Archive for March, 2008
Sunday, March 30th, 2008
March 30, 2008 - On March 12, 2008, Jim Rogers appeared for a live interview on CNBC Europe. If you missed it, just click on the link below.
Just watched it… It is a must watch. In his usual candour, Mr. Rogers tells it like it is. If he woke up in Bernanke’s place, he would quit, and then abolish the Fed for providing t”socialism for the rich.”
His calls - Invest in agricutural commodities (in his opinion, this will be the most profitable trade for the next 2 to 5 years), long the Renminbi, short the investment banks.
http://www.cnbc.com/id/15840232?video=682734828&play=1
Even if you don’t like the guy, its a good interview with one seriously interesting and knowledgeable person.
Thank you Mr. Rogers.
Tags: Agriculture, Banks, Commodities, Currency, Investment Strategy, Markets
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Thursday, March 27th, 2008
March 27, 2008 - Donald Dony, The Technical Speculator, offers the following explanation of how the strengthening of the yen to a twelve year high against the US dollar has had a profoundly negative effect on global markets, in the past and during the most recent 6-7 months. We would also add that while Mr. Dony does a great job of explaining this concept, he also points out in the present tense that as the cheap money is quickly evaporating, so is the global market.
Our sense is that the yen broke through par, a level (usd/yen<100) that required intervention (which came last week), primarily by the BoJ to maintain it at levels that are more supportive of Japan’s economy. For this reason, it may be that if the yen has reached a turning point, that a new round of carry trade in the yen could provide stimulus and/or support to global markets at these levels. Change that to evaporated, past tense.
Global equity traders had, for many years, a ready source of funds at almost no interest charge. Traders have been shorting the Yen and using the funds to purchase stocks, currencies and high-yielding securities around the world. However, as of mid-2007, that “free bank account” is becoming more and more costly. The Yen carry trade is starting to unwind with very negative results for stocks.
But what is the “Yen carry trade”? Simply put, it is borrowing at very low interest rates in Yen and using the loan to buy higher yielding assets elsewhere. During the past 12 years, the trade has become standard business practice for many institutional investors. Perhaps the most popular form of the strategy exploits the yield gap between U.S. and Japanese fixed income securities. Another plus that came with the Yen/U.S. cross was from the dollar’s rise against the yen. Investors make their profit when they reverse the trade and pay back the Yen loan.
But all of this endless liquidity is quickly coming to an end and with bearish consequences to global equity markets.
Chart 1 illustrates the tight connection of the Japanese currency with global stocks. With every major rise of the Yen throughout 2007, there was a mirrored decline in the Dow Jones World Stock Index. Quite simply, the global equity markets began to fall when the tap was turned off to cheap money. Traders are now forced to buy back massive Yen short positions and sell assets to pay for it.
And what is happening to the Yen?
Chart 2 shows the Japaneses currency is breaking through a decade old resistance levels and surging to new highs. And this trend shows no signs of reversing. The upside target is 120.
Bottom line: The bearish impact of the advancing Yen is clearly apparent on global stock markets. World equities appear to have been propped up largely due to the availability of foreign liquidity. As this “cheap money” is quickly evaporating, so is the global bull market.
Donald W. Dony FCSI, MFTA
Tags: carry trade, credit market, Currency, Markets, Technical Analysis
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Thursday, March 27th, 2008
Mar. 27, 2008 - Bespoke Investment Group - Recently released short interest figures from both the NYSE and Nasdaq show that short interest as a percentage of float is currently at record levels. On the NYSE, the mid-month short interest report hit a level of 4.15%, which is record high. On the S&P 500, short interest is even higher. As of mid March, 5.4% of the float of S&P 500 listed companies were sold short. This represents an increase of 53% over the last year!
On a sector by sector basis, short interest also remains at elevated levels.
Tags: Investment Strategy, Markets, Technical Analysis
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Thursday, March 27th, 2008
Mar. 27, 2008 - In November 2008, Goldman Sachs’ Chief Global Strategist, Jim O’Neill, and associates, who coined the “BRICs” term, have followed up with a complete updated report on the fundamentals for each of Brazil, Russia, India and China. The report goes on to cover the markets of the Next 11 frontier markets. Click the following link to download the complete report, BRICs and Beyond (Goldman Sachs).
Here are some excerpts:
India’s rising growth potential
…We argue that there has been a structural increase in India’s potential growth rate since 2003 on the back of high productivity growth. In this paper, we explain why productivity (by which we mean total factor productivity, or the manner in which all inputs are combined to achieve more output) has surged, and why we think this is likely to continue over the next decade.
… Industry is increasingly becoming an important growth driver, contrary to conventional wisdom that growth in India is only services-led. A quarter of services are directly linked to industry, in sectors such as trade, transport, electricity and construction.
…In India, labour is nearly four times more productive in industry and six times more productive in services than in agriculture, where there is a surplus of labour. Economic theory tells us that as labour moves from low-productivity sectors (such as agriculture) to high-productivity sectors (such as industry or services), overall output must improve.
…In absolute terms India will remain a low-income country for several decades, with per capita incomes well below its BRIC peers. But if it can fulfil its growth potential, it can become a motor for the world economy and a key contributor to generating spending growth.
…India’s imminent urbanisation process has implications for demand for housing, urban infrastructure, location of retail and demand for consumer durables. We expect the coming onstream of major highways (especially the Golden Quadrilateral) to drive growth in the transportation sector, spur demand for vehicles, increase real estate values along the corridor and potentially boost construction of suburban homes as people escape congested cities. The SEZs hold out substantial investment opportunities in all spheres of activity.
Russia: A smooth political transition
…There are signs that investment has begun to accelerate over the last 12 months, with capital expenditures up over 21%yoy in 2007H1. Private investment growth may suffer a brief interruption due to the recent troubles in the local credit markets. But public investment may make up some of the shortfall: after repairing its balance sheet and accumulating a substantial ‘rainy-day’ fund, the government has announced ambitious plans to invest over $1-trillion over the next ten years in roads, rail, ports, pipelines and other infrastructure projects.
…The BRICs dream is not even a best case scenario in fact, Russia’s recent performance has been considerably better than projected in the original BRICs papers. But it does assume that the necessary conditions for long-run growth are in place, conditions that we have tried to capture in our Growth Environment Scores (GES). Russia scores well above the emerging market mean on education, government deficit and external debt; marginally above average on openness and life expectancy; lower but still above average on technology (phones, PCs and internet access per capita); and somewhat below average on inflation, which is now in the high single digits.
…Our equity strategists’ favourite themes are the consumer, telecoms and retail sectors, as well as steel and pipe companies, and other names poised to benefit from the state’s infrastructure spending. They also see opportunities in domestic restructuring stories, such as power generation and gas. With significant segments of the economy still private, we see considerable opportunities in direct investment.
China: Will China grow old before getting rich?
…China’s unrivalled economic growth over the past quarter-century has surpassed all records and created a new standard in the history of economic development. With an average annual real GDP growth rate of 9.6% from 1978 to 2004, China’s pace of growth is faster than that achieved by any East Asian economy during their fastest-growing periods.
China’s investment strength is sustainable
…One of the most widely-held misconceptions about China is that the economy contains an over-investment time-bomb, which will soon result in a sharp correction in both investment and GDP growth, resulting in rising non-performing loans (NPLs) and in deflation. The reasoning behind this theory is that fixed asset investment (FAI) is growing at above 20% year on year, while the investment-to-GDP ratio is already above 45% (higher than the levels reached by Asian economies before the 1997 crisis). Furthermore, this investment boom is financed by misallocated bank credits and generates few returns.
Although this is a popular view, we believe it is wrong for two reasons. First, the conclusion is based on macro data that is deeply flawed, leading to a substantial overstatement of the investment-to-GDP ratio. Second, a high investment-to-GDP ratio is consistent with China’s rapid growth. The fact that the return on capital is high and generally has been climbing over the past decade supports our thesis that Chinas investment strength is sustainable.
The “B” in BRICs: Unlocking Brazil’s growth potential
We remain confident about Brazil’s growth potential, at least in terms of what we have envisaged in our BRICs studies. The main reason for Brazil’s underperformance is that, until now, the government had been in the process of implementing a stabilisation programme, with a view to achieving macroeconomic stability. This is a key precondition for growth. Thanks to these adjustment efforts, macroeconomic conditions are more favourable now than they have been for decades. The large balance of payments surpluses have been used to prepay external debt and accumulate reserves, while a credible central bank (BACEN) has reduced inflation to 3.0% in 2006.
We believe that the Lula II administration will sustain sound macroeconomic policies and make some progress on structural reforms. Stability should allow real GDP growth rates to move gradually towards Brazil’s potential rate of about 3.5%, which is near our BRICs potential growth rate of 3.7%.
We also believe that Brazil could grow much faster, perhaps at a secular growth rate of about 5.0%. For this to happen, the government will have to tackle four difficult structural problems:
· Brazil saves and invests too little. To address this issue, the government will have to deepen and improve the quality of the fiscal adjustment.
· The economy should be opened to trade.
· The government must improve the overall quality of education.
· The government should implement structural reforms to improve institutions, with a view to increasing total factor productivity.
We do not believe that the Lula II administration and Congress will be ambitious enough to implement this politically difficult agenda. Therefore, while Brazil has the potential to grow at or above 5.0%, this is unlikely to happen during the next four years.
Tags: BRICs, China, Emerging Markets, India, Markets, Russia
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Wednesday, March 26th, 2008
Courtesy: PriceWaterhouseCoopers
March 25 /CNW/ - Long-term growth prospects for China, India and other so-called ‘E7′ economies (Brazil, Mexico, Russia, Indonesia and Turkey) remain upbeat. However according to a new report from PricewaterhouseCoopers (PwC) an additional 13 emerging economies also have the potential to grow significantly faster than the established OECD countries. This rapid growth creates both challenges and opportunities for Canada.
The report, The World in 2050: Beyond the BRICs: a broader look at emerging market growth prospects, suggests that China could overtake the US by 2025 to become the world’s largest economy and will continue to grow to 130% of the size of the US economy by 2050. The Indian economy could grow to almost 90% of the size of the US economy by 2050. Brazil seems likely to overtake Japan by 2050 to move into fourth place, while Russia, Mexico and Indonesia all have the growth potential to surpass the economies of Germany or the UK by the middle of this century. The most impressive economic growth could be realized by Vietnam, with a potential growth rate of almost 10% per annum in real dollar terms. This rapid growth could propel the Vietnamese economy to around 70% of the size of the UK economy by 2050.
Interestingly, Nigeria has the long-term potential to overtake South Africa as the largest African economy by 2050. This assumes that non-oil based growth policies implemented in recent years are sustained in the long-run, something that may prove to be a challenge.
“As the economies of emerging nations grow, Canada’s share of the global economy is projected to diminish,” says Edward Mansfield, an associate partner with PwC’s statistics and economics group. “To maintain our competitive position, Canadian businesses will have to differentiate through innovation and technological progress. This will require greater investments in education and capital equipment to promote the productivity gains necessary for economic growth. However, as a highly culturally diverse nation, Canada could be well positioned to capitalize on the growth of emerging markets due to well established cultural and economic links.”
http://www.pwc.com/extweb/pwcpublications.nsf/docid/146E4E4D52487154852573FA0058A179/$file/world_2050_brics.pdf
Tags: Brazil, BRICs, China, de-coupling, Emerging Markets, India, Markets, Metals, Russia
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Sunday, March 23rd, 2008
Mar. 23, 2008 - For a certain strata of Wall Street denizens, the writings of Oaktree’s Howard Marks’ are equally anticipated to those of Warren Buffett’s.
Marks is the chairman of Oaktree, the low-profile but powerful L.A-based firm that manages more than $50 billion in alternative investments, mostly in fixed-income strategies. He’s been writing memos to clients since 1990, but a cult following developed after a missive he penned on Jan. 1, 2000 titled “bubble.com.” A few months before tech stocks imploded, Marks sounded a warning. “To say technology, Internet and telecommunications stocks are too high and about to decline is comparable today to standing in front of a freight train,” he wrote. “To say they have benefited from a boom of colossal proportions and should be examined skeptically is something I feel I owe you.”
This is a fascinating read from one of the most important people in the market, and we feel that it is a must read. It is broken out into several well defined subsections, and we are sure that you will find it eloquent and enlightening. Here are some excerpts from March 18, 2008, The Tide Goes Out.
In the simpler but still not totally stable financial world I entered forty years ago, stability was desired in financial institutions. So, for example, banks and insurance companies were allowed to carry a loan or a bond at cost on their balance sheets as long as it was (a) fundamentally unimpaired and (b) intended to be held to maturity. Even if its market value fell temporarily, it was assumed that a creditworthy claim would be repaid in full at maturity. Thus, price fluctuations were ignored as long as fundamentals were sound.
More recently, “transparency,” “accountability” and “market signals” became more highly prized. A lot of this had to do with skullduggery unearthed at companies like Enron. As a result, accounting increasingly came to require that assets be valued at actual or estimated market prices. I’d had a preview of this in 1990 when, as part of efforts to “get” the high yield bond industry (and Drexel and Milken), S&Ls were required to market price their holdings of high yield bonds – dooming many of them in a time of price weakness. . . .
In 1990, when high yield bonds had the brush with difficulty described above (meaning spreads widened to 1,100 basis points, and a law was passed that required S&Ls to reflect price declines on their balance sheets), I was asked to brief the board of TCW on the risks. I presented a parable about a regulated financial institution that went bankrupt under the weight of mark-to-market accounting. I joked with Bill Spencer, who was president of Citibank when I worked there, that in the 1980s, that could have been Citibank if it was required to recognize mark-to-market losses on real estate loans. Guess what: today that’s the rule.
Read on, you’ll be glad you did. The Tide Goes Out.
Thanks, Mr. Marks.
Tags: Banks, CDS, credit market, Economy, Fixed Income, Investment Wisdom, Markets
Posted in Markets | 1 Comment »
Wednesday, March 19th, 2008
Mar. 18, 2008 - Special thanks to Prieur du Plessis, for this comprehensive analysis of the recent commodities activity - Mr. du Plessis is chairman of the Plexus group of companies, based in South Africa, which he founded in 1995.
Can money trees in fact grow to heaven? It was certainly beginning to look that way when considering the frenzied surge of many commodities to new highs week after week.
The following table shows the strong performance of most commodities over various measurement periods.
Source: Plexus Asset Management (based on data from I-Net Bridge)
But the past few days have seen commodity prices pulling back from their lofty levels. What should one read in this?
Let’s firstly consider a picture of the Reuters/Jeffries CRB Index, a basket of agricultural, energy, industrial metal and precious metal commodities.
Source: StockCharts
The graph only shows the last portion of the seven-year bull market in the CRB Index in order to illustrate the parabolic rise over the past six weeks, resulting in a heavily overbought condition. Considering a combination of technical indicators, a sell signal seems to have been given. Of special note are the Bollinger Bands where a top was made outside the top band, followed by a top inside the top band, indicating a trend reversal. A move originating at the top band often tends to decline to the bottom band.
Part of the reason behind the strong rise in commodity prices was undoubtedly the plummeting US dollar, but very strong underlying demand from especially emerging markets, together with a tight supply situation, has naturally been a primary driver. Although I am a strong believer in a multi-year uptrend, I am concerned about commodity prices having become detached from the fundamental picture over the short term in the light of the rather dismal global outlook for economic growth.
The graph below illustrates the close historical relationship between the annual change in the US Leading Indicators Index (blue line) and The Economist Metals Index (pink line).
Source: Plexus Asset Management (based on data from I-Net Bridge)
Unless one expects a turnaround in economic activity, it would seem that a breather of at least a few months could be on the cards for commodities in general.
Andrew Garthwaite, chief global equity strategist of Credit Suisse, remarked: “Sharply rising commodity prices may … exacerbate a growth downturn, but eventually weak growth gets its revenge, as falling real demand triggers speculative liquidation.”
Also emphasizing growth concerns, but specifically from an emerging-market point of view, Albert Edwards, co-head of global strategy of Société Générale, said: “The unfolding US consumer recession is likely to suck liquidity away from the emerging-market region as the US current account deficit declines and emerging-market accumulation of foreign exchange reserves slows sharply. As emerging-market asset prices slide and decoupling arguments evaporate, commodity prices will react sharply as recent speculative ‘safe haven’ froth unwinds.”
I believe that irrespective of high demand from China and other emerging markets, commodity prices will remain cyclical and that it is only natural to expect periodic corrections within a long-term uptrend. Profit-taking/deleveraging by hedge funds may result in sharper sell-offs than otherwise, but negative real interest rates in the US should temper the downside potential. Different commodities, needless to say, will behave in different fashions, but in general one’s approach should be to be patient and await better buying opportunities down the line.
Tags: Commodities, Markets
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Friday, March 14th, 2008
Mar. 14, 2008 - There are few who can rival Donald Coxe, BMO Financial’s Chief Investment Strategist, when it comes to providing what has historically been an accurate macro outlook on financial markets. Below, are Mr. Coxe’s paragraphed recommendations from February’s edition of Basic Points (courtesy of J’s Global Analysis). In a time of great uncertainty, this kind of clarity and direction is invaluable.
1. Long-term investors should remain heavily overweight commodity stocks, including the base-metal stocks. As the bear market grinds on, use days of stock market weakness to add to commodity stock exposure. They not only remain the asset class with the best earnings outlook, but also the asset class that is least understood by conventional asset allocators, who still see them as cyclicals dependent on OECD growth.
2. In the near term, the golds will continue to outperform stock markets and to act as a form of hedge against two kinds of shocks – financial panics and inflation shocks.
3. Remain heavily underweight bank stocks, and financials tied to “Jurassic Park Avenue” excesses. Within the financial group, overweight high-quality fire and casualty companies, life insurers, and asset management organizations.
4 Retain above-average cash positions, preferably in strong currencies.
5. Where possible, borrow in dollars and invest in assets denominated in strong currencies.
6. The Canadian dollar remains the Western currency with the best fundamentals. Canada’s problems arise because the Great Lakes are an insufficient barrier to the flow of bad economic and financial trends from the South.
7. Within the commodity groups, continue to emphasize investment in companies with long-duration unhedged reserves in the ground in politically secure regions.
8. The growth of sovereign control of energy assets means that the supply-side response to record-high oil prices will probably be inadequate to meet relentlessly growing global demand. Too many Third World governments with rich oil reserves have too many other demands for cash to reinvest heavily for the long term in new production. Retain exposure to the shares of producing Alberta Oil Sands companies with reserves that could outlast this century.
9. Long-term-oriented investors should use any temporary pullback in base metal producers to build their portfolios for the Final Movement of the Sonata – which will be the longest and loveliest performance of metal music in history.
10. The Treasury yield curve is now in recession mode – low yielding and upward sloping. It is of investment merit only for those who expect a long, deep recession. The Ten-Year note, with a negative real yield of 50 basis points, should appeal only to those who believe the recession will be accompanied by deep deflation. Oddly enough, credit spreads, though they have widened from their record-low levels, do not discount any recession at all.
We think bond investors should go for short- and medium-term high-quality non-Treasury paper – preferably in currencies other than greenbacks.
11. Defence stocks remain attractive, even if Democrats win it all in November. The next president may well choose to speak more softly than the incumbent, but if he or she doesn’t carry a big stick, the jihadists won’t listen.
Also, click here for Donald’s most recent webcast, dealing with the case for commodities and resources stocks.
Tags: Agriculture, BRICs, Commodities, energy, Fixed Income, Investment Strategy, Investment Wisdom, Markets
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Friday, March 7th, 2008
Mar. 7, 2008 - Warren Buffett’s annual shareholder’s letter is the fountainhead from which legions of investment professionals glean insight from the world’s richest man ($62-billion net worth - according to Forbes 2008) and the single most successful investor in history.
Whether you’re a novice or a pro, this letter is full of the mindset and humour that are pre-requisite for long term investing success.
Click the image below for this year’s letter:
Tags: Investment Wisdom
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Monday, March 3rd, 2008
In a fascinating article, Inside Wall Street’s Black Hole, Michael Lewis bestselling author of Liar’s Poker, discusses the flaws in the Black-Scholes theory. Its a must read. Here are some excerpts:
…The striking thing about the seemingly endless collapse of the subprime-mortgage market is how egalitarian it has been. It’s nearly impossible to draw a demographic line between the victims and the perps. Millions of ordinary people ignorant of high finance have lost billions of dollars, but so have the biggest names on Wall Street, and both groups made exactly the same bet: that real estate values would never fall.
…Portfolio insurance evolved from the most influential idea on Wall Street, an options-pricing model called Black-Scholes. The model is based on the assumption that a trader can suck all the risk out of the market by taking a short position and increasing that position as the market falls, thus protecting against losses, no matter how steep.
…That’s what happened on October 19, 1987, when the sweet logic of Black-Scholes was shown to be irrelevant in the real world of crashes and panics. Even the biggest portfolio insurance firm, Leland O’Brien Rubinstein Associates (co-founded and run by the same finance professors who invented portfolio insurance), tried to sell as the market crashed and couldn’t.
Oddly, this failure of financial theory didn’t lead Wall Street to question Black-Scholes in general. “If you try to attack it,” says one longtime trader of abstruse financial options, “you’re making a case for your own unintelligence.”
…Black-Scholes didn’t work; trillions of dollars’ worth of securities may have been priced without regard to the possibility of crashes and panics. But until very recently, no one has bitched and moaned about this problem too loudly. Lay folk might harbor private misgivings about the clergy, but as lay folk, they are reluctant to express them. Now, however, as the subprime market unravels, the beginnings of a revolt against the church seem to be taking shape.
…One of the revolt’s leaders is Nassim Nicholas Taleb, the bestselling author of The Black Swan and Fooled by Randomness and a former trader of currency options for a big French bank. Taleb can precisely date the origin of his own personal gripe with Black-Scholes: September 22, 1985. On that day, central bankers from Japan, France, Germany, Britain, and the United States announced their intention to torpedo the U.S. dollar—to reduce its value in relation to the other countries’ currencies. Every day, Taleb received a list of his trading positions from his firm and a matrix describing his risks. The matrix told him how much money he stood to make or lose, given various currency fluctuations. That September 22, when the central bankers announced their plan to lower the dollar’s value, he made money but didn’t know it. “I didn’t know what my position was,” he says, “because the movement was outside the matrix they’d given me.” The French bank’s risk-analysis program assumed that a currency crash of this magnitude would occur once in several million years and therefore wasn’t worth considering.
Tags: Derivatives, Markets
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