Posts Tagged ‘Economy’
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
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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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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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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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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
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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:
- The Carry Trade and Markets? What is the relationship?,
- Resurgent Yen is Scary News,
- Why the selloff in commodities and emerging markets?,
- More Carry-Trade commentary
- More volatility coming and more ETF options
- Yen’s Strength [has been] profoundly negative for global markets
From the Economic Times, The Group of Seven issued warnings on Monday the yen’s wild swings are threatening financial stability, fanning speculation central banks may intervene to halt a rally in the currency driven by a Japanese exodus from emerging markets.
The yen was the only currency mentioned in a brief G7 statement as it rallied to 13-year high against the dollar, not only threatening Japanese exports as the world’s second-largest economy tumbles toward recession amid the worst global financial crisis in 80 years, but leading to a destabilization of currency related transactions that need to be unwound.
As a matter of background building, we provide below a summary of milestones in the yen’s history:
1871 - The yen became Japan’s currency as part of the Meiji Restoration, which marked the start of Japan’s modernization and opening to the rest of the world. Japan adopted the gold standard.
1949 - After World War Two the dollar’s fixed rate is set at 360 yen via the Bretton Woods system, partly to help stabilize prices in the Japanese economy.
1959 - The dollar/yen exchange rate is liberalized and the margin of fluctuation is set at 0.5 percent on either side of its dollar parity.
1963 - The margin of fluctuation is widened to 0.75 percent. 1971 - United States abandons gold standard, bringing an end to the Bretton Woods system of fixed exchange rates and forcing a realignment of world currencies.
December 1971 - Under the Smithsonian Agreement, the dollar/yen exchange rate is set at 308 yen and is allowed to fluctuate in a wider band between 301.07 yen and 314.93 yen.
1973 - Japanese monetary authorities decide to let the yen float freely against the dollar, and the yen appreciates as far as 263 to the dollar.
1978 - The yen pushes through 200 to the dollar for the first time, strengthening as far as 177.
1980 to 1985 - The yen’s appreciation halts and partially reverses despite Japan’s big trade surpluses. Higher interest rates in the United States prompt Japanese investors to put money in dollar assets.
1985 - The Group of Five industrial nations, the predecessor to the G7, sign the Plaza Accord in which they agree the dollar is overvalued and to weaken it. The yen climbs from its pre-accord level of around 240 to 211 in October and 200 in November, a 20 percent rise in just a few months.
1986 - The U.S. currency falls further to around 190 yen in January, 167 yen in April and 153 yen in August.
1987 - In February, six of the G7 nations sign the Louvre Accord, which aims to stabilize currencies and halt the dollar’s broad decline. The dollar still falls from near 153 to 137 in April and 120.80 by the end of the year.
1988 - On January 4, the dollar falls to a post-war low of 120.45 yen in Tokyo trade, a level that holds as the low for more than five years. The Bank of Japan intervenes to buy dollars and sell yen that day on behalf of the Ministry of Finance.
August 17, 1993 - The dollar declines to a new post-war low of 100.40 yen in Tokyo.
June 21, 1994 - The dollar falls through the key 100 yen level and touches a record postwar low of 99.85 yen in New York trade before finishing at 100.30 yen.
April 19, 1995 - The dollar hits a record post-war low at 79.75 yen after U.S.-Japanese trade frictions spark heavy selling. By the end of the year it is near 103.40.
June 17, 1998 - As the dollar shoots above 144 yen, U.S. authorities join the Bank of Japan to buy yen, spending $833 million. By August the dollar rises to near 148 yen, partly due to yen carry trades in which investors borrow yen funds at Japan’s near zero interest rates to buy higher-yielding currencies.
1998 - After the global financial market strains from the near collapse of hedge fund Long-Term Capital Management, carry trades are unwound quickly. In one week alone in October, the dollar tumbles from near 136 yen to a low around 111.50 yen.
1999 - The yen strengthens further despite repeated intervention, reaching 102 in November.
2001 - Following the Sept 11 attacks, Bank of Japan intervenes to sell yen for dollars.
2003 - The MOF begins massive intervention to halt the yen’s rise against the dollar, partly to shield Japanese exporters as the economy remains stuck in its post-bubble slump and deflation. The MOF spends 20.4 trillion yen ($200 billion) over the year, nearly all of it to buy dollars and sell yen.
2004 - The MOF spends 14.8 trillion yen ($145 billion) intervening in the first quarter of the year, including 1.67 trillion yen buying dollars on January 9 alone. But the MOF ceases intervention in March and has never since resumed.
2005 - The yen reaches a high of 101.67 yen in January but then starts to fall, hitting 121.40 in December. Yen carry trades and Japanese investors shifting funds into foreign assets drive the slide.
June 2007 - The dollar hits a 4-1/2-year high of 124.14 yen. July 2007 - The yen’s broad depreciation takes it to a 22-year low on a real effective exchange rate basis. Since January 2005 the yen has lost 25 percent of its value on a REER basis.
August 2007 - Strains in financial markets from the U.S. subprime mortgage crisis spark an unwind of yen carry trades.
The dollar falls from near 120 yen to 111.60 yen. The high-yielding Australian and New Zealand dollars tumble nearly 10 percent.
March 13, 2008 - The yen hits an 12-year high of 99.77.
October 24, 2008 - Yen hits 13-year high of 90.87 versus the dollar, while setting an all-time high against the Australian dollar of 55.11, with the Aussie losing almost a third of its value in just a month on a massive unwind of carry trades.
October 27, 2008 - The yen’s surge to 13-year highs prompts the G7 to issue statement to single out the yen in warning on currency market volatility.
The yen has surged nearly 20 percent so far in October on a trade weighted basis, more than twice as big as any month going back to 1970, including the carry trade collapse in October 1998 and the Plaza Accord to weaken the dollar in 1985.
(Sources: Reuters, Bank of Japan, Bank of England)
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Tags: Australia, Banks, Carry Trade, Commodities, Correlation, Currency, Dollar, Economy, Emerging Markets, ETF, Gold, interest rates, Japan, Markets, Mortgage, Recession, SMI, Value
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China’s Bold Economic Policy Moves
Wednesday, October 29th, 2008
CLSA Asia-Pacific Markets, a division of Credit Lyonnais/Credit Agricole, are one of the best groups of analysts providing background on China.
Included here are excerpts from a report by CLSA’s macro strategist Andy Rothman regarding China’s recent decision to stimulate its housing sector.
Beijing is cutting mortgage rates to as low as 5.23 percent, reducing required down payments to buy a home from 30 percent to 20 percent for first-time buyers, comparatively still far above what most Americans have put up to purchase a house, and also lowering some taxes and fees.
CLSA views the government’s action as a move to get people to invest their wealth in real estate, which will serve to shrink an overbuilt housing inventory and help keep the broader economy from slowing down further.
“Beijing had succeeded in cooling off price growth, taking it from 25 percent year over year last fall to about zero year over year today. And, having achieved the objective of avoiding a bubble, the last thing the Communist Party wanted to do was crash the property market.
“(This week’s) policy changes will have two effects:
“First, they make home-buying more affordable, with a combination of lower interest rates, lower down payments and lower transaction fees.
“But the second effect is most important, as affordability has never been the big problem in China. (The) measures represent the government reversing its anti-property stance adopted one year ago. Back then, Beijing said, in effect, ‘we will do our best to depress prices and discourage home-buying.’ Consumers responded rationally by delaying purchases.
“Now, the government is saying, (my words), ‘we encourage home-buying and you should anticipate that property prices will start rising again.’
“With affordability good, household debt almost non-existent, and banks ready to lend (they are all controlled by the Party), homebuyers will return to the market in response to Beijing’s message.
“(The) move can be considered part of an overall effort to give a light stimulus to the economy, but in my view is primarily focused on the real estate sector. These changes also illustrate that the Party is capable of taking proactive steps to deal with a changing economic environment.”
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Tags: Asia, Banks, China, Credit, Economy, Focus, interest rates, Markets, Mortgage, Real Estate
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Hendry: 10-20 Years to Recover Thanks to ECB
Thursday, October 23rd, 2008
Hugh Hendry, CIO, Eclectica Asset Management told Power Lunch Europe that it will take 10-20 years to heal from the current turmoil in markets. This is a must see interview.
click image for video
Here is the summary of the interview:
Hendry has avoided risk the last few years. His hedge fund is up 20% YTD and 42% this month. He has been investing more heavily in long term US treasuries recently. Hendry is looking at increasing the risk exposure in his hedge-fund’s portfolio.
He pointed to Mervyn King’s hinting toward the “R” word as putting it mildly, that the big “D” is in the forecast.
“It’s not a question of losing out in a recession, I’m talking about 10 or 20 years before we recover from this. This is a catastrophe,” Hendry told “Power Lunch Europe.”
Hendry made an example of Hungary. He lambasted the Hungarian central bank governor, Mr. Andra Simor, who described the situation as akin to “the slower antelopes in a chase being devoured by lions one after the other.”
This stems from Hendry’s past involvement in discussions with European financial officials about European convergence.
Hendry specifically alludes to discussions he’d had with the Hungarian governor in particular regarding the integration of Hungary into the EU and that he warned against the way in which they planned to finance their move with Swiss Francs and Yen via the carry trade.
While in violin-playing posture, Hendry claimed,”It’s tragic.”
“What it [the reel] doesn’t reveal is that I sat there, he just said, you’re rubbish. I’m Hungary. I’m going join the EU. My interest rates are 8% and they’re going to be 4%. You’re a fool, You can’t catch me Mr. Lion, I can outsmart you, I can outrun you. And I said “I dare you.”
I said, “I’ll give you a head start.”
They suspended all economic rationality. Mortgages were given to poor people in Swiss Francs and Japanese Yen. They took on an enormous foreign exchange risk, because they thought that the little antelope could outrun the lions of economic intelligence. And you can’t.
Hendry said, “You can game the system, but you can’t beat it.”
There’s nothing crude, there’s nothing moral here. They were wrong.”
Dominoes. Iceland, Hungary, Latvia, Bulgaria, Eastern Europe, the dominoes are crashing. There’s economic disequilibrium. The economic chaos which we ignored for 5 years because we were bribed to ignore it, because they paid high interest rates. It was a bribe to ignore reality. But in a world where everything is falling down, the dominoes just crash. There is no answer.
Hendry’s beef is with EU and UK regulators and officials.
“I’m the heretic. I was laughed at, scoffed at, dismissed, ignored, at a time when investment bankers who advise governments, and who manage money, took reckless risk upon reckless risk.
We reached a point at which the Royal Bank of Scotland had a bigger balance sheet than the economy. Everyone looked the other way. Its not a question of losing out in a recession. I’m talking about 10 or 20 years before we recover from this. This is a catastrophe.
Forget about Mervyn King, UK Finance Minister, saying the “R” word. You wait until he says the “D” word.; depression. We had interest rates in the UK at 5% for a year as everything collapsed.
There’s a notion of stall speed. Never allow an aircraft to reach stall speed. That is the pledge central bankers must make. ” We won’t allow the economy to reach stall speed,” because everything below that you’re pushing on a string.
Interest rates in the UK will be 2% at the end of next year, and they’ll be 2% at the end of the year after that.
The ECB, the most hideous, intellectually conceited group of bankers, raised interest rates this summer; history will send the ECB to damnation because they have sent us to damnation. That’s the reality.
Thank you Mr. Hendry.
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Tags: Carry Trade, COT, ECB, Economy, energy, Euro, Fed, Hugh Hendry, interest rates, Japan, Markets, Mortgage, Recession, SMI, UK, Video
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Governments Keep Making Mistakes: Jim Rogers
Wednesday, October 22nd, 2008
Jim Rogers, CEO, Rogers Holdings, appeared on CNBC’s European Squawk Box this morning with Geoff Cutmore, to discuss the progress of markets and his outlook.
click image for video
Rogers stated that the economy is in for high inflation given the size and nature of the central bank interventions and injections in to the financial system, and pre-ambles this saying,
“The world is unfolding. The American government keeps making mistake after mistake after mistake. Other governments do too. Unfortunately this is going to be a mess,” Jim Rogers, CEO of Rogers Holdings said Wednesday.
“Bernanke, and Paulson and the guy at the NY Fed, Tim G-r-eithner [or whatever his name is: slips Rogers] have been wrong every week for the last two years. Why do you think they know what they’re doing?”
He has covered most of his “shorts,” and wishes that he had not yet covered them, as their has been more downside.
He is long short-term US government bonds and short and shorting long term government bonds as he believes that we are heading for inflation. He has been buying agricultural commodities, though he admits that his timing is bad, as they are down.
“I bought some more agriculture earlier this week and it promptly went down. The fundamentals for commodities and agriculture have not changed,” says Rogers. “What’s happening in the world right now means that there will be less supply of everything coming out of this, and nobody can get a loan for a new zinc mine or a loan to increase their crop production.”
Rogers adds that
“What’s happening now is that we are in a period of forced liquidation; we’ve had 8 or 10 of these in the last 100-150 years; 1929 in the US, 1974 in the UK…We’ve had these before. The things that come out on the other side have always been the things that are unimpaired. The US financial system is impaired. The investment banking system is impaired.”
“But, commodities and agriculture are totally unimpaired by all of this. If history’s any guide, the things to buy will be the things that are doing fine; water treatment in Asia [for example], agriculture’s gonna do fine; that’s what you should buy.” Rogers adds, “However, my timing’s not very good.”
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke should resign for keeping alive “zombie banks” that should be allowed to fail, he said.
The Japanese government refused to let financial institutions fail in the 1990s, Rogers said.
“It’s 18 years later and their stock market is 75 or 80 percent below what it was 18 years ago,” he added.
Rogers also said that interest-rate cuts are coming.
“I know we are going to get aggressive rate cuts everywhere, that’s why I’m long short-term government bonds in the U.S., but shorting long-term government bonds because it’s not going to help, it’s going to add to inflation.”
Source: CNBC
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Tags: Agricultural commodities, Agriculture, Asia, Banks, Bernanke, Commodities, Economy, EFU, Euro, Fed, Federal Reserve, inflation, Japan, Jim Rogers, Markets, Paulson, UK, Video, Water
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Donald Coxe: Homeicide: The Crime of the Century
Monday, October 13th, 2008
Donald Coxe, Chief Investment Strategist, BMO Capital Markets, has published his latest issue (October 8) of Basic Points, titled “Homeicide: The Crime of the Century.” Given the release date of this issue, its interesting to see how timely his calls to action are.
Particularly, we would highlight Coxe’s call to reduce general equity exposure further, prior to what was one of the worst weeks ever (last week), and to not wait too long to buy agricultural stocks.
Columbus Day 2008 will go down in the history books as the single-biggest one day rally since 1933, the Dow rising 936 pts (its biggest one day point closing ever, and fifth largest %-age closing) . This rally followed the US government’s announcement that it would take an equity stake in the banking sector, by injecting $250-billion into the sector.
Its still early though, and as Coxe says, this is likely a “Mama Bear.” Question is, is this a Mini-Mama Bear (like late1980’s or late 1990’s) or a Big Mama (like 1930’s). In the full text of Basic Points, a must read, Mr. Coxe explains himself fully.
Here, we summarize his recommendations:
- Recommended exposure to equities is 46% depending on investor’s overall portfolio and risk tolerance, and close to absolute minimum equity exposure of 40%. Cash is currently at 20%, the maximum. (nice call considering the following week was one of the worst weeks ever in the market)
- Long term investors should not wait too long to choose among the heavily battered commodity stocks. Specifically, the best companies the world has to offer, relative to the world economy, competitiveness, management, cash flows, and balance sheets. Many may now be bought at a discount to their reserves in the ground, without taking into account balance sheet assets.
- Agricultural stocks have been savaged. All it would take is one “medium-sized crop failure” to mark the return of the global food crisis. A handful of very important companies have the means and ability to make the difference of assisting in the fulfillment of the protein demands of a billion people escaping the rice bowl and bread diet.
- For the time being, their lower stock prices prevents them from over-expanding or over-producing, which means their profits will end up being even higher in the super-cycle.
- Interest rates are sharply lower, thanks to short covering in the dollar, and collapse of stock prices, which has forced asset reallocation. This will soften the blow to the mortgagees facing potential foreclosure and not be so ghastly, as predicted by gloomy forecasters.
- Commodity prices fall during recession, but the real value of them does not. Small under-capitalized producers will be devastated in a recession, making them easy pickings for the larger ones when clarity returns in the market.
- Gold and Gold-mining shares remain an effective way to reduce “endogenous” risk in an equity portfolio. Although inflation will recede for a short while, the sheer size of the economic stimulus (so-called printed money) means gold could move to new highs.
- The downward movement of commodity prices has been far more severe than we expected. We should have warned clients to the rapid deterioration in the fundamentals in the last Basic Points. On Sep. 19 conference call, we advised a significant reduction in equity exposure to energy and base metals, in favour of the precious metals. These rebalancings should be of some consolation to investors in the volatile period ahead.
- The size and complexity of the credit market created in the final days of the bank mania, and the scale of deleveraging has made measuring overall risk unknowable. The Lehman failure means huge losses and years of litigation. Those assets were either sold or still overhang the market. Never before have so many colluded to behave so badly. Our doubts remain their malefactions have created a really big bear market, but we’ll probably know within weeks.
Thank you Mr. Coxe.
The complete report is available here.
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Tags: Basic Points, BMO, BMO Capital Markets, Credit, Credit Market, DOG, Dollar, Donald Coxe, Economy, energy, Gold, inflation, interest rates, Markets, Metals, Mining, Mortgage, precious metals, Recession, Value
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Interest Rates Cut by 0.50% Around World
Wednesday, October 8th, 2008
Key Central Banks around the globe have announced a concerted cutting of interest rates, by 0.50%, this morning, in an historic moment of cooperation, to stem the tide of the global credit market’s woes.
The US Federal Reserve, the European Central Bank, the Bank of England, and the central banks of Canada, Sweden, and the United Arab Emirates have all cut key lending rates by 50 bps or 0.5 percent.
The Bank of England also announced that it would partially nationalize the country’s banking system by investing $90-billion in some of its banks.
In China, the People’s Bank has cut its key rate by a commensurate 27 basis points, and the Bank of Japan whose key rate is only 0.5% did not cut, but is lending “strong support” to the other central banks’ moves.
In identical statements, the Fed, ECB, and Bank of England, explained that inflationary concerns have moderated, and the worsening financial crisis had “augmented the downside risks to growth.”
Trichet, the ECB’s Chair, very modestly stated that “inflation is moderating.” Critics have argued that the ECB has been too slow and looking in the rear view mirror too long, to do anything meaningful for the European economy, and at the expense of the financial stability of European businesses. Others argued that while the move is very welcome, it may be too little, too late.
Euro and Sterling both gained on the announcement, while the price of gold fell.
Equity markets in Europe rebounded from intraday lows on the hope that this monetary action would help banks and consumer stocks.
Pre-Opening trading in index futures indicate a strong opening for US markets following the announcements.
Key Rates (post-cut)
- US - 1.50%
- Canada - 2.50%
- ECB - 3.75%
- UK - 4.5%
- Sweden - 4.25%
- China - 6.93%
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Tags: Banks, Canada, China, Credit, Credit Market, ECB, Economy, Euro, Fed, Federal Reserve, Gold, inflation, interest rates, Japan, Markets, Sweden, Trading, UK
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European Credit Crisis Deepens Global Selloff
Tuesday, October 7th, 2008
Ongoing credit market turmoil and a rapidly deteriorating economic outlook have hit global equities very hard.
Ongoing credit crunch worries and evidence of resultant effects on the global economy are diminishing the remnants of confidence among investors. Investors are fleeing all risk assets indiscriminately, moving into safe havens such as cash and government securities. Widening concerns of global bank failures continue (regardless of last week’s approval of the U.S. TARP program, now anti-climactic), bringing about runs on banks in several countries and preventing financial institutions from lending to one another.
Germany and Denmark announced guarantees on all private deposits following Ireland’s first-mover decision last week. Looks like we’ll have to wait for Europe to come to some unified solution such as a concerted bailout, and some nationalization of the banking sector in some of the larger markets.
Source: BCA Research, October 7, 2008
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Tags: Banks, Credit, Credit Crisis, Credit Market, Economy, energy, Euro, Germany, Markets
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Is There a Bull Market Somewhere?
Wednesday, September 24th, 2008
Not likely, according to PIMCO’s Bill Gross. In his most recent Investment Outlook, Gross, reasons and opposes (for now) the idea that in the very different worlds of Louis Rukeyser, Jim Cramer, and Jim Grant, “There’s always a bull market somewhere!”
While he does agree that there are always stocks, bonds, and currencies that can be found to be going up, while markets are going down, Gross cautions:
So the lesson must be to go forth and find the bull market, wherever it is. Almost always – but NOT NOW, because in a global financial marketplace in the process of delevering, assets that go up in price are rare diamonds as opposed to grains of sand. For the past several months our PIMCO Investment Committee blackboard has continued to display the following lesson plan:
What Happens During Delevering
- Risk spreads, liquidity spreads, volatility, term premiums – they all go up.
- Delevering slows/stops when assets have been liquidated and/or sufficient capital has been raised to produce an equilibrium.
- The raising of sufficient capital now depends on the entrance of new balance sheets. Absent that, prices of almost all assets will go down.
Essentially, Gross’ thesis is that as the GSEs, banks, investment banks and global hedge funds delever their balance sheets, they also lower the prices of all securities that can be arbitraged within the marketplace.
The 10% year over year decline in prices has not been witnessed since the great depression, and that is a red flag.
a 10% aggregate asset price decline does more than make us all 10% less wealthy. Because many of these assets are leveraged and margined, the more they decline, the more frequent and frenzied the margin calls, and if the additional cash flow is not provided, not only an asset liquidation but a debt liquidation follows. It is the debt liquidation that potentially turns a stagnant/recessionary economy into something much worse.
This rare event of systematic debt liquidation is the central issue in both the US and globally. If central bankers are unable to take effective measures, the campfire could turn into a forest fire, and a mild asset bear market could turn into a destructive financial tsunami. Gross points out that even they and their SWF and central bank counterparts who have been doing their part to stem the tide, and in some cases bought into debt issues too early, only to see those issues now priced “underwater,” are now reluctant to make additional commitments.
Paulson and Bernanke have consulted PIMCO regularly throughout the credit market debacle, and have apparently acted on some of that advice as well as that of others like Pershing Square’s Bill Ackman, who floated a Frannie bailout plan prior to the Fed’s that was eerily similar.
Paul McCulley stated in late July, that the only thing that was viable given the delevering of the market that was well underway, was for government to lever up its balance sheet, much the way it is proposing to this week, with the $700-billion TARP plan.
common sense can lead to no other conclusion: if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions.
Gross concludes:
Now that the Fed has spent 12 months proving that it “knows something…knows something,” it is time for the Treasury to do likewise.
(note: these ideas were published well before the Fed/Treasury realized the need for a far reaching solution)
Is there a bull market somewhere?
There is, but those assets are “rare as diamonds, as opposed to grains of sand,” according to Bill Gross.
Investment Outlook, Bill Gross, September 2008
Source: PIMCO
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Tags: Banks, Bernanke, Bill Gross, Chart, Credit, Credit Market, Economy, Fed, Grain, GSE, liquidity, Markets, Paul McCulley, Paulson, PIMCO, Recession, spreads, Thesis, UK, Water
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Rob Fraim’s Call on Energy
Wednesday, September 17th, 2008
September 17, 2008 - The fall in the price of oil during the past two months may not have surprised everyone, but its dramatic nature and swiftness was unexpected. One analyst who got it right was Rob Fraim of Mid-Atlantic Securities. With crude down by almost 40%, a new report on energy has just been published by Rob.
This report is worth perusing for two reasons: (1) Rob has a good long-term track record in this sphere, and (2) a common-sense approach and findings with which I mostly concur. Here are some excerpts from his current report.
Today I will tackle one of the (many) issues with which market participants are grappling. And I will have a sector recommendation that has “hero or a goat” implications for the writer of this missive.
I am cogitating on the disruptions and disasters in the financial sector – and the implications for the broad market. At some point you will hear from me on that subject as this mess unfolds and I feel that I have actionable thoughts to share.
Today though – we talk energy.
I’ll probably get tons of e-mail taking exception to my conclusions and citing multitudinous arcane bits of Economist World data. And I will gladly receive these and will appreciate the input. But that doesn’t have to mean that I will necessarily agree or find reason to change my conclusions.
I am approaching this … and I don’t want to use the word “gut feeling” – given that I believe that I have sound reasons for my opinion on this – but there is a certain amount of “feeling” involved in the process and conclusions. What I see in market action, what I hear from clients, what I sense in the mood of market participants, what I observe in the market’s reaction to events. And with all due respect to economists, the market is often more art than science. So I don my proverbial beret, pick up my figurative brushes and paint, and present my art project. Some fact, some feel, lots of opinion.
What a bleak mood in the energy patch. What a sickening slide. What the h*** happened? What an … opportunity?
Back on June 10, in a piece I wrote entitled “Oil – Whither Goest Thou? ”I gave the opinion that crude oil – then at $136 a barrel was overextended and due for a correction. I said that the $100 or so area looked about right. Of course oil promptly rallied to $147 or whatever it was and I was a stoopie-head for a little while. But since then, well … hey, hey what a genius, huh?
You don’t believe that I actually got something right? OK, you force me to quote/copy/paste. Here is an excerpt from the June 10 flash in which I recommended lightening up on energy stocks:
“Do I think that oil is going to $50? Not a chance? Not $50, not $60, not $80. But I do think that there is a better than average chance that we are going to revisit $100-ish and stabilize there for a while.
“This being the case I am suggesting that reaping some profits and reducing energy positions a bit might be a wise move – at least on a trading basis. Keep a core holding for the long-term, but lighten up. Sell some stuff. Write some covered calls. Hedge a bit. Maintain the core but trade with part of your energy investments. Do something other than get whipsawed.
“… It would not surprise me to see $100-105 oil by the end of the year. That probably equates to gasoline in the $3.50-ish area.”
Of course after that I went on to elaborate brilliantly (oh all right it wasn’t that brilliant, but I did elaborate) on the reasons why I was – at that time, in June – becoming cautious on energy. Recapping (sans the details) the reasons for the selling recommendation were:
a) Demand destruction resulting from changing consumer and transportation industry driving habits and vehicle choices
b) The potential for a rise in the US dollar
c) Slowing demand for China with the Olympics build-out winding down
d) Modest production growth – specifically from Russia
e) Comments from the Saudis saying that there was no justification for the rise in oil prices that had occurred.
Hmm … not too shabby on those points if I do say so myself.
And then I stated the following:
“When the crowd is virtually all leaning in one direction on a sector, you have to take advantage of it at some point. You just have to. Right now everybody says that financials are garbage and energy is gold, and we of course know all of the reasons for both. But just you wait and see… 12 months, 18 months out – when quality banks have risen 30% in price – the analysts will fall in love with them again. And if energy stocks go down 20% the cries to sell will erupt. We have to take the opposite side of the masses sometimes. We. Just. Have. To.”
So as it turns out I was reasonably on target with those comments and the call to reduce energy holdings for a while. (You know what they say about even a blind squirrel finding an acorn every now and then.) Now the burning question on the minds of my readers is this: “What now, Rob?” Well, again, I don’t know how many minds are burning and hearts yearning to hear the answer, but I’ll take a crack anyway.
I don’t expect a huge rally in oil in the near term, but I do believe the correction has just about run its course. Recently when crude approached $100 on the way down, OPEC began the “defending” process by announcing some production cutbacks – hoping to maintain $100 as floor of sorts. But now with the disruptions across all segments of the market, oil prices have moved right through that level – particularly yesterday as panic hit all markets, trading below $92 as I write this. I would not be surprised to see OPEC coming back with more production curtailments.
I am somewhat more bullish on natural gas prices than many analysts I have read, more based on seasonality, but also because of increased focus on natural gas use. (We’ve all seen the Boone Pickens/Aubrey McClendon ads. And we are approaching an election – what politician is going to badmouth natural gas? Heck, Nancy Pelosi said that it isn’t even a fossil fuel. As to the seasonality play, I have had some success through the years in buying natural gas stocks in the fall prior to our entering the heating season for a trade out as spring approaches.
So, I’m kind of reasonably positive on oil itself – the commodity – for the short term. I’m growing more bullish on natural gas – against the opinion of some smart people who feel otherwise.
The key point though is that I am getting significantly more interested in the stocks of the energy companies. Why? Because it doesn’t take $140 oil for the energy companies to make a lot of money. They do very nicely at $100 and the resultant decline in gasoline prices (once we get past this hurricane pricing anomaly) will calm down some of the finger-pointing and windfall profit-espousing by the politicians.
And the prices of the energy company stocks – oil and gas producers, drillers, coal companies, energy trusts, MLPs, alternative energy … the whole bunch of them – have just absolutely plummeted over the last couple of months and it (again I hate to use the word but here I go) feels like a bit of a selling crescendo taking place.
I have made the comment to a number of people the last few days that it seems that we have margin clerks running billion dollar portfolios. We know there was a liquidation of a large energy-focused hedge fund recently. The sector action of late feels/smells/acts like there is more forced selling taking place. And as one astute observer pointed out to me, in addition to the margin clerks, you have to factor in the risk management people at the funds. Forced selling of another sort. On top of that there seem to have been some significant fund redemption requests at hedge funds – particularly by fund-of-fund groups, which are notoriously fickle and prone to pull out.
So now that everything energy-related has been hammered we hear all of the after-the-fact cautionary/bearish thoughts: China doesn’t want any energy anymore … all commodities are going to fall another 50% they say … the economy is going to totally destroy energy demand … we’re all going to bike to work and cook on campfires … we’re going to be awash in cheap oil … blah, blah, yadda, yadda.
We’ve heard it all lately. I’m just not totally buying it. I’m not convinced that the big picture has shifted totally.
I believe that the stocks of energy companies have more than discounted the decline we have seen and then some. 50% declines in stock prices have not been out of the ordinary. I don’t think you have to be a raging, snorting bull on the commodities themselves to believe that the producers of energy products and services will be very nicely profitable – even at today’s lower-than-before prices for oil and gas.
And my very astute friend Jeffrey Saut at Raymond James (who has been spot on about energy and who has become more bullish of late) pointed out something very interesting yesterday. Evidently China – the previous “buyer at the margin,” the force that kept sopping up all supply for so long, which contributed to the big rise in energy before – has been pretty much out of the energy markets for a couple of months. The reason: pollution concerns during the Olympics and the Paralympics (the games for those with disabilities.) Many factories and industries were shut down and idled during that period so as to improve air quality during a time of so many visitors and so much world attention being focused on China. (We know China is image-conscious. Just ask the little girl who was not considered pretty enough to sign the anthem live and was replaced by a more attractive lip-syncher.)
The Paralympics end on September 17, and this means that China may very soon reopen manufacturing and transport – particularly so since there is a massive earthquake rebuilding to be done. And they could well be back in the energy market as buyers almost immediately – like on the 18th. The implications for the energy commodities are positive and a psychology shift in those markets could quickly spill over to the beaten up stocks of the energy companies.
Big picture, let’s not forget a few key energy points:
1. Production in many places is peaking or has peaked. Mexico appears to have peaked and Russia – a recent source of supply and the currently the 2nd largest oil producer – is doing things in a way that is short-term profitable for them, but long-term counterproductive. They are investing very, very little in new exploration (the capital intensive part of the business) – opting instead to try to squeeze out production from existing fields. That’s cheaper production for them in the short run, output has peaked and they are depleting those fields. Ultimately, they stand to be left with played out reserves and few new prospects – since they are skimping horribly on cap-ex and exploration now. It’s like the landlord who spends all the rent and doesn’t maintain the building. Eventually it catches up to him as the structure falls apart. Or the pharmaceutical company that does no R&D even though patents are expiring. Russia is milking the cow but not feeding it.
2. The low-lying fruit in the oil business has been picked. The potential “super giants” being explored and developed now – Brazil’s Carioca/Sugarloaf and the Bakken formation in the US for example, while exciting are also challenging and very expensive to produce on a per barrel basis. Same with the huge Canadian tar sands projects. Tar sand fields have been known of for years, but until oil reached high prices it was economically impractical to extract oil there.
There is still plenty of oil out there, but it is not the cheaply available, “poke a stick in the ground and watch it flow” type of oil. Prices will have to remain high to justify development.
3. While the world got a bit “China and India crazy” there for a while as regards energy consumption, the basic premise remains valid. As these huge populations become more urban and industrialized in nature – with cars, the need for electricity, etc. – there will be growing demand for the foreseeable future. Oh there will be the month-to-month ups and downs of course and everybody will obsess about that. But big picture – demand grows.
4. Alternative energy sources – and look, I’m a big believer that we have to develop new ways to provide power – are a long way from meeting our energy needs. And while they may do so one day, for now those needs must be met from both traditional (fossil) and progressive (alternative) sources. I believe that we need to break the oil addiction via new sources. But that is a process over a generation of time, not an immediate reality. For now, to quote Mr. Pickens, we have to drill, drill, drill.
5. We need more electrical power. Badly. Some experts say as many as 30 new power plants are needed ASAP. We might be oil addicted, but we are electricity junkies of the first magnitude. Computers, multiple TV sets, cell phones, iPods, recessed lighting all over the house, floodlights in the yard, plug-in cars on the way, so many appliances and gadgets in every home that it would have seemed like The Jetsons to a 1960s observer. And what runs power plants? While it might be alternative sources as time goes on, right now and for a good while to come, it’s fuel of the old-style. Natural gas and coal mostly.
6. And speaking of natural gas, I like Pickens’ idea of automobile conversion. We have lots of natural gas produced domestically and it is comparatively clean and certainly readily available. And what does that mean for the future price of natural gas? The same natural gas that runs the power plants being used to run our cars? Not too hard to figure out.
7. If this financial system mess puts pressure on the US dollar that has the obvious effect of causing oil prices to rise, all other things being equal, as it will take more dollars to exchange for one barrel.
By the way, I recently talked to a coal industry contact – a coal broker – who said that although the stock market doesn’t indicate it, the coal business is not bad at all. Pricing is off of the peaks, but