Posts Tagged ‘Markets’
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: 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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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
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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:
- 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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Mobius: Brazil will Lead Recovery
Wednesday, October 29th, 2008
In a webcast interview with Times Online UK, Mark Mobius discusses why he believes Brazil will lead the recovery in Emerging Markets.
Press Play to listen here:
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Tags: Brazil, Emerging Markets, Mark Mobius, Markets, UK
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Howard Marks: The Limits to Negativism
Sunday, October 26th, 2008
Howard Marks, Chairman, Oaktree Capital Management, has recently published his latest memo The Limits to Negativism, sharing his most recent perspective on the market. For a certain strata of Wall Street denizens, Marks’ writings 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.”
Back on March 23, 2008 we published excerpts from Howard Marks memo, The Tide Goes Out. This most recent memo 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 the memo of October 15, 2008, The Limits to Negativism.
The Swing of Psychology
The last few weeks witnessed the greatest panic I’ve ever seen, as measured by its severity, the range of assets affected, its worldwide scope and the negativity of the accompanying tales of doom. I’ve been through market crashes before, but none attributed to the coming collapse of the world financial system.
It’s worth noting that few of the recent sharp price declines were associated with weakness in the depreciating assets or the companies behind them. Rather, they were the result of market conditions brought on by psychology, technical developments and their interconnection. The worst of them reflected a spiral of declining security prices, mark-to-market tests, capital inadequacy, margin calls, forced selling and failures.
For forty years I’ve seen the manic-depressive cycle of investor psychology swing crazily: between fear and greed – we all know the refrain – but also between optimism and pessimism, and between credulity and skepticism. In general, following the beliefs of the herd – and swinging with the pendulum – will give you average performance in the long run and can get you killed at the extremes.
The Black Swan
The message of The Black Swan is how important it is to realize that the things everyone rules out can still come to pass. That might be generalized into an understanding of the importance of skepticism.
I’d define skepticism as not believing what you’re told or what “everyone” considers true. In my opinion, it’s one of the most important requirements for successful investing. If you believe the story everyone else believes, you’ll do what they do. Usually you’ll buy at high prices and sell at lows. You’ll fall for tales of the “silver bullet” capable of delivering high returns without risk. You’ll buy what’s been doing well and sell what’s been doing poorly. And you’ll suffer losses in crashes and miss out when things recover from bottoms. In other words, you’ll be a conformist, not a maverick (an overused word these days); a follower, not a contrarian.
Skepticism is what it takes to look behind a balance sheet, the latest miracle of financial engineering or the can’t-miss story. The idea being marketed by an investment banker or broker has been prettied up for presentation. And usually it’s been doing well, making the tale more credible. Only a skeptic can separate the things that sound good and are from the things that sound good and aren’t. The best investors I know exemplify this trait. It’s an absolute necessity.
Regarding Bear Markets
In “The Tide Goes Out” in March, I listed the stages of both bull and bear markets. I said that in the terminal third stage of a bull market, everyone is convinced things will get better forever. The folly of joining that consensus is obvious; people who invest thinking there’ll never be anything to worry about are sure to get hurt.
In the third stage of a bear market, on the other hand, everyone agrees things can only get worse. The risk in that - in terms of opportunity costs, or forgone profits - is equally clear. There’s no doubt in my mind that the bear market reached the third stage last week. That doesn’t mean it can’t decline further, or that a bull market’s about to start. But it does mean the negatives are on the table, optimism is thoroughly lacking, and the greater long-term risk probably lies in not investing.
The excesses, mistakes and foolishness of the 2003-2007 upward leg of the cycle were the greatest I’ve ever witnessed. So has been the resulting panic. The damage that’s been done to security prices may be enough to correct for those excesses - or too much or too little. But certainly it’s a good time to pick among the rubble.
Marks often ends with a quote from Warren Buffett, and often it’s the same one:
The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.
Make sure you read the complete text. It is a must.
Thank you Mr. Marks.
Source: Howard Marks, Oaktree, October 15, 2008, The Limits to Negativism
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Tags: Black Swan, Markets, Silver, upw
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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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Counterparty Risk Easing: CDS Spreads Decline
Wednesday, October 22nd, 2008
According to BCA Research, CDS spreads declined sharply last week, further indicating that normalization of inter-bank lending could develop. CDS spreads tend to lead the corporate bond market, where high yield spreads have recently reached record levels. A reduction in corporate debt spreads in general would come as a relief as the thawing of credit markets is highly aniticipated as a sign that bailout efforts are working.
The BCA chart features the CDS and corporate debt spreads of bank issues only versus the 10 year treasury and policy rate expectations, which indicate spreads on bank debt recently hit an alll time high of around 600 and have only recently pulled back, but slightly.
The Fed will have to provide more assurance that policy rates will remain low, as a recent uptick in the 10 year treasury yield has offset some of the reduction in spreads.
BCA adds that bailout efforts need to proceed to ensure that the banking system starts functioning again.
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Tags: CDS, Chart, Credit, Credit Market, Fed, Markets, spreads
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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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International Equity Market Snapshot
Thursday, October 16th, 2008
It should come as no surprise to market watchers that just about every equity market on the planet has gotten slaughtered in the recent weeks. Taking a look at these charts below gives should give you profound sense of just how bad things have gotten, that even a global bailout appears for now to have been anti-climactic.
At some point these indices will eventually get back to their mid- and upper ranges. The green zones in the charts are 2 standard deviations from the 50-day averages. Many of these market indices are now trading below two standard deviations, in what appears to be an oversold state. Markets usually do overdo their moves not only to the top, but these days, to the bottom.
