International Market Returns from 2012 Peaks (Bespoke)

Thursday, May 10th, 2012

by Bespoke Invest­ment Group

If there is one thing we can all agree on, it is that the last sev­eral weeks have not been enjoy­able for any­one who is long equi­ties.  The chart below sum­ma­rizes when and by how much major inter­na­tional equity mar­kets have declined from their 2012 peaks.  Not sur­pris­ingly, Spain was the first to peak and now leads the list of inter­na­tional mar­kets high­lighted with a decline of 24% from its peak.  Although its peak came more than a month later, Italy has been play­ing catch up with Spain and is now down 19.7% from its high.

Although US equi­ties are down close to 5% from their highs in April, com­pared to the rest of the world, things looks pretty good here.  The only other coun­try that has seen less of a decline than the US is China.  In terms of tim­ing, while most coun­tries saw their year to date peaks in early to mid-March, US equi­ties held out the longest and didn't peak until April 2nd.

Tags: China, Decline, International Equity Markets, International Markets, Investment Group, Italy, Mid March, Nbsp, Rest Of The World, Spain
Posted in Markets | Comments Off

Equities Struggle Globally

Saturday, April 14th, 2012

Tags: Asset Classes, China, Consensus, Couple Weeks, Double Digits, Fixed Income, Fxi, Investment Group, Major Indices, Matrix, Nasdaq 100, Qqq, Sectors, Snapshot, Stocks, Treasury, Xle, Xlf, Xlk, Xly
Posted in Markets | Comments Off

Managing Expectations: Why Gold Should Thrive

Sunday, April 8th, 2012

Man­ag­ing Expec­ta­tions: Why Gold Should Thrive

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

It’s been a chal­leng­ing week for gold investors. As I often say, invest­ing, like life, is about man­ag­ing expec­ta­tions. Over the past 11 years dur­ing gold’s spec­tac­u­lar bull run, investors should remem­ber that price action can go both ways. What helps is to look at the his­tor­i­cal rise and fall of gold.  For exam­ple, look­ing at the past decade of one-day 5 per­cent drops in gold, you can see that this event is pretty rare. In 2006, gold dropped more than 5 per­cent in a day only two times. In 2008, there were three such events. Another one occurred at the end of this February.

The 1.7 per­cent drop expe­ri­enced over the past month shouldn’t sur­prise gold investors given the sea­sonal pat­tern for gold. Whereas gold rises nearly 2 per­cent in both Jan­u­ary and Feb­ru­ary, over the past 11 years, it’s been a non-event for gold to cor­rect in March.

In addi­tion, it’s a good reminder that bul­lion has his­tor­i­cally been less volatile than the stock mar­ket: the 12-month rolling volatil­ity over the past 10 years for gold was 13 per­cent. For the S&P 500 Index, the 12-month rolling volatil­ity over the same period was 19 percent.

This March, there seemed to be one main dri­ver eight thou­sand miles away neg­a­tively affect­ing gold prices. I often say that gov­ern­ment pol­icy is a pre­cur­sor to change, and fis­cal gov­ern­ment pol­icy strongly affected the Love Trade in India last month. To trim its cur­rent account deficit, India’s finance min­is­ter pro­posed dou­bling the cus­toms tax on the pre­cious metal. It was soon reported that jew­el­ers closed shops in protest.

As a result, gold imports into the world’s largest gold mar­ket fell 55 percent.

It’s not the cus­toms tax that has the gold shops boy­cotting, says UBS Invest­ment Research firm. Jew­el­ers’ “prime gripe is with the new 1 per­cent excise duty on unbranded jew­elry” lead­ing to a greater record­ing of gold trans­ac­tions, which means more reg­u­la­tion and red tape. What’s so egre­gious to jew­el­ers is the excise tax will be retroac­tive so those shop own­ers hold­ing old gold stocks will have to pay duty on those as well, says UBS.

I believe this is only a tem­po­rary sell-off for India. As I often dis­cuss in my pre­sen­ta­tions, tra­di­tional fes­ti­vals and hol­i­days drive gold demand in India because of their strong his­tory with gold. With their love for the yel­low metal, Indi­ans hold the belief that gold “will per­pet­u­ally rise,” although there are cer­tain buy­ers that wait for a “psy­cho­log­i­cally impor­tant $1,600 level,” keep­ing in mind the strength of the rupee, says UBS.

While the sea­sonal Love Trade period for gold gen­er­ally falls between August and Feb­ru­ary, an impor­tant hol­i­day is com­ing up which has his­tor­i­cally dri­ven higher sales of gold. Akshaya Tri­tiya fes­ti­val occurs on April 24 this year. This is an impor­tant occa­sion for Hin­dus, cel­e­brated annu­ally in late April or early May, depend­ing on the Hindu cal­en­dar. Buy­ing and wear­ing of gold jew­elry is impor­tant on this day, as UBS says it’s one of the two “biggest gold buy­ing events” in the Hindu cal­en­dar. The sec­ond event is Dhanteras, which occurs dur­ing the peak sea­son­al­ity period for the yel­low metal.

How impor­tant is this fes­ti­val for the gold mar­ket? UBS ana­lyzed the buy­ing data from India last year when Indi­ans cel­e­brated Akshaya Tri­tiya fes­ti­val on May 6. It found that “phys­i­cal sales to India peaked four days before­hand.” Also, “sales were con­sis­tently above aver­age for 13 work­ing days” before the fes­ti­val because local banks and jew­el­ers restocked their inventory.

Two fac­tors need to change to help sales in India this year, warns UBS. The firm says the jew­el­ers’ strike needs to end, and, accord­ing to one local who talked with UBS, it would help gold sales if the price of oil would reverse—this would “relieve some of the cur­rent account pres­sure and per­haps allow for more flex­i­bil­ity with regard to gold imports.”

What won’t change over the long-term is Indi­ans’ gold-buying behav­ior: Indi­ans “have an exten­sive cul­tural tie to gold” and this “is not chang­ing,” says UBS.

Fear Trade for Gold is Still Alive
The world has been expe­ri­enc­ing the largest liq­uid­ity boom, as the cen­tral banks’ seven-month eas­ing binge con­tin­ues. Over this time, ISI counted 127 dif­fer­ent stim­u­la­tive poli­cies, such as print­ing money, low­er­ing inter­est rates and other eas­ing mea­sures, taken by gov­ern­ments around the world.

The pol­icy shifts helped carry the equity mar­ket a long way from the low on March 9, 2009. At the time, we noted in a spe­cial Investor Alert that there were sig­nif­i­cant gov­ern­ment pol­icy changes that sig­naled the mar­ket had hit rock bot­tom. Accord­ing to USA Today, from the 2009 bot­tom through the end of the first quar­ter, the S&P 500 Index increased more than 100 per­cent. No won­der U.S. equity investors are singing.

How­ever, the side effect of the abun­dance of print­ing by the cen­tral banks in the U.S., Europe, Japan and Eng­land has bloated bal­ance sheets amount­ing to nearly $9 tril­lion. This is dou­ble the amount that it was three and a half years ago, says Ian McAv­ity in his recent Delib­er­a­tions on World Mar­kets, as the print­ing presses have pumped our mon­e­tary sys­tem full of liq­uid­ity. This is merely “kick­ing the can down the road,” as cen­tral banks will have to deal with the over­hang later, says Ian.

This has his­tor­i­cally been a strong pos­i­tive cat­a­lyst for gold. An ana­lyst at the Eco­nom­ics and Finance Fanatic blog put together a visual that illus­trates just how strong of a cat­a­lyst the non­stop print­ing of money is. The chart com­pares the U.S. adjusted mon­e­tary base since 1990 with the “surg­ing” price of gold. As you can see below, the amount of money in the U.S. sys­tem climbed to extra­or­di­nary heights since 2008, with gold fol­low­ing the same path.

The eco­nomic chal­lenges of the U.S. and euro­zone “promise to be a pro­longed one with slug­gish eco­nomic growth,” says the blog, and easy mon­e­tary poli­cies will likely be the rem­edy for awhile. I believe this pro­vides a strong case that any pull­back in the gold price appears to be a buy­ing oppor­tu­nity. Ian says, “Tax uncer­tainty, fes­ter­ing toxic debt that’s out there but out of sight and impos­si­ble debt ser­vice abil­ity loom­ing? I’ll stick with gold and sleep bet­ter at night.”

U.S. investors might sleep bet­ter at night with an allo­ca­tion to gold in the face of con­tin­ued neg­a­tive real inter­est rates. The chart below shows how gold has his­tor­i­cally climbed when inter­est rates fell below zero per­cent, with a “strong cor­re­la­tion from 1977–84, and again recently when rates turned neg­a­tive in early 2008,” accord­ing to Des­jardins Cap­i­tal Markets.

The U.S. has not made any cuts in enti­tle­ments which make up 60 per­cent of the deficit. There have been no changes in fis­cal pol­icy and no change in cur­rent mon­e­tary pol­icy. Ian McAv­ity says these fac­tors together make “the most pow­er­ful argu­ment in favor of con­vert­ing that paper into gold.”

What would have to change to make me turn bear­ish? I believe the fol­low­ing three actions would need to be taken:

1. Real inter­est rates would have to increase 2 per­cent above the CPI in the U.S. and Europe
2. GDP per capita in Chin­dia would need to fall, neg­a­tively affect­ing the Love Trade
3. Sub­stan­tial fis­cal cuts would need to be made in enti­tle­ment pro­grams in the U.S. and Europe

I believe there is a low prob­a­bil­ity of these events occur­ring any time soon, so in this envi­ron­ment, gold should thrive.

Tags: Bull Run, Bullion, Chief Investment Officer, China, Current Account Deficit, Driver Eight, Excise Duty, Finance Minister, Frank Holmes, Gold, Gold Imports, Gold Investors, Gold Market, Gold Prices, Government Policy, India, Investment Research, Managing Expectations, Precious Metal, Seasonal Pattern, Thousand Miles, U S Global Investors, Volatility
Posted in Brazil, Markets | Comments Off

The Economy and Bond Market Radar (April 9, 2012)

Sunday, April 8th, 2012

The Econ­omy and Bond Mar­ket Radar (April 9, 2012)

Trea­sury yields changed lit­tle this week, but the gen­eral direc­tion was down as global eco­nomic data was weaker than gen­er­ally expected. Euro­pean con­cerns resur­faced this week as 10-year Span­ish gov­ern­ment bond yields spiked to the high­est level this year on tepid demand at this week’s auc­tion. Spain has become the focus in the mar­kets with a dif­fi­cult bud­get sit­u­a­tion and already high unem­ploy­ment. This is a reminder that many of the dif­fi­cul­ties fac­ing the mar­kets have not been resolved and are likely to sur­face again as we move through the year.

Strengths

• The ISM Man­u­fac­tur­ing Index rose in March and was ahead of expec­ta­tions, indi­cat­ing con­tin­u­ing eco­nomic expan­sion in the man­u­fac­tur­ing area.
• The non-Manufacturing ISM Index fell in March, but remains well into expan­sion mode.
• The four-week aver­age for the weekly ini­tial job­less claims con­tin­ues to make new lows and is viewed as a pos­i­tive lead­ing indi­ca­tor for the over­all economy.

Weak­nesses

• Global man­u­fac­tur­ing data dis­ap­pointed as euro­zone PMI remained weak and con­tin­ued to indi­cate con­trac­tion in manufacturing.
• Con­struc­tion spend­ing fell 1.1 per­cent in Feb­ru­ary even as weather was con­ducive to growth.
• Euro­zone retail sales fell 0.1 per­cent in Feb­ru­ary as aus­ter­ity and high unem­ploy­ment take their toll.

Oppor­tu­ni­ties

• Over the past cou­ple of weeks, bonds have staged as investors reassessed the global growth out­look. That trend appears likely to con­tinue as long as China is com­fort­able with slower growth.

Threats

• Ris­ing oil and gaso­line prices com­bined with liq­uid­ity impli­ca­tions of global eas­ing, led by Europe, may raise the prospect of a reap­pear­ance of higher infla­tion going forward.

Tags: Austerity, Bond Market, Budget Situation, China, Contraction, Economic Data, Economic Expansion, European Concerns, Expansion Mode, Gasoline Prices, Global Growth, Government Bond, Growth Outlook, Initial Jobless Claims, Ism Index, Ism Manufacturing Index, Leading Indicator, Lows, Market Radar, Spanish Government, Treasury Yields
Posted in Markets | Comments Off

Gold Market Radar (April 9, 2012)

Sunday, April 8th, 2012

Gold Mar­ket Radar (April 9, 2012)

For the week, spot gold closed at $1,631.23 down $37.12 per ounce, or 2.2 per­cent. Gold stocks, as mea­sured by the NYSE Arca Gold BUGS Index, fell 6.8 per­cent. The U.S. Trade-Weighted Dol­lar Index jumped 1.3 per­cent for the week.

Strengths

• Fol­low­ing the release of Fed min­utes that indi­cated sen­ti­ment towards renewed stim­u­lus pro­grams was not imme­di­ately press­ing, the pull­back in bul­lion prices stim­u­lated strong phys­i­cal demand from India on Wednes­day. Deal­ers reported that buy­ing demand was the strongest since March 14. His­tor­i­cally, Indian buy­ers have been fairly price-sensitive to buy­ing when they per­ceive pric­ing is at bar­gain levels.
• Rand­gold Resources, Mali's largest investor, and Angl­o­Gold Ashanti, Africa's largest gold pro­ducer, said on Wednes­day they had enough sup­plies of fuel to sit out any imme­di­ate changes in the way they do busi­ness with respect to the coup d’état in Mali.
• Mark Bris­tow of Rand­gold Resources said the com­pany, which sources two-thirds of its gold from Mali, had no prob­lem bring­ing in fuel and ship­ping gold despite bor­der clo­sures by the 15-state Eco­nomic Com­mu­nity of West African States designed to squeeze Mali's econ­omy. Gold com­pa­nies with mines in Mali are play­ing down the risk of bor­der clo­sures and fall­out from sanc­tions imposed on the West African nation after a coup last month.

Weak­nesses

• Gold’s recent decline has also been based on India’s nation­wide jeweler’s strike to protest a tax on non-branded orna­ments. The strike is in its 19th day today. The coun­try was the world's second-largest bul­lion con­sumer in the fourth quarter.
• Gold imports into India tum­bled more than 55 per­cent in March. The pres­i­dent of the Bom­bay Bul­lion Asso­ci­a­tion notes that the coun­try imported just 15 to 20 tonnes of gold in March as com­pared to the 45 to 55 tonnes that is usu­ally imported on a monthly basis. He added that the high price of the pre­cious metal also deterred fresh pur­chases in the first quarter.
• The com­bined jew­el­ers strike in India plus the com­ments that the Fed­eral Reserve was unlikely to pro­vide more stim­uli for the econ­omy, sent many gold stocks to 52-week lows this week. In addi­tion, this sit­u­a­tion was exac­er­bated by a large fund com­plex in Canada that had a change in own­er­ship, with the new man­age­ment insti­tut­ing whole­sale changes for many of the firm’s port­fo­lios, dump­ing mil­lions of shares of gold-mining and oil stocks.

Oppor­tu­ni­ties

• An upcom­ing Hindu fes­ti­val, Akshaya Tri­tiya, held on April 24, may be the cat­a­lyst that brings the jeweler’s strike in India to an end and moves gold prices higher in April. In terms of impor­tant fes­ti­vals, the Akshaya Tri­tiya fes­ti­val and Dhanteras are the two biggest gold-buying events in the Hindu cal­en­dar. These are essen­tial buy­ing occa­sions that jew­el­ers won't want to miss, espe­cially after the strike-inflicted drop in rev­enues in March.
• Accord­ing to an analy­sis of the Chi­nese gold mar­ket, growth in aggre­gate demand from jew­elry buy­ers, pri­vate investors, and the People's Bank of China will con­tinue to out­pace growth in total sup­ply from mine pro­duc­tion and sec­ondary sources. Fur­ther­more, it sug­gests that the country's gold pro­duc­tion and con­sump­tion are both far higher than fig­ures sug­gest, but also that this gold will not find its way back on to the global marketplace.
• With both domes­tic sup­ply and demand rel­a­tively price inelas­tic, the mar­ket will require a grow­ing stream of imports, which will be avail­able only at higher prices. Despite bul­lion prices hav­ing moved up from $300 to more than $1,600 over the last decade, world gold mine pro­duc­tion is essen­tially unchanged.

Threats

• The Mozam­bi­can gov­ern­ment is seek­ing to guar­an­tee that the sale of shares in min­ing com­pa­nies whose assets are in the coun­try should bring finan­cial ben­e­fits to the coun­try. A team of offi­cials from the Min­istries of Min­eral Resources and of Finance has been set up to work on how to tax these sales. The new law, which is expected to be sub­mit­ted to the country’s par­lia­ment, will stip­u­late that the trans­mis­sion of min­ing rights and titles must oblig­a­to­rily take place in Mozam­bique and any pub­lic offer of shares must be announced in the Mozam­bi­can press.
• Ongo­ing con­flicts in Eritrea and the threat of addi­tional sanc­tions pose sig­nif­i­cant risks to the country’s min­ing sec­tor and those com­pa­nies oper­at­ing within the bor­ders. The coun­try is cur­rently the tar­get of U.N. sanc­tions, its hos­til­i­ties with neigh­bor­ing Ethiopia have reignited in recent months, it faces seri­ous infra­struc­ture issues (par­tic­u­larly with regards to water), and its author­i­tar­ian government’s mil­i­tary and geopo­lit­i­cal ambi­tions are unsus­tain­able. So while Eritrea’s min­eral deposits are attrac­tive, it will remain one of the riskier min­ing juris­dic­tions in Africa for the fore­see­able future.
• A Roman­ian court annulled a zon­ing plan that fur­ther delayed the devel­op­ment of Gabriel Resources’ Rosia Mon­tana project. The project has been a favorite for a num­ber of non-governmental orga­ni­za­tions to rally around to pre­vent the devel­op­ment of the mine. React­ing to the news today, Gabriel’s share price plunged 23 percent.

Tags: African Nation, Anglogold Ashanti, Border Closures, Bullion Prices, Canadian Market, China, Coup D, Dollar Index, Economic Community, Gold, Gold Bugs, Gold Companies, Gold Imports, Gold Market, Gold Producer, gold stocks, India, Mark Bristow, Market Radar, Mining, Nyse Arca, Pullback, Quar, Randgold Resources, Spot Gold
Posted in Brazil, Markets | Comments Off

Energy and Natural Resources Market Radar (April 9, 2012)

Sunday, April 8th, 2012

Energy and Nat­ural Resources Mar­ket Radar (April 9, 2012)

Strengths

• Saudi Ara­bia is likely to main­tain high oil pro­duc­tion in the event con­sumer coun­tries release emer­gency stocks, but it will not seek to lure buy­ers for more oil by dis­count­ing its crude, indus­try sources said. Spare capac­ity has fallen below 2 mil­lion bar­rels per day which typ­i­cally is a sign of a tight oil market.
• Palm oil gained to the high­est level in more than a year on spec­u­la­tion that buy­ing from China, the biggest user of cook­ing oils, may increase when local mar­kets reopen this week after a three-day hol­i­day. June-delivery palm oil rose as much as 1.2 per­cent to 3,574 ring­git ($1,167) a met­ric ton on the Malaysia Deriv­a­tives Exchange, the high­est for a most-active con­tract since March 9 last year. Finan­cial mar­kets in China were closed from April 2 for pub­lic hol­i­days. Palm oil advanced 2.9 per­cent in two days after a U.S gov­ern­ment sur­vey showed soy­bean acreage in the world’s largest pro­ducer will decline. Palm oil and soy­bean oil are sub­sti­tutes in food and fuel uses.
• Also in agri­cul­ture, soy­beans jumped 3.5 per­cent after the U.S. Depart­ment of Agri­cul­ture cut the acreage to 73.9 mil­lion acres which is the low­est since 2007. Soy­beans advanced 17.1 per­cent in the first quar­ter and were the best-performing agri­cul­ture com­mod­ity year to date as dry weather con­di­tions in South Amer­ica hurt crops.
• The Sun reports that stores are hik­ing the price of Easter eggs — even though the cost of pro­duc­ing them has fallen. Since peak­ing two years ago, cocoa prices have plunged by a third. But Easter egg favorites are still up in price.

Weak­nesses

• A slump in coal exports con­tributed to another monthly trade deficit for Aus­tralia. Exports were down to their low­est level in a year at A$24.4 bil­lion as coal exports plunged 21 per­cent to A$3.4 bil­lion, the low­est since March 2011. Hard cok­ing coal exports were down $597 mil­lion, 27 per­cent, hurt by vol­umes down 27 per­cent. Ther­mal coal export vol­umes were down 16 per­cent and prices were down 4 per­cent, imply­ing a 19 per­cent drop in dol­lar terms.
• While gold pro­duc­ers in Mali sig­nal min­ing oper­a­tions have so far gone unaf­fected by a recent mil­i­tary coup d'état and an ongo­ing rebel insur­gency in the country's north, juniors, inter­me­di­ates and majors alike have sus­pended work at Malian explo­ration projects cit­ing, among other rea­sons, fuel-supply risk and flight of for­eign per­son­nel. The lat­est notice of sus­pen­sion of explo­ration oper­a­tions comes from inter­me­di­ate pro­ducer IAMGOLD.
• Bloomberg news reported wan­ing demand for gaso­line is putting the U.S. on course to miss a tar­get for ethanol use for the first time, sig­nal­ing no let-up in the slide in prices. A 2007 U.S. law requires refin­ers to mix 13.2 bil­lion gal­lons of renew­able prod­ucts with motor fuels in 2012, up 4.8 per­cent from last year. Gaso­line demand aver­aged over four weeks fell 3.8 per­cent from a year ear­lier, the U.S. Energy Depart­ment reported this week.

Oppor­tu­ni­ties

• Global food prices rose in March for a third suc­ces­sive month, dri­ven by gains in grains and veg­etable oils, the United Nations' Food and Agri­cul­ture Organ­i­sa­tion (FAO) said on Thurs­day, putting food infla­tion firmly back on the eco­nomic agenda. Food prices hit record highs in Feb­ru­ary 2011 and stoked protests con­nected to the Arab Spring wave of civil unrest in some north African and mid­dle east­ern coun­tries. They then receded but started to grow again in Jan­u­ary. An FAO index that mea­sures monthly price changes for a food bas­ket of cere­als, oilseeds, dairy, meat and sugar, aver­aged 215.9 points in March, up from a revised 215.4 points in Feb­ru­ary, FAO data showed. Its Cereal Price Index aver­aged 227 points in March, up from Feb­ru­ary, with maize prices show­ing gains, sup­ported by low inven­to­ries and a strong soy­bean mar­ket, the FAO said. "You can see prices in the near term ris­ing even fur­ther," FAO's senior econ­o­mist and grain ana­lyst Abdol­reza Abbass­ian told Reuters before the index update.
• China is mulling a new round of sub­si­dies for the home appli­ance sec­tor that may help sup­port cop­per demand this year accord­ing to Hu Xiao­hong, an offi­cial with China House­hold Elec­tri­cal Appli­ances Asso­ci­a­tion. Sub­si­dies for the pur­chase of energy-saving mod­els of air con­di­tion­ers and tele­vi­sions are being con­sid­ered. Last year, air-conditioner man­u­fac­tur­ers were the second-largest con­sumers of cop­per in China, behind the power sec­tor com­pris­ing 15 per­cent of consumption.
• Chi­nese alu­minum pro­ducer Chalco is said to be buy­ing a con­trol­ling stake in a Mon­go­lian coal miner. Chi­nese alu­minum pro­ducer Chalco has agreed to buy 56–60 per­cent of South­Gobi Resources at $4.89/share (a 29 per­cent pre­mium over SouthGobi’s clos­ing price) from Ivan­hoe Mines. Chi­nese min­ers have increased ini­tia­tives to acquire over­seas nat­ural resources assets as the deal sug­gests. Chalco is diver­si­fy­ing its expo­sure out of alu­minum and is invest­ing in other resources as well; how­ever, this coal will help in secur­ing coal for its alu­minum pro­duc­tion, too.
• In cok­ing coal, BHP Bil­li­ton has declared force majeure on coal ship­ments from its Bowen Basin coal mines in Aus­tralia due to a con­tin­ued work­ers' strike and heavy rain­fall. The indus­trial action at the BHP Billiton-Mitsubishi Alliance (BMA) oper­ated Bowen Basin coal mines has clearly inten­si­fied, adding to the rolling work stop­pages expe­ri­enced since June 2011. BMA-operated coal mines together pro­duced 38.2 mil­lion tonnes of cok­ing coal, account­ing for 14 per­cent of the global cok­ing coal trade and 29 per­cent of Aus­tralian cok­ing coal exports in 2011.

Threats

• Despite some con­fu­sion, an indus­try min­istry offi­cial said this week that Indone­sia plans to impose a 25 per­cent export tax on coal and base met­als this year, jump­ing to 50 per­cent in 2013, as the major pro­ducer of raw mate­ri­als looks to boost domes­tic invest­ment and take a big­ger slice of min­ing prof­its. If imposed, the tax would add to a raft of reg­u­la­tions announced this year that have caused con­fu­sion in Indonesia's min­ing sec­tor and wor­ried for­eign investors. It would hit the prof­its of both national and foreign-owned com­pa­nies and could also raise costs for importers. India, a major buyer of Indone­sian coal, said it would raise con­cerns about the pro­posed tax with Jakarta.
• States hop­ing to cap­i­tal­ize on their energy booms are run­ning into resis­tance from local offi­cials who want to be able to police the noise and indus­tri­al­iza­tion that accom­pany oil-and-gas drilling. Last Thurs­day, seven towns col­lec­tively sued Penn­syl­va­nia in state court to over­turn a law passed in Feb­ru­ary that pre­vents them from using their zon­ing author­ity to reg­u­late oil-and-gas devel­op­ment. The day before, an Ohio state sen­a­tor intro­duced leg­is­la­tion to grant local offi­cials more con­trol over where com­pa­nies can drill. The munic­i­pal­i­ties are fight­ing laws that bar them from reg­u­lat­ing drilling, enacted by state law­mak­ers who feared towns would stunt job-creation and a stream of tax revenue.
• Agri­money reported that “U.S. corn stocks may fall over 2011-12 up to 50 per­cent more than offi­cials are cur­rently fac­tor­ing in,” ana­lysts said, as they reacted to data show­ing inven­to­ries weaker-than-expected at the mid-year stage. The U.S. Depart­ment of Agri­cul­ture has fore­cast a 327 mil­lion bushel drop in inven­to­ries, to 801 mil­lion bushels, over the cur­rent sea­son, depleted by resilient domes­tic and export demand fol­low­ing a dis­ap­point­ing har­vest. How­ever, investors expected the fig­ure to be revised after inven­tory data, released on Fri­day, showed stocks as of March 1 at a multi-year low of 6.0 bil­lion bushels, and below mar­ket forecasts.
• Argentina’s Neuquen Province has revoked oil and gas con­ces­sions held by three com­pa­nies, Tecpetrol, Argenta Argentina and Petro­bras, because the com­pa­nies had not invested enough in pro­duc­tion at the oil fields, the province said in a state­ment. The con­ces­sions will be given to the provin­cial government's oil and gas com­pany, Gas y Petroleo del Neuquen.

Tags: Agriculture, China, Coal Exports, Cocoa Prices, Coking Coal, Consumer Countries, Cooking Oils, Department Of Agriculture, Dry Weather Conditions, Easter Egg, Easter Eggs, Food And Fuel, Gold, Government Survey, India, Industry Sources, Market Radar, Metric Ton, Mining, Oil Market, Palm Oil, Public Holidays, Soybean Acreage, Soybean Oil, Sun Reports
Posted in Brazil, Markets | Comments Off

Emerging Markets Radar (April 9, 2012)

Sunday, April 8th, 2012

Emerg­ing Mar­kets Radar (April 9, 2012)

Strengths

• The Hun­gar­ian PMI surged above expec­ta­tions in March to 56.8, the strongest read­ing in the last thir­teen months, reflect­ing the pos­i­tive impact of the open­ing of the brand new Daim­ler AG plant. The Czech man­u­fac­tur­ing PMI has also improved.
• Brazil’s con­sumer prices rose 0.21 per­cent in March from Feb­ru­ary, the government’s sta­tis­tics agency said in a report dis­trib­uted in Rio de Janeiro today. Econ­o­mists sur­veyed by Bloomberg had expected infla­tion of 0.37 per­cent, accord­ing to the median fore­cast of 50 analysts.
• Chilean con­sumer prices rose 0.2 per­cent in March from the pre­vi­ous month, less than ana­lysts’ fore­cast, bring­ing annual infla­tion back within the cen­tral bank’s tar­get range for the first time in four months.
• China offi­cial March PMI was 53.1 ver­sus the esti­mate of 50.8, ris­ing 2.1 from Feb­ru­ary; new orders were up 4.1 points at 55.1 per­cent. Nev­er­the­less, due to sea­son­al­ity, March’s PMI is usu­ally 3 points bet­ter than February’s, there­fore, the mar­ket is cau­tious about the better-than-expected PMI for last month. PMI above 50 indi­cates indus­trial activ­i­ties are expanding.
• China’s March non-manufacturing PMI was 58 ver­sus 48.4 in Feb­ru­ary, indi­cat­ing con­sumer con­sump­tion may be resilient.
• Philip­pines infla­tion eased to 2.6 per­cent on a year-over-year basis in March from 2.7 per­cent in Feb­ru­ary. A base-year com­par­i­son sug­gests infla­tion in the coun­try will remain sub­dued in April. How­ever, infla­tion trends should turn up from mid-year dri­ven by a resumed rise in oil and com­mod­ity prices and strength­en­ing domes­tic demand.
• March hous­ing trans­ac­tions increased 40 per­cent in Bei­jing, and sim­i­lar increases were also seen in other tier 1 and tier 2 cities. Some ana­lysts say buy­ers are encour­aged by the fact that the Chi­nese gov­ern­ment had his­tor­i­cally failed in curb­ing hous­ing prices, but oth­ers say March sales vol­ume is always the equiv­a­lent of com­bined sales of Jan­u­ary and Feb­ru­ary in the year and March of this year didn’t see bet­ter vol­ume than prior years.
• Indonesia’s par­lia­ment did not pass the fuel raise bill which was to remove the fuel sub­sidy and raise fuel prices by 33 percent.

Weak­nesses

• The Russ­ian cen­tral bank chair­man said the liq­uid­ity deficit faced by the finan­cial indus­try is the “new norm” this year. One of the rea­sons is a con­tin­ued cap­i­tal out­flow. Rus­sians spent $12 bil­lion on for­eign prop­erty last year, com­pared with $5.5 bil­lion a year in 2007 and 2008, accord­ing to the chairman.
• Colom­bian pol­icy mak­ers meet­ing last month were divided over the need to raise inter­est rates fur­ther to keep infla­tion in check. Ana­lyst Brian Lesmes, at Grupo Ban­colom­bia in Bogota, said that though infla­tion and credit demand have eased, fur­ther tight­en­ing may be needed to cool house­hold demand.
• Thai­land infla­tion edged up to 3.4 per­cent year-over-year in March from 3.3 per­cent in Feb­ru­ary, but base-year com­par­i­son sug­gests infla­tion in the coun­try will remain sub­dued in April.
• Indone­sia is to dis­cuss an export tax on coal and base met­als, which is neg­a­tive for local mate­ri­als com­pa­nies but good for global coal and base metal producers.
• Tai­wan may imple­ment a cap­i­tal gains tax on stock trad­ing profits.

Oppor­tu­ni­ties

• Cit­i­group Inc. raised South African equi­ties to over­weight, the equiv­a­lent of a buy, on expected strong earn­ings growth and com­pa­nies’ expan­sion into Africa’s fast-growing fron­tier mar­kets, the bank said.
• In the last decade, Indone­sia has restored sta­ble eco­nomic growth and, there­fore, has improved its wealth. With oppor­tu­ni­ties to build vast infra­struc­tures and indus­trial com­plex, for­eign direct invest­ments (FDI) now are return­ing to the coun­try. The increas­ing FDI has dri­ven up demand for indus­trial estate and build­ing mate­ri­als, such as cements.

Threats

• Brazil's tax agency said on Wednes­day that intra-company com­modi­ties exports and imports by multi­na­tional traders must be set­tled using inter­na­tional prices. The country’s Fed­eral tax author­ity said the mea­sures are aimed at end­ing "price manip­u­la­tion" of inter-company imports and exports that allow multi-national com­pa­nies to evade local taxes.
• Peru is rene­go­ti­at­ing with Mex­ico to cut nat­ural gas ship­ments after allo­cat­ing gas reserves to its domes­tic indus­try, a Peru­vian gov­ern­ment offi­cial said. Approx­i­mately half of the ship­ments will be cut, the pres­i­dent of state oil con­tract­ing agency Peru­petro said this week.
• The Chi­nese econ­omy is still in the process of a soft land­ing, but the pol­icy response may fall behind the curve. In 2012, cor­po­rate rev­enue growth is pre­dicted to be much slower than 2011, with gross mar­gins also expected to be lower due to weaker demand and a rise in input costs.

Tags: Beijing, Brazil, China, China Official, Chinese Government, Commodities, Commodity, Commodity Prices, Consumer Consumption, Daimler Ag, Economists, Emerging Markets, Four Months, inflation, Philippines, Pmi, Radar, Rio De Janeiro, Russia, Sales Volume, Seasonality, Statistics Agency, Target Range, Thirteen Months, Tier 2
Posted in Markets | Comments Off

Shifting Focus: Behind Country Valuations Today

Thursday, April 5th, 2012

by Russ Koes­terich, iShares

As the Euro­pean finan­cial cri­sis raged last fall, investors were closely mon­i­tor­ing met­rics like credit default swaps and yields on Ital­ian bonds to deter­mine where to place their coun­try bets.

But 2012 has brought some sta­bil­ity to the euro­zone and with it we’ve noticed a shift in the types of indi­ca­tors that investors should be track­ing when it comes to deter­min­ing coun­try val­u­a­tions — met­rics that show eco­nomic growth.

Yes, investors have always kept an eye on eco­nomic growth by track­ing met­rics like lead­ing indi­ca­tors, retail sales and indus­trial pro­duc­tion. But what Nelli Oster, an invest­ment strate­gist on my team, has noticed is that over the last six months, the sen­si­tiv­ity of coun­try val­u­a­tions to eco­nomic growth expec­ta­tions has intensified.

Per­haps six months ago investors were too con­sumed by wor­ries over Euro­pean sol­vency to focus on eco­nomic growth. But today, that appears to have changed as those wor­ries have less­ened and as eco­nomic growth has become more var­ied and harder to find.

Nelli’s research shows that the coun­try val­u­a­tions have become more sen­si­tive to how the near-term growth prospects for a coun­try com­pare to past trends. Take China as an exam­ple. In early March, the Chi­nese gov­ern­ment mod­estly low­ered its annual growth tar­get to 7.5% from 8%. While that is still a very healthy pace com­pared to the devel­oped world, it left investors more wor­ried about a slow­down in China — and the MSCI China index fell 6.9% in US dol­lars in March.

Nelli has also found that the val­u­a­tions of devel­oped mar­ket coun­tries have become more sen­si­tive to absolute growth lev­els, or how the near-term growth pro­jec­tion for a devel­oped coun­try com­pares to those for other devel­oped mar­kets. The growth pro­jec­tions Nelli ana­lyzed were gar­nered from lead­ing indicators.

She also noted that there’s more vari­a­tion in growth rates. Coun­tries such as the United States, Mex­ico and Japan are expected to grow faster rel­a­tive to their past trends than six months ago, while prospects for coun­tries such as Italy and Bel­gium have dete­ri­o­rated. As growth is more dif­fi­cult to find, investors seem will­ing to pay a larger pre­mium to access it.

For investors, the inten­si­fied empha­sis on growth means that in com­ing months, faster grow­ing coun­tries will likely be rewarded with higher returns, and the dif­fer­ence in returns between faster grow­ing coun­tries and slower grow­ing ones will likely stay elevated.

Of coun­tries expected to fare well rel­a­tive to their past growth trends – also tak­ing into account val­u­a­tions, cor­po­rate sec­tor prof­itabil­ity and risk­i­ness – I hold over­weight views of Nor­way and Rus­sia. Of coun­tries expected to slow down fur­ther, I hold under­weight views of Italy and India (poten­tial iShares solu­tions: AMEX: ENOR, NYSEARCA: ERUS).

Sources: Bloomberg, Worldscope

Dis­clo­sure: Author is long ERUS

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.

Tags: China, Chinese Government, Credit Default Swaps, Developed Country, Economic Growth, ETF, ETFs, Eurozone, Growth Expectations, Growth Projection, Growth Projections, Growth Prospects, Growth Target, India, Investment Strategist, Ishares, Leading Indicators, Market Countries, Metrics, Mining, Msci China Index, Russia, Shifting Focus, Slowdown, Solvency, Valuations
Posted in Markets | Comments Off

3 Trends to Watch for Global Investors

Thursday, April 5th, 2012

Bloomberg announced over the week­end that China’s man­u­fac­tur­ing grew at the fastest pace in a year. We fol­low the government’s Pur­chas­ing Man­agers’ Index (PMI) closely, as we believe it is a bet­ter indi­ca­tor of China’s domes­tic demand than the HSBC PMI. Whereas HSBC PMI sur­veys 400 small and mid-sized com­pa­nies, which are typ­i­cally export-oriented, the government’s PMI sur­veys 820 mostly large, state-owned enter­prises across 20 indus­tries.
Though man­u­fac­tur­ing activ­ity exceeded ana­lysts’ esti­mates, some China bears focused on the fact that the March 2012 num­ber is lower than the aver­age dur­ing the third month from 2005 through 2011. What’s impor­tant for investors to con­sider is that the trend is your friend: It is the fourth month in a row where the PMI landed above the three-month PMI, and shows the econ­omy is on the right path.

Below are three addi­tional con­struc­tive trends we see in China.

1. China Returns Poised to Revert to the Mean

Over the past few years, Chi­nese stocks have lagged com­pared to their emerg­ing mar­ket peers. How­ever, the Peri­odic Table of Emerg­ing Mar­kets per­fectly illus­trates how last year’s loser can be this year’s win­ner. His­tor­i­cally, every emerg­ing coun­try has expe­ri­enced wide price fluc­tu­a­tions from year to year. Over time, though, each coun­try tends to revert to the mean.

In the visual below, we high­lighted China’s per­for­mance pat­tern over the past 10 years. Chi­nese stocks landed in the top half four out of 10 years—2002, 2003, 2006 and 2007. In 2003, China climbed an astound­ing 163 per­cent; in 2007, it was the top emerg­ing mar­ket again, return­ing nearly 60 per­cent.
Since then, the coun­try has fallen to the bot­tom half of the chart. If you apply the prin­ci­ple of mean rever­sion, his­tory appears to favor China land­ing in the top half dur­ing this Year of the Dragon.

See the orig­i­nal Peri­odic Table of Emerg­ing Mar­kets here.

2. Liq­uid­ity Cycle Could Ben­e­fit Stocks

Yet China lead­ers won’t leave its suc­cess to pure luck. If the Dragon doesn’t breathe fire into mar­kets, it may be a shot of liq­uid­ity injected by pol­icy eas­ing that could drive stock prices higher. Macro­eco­nomic the­ory states that when a country’s money sup­ply exceeds eco­nomic growth, the excess liq­uid­ity tends to drive up asset prices, includ­ing stocks.

BCA Research doc­u­mented this trend in China over the past eight years. The research firm com­pared the dif­fer­ence between the change in money sup­ply growth and nom­i­nal GDP growth and Chi­nese stock prices. In both instances when the change in excess liq­uid­ity fell to a low, so did stocks. Con­versely, the rise of money sup­ply growth com­pared to GDP growth “coin­cided with major ral­lies” for China’s stock mar­ket, accord­ing to BCA.

Today, it appears that the change in excess liq­uid­ity is just begin­ning to bounce off another low, as are stocks, indi­cat­ing another poten­tial inflec­tion point.

3. Incen­tive to Main­tain Growth

BCA hedges China’s pos­si­ble stock advance­ment in the short-term if signs of eco­nomic improve­ment con­tinue because they “reduce the odds of aggres­sive pol­icy eas­ing.” A few weeks ago, I dis­cussed how investors seemed to over­look China’s focused macro pol­icy strat­egy, with its actions delib­er­ate and pur­pose­ful. This year, the gov­ern­ment has extra incen­tive to sus­tain mean­ing­ful growth as it tran­si­tions to a new lead­er­ship by the end of the year. As Pres­i­dent Hu Jin­tao and Pre­mier Wen Jiabao depart, Xi Jin­ping and Li Keqiang are expected to take over.

Look­ing at his­tor­i­cal GDP growth per year since 1978, Deutsche Bank finds there’s prece­dence for this idea. Dur­ing the fifth year of the lead­er­ship tran­si­tion cycle, “high or sta­ble” GDP growth was main­tained, with the excep­tion being the Asian Finan­cial Cri­sis in 1997.

These trends will be cov­ered in my upcom­ing web­cast on China with CLSA’s Andy Roth­man. Join us as we dis­cuss what investors should expect from China in terms of long-term GDP growth, fixed asset invest­ment, exports and the hous­ing market.

When I was in Sin­ga­pore at the Asia Min­ing Con­gress last week, I was for­tu­nate to be among a group of sharp and intel­li­gent experts across the finan­cial and min­ing indus­tries. A China bull pre­sent­ing an excel­lent case for the coun­try was Jing Ulrich, JP Morgan’s man­ag­ing direc­tor and chair­man of China equi­ties and com­modi­ties group. She’s the Oprah Win­frey of the invest­ment world, as for the past three years, Forbes Mag­a­zine has ranked her among the 50 Most Pow­er­ful Women in Business.

Ulrich expressed sim­i­lar views toward China and its polit­i­cal will in a recent “Hands-On China Report” fol­low­ing her atten­dance at the China Devel­op­ment Forum in Bei­jing. She said that the gov­ern­ment min­is­ters empha­sized their com­mit­ment to rebal­anc­ing the econ­omy toward con­sump­tion. While “fun­da­men­tals are cur­rently sound, the nation must mod­ify its ‘imbal­anced, unco­or­di­nated and unsus­tain­able’ course of devel­op­ment,” says Ulrich. What investors should remem­ber is that the gov­ern­ment had the finan­cial resources to effect this change and con­sid­ered it impor­tant to main­tain sus­tain­able growth.

All opin­ions expressed and data pro­vided are sub­ject to change with­out notice. Some of these opin­ions may not be appro­pri­ate to every investor. The Pur­chas­ing Manager’s Index is an indi­ca­tor of the eco­nomic health of the man­u­fac­tur­ing sec­tor. The PMI index is based on five major indi­ca­tors: new orders, inven­tory lev­els, pro­duc­tion, sup­plier deliv­er­ies and the employ­ment envi­ron­ment. The Hang Seng China Enter­prises Index is a capitalization-weighted index com­prised of state-owned Chi­nese com­pa­nies (H-Shares) listed on the Hong Kong Stock Exchange and included in HSMLCI index (Hang Seng Main­land Com­pos­ite Index).

Tags: 10 Years, China, Chinese Stocks, Commodities, Commodity, Dragon, Economy, Emerging Market, Emerging Markets, Estimates, Global Investors, Gold, History China, India, liquidity, Loser, Mining, Pace, Periodic Table, Pmi, Price Fluctuations, Principle, Purchasing Managers Index, State Owned Enterprises, Surveys, Year Of The Dragon
Posted in Brazil, Markets | Comments Off

Drilling into Fuel Prices (Templeton)

Wednesday, April 4th, 2012

by Franklin Tem­ple­ton Investments

Gaso­line, deodor­ant, dish­wash­ing, liq­uid, eye glasses, crayons….What does this list of seem­ingly ran­dom items have in com­mon? They are all made from refined crude oil.¹ So even if you don’t feel pain at the gas pump, you prob­a­bly rely on more prod­ucts made with or from crude oil than you’d think. And of course even non-oil based prod­ucts are gen­er­ally shipped via fuel-consuming trans­port vehi­cles, so you’re bound to feel the pinch in the form of fuel sur­charges or price hikes sooner or later.

But Beyond Bulls & Bears has never taken a fatal­is­tic view. If volatil­ity can present buy­ing oppor­tu­ni­ties, surely there’s a pos­si­ble sil­ver lin­ing to headline-making oil price heights. And so we turn to Fred Fromm, port­fo­lio man­ager for Franklin Nat­ural Resources Fund and part of the team that man­ages Franklin Gold and Pre­cious Met­als Fund, aka the guy with the inside scoop on all things oil, gold, and even those other less-talked-about commodities.

Fromm in brief:

• U.S. demand for gaso­line is actu­ally down, but demand out­side the U.S. is strong.
• Geopo­lit­i­cal issues, namely in Iran and Syria, are being fac­tored into oil pric­ing, but major dis­rup­tions may not occur.
• If China’s growth rate could con­tinue indef­i­nitely, its too-strong growth would likely strain com­mod­ity supply.
• Supply-demand bal­ance looks tight enough to sup­port gold, but demand can fall quickly and should be closely watched.
• Fromm opts for geo­graphic diver­si­fi­ca­tion to avoid the risk of hav­ing too many invest­ments in a coun­try with a high degree of polit­i­cal risk.

Oil prices tend to fol­low a sea­sonal rise in the sum­mer, but the recent run-up, much like the recent odd weather, has been out­side the expected norm. The price of a bar­rel of crude oil has risen above $100 this year, and the U.S. national aver­age for a gal­lon of gas rose to $3.867 in mid-March, up more than 30% over last year.¹ All this, and the tra­di­tional North Amer­i­can sum­mer dri­ving sea­son hasn’t even started yet. Fromm explains the dance of sup­ply and demand, as he sees it.

“We’re actu­ally see­ing U.S. demand down year-over-year for gaso­line, but demand out­side the U.S. has remained strong. Exports out of the United States have now reached a level we haven’t seen for sev­eral decades; we’ve actu­ally become a net exporter of fuel.¹ Of course, we still import quite a bit of crude oil, but demand in Latin Amer­ica, for instance, is quite robust and they don’t have a lot of refin­ing capac­ity com­ing on line there. China’s demand has also remained quite strong, even though there’s a lot of con­cern about slow­ing eco­nomic growth. In Feb­ru­ary, China set a monthly record for oil imports.² One of the other fac­tors is sup­ply. Non-OPEC sup­ply con­tin­ues to dis­ap­point, mean­ing it’s com­ing in lower than most peo­ple had expected it. And, as a result, that helps keep the sup­ply side fairly tight as well.

And then, of course, there are geopo­lit­i­cal ten­sions: what’s going on with Iran and the poten­tial for a sig­nif­i­cant dis­rup­tion to fuel sup­ply, and also the issues in Syria, which are ongo­ing. I don’t think we’re going to have a sig­nif­i­cant dis­rup­tion, but there is some prob­a­bil­ity that a dis­rup­tion could occur. I think that’s being fac­tored into crude oil prices.”

Impact of Chi­nese Demand

As Fromm men­tioned, the impact of Chi­nese demand is impor­tant for the oil mar­ket. China is the world’s second-largest con­sumer of oil, behind the United States,³ and is also a large con­sumer of other nat­ural resources. That con­sump­tion has been an eco­nomic dri­ver for sup­pli­ers, but it’s also been a source of con­cern for those who fear China’s con­sump­tion will drive up prices and leave the rest of the world with expen­sive table scraps. Regardless, China’s GDP is antic­i­pated to slow a bit this year from last year’s pace of 9.2%. In Fromm’s view, that’s not nec­es­sar­ily a bad thing, because he does believe com­mod­ity sup­plies would be strained if China sus­tained its recent high level of demand.

“I think one of the most impor­tant things to think about is that China had to slow: as I see it, there’s no way it could con­tinue at the pace that it was grow­ing, indef­i­nitely. The world just does not have enough com­modi­ties to sup­ply that level of growth. We do see some risk areas that have been grow­ing quite rapidly, like steel pro­duc­tion, which is a fac­tor in iron ore con­sump­tion and where China rep­re­sents a large part of world demand. That is an area, where, even if you see a lit­tle bit of slow­ing, it could have a big­ger impact. And it’s one of the rea­sons why in the fund we tend to focus more on energy, because we believe it’s a more durable com­mod­ity in terms of global demand, longer term.

Our main job, as we see it, is to iden­tify the areas that we think are going to be the strongest in terms of the supply-demand bal­ance and then iden­tify the com­pa­nies that we think are posi­tioned to ben­e­fit from that envi­ron­ment. So what we’re try­ing to do is fig­ure out which com­modi­ties we think will be best sup­ported by the envi­ron­ment that we see, and then stay away from those that might suf­fer from a slower environment.”

A Look at Gold

Gold is another com­mod­ity that’s been cap­tur­ing head­lines, per­ceived as a “safe-haven” asset class by many investors. Gold made a record run in the wake of the 2008–2009 finan­cial cri­sis. What does Fromm, think of gold? And what is his strategy?

“Gold is prob­a­bly the most dif­fi­cult to pre­dict among all of the com­modi­ties for var­i­ous rea­sons, so we don’t try to come up with a spe­cific com­mod­ity price for gold. We use ranges and try to estab­lish a level where we feel its price is well sup­ported. And then we look to see what the gold-based– equi­ties are reflect­ing, because that’s where we invest. We do not invest in gold bul­lion itself. The demand side still looks fairly robust around the world, even though we do have to watch that closely because invest­ment demand has become a much big­ger por­tion and that’s some­thing that, as we know, can go away pretty quickly.

But I think the sup­ply side and what’s going on there is more impor­tant. It con­tin­ues to strug­gle to grow, and what we are see­ing right now is that costs are ris­ing sig­nif­i­cantly, espe­cially for new projects. And what that could mean in the future is that there could be less invest­ment. We’re also see­ing a lack of explo­ration from some of the major min­ing com­pa­nies, which could impact sup­ply longer term. So as long as demand stays fairly healthy, and the sup­ply side con­tin­ues to strug­gle, we think the supply-demand bal­ance should remain tight enough to sup­port the com­mod­ity.

I also think that, as impor­tant as how the com­mod­ity itself is priced, is what the commodity-based stocks are reflect­ing, and the equi­ties have sig­nif­i­cantly under­per­formed the metal itself over the past year or year and a half. And because of that, in our view, the equi­ties are look­ing more attrac­tive now. So what we are try­ing to do is to deter­mine if the metal will be sup­ported at a level that will still make the equi­ties attrac­tive, and we do believe at this time that looks to be the case.”

Geopo­lit­i­cal Risks

Both oil and gold are mar­kets that can be sub­ject to geopo­lit­i­cal risk, which in turn can cre­ate price volatil­ity. Vet­ting each indi­vid­ual com­pany is always a very impor­tant part of the invest­ment process, but polit­i­cal unpre­dictabil­ity can add a layer of addi­tional chal­lenges. For Fromm, it boils down to thor­ough fun­da­men­tal research and due dili­gence, which often includes man­age­ment meet­ings and site vis­its in far-flung locales.

“We have ana­lysts going to small coun­tries in Africa.  I’ve been to the inte­rior in China vis­it­ing sin­gle gold mines. And this is a very impor­tant part of the research process. But I think what’s very crit­i­cal is a company’s man­age­ment and their abil­ity to find their way through the polit­i­cal land­scape in the var­i­ous coun­tries. And so, there­fore, we put a high degree of impor­tance on management’s abil­ity, their expe­ri­ence and track record to not only explore new areas but also deliver on projects.  One of the areas where we are see­ing costs really go up is the process of actu­ally bring­ing pro­duc­tion on line at these var­i­ous mines.

The other fac­tor is diver­si­fy­ing. You obvi­ously don’t want to put all your eggs in one bas­ket and be in too many invest­ments in one coun­try that has a high degree of polit­i­cal risk. You are always going to have some polit­i­cal risk; we even have it here in the United States. But in cer­tain coun­tries it is ele­vated, and we will attempt to man­age that risk through diver­si­fi­ca­tion and also through posi­tion size. So we will strive to have smaller posi­tions in names that we believe have a higher degree of geopo­lit­i­cal risk.”

Fromm’s phi­los­o­phy fits with Sir John Templeton’s thoughts on the sub­ject. “No mat­ter how care­ful you are, you can nei­ther pre­dict nor con­trol the future…so you diversify—by indus­try, by risk, and by coun­try.”

What are the Risks?

All invest­ments involve risks, includ­ing pos­si­ble loss of prin­ci­pal. Stock prices fluc­tu­ate, some­times rapidly and dra­mat­i­cally, due to fac­tors affect­ing indi­vid­ual com­pa­nies, par­tic­u­lar indus­tries or sec­tors, or gen­eral mar­ket con­di­tions.

Franklin Nat­ural Resources Fund: Invest­ing in a fund con­cen­trat­ing in the nat­ural resources sec­tor involves spe­cial risks, includ­ing increased sus­cep­ti­bil­ity to adverse eco­nomic and reg­u­la­tory devel­op­ments affect­ing the sec­tor. The fund may also invest in for­eign stocks, which involve expo­sure to cur­rency volatil­ity and polit­i­cal and eco­nomic uncer­tainty. The fund’s hold­ings in smaller com­pa­nies involve spe­cial risks asso­ci­ated with smaller rev­enues and mar­ket share, and more lim­ited prod­uct lines. The prices of such secu­ri­ties can be volatile, par­tic­u­larly over the short term. These and other risks are described more fully in Franklin Nat­ural Resources Fund’s prospec­tus.

Franklin Gold and Pre­cious Met­als Fund: Invest­ing in a non-diversified fund involves the risk of greater price fluc­tu­a­tion than a more diver­si­fied port­fo­lio. Also, the fund con­cen­trates in the pre­cious met­als sec­tor which involves fluc­tu­a­tions in the price of gold and other pre­cious met­als and increased sus­cep­ti­bil­ity to adverse eco­nomic and reg­u­la­tory devel­op­ments affect­ing the sec­tor. In addi­tion, the fund is sub­ject to the risks of cur­rency fluc­tu­a­tion and polit­i­cal uncer­tainty asso­ci­ated with for­eign invest­ing. Invest­ments in devel­op­ing mar­kets involve height­ened risks related to the same fac­tors, in addi­tion to those asso­ci­ated with their rel­a­tively small size and lesser liq­uid­ity. The fund may also invest in smaller com­pa­nies, which can be par­tic­u­larly sen­si­tive to chang­ing eco­nomic con­di­tions, and their prospects for growth are less cer­tain than those of larger, more estab­lished com­pa­nies. These and other risks are described more fully in Franklin Gold and Pre­cious Met­als Fund’s prospec­tus.

² Source: People’s Repub­lic of China, Gen­eral Admin­is­tra­tion of Customs.

³ Source: CIA World Fact Book 2010 – 2011.

Tags: China, Commodities, Commodity, Commodity Supply, Demand Balance, Eye Glasses, Franklin Templeton Investments, Fromm, Fuel Prices, Fuel Surcharges, Gallon Of Gas, Geographic Diversification, Geopolitical Issues, Gold, Liquid Eye, Mid March, Mining, Natural Resources Fund, Oil Price, Political Risk, Precious Metals Fund, Price Hikes, Price Of A Barrel Of Crude Oil, Seasonal Rise, Transport Vehicles
Posted in Brazil, Markets | Comments Off

The Fed’s Con Appears To Be Working But The Curtain Is Rising On The Third Act

Wednesday, April 4th, 2012

 
Cour­tesy of Lee Adler of the Wall Street Examiner

In today’s conomic news, the main­stream media focused on the dis­ap­point­ment sur­round­ing the FOMC Min­utes, the mas­saged and san­i­tized fairy tale about what the par­tic­i­pants said at last month’s FOMC con­fab. The mar­ket was shocked! SHOCKED! that most of the mem­bers saw no need for addi­tional QE, unless things got worse. I had con­cluded that a cou­ple of months ago based on the fact that every time QE spec­u­la­tion arose, not only did stocks rally, but so did energy and other com­mod­ity prices. The com­mod­ity vig­i­lantes, I thought, would tie the Fed’s hands. That and the fact that the conomic data was com­ing in rel­a­tively perky, at least in terms of the head­line data, made it highly unlikely that the Fed would do any more money printing.

But here’s the thing. The min­utes are fake. They are fab­ri­cated, false, phony, and ster­il­ized garbage, designed for pub­lic con­sump­tion. To put it bluntly, they’re pro­pa­ganda. They are what the Fed and Wall Street casino own­ers want you to think. They are a bla­tant attempt to manip­u­late the behav­ior of mar­ket par­tic­i­pants through the use of clever turns of phrase. The Fed wants the mar­ket to go higher, but it doesn’t want com­modi­ties to go with it, so its story line is that the con­omy is healthy enough to con­tinue grow­ing with­out more QE. That gives traders rea­son to con­tinue buy­ing stocks, and no rea­son to buy com­modi­ties, which every­one “knows” go up when the Fed prints, in spite of Bernanke’s denials. And besides, com­modi­ties are up for other rea­sons, not any­thing Ben did, accord­ing to Ben.

That’s what these “min­utes” are about, self jus­ti­fi­ca­tion and mar­ket manip­u­la­tion. We won’t know the real story until Feb­ru­ary 2018 when the Fed will release the tran­scripts of this year’s FOMC meet­ings. Why do they hold them back for at least 5 years? Because the Fed thinks that you can’t han­dle the truth. The prob­lem is that you can and they just don’t want you to know what it is, because if you did, you’d be able to make informed invest­ment deci­sions. The deci­sions the Fed wants you to make are to buy stocks, bay and hold Trea­suries, and sell com­modi­ties. They tai­lored the min­utes accord­ingly, so that the head­lines would elicit the desired response. They think that they’re Pavlov, and we’re the dogs.

Admit­tedly, I have not yet read the min­utes (I will for this weekend’s Fed Report), but I have read the news head­lines. Those head­lines are what the Fed-Wall Street-Media-Industrial Com­plex wants you to think, so you really don’t need to read the min­utes. Rest assured that the Fed got the pro­pa­ganda it wanted. The mar­ket reac­tion it wanted it hasn’t yet got­ten, yet, but the Fed is bet­ting that it will, and therein lies the rub. The Fed doesn’t always get what it wants. If traders decide to sell the Dow off 200 points in response to this news, then the next morn­ing, the Fed’s ven­tril­o­quist dummy, Jon Hilsen­rath, will float another QE3 trial bal­loon in the Wall Street Urinal.

So we’ll just have to see how traders respond. As for what the Fed really thinks, sorry, that will have to wait 6 years.

Mean­while, the other dat­a­point the con­o­mists focused on today was Feb­ru­ary Fac­tory Orders. This is an item based on a Cen­sus Bureau monthly sur­vey of a tiny sam­pling of US man­u­fac­tur­ers that extrap­o­lates that sam­ple into a total dol­lar esti­mate of new orders and other met­rics. The Bureau reports both the sea­son­ally adjusted result and the actual result, also known as not sea­son­ally adjusted. The only num­ber the pun­dits and media pay atten­tion to is the sea­son­ally adjusted, fic­tional num­ber. That’s just wrong, but that’s the way it is. It gives us the oppor­tu­nity to look at the actual data and know what’s really going on, rather than the smoothed fic­tion that the Wall Street mouth­pieces present on a sil­ver plat­ter as if it’s the grail.

The head­line num­ber for Feb­ru­ary was a 1.3% month to month increase, sea­son­ally smoothed. That was a miss. The conomic con­sen­sus was for a gain of 1.5%. But this is a minor item in the conomic firmament–durable goods orders out the week before are more important–and the pun­dits man­aged to spin it as bull­ish any­way. The bull­ish­ness is wild and uni­ver­sal, nary a con­trar­ian to be found in the pages of the Mur­doch, Bloomberg tout sheets.

The head­line num­ber isn’t always wrong or mis­lead­ing, and as it turns out, the actual, not sea­son­ally adjusted gain in Feb­ru­ary was impres­sive, up 4.7% from Jan­u­ary and up 10.6% over Feb­ru­ary 2011, both in real terms adjusted by CPI infla­tion. The 4.7% monthly gain com­pared with a decline of 0.7% in Feb­ru­ary 2011. Over the prior 10 years, monthly changes in Feb­ru­ary ranged from last year’s –0.7% to a high of +4.9% in Feb­ru­ary 2004. Any way you slice it this was a good num­ber. Did the warm weather in Feb­ru­ary have any­thing to do with that? Cer­tainly, but it’s impos­si­ble to say how much. If it pulled demand for­ward from March and April, we’ll see that in the next month or two.

I thought it would be inter­est­ing to over­lay the ISM’s not sea­son­ally adjusted New Orders Index on the chart of new fac­tory orders. I am using the fac­tory orders not sea­son­ally adjusted data, but adjusted for infla­tion in order to see the real change in unit vol­ume over time. The ISM­sur­vey should lead the Fac­tory Orders. The ISM data is for March. It turns out that the cor­re­la­tion with the between the ISM New Orders Index, and the 12 month rate of change in the Com­merce Department’s New Fac­tory Orders data is pretty close. Lately, how­ever, the ISM data sug­gests greater weak­ness than has been show­ing up in the gov­ern­ment data. Who’s right? I don’t know, but as with the ISM and the 50 line on its chart, an annual change in fac­tory orders of more than 1 to 2%, tends to cor­re­late with an ongo­ing uptrend in stocks. It will be time to start wor­ry­ing when the growth rate closes in on zero. That has cor­re­lated with a top­ping process in stocks.

Real Fac­tory Orders NSA Chart– Click to enlarge

Man­u­fac­tur­ing activ­ity lags stock prices. By the time new fac­tory orders go neg­a­tive, stocks will have already gone through their first leg down.  Con­sumers and busi­nesses take their cues from the stock mar­ket, and the stock mar­ket takes its cues from the Fed.

Every­body thinks that Dr. Bernankenstein’s mon­ster alpha­bet soup exper­i­ments, and Henry Paulson’s TARP saved the world from conomic col­lapse. The fact is that they caused, or at least exac­er­bated the conomic col­lapse. Take the man­u­fac­tur­ing orders data as an exam­ple of how that unfolded.

Fed, Stocks, and Fac­tory Orders Chart– Click to enlarge

The man­u­fac­tur­ing con­omy was doing just fine until Bernanke stopped feed­ing the Pri­mary Deal­ers and actu­ally starved them out early in 2008. He did that by pay­ing for his crazy alpha­bet soup pro­grams with cash from the Fed’s Sys­tem Open Mar­ket Account. In sell­ing and redeem­ing Trea­suries from the SOMA he rad­i­cally shrank the cash lev­els in Pri­mary Dealer accounts, ren­der­ing them  unable to main­tain orderly mar­kets. The deal­ers are, after all, not just mar­ket mak­ers in Trea­suries. They run all the mar­kets, stocks, bonds, com­modi­ties, futures, options, every­thing. They are the big mahoffs of all the mar­kets, and Ben is their banker and bagman.

So man­u­fac­tur­ing  was doing just fine in 2007 and 2008 until stocks broke down. Stocks broke because of the com­bi­na­tion of the Fed starv­ing out the Pri­mary Deal­ers in late 2007 and the first half of 2008, fol­lowed by Henry Paulson’s bravura panic per­for­mance before House and Sen­ate com­mit­tees, con­vinc­ing Con­gress to fund the $700 bil­lion TARP. Bernanke was best sup­port­ing actor at those hearings.

Faced with the tes­ti­mony of the two dyna­mite strapped sui­cide extor­tion­ists, Con­gress caved, and the Trea­sury raised that money in a few short weeks in Sep­tem­ber and Octo­ber 2008. That forced the deal­ers (and oth­ers) to absorb $100–200 bil­lion a week of new Trea­sury sup­ply at a time when the Fed had already cut their balls off. They were in no posi­tion to absorb any­thing.  The Fed had taken their man­hood and all their cash.

In order to per­form their func­tion as Pri­mary Deal­ers and absorb that part of the new Trea­sury sup­ply not pur­chased by oth­ers, the deal­ers had no choice but to liq­ui­date stocks. Because most eco­nomic units, both indi­vid­ual con­sumers and busi­nesses, base their pur­chase deci­sions on the stock mar­ket, when it cratered that was their sig­nal to con­sumers and busi­ness to be scared, be very scared, and hun­ker down in fear in their men­tal bunkers.

Man­u­fac­tur­ing orders were still very strong in June 2008. They didn’t col­lapse until after Bernanke and Paul­son trig­gered the panic.  In Octo­ber 2008, they col­lapsed on the heels of  the Bernanke-Paulson Panic.

The Fed finally fig­ured it out in Feb­ru­ary 2009, and it started a rad­i­cal pro­gram of pump­ing hun­dreds of bil­lions into the accounts of the Pri­mary Deal­ers with QE1. The stock mar­ket and man­u­fac­tur­ing orders rebounded almost imme­di­ately. When the Fed exper­i­mented with with­hold­ing funds in mid 2010, stocks plunged and man­u­fac­tur­ing activ­ity stalled. Dou­ble dip fears exploded and the Fed resumed pump­ing cash into dealer accounts.

Flash for­ward to today and the Fed is again on hold, although its MBS replace­ment pur­chase pro­gram helps to keep the deal­ers liq­uid. The effect of that pro­gram on dealer accounts is not reflected in the SOMA, but it does send cash to dealer accounts. The effects of the pro­gram on stock prices are clear.

The issue now is when will the Fed make its next cat­a­strophic blun­der. Just by tap­ping the brakes on the SOMA, it is cre­at­ing con­di­tions for another swoon. It is try­ing to hold back com­mod­ity prices while get­ting the ben­e­fit of conomic growth. The prob­lem is that that growth is a sec­ond order bub­ble effect of the ris­ing stock mar­ket. If they don’t feed the mar­ket, they won’t get their conomic growth. If they do feed the mar­ket, com­mod­ity prices will explode upward, and that will even­tu­ally put a stake in the heart of growth. For now, man­u­fac­tur­ing activ­ity is on a growth track. On the sur­face it appears that the Fed’s pro­pa­ganda and manip­u­la­tion is work­ing, but in truth Bernanke has laid the ground­work for the Fed’s next blun­der, panic move,  and mas­sive dislocation.

Copy­right © 2012 The Wall Street Exam­iner. All Rights Reserved. This arti­cle may be reposted with attri­bu­tion and a promi­nent link to the source The Wall Street Examiner.

Tags: Bernanke, Blatant Attempt, Buying Stocks, Casino Owners, China, Commodities, Commodity, Commodity Prices, Conomy, Denials, Fairy Tale, Fomc Meetings, Fomc Minutes, Lee Adler, Mainstream Media, Market Manipulation, Market Participants, Money Printing, Public Consumption, Qe, Self Justification, Street Casino
Posted in Markets | Comments Off

Comfortably Numb: Have Investors Become Too Complacent?

Wednesday, April 4th, 2012

Com­fort­ably Numb: Have Investors Become Too Complacent?

April 2, 2012

Let's get right to the point: It was the best first quar­ter for the stock mar­ket since 1998. The total return of the S&P 500 index® was 12.6% for the quar­ter; up nearly 30% from the Octo­ber 3, 2011 low. What was par­tic­u­larly notable about the surge since then has been the atten­dant plunge in volatility.

Com­pla­cency?

As you can see in the chart below, the CBOE Volatil­ity Index (VIX) has dropped dra­mat­i­cally from its high of 48 last August (when Washington's fear­less lead­ers failed to con­struct a debt deal, lead­ing to Stan­dard & Poor's down­grade of US debt) to 15 recently.

Plung­ing Volatility

Source: Fact­Set, as of March 30, 2012.

Many investors—notably those painfully on the sidelines—have sug­gested this shows a high level of com­pla­cency. And the fact that trad­ing vol­ume has been weak has been another pil­lar in the bears' case for why the "rally isn't for real." (See more on trad­ing vol­ume later in this report.)

Most read­ers know I have been opti­mistic, and remain so. But, the con­trar­ian in me does have some sym­pa­thy for the case that opti­mism has become ele­vated enough to offer a head­wind for the mar­ket in the near term.

I am a big fan of the sen­ti­ment work done by Ned Davis Research (NDR) and SentimenTrader.com. NDR noted recently in a report that the recent backup in Trea­sury yields has accom­pa­nied a rise in opti­mism by investors, and this com­bined indi­ca­tor did flash a short-term sell sig­nal for the mar­ket. That said, NDR argues, and I con­cur, that yields remain extremely low and as such, are not "bit­ing" stocks yet.

Ele­vated opti­mism = near-term headwind

Below is NDR's most widely-followed sen­ti­ment mea­sure, its Crowd Sen­ti­ment Poll, and as you can see, accom­pa­ny­ing the market's rally has been a surge in opti­mism into the "uncom­fort­able" zone. Given a bit chop­pier action lately by stocks, I am hope­ful we will see a wan­ing of this opti­mism, at least back into the neu­tral zone.

Ele­vated Optimism

Source: Fact­Set, Ned Davis Research (NDR), Inc. (Fur­ther dis­tri­b­u­tion pro­hib­ited with­out prior per­mis­sion. Copy­right 2012 © Ned Davis Research, Inc. All rights reserved.), as of March 27, 2012.

Another sen­ti­ment met­ric show­ing ele­vated opti­mism is SentimenTrader's Smart Money/Dumb Money Con­fi­dence index, shown below.

Smart Money Warm­ing Up to Market

Source: Fact­Set, SentimenTrader.com, as of March 30, 2012.

Although no where near the recent extremes of smart money pes­simism and dumb money opti­mism, it bears watch­ing. The good news is that the gap has begun to nar­row in a favor­able way. Remem­ber, as the labels sug­gest, the smart money tends to be right at extremes of sen­ti­ment, while the dumb money tends to be wrong.

Crash wor­ries still abound

But not all sen­ti­ment met­rics are cre­ated equal. One I dis­cov­ered recently is put together by the folks at Yale and it mea­sures the per­cep­tions about the like­li­hood of a stock mar­ket crash among indi­vid­ual and insti­tu­tional investors. I quib­ble with the way they pose the ques­tion, mak­ing the chart a lit­tle dif­fi­cult to deci­pher, but let me explain. First, see the chart below:

Crash Like­li­hood Still Seen as High

Source: Fact­Set, Yale School of Management/International Cen­ter for Finance, as of Feb­ru­ary 28, 2012.

The ques­tion is asked in a way that the read­ing expresses the per­cent­age of sur­vey respon­dents that believe a crash will not occur. In other words, as per the lat­est read­ings, less than 25% of the survey's respon­dents, either indi­vid­ual or insti­tu­tional, believe the mar­ket won't suf­fer a crash. Put another way, more than 75% believe there's a high like­li­hood of a crash. This is a clear sign that the "wall of worry" the stock mar­ket likes to climb is still very much intact.

Investors lov­ing bonds

Much of what I've high­lighted above are sen­ti­ment mea­sures of atti­tudes, not actions. One clear way to judge the lat­ter is to look at mutual fund flows. Given that the past five years have seen a record $1.3 tril­lion spread in favor of bonds over stocks, I agree with the notion that investors have yet to become overly enthused by stocks.

All About Bonds

Source: Fact­Set, Invest­ment Com­pany Insti­tute, as of Feb­ru­ary 28, 2012.

I also think fund flows help explain why trad­ing vol­ume has been so low. Sim­ply, the retail investor has not been engaged with this mar­ket rally and much money has remained on the side­lines. Add to that the fact that high-frequency traders (HFT), which accounted for over 70% of last year's trad­ing vol­ume at times, are under a mag­ni­fy­ing glass held by the Secu­ri­ties and Exchange Com­mis­sion (SEC) for ques­tion­able trad­ing prac­tices. This has likely kept many of the HFTs in hibernation.

Busi­nesses happy; con­sumers less so

Let me step off the mar­ket path for a moment and share another inter­est­ing sen­ti­ment analy­sis. Last Wednes­day, the Busi­ness Round­table recently released its first quar­ter CEO Eco­nomic Out­look Sur­vey, pre­ceded the day before by the release of the Con­fer­ence Board's mea­sure of con­sumer con­fi­dence. CEOs are now as opti­mistic as they were dur­ing much of the pre-recession period. Although they cite head­winds includ­ing Europe, China, oil prices and US polit­i­cal uncer­tainty, they do not believe they will mate­ri­ally impact their business.

On the other hand, con­sumer con­fi­dence pulled back from a still-weak read­ing in the lat­est report. It had risen sharply in Feb­ru­ary. The level of con­fi­dence, with a head­line of 70, is well below where the index stood dur­ing prior eco­nomic expansions.

For what it's worth, CEO con­fi­dence has his­tor­i­cally acted in a sim­i­lar man­ner as the afore­men­tioned "smart money" and its high level of con­fi­dence is com­fort­ing. On the other hand, very weak peri­ods of con­sumer con­fi­dence have typ­i­cally been accom­pa­nied by higher stock mar­ket gains, as the con­sumer has his­tor­i­cally acted in a sim­i­lar man­ner as the afore­men­tioned "dumb money."

Schwab's sur­vey says

Finally, we have a new sur­vey from Schwab of its active traders. The lat­est Charles Schwab Active Trader Sen­ti­ment Sur­vey polled 421 indi­vid­ual investors who trade fre­quently and found 51% now con­sider them­selves bullish—the high­est level since we began track­ing active trader sen­ti­ment in April 2008. This is up from only 25% in Octo­ber 2011. Only 14% say they are cur­rently bearish.

In sum, my opti­mism in the medium-to-long-term has not been dented by the lat­est sen­ti­ment read­ings. Last week was the 26th con­sec­u­tive week of better-than-expected eco­nomic news. Of the 17 indi­ca­tors that ISI tracks that did a good job track­ing 2010 and 2011 double-dip reces­sion con­cerns, only two are presently weak­en­ing, with First Call's earn­ings revi­sion index notably strong. How­ever, I do think the mar­ket has become more vul­ner­a­ble to neg­a­tive news in the short term.

Impor­tant Disclosures

Tags: Cboe Volatility Index, Charles Schwab, Chief Investment Strategist, China, Complacency, Contrarian Indicator, Debt Deal, Factset, Fearless Leaders, Headwind, Liz Ann, Ndr, Ned Davis Research, Optimism, Plunge, Senior Vice President, Sentimentrader, Sidelines, Stock Market, Treasury Yields, Volatility Index Vix
Posted in Markets | Comments Off

Are Stocks Giffen Goods? (Tchir)

Tuesday, April 3rd, 2012

by Peter Tchir, TF Mar­ket Advisors

So when will retail investors start buy­ing stocks? One of the final legs prop­ping up this rally is the belief that retail investors will finally pile into stocks. There is hope that all this “money on the side­lines” will find its way into the stock mar­ket. The S&P at 1,350 was sup­posed to do the trick. Cer­tainly 1,400 on the S&P was going to be enough to chase retail investors into stocks. Basi­cally the argu­ment that retail will capit­u­late and finally invest in stocks is based on the assump­tion that higher prices increase demand – aka, a Gif­fen Good.

Is it real­is­tic to assume that investors will decide to pur­chase more of some­thing just because the price has gone up? They did it in 2000 with inter­net stocks, that infat­u­a­tion ended badly. They did it with hous­ing in the mid 2000′s, which ended even worse. If any­thing, Amer­i­cans have become more focused on buy­ing things on sale and get­ting things at a bar­gain. Why shouldn’t that apply to stocks as much as it applies to any­thing else?

We have hit multi year highs, yet most peo­ple seem to shrug it off. If the retail investor was about to increase their allo­ca­tion to stocks, do you not think there would be more hype in the media about how well stocks have done? Expect­ing “the masses” to buy just because some­thing is already up 20% seems a lit­tle silly, if not down­right arro­gant. The retail investors are not stu­pid. They can also see that the stock mar­ket has decou­pled from the econ­omy. While pro­fes­sional investors can eas­ily accept that, retail investors still have some level of con­vic­tion that the stock mar­ket should reflect eco­nomic activ­ity and not just cen­tral bank print­ing and gov­ern­ment spend­ing. Retail investors can see that the U.S. debt has con­tin­ued to grow and that in spite of lip ser­vice to deficit reduc­tion, we are cre­at­ing a big­ger deficit. They are ner­vous about what will hap­pen when finally the spend­ing gets pulled in. They are also very ner­vous (as are many pro­fes­sional investors) that they will be the last pur­chase of stocks before the cen­tral banks stop pump­ing fresh money into the sys­tem in their never end­ing attempt to inflate asset prices.

If there is one sec­tor where the upward price move­ment is suck­ing in more money it is amongst cor­po­ra­tions them­selves. The num­ber and size of buy­back announce­ments seems to be increas­ing. That makes sense, since if any group has shown an abil­ity to buy high and sell low, it is cor­po­ra­tions them­selves. In 2007 and the first half of 2008, com­pa­nies, includ­ing AIG, were buy­ing back their own stock aggres­sively. From the sec­ond half of 2008 and all of 2009, most com­pa­nies couldn’t afford to buy back shares and many had to issue. It is just wrong to expect indi­vid­u­als to be as friv­o­lous with their money as cor­po­ra­tions are.

I con­tinue to believe that retail is rea­son­ably allo­cated to equi­ties, under the new allo­ca­tion model. The new allo­ca­tion model takes into account debt before deter­min­ing what is investible. Then there is an actual allo­ca­tion to ultra-safe “rainy day” money. That “investible” money is then allo­cated at a much more real­is­tic per­cent­age to equi­ties and fixed income and “other invest­ments”. A myr­iad of new invest­ment vehi­cles have helped make it eas­ier for investors to par­tic­i­pate in the fixed income mar­ket and other asset classes, help­ing to ensure that the allo­ca­tion to those remains higher than it was through the 90′s and the first part of this century.

I do not believe stocks are a Gif­fen good, at least when it comes to retail, so expect­ing “dumb” money to come in and take out the “smart” money may be just as para­dox­i­cal as a Gif­fen good.

The mar­ket is a lit­tle weaker again this morn­ing, so I bet­ter type quickly, since the “Europe went home” rally now starts before Europe goes home.

Chi­nese ser­vice PMI came in strong, but no one really cares about China as a ser­vice econ­omy, so that news was largely shrugged off.

Euro­zone PPI came in slightly higher than expected and last month was revised slightly higher as well. Noth­ing too earth shat­ter­ing, but ris­ing infla­tion with falling employ­ment makes for a very bad combination.

Span­ish bond yields are once again under pres­sure – as they should be. Italy is also feel­ing weaker again. In 10 years Spain is back to 5.40% and Italy is at 5.15%, out by 5 and 7 bps respec­tively. We have seen sup­port, whether nor­mal mar­ket sup­port, or cen­tral bank pur­chase sup­port around the 5.20% and 5.45% lev­els in the past few days, so need to keep a close eye on these lev­els. Spain is under­per­form­ing more notice­ably in the 5 year sec­tor, but still trades at 4.19% com­pared to Italy at 4.32%. Yes, Spain yields more in 10 years than Italy, but less in 5 years. Span­ish 5 year CDS is at 436, but Ital­ian 5 year CDS is at 388. So the 5 year bond inver­sion is clearly an anom­aly and a func­tion of sup­ply and demand and an obvi­ous sign of how inef­fi­cient bond prices are. There are so many “tech­ni­cals” at work in the bond mar­ket that it is extremely hard to sep­a­rate what part of price is reflect­ing risk as per­ceived by the mar­ket and what part is influ­enced by other non mar­ket fac­tors. That is one rea­son CDS is so pop­u­lar – it is fun­gi­ble and not con­strained by who holds what issue.

CDS indices are all a lit­tle bit bet­ter today. Euro­pean ones were largely catch­ing up to the after­noon move tighter here. IG18 is trad­ing even richer to fair value. This shows a lack of con­vic­tion in the rally by the mar­ket as a whole since it looks like investors want to set their longs in the most liq­uid prod­uct giv­ing them the great­est abil­ity to exit if nec­es­sary. At 7 bps rich with a spread of 90, investors are over­pay­ing for that liq­uid­ity. Look for IG18 to con­tinue to lag.

Other anec­do­tal evi­dence of this ten­ta­tive con­vic­tion can be seen in the bond mar­kets, where once again, new issue trad­ing is dom­i­nat­ing daily flows. Investors have their core longs in bonds, add beta via the index, and look for alpha on new issue allo­ca­tions and flip­ping. While not bad in of itself, it is not a sign of a truly healthy mar­ket. The ETF’s con­tinue to get some inflows, but the pace has slowed dra­mat­i­cally and much of it can be accounted for by div­i­dend re-investment and “arb” activ­ity. While the ETF’s remain at a pre­mium, “arbs” are buy­ing the bonds that the ETF is will­ing to accept and exchang­ing them for new shares, which they then sell into the mar­ket. That form of share cre­ation is far less indica­tive of strength in the mar­ket, than when peo­ple are truly just buy­ing shares and leav­ing deal­ers and ETF man­agers scram­bling to find bonds. That is a sub­tle, but impor­tant difference.

Sources: Bloomberg, TFMA

 

Copy­right © TF Mar­ket Advisors

Tags: Amp, Assumption, Buying Stocks, China, Conviction, Deficit Reduction, Economic Activity, ETF, ETFs, Giffen Good, Giffen Goods, Hype, Infatuation, Internet Stocks, Invest Stocks, Lip Service, Mining, Professional Investors, Retail Investor, Retail Investors, Sidelines, Spite, Stock Market, Tf
Posted in Markets | Comments Off

“Shrugging Off Bad News!” (Saut)

Tuesday, April 3rd, 2012

“Shrug­ging Off Bad News!”

by Jef­frey Saut, Chief Invest­ment Strate­gist, Ray­mond James

April 2, 2012

Most traders, and investors, seem to become con­vinced of the gen­uine­ness of a move­ment in either direc­tion only when it approaches a cul­mi­na­tion. . . . One reli­able indi­ca­tion of the start of an upward swing is afforded when, after a period of declin­ing prices or, less fre­quently, dull­ness, the mar­ket advances or refuses to go down fol­low­ing the receipt of bad news. News can sel­dom be uti­lized by the pub­lic for mar­ket pur­poses, even when its authen­tic­ity is beyond ques­tion. For instance, if tomor­row morning’s news­pa­pers should announce the death of the Pres­i­dent or the fail­ure of a great ‘cor­ner house,’ or the com­plete destruc­tion of Gary, Indi­ana, it is more likely that stocks sold on the news would bring the low­est prices of the day, for the very good rea­son that each seller would be com­pet­ing with thou­sands of other sell­ers who would have learned the news at the same time.

... One-Way Pock­ets, by Don Guyon; 1917

One of my early men­tors in this busi­ness was Lucien Hooper; strate­gist, ana­lyst, econ­o­mist, stock mar­ket his­to­rian, the longest con­tribut­ing colum­nist to Forbes, and my friend. I can hear his sage words like it was yes­ter­day. The year was 1971, and we had just walked across the floor of the Amer­i­can Stock Exchange. As we headed down the atten­dant stair­case for lunch at “Harry at the Amex” Lucien said, “Jef­frey, when mar­kets ignore bad news, that’s good news!” Said state­ment has stuck with me ever since; and, it is just as true today as it was 41 years ago. Fast for­ward, over the past few weeks the equity mar­kets have had to endure a plethora of bad news – China’s slow­ing econ­omy, ris­ing inter­est rates, $4.00 per gal­lon gaso­line, a dys­func­tional gov­ern­ment, Iran, etc., yet the equity mar­kets have refused to sur­ren­der much ground. Last week was no excep­tion, for despite the neg­a­tive news back­drop the senior index (INDU/13212.04) gained 1%. Such action remains con­sis­tent with my mantra for this year, “You can get cau­tious, but DO NOT get bear­ish.” How­ever, many investors are either bear­ish, or frozen like a deer in the head­lights of a car, hav­ing been stung in last year’s June – August angst because they didn’t man­age the risk when they should have.

Recall, it was in March/April of last year that I rec­om­mended rais­ing cash. At the time the major “push back” from accounts was, “The stock mar­ket is going up, why should I raise cash?” And that was the exact rea­son you should have been rais­ing cash and rebal­anc­ing port­fo­lios. Most did not heed that strat­egy and sub­se­quently suf­fered through a ~20% decline only to liq­ui­date their port­fo­lios around August 8th when the equity mar­kets were in the process of bot­tom­ing. At the time I was actu­ally rec­om­mend­ing putting cash back to work based on the fact that we were expe­ri­enc­ing a cli­mac­tic capit­u­la­tion of his­toric pro­por­tions. Indeed, at the August 8th “low” less than 2% of all stocks traded were “up” on the day. As writ­ten, “You have to go back to May 13, 1940 to find another ses­sion whereby less than 2% of all stocks traded were ‘green’ on the day. Inter­est­ingly, on 5/13/40 the Ger­man army punched a 60-mile wide hole in the Mag­inot Line and invaded France, leav­ing every­one think­ing, “It’s the end of the world as we know it!”

Luck­ily, at those August lows, I began using the anal­ogy of the declines that occurred in Octo­ber 1978 and Octo­ber 1979 (see the charts on page 3). Those late-1970s Octo­ber declines came out of the blue, and were equally as debil­i­tat­ing as the June – August 2011 affair. They also ended with a sell­ing cli­max like that seen on August 8, 2011. As writ­ten at the time, post the selling-climax the sub­se­quent trad­ing pat­terns of Octo­ber 1978 and 1979 saw a bot­tom­ing sequence that left the senior index bob­bing and weav­ing for seven to eight weeks fol­lowed by an “under­cut low” (a low below the selling-climax low) that was for buy­ing. Study­ing the atten­dant charts shows the cor­re­la­tion between the Octo­ber 1978 and 1979 bot­tom­ing sequences and last year’s bot­tom­ing sequence, which is what gave me the con­vic­tion to rec­om­mend buy­ing the Octo­ber 4, 2011 “under­cut low.” Since then, I have been pretty bull­ish, save my cau­tion of the past num­ber of weeks. Indeed, for the past month I have averred that the over­bought con­di­tion of the indices could be cor­rected in one of two ways. They could either cor­rect with the per­func­tory 5–8% pull­back, or they could trade side­ways while the stock market’s over­bought con­di­tion was cor­rected, and the market’s inter­nal energy was rebuilt. Obvi­ously, at least so far, it has been a side­ways affair, which brings us to the start of the new quarter.

So, what’s in store going for­ward? I believe the Fed­eral Reserve wants Wall Street to inflate; and, with the Pres­i­den­tial elec­tions loom­ing, Pres­i­dent Obama will likely do every­thing in his power to keep the stock mar­ket ebul­lient. Thus, investors should be pre­pared for fur­ther poli­cies designed to stim­u­late the econ­omy, which should allow stocks to travel higher even if they do pause, or stum­ble, in the near-term on con­cerns the fun­da­men­tals are turn­ing squir­relly. Nev­er­the­less, what many investors don’t under­stand is that in the short/intermediate-term there is not a lin­ear rela­tion­ship between the fun­da­men­tals and the stock market’s direc­tion­al­ity. Man­i­festly, it is the dilu­tion of our cur­rency, with a con­cur­rent decline in its value due to a mas­sive increase in the money sup­ply, which is caus­ing money to flow into assets of all kinds, includ­ing stocks. And that, ladies and gen­tle­men, is the nat­ural reac­tion to the flood of liq­uid­ity injected into the sys­tem by the world’s cen­tral banks. I don’t think it will end any­time soon.

Mean­while, the over­bought con­di­tion, as reflected by the NYSE McClel­lan Oscil­la­tor, that got us wor­ried fol­low­ing the end of the “buy­ing stam­pede” at the end of Jan­u­ary, has been cor­rected; and the stock market’s inter­nal energy is being rebuilt. Ver­ily, our daily inter­nal energy indi­ca­tor has lifted from a “totally used up” 30 read­ing on March 19th to 50 as of last Fri­day. For a full charge of energy that indi­ca­tor needs to be above 55. The weekly energy indi­ca­tor, how­ever, is still around the 30 level. Hereto, for a full charge of energy the weekly needs to be above 55. Accord­ingly, my sense is that the equity mar­kets need another few weeks of con­va­lesc­ing, prob­a­bly in a range between 1385 and 1420 basis the S&P 500 (SPX/1408.47), before they are ready to re-rally. The big test for this week should be Friday’s employ­ment report, which is antic­i­pated to be bad. Still, as long as the SPX resides above 1385 the bull­ish case remains intact.

Speak­ing to the econ­omy, while last week’s +3% GDP report was in the fore­front, less noticed was the GDI report. Sur­pris­ingly, the Gross Domes­tic Income report rose a larger than expected 4.4%. This is not an unim­por­tant obser­va­tion because the GDI mea­sures all the wages and prof­its in the econ­omy while the GDP mea­sures only spend­ing. The­o­ret­i­cally, the GDP and GDI reports should be the same. To me, this is just fur­ther evi­dence that the econ­omy is not sink­ing back into reces­sion. Another boost for the equity mar­kets last week seemed to be the tone of the ques­tion­ing by the Supremes sug­gest­ing Oba­macare may be in more trou­ble than expected. Such news con­tin­ues to be a night­mare for the under­in­vested crowd; and the world remains pro­foundly under­in­vested in U.S. equities.

The call for this week: March came in like a bear, but went out like a bull, cap­ping the best first quar­ter since 1998. For the quar­ter the SPX gained 11.99% for its 10th best start of the year ever. For me it was almost like déjà vu as I recalled the best first quar­ter of my life­time, which was 1975’s surge of 21.59%. Why déjà vu? Well, it is because I began writ­ing strat­egy In Novem­ber of 1974 with the line, “I believe now is the time to accu­mu­late stocks.” At the time the Dow was trad­ing below 600, hav­ing fallen from its March high of 891 for a 34% decline. Sim­i­larly, on Octo­ber 3, 2011, in a report titled ”Under­cut Low” I rec­om­mended buy­ing stocks fol­low­ing the Dow’s decline of ~20%. As stated at the time, “I have been adamant since March 2009 that like the ‘nom­i­nal’ price low of Decem­ber 1974 this wide-swinging trad­ing range mar­ket saw its nom­i­nal price in March 2009. Last Octo­ber I sug­gested what we could cur­rently be expe­ri­enc­ing is sim­i­lar to the “val­u­a­tion” low of August 1982 because the SPX was trad­ing below 10x for­ward earn­ings esti­mates with an earn­ings yield of over 10%, ren­der­ing an equity risk pre­mium of more than 8% for val­u­a­tion met­rics not seen in decades. I still believe that is the case.

Click here to enlarge

Copy­right © Ray­mond James

Tags: American Stock Exchange, Amex, Bad News, Chief Investment Strategist, China, Culmination, Don Guyon, Gary Indiana, Genuineness, Hooper, India, jeffrey saut, Lucien, Negative News, One Way Pockets, Plethora, Raymond James, Rising Interest Rates, Sage Words, Stock Market, Time One, Upward Swing
Posted in Markets | Comments Off

David Rosenberg: The Record Quarter

Tuesday, April 3rd, 2012

from David Rosen­berg, Gluskin Sheff

What a quar­ter! The Dow up 8% and enjoy­ing a record quar­ter in terms of points — 994 of them to be exact and in per­cent terms, now just 7% off attain­ing a new all-time high. The S&P 500 surged 12% (and 3.1% for March; 28% from the Octo­ber 2011 lows), which was the best per­for­mance since 1998. It seems so strange to draw com­par­isons to 1998, which was the infancy of the Inter­net rev­o­lu­tion; a period of fis­cal sta­bil­ity, 5% risk-free rates, sus­tained 4% real growth in the econ­omy, strong hous­ing mar­kets, polit­i­cal sta­bil­ity, sub-5% unem­ploy­ment, a sta­ble and pre­dictable cen­tral bank.

And look at the com­po­si­tion of the rally. Apple soared 48% and accounted for nearly 20% of the appre­ci­a­tion in the S&P 500 (it now makes up 3% of the 200 largest hedge fund port­fo­lios — three times as much as any other name; 4% of the S&P 500 mar­ket cap; and 11% of the Nas­daq). Not since Microsoft in 1999 was one stock this dom­i­nant, though the val­u­a­tions are not com­pa­ra­ble (MSFT then was trad­ing with a 70x P/E multiple).

But out­side of Apple, what led the rally were the low-quality names that got so beat up last year, such as Bank of Amer­ica bounc­ing 72% (it was the Dow's worst per­former in 2011; finan­cials in aggre­gate rose 22%). Sears Hold­ings have sky­rock­eted 108% this year even though the com­pany doesn't expect to make money this year or next.

What does that tell you? What it says is that this bull run was really more about pric­ing out a pos­si­ble finan­cial dis­as­ter com­ing out of Europe than any­thing that could really be described as pos­i­tive on the global macro­eco­nomic front. Low– qual­ity stocks in the S&P 500 out­per­formed high-quality stocks in Q1 by 500 basis points and high-beta stocks within the Rus­sell 1000 out­per­formed low– beta by 900bps. On a global scale, what has been a poorer place to put cap­i­tal to work than Japan? And yet the Nikkei posted a rip­ping 19% advance in Q1, the best start to any year since the pre-bubble-burst times of 1988. Emerg­ing mar­kets are up 13% year-to-date. Greece ral­lied 7% in Q1 — that also tells you some­thing about this rally. It's called a dead-cat bounce. Mean­while, the stodgy sec­tors that worked so well last year are bid­ing their time — util­i­ties so far in 2012 are down 3%, tele­com is flat, and sta­ples are up a mere 5%.

Most investors can dig back to 2000 if they really try. It was not uncom­mon for typ­i­cally risk-averse investors such as retirees to be insis­tent that at least half of their port­fo­lios con­sisted of Microsoft, Intel, Cisco and Dell. Each of these stocks had gone par­a­bolic and none of them paid div­i­dends, which was a good thing because that left them with all those earn­ings to plow back into the busi­ness. If you needed to buy gro­ceries, you could just sell a few shares for cash flow.

My how things have changed. Today, "div­i­dend pay­ing stocks" are all the focus of atten­tion — not to men­tion fund flows. Indeed, what is still so fas­ci­nat­ing is how the pri­vate client sec­tor sim­ply refuses to drink from the Fed liq­uid­ity spiked punch bowl, hav­ing been burnt by two cen­tral bank-induced bub­bles sep­a­rated less than a decade apart. Investors con­tinue to use stock price appre­ci­a­tion as an oppor­tu­nity to rebal­ance and diver­sify rather than chase per­for­mance — pulling $15.6 bil­lion from U.S. equity mutual funds so far this year while tax­able bond funds have seen net inflows amount­ing to $59 billion.

The lack of any real sig­nif­i­cant back-up in bond yields sug­gests that the asset allo­ca­tors have been idle as well.

It would then seem as though this is a mar­ket being dri­ven by traders. Then again, it has been a very trad­able rally, just as the post-QE1 and post-QE2 jumps were. Ditto for the cur­rent post-LTRO rally. But liq­uid­ity is not an anti­dote for fun­da­men­tals. And a mar­ket that lacks breadth, par­tic­i­pa­tion and vol­ume is not gen­er­ally one you can rely on for sus­tained strength, notwith­stand­ing the ter­rific first quar­ter that risky assets deliv­ered. We lived through this exactly a year ago.

Mean­while, we have real estate defla­tion rear­ing its ugly head in China, a spread­ing Euro­pean reces­sion (for all the talk of Ger­man resilience, retail sales vol­umes sank 1.1% in Feb­ru­ary and have con­tracted now in four of the past five months), acute debt prob­lems in Por­tu­gal and Spain (there is already talk in Greece about the need for a third bailout), and the U.S. data have been com­ing out rather mixed (it should have enjoyed a much big­ger bounce than it did in recent months from the extremely warm weather — it was the fourth warmest win­ter since 1896; 15% warmer than usual.

In Chicago, it was the warmest March ever and sec­ond balmi­est March on record in New York City. For the lat­ter, it was 9 degrees above nor­mal and would have lined up in the top 10 for any April!). That the employ­ment, hous­ing and spend­ing data weren't even stronger than what they showed — likely lit­tle bet­ter than a 2% pace for Q1 real GDP — is the real story beneath the story. The fact that the 10-year note yield stopped at 2.4% and has since ral­lied 20 basis points instead of mak­ing the expected tech­ni­cal chal­lenge of 2.65% sug­gests that the bond mar­ket crowd may be fig­ur­ing out what this means for the Q2 land­scape as the weather skew to the data subsides.

U.S. DATA ON SHAKY GROUND
Yes, yes, U.S. per­sonal spend­ing jumped an above-expected 0.8% in Feb­ru­ary, above the 0.6% increase that was gen­er­ally expected and the largest monthly gain since August 2009 when the shoots were green. But if truth be told, this as we would say in mar­ket par­lance, was a "low mul­ti­ple" increase. The rea­son? Per­sonal incomes were soft and that is what counts most — income fun­da­men­tals remain dis­mal. Not only did income come in soft at +0.2% (half what was expected) but not even enough to cover the cost of liv­ing, but Jan­u­ary and Feb­ru­ary were both revised lower. Real dis­pos­able income also declined 0.1% — the third decrease in the past four months and on a per capita basis is down 0.4% YoY, a far cry from the +2% trend of a year ago. The econ­omy is build­ing momen­tum. Right.

Let's just say that had the sav­ings rate stayed the same in Feb­ru­ary, nom­i­nal con­sumer spend­ing growth would have come in at a puny +0.2% and guess what? Real PCE would have been –0.1%. Thanks for com­ing out. As we said, a "low qual­ity" spend­ing per­for­mance, absent the income fun­da­men­tals, there is no sustainability.

Then we got yet another spotty regional man­u­fac­tur­ing index in the form of the Chicago PMI (the national fig­ure comes out today). It came in below expec­ta­tions at 62.2 for March (con­sen­sus was 63.0) — a 1.8 point drop from the pre­vi­ous month, and the third decline in the past four months. New orders slid from 69.2 to 63.3 — the largest one month drop since last May and the low­est level since Octo­ber (this is now the fifth man­u­fac­tur­ing sur­vey to show a drop in new orders). If not for the inven­to­ries, which jumped from 49.6 to 57.4 — the sharpest run-up since Decem­ber 2010 and the high­est lev­els since last Sep­tem­ber — the head­line decline would have been much worse. And in a sign­post of how cor­po­rate exec­u­tives (or the Human Resource depart­ments in any event) are respond­ing to neg­a­tive pro­duc­tiv­ity growth, the employ­ment index dropped from 64.2 to 56.3— largest drop since April 2008 and it has fallen in two of the past three months.

Then we got the Uni­ver­sity of Michi­gan con­sumer sen­ti­ment index which was revised higher for March to 76.2 from 74.3 in the pre­lim­i­nary read­ing — this the high­est level since Feb­ru­ary 2011. What was inter­est­ing were the details beneath the sur­face, such as auto buy­ing plans being revised down from 123 to 122 — first decline in three months; and buy­ing con­di­tions for large house­hold items being revised lower from 127 to 125— a four-month low.

Finally, the best Canada could muster up was a 0.1% gain in real GDP for Jan­u­ary. At least it was pos­i­tive — but barely. It reveals an econ­omy that right now is uneven and sput­ter­ing. It's a good thing there was a solid hand­off from the tail-end of Q4, as that is what is keep­ing Q1 GDP esti­mates close to a 2% annual rate. If there is a piece of infor­ma­tion that Cana­dian dol­lar bulls can put in their back pocket it is that man­u­fac­tur­ing out­put, even with the loonie at par, man­aged to post a solid 0.7% advance — fac­tory out­put up now for five months run­ning. Now that is impressive.

Copy­right © Gluskin Sheff

Tags: Bank Of America, Basis Points, Bull Run, Canadian, Canadian Market, China, David Rosenberg, Financial Disaster, Fiscal Stability, Fund Portfolios, Global Scale, Gluskin Sheff, Hedge Fund, Internet Revolution, Low Quality, Lows, Msft, Nasdaq, Political Stability, Quality Names, Quality Stocks, Record Quarter, Sears Holdings
Posted in Markets | Comments Off

Shifting Winds-Turbulence Ahead? (Sonders)

Monday, April 2nd, 2012

Shift­ing Winds-Turbulence Ahead?

March 30, 2012

by Liz Ann Son­ders,Senior Vice Pres­i­dent, Chief Invest­ment Strate­gist, Charles Schwab & Co., Inc., and,
Brad Sorensen, CFA, Direc­tor of Mar­ket and Sec­tor Analy­sis, Schwab Cen­ter for Finan­cial Research, and
Michelle Gib­ley, CFA, Direc­tor of Inter­na­tional Research, Schwab Cen­ter for Finan­cial Research

Key Points

• Trea­sury yields have moved some­what higher, while stocks have largely con­tin­ued to rise. Some recent cor­re­la­tions appear to be break­ing down, which could lead to some increased volatil­ity but we remain rel­a­tively con­fi­dent in the equity mar­ket. Per­cep­tion as to the next poten­tial moves by the Fed­eral Reserve appeared to be shift­ing, but Chair­man Bernanke reit­er­ated their easy mon­e­tary stance. Uncer­tainty is ris­ing and the Fed’s goal of increased clar­ity through more trans­par­ent com­mu­ni­ca­tion is under increased scrutiny.
• Liq­uid­ity con­cerns in Europe have eased but eco­nomic risks remain ele­vated, while Spain and Italy face deal with their ongo­ing debt crises. Mean­while, fears remain about a hard land­ing in China, although we have a more san­guine view.

Are we start­ing the return to a more "nor­mal" mar­ket envi­ron­ment? It's too early to tell but we are begin­ning to see lower volatil­ity and asset class cor­re­la­tions. Con­tribut­ing to this more sta­ble envi­ron­ment is a shift­ing of Fed expec­ta­tions and increased investor con­fi­dence about US eco­nomic expan­sion. How­ever, we acknowl­edge that such a shift will likely cause some near-term tur­bu­lence in the mar­ket, espe­cially given ele­vated bull­ish investor sen­ti­ment (a con­trar­ian indi­ca­tor). The mar­ket has also become tech­ni­cally extended after its roughly 30% rally since early Octo­ber 2011, and could be due for a breather. Addi­tion­ally, an uncer­tain earn­ings sea­son is approach­ing, oil prices con­tinue to be con­cern­ing, and the siren song of "sell in May" is likely to be heard again. We believe any con­sol­i­da­tion is likely to be shal­low and could bring back some of the "wall of worry" that the mar­ket loves to climb.

One of this year’s ear­lier trends had been stocks mov­ing higher, but Trea­sury bond yields remain­ing near record lows, indi­cat­ing both con­tin­ued con­cern about the sus­tain­abil­ity of the eco­nomic expan­sion, and the con­fi­dence that the Fed­eral Reserve would con­tinue its extremely accom­moda­tive mon­e­tary stance for the fore­see­able future. Recently, we’ve seen Trea­sury yields move up from those record lows, while stocks con­tin­ued to move higher. This could be the begin­ning of a shift in investor atti­tudes as con­fi­dence in the eco­nomic expan­sion may be grow­ing lead­ing to skep­ti­cism that the Fed can main­tain its cur­rent pol­icy stance through 2014.

Yields Move Higher—For Pos­i­tive Reasons

Source: Fact­Set, Fed­eral Reserve. As of Mar. 27, 2012.

While it's too early to say this is the start of a trend of yields mov­ing inex­orably higher, it does appear that the retail investor could begin to shift some assets from bond funds and cash into equi­ties. This could feed the next leg up in the equity rally.

Eco­nomic Transition

Part of the impe­tus behind the retail investor warm­ing up to equi­ties may be the improve­ment in eco­nomic data—especially as it relates to jobs and hous­ing. But here too we may be enter­ing a tran­si­tion phase as year-over-year com­par­isons become more dif­fi­cult and sub­stan­tial gains become harder to come by. Hous­ing data con­tin­ues to be mixed and although ini­tial job­less claims recently hit their low­est level in three years, the pace of the recov­ery in jobs could slow. This could con­tribute to near-term volatil­ity, but we do believe in the sus­tain­abil­ity of the eco­nomic expan­sion, which should help to sup­port equity prices through the bal­ance of 2012.

Jobs pic­ture con­tin­ues to improve

Source: Fact­Set, U.S. Dept. of Labor. As of Mar. 27, 2012.

Hous­ing is not off to the races and likely won’t see a sharp bounce off of the bot­tom, but we are see­ing encour­ag­ing signs. Although exist­ing home sales fell 0.9% month-over-month in Feb­ru­ary, it was still the best Feb­ru­ary read­ing in five years and sales were up 8.8% over a year ago. Mean­while, hous­ing starts fell 1.1% but forward-looking build­ing per­mits rose 5.1%, to the high­est level since Octo­ber 2008. And while hous­ing remains extremely afford­able based on his­tor­i­cal lev­els, mort­gage rates have moved mod­estly higher. Some­what counter-intuitively this could con­tribute to fur­ther improve­ment of the hous­ing mar­ket as the prospect of rates actu­ally mov­ing higher may push poten­tial pur­chasers who had been sit­ting on the fence toward action.

Other eco­nomic data con­tin­ues to show growth in the econ­omy, although there are some poten­tial chinks that we are watch­ing closely. The Empire Man­u­fac­tur­ing Index moved to its high­est level since June 2010 while the Philly Fed Index rose to its best read­ing since April 2011. How­ever, the for­ward look­ing new orders com­po­nent of both reports moved lower. While not overly con­cern­ing yet, it’s some­thing we’re keep­ing an eye on.

Addi­tion­ally, the Index of Lead­ing Eco­nomic Indi­ca­tors rose 0.7% in Feb­ru­ary, mark­ing the fifth-straight month of improve­ment. The National Fed­er­a­tion of Inde­pen­dent Busi­nesses Index moved higher, indi­cat­ing improv­ing small busi­ness con­fi­dence. Finally, retail sales moved 1.1% higher; while ex-autos and gas they moved 0.6% higher and the pre­vi­ous month was also revised upward, indi­cat­ing the Amer­i­can con­sumer con­tin­ues to spur activity.

Fed Stance Shifting?

This con­tin­ued improv­ing data may be con­tribut­ing to a shift in the per­cep­tion of the future of Fed pol­icy. While the recent Fed meet­ing kept pol­icy the same and con­tin­ued to pre­dict near zero inter­est rates through at least late 2014, they did upgrade their out­look of the econ­omy slightly. Also, sev­eral Fed mem­bers have said they believe higher inter­est rates may be needed sooner than cur­rently offi­cially pre­dicted. The fed funds futures mar­ket has the first rate hike com­ing at least six months before the end of 2014. And finally, dur­ing Chair­man Bernanke’s recent tes­ti­mony on Capi­tol Hill, he did noth­ing to indi­cate another round of quan­ti­ta­tive eas­ing was in the cards, lead­ing investors to believe the Fed's con­fi­dence in the eco­nomic expan­sion may be grow­ing. How­ever, in a sub­se­quent speech, he reit­er­ated his belief that the econ­omy and job mar­ket would con­tinue to need Fed assis­tance, throw­ing a lit­tle more uncer­tainty into the equa­tion. We are encour­aged at these glim­mers of hope and believe that a return to more nor­mal pol­icy sooner rather than later would be appropriate.

Europe’s debt cri­sis merely on pause

The sec­ond Greek bailout was com­pleted on March 20 with mar­kets hardly bat­ting an eye. But the euro­zone sov­er­eign debt cri­sis is far from over—it is merely on pause and there is still risk of future outbreaks.

Where could sov­er­eign debt con­cerns arise?

• Greece and Por­tu­gal could need addi­tional bailouts;
• Ire­land could ask for debt for­give­ness to bol­ster a pub­lic vote for the fis­cal pact;
• France’s gen­eral elec­tion could result in a change of lead­er­ship from Sarkozy to Hollande.

How­ever, we feel these poten­tial events are unlikely to result in a broad con­ta­gion out­break. On the other hand, Spain and Italy have the abil­ity to heat up con­cerns and risk aver­sion due to their large debts and economies. Italy’s econ­omy has grown less than the euro­zone aver­age over the past decade and reforms are needed to improve com­pet­i­tive­ness and enhance growth prospects. Ital­ian Prime Min­is­ter Monti needs to keep mak­ing progress to main­tain investor con­fi­dence, and watered down labor reforms may not have a last­ing effect.

How­ever, Italy has some pos­i­tive attrib­utes, includ­ing a wealthy pri­vate sec­tor with a per capita net worth more than three times higher than the other Euro­pean periph­eral coun­tries, accord­ing to BCA Research, giv­ing them the abil­ity to fund debt locally. As such, Italy’s debt tends to be in stronger, longer-term, hands. Addi­tion­ally, Italy has a pri­mary bud­get sur­plus – a sur­plus before debt pay­ments – as well as long debt maturities.

Spain's hous­ing bub­ble still deflating

Source: Fact­Set, S&P/Case-Shiller, Bank of Spain. As Mar. 27, 2012. Indexed to 100 = 1/1/1996.

Spain on the other hand has a more uncer­tain and risky out­look. While Spain’s cur­rent gov­ern­ment debt load is smaller than Italy’s as a per­cent­age of gross domes­tic prod­uct (GDP), it has an ele­vated deficit, high and ris­ing unem­ploy­ment and a hous­ing bub­ble that is still deflat­ing. A risk is that the large amount of pri­vate sec­tor debt could incur more losses for banks, poten­tially requir­ing cash infu­sions from the gov­ern­ment. Addi­tion­ally, instead of mak­ing deficit-reduction progress, Spain has backpedaled; now tar­get­ing a higher deficit to end 2012 than envi­sioned a few months ago.

Pos­i­tively, Euro­pean pol­i­cy­mak­ers are doing their part to con­tain risks, from the Euro­pean Cen­tral Bank's three-year loans and Germany's recent will­ing­ness to com­bine the tem­po­rary Euro­pean Finan­cial Sta­bil­ity Facil­ity (EFSF) with the longer-term Euro­pean Sta­bil­ity Mech­a­nism (ESM) that comes into effect in July. How­ever, an even big­ger fire­wall may even­tu­ally be needed.

Europe drag­ging down global growth

The lin­ger­ing effects of the sov­er­eign debt cri­sis on the Euro­pean econ­omy con­tinue. The renewed down­turn of euro­zone pur­chas­ing man­ager indexes in March indi­cate the econ­omy is still frag­ile and it could take some time before growth reac­cel­er­ates. A hob­bled Euro­pean bank­ing sys­tem remains at the heart of the slow­down. Bank bal­ance sheets likely don't have enough excess cap­i­tal to expand lend­ing and banks have responded by tight­en­ing lend­ing stan­dards. Lend­ing is the lifeblood of eco­nomic growth and a severe reduc­tion in lend­ing is likely to restrain activity.

In terms of invest­ment impli­ca­tions, the out­look for Euro­pean stocks is mixed. Val­u­a­tions appear attrac­tive and we believe cor­re­la­tions will decline and investors will dif­fer­en­ti­ate across mar­kets. Mar­kets with stronger economies such as Ger­many could do bet­ter, while those with weaker eco­nomic out­looks, like Spain, could lag. The Ital­ian stock mar­ket falls in the mid­dle, as a neg­a­tive eco­nomic out­look is off­set by high pri­vate sec­tor wealth.

Should we worry about China?

There are plenty of bear­ish sto­ries about China these days and China remains a puz­zle to many. The lack of trans­parency and the view that news is fil­tered and man­aged helps fuel the fears.

We believe the truth lies some­where between the bear­ish and bull­ish case. We still believe that a hard land­ing is unlikely and that mar­kets are at times over-reacting to data that is really not new news. Exam­ples include the 7.5% growth tar­get for 2012 when the Five-Year Plan issued a year ago envi­sioned a 7% rate over the full period; and com­ments from BHP Bil­li­ton that demand for iron ore would drop to single-digits, which was not sig­nif­i­cantly dif­fer­ent than what they had said in the past.

Even reports that China's man­u­fac­tur­ing pur­chas­ing man­ager index (PMI) is in con­trac­tion ter­ri­tory are a mis­nomer. The PMI sur­vey is a dif­fu­sion index—a read­ing below 50 indi­cates more peo­ple say things are slower ver­sus last month than faster—in other words, below aver­age activ­ity. In a fast grow­ing econ­omy such as China, this does not nec­es­sar­ily equate to a contraction.

Man­u­fac­tur­ing in China slowing

Source: Fact­Set, Markit. As Mar. 27, 2012.

We have believed for some time that China's econ­omy would con­tinue to slow, but that a sharp drop in infla­tion and money sup­ply would allow stim­u­lus to be enacted that could reac­cel­er­ate growth later in 2012. How­ever, we are dis­cour­aged by so far mod­est pol­icy eas­ing amid signs of accel­er­ated slowing.

In par­tic­u­lar, the report that prof­its for Chi­nese indus­trial com­pa­nies fell 5.2% dur­ing the first two months of 2012 was worse than we expected. Granted, this fig­ure was after prof­its gained 34.3% a year ear­lier and is dur­ing a sea­son­ally weak period, so it may not be a last­ing trend, but is concerning.

The Chi­nese gov­ern­ment typ­i­cally takes grad­ual moves, but the slow pace of response while eco­nomic data is mov­ing faster indi­cates the gov­ern­ment could slip behind the eco­nomic momen­tum, then strug­gle to gain ground. China’s econ­omy is now the second-largest glob­ally and is becom­ing tougher to micro-manage – the risk of a pol­icy mis­take is grow­ing. We’re not ready to change our view as we believe we’re still in the early innings of the slow­down, but have a wary eye on pol­icy response.

An event that could have longer-term impli­ca­tions is the com­ing polit­i­cal changeover at year's end. Con­cerns have arisen after the party chief in Chongqing, one of China's biggest cities, was sacked in March. This is the high­est level offi­cial removed in over two decades. There appears to be increas­ing strains within the Com­mu­nist party about whether to move toward reforms or tighten con­trol. We'll be mon­i­tor­ing this over the com­ing year.

Read more inter­na­tional research at www.schwab.com/oninternational.

Impor­tant Disclosures

The MSCI EAFE® Index (Europe, Aus­trala­sia, Far East) is a free float-adjusted mar­ket cap­i­tal­iza­tion index that is designed to mea­sure devel­oped mar­ket equity per­for­mance, exclud­ing the United States and Canada. As of May 27, 2010, the MSCI EAFE Index con­sisted of the fol­low­ing 22 devel­oped mar­ket coun­try indexes: Aus­tralia, Aus­tria, Bel­gium, Den­mark, Fin­land, France, Ger­many, Greece, Hong Kong, Ire­land, Israel, Italy, Japan, the Nether­lands, New Zealand, Nor­way, Por­tu­gal, Sin­ga­pore, Spain, Swe­den, Switzer­land and the United Kingdom.The MSCI Emerg­ing Mar­kets IndexSM is a free float-adjusted mar­ket cap­i­tal­iza­tion index that is designed to mea­sure equity mar­ket per­for­mance in the global emerg­ing mar­kets. As of May 27, 2010, the MSCI Emerg­ing Mar­kets Index con­sisted of the fol­low­ing 21 emerging-market coun­try indexes: Brazil, Chile, China, Colom­bia, the Czech Repub­lic, Egypt, Hun­gary, India, Indone­sia, Korea, Malaysia, Mex­ico, Morocco, Peru, Philip­pines, Poland, Rus­sia, South Africa, Tai­wan, Thai­land and Turkey.The S&P 500® index is an index of widely traded stocks.Indexes are unman­aged, do not incur fees or expenses and can­not be invested in directly.Past per­for­mance is no guar­an­tee of future results.Investing in sec­tors may involve a greater degree of risk than invest­ments with broader diversification.International invest­ments are sub­ject to addi­tional risks such as cur­rency fluc­tu­a­tions, polit­i­cal insta­bil­ity and the poten­tial for illiq­uid mar­kets. Invest­ing in emerg­ing mar­kets can accen­tu­ate these risks.The infor­ma­tion con­tained herein is obtained from sources believed to be reli­able, but its accu­racy or com­plete­ness is not guar­an­teed. This report is for infor­ma­tional pur­poses only and is not a solic­i­ta­tion or a rec­om­men­da­tion that any par­tic­u­lar investor should pur­chase or sell any par­tic­u­lar secu­rity. Schwab does not assess the suit­abil­ity or the poten­tial value of any par­tic­u­lar invest­ment. All expres­sions of opin­ions are sub­ject to change with­out notice. The Schwab Cen­ter for Finan­cial Research is a divi­sion of Charles Schwab & Co., Inc.

Tags: asset class, Bernanke, Brazil, Canadian Market, Charles Schwab, Chief Investment Strategist, China, Contrarian Indicator, Earnings Season, Economic Expansion, Economic Risks, India, Investor Confidence, Investor Sentiment, Liz Ann, Market Environment, Market Perception, Monetary Stance, Russia, Sanguine View, Senior Vice President, Siren Song, Stable Environment, Transparent Communication, Treasury Yields
Posted in Markets | Comments Off

Does China Hold the Winning Ticket?

Sunday, April 1st, 2012

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

The odds of win­ning tonight’s Mega Mil­lions jack­pot are 1 in 175,711,536. This remote chance hasn’t stopped peo­ple from lin­ing up to buy a ticket, as the “what-if-I-win” idea seems so thrilling.

Some bears may think the odds of China being the win­ner among emerg­ing mar­kets in 2012 are also remote. Over the past few years, Chi­nese stocks have lagged com­pared to its emerg­ing mar­ket peers. How­ever, the Peri­odic Table of Emerg­ing Mar­ketsper­fectly illus­trates: last year’s loser can be this year’s win­ner. His­tor­i­cally, every emerg­ing coun­try has expe­ri­enced wide price fluc­tu­a­tions from year to year. Over time, though, each coun­try tends to revert to the mean.

In the visual below, we high­lighted China’s per­for­mance pat­tern over the past 10 years. Chi­nese stocks landed in the top half four out of 10 years—2002, 2003, 2006 and 2007. In 2003, China climbed an astound­ing 163 per­cent; in 2007, it was the top emerg­ing mar­ket again, return­ing nearly 60 percent.

Since then, the coun­try has fallen to the bot­tom half of the chart. If you apply the prin­ci­ple of mean rever­sion, his­tory appears to favor China land­ing on top dur­ing this Year of the Dragon.

See the orig­i­nal Peri­odic Table of Emerg­ing Mar­kets here.

Unlike the lot­tery sys­tem, China won’t leave its suc­cess to pure luck. If the Dragon doesn’t breathe fire into mar­kets, it may be a shot of liq­uid­ity injected by pol­icy eas­ing that could drive stock prices higher. Macro­eco­nomic the­ory states that when a country’s money sup­ply exceeds eco­nomic growth, the excess liq­uid­ity tends to drive up asset prices, includ­ing stocks.

BCA Research doc­u­mented this trend in China over the past eight years. The research firm com­pared the dif­fer­ence between the change in money sup­ply growth and nom­i­nal GDP growth and Chi­nese stock prices. In both instances when the change in excess liq­uid­ity fell to a low, so did stocks. Con­versely, the rise of money sup­ply growth com­pared to GDP growth “coin­cided with major ral­lies” for China’s stock mar­ket, accord­ing to BCA.

Today, it appears that the change in excess liq­uid­ity is just begin­ning to bounce off another low, as are stocks, indi­cat­ing another poten­tial inflec­tion point.

BCA hedges China’s pos­si­ble stock advance­ment in the short-term if signs of eco­nomic improve­ment con­tinue because they “reduce the odds of aggres­sive pol­icy eas­ing.” A few weeks ago, I dis­cussed how investors seemed to over­look China’s focused macro pol­icy strat­egy, with its actions delib­er­ate and pur­pose­ful. This year, the gov­ern­ment has extra incen­tive to sus­tain mean­ing­ful growth as it tran­si­tions to a new lead­er­ship by the end of the year. As Pres­i­dent Hu Jin­tao and Pre­mier Wen Jiabao depart, Xi Jin­ping and Li Keqiang are expected to take over.

Look­ing at his­tor­i­cal GDP growth per year since 1978, Deutsche Bank finds there’s prece­dence for this idea. Dur­ing the fifth year of the lead­er­ship tran­si­tion cycle, “high or sta­ble” GDP growth was main­tained, with the excep­tion being the Asian Finan­cial Cri­sis in 1997.

When I was in Sin­ga­pore at the Asia Min­ing Con­gress this week, I was for­tu­nate to be among a group of sharp and intel­li­gent experts across the finan­cial and min­ing indus­tries. One China bull pre­sent­ing an excel­lent case for the coun­try was Jing Ulrich, JP Morgan’s man­ag­ing direc­tor and chair­man of China equi­ties and com­modi­ties group. She’s the Oprah Win­frey of the invest­ment world, as for the past three years, Forbes Mag­a­zine has ranked her among the 50 Most Pow­er­ful Women in Business.

Ulrich expressed sim­i­lar views toward China and its polit­i­cal will in a recent “Hands-On China Report” fol­low­ing her atten­dance at the China Devel­op­ment Forum in Bei­jing. She said that the gov­ern­ment min­is­ters empha­sized their com­mit­ment to rebal­anc­ing the econ­omy toward con­sump­tion. While “fun­da­men­tals are cur­rently sound, the nation must mod­ify its ‘imbal­anced, unco­or­di­nated and unsus­tain­able’ course of devel­op­ment,” says Ulrich. Impor­tantly, the gov­ern­ment had the finan­cial resources to effect this change and con­sid­ered it impor­tant to main­tain sus­tain­able growth, writes Ulrich.

The ups and downs of this road toward a consumption-led econ­omy are top­ics I’ll cover in next week’s web­cast on China. I will be joined by CLSA’s Andy Roth­man. Together, we’ll dis­cuss what investors should expect from China in terms of long-term GDP growth, fixed asset invest­ment, exports and the hous­ing mar­ket. Be sure to sign up now.

Copy­right © U.S. Global Investors

Tags: Asset Prices, Chief Investment Officer, China, Chinese Stock, Chinese Stocks, Commodities, Commodity, Emerging Market, Emerging Markets, Excess Liquidity, Frank Holmes, Gold, India, Lottery System, Macroeconomic Theory, Mega Millions, Mining, Money Supply Growth, Nominal Gdp Growth, Periodic Table, Price Fluctuations, Ris, Stock Prices, Theory States, U S Global Investors, Year Of The Dragon
Posted in Brazil, Markets | Comments Off

Is Risk in Emerging Economies Less Than Developed Economies?

Monday, March 12th, 2012

To get an over­all view of the health of emerging-market economies I devel­oped a GDP-weighted man­u­fac­tur­ing PMI as well as a GDP-weighted non-manufacturing/services PMI index using 2010’s GDP con­verted to U.S. dollars.

Fol­low­ing a double-dip in Sep­tem­ber and Novem­ber last year, growth in man­u­fac­tur­ing is steadily increas­ing, with the man­u­fac­tur­ing PMI in Feb­ru­ary ris­ing to 52.0. The PMI is still sig­nif­i­cantly below the recent peak of 54.3 in Jan­u­ary last year.

Sources: Markit; HSBC; CFLP; Kag­iso; Plexus Asset Management.

In the first half of last year growth in the man­u­fac­tur­ing sec­tor of emerg­ing economies was sig­nif­i­cantly slower than that of the major devel­oped economies. The sov­er­eign debt cri­sis in the Euro­zone lev­eled the score in the sec­ond half, though.

Sources: Markit; HSBC; CFLP; Kag­iso; ISM; Plexus Asset Management.

With a weight of 51.9% China’s man­u­fac­tur­ing sec­tor has a major bear­ing on the emerg­ing economies’ man­u­fac­tur­ing PMI. Nowa­days it is pop­u­lar to say that when China sneezes the other the emerging-market economies catch a cold – yes, the same adage used for the U.S. in the past. My analy­sis indi­cates it is devoid of any truth. It is evi­dent that the trend of my cycli­cally adjusted China CFLP Man­u­fac­tur­ing PMI is out of sync with the GDP-weighted Man­u­fac­tur­ing PMI of the emerg­ing economies exclud­ing China. The grad­ual weak­en­ing of China’s PMI from Octo­ber 2010 to Feb­ru­ary 2011 had no effect on the rest of the emerg­ing economies as the latter’s PMI con­tin­ued to rise until Japan’s ter­ri­ble twin dis­as­ters in March. The Man­u­fac­tur­ing PMI (exclud­ing China) bot­tomed in Sep­tem­ber last year while China’s PMI only bot­tomed in Novem­ber, but the two series are now ris­ing in unison.

Sources: Markit; HSBC; CFLP; Kag­iso; Plexus Asset Management.

The GDP-weighted PMI (exclud­ing China) is highly cor­re­lated with the GDP-weighted Man­u­fac­tur­ing PMI that I cal­cu­late for the major devel­oped economies.

Sources: Markit; HSBC; CFLP; Kag­iso; ISM; Plexus Asset Management.

Due to lim­ited data, I was forced to focus on the BRIC coun­tries when cal­cu­lat­ing the non-manufacturing/services PMI for emerg­ing economies. Con­trary to the man­u­fac­tur­ing PMI the non-manufacturing/services PMI of the BRICs remained well above 50 at the height of the Euro­zone cri­sis and in Feb­ru­ary regained pre-crisis levels.

Sources: Markit; HSBC; CFLP; Kag­iso; Plexus Asset Management.

It is note­wor­thy that while the ser­vices sec­tor in the devel­oped economies col­lec­tively was severely affected by Japan’s twin dis­as­ters the ser­vices sec­tor in the BRIC zone was largely unaf­fected. It was only when the Euro­zone cri­sis deep­ened that sig­nif­i­cant weak­ness appeared in the BRIC ser­vices sec­tor. This sec­tor also led the recov­ery as the cri­sis started to dissipate.

Sources: Markit; HSBC; CFLP; Kag­iso; Plexus Asset Management.

China’s non-manufacturing sec­tor that com­prises 44.7% of the BRIC zone’s non-manufacturing/services PMI ini­tially held up extremely well rel­a­tive to the other BRIC economies when the Euro­zone cri­sis hit the head­lines, but in the end suc­cumbed when the cri­sis deep­ened. The drop in China’s PMI in Feb­ru­ary last year can be ascribed to the later than nor­mal Chi­nese Lunar New Year.

Sources: Markit; HSBC; CFLP; Kag­iso; Plexus Asset Management.

It is also inter­est­ing to note that growth in the ser­vices sec­tor of the BRIC zone is very steady com­pared to that of the devel­oped economies – even with the stal­wart China excluded.

Sources: Markit; HSBC; CFLP; Kag­iso; Plexus Asset Management

Although the country’s weight is only 3.4%, I included South Africa in the cal­cu­la­tion of a GDP-weighted com­pos­ite PMI (man­u­fac­tur­ing and ser­vices com­bined) for emerg­ing economies as rep­re­sented by the BRICS zone (BRIC plus South Africa).

The BRICS Com­pos­ite PMI recov­ered sharply to 55.5 in Feb­ru­ary after nearly stalling in Novem­ber last year.

Sources: Markit; HSBC; CFLP; Kag­iso; Plexus Asset Management.

The com­pos­ite PMI of BRICS remained rel­a­tively steady in the after­math of Japan’s twin dis­as­ters but even­tu­ally gave way as the Euro­zone cri­sis deepened.

Sources: Markit; HSBC; CFLP; Kag­iso; Plexus Asset Management.

Again China’s dom­i­nance in the com­pos­ite PMI had a major impact as it is note­wor­thy that the BRICS Com­pos­ite PMI exclud­ing China bot­tomed in Sep­tem­ber while China’s PMI only bot­tomed two months later.

Sources: Markit; HSBC; CFLP; Kag­iso; Plexus Asset Management.

I asked myself whether rel­a­tive strength in the BRICS com­pos­ite PMI rel­a­tive to devel­oped economies mat­ters in the rel­a­tive per­for­mance of the emerging-market equity indices against mature-market equity indices.

There is clear evi­dence that China’s stock market’s per­for­mance rel­a­tive to the MSCI World Index in terms of U.S. dol­lar is in fact heav­ily influ­enced by the per­for­mance of the under­ly­ing econ­omy rel­a­tive to the global econ­omy as mea­sured by rel­a­tive com­pos­ite PMIs. The der­at­ing of China’s stock mar­ket rel­a­tive to global stock mar­kets in the sec­ond quar­ter of last year stands out. Over the past three months the Chi­nese mar­ket has made up some lost ground but sig­nif­i­cant rel­a­tive upside poten­tial remains.

Sources: Markit; HSBC; CFLP; Kag­iso; I-Net Bridge; Plexus Asset Management.

My research indi­cates that the under­ly­ing econ­omy of India as mea­sured by the com­pos­ite PMI has no bear­ing on the rel­a­tive per­for­mance of the Indian stock mar­ket. The rel­a­tive per­for­mance of China’s econ­omy has a huge impact, though.

Sources: Markit; HSBC; CFLP; Kag­iso; I-Net Bridge; Plexus Asset Management.

As in the case of India the under­ly­ing econ­omy of Brazil as mea­sured by the com­pos­ite PMI has no bear­ing on the rel­a­tive per­for­mance of the Indian stock mar­ket. What I found is that the Brazil­ian stock market’s per­for­mance rel­a­tive to global stock mar­kets is highly cor­re­lated to the GDP-weighted Emerg­ing Economies’ man­u­fac­tur­ing PMI.

Sources: Markit; HSBC; CFLP; Kag­iso; I-Net Bridge; Plexus Asset Management.

In Russia’s case the rel­a­tive per­for­mance of the stock mar­ket is pri­mar­ily influ­enced by oil prices and not the state of the under­ly­ing econ­omy as mea­sured by the com­pos­ite PMI rel­a­tive to the global economy.

Sources: I-Net Bridge; Plexus Asset Management.

The rel­a­tive per­for­mance of the South Africa’s econ­omy also has no bear­ing on the stock market’s per­for­mance. Metal prices are the main determinants.

Sources: I-Net Bridge; Plexus Asset Management.

In con­clu­sion, the emerg­ing economies are not as depen­dent on China as many would like to believe. In light of the steadi­ness of espe­cially the non-manufacturing/services com­pos­ite PMI of BRICs rel­a­tive to that of the JP Mor­gan Global Ser­vices PMI I am of the opin­ion the eco­nomic risk in emerg­ing economies is less than that of devel­oped economies. Do emerg­ing mar­kets then not deserve bet­ter rat­ings and more expo­sure in global diver­si­fied port­fo­lios? It is clear to me that dif­fer­ent fac­tors influ­ence the rel­a­tive per­for­mance of the indi­vid­ual emerg­ing mar­kets and they are there­fore not a homoge­nous group.

Tags: Adage, Asset Management, Bearing, China, Debt Crisis, Disasters, Double Dip, Emerging Economies, Emerging Market Economies, Eurozone, GDP, Ism, Manufacturing Sector, Manufacturing Services, Pmi, Russia, Score, Second Half, Sovereign Debt, Sync, Unison
Posted in Markets | Comments Off

China: Hard, Long, or Soft Landing? (Chanos, Pettis, and O'Neill)

Sunday, February 5th, 2012

Feb­ru­ary 6, 2012 — Hedge fund bil­lion­aire Jim Chanos, Finance Pro­fes­sor Michael Pet­tis, and Goldman's Jim O'Neill weigh in with equally inter­est­ing but dif­fer­ent views on whether or not China will expe­ri­ence a hard, long, and or soft eco­nomic landing.

Sources for full inter­view video:

Jim Chanos on Bloomberg.com — China's Bank­ing Sys­tem is 'Extremely Frag­ile" (Novem­ber 23, 2012)
http://www.bloomberg.com/video/81455126/

Michael Pet­tis on BNN.ca — The Achilles Heel of China — Feb­ru­ary 2, 2012
http://watch.bnn.ca/the-street/february-2012/the-street-february-2–2012/

Jim O'Neill on Bloomberg.com — Goldman's O'Neill on Global Eco­nomic Out­look, Jan. 17, 2012
http://www.bloomberg.com/video/84388896/

For future ref­er­ence, our (iPad com­pat­i­ble) player with AdvisorAnalyst.com video dis­patches will be per­ma­nently on our video page which you can nav­i­gate to by click­ing on the VIDEO link in the menu at the top of this page, or on the link in the Lat­est Sto­ries box below.

Tags: Achilles Heel, Banking System, Bloomberg, Bnn Ca, China, Compatible Player, Dispatches, February 2, Finance Professor, Global Economic Outlook, Goldman, Hedge Fund Billionaire, Jim Chanos, Michael Pettis, Nbsp, O Neill, Professor Michael, Video Link
Posted in Markets | Comments Off

YTD 2012 Country Stock Market Performance

Friday, January 27th, 2012

Below is a table high­light­ing the year to date stock mar­ket returns for 78 coun­tries around the world.  Of the 78 coun­tries shown, 59 (75%) are in the black for the year, while 19 are in the red.  Twelve coun­tries have posted dou­ble digit gains already in 2012, with Argentina lead­ing the way at 18.11%.  Rus­sia ranks sec­ond with a gain of 13.70%, fol­lowed by Hun­gary in third and Greece (yes, Greece) in fourth.

The US cur­rently ranks 33rd on the list with a gain of 4.73% year to date.  The US ranks fourth among G7 coun­tries behind Ger­many (10.88%), Italy (6.77%) and France (6.44%).  The UK has been the worst per­form­ing G7 coun­try so far in 2012 with a gain of 4%.

Last year the BRICs were sig­nif­i­cant under­per­form­ers ver­sus the rest of the world, but they've bounced back so far in 2012.  As men­tioned above, Rus­sia is up 13.70% year to date, which is the best of the BRICs.  Brazil ranks sec­ond with a gain of 10.92%, India isn't far behind at 10.50%, and China ranks fourth with a gain of 5.44%.

Tags: Argentina, Brazil, BRICs, China, Countries Around The World, Country Stock, France 6, G7 Countries, G7 Country, Greece, Hungary, India, Italy, Leading The Way, Rest Of The World, Russia, Stock Market Performance, Stock Market Returns, Stock Performance, Year To Date
Posted in Markets | Comments Off