As I reluctantly start packing my bags after a most enjoyable two weeks of R&R in Europe (see my posts on Slovenia and Switzerland), Words from the Wise comes to you a bit more cryptically than usual. However, a full dose of excerpts from interesting news items and quotes from market commentators is included.
Despite having crisscrossed Heidi's country, I have yet to find the elusive Swiss gnomes to glean what they make of financial markets at this juncture. Meanwhile, the past week has been characterized by a fresh wave of risk aversion, as uncertainty over the global economic outlook took its toll on stock markets, commodities and precious metals, and investors favored safe-haven assets such as government bonds and the Japanese yen.
The S&P 500 Index, Dow Jones Industrial Index and the Reuters/Jeffries CRB Index - all now in corrective mode - closed down for a fourth consecutive week, while US Treasuries recorded gains for a fifth straight week and the Japanese yen for four out of the past five weeks.
The yen is often seen as a global barometer of risk aversion. The graph below demonstrates the strong inverse relationship between the movements of the yen (against the euro, in this case) and those of the Dow Jones World Index. As shown, a falling yen indicates risk tolerance (and a willingness to buy risky assets) and a rising yen shows risk aversion (and an indisposition towards risky assets). A downturn in the yen exchange rate could be a good indicator to keep an eye out for confirmation of better times ahead for stocks and commodities.
Also featuring prominently in investment discussions during the week were the viability of the Public-Private Investment Program (PPIP) and the merits of a second stimulus package - calls for this comes at a time when estimates of trillion-dollar fiscal deficits and unsustainable debt levels are raising inflation expectations and putting upward pressure on long-term yields, thus partly undoing the Fed's monetary easing.
Source: Eric Allie, July 8, 2009.
A summary of the movements of major stock markets for the past week, as well as various other measurement periods, is given below. As the second-quarter earnings results in the US start rolling in, the American and most other markets closed the week in negative territory, with the Shanghai Composite Index being one of the few major benchmarks to make headway.
With the exception of the Nasdaq Composite Index, the major US indices are all back in the red for the year to date.
Click here or on the table below for a larger image.
Stock market returns for the week ranged from top performers Nepal (+5.3%), Croatia (+3.0%), Uganda (+3.0%), Ecuador (+2.9%) and the Philippines (+2.4%) to India (-9.4%), Egypt (-8.5%), Argentina (-8.2%), Russia (-8.1%) and Kuwait (-7.6%) at the other end of the scale.
Of the 98 stock markets I keep an eye on, a majority of 64% recorded losses, 34% showed gains and 2% were unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)
John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the winners for the week included all things short such as ProShares Short MidCap 400 (MYY) (+3.5%), ProShares Short SmallCap 600 (SBB) (+3.2%) and ProShares Short S&P 500 (SH) (+2.0%). Among the long ETFs, WisdomTree Dreyfus Japanese Yen (JYF) (+3.7%), CurrencyShares Japanese Yen (FXY) (+3.7%) and iShares MSCI Taiwan (EWT) (+2.9%) performed well.
On the losing side of the ledger, ETFs were centered in the energy sectors, including PowerShares Solar Energy (PBW) (-12.3%), Claymore Solar Index (TAN) (-12.1%) and United States Oil (USO) (-10.1%). Market Vectors Russia (RSX) (-12.6%) also had a rough ride.
The quote du jour this week comes from Richard Russell, 84-year-old doyen of newsletter writers who has been scribing the Dow Theory Letters for the past 50 years. Russell said: The whole bailout campaign stinks to high heaven. It was created and run by Wall Street - FOR Wall Street. Again, I say, personally, I wouldn't have lifted a finger to bail Wall Street out. Let all these Wall Street thieves stew in their own toxic juices. Thieves should be out on the street or in jail, not luxuriating in government bailout money.
In the end, the bailouts will simply extend the bear market in stocks and the economy. The Wall Streeters will be richer, and the nation will be poorer, choking on trillions in debt that will keep future generations struggling to deal with the sins of Wall Street. Too bad Obama didn't have the courage (or knowledge) to tell the nation what was going on. Obama should have said, 'sit tight' and 'this too shall pass'. Unfortunately, after the trillions spent in bailouts, 'this too will not pass'.
Next, a quick textual analysis of my week's reading. No surprises here, with all the usual suspects such as market, banks, economy and financial featuring prominently. Although (interest) rates had some prominence, other key words such as dollar and China were relatively quiet.
Back to equities: The key moving-average levels for the major US indices are given in the table below. The S&P 500 Index on Tuesday breached the important 200-day line to the downside (for the third time in 26 trading days), joining the Dow Jones Industrial Average and the Dow Jones Transportation Index in bearish mode. The US indices are also all trading below their respective 50-day moving averages.
I have also added the BRIC countries and South Africa (my home country) to the table. All these markets are above the 200-day averages, having previously broken out of base formations. However, with the exception of China, the emerging markets have all recently broken below their 50-day moving average support lines. Importantly, the 50-day lines are in all instances still above the 200-day lines and therefore not yet threatening the bullish golden crosses established when the 50-day averages broke upwards through the 200-day averages.
Click here or on the table below for a larger image.
Additionally, the Dow Industrial Average and S&P 500 Index on Tuesday also broke through the neckline of a head-and-shoulders formation - a bearish event. For more on this, key levels and the most likely short-term direction of the S&P 500 Index, Adam Hewison's (INO.com) short technical analysis provides valuable insight. Click here to access the presentation. The analysis was done on Tuesday, but is still as relevant today as it was a few days ago. (Adam also covered the outlook for crude oil and the dollar/yen exchange rate in recent analyses. Click the links to view these.)
The first meaningful pullback since the March 9 low has brought the bears out of the woods. According to Bespoke, the weekly poll of the American Association of Individual Investors (AAII) shows bearish sentiment currently at 54.65% - higher than any other point since March 5.
Source: Bespoke, July 9, 2009.
The onus is now on bulls to keep stocks buoyant. The technical breakdown of stocks is complete. Unless stocks rally robustly for several days - not just a one-day surge - stocks are likely to test 850 on the S&P 500 and then the very important 825 level ..., added Bill King (The King Report).
Richard Russell, highlighted the latest statistic from Lowry Research, saying: Turning to the current market, what to me is most significant is that Lowry's Buying Power Index (demand) is collapsing. As a matter of fact, it's now below the level that it was on March 9. Meanwhile, the Selling Pressure Index (supply), after moving sideways for months, is now trending higher. This is a bearish combination and calls for a very defensive stance. On top of everything else, total NYSE volume is fading, particularly on days when the broad market is higher. It's obvious that buyers of stocks are becoming scarce. Despite 'Green Shoots' nonsense, the stock market doesn't like what it sees. And neither do I.
The last word on stocks goes to Teun Draaisma, highly regarded equity strategist at Morgan Stanley, who argued that there were plenty of opportunities to make money beyond the market direction call by pursuing a strategy that he described as the middle ground, as reported by the Financial Times.
Macro and the next big market move have become everyone's favourite investment topic over the past two years. We suspect it is time to move on to the micro of sectors, stocks and styles, he said.
Draaisma's large middle ground of investment opportunities includes the forgotten market Japan and sectors that are cheap and under-owned with improving fundamentals such as utilities, telcos and energy. Also buying stocks with a management change, financial restructuring or a change of focus can be very lucrative.
The technicals undoubtedly look ugly, and investors will now focus on the second-quarter earnings reports as a test of whether stock prices have run away from fundamental reality. While investors wait for Mr Market to show his hand, a cautious approach is warranted but that should not preclude one from finding stocks that look cheap.
For more discussion on the direction of stock markets, see my recent posts Stock markets rolling over, How to play a stock market correction, Technical talk: S&P 500 - expect retest sequence, Rosenberg interview: Cold truth about the economy and markets and Video-o-rama: Fresh wave of risk aversion. (And do make a point of listening to Donald Coxe's webcast of July 10, which can be accessed from the sidebar of the Investment Postcards site.)
Global business sentiment continues to improve. At the start of July confidence is as strong as it has been since the start of last October. Expectations regarding the outlook towards the end of this year rose strongly again last week to their highest level since spring 2006, said the latest Survey of Business Confidence of the World conducted by Moody's Economy.com. Business sentiment remains consistent with a global recession, but the downturn is quickly moderating.
Edward Hugh (Global Economic Perspectives) said: Global manufacturing took another step towards growth in June - but the process was, as ever, uneven. The JPMorgan Global Manufacturing PMI posted 46.9, its highest reading since last August. Only 4 PMIs - those for China, India, Turkey and Sweden - posted growth readings in June (although Sweden is not included in the JPMorgan survey). There was a general easing in the rates of contraction recorded elsewhere. The next two to three months will now be critical in order to decide whether the [manufacturing] sector is going to move over to expansion mode, and if it does, at what pace.
Source: Global Economic Perspectives
The IMF's World Economic Outlook reported that the global economy was beginning to emerge from the recession but stabilization is uneven and the recovery is expected to be sluggish. Economic growth was projected at 0.5 percentage points higher than in April 2009 or a 1.4% contraction in 2009 and 2.5% growth in 2010. Advanced economies were expected to contract by 3.8% in 2009 and expand by 0.6% in 2010, whereas emerging markets would slow sharply, growing by only 1.5% in 2009 before rebounding to 4.7% in 2010.
Source: IMF's World Economic Outlook, July 8, 2009.
Interestingly, the report also published financial stress indices for advanced and emerging economies, showing these have receded markedly since the beginning of 2009. However, the report mentioned that improvements are far from uniform across markets and countries and bank lending conditions are expected to remain tight and external financing conditions constrained for a considerable time.
Source: IMF's World Economic Outlook, July 8, 2009.
A snapshot of the week's US economic data is provided below. (Click on the dates to see Northern Trust's assessment of the various data releases.)
- The $787 billion fiscal stimulus package - facts lost in policy rhetoric
- Trade gap posts significant improvement in May
• Consumer outlook turns a bit sour once again
• Initial Jobless Claims report - distortions from seasonal adjustments
- CEO Business Confidence moves up in the second quarter
- Mortgage Purchase Index suggests an increase in home sales during June and possibly July
• Consumers continue to borrow less but pace of decline is notable
• ISM Survey points to moderation in pace of decline in economic activity
Also, late payments on home-equity loans rose to a record in the first quarter as 18 straight months of job losses and a slumping economy left more borrowers unable to pay their debts, the American Bankers Association reported (via Bloomberg). Delinquencies on home-equity loans climbed to 3.52% of all accounts from 3.03% in the fourth quarter.
Summarizing the US economic outlook, with specific reference to the stimulus plan, Asha Bangalore (Northern Trust) said: At the present time, it is necessary to assess if the stimulus package is working in the preferred direction and if modifications and enhancements are called for, but it is imprudent to declare that it is not successful and a sheer waste of tax dollars or that a bigger package is necessary.
In recent days, much to the chagrin of economic bears, a wide range of economic reports point to improving economic conditions. Without doubt more bullish economic data are necessary to confirm that the economy is on firm footing. The intensity and nature of the economic and financial market crisis that has been under way suggests that economic miracles will not materialize in a short period, which means that a weak economic report does not translate into going back to the drawing board in a panic.
|Import Prices ex-oil||Jun|
Source: Yahoo Finance, July 10, 2009.
The US economic highlights for the coming week include the following:
Source: Northern Trust
Click the link below for the following economics reports:
If you get all the facts, your judgment can be right; if you don't get all the facts, it can't be right, said Bernard Baruch. Let's hope that the news items and quotes from market commentators included in the Words from the Wise review will assist Investment Postcards readers to focus on the facts rather than having to wade through a plethora of noise.
For short comments - maximum 140 characters - on topical economic and market issues, web links and graphs, you can also follow me on Twitter by clicking here.
That's the way it looks from Veysonnaz, a quaint Alpine village in the south-western part of Switzerland from where I will be heading back to Cape Town early next week.
Faith in the US dollar is waning - the greenback's role as the world's main reserve currency is being challenged by the Chinese ...
Source: Economist.com, July 9, 2009.
MoneyNews: Pope calls for new world financial order
Pope Benedict XVI called Tuesday for a new world financial order guided by ethics, dignity and the search for the common good in the third encyclical of his pontificate.
In 'Charity in Truth', Benedict denounced the profit-at-all-cost mentality of the globalized economy and lamented that greed had brought about the worst economic downturn since the Great Depression.
'Profit is useful if it serves as a means toward an end,' he wrote. 'Once profit becomes the exclusive goal, if it is produced by improper means and without the common good as its ultimate end, it risks destroying wealth and creating poverty.'
The document, in the works for two years and repeatedly delayed to incorporate the fallout from the crisis, was released one day before leaders of the Group of Eight industrialized nations meet to coordinate efforts to deal with the global meltdown.
The release was clearly designed to give world leaders a strong moral imperative to correct errors of the past, 'which wreaked such havoc on the real economy', and make a more socially just and responsible world financial order.
'The economy needs ethics in order to function correctly - not any ethics, but an ethics which is people centered,' he wrote.
Source: MoneyNews, July 7, 2009.
Wolfgang Münchau (Financial Times): Liquidity injections alone are not enough
Monetary policy's various guises from near-zero short-term interest rates, to massive liquidity injections, to quantitative easing and its relatives have so far had no traction in this crisis. While the global economy is no longer shrinking at quite the speeds seen at the beginning of the year, it is still trapped in a bad recession.
The main reason for its longevity is the state of the banking sector. The European Central Bank has recently pumped €442bn in one-year liquidity into the system, but the money is not reaching the real economy. Japanese-style stagnation is no longer possible - it is already here. The only question is how long it will last. Even in an optimistic scenario, global economic growth will be weighed down by a combination of credit squeeze, rising unemployment, rising bankruptcies, rising default rates, and balance sheet adjustment in the household and financial sectors.
I would expect the US to have something approaching a genuine recovery at some point in the next decade, but probably not in 2010 or 2011. Judging by the co-ordination failure at the level of the European Union, the persistent failure to deal with the continent's 40 or so cross-border banks at European level, and in particular Germany's inability to sort out its toxic-asset contaminated Landesbanken, the economic prospects for the eurozone are infinitely worse.
From comments by senior central bankers in the US and Europe, I am sure they understand the gravity of the situation very well. Janet Yellen, present of the Federal Reserve Bank of San Francisco, warned last week that the recovery would be agonisingly slow, that unemployment could stay high for many years, and that interest rates might stay low for a long time.
I would also interpret the decidedly downbeat statement last week by Jean-Claude Trichet, president of the European Central Bank, as a sign that the ECB is getting more worried - when others are getting more optimistic. In Europe, there is some evidence that the credit crunch has deteriorated in recent weeks. Much of that evidence is anecdotal, but these anecdotes are disquieting.
Companies who file for bankruptcy increasingly blame the banks, and the number of bankruptcies is rising rapidly. Only a fool would take comfort from the strength in economic indicators. During a financial crisis, these indicators could be a metric of its respondents' degree of delusion.
The problem is that the trillions of dollars and euros in liquidity are not getting through. There is no point in blaming the banks.
Click here for the full article.
Source: Wolfgang Münchau, Financial Times, July 5, 2009.
Lucian Bebchuk (The Wall Street Journal): The fall of the toxic-assets plan
The plan for buying troubled assets - which was earlier announced as the central element of the administration's financial stability plan - has been recently curtailed drastically. The Treasury and the FDIC have attributed this development to banks' new ability to raise capital through stock sales without having to sell toxic assets. But the program's inability to take off is in large part due to decisions by banking regulators and accounting officials to allow banks to pretend that toxic assets haven't declined in value as long as they avoid selling them.
The toxic assets clogging banks' balance sheets have long been viewed - by both the Bush and the Obama administrations - as being at the heart of the financial crisis. Secretary Geithner put forward in March a 'public-private investment program' (PPIP) to provide up to $1 trillion to investment funds run by private managers and dedicated to purchasing troubled assets. The plan aimed at 'cleansing' banks' books of toxic assets and producing prices that would enable valuing toxic assets still remaining on these books.
The program naturally attracted much attention, and the Treasury and the FDIC have begun implementing it. Recently, however, one half of the program, focused on buying toxic loans from banks, was shelved. The other half, focused on buying toxic securities from both banks and other financial institutions, is expected to begin operating shortly but on a much more modest scale than initially planned.
What happened? Banks' balance sheets do remain clogged with toxic assets, which are still difficult to value. But the willingness of banks to sell toxic assets to investment funds has been killed by decisions of accounting authorities and banking regulators.
Earlier in the crisis, banks' reluctance to sell toxic assets could have been attributed to inability to get prices reflecting fair value due to the drying up of liquidity. If the PIPP program began operating on a large scale, however, that would no longer been the case.
Armed with ample government funding, the private managers running funds set under the program would be expected to offer fair value for banks' assets. Indeed, because the government's funding would come in the form of non-recourse financing, many have expressed worries that such fund managers would have incentives to pay even more than fair value for banks' assets. The problem, however, is that banks now have strong incentives to avoid selling toxic assets at any price below face value even when the price fully reflects fair value.
A month after the PPIP program was announced, under pressure from banks and Congress, the US Financial Accounting Standards Board watered down accounting rules and made it easier for banks not to mark down the value of toxic assets. For many toxic assets whose fundamental value fell below face value, banks may avoid recognizing the loss as long as they don't sell the assets.
Click here for the full article.
Source: Lucian Bebchuk, The Wall Street Journal, July 10, 2009.
Financial Times: EU plans new push on bank reform
New European Union laws to drive banks to strengthen capital cushions will be unveiled in October, the Financial Times has learnt, as EU member states intensify a regulatory assault aimed at preventing a repeat of the global financial crisis.
A draft report expected to be backed by EU finance ministers in Brussels on Tuesday says that there is a 'strong case' for curbing existing rules on banks' funding needs, which critics say exacerbate the ups and downs of economic cycles.
The report recommends accounting reforms and other policy measures to build more resilient capital 'buffers' during good economic times.
The aim of the new laws would be to make it easier for banks to build up provisions in good times without having to assign the money to specific impaired assets. These funds could then be used to weather future economic storms.
Source: Nikki Tait, Chris Bryant and Patrick Jenkins, Financial Times, July 6, 2009.
The Wall Street Journal: GM takes new direction
General Motors kicked off a new era following its exit from bankruptcy protection on Friday, with Chief Executive Frederick 'Fritz' Henderson promising to transform the auto maker into a leaner and more customer-focused company.
The new company will put a premium on speed, accountability and risk taking, and root out the layers of management that had hobbled decision making, he said at a news conference.
'Business as usual is over at GM,' Mr. Henderson said. He said the company was scrapping a number of senior posts and has disbanded two committees of top executives that made key decisions for the company's automotive operations. Mr. Henderson expects hundreds of middle managers to be let go in the weeks ahead, and the company's sales and marketing operation will be reorganized.
'Our culture to this point has been an impediment,' Mr. Henderson, a 25-year GM veteran, said. 'This is all about flattening the management structure.'
Mr. Henderson said he is adopting some techniques used by the alliance of Renault SA and Nissan Motor Co., led by Carlos Ghosn. Several of GM's highest-ranking executives studied Mr. Ghosn's approach in 2006 while GM's board weighed a potential merger with Nissan-Renault.
Mr. Henderson and his top lieutenants also are planning to hit the road in August to talk to dealers and consumers to gain insight into the US market. In the past, GM based much of its decision making on market-research studies, focus groups and strategy meetings among executives. Dealers said the company needs to reconnect with consumers.
Source: John Stoll and Sharon Terlep, The Wall Street Journal, July 11, 2009.