China. The Xin­hau news agency is report­ing that pri­vate gas sta­tions are scour­ing the coun­try for diesel sup­plies and lines are grow­ing longer at fill­ing sta­tions in major cities. Diesel fuel short­ages are com­mon in the win­ter but longer and heavier-than-usual refin­ery main­te­nance mixed with a reduc­tion in retail prices could cre­ate the per­fect recipe for a squeeze once again this year. PetroChina imported 120,000 tonnes of diesel fuel in Octo­ber to meet the increas­ing demand while China National Petro­leum Corp. (CNPC) is run­ning its refiner­ies at full capac­ity. Refin­ery runs have increased 5.7 per­cent on a year-over-year basis and the com­pany has encour­aged refiner­ies to reduce naph­tha out­put to allow for higher diesel pro­duc­tion. Fur­ther, CNPC has said that it will raise refin­ery runs to the second-highest level on record next month in order to max­i­mize diesel output.
• Resource Invest­ing News says ris­ing pro­duc­tion costs are putting down­ward pres­sure on fer­til­izer prof­its. Fer­til­izer pro­duc­tion is very energy inten­sive, with pro­duc­tion requir­ing sig­nif­i­cant amounts of sul­fur, ammo­nia and nat­ural gas. Ana­lysts worry that ris­ing input costs and shrink­ing mar­gin prof­its may neg­a­tively impact the entire indus­try. How­ever, Potash Cor­po­ra­tion of Saskatchewan antic­i­pates improv­ing mar­gins over the near future due to “econ­omy of scale” in terms of potash pro­duc­tion. Accord­ing to Potash, “with demand expected to rise, we believe our expand­ing potash capa­bil­ity pro­vides a unique growth oppor­tu­nity. The pow­er­ful levers of sell­ing more vol­umes at higher prices, with the poten­tial for lower per tonne oper­at­ing costs, offer sig­nif­i­cant gross mar­gin poten­tial in the years ahead. Beyond the oppor­tu­nity for mar­gin expan­sion, the poten­tial for lower per-tonne min­ing taxes and improved earn­ings from our equity invest­ments pro­vides sig­nif­i­cant growth potential.”

Threats

• Sep­tem­ber PMI data across Emerg­ing Europe will be released on Novem­ber 1. Roubini Global Eco­nom­ics (RGE) is fore­cast­ing fur­ther weak­en­ing in man­u­fac­tur­ing con­di­tions, reflect­ing a decline in export orders and weak­en­ing growth out­look in the eurozone.
• On Wednes­day, Freeport McMoRan declared force majeure on ship­ments of cop­per con­cen­trates from its Gras­berg cop­per mine in Indone­sia as an increas­ingly acri­mo­nious labor strike over pay and con­di­tions con­tin­ued into its fifth week. Mineweb sug­gested that this would mean that the com­pany is not antic­i­pat­ing a pro­tracted period of dis­rup­tion at the mine.
• In the midst of earn­ings report­ing sea­son, Resource Invest­ing News reported that many ana­lysts are skep­ti­cal about pro­duc­ers being able to reach their pro­duc­tion tar­gets. As an exam­ple, Exxon Mobil will need to pump out 5 mil­lion bar­rels a day to reach its 4 per­cent growth tar­get for 2011. For the Sep­tem­ber quar­ter, Exxon Mobil reported pro­duc­ing 4.28 mil­lion bar­rels a day. Ana­lysts have spec­u­lated that one prob­lem for the pro­duc­ers is that com­pa­nies must sign production-sharing con­tracts with local gov­ern­ments in some coun­tries. This means oil pro­duc­ers receive a smaller out­put when coun­tries cash in on ris­ing crude prices. Such agree­ments are preva­lent in Africa, which accounts for 20 per­cent of Exxon Mobil’s crude oil supply.

Tags: agricultural, Alerian Mlp Index, Commodities, Copper Price, Corporate Earnings, Crude Oil, Durable Goods Orders, Earnings Results, Exxon Mobil, Hot Rolled Coil, Industrial Metals, Laggards, Opec Oil, Outlook, Rapid Decline, Resources Fund, Rising Oil Prices, Risk Appetite, Royal Dutch Shell, Same Time Period, Steel Dynamics, West Texas Intermediate, World Steel Dynamics, Wti Crude Oil
Posted in Commodities, ETFs, Markets, Oil and Gas, Outlook | Comments Off

Emerging Markets Cheat Sheet (October 31, 2011)

Monday, October 31st, 2011

Emerg­ing Mar­kets Cheat Sheet (Octo­ber 31, 2011)

Strengths

• China’s Flash PMI in Octo­ber came in at 51.1, its first read­ing above 50 in four months. A PMI read­ing above 50 indi­cates the econ­omy is in expan­sion mode and Asian mar­kets have reacted pos­i­tively to the news.
• China’s resources tax pol­icy has been revised to be based on sales. It was pre­vi­ously based on pro­duc­tion, which could have an adverse effect on cor­po­rate earn­ings when nat­ural resources prices are down. Also, the tax was con­firmed to be at 5 per­cent instead of the prior pro­posed rate between 5 and 10 percent.
• China has cre­ated 9.93 mil­lion jobs dur­ing the first nine months of this year and the country’s unem­ploy­ment rate now sits at 4.1 per­cent. This is evi­dence of China’s robust labor market.
• After September’s slower infla­tion fig­ures, China is prob­a­bly passed the infla­tion inflec­tion point. From Octo­ber 17 to Octo­ber 23, veg­etable prices dropped 2.5 per­cent, and pork prices, the major dri­ver of this year’s infla­tion rates, were down 1.8 per­cent on a week-over-week basis. Declin­ing infla­tion should relieve the People’s Bank of China from fur­ther mon­e­tary tightening.
• China’s Pre­mier Wen Jiabao said that the country’s eco­nomic pol­icy will be fine-tuned as needed. China’s indus­try min­istry said it is study­ing “stim­u­la­tive poli­cies” for smaller com­pa­nies as a global slow­down threat­ens growth.
• China’s Shang­hai Com­pos­ite Index rose 6.74 per­cent with increas­ing vol­ume for the week, reclaim­ing the 50-day mov­ing aver­age for the first time since the end of July. It was also the first unin­ter­rupted “up week” in a year. How­ever, the index is still down 12 per­cent year-to-date and its price-to-earning ratio is at the low of 2008.
• Accord­ing to Cit­i­group, emerg­ing mar­ket equity funds reported a sec­ond week of inflows as investors became more opti­mistic about the euro­zone debt cri­sis. Funds invest­ing in developing-nation stocks took in $1 bil­lion for the week ended Octo­ber 26. Adrian Mowat, JPMor­gan Chase & Co.’s Hong Kong-based chief Asian and emerging-market strate­gist, said that, “we are now call­ing for emerg­ing mar­kets to out­per­form the devel­oped mar­kets. Every­thing in emerg­ing mar­kets got con­sid­er­ably cheaper in the last year.”
• Rus­sia left bor­row­ing costs unchanged after infla­tion slowed to 6.9 per­cent. Eco­nomic growth expanded the most in three years last quar­ter as lend­ing to house­holds spurred demand, Russia’s Econ­omy Min­istry said this week.

Weak­nesses

• Korea’s third-quarter GDP expanded 0.7 per­cent from the prior quar­ter. This is down from the 0.9 per­cent growth seen dur­ing the pre­vi­ous quar­ter but slightly bet­ter than the con­sen­sus esti­mate. Con­sumer con­fi­dence in Korea slightly increased but is still trend­ing lower.
• Bar­clays Cap­i­tal high­lighted that Thailand’s flood is the worst in more than half a cen­tury, and may have wiped out as much as 14 per­cent of paddy fields in the world’s biggest rice exporter, poten­tially eras­ing the pre­dicted global glut of rice. The cri­sis has severely affected large and small farm­ers alike. Many are also look­ing at more dam­age because they have been unable to move their ani­mals in time to save them. One of the government’s recent mea­sures has been a tem­po­rary waiver of the 2 per­cent import tar­iff on soy­beans, a major ingre­di­ent in feed pro­duc­tion, in order to help the live­stock indus­try keep costs under control.
• Brazil’s Sep­tem­ber job­less rate remained unchanged in Sep­tem­ber at 6 per­cent, higher than expected. It had been antic­i­pated that it would fall to 5.8 percent.
• Colom­bian pol­i­cy­mak­ers held bor­row­ing rates at 4.5 per­cent as they gauge the impact of the Euro­pean debt cri­sis on global growth.
• Faced with a widen­ing cur­rent account deficit, the Turk­ish Cen­tral Bank tight­ened mon­e­tary pol­icy. The bank scaled back its weekly repo auc­tions and will instead pro­vide funds via its overnight lend­ing facility.

Oppor­tu­ni­ties

• BM&FBovespa SA CEO Edemir Pinto said that there are 40 com­pa­nies wait­ing to list on Brazil’s stock exchange once mar­ket volatil­ity eases after the country’s cen­tral bank cuts inter­est rates to boost growth, Bloomberg reports. Pinto, head of Latin America’s largest secu­ri­ties exchange, said the worst of the recent finan­cial tur­moil is over and investors will return to Brazil­ian stocks. He main­tains his fore­cast for 200 new share sales by 2015.
• The yield on 10-year bonds issued by Poland fell below the yield on Ital­ian debt of the same matu­rity on the expec­ta­tions of a rat­ing upgrade to A– from S&P.
• Russia’s 18-year quest to join the World Trade Orga­ni­za­tion (WTO) moved closer to ful­fill­ment this week after Geor­gia agreed to a Swiss pro­posal for a com­pro­mise between the two governments.
• This chart from BCA Research shows that China’s infra­struc­ture spend­ing per capita is still much lower than the amount the U.S. has invested in its roads, rails, tele­phones, liv­ing spaces and pas­sen­ger cars. There­fore, BCA fore­casts China’s infra­struc­ture build-out will con­tinue, in turn boost­ing demand for nat­ural resources and machinery.

Threats

• Sales of res­i­den­tial prop­er­ties in Shang­hai fell 14.9 per­cent dur­ing the first nine months to 10.63 mil­lion square meters, the Shang­hai Sta­tis­tics Depart­ment said. Fac­ing increas­ingly tight liq­uid­ity con­di­tions, swelling inven­tory and slow­ing sales, more Chi­nese devel­op­ers have moved to cut prices by 30 per­cent in order to lure cus­tomers, Phoenix News reported from Hong Kong.
• RGE reported that a reces­sion in devel­oped mar­kets, con­tin­ued delever­ag­ing in the euro­zone and risk-aversion stem­ming from the euro­zone debt cri­sis will hit Africa mostly through trade chan­nels and higher financ­ing costs. Despite sub-Saharan Africa’s over­all resilience, lim­ited finan­cial inte­gra­tion on a global scale and depressed devel­oped mar­kets could hold back the region’s expan­sion. As a result, RGE has reduced growth fore­casts to 4.8 per­cent in 2011 and 4.7 per­cent in 2012. In par­tic­u­lar, RGE is expect­ing south­ern Africa, which has expanded 3 per­cent year-to-date, to keep lag­ging behind West and East Africa. This is due to the region’s weaker demo­graph­ics, slower pop­u­la­tion growth and less con­ver­gence poten­tial as the region has a higher per-capita GDP in com­par­i­son to its West and East counterparts.
• Argentina’s Pres­i­dent Cristina Fer­nan­dez de Kirch­ner was re-elected in a land­slide win this week, secur­ing nearly 54 per­cent of votes. Ms. Fernandez’s cur­rent pop­u­lar­ity is mostly due to the health of the econ­omy, which has boomed thanks to high prices for exports such as soya. Days later, after regain­ing con­trol, Pres­i­dent Fer­nan­dez imple­mented a con­tro­ver­sial law requir­ing all oil, gas and min­ing com­pa­nies to repa­tri­ate all export revenue.
• PIRA Energy Group fore­casts flat-to-declining oil pro­duc­tion in Rus­sia. Monthly pro­duc­tion data to be released by the Russ­ian sta­tis­ti­cal agency next week will give investors a more detailed view of the near-term trends.

Tags: Bank Of China, Bonds, Brazil, Corporate Earnings, Crisis Funds, Debt Crisis, Equity Funds, Expansion Mode, First Nine Months, Global Slowdown, Industry Ministry, Inflation Figures, Inflation Rates, Inflection Point, Infrastructure, Market Equity, Pork Prices, Premier Wen Jiabao, Price To Earning Ratio, Resources Prices, Shanghai Composite Index, Unemployment Rate, Vegetable Prices
Posted in Bonds, Brazil, Infrastructure, Markets | Comments Off

Sprott: Investment Outlook (October/November 2011)

Friday, October 28th, 2011

Oil or Not,
Here They Come

By Kevin Bam­brough
Con­tribut­ing Author: Paul Dim­i­tri­adis
Sprott Asset Management

Oil has been markedly absent in the finan­cial head­lines lately. While the recent clamor over EU sol­vency and weak global growth has tem­porar­ily dis­placed its media atten­tion, oil’s cru­cial impor­tance to the world econ­omy has not dwin­dled in the slight­est. Oil remains the world’s great­est sin­gle energy source today, pro­vid­ing over 1/3 of our energy sup­ply. Although it is well under­stood that the oil price is crit­i­cal to the global econ­omy, we some­times neglect to appre­ci­ate how tightly oil sup­ply is cor­re­lated to global growth. By his­tor­i­cal stan­dards, the world has been cop­ing with con­strained oil pro­duc­tion and high oil prices for most of the past six years. This tight­ness in oil sup­ply has been a sig­nif­i­cant fac­tor lim­it­ing global growth, and it would appear that no mat­ter what finan­cial solu­tions are even­tu­ally engi­neered by our politi­cians, global growth will remain sig­nif­i­cantly restricted by the real economy’s abil­ity to pro­duce oil. Lim­ited global sup­ply growth means that the West­ern world now faces sig­nif­i­cant com­pe­ti­tion for oil from emerg­ing mar­kets whose cit­i­zenry are will­ing to work much harder for far less. This will con­tinue to result in a nar­row­ing gap of per capita con­sump­tion between emerg­ing and devel­oped economies as the emerg­ing economies con­tinue to gain rel­a­tive eco­nomic strength, wage growth, cur­rency appre­ci­a­tion and pur­chas­ing power. We believe strate­gic invest­ments in oil pro­duc­ers and ser­vice com­pa­nies will offer an effec­tive way to profit from this trend.

Pro­duc­tion – Where’s the Growth?

We begin with a review of global oil pro­duc­tion. We first wrote about Peak Oil back in 2005; and spec­u­lated that we were approach­ing the pin­na­cle of global crude oil production.1 As Fig­ure 1 below illus­trates, since that time, global oil pro­duc­tion has grown very lit­tle, appre­ci­at­ing by a mere 2% in total pro­duc­tion. This pro­duc­tion plateau gen­er­ated the 2008 oil price spike to nearly $150 per bar­rel. Sub­se­quently, despite the eco­nomic stag­na­tion expe­ri­enced by devel­oped economies, the price of Brent Crude Oil has aver­aged over $78 per bar­rel, four times higher than the ~$18 aver­age that Brent traded at in the 1990s.2

Despite this extremely large and sus­tained increase in price, oil pro­duc­tion has failed to grow mean­ing­fully. Over the past ten years, most experts have con­sis­tently over­es­ti­mated future pro­duc­tion growth and have con­tin­u­ally revised their fore­casts lower as a result. Fig­ure 2 from the U.S. Energy Infor­ma­tion Admin­is­tra­tion (“EIA”) below charts pro­duc­tion fore­casts made in 2000, 2005 and 2010. Over the last decade the EIA has revised its global oil pro­duc­tion esti­mates lower for 2015 and 2020 by 14% and 18%, respec­tively. In light of these down­ward revi­sions, it still seems extremely opti­mistic that sup­ply will increase sig­nif­i­cantly in the com­ing years.

Fig­ure 3 above illus­trates that the Inter­na­tional Energy Agency (“IEA”) esti­mates have been just as inac­cu­rate, forc­ing it to reduce its global oil pro­duc­tion esti­mates year after year.

Tags: Author Paul, Canadian, Canadian Market, Commodities, Crude Oil, Crude Oil Production, Dimitriadis, Economic Strength, Emerging Economies, Energy Supply, Financial Headlines, Global Economy, Global Growth, Global Oil Production, Global Supply, India, Investment Outlook, Oil Producers, Oil Supply, Outlook, Peak Oil, Solvency, Sprott Asset Management, Strategic Investments, Trend Production, World Economy
Posted in Canadian Market, Commodities, India, Markets, Oil and Gas, Outlook | Comments Off

"If We Don't Let Our Children Play, Who Will be the Next Steve Jobs?," and other Weekend Reads

Friday, October 28th, 2011

Here are this week's read­ing diver­sions for your per­sonal enlight­en­ment. Have a great week­end, and a Happy and Safe Hal­loween on Monday!

Lynn Crawford's Cider Glazed Pork Chops Recipe

If you want to get cre­ative for din­ner, why not try an alter­na­tive meat. Pork chops dressed with apples is deli­cious com­bi­na­tion for fall.

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4 Secrets To Never Get­ting Sick

Com­mon wis­dom has it that stay­ing indoors, where it's warm and toasty, is eas­ier on your immune sys­tem than being out­side in the cold. Prob­lem is, being inside puts you in close con­stant con­tact with other peo­ple — and their germs.

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Cof­fee May Keep World's Most Com­mon Can­cer At Bay, New Research Shows

New research pre­sented at an Amer­i­can Asso­ci­a­tion for Can­cer Research con­fer­ence sug­gests daily joe con­sump­tion may help reduce the risk of basal cell car­ci­noma, the world's most com­mon cancer.

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Marlo Thomas: Jokes For Your Next Mammogram

Many women (myself included) find it eas­ier to go to the appoint­ment with a friend. About ten years ago my best (and very funny) friend and I decided to make an annual date of it. And we've kept to that plan. We block out the after­noon, head off to the lab together, then hud­dle next to each other in our paper gowns — all the while crack­ing jokes about those freez­ing machines that will soon be "embrac­ing" us (even though embrac­ing is a very kind word for what actu­ally feels like a train wreck across your chest).

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25 Breast Can­cer Myths Busted

1. Myth: Only women with a fam­ily his­tory of breast can­cer are at risk.

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Hal­loween Safety Tips from Safe Kids Canada | iVillage.ca

Hal­loween means that there will be more chil­dren out on the streets. Dri­vers need to take extra care.

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Male Breast Can­cer: Lim­ited Aware­ness Costs Lives, New Study Says

Men have a breast can­cer inci­dence rate less than 1 per­cent of that of females, but when they do get the dis­ease, it is often more advanced, accord­ing to a sweep­ing new study.

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Mark Changizi, Ph.D.: Explained: Why We Get 'Pruney' Fingers

Our fin­gers and toes get pruney when wet. It hap­pens to even the smoothest among us. And it hap­pens to each of us in roughly the same way. There are wildly dif­fer­ent ways wrin­kles could occur on a sur­face, but pruney fin­gers have a par­tic­u­lar look. Mine in this link illus­trates the pruney signature.

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Diwali In Canada: How To Cel­e­brate The Fes­ti­val Of Lights This Weekend

The fes­ti­val is so large — and is cel­e­brated on an annual basis by so many peo­ple around the world — some even believe Diwali should be the next main­stream hol­i­day for North Americans

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Darell Ham­mond: If We Don't Let Our Chil­dren Play, Who Will Be the Next Steve Jobs?

The fore­cast doesn't look good. In an era of parental para­noia, law­suit mania and test­ing frenzy, we are fail­ing to inspire our children's curios­ity, cre­ativ­ity, and imag­i­na­tion. We are deny­ing them oppor­tu­ni­ties to tin­ker, dis­cover, and explore — in short, to play.

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Aspirin every day can cut can­cer risk: British sci­en­tists find first proof of pre­ven­ta­tive effect | Mail Online

Tak­ing aspirin reg­u­larly can cut the long-term risk of can­cer, accord­ing to the first major study of its kind.

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Hal­loween in Canada

Hal­loween is cel­e­brated in Canada on or around Octo­ber 31. It is a day to mark the sin­gle night in the year when, accord­ing to old Celtic beliefs, spir­its and the dead can cross over into the world of the liv­ing. Some peo­ple hold par­ties and chil­dren may trick-or-treat in their neighborhood.

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Tags: Basal Cell Carcinoma, Breast Cancer, Breast Cancer Incidence, Breast Cancer Myths, Canadian Market, Cancer Research, Constant Contact, Delicious Combination, Halloween Safety Tips, History Of Breast Cancer, Incidence Rate, Ivillage, Kind Word, Lynn Crawford, Male Breast Cancer, Marlo Thomas, Paper Gowns, Personal Enlightenment, Pork Chops Recipe, Safe Kids Canada, Train Wreck
Posted in Canadian Market, Markets | Comments Off

Daniel Kahneman: Would You Be Happy If You Were Richer?

Friday, October 28th, 2011

“When peo­ple con­sider the impact of any sin­gle fac­tor on their well-being — not only income — they are prone to exag­ger­ate its impor­tance; we refer to this ten­dency as the focus­ing illusion”

Click Here To Read: Daniel Kah­ne­man ” Would You Be Hap­pier If You were Richer? A Focus­ing Illusion”

Intro­duc­tion (Via Princeton)

Most peo­ple believe that they would be hap­pier if they were richer, but sur­vey evi­dence on sub­jec­tive well-being is largely incon­sis­tent with that belief. Sub­jec­tive well-being is most com­monly mea­sured by ques­tions that ask peo­ple, “All things con­sid­ered, how sat­is­fied are you with your life as a whole these days?” or “Taken all together, would you say that you are very happy, pretty happy, or not too happy?” Such ques­tions elicit a global eval­u­a­tion of one’s life. An alter­na­tive method asks peo­ple to report their feel­ings in real time, which yields a mea­sure of expe­ri­enced hap­pi­ness. Sur­veys in many coun­tries con­ducted over decades indi­cate that, on aver­age, reported global judg­ments of life sat­is­fac­tion or hap­pi­ness have not changed much over the last four decades, in spite of large increases in real income per capita. While reported life sat­is­fac­tion and house­hold income are pos­i­tively cor­re­lated in a cross-section of peo­ple at a given time, increases in income have been found to have mainly a tran­si­tory effect on indi­vid­u­als’ reported life sat­is­fac­tion. (1–3) More­over, the cor­re­la­tion between income and sub­jec­tive well-being is weaker when a mea­sure of expe­ri­enced hap­pi­ness is used instead of a global mea­sure. This arti­cle reviews recent evi­dence that helps inter­pret these observations.

Addi­tional Excerpts (Via Princeton)

When peo­ple con­sider the impact of any sin­gle fac­tor on their well-being — not only income — they are prone to exag­ger­ate its impor­tance; we refer to this ten­dency as the focus­ing illu­sion. Income has even less effect on people’s moment-to-moment hedo­nic expe­ri­ences than on the judg­ment they make when asked to report their sat­is­fac­tion with their life or over­all hap­pi­ness. These find­ings sug­gest that the stan­dard sur­vey ques­tions by which sub­jec­tive well­be­ing is mea­sured (mainly by ask­ing respon­dents for a global judg­ment about their sat­is­fac­tion or hap­pi­ness with their life as a whole) may induce a form of focus­ing illu­sion, by draw­ing people’s atten­tion to their rel­a­tive stand­ing in the dis­tri­b­u­tion of mate­r­ial well-being. More impor­tantly, the focus­ing illu­sion may be a source of error in sig­nif­i­cant deci­sions that peo­ple make.

Despite the weak rela­tion­ship between income and global life sat­is­fac­tion or expe­ri­enced hap­pi­ness, many peo­ple are highly moti­vated to increase their income. In some cases, this focus­ing illu­sion may lead to a mis­al­lo­ca­tion of time, from accept­ing lengthy com­mutes (which are among the worst moments of the day) to sac­ri­fic­ing time spent social­iz­ing (which are among the best moments of the day). (28) An empha­sis on the role of atten­tion helps to explain both why many peo­ple seek high income – because they over pre­dict the increase in hap­pi­ness due to the focus­ing illu­sion and because changes in rel­a­tive income are asso­ci­ated with strong emo­tional responses – and why the long-term effects of these changes are rel­a­tively small — because atten­tion even­tu­ally shifts to less novel aspects of daily life.

Copy­right © Daniel Kah­ne­man, Prince­ton University

h/t: Simoleon Sense

Tags: Correlation, Cross Section, Daniel Kahneman, Excerpts, Global Evaluation, Happiness, Household Income, Illusion, Income Per Capita, Judgments, Last Four Decades, Life Satisfaction, Moment To Moment, Princeton, Spite, Subjective Well Being, Survey Evidence, Tendency, Time Increases, Transitory Effect
Posted in Markets | Comments Off

Key ETF Performance: Green Everywhere (Except Gov't Bonds)

Friday, October 28th, 2011

by Bespoke Invest­ment Group

Take a look at the table below high­light­ing the recent per­for­mance of key ETFs across all asset classes.  The gains today alone — espe­cially for the coun­try ETFs — are staggering.

Copy­right © Bespoke Invest­ment Group

Tags: Asset Classes, Bonds, Bonds Investment, Etf Performance, ETFs, Investment Group, Performance Bonds
Posted in Bonds, Brazil, ETFs, Markets | Comments Off

All Ten Sectors Overbought (Bespoke)

Friday, October 28th, 2011

by Bespoke Invest­ment Group

The dark red shad­ing in the table below rep­re­sents between two and three stan­dard devi­a­tions above the sector's 50-day mov­ing aver­age, and moves into this range are con­sid­ered extremely over­bought.  As shown, not only are all ten S&P 500 sec­tors over­bought (at least one stan­dard devi­a­tion above the 50-day), but 8 out of 10 are in extreme ter­ri­tory.  The Finan­cial sec­tor is the most over­bought of them all at three stan­dard devi­a­tions above its 50-day.  The Mate­ri­als sec­tor is the least over­bought at just under two stan­dard devi­a­tions above its 50-day.

Copy­right © Bespoke Invest­ment Group

Tags: Stocks
Posted in Markets | Comments Off

From Russian Rubles to the Chilean Peso, EM Debt Goes Local (Tucker)

Friday, October 28th, 2011

by Matt Tucker, Man­ag­ing Direc­tor, iShares

A decade ago, buy­ing a local cur­rency emerg­ing mar­ket (EM) bond fund would have been nearly impos­si­ble. In the “old” days emerg­ing mar­ket gov­ern­ments pri­mar­ily issued bonds that were denom­i­nated in for­eign cur­ren­cies, like US dol­lars, Japan­ese Yen or Euros, when they wanted to raise capital.

Issuers like Brazil, Poland and Indone­sia used to tar­get this exter­nal debt at for­eign investors. Their local cur­rency debt was tar­geted at local investors, like pen­sion plans, insur­ance com­pa­nies and pri­vate indi­vid­u­als within the coun­try. Many of these coun­tries directly restricted for­eign investors from buy­ing local cur­rency bonds through cap­i­tal con­trols, puni­tive taxes or reg­u­la­tions. A US investor look­ing to access a Brazil­ian bond denom­i­nated in reals would have been fac­ing an uphill battle.

Some issuers, like China and India, still restrict for­eign investors from pur­chas­ing their local cur­rency debt. Oth­ers have taxes on for­eign investors, which are designed to limit the amount of for­eign cap­i­tal, like Brazil’s 6% IOF (Imposto sobre Oper­ações Finan­ceiras) tax.

But times are chang­ing and many EM issuers are relax­ing such restric­tions. Some coun­tries are now issu­ing bonds that are denom­i­nated in local cur­ren­cies but tar­geted at inter­na­tional investors. These “global” bonds trade in global clear­ing and set­tle­ment sys­tems, like Euro­clear or the Depos­i­tory Trust Com­pany (DTC), instead of local clear­ing sys­tems. The Philip­pines, Rus­sia, Colom­bia, Chile, Brazil and Egypt have all issued global local cur­rency bonds.

Last week, my col­league Russ blogged about using emerg­ing mar­ket debt as a long-term option for investors wor­ried about a dete­ri­o­ra­tion of credit qual­ity in the devel­oped world.

Local cur­rency emerg­ing mar­ket bond ETFs can offer investors expo­sure to emerg­ing mar­kets with­out the same type of poten­tial volatil­ity that is typ­i­cally asso­ci­ated with equi­ties. Adding an allo­ca­tion to local cur­rency EM debt can also help an investor diver­sify out of the US dol­lar or away from devel­oped mar­ket cur­ren­cies, like the Euro or the Yen.

Addi­tion­ally, because yield lev­els are higher than for devel­oped mar­ket bonds, local cur­rency EM debt can increase the yield of a fixed income portfolio.

Emerg­ing mar­ket debt is a rel­a­tively new asset class for many investors, espe­cially bonds that are denom­i­nated in local cur­ren­cies, but it offers another tool with which to man­age fixed income expo­sure.  (Poten­tial iShares solu­tion: LEMB)

Diver­si­fi­ca­tion may not pro­tect against mar­ket risk.

Bonds and bond funds will decrease in value as inter­est rates rise. In addi­tion to the nor­mal risks asso­ci­ated with invest­ing, inter­na­tional invest­ments may involve risk of cap­i­tal loss from unfa­vor­able fluc­tu­a­tion in cur­rency val­ues, from dif­fer­ences in gen­er­ally accepted account­ing prin­ci­ples or from eco­nomic or polit­i­cal insta­bil­ity in other nations. Emerg­ing mar­kets involve height­ened risks related to the same fac­tors as well as increased volatil­ity and lower trad­ing vol­ume. Secu­ri­ties focus­ing on a sin­gle coun­try may be sub­ject to higher volatility.

Nar­rowly focused invest­ments typ­i­cally exhibit higher volatil­ity and are sub­ject to greater geo­graphic or asset class risk. Bond funds may be sub­ject to credit risk, which refers to the pos­si­bil­ity that the debt issuers will not be able to make prin­ci­pal and inter­est pay­ments.
Copy­right © iShares

Tags: Bond Fund, Bonds, Brazil, Chilean Peso, Credit Quality, Currency Bonds, Currency Debt, Depository Trust Company, Emerging Market, Euroclear, External Debt, Foreign Currencies, Foreign Investors, Global Bonds, India, International Investors, Japanese Yen, Matt Tucker, Pension Plans, Punitive Taxes, Russian Rubles, Settlement Systems, Term Option
Posted in Bonds, Brazil, ETFs, India, Markets | Comments Off

Backing Brazil and Avoiding Indian Inflation (Koesterich)

Friday, October 28th, 2011

by Russ Koes­terich, Chief Invest­ment Strate­gist, iShares

In his lat­est video install­ment, iShares Chief Invest­ment Strate­gist Russ Koes­terich takes investors to Latin Amer­ica and explains why Brazil is his favorite spot in the region. But for investors who might be inter­ested in India, Russ has some words of caution.

For more from Russ on this topic, lis­ten to the Novem­ber Mar­ket Per­spec­tives pod­cast.

Tags: Brazil, Chief Investment Strategist, Favorite Spot, India, inflation, Investors, Ishares, Latin America, Market Perspectives, Russ, Words Of Caution
Posted in Brazil, India, Markets | Comments Off

Eddie Lampert vs. Larry Summers on Long-Term Investing

Friday, October 28th, 2011

Video: Eddie Lam­pert on Long-term Investing

Bil­lion­aire hedge fund man­ager Edward Lam­pert, For­mer U.S. Trea­sury Sec­re­tary Lawrence Sum­mers, and Google Inc. Chair­man Eric Schmidt talk about long-term ver­sus short-term invest­ing.

H/T Val­ueIn­vest­ing­World

Tags: Billionaire, Eddie Lampert, Edward Lampert, Eric Schmidt, Google, Google Inc, Hedge Fund Manager, Larry Summers, Lawrence Summers, Short Term Investing, Term Investing, Treasury Secretary, U S Treasury
Posted in ETFs, Markets | Comments Off

Robert Arnott: Investment Outlook (October 2011)

Thursday, October 27th, 2011

THE LONG VIEW—BUILDING THE 3-D SHELTER

by Robert Arnott, Octo­ber (end) 2011

The word hur­ri­cane is derived from “juracán,” a Span­ish deriva­tion of a word from the indige­nous islanders of the West Indies. The islanders believed in a god named Juracán that either was the storm or cre­ated the great storms that descended upon them cer­tain times of the year.1 Given the feroc­ity and result­ing dis­rup­tion of daily life, Juracán and his storms not sur­pris­ingly helped define the islanders’ cul­ture. Colum­bus learned of the word shortly upon arriv­ing in the New World and brought the term back to Spain for its even­tual incor­po­ra­tion into most West­ern languages.

A half-millennium later, we use the term to describe the “3-D” storm that will likely be at the fore­front of cap­i­tal mar­kets. Unend­ing deficits, mas­sive debt, and unfa­vor­able demo­graph­ics, like low pres­sure eddies over warm ocean waters, are the kinds of con­di­tions that cre­ate stagfla­tion­ary squalls over the next decade or more. With recent mar­kets focused relent­lessly on the pre­sumed defla­tion­ary impact of a double-dip reces­sion and Euro­pean con­ta­gion, the mar­ket is focused on—to bor­row a phrase from Will Rogers—a return of cap­i­tal, not on cap­i­tal. But for the vast major­ity of investors, the rel­e­vant time hori­zon is much longer and likely to be infla­tion­ary. Sadly, tra­di­tional port­fo­lios are likely to leave many investors caught up in the storm surge of ris­ing prices.

In this issue, we will sug­gest grad­u­ally build­ing a “third pil­lar” to exist­ing devel­oped world equity and bond allo­ca­tions. Such a port­fo­lio should pro­duce more mean­ing­ful real returns over a mar­ket cycle—an out­come we assert should be the ulti­mate goal for investors.

A Miss for Diver­si­fi­ca­tion and Real Return Assets

Before we delve fur­ther into the prog­no­sis for infla­tion and port­fo­lio impli­ca­tions, let us review the recent asset allo­ca­tion envi­ron­ment. Table 1 shows third quar­ter per­for­mance of the 16 asset classes we typ­i­cally use to proxy a more diver­si­fied port­fo­lio than the tra­di­tional 60/40 equity/fixed-income stan­dard asset allocation.

The diver­si­fied port­fo­lio fell 6.2%, the bulk of which occurred in the quarter’s final month. Sep­tem­ber, with its –4.5% return, was the eighth worst month since 1988 for the diver­si­fied port­fo­lio. In fact, the diver­si­fied 16 asset class mix also trailed the tra­di­tional 60/40 blend of S&P 500 Index stocks and Bar­Cap Aggre­gate bonds, which posted a –3.9% return.

Since 1988, such short­falls for diver­si­fi­ca­tion have largely been asso­ci­ated with cri­sis peri­ods where mas­sive uncer­tainty forces investors to first sell alter­na­tive mar­kets, where per­haps risk is least under­stood. Par­en­thet­i­cally, there’s prob­a­bly some “mav­er­ick risk” con­tribut­ing as well—large losses in emerg­ing mar­ket local cur­rency bonds draw far more scrutiny than sim­i­lar declines incurred in the S&P 500! As Fig­ure 1 shows, the Sep­tem­ber loss for the 16-asset port­fo­lio was exceeded only in four note­wor­thy periods—the 2008 Global Finan­cial Cri­sis, the 1998 Long-Term Cap­i­tal Management/Russian Default, the 1990 Inva­sion of Kuwait, and the Sep­tem­ber 2001 ter­ror­ist attacks. Inter­est­ingly, these pre­vi­ous cri­sis peri­ods all sub­se­quently wit­nessed supe­rior results—an aver­age of 2.7% per annum over the 60/40 portfolio—in the three years post cri­sis, as shown in

Of course, every cri­sis is dif­fer­ent. So what is dri­ving the seem­ing fail­ure of diver­si­fi­ca­tion this time? Revis­it­ing Table 1, it is clear that the mar­kets whole­heart­edly aban­doned the idea of infla­tion pro­tec­tion dur­ing the third quar­ter. Of the 12 asset classes that have his­tor­i­cally been pos­i­tively cor­re­lated with infla­tion, only TIPS (Trea­sury Inflation-Protected Secu­ri­ties) pro­duced a pos­i­tive return for the lat­est quar­ter, and that was pri­mar­ily due to across the board bond yield com­pres­sion over­rid­ing the neg­a­tive impact from its infla­tion pro­tec­tion. The remain­ing 11 all posted losses—averaging 12%!

Is Infla­tion Really a Non-Issue?

Unlike “the mar­ket,” we believe infla­tion will be a fac­tor in the next decade or two because of the game-changing effects of deficits, debts, and demo­graph­ics. Com­bined these three “Ds” could pro­duce hur­ri­cane force head­winds to devel­oped world growth and tail­winds to bursts of ris­ing prices as debt lev­els are manip­u­lated down to more man­age­able lev­els. Over the past two years, we have encour­aged investors to place a greater empha­sis on real return asset classes and the emerg­ing mar­kets (where our 3-D head­wind is a rel­a­tive tail­wind). We also advo­cate using an expanded inflation-protection asset class toolkit and tac­ti­cal man­age­ment to pro­duce sub­stan­tive real returns in such an environment.2 Key tools in the toolkit: tra­di­tional real return asset classes (TIPS, com­modi­ties, and REITs) and what we have labeled “stealth infla­tion fight­ers” such as bank loans, emerg­ing mar­ket local cur­rency debt, high yield bonds, and convertibles—the same assets that were bru­tal­ized in the third quarter!

We have oft referred to a port­fo­lio of these assets as the “third pil­lar” to be added to the main­stays of tra­di­tional stocks and bonds. Scal­ing the allo­ca­tion of this third pil­lar is depen­dent on one’s view of the prob­a­bil­ity and mag­ni­tude of the 3-D storm. We obvi­ously are strong believ­ers and assert the third pil­lar should be the core—the largest and most cen­tral part of one’s port­fo­lio mix.

But if these inflation-protection assets were sav­aged, then we must really be look­ing at a rapidly deflat­ing price level, right? Wrong! Infla­tion is 3.9% and core inflation—inflation net of the basic things that dom­i­nate the spend­ing of work­ing families—is 2%. Com­pound­ing mat­ters, infla­tion is cal­cu­lated in a way that pro­duces fig­ures 2–4% lower than in the past. So, 3.9% infla­tion prob­a­bly means 6–8%, using the old fash­ioned method. The dif­fer­ence? The old fash­ioned method sim­ply asks how much prices are ris­ing or falling. The new method asks how much quality-adjusted prices have risen or fallen. If an anti-lock brak­ing sys­tem for a car was a $2,000 option, but it’s now stan­dard equip­ment, and the car costs $1,000 more, then the car is pre­sumed to be $1,000 cheaper. If a $1,000 com­puter has dou­bled in speed or capac­ity, it is pre­sumed to have fallen 50% in price. This cal­cu­la­tion pro­vides lit­tle com­fort to those squeezed by ris­ing prices for basic necessities.3

Worse, the near-term direc­tion for infla­tion is up, not down. The one-year infla­tion rate is a func­tion of the dif­fer­ence between the new month’s data (com­ing in) and the year-old month’s data (going out). Rates for those soon-to-be-dropped months are 0.0–0.2%. That means year-end infla­tion will assuredly be above 4% and may even reach 5%… using the new method that sys­tem­at­i­cally reduces our reported rates of infla­tion. Fed­eral Reserve Chair­man Ben S. Bernanke dis­misses the one-year infla­tion rate as a tem­po­rary spike, because core infla­tion and three-year infla­tion rates are “well grounded.” Based on the year-ago months that are about to be dropped, one-year core infla­tion is likely to fin­ish the year at about 3%. And, based on the three-year-ago defla­tion­ary months from 2008 that are about to be dropped, the three-year annu­al­ized infla­tion rate is likely to soar from 1.1% at mid-year to around 3% at year-end.

If we fin­ish 2011 with 3% core infla­tion, 4–5% total infla­tion, and 3% three-year total infla­tion, the Fed’s ammu­ni­tion will be tapped out. If the Fed runs the print­ing presses in the face of 6–10% true infla­tion, we are flirt­ing with hyperinflation.

So, con­trary to the pre­vail­ing cur­rent view, we are strongly inclined to believe the big issue for most investors over their rel­e­vant invest­ment time hori­zon will be the wealth-eroding effect of inflation.4 As a result, the first and pri­mary focus should be to locate and invest in asset classes that over a full mar­ket cycle (and beyond) are likely to gen­er­ate supe­rior real returns. Can some of these recently bat­tered asset classes that meet this def­i­n­i­tion fall fur­ther? Of course. But aver­ag­ing into the riskier mar­kets, when recent mar­kets have brought them to rea­son­able val­u­a­tions, and accept­ing some down­side risk if you’re early, is essen­tial to suc­cess­ful asset allocation.

The First Steps to Build­ing the Shelter

If we take the long view and focus on asset classes that are likely to excel over a 3-D dom­i­nated sec­u­lar period, the recent sell-off is slowly begin­ning to cre­ate oppor­tu­ni­ties for estab­lish­ing a mean­ing­ful third pil­lar within our port­fo­lios. It’s not yet a clear­ance sale, but bargain-starved asset allo­ca­tors are finally being offered the chance to buy some asset classes at below retail prices. Let’s review some that are cur­rently inter­est­ing (based upon data as of Sep­tem­ber 30, 2011).

• Emerg­ing Mar­kets Debt sports attrac­tive nom­i­nal yields of 6.7% (as mea­sured by the JPM GBI-EM Global Diver­si­fied Index), a pretty attrac­tive rate given their sub­stan­tially higher capac­ity to ser­vice that debt.5 Emerg­ing mar­kets have 38% of world GDP, 81% of global pop­u­la­tion, 65% of its land­mass, and 45% of world­wide energy con­sump­tion but only 11% of the debt.6
• Invest­ment Grade Credit offers yields of 3.2% on the inter­me­di­ate part of the curve (as mea­sured by the Bar­clays Cap­i­tal Inter­me­di­ate U.S. Cor­po­rate Index), a spread of 2.2% above Trea­suries, mak­ing it a far bet­ter low-risk option.
• Emerg­ing Mar­kets Equi­ties have had higher div­i­dend yields than today’s 3.2%7 only twice—during the Long-Term Cap­i­tal Man­age­ment episode and the Global Finan­cial Cri­sis. If we add in the his­tor­i­cal excess return from the Fun­da­men­tal Index® strat­egy and a slight pre­mium for earn­ings growth above the devel­oped world, we can arrive at an expected long-term real return over 8%.
• High Yield Bond spreads are the cheap­est since 1986. Nom­i­nal yields are 9.5%, which allows for decent forward-looking returns even after net­ting out a size­able default risk.

For an asset allo­ca­tor, the sweet spot is a com­bi­na­tion of cheap assets and an improv­ing eco­nomic back­drop. Today, we have cheaper assets and a dete­ri­o­rat­ing macro pic­ture. Thus, the pru­dent course is to add incre­men­tally to these exposures.

If you are buy­ing some assets, you have to be sell­ing oth­ers. The obvi­ous sell can­di­date in a long-term infla­tion­ary envi­ron­ment would be devel­oped world sov­er­eign debt. See Fig­ure 3, which plots the start­ing nom­i­nal yield of the Ibbot­son Inter­me­di­ate Gov­ern­ment Bond Index (essen­tially a five-year Trea­sury) and its sub­se­quent five-year real return. When start­ing gov­ern­ment bond yields are below 1% (as they are today), sub­se­quent five-year real returns are sub­stan­tially negative—by an aver­age of 5%! After incor­po­rat­ing our long-term 3-D fore­cast, buy­ing and hold­ing Trea­suries is the equiv­a­lent of an islander sit­ting in his hut and never look­ing out the win­dow for the dura­tion of the hur­ri­cane season!

So while Trea­suries and other ultra-low yield­ing safe haven assets will likely pro­vide liq­uid­ity and pos­si­ble short-term pro­tec­tion on a nom­i­nal basis, their long-term real return out­look is bleak. Thus, investors must ask them­selves: What is risk? Short-term volatil­ity or long-term impair­ment of pur­chas­ing power? Unless one plans to spend the bulk of one’s assets in the next year or two, we strongly assert the lat­ter is a far greater risk.

Con­clu­sion

With­out the aid of satel­lite images, radar, or air­planes, the islanders had to rely on sub­tle signs of an impend­ing tem­pest learned over generations—blooming grass, a hazy sun, a light driz­zle, and the nor­mally open ocean frigate birds con­verg­ing on land. Of course, none of these pro­vided much advance notice ver­sus the hur­ri­cane track­ers of today. Thus, these ancient peo­ple had to pre­pare by build­ing crude shel­ters well before the storm sea­son. Typ­i­cally, these shel­ters con­sisted of a dugout with a cen­trally placed and stur­dily anchored log from which to lash cover to nearby trees.8

Invest­ment port­fo­lios of today are in a sim­i­lar predica­ment. Sadly, a 3-D hur­ri­cane sea­son will not be a mat­ter of wait­ing a hand­ful of months but will require many years of guarded vig­i­lance. Pre­pared­ness can and should start now while a soft­en­ing econ­omy post­pones the 3-D hur­ri­cane sea­son a year or two. For­tu­nately, many of the asset classes that will form the bul­wark of our shel­ter are becom­ing rea­son­ably priced. There may never be a bet­ter time to estab­lish our third pil­lar, using con­tin­ued weak­ness to embed and rein­force our abil­ity to weather the storm. The beach days are over. It’s time to get to work—carefully and deliberately—building pro­tec­tion from the great­est threat to our portfolios.

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End­notes
1. See http://en.wikipedia.org/wiki/Jurac%C3%A1n.
2. See the fol­low­ing Fun­da­men­tals issues: “A Com­plete Toolkit for Fight­ing Infla­tion,” June 2009; “The ‘3-D’ Hur­ri­cane Force Head­wind,” Novem­ber 2009; “Debt Be Not Proud,” August 2010; “Are 401(k)
Investors Fight­ing Yesterday’s War?” Sep­tem­ber 2010; “King of the Moun­tain,” Sep­tem­ber 2011. http://researchaffiliates.com/ideas/fundamentals.htm.
3. This mes­sage was com­mu­ni­cated to New York Fed Chair Bill Dud­ley at a March 2011 town hall meet­ing in Brook­lyn. Dud­ley tried to explain that, while gro­cery prices had risen, the new iPad 2 cost
the same as the orig­i­nal iPad with far bet­ter fea­tures, which really meant falling prices. One attendee then shouted “we can’t eat an iPad.” See “For Fed’s Dud­ley, iPad Com­ment Falls Flat in Queens,”
March 11, 2011, http://www.reuters.com/article/2011/03/11/us-usa-fed-dudley-ipad-idUSTRE72A4D520110311.
4. Even those well into retire­ment or in the spend down stage of a port­fo­lio are likely 10-plus years investors.
5. Many are sur­prised, espe­cially given some of the spec­tac­u­lar defaults, that the start­ing yield is over 90% cor­re­lated with the sub­se­quent five-year total return for the asset class. In other words,
what you see (in yield) is what you get (in return). The improv­ing cred­it­wor­thi­ness of the survivors—the asset class has gone from approx­i­mately 8% invest­ment grade in 1998 to 57% today—
makes up for the blow-up losses leav­ing the over­all port­fo­lio no worse for the wear.
6. For a com­plete descrip­tion of these met­rics, see “Debt Be Not Proud,” 2010, Jour­nal of Indexes, November/December: http://www.indexuniverse.com/publications/journalofindexes/joi–
articles/8237-debt-be-not-proud.html
7. Based on the MSCI Emerg­ing Mar­kets Index.
8. See http://www.e-missions.net/om/2weeks/hurricanes.aspx.

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