Archive for 2008
Donald Coxe: Capitalism Faces its Greatest Challenge
Monday, November 17th, 2008
Donald Coxe
Donald Coxe, Chief Investment Strategist, BMO Capital Markets has just released his latest instalment of Basic Points, “Capitalism Faces its Greatest Challenge” for November, 2008.
Mr. Coxe is best known for his highly read monthly newsletter, “Basic Points,” as well as his bi-weekly conference calls. His convictions that we are in the midst of the biggest long-term commodities bull market have been severely tested during the most recent months since this past summer, when he launched the Coxe Commodity Strategy Fund, but he remains convinced that the thematic fundamentals are in tact.
Here, we summarize his November 14, 2008 recommendations:
- Its too late to sell losing stocks, and too soon to do more than nibble at bargains. This is a time for investors to be opportunistic about investing, and stocks are available at prices that will look incredibly cheap in a couple years’ time.
- When conditions resume for rebuilding equity positions, buy banks and diversified financial sector stocks.In a global recovery, these should perform well, considering the mostly new management teams.
- Buy commodity oriented stocks. They have been totally oversold beyond all expectations. When there is a global recovery, they will be the winning asset group.
- During the waiting period, start accumulating convertible bonds of quality corporations. A sharp contraction in the near-record yield spread between investment grade companies’ bonds and comparable treasuries, could trigger a major equity rally.
- Buy Emerging Market bonds from China, India, and Brazil, whose economies are fundamentally sound. Avoid Eastern European bonds.
- Business-oriented tech-stocks should also be included when once again accumulating stocks as these will participate in the global recovery. comparatively, consumer-oriented tech stocks may take quite a while.
- Railroad stocks benefit from lower energy costs and the savings may offset the reduction in top-line revenues during the recession. Upon exiting the recession, these should be core investments.
- Gold has been disappointing. Though it has outperformed stocks since the peak in the S&P 500, this has not yet been reason enough to own it. As deflation fears diminish, it will once again regain its lustre.
You can download the complete report here.
Source: Donald Coxe, BMO Capital Markets, Basic Points, “Capitalism Faces its Greatest Challenge,” November 14, 2008
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Tags: Basic Points, BMO, Brazil, China, Commodities, Donald Coxe, Eastern European, Gold, India, Recession, S&P 500
Posted in Gold, Markets | No Comments »
Worst Oil Bear in Decades
Saturday, November 15th, 2008
The 53% decline in oil prices since September 22, 2008, without a 20% rally is the biggest since 1986 (based on available daily data). The week of Sep. 16 to Sep. 22, oil rallied 20%+ after dropping 37% from the July 3, 2008 high.
In all, the price of oil has dropped more than 61% since the July peak, and likely to break lower given the ongoing conditions in the market.
Chart: Bespoke Investment Group
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Tags: Chart, ECB, oil, Oil Prices
Posted in Gold, Markets | No Comments »
Year to Date World Stock Market Returns
Tuesday, November 11th, 2008
Is this a buyer’s market or what?
Look at Russia; although most folks aren’t interested (but should be) Russia is not only off by -64.5%, its valuations have compressed to 4.3 times trailing earnings. China stocks are down -64.3% is fetching 14.55 times trailing earnings. India stocks are down -48.1% and priced at 10.7 times. Canada’s TSX 60 is down 29.4% and PE has contracted to 10.9 times earnings.
Oddly, US Stocks, down -36.4% year-to-date, have experienced a slight expansion in P/E from 20.11 times to 20.54 times. Hmmm? Does this suggest that there is more downside in US stocks, given that there has been no compression in valuation? Tunisia, Bahrain, and Switzerland are the only countries out of 84 to join the US in this phenomenon of rising P/E. For the US, it appears that earnings have gone down in lockstep with the stock market, perhaps more than stock prices themselves.
click to enlarge
For those countries whose P/E ratios have gone down the most in this tumultuous year-to-date, high P/E compression suggests relatively strong earnings fundamentals versus very poor technical considerations.
Only three countries, Ghana, Tunisia, and Ecuador, out of 84, have had positive results this year.
Below are the comparisons of China stocks vs. US stocks, and China P/E vs US P/E. China’s market has had a much larger correction than the S&P 500, but look at the valuations. Chinese stocks are now far less expensive than US stocks. China’s earnings are in tact, while its stock market has been liquidated as a result of deleveraging.
Charts: Bespoke Investment Group
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Tags: Canada, China, compression, India, P/E, Russia, Switzerland, TSX 60, US Stocks
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Hugh Hendry Interview: Invest in Long Government Bonds
Tuesday, November 11th, 2008
Hugh Hendry, the brilliant, brash and outspoken and eloquent CIO of Eclectica Asset Management, one of the UK’s most prolific asset managers discusses global markets and is investing in long-term government securities in the US and UK. Dominic Frisby, of Money Week and Commodity Watch Radio conducts this interview, which was recorded on November 1, 2008.
Here is a summary of some of Hendry’s thoughts:
- the present environment is all about the return of your capital, not return on capital.
- he is intrigued by government bonds and bets that interest rates will be cut further than people anticipate at the present time.
- interest rates will come down to unprecendented levels but it won’t make a difference.
- monetary policymakers will be pushing on a string.
- Hendry has been investing in long term US treasuries
- he is profoundly bearish on commodities, for now
- He believes that gold will drop further to below $600 as a result of the deflationary pressure that we are facing from the fixing of the system, then as a result of all the stimulus, we will face profound inflation. When long-term bond yields drop to around 2.5% that’s when you want to own commodities. That’s when he’ll back the truck up for gold, the big 16 oz. bars.
- For now Hendry will place his bets on deflation and falling long term interest rates.
If being leveraged means shorting cash, then deleveraging means buying cash, and he’s afraid the deleveraging is far, far, from over, because debt levels are still very high at this point. That means the dollar will continue to rally on the resultant repurchasing or short covering of the dollar. The rallying dollar, and ongoing asset liquidation is deflationary for now.
Hendry’s case and outlook is deeply compelling and worth taking seriously.
The second part of Dominic Frisby’s interview is with Dr. Francis Claessens of Peers, who tells us what the super rich have been doing with their money. Claessens leads WealthPeerGroup.com, a peer group that meets on a monthly basis to discuss financial issues. Minimum entry to this group is investable assets of £5-million ($8-million). This too is very interesting, i.e. if you’re interested in what’s worrying the very HNW investor these days.
Listen to the entire interview here:
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Tags: Claessens, Commodities, Commodity, deflationary pressure, Dollar, Dominic Frisby, Eclectica, government securities, Hugh Hendry, interest rates, Monetary Policy, UK
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China Unveils $586-billion Economic Stimulus Plan
Sunday, November 9th, 2008
China’s stunning $586-billion (4-trillion Yuan) economic stimulus package, unveiled Sunday evening, aims to give the country’s domestic demand and global GDP a massive shot in the arm. This should also give commodities and commodity stocks a mighty boost. Here are a few excerpts from the Wall Street Journal on the subject:
The announced sum of four trillion yuan represents about 16% of China’s economic output last year, and is roughly equal to the total of all central and local government spending in 2006. New spending of even half that amount would be substantial next to China’s six trillion yuan annual budget for this year.
The plan includes spending in housing, infrastructure, agriculture, health care and social welfare, and features a tax deduction for capital spending by companies. China’s economy won’t be able to absorb so much spending immediately: Economists expect one or two more quarters of slowing growth at a minimum before a rebound could take hold.
With the announcement, China will enter a meeting Saturday of the Group of 20 largest economies with a plan that would dwarf stimulus measures by others in the group, which is convening in Washington to discuss ways to stem a global slowdown in growth.
…
In the new stimulus package, total new investment could be less than the headline figure of four trillion yuan, since the plan does appear, for instance, to incorporate rebuilding programs for the areas affected by May’s massive earthquake. Those have already been allocated one trillion yuan in funds.
Although Chinese officials have been meeting daily on the financial crisis, most observers hadn’t expected leaders to reach final consensus on a stimulus plan until an annual economic-policy meeting scheduled for the end of this month. The rapidity of the response underscored the government’s concern about the growing risks of a real downturn.
A stimulus this large comes once in a generation, or two, as does the opportunity, especially when the margin of safety is this high. As of Friday November 7, 2008, the Shanghai Stock Exchange Index was down 72% from October 16, 2007 peak closing of 6,092 points, having closed at 1,747 points, and roughly 44% below its 200-day moving average of 3,120 points.
Other packages have been relatively in the same ballpark, but set to span much longer periods of time, like ten years. A few years ago, for example, China earmarked 2.7-trillion Yuan ($300-billion) towards augmenting the country’s railroads, a sum to be invested over ten years.
Giving details of the package, Xinhua said China would invest an additional 100 billion yuan in national construction this quarter and would earmark an extra 20 billion yuan next year for reconstruction in areas hit by major natural disasters.
Sectors that will benefit from the extra spending include affordable housing, rural infrastructure, transport networks, environmental protection and technical innovation, Xinhua said.
The cabinet also confirmed a long-awaited reform to the way value added tax is calculated. The result will be to reduce companies’ tax bill by 120 billion yuan a year, the agency added.
This sum, a grand total of 4-trillion Yuan ($586-billion) is set to be dispensed over 2 years. You do the math…this is enormous.
Click for the complete WSJ.com article here [PDF]
Sources: Reuters
WSJ, China Sets Big Stimulus Plan In Bid to Jump-Start Growth
http://online.wsj.com/article/SB122623724868611327.html
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Tags: Agriculture, China, chinese officials, economic policy, Economy, GDP, government spending, Infrastructure, Markets, Yuan
Posted in Markets | 1 Comment »
Donald Coxe: Barron’s Interview
Sunday, November 9th, 2008
This week’s issue of Barron’s features an in depth interview with Don Coxe, Chief Investment Strategist, BMO Capital Markets. Mr. Coxe is best known for his highly read monthly newsletter, “Basic Points,” as well as his bi-weekly conference calls. His convictions that we are in the midst of a biggest long-term commodities bull market have been severely tested during the most recent months since this past summer, when he launched the Coxe Commodity Strategy Fund, but he remains convinced that the thematic fundamentals are in tact.
Here are a few excerpts from the must read interview, “Feed the World - and Boost Returns.”
How should investors approach today’s stock market?
If you aren’t deeply in the equity market, this is not a time to be committing large amounts of money. Stocks are cheap but they can get cheaper; we know that. We got back to the Dow having a multiple of 5.9 in December of ‘74, which was the foundation of Warren Buffett’s wealth because he started buying at that level. The Dow isn’t anywhere near 5.9 [its multiple last week was 11], but some of my favorite stocks are trading at lower P/Es than that. I can tell you they are the fertilizer, oil and agricultural companies.
…
Tell us some more about those industries.
The core investment concept of our time is that we are living through the greatest simultaneous effervescence of personal economic liberty in history. When people go from abject poverty to dwellings with indoor plumbing, electricity, basic appliances and access to motorized transportation, they have more economic liberty than 99% of humanity enjoys and we are adding 50 to 150 million people a year to that list. The gigantic investment returns are all going to be tied to companies that meet real human needs and do it better than other companies. What a great time to be an investor, because it is not just about the dwellings and the transportation, it is about the high-protein diet. When I came back from a trip two years ago, I said the biggest commodity story is going to be food, bigger than the other ones. It is high-protein food. The way to play that is through the fertilizer stocks, the genetically modified seed stocks and the farm-equipment stocks.
Which commodity groups do you like best?
Agriculture is first. We will need more fertilizer. There are only three farm-equipment companies of any size in the world. Terms of entry are difficult. You have to have dealerships. CNH Global [ticker: CNH] is one of the top three companies in the world in the field. It’s a subsidiary of Fiat and its stock has collapsed, but earnings haven’t collapsed. In May it sold for $45 a share. It’s $17 now. The next group has to be gold stocks. A period of massive reflation always leads to a good move in gold.
To read the entire interview click here.
Source: Barron’s, Feed the World — Boost Your Returns, November 10, 2008
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Tags: Agriculture, Barron's, Basic Points, BMO Capital Markets, CNH, Commodity, Donald Coxe, electricity, fertilizer, Gold, interview, oil, Trading, Warren Buffett
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Donald Coxe: Post US Election Analysis
Sunday, November 9th, 2008
Donald Coxe and his colleagues at BMO Harris provided their post-election views following the Obama victory:
Donald Coxe, Global Portfolio Strategist, BMO Financial Group
- Obama’s victory will lead to a “feel-good” attitude within America at a time when gloom and sourness have become excessive. That favours financial assets generally at a time that fall is moving into winter.
- Obama’s spending plans will be seen as economy-favourable with the nation in recession. Stocks should benefit near-term.
- Obama is fully committed to continuation of all the ethanol subsidies and tariffs that McCain opposed. That is good news for the reeling ethanol stocks that have been buffeted by falling oil prices and still-high corn prices.
- Obama has threatened to impose carbon taxes on coal-fired electrical generating plants.
- None of the candidates promised significant revisions to the extremely favourable royalty structure for mining on federally-owned properties, mostly in the West. That is important for Canadian gold miners operating in Nevada.
- He famously said that on his first day in the White House he would “call up the President of Canada to announce he was tearing up NAFTA.” We believe he won’t do that.
- Worldwide, the election of a new U.S. President with a change agenda will be greeted favourably. This should facilitate America’s dealings with other nations on such hot topics as Russian expansionism and response to Iranian nuclear weapons development.
Andrew Busch, BMO Capital Markets, Global FX Market Strategist
- Expect a U.S. stimulus package of $150 billion to be enacted and checks out the door by March with an impact on consumer spending by late April and May.
- Expect very expensive bond deals issuance to be done over the next three months with those issuing likely to only be high quality to get done and with high spreads to Treasuries. This should mean they get snapped up.
- There is going to be massive government bond issuance in 2009 across the globe to pay for bailouts, stimulus packages, and social spending. This means we should see a further steepening of the yield curve in 2009, but it won’t necessarily point to a big economic recovery like it has in the past.
Jack Ablin, Chief Investment Officer, Harris Private Bank
- Both an Obama victory and a Democrat-controlled Congress are currently factored into markets.
- When looking at Europe vs. U.S. price-to-sales comparisons, one can see the U.S. is beginning to trade like a “nationalized” country.
- Tax rates are expected to increase which will give an edge to municipal bonds.
- A move towards socialized medicine appears to be already discounted. In examining the valuation of U.S. vs. European pharmaceutical stocks, the U.S. valuation already incorporates nationalized health care.
- Large cap is set to outperform as small cap moves back to normal valuation.
Paul Taylor, Chief Investment Officer, BMO Harris Private Banking
- We are a long way away from a sustainable equity market rally. A sustainable equity market rally will only occur when it is clear that the spectre of a protracted, significant U.S. economic recession is not in sight.
- Leading economic indicators signal a meaningful U.S. and global economic recession. This will cause policymakers in Washington to focus attention on the economy as the number one priority.
- Investors should have a defensive strategy, with an overweight in Consumer Staples, Telecom, Utilities and underweight in Energy, Materials and Technology. This will be more appropriate until the spectre of recession is past.
- With Fed Funds at 1.0%, monetary policy will be impotent moving forward.
- A global economic recession is bearish for commodity based currencies (Canadian and Australian dollars) and is bullish for other currencies. The current “crisis of confidence” is bullish for the U.S. dollar due to its position of reserve currency.
Source: PR Newswire
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Tags: Australia, BMO, BMO Capital Markets, Canada, Currency, Dollar, Donald Coxe, Economy, energy, Euro, Fed, Focus, Gold, Markets, Mining, Monetary Policy, Oil Prices, Recession, REW, Russia, spreads
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Hitler Loses His Home
Saturday, November 8th, 2008
Hitler and his lieutenants discuss the real estate bubble and his failure to flip his home. These days, a good laugh goes a long way.
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Tags: Real Estate, Value
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New Audio Resource at GreenLightAdvisor.com
Saturday, November 8th, 2008
Now you can listen to the Investment Outlook and Commentary from Bill Gross (PIMCO), Vanguard Funds’ Portfolio Managers, and others on GreenLightAdvisor.com’s Audio Resources page.
This month, Bill Gross presents his latest investment outlook, Kenneth Volpert from Vanguard discusses the Credit Crisis, and Dominic Frisby, from MoneyWeek interviews Hugh Hendry of Eclectica Asset Management.
Enjoy!
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Tags: Bill Gross, Credit, Credit Crisis, Hugh Hendry, PIMCO
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Risk of Default at Large Financials
Thursday, November 6th, 2008
It appears that CDS rates at the largest US financials has fallen. Morgan Stanley and Goldman Sachs have the highest CDS prices while Wells Fargo and HSBC now have CDS prices below 100. These prices are indications of the cost to insure $10,000 of bond debt for 5 years.
These prices were much higher a few weeks ago, before TARP kicked in.
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Tags: Banks, Brokers, CDS, Credit Market
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Obamarket?
Thursday, November 6th, 2008
The-day-after-the-election results are in. Some folks (partisan) seem to believe that this is due to expectations that left-wing policy-making from the Obama administration will have consequences, particularly in the way of tax hikes. However, while you cannot dismiss this idea, it seems more likely that the market has gotten back to work, after the grand diversion of the election.
The chart below shows yesterday’s loss of -5.05%, was indeed, the worst day for the Dow, following the election of a new president. Reports cited the market’s reaction to the ADP report, and not the election results.
Our sense is that the real reason markets are liquidating is due to the unwinding of carry trades as a result of rate cuts out of the UK and the Euro. They cause destabilization in the global currency balance and that forces markets to unravel further. This kind of activity is not likely to subside until currencies come back into balance i.e. when Euro and Sterling (UK) rates and thus currency valuations fall to lower levels against the dollar. Furthermore you’d also have to see the Yen back above 100/dollar (USDJPY).
The Yen is an excellent negatively correlated barometer for global markets. When the Yen weakens, markets gain, and vice versa.
Table: Bespoke Investment Group
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Tags: Chart, SMI
Posted in Markets | 1 Comment »
Commodities Snapshot
Wednesday, November 5th, 2008
A snapshot view of commodities reveals that they have all experienced some mild recovery at the end of the month of October, as liqudation pressure caused by the deleveraging of hedge fund and bank balance sheets which wreaked havoc on markets during the month subsided. Its been little more than a week since TARP began deploying funds in a meaningful way. Also, another factor seems to have been the destabilization that was caused by the covering of short positions in Dollar/Yen carry trades that forced further liquidation in equity and commodity markets making October 2008 the worst month in 21 years. These conditions have been profoundly deflationary.
The following chart shows how as a result of high commodity prices the daily cost of living rose incrementally to a high of an additional cost per capita of $4.77. While the turmoil in commodity market has been terrible for investors, the turn has been beneficial to comsumers, who are now enjoying a $2.58 dividend off the resultant cheaper cost of living.
In the above chart we calculated the ‘08 price change of the major food and energy commodities in the CRB index (Corn, Soy, Wheat, Cattle, Hogs, Oil and Natural Gas) and multiplied the changes by the annual per capita consumption of each item. While this method may oversimplify the actual costs, it provides a good idea of how changes in commodity prices have impacted consumers wallets this year. (Bespoke)
Volatility in commodities is sure to continue and their prices have still a long way to go before the upper limit of the current downtrend line is broken. Under present circumstances, if you consider the economic growth numbers for the US economy continue to show up in the negative GDP growth and the credit market volatility continues to reign on the markets’ parade, commodity prices could face more downward pressure.
Charts: Bespoke Investment Group
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Tags: Banks, Carry Trade, Chart, Commodities, Credit, Credit Market, Economy, energy, GDP Growth, Gold, Markets, Natural Gas, Silver
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Global Writedowns vs. Capital Raised
Tuesday, November 4th, 2008
According to Bloomberg data, capital raised now exceeds global writedowns, and this may be a strong signal for the market that the banking sector has rounded the corner on the credit market debacle. During the previous month capital raised was trailing writedowns by around 50%, but during the last month saw quite a substantial jump bringing the totals to Capital Raised $690-billion vs. Writedowns $684-billion.
Chart: Bespoke Investment Group
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Tags: Chart, Credit, Credit Market
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Hugh Hendry: Don’t Bank on the Bailout
Sunday, November 2nd, 2008
Hugh Hendry, the brash, outspoken, and eloquent CIO, Eclectica Asset Management was invited to host Channel 4’s Dispatches, a UK TV program - “Don’t Bank on a Bailout”- a production that aired on October 27, 2008 about the fallout from this years credit debacle which adversely affected the UK and the US. Hendry travels throughout the City Financial District and then Wall Street.
Hendry has been one of the harshest critics of the lack of regulation in credit markets.
The three segments total about 15 mins. Its a must see:
Hugh Hendry, Part 1, Dispatches: Don’t Bank on the Bailout
Hugh Hendry, Part 2, Dispatches: Don’t Bank on the Bailout
Hugh Hendry, Part 3, Dispatches: Don’t Bank on the Bailout
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Tags: Credit, Credit Market, Hugh Hendry, Markets, UK, Value
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Heebner and Holmes on Emerging Markets
Saturday, November 1st, 2008
Click image for video
Ken Heebner, CGM Funds, and Frank Holmes, US Global Investors, discuss emerging markets in the context of the Fed’s 50 bps rate cut last week. Both their remarks on the rate cut and emerging markets are noteworthy.
Ken Heebner, CGM Funds: “Well, the emerging market economies are going to continue to have long-term growth. Those are the markets down the most, they’re down 50, in some places 60 percent and long term they have a bright future. Even Jeremy Grantham, the mega… the bear, is saying they’re almost cheap enough for him to buy. … When he’s ready to buy something, it’s going to go up.”
Frank Holmes, US Global Investors: “Well, I do like the emerging markets and I think if you look at energy names like PetroChina, it’s been just devastated here in stock price and it has a huge upside to get back to basically a healthier equilibrium and P/E ratios. But remember that most of these emerging markets, unlike 10 years ago Erin, they have, like China has $2 trillion of U.S. dollars…so they have a huge (foreign reserve) surpluses to be able to reinvigorate their economies. …I totally agree with Ken, this is where growth opportunities lie.”
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Tags: China, Dollar, Emerging Markets, energy, Fed, Frank Holmes, Markets, Silver, Video
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Deleveraging Forces Liquidation
Friday, October 31st, 2008
“When investors are in trouble, they sell what they can, not what they would like to.”
The current issue of The Economist features an excellent article about the forced selling that has been the key feature of this bear market, caused by the violent trading days that have come in the wake of the deleveraging of many banks and hedge funds as they need to get their balance sheets in order.
Here are some excerpts:
… the speed of market movements suggests another factor has been even more important. When investors are in trouble, they sell what they can, not what they would like to. It looks as if they have been dumping a whole range of assets.
Emerging stockmarkets, for example, have lost more than half their value this year, while emerging-government bonds were yielding more than eight percentage points above Treasury bonds, at least until a rally on October 28th. Leveraged loans (debts to finance management buy-outs) are trading at just 70 cents on the dollar.
… Who is being forced to sell? One obvious answer is banks that have ended up owning far more risky assets than they would like. Barclays Capital put $970 million of leveraged loans up for sale in October; in the face of disappointing offers, it ended up selling just 30% of the lot. Other banks have been winding down their trading, a big source of revenue earlier this decade, in an attempt to reduce risk.
Another group of sellers is the hedge funds. After a disappointing performance this year, many are facing calls for redemptions from clients and are having to sell assets to raise cash. But their problems also stem from their use of leverage, or borrowed money.
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Tags: Banks, Commodities, Dollar, Markets, Trading, Value
Posted in Markets | 1 Comment »
The Teflon Maple Leaf: TD Securities
Friday, October 31st, 2008
Eric Lascelles, TD Securities’ Chief Economics Strategist, points out that the Canada has the highest sovereign debt ratings in the world, in his latest report, “The Teflon Maple Leaf.”
Lascelles points to several key areas:
- A peek at the latest sovereign credit default swap data reveals that Canada is now regarded as quite possibly the world’s safest sovereign country in terms of the solvency of the country’s government.
- On the surface, this seems surprising given how closely Canada is linked into the U.S. economy and into commodity prices, and how both of those two erstwhile pillars have recently crumbled.
- But a closer look reveals that there may be some method to the market’s madness - Canada is indeed in a remarkably good position by several metrics, which we pursue in this piece.
- We should begin by noting that we believe Canadian bonds should continue to underperform the U.S. because sovereign debt concerns have not played a major role in the market to date, and because Canada’s economic prospects are somewhat better than in the U.S. and so less rate cutting will be needed.
- However, should the market begin to differentiate between countries based upon their debt-to-GDP ratios and other measures of fiscal pressure, Canadian bonds would ultimately be a winner in that contest. At present, there is little evidence that this is happening - case in point, both Japanese and U.S. debt continue to be happily purchased, yet the Japanese debt burden is extremely high and the U.S. debt burden is growing quickly. Nor do we necessarily expect this to change. But should the market grow more fickle about what it buys, there could be a quick reversal and this would prompt us to favour Canada over the U.S. in bonds.
- Third, throughout the credit crunch, Canadian bonds have been less volatile than in the U.S., and this speaks in no small part to the relatively more stable fiscal and economic foundations in Canada. We expect this trend of relative stability to continue.
The Teflon Maple Leaf, October 31, 2008, Eric Lascelles, TD Securities Inc.
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Tags: Canada, CDS, Credit, Economics, Economy, Japan
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Better To Be Late, Amid Credit Crises: Thomas Barrack, Jr.
Thursday, October 30th, 2008
Thomas J. Barrack Jr., billionaire and Founder of Colony Capital, which controls $39-billion in real estate assets, in his recent newsletter, “Is the world going to an [Extinction Level Event?” provides his assessment of the state of the markets, and shares the following:
Why the Banks Have Most Likely Not Hit Bottom
• Corporate earnings from most sectors will be weak and capex programs will be slashed.
• Hedge funds will continue to be tortured by redemptions and their interplay with banks was
incestuous.
• The effect of hedge funds pulling out of the market will chill many sources of corporate
finance - Redemptions are massive.
• Counterparty risk in the CDS market will remain a bit of a mystery.
> CDS was equally as bad at the plate as equity and debt players
> The governments infusion of equity collapsed the CDS spreads
• CDS payments and failures at levels that are unfathomable - watch Lehman reconciliations on
Tuesday, Oct. 21st.
• The housing market will remain anemic.
• Insurance companies, automakers, airlines and shippers are all in trouble.
• State and municipalities are also Fed borrowers.
• Corporate refinancings at $150 billion a quarter with no one to refinance.
• Massive margin calls on the titans of America which will cause collapse in the corporate
equities they own.
• Forced liquidations.
• LBO restructurings and covenant violations.
• No DIP financing for bankruptcies, only liquidations.Long-term Consequences
The good news is that all we care about at the moment is SURVIVAL. We need to fight every day to monitor and steward the best deals we can find — the ones we own. However, eventually we will need to examine the long-term effects of our triage.
• Huge inflationary pressures. Inevitable higher interest rates and taxes.
• Massive national debt and budget deficits.
• Are we deferring the pain like Japan did?
• $11.3 trillion national debt is really $55 trillion due to OBL (off balance-sheet liabilities).
• Implications of investment losses for pension funds and endowments?Bottom Line
The game is afoot and not over. Don’t panic and don’t be euphoric. The discoveries will be constant and unsettling. Fortunately, the world powers have committed to win it. Now we all have to figure out what exactly that means. Based upon our past experience at implementing bank takeovers and “distressed asset” management and dispositions, we suggest that we all buckle our seatbelts for a longer ride with lots of ups and downs before we arrive to safety.
From Bloomberg, October 10, 2008:
“For once, it will be better to be late rather than early,” Barrack said in a four-page letter to investors on Oct. 8, a copy of which was obtained by Bloomberg News. “There is no bottom because no one believes the messenger.’
“As all markets come to the realization that we are now in a worldwide systemic recession — not just a credit crunch — things may get worse,” the Los Angeles-based Barrack, 61, wrote in the letter, titled “In God We Trust — But Not Counterparties.”
“The massive restructurings, refinancings and re-pricings that will now take place, cascading from the financial world to the industrial world, will be legend. The complexities, repercussions and consequences to all parties are indeterminate.”
From Donald Trump’s Blog, the Donald quotes his good friend’s (Thomas Barrack Jr.) newsletter:
Why Can’t Anybody Find the Bottom?
It all boils down to trust! The mantra of the country is “In God We Trust–but not counterparties.” No buyer trusts any seller, banker, insurer or intermediary. No investor trusts any depository, insurer, broker-dealer or advisor. No Main Street citizen trusts Wall Street, and neither Main Street or Wall Street trusts the government. No counterparty in any transaction has confidence in the other. Values at every level have been artificially adjusted and when the air comes out of the “speculative hope certificates” everyone is pointing fingers at each other for fault and retribution.
The Worst is in Front of Us
Counterparties are renegotiating, borrowers are violating covenants, banks are finding any excuse not to fund existing commitments, insurers are negating liability, and renegotiations of responsibility and liability are being conducted at every level of the capital structure across the spectrum of companies.
There is no bottom because no one believes the messenger. With trillions of dollars of re-pricing occurring in these markets there is no hurry to catch the falling knife. There will be ample time once that last “dead cat bounce” has bounced and the government launches a coherent and consistent program. For once it will be better to be late rather than early.
Bottom Line: This is Not the Bottom.
Thomas J. Barrack Jr., “Is the World Going To ELE?”, October 14, 2008
Source: NakedShorts.com, Colony Capital
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Tags: Banks, CDS, Credit, Dollar, energy, Fed, Housing Market, inflation, interest rates, Japan, Markets, Real Estate, Recession, spreads, Value
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The Age of Prosperity is Over: Arthur Laffer
Thursday, October 30th, 2008
Arthur Laffer, the Reagan-era economist, famous for defining Supply-Side economics and developing what is now referred to as the Laffer Curve, has written an Op-Ed piece in the Wall Street Journal (October 27, 2008).
The Age of Prosperity is Over, October 27, 2008. This is a must read.
Seymour Schulich provides a foreword to this article:
“This piece from an American friend gives a clear picture of where the U.S. is heading and the price to be paid for allowing unregulated hedge funds and derivative activity.
The next commodity boom will set new price records. It is galling to see the u.s. dollar sell at a huge premium. I think our Canadian dollar is the best buy in the world today.”
Best Regards, Seymour Schulich
Here are some excerpts:
When markets are free, asset values are supposed to go up and down, and competition opens up opportunities for profits and losses. Profits and stock appreciation are not rights, but rewards for insight mixed with a willingness to take risk. People who buy homes and the banks who give them mortgages are no different, in principle, than investors in the stock market, commodity speculators or shop owners. Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses.
No one likes to see people lose their homes when housing prices fall and they can’t afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house’s value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.
Regarding past Presidents and central bankers:
The stock market is forward looking, reflecting the current value of future expected after-tax profits. An improving economy carries with it the prospects of enhanced profitability as well as higher employment, higher wages, more productivity and more output. Just look at the era beginning with President Reagan’s tax cuts, Paul Volcker’s sound money, and all the other pro-growth, supply-side policies.
Bill Clinton and Alan Greenspan added their efforts to strengthen what had begun under President Reagan. President Clinton signed into law welfare reform, so people actually have to look for a job before being eligible for welfare. He ended the “retirement test” for Social Security benefits (a huge tax cut for elderly workers), pushed the North American Free Trade Agreement through Congress against his union supporters and many of his own party members, signed the largest capital gains tax cut ever (which exempted owner-occupied homes from capital gains taxes), and finally reduced government spending as a share of GDP by an amazing three percentage points (more than the next four best presidents combined). The stock market loved Mr. Clinton as it had loved Reagan, and for good reasons.
Hat Tip: John Budden, BeEarly.com
The Age of Prosperity is Over, Wall Street Journal, October 27, 2008.
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Tags: Alan Greenspan, Banks, Dollar, Economics, Economy, Markets, Mortgage, REW, Value
Posted in Credit Markets, Markets | No Comments »
BRICs Lay Foundation Stability: Merrill Lynch
Thursday, October 30th, 2008
Alex Patelis, Head of Global Economics, Merrill Lynch discusses the strength of BRIC (Brazil, Russia, India, China) countries in the midst of the global credit crisis, and how well suited they are to recover strongly.
Patelis points out that close to 90% of global GDP growth will come from emerging markets economies in 2009, and goes one step further saying that he would not be surprised if global growth would come exclusively from emerging markets. They are underlevered, strong domestic economies, where consumption growth is being fuelled by income growth, and strong savings rates. In particular, he favours China and India.
Click image to watch video
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Tags: Brazil, BRICs, China, Credit, Credit Crisis, Economics, Emerging Markets, GDP Growth, India, Markets, Russia, Savings Rate, Video
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Resurgent Yen a Global Destabilizer
Wednesday, October 29th, 2008
Once again, volatility favouring the Japanese Yen is having a pronounced effect on what happens in the stock market. There is a well documented history of the relationship that exists between global stock markets and the Yen. There appears to be a well-defined negative correlation between the yen and equity markets. When the yen surges, markets fall, and vice versa.
We have covered this topic on several occasions during this year: