Technical analysis by Societe Generale, click to enlarge.
Consider as a probability!
GDP would have been even worse, if it wasn’t for how fast imports have plummeted; They are falling faster than exports, perversely creating a appearance of relative improvement . . .and
• Consumer spending climbed at a 2.2% annual pace in Q1 — the most in two years.Dean Baker writes today:
Inventories will not keep falling and in fact will likely increase in subsequent quarters. That is good news for the economies of Japan and China and other major exporters. The bulk of the increase in inventories will be met by imports, not domestic production. In other words, inventories will not be the force that turns around the U.S. economy.So, in fact the "green shoot" reading may increase imports, so reducing the GDP growth in 2nd quarter. Another surprise for consensus economist was the rise in consumer spending, whereby Dean Baker notes:
Many pointed to this rise as an increase in consumer confidence.This raises the question of sustainability of consumption. So, keep eyes wide shut ...
Okay, so how does this increase in confidence fit with the rise in the savings rate from 3.2 percent to 4.2 percent? That won't work for most definitions of 3.2 percent and 4.2 percent.
Higher consumption can't be explained by rising income either. Income fell in the first quarter. So, where does higher consumption come from?
The answer to the mystery is lower taxes and higher transfers, most importantly the big cost of living increase in Social Security payments that seniors got this year. (The cost of living adjustment is based on the 3rd quarter CPI compared with the prior year. This included the run-up in gas prices, but not the subsequent fall.)
Personal consumption Is forecast to fall significantly in March after having increased in the previous two months. Retail sales fell 1.1% in March, with declines in all categories except food and healthcare. Services are expected to grow very slowly in March, leaving overall consumption down by 0.3% with most of the declines in durable goods. The early spending gains in this quarter, however, will cause consumption to grow in Q1 for the first time since Q2 2008. Personal income is also expected to decline in March, by an estimated 0.2%. Wages and salaries will probably decline slightly faster as jobs and hours plunged in March. As a result, income will have increased by only 0.3% in the past 12 months. Consumption will have declined by 1.2% in the same period. In real terms, the magnitude of the declines in personal income and consumption are more devastating. In the past 12 months, real income has fallen by 0.4% and real consumption by 1.4%. In March we estimate that the personal consumption deflator will be 0.7% y/y. The core consumption deflator is forecast to rise by 0.1%, keeping its y/y rate around 1.7%. The greater decline in consumption than in income in March should keep the personal savings rate around 4.3%, its Q1 average. In comparison, the savings rate rose to 1.8% last year, from near zero the year before.
Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower.... is obviously bullish after today's advance estimate of GDP for 1q2009, that signals 6.1% contraction.
As global economic processes continue to worsen, it is rather unlikely that the current global crisis, which some have called the Great Recession, will find its bottom this year. Nevertheless, most forecasts (e.g. IMF) expect that in 2010 the US economy and then Europe will start a gradual and slow recovery. It is extremely unlikely that the three Baltic countries will start recovery earlier than the global trend, although there might be some aspects (e.g. lower production costs), which could, if adequately addressed, help the economies recover sooner or at the same time as other regions. But the current economic processes in the Baltic region and investors’ attitudes towards it are pointing to a lagged and painful recovery. Still, some economic processes may stabilize (i.e. not become worse) by the end of 2009 or early 2010.
We expect a very deep recession in the three countries this year: the Latvian economy is expected to fall by 15%, the Lithuanian by 13% and the Estonian by 10.5%. The next year may bring growth in Estonia (according to the optimistic scenario by ca 0.5%), but a slight decline is more likely. The Latvian and Lithuanian economies are forecast to decline 4% and 3%, respectively. So the first year of growth will be 2011 and even then it will be not impressive.
The economies are heavily affected by fallen external demand, and extremely weak domestic demand, which suffers from low confidence, growing unemployment, wage cuts, and the credit squeeze. All three economies have entered a painful adjustment process, which should end up with a more competitive and effective corporate and public sector. Estonia has gone through a bigger part of the adjustment process. Latvia faces the most challenges, while Lithuania entered into recession only at the end of 2008 and therefore may still have a relatively long way to go. However, the dire economic situation makes the adjustments swifter and more painful.
The adjustment process in economies has substantially lowered misbalances therein, and as the process continues, the misbalances, if they still exist, will be eroded very quickly. We expect consumer price inflation to slip into the negative side this year in Estonia and Latvia. Lithuanian consumer prices are forecasted to grow this and next year as some administrative factors remain strong (or are not yet unsolved) while the country replaces its electricity generation to the more expensive form (i.e. nuclear energy will be replaced with fossil fuels due to the closure of Ignalina NPS).
External balances have also improved rapidly and we expect the process to continue, so that Estonia and Latvia will see close to a balance or surplus in their current accounts this year, and the Lithuanian deficit will be substantially lower than in
previous years. The foreign capital inflows will diminish considerably, and private sector flows will turn (i.e. assets are returned and liabilities diminished). As of now, only Latvia is about to face a substantial increase in foreign debt due to the IMF Stand-by Arrangement.
Domestic financial sectors are already or are on the brink of the deleveraging process as foreign capital inflows are scarce, domestic savings low (but household savings growing), and pessimism in the corporate and household sector is high. The process will be rather intensive, and the level of non-performing loans will continue to increase, but we do not expect it to reach extremely high levels.
Governments of three countries have found themselves in a particularly difficult position: fragmented political landscapes, elections and alienation from the public have made the changes painful, having a lot of setbacks and hurdles. Governments have to make cuts in spending at the same time as other countries apply supportive measures, as the financing of the budget gap is very expensive or impossible. Only Estonia has reserves for covering the budget deficit, but without changes in the spending the reserves could be exhausted by mid-2010 or earlier. So the government policies are actually making the economic situation worse (cutting employment, wages, subsidies, etc) although they are targeted to create fiscal prudence and stabilize public sector finances. The latter is important due to continuously poor external perceptions, which has pushed up risk margins, scared investors off and forced some of them to leave, thus making developments for the corporate sector extremely difficult and pushing the prospect of economic recovery further back. However, on the positive side we can expect that the productivity and efficiency of the public sector will improve strongly.
We do not expect changes in current monetary policy, i.e. the currency systems in the three countries will remain as they are now until the Euro adoption. Devaluation will not be a solution for existing problems and would create other, more serious
problems, having also a spill-over effect on other economies (e.g. CEE, countries with substantial exposure to the CEE financial markets). We are of the opinion that Estonia has a window of opportunity for entering the Euro zone in 2011, but the government has to make very serious efforts to use this opportunity. The prospects for Latvia and Lithuania are in a more distant future (after 2012).
So is China really the first nation to rebound? Is this the first sign of a rebounding global economy?This is very much against the "Farmageddon's" (Don Coxe's) view in the latest Basic Points. HT market folly.
I’m sorry to say that the answer to both questions is no.
April 28 (Bloomberg) -- Deutsche Bank AG, Germany’s biggest bank, returned to profit in the first quarter as a thaw in credit markets buoyed trading income at the investment bank.
The company fell as much as 7.9 percent in Frankfurt trading on concern it may face further writedowns, and as earnings from the so-called stable businesses of asset management and transaction banking missed analysts’ estimates.
Well, although being lazy, I looked at their "fairy tale", on page 44 they listed the reasons of good trading performance and why they do need neither to raise capital, nor government guarantees or other form of assistance ... Click to enlarge!
Germans have a nice name of "Bewertungserleichterungen" for that ...
Who cares about differences in carrying value and fair market value of some 6.7 billion EUR, and 33.6 billion EUR of reported Total Shareholders' Equity? For a 2.103 trillion EUR Total Assets it has no relevance?
Hey everyone, look at my excellent operating earnings, and do not care about balance sheet!
Well, no more time to write, I have to run ...
UPDATE 14:45 (12:45 GMT): No doubt! Is it not obvious Josef should be re-elected?
My recent bout of bullishness has revealed that our mailing list has two distinct constituencies. One group might be best described as value investors. The other group are probably best characterised as hard-core bears. The first group understand my desire to become more bullish as valuations drop. The second tend to argue that my valuation measures are overly generous. In particular, they are arguing that the 10 year earnings behind the Graham and Dodd PE are overstated. My examination of both the top-down and bottom up viewpoints finds little support for this accusation.Market psychology rather than valuation ... We had the chance to buy cheaper equities in 1980ties, after the stagflationary environment, not mentioning the deflationary era of Great Depression. Obviously the value investors are so bullish to have the chance to buy so cheap after so many years of overvalued stocks, that it does not matter what were the lessons during Great Depression. Well, Green Shoots mean that worst is averted?
Go back a few years and I was regularly told my Graham and Dodd PEs (G&D) were
making the market look expensive because they used 10-year average earnings which didn't reflect high secular growth rates. These days I am being told that my measures make the market look artificially cheap as the earnings for the last ten years have been overstated. I suspect these swings tell us more about market psychology rather than valuation.
Last week the D-J Transportation Average (TRAN/3137.76) rallied to a new reaction high. Unfortunately, the D-J Industrial Average (INDU/8076.26) did not. Whether this upside non-confirmation is meaningful remains to be seen, but at session 35 in the upside skein we are pretty cautious. Moreover, as the astute Dines Letter observes, “April has been a month with a pivotal reversal of the March trend 67% of the time since 1963; and, at least a semi-important Top has been reached in virtually every April or May since then.” Consequently, while we don’t think the old stock market “saw” of “sell in May and go away” is going to play in 2009, we do believe the trick from here is harvesting trading profits and hedging some of your investment positions using various option strategies. As for that piece of bad news that comes out of nowhere, which breaks the back of the buying stampede, that we have been warning about. Well, we may have just gotten it – swine flu.
Commodities prices displayed mixed results last week. Oil and base metal prices were in great part driven by the mood of financial markets. Agricultural prices, on the other hand, remained more reactive to fundamentals. The Food and Agriculture Organization (FAO) announced that world cereals production should fall 3.1% this year.Less food during the crisis? Or green fuels go bust?
Stocks – Swine flue and stress test
People believing in Armageddon will undoubtedly feel encouraged by the potentially pandemic swine flue, but as with SARS economic implications are pure guesswork as opposed to the US banking stress test and investors’ re-pricing to macro levels consistent with an expectation of “just” a global recession. Therefore, concentrating on our endogenous financial and economic crisis we too agree that investors last week appeared fragile. However, we still believe that we should focus on the facts that 1) a sector rotation continues towards early cycle sectors signals the bottom of the financial business cycle slowdown and 2) investors have reportedly been very underweight stocks, overweight bonds and loaded with cash and 3) that the recovery reflects a re-pricing from global depression to global recession. We also believe that a further reallocation could take stocks higher before investors reassess such valuations being consistent with “a global recession”. Consequently, too little bearish market action has occurred to conclude that the recovery has come to an important halt.
Bonds – Very cautious about the long end
In spite of major central banks like Fed and BoE buying long bonds as part of their quantitative easing programs such bond yields are either moving sideways or edging higher, and with US bond strategists collapsing their “buy recommendations” to a new low reading it is clear that investors are very cautious holding long maturity bonds. With Europe lagging the US slowdown German bonds are doing slightly better… awaiting a hesitant ECB joining in with QE. Now, with global stock investors continuing to pricing in the bottom of the financial business cycle investors will probably need more than a swine flue to rebuild an overexposure in bonds! Overall, two dominating investment themes continue to exist: 1) global recession and dovish central banks i.e. bullish bonds and 2) the fear from enormous bond issuances i.e. bearish bonds. Combining these two investment themes with evidence that the financial business cycle is close to its bottom long bonds hold increasingly unattractive risk/reward relations!
Commodities – Traders rebuild shorts in oil
Traders appear to be returning to oil with a bearish attitude suggested by the largest short futures position evident in many months. Still, they haven’t any reel confirmation from market action. Copper recently recovered to the roundaphobia 5000 level and overhead trading (supply) now questions much additional recovery potential. Generally, with the global financial business cycle slowdown close to its bottom individual product supply and demand imbalances are much more likely to dominate!
Currencies – US dollar slowly faltering
The traded US dollar index continues to show evidence of faltering near recent months’ highs – this not least illustrated versus SEK and NOK while the battered GBP still hasn’t felt much relief, and GBP remains the most disliked currency together with JPY and CHF. While some caution was evident last week we remain encouraged by the continued signs of stock investors returning to early cyclical sectors… emphasising that recent months’ extreme currency pricing did mark important turning points! Overall, USD could be in a prolonged price range oscillating between current popularity of: 1)“old US dollar collapse theorists” and 2)“US business cycle well ahead of Europe’s first recession with a euro currency”.
Consider as a probability!
Business Week, April 25, 2009(BW) - File under Good News That Could Turn Bad: An index developed decades ago by the independent Economic Cycle Research Institute suggests the economy may recover before yearend.There are some having faith in government criminality to lead the way, but, unless, you find enough evidence that we are anyway repeating the credit cycle that turned during the Great Depression, the outlook is improving...
The growth rate of the Weekly Leading Index—composed of forward-looking indicators for sales, jobs, income, and output—has improved by a third from its Dec. 5, 2008, low of roughly -30%. While the rate is still negative, says Lakshman Achuthan, the institute's managing director, the uptick "has us forecasting an economic upturn."
In 16 of the last 17 U.S. downturns, a climb like this one was followed by recovery in about four months, Achuthan says. The exception: In 1930, after months of climbing, a similar index used by the institute went south, and so did the economy—into the Great Depression.
This may come as a shock to investors but despite a close to 50% drop in equity valuations, equities look not only rich but are significantly mispriced and are a bubble waiting to be pricked. Within this article, using several different measures and examples together with the broader macro picture, we show that going behind the numbers reveals a very different picture for equities compared to what the pundits continue to tout. On the other hand, equity analysts are ignoring the tremendous value embedded in investment grade credit, where we remain steadfastly bullish.FT Alphaville features this report more in detail.
(Reuters) - A weekly measure of U.S. future economic growth remained unchanged, while its annualized growth rate rose to levels last seen in early October 2008, suggesting economic recovery for the near future, a research group
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index was flat at 107.2 for the week ending April 17 .
The index's annualized growth rate -- continuing its six-month upswing -- rose to negative 18.6 percent from the prior week's rate of negative 19.7 percent.
It was the highest yearly growth reading since Oct. 10, 2008, when the rate was minus 17.0 percent, according to ECRI data.
"With WLI growth rising to a 27-week high, U.S. economic growth, which is now at a record low, will soon begin to improve," said Lakshman Achuthan, managing director at ECRI.
While the yearly economic growth forecast improved, the index level was unchanged as lower interest rates and higher commodity prices were neutralized by higher jobless claims and weaker housing activity, Achuthan said.
The Federal Reserve, releasing details of how it conducted "stress tests" on the nation's 19-largest financial institutions, said "most banks" are currently well capitalized but need to hold a "substantial" amount above regualtory requirements in case the recession worsens. “Most banks currently have capital levels well in excess of the amounts needed to be well capitalized," the Fed said in its eagerly awaited report.WSJ reports:
WASHINGTON – The Federal Reserve on Friday said any banks directed to raise new capital as a result of the government's stress tests should not be viewed as insolvent or unviable, one way government officials are trying to manage the potential fallout from the high-stakes exams. The central bank released the methodology of its stress tests Friday, the same day bank executives across the country huddled with Fed officials to go over their results. The Fed is sharing with the banks how much capital each company might need to raise to satisfy regulators that they can continue lending if the economy worsens significantly next year. Banks will have several days to challenge the findings before the government makes results public the week of May 4.And first reactions (equities are happy!) developing: http://paul.kedrosky.com/archives/2009/04/lots_of_testing.html http://zerohedge.blogspot.com/2009/04/fed-releases-stress-test-assumptions.html http://dealbreaker.com/2009/04/stress-kills.php http://247wallst.com/2009/04/24/stress-test-criteria-very-conservative/
While the global economy is showing tentative signs of improvement and some risk appetite has returned, Latvia’s economic woes have simply got worse. Hence, over the last couple of weeks speculation has increased that Latvia will not receive its June instalment on its IMF loan, as the IMF doesn’t believe that the Latvian government has fulfilled its obligations in the Standby agreement. In our view, if the IMF does not pay the June instalment, then Latvia would be pushed very close to a default.Charts courtesy of Danske Bank, click to enlarge.Another tragedy looming?
According to Reuters, Latvian officials said this week that the 2009 budget gap will be 7% of GDP, even if it cuts spending by 40%! Furthermore, they suggested that social spending – for example pensions – would need to be cut. This looks like ‘Mission Impossible’ to us – bearing in mind that Latvia will have local and European Parliamentary elections on 6 June.
We cannot forecast whether or not the IMF will pay the instalment, but we are worried that if the funds are not forthcoming, then the Latvian government would have to cut public spending very dramatically in order to avoid a default.
We therefore conclude that this is ‘Mission Impossible’ for Latvian Finance Minister Einars Repse, and it appears that the credit agencies agree – earlier this week Moody’s cut Latvia’s credit rating two notches to Baa3 from Baa1.
I think it’s possible to see 500 points down, but 1,500 points up, within the next 3-6 months. I know the employment issue persists. However, I have faith in government criminality to lead the way. ...The Failed Sate Latvia lacks faith of any sort ... except their own pockets.
April 23 (Bloomberg) -- Swedbank AB, the largest bank in the Baltic states, fell the most in six months in Stockholm trading after reported a first-quarter loss as bad loans increased in Ukraine and the Baltic states.
The loss of 3.36 billion kronor ($398 million) compared with a 2.9 billion-kronor profit in the year-earlier period, the Stockholm-based bank said in a statement. Swedbank was forecast to post net income of 1.12 billion kronor, according to the median estimate of six analysts surveyed by Bloomberg.
Swedbank, which makes 17 percent of its loans in the Baltic states, reported 6.85 billion kronor of loan impairments in the region and said it can’t rule out writedowns on investments there. Latvia’s economy may shrink 15 percent this year and Lithuania’s 8.5 percent, the bank has said, as the global financial crisis compounds a collapse in the real-estate market.
The recovery of share price is stunning, however:
Swedbank fell as much as 17 percent and was down 6.8 percent at 43.80 kronor as of 1:05 a.m. in Stockholm. That cut the lender’s market value to 22.8 billion kronor.BTW, Danske maintains SELL recommendation on Swedbank's credit due to concerns of asset quality and worsening business outlook ...
To sum up:
- You just got the shaft because a recession has meant higher default rates generally.
- You just got the shaft because of unexpected pre-payment and lower cash flows that result from this.
- You just got the shaft because your pool of borrowers has been adversely impacted by the Fed’s interference in the MBS market
All of this is very bad for existing or so-called legacy assets. Moreover, these assets must be marked-to-market to reflect asset vale impairment. So, this will mean massive writedowns going forward.
But, wait a minute, didn’t we just change the accounting rules? Enter new mark-to-market accounting a.k.a. mark-to-make-believe. Because of the guidance on marked-to-market accounting in FAS 157-e, you can deem these changes to be temporary impairments. There is no need to mark to market. Problem solved.
Here’s what Wells Fargo had to say about its marking-to-market last quarter in their earnings release (PDF):
The net unrealized loss on securities available for sale declined to $4.7 billion at March 31, 2009, from $9.9 billion at December 31, 2008. Approximately $850 million of the improvement was due to declining interest rates and narrower credit spreads. The remainder was due to the early adoption of FAS FSP 157-4, which clarified the use of trading prices in determining fair value for distressed securities in illiquid markets, thus moderating the need to use excessively distressed prices in valuing these securities in illiquid markets as we had done in prior periods.
And if you think people aren’t fooled by all of this, think again. Bank stocks are way, way up.
Enjoy the fool's party! Did you miss the story of Big Swinging Dicks?
Devaluations not imminent, but now probable: We do not think that devaluation is imminent for any of the Baltics. Small and closed financial markets make it very hard to force or accelerate the process from outside. We think that Lithuania will receive an EU/IMF aid package before long, and that disbursement will resume in Latvia. IMF funds are currently plentiful and even Ukraine appears to be on the verge of a large disbursement with minimal compliance. It makes little sense to us for Estonia to choose to devalue while 2011 EMU is still an option. However, if the EMU exit strategy is unfeasible in the next few years for Latvia and Lithuania, we now think that both will eventually choose devaluation. International aid may serve to delay this until Estonia can be convincingly seen as being on course for 2011 euro entry, likely early in 2010. A Latvian devaluation before this would risk having a negative impact on its neighbours too. Devaluation would be highly disruptive and no easy option. However, unless the global economy recovers more quickly than we think likely, the alternative to a 2010 devaluation looks like almost open-ended aid and pain.However, this sounds wrong: "... if the EMU exit strategy is unfeasible in the next few years for Latvia and Lithuania, we now think that both will eventually choose devaluation". Should be "entry strategy"?
Taču Latvijas ekonomikā nav krīzes, jo nav nekāda modeļa, kurš varētu piedzīvot funkcionālas grūtības vai pārvarēt tās. Pēdējo gadu laikā Latvijā ir norisinājies anarhisks ekonomiskas caurejas process, kuru uzskatīt par kaut kādu daudz maz skaidru organizācijas modeli ir pilnīgi nepamatoti. Tādēļ nomierinošā runāšana par “krīzi” un tās pārvarēšanu šodien vienīgi uz laiku atbrīvo no nepieciešamības atbildēt uz sāpīgo jautājumu — no kurienes lai nāktu šīs valsts izaugsme tagad, kad īpašumu burbulis ir pārsprādzis? Citiem vārdiem sakot, ar kādu jomu vajadzētu saistīt savu nākotni vienkāršam, strādājošam cilvēkam bez īpašas izglītības un īpašumiem, kurš šodien ir atlaists no darba celtniecībā? Ar rūpniecību? Ar lauksaimniecību? Ar pakalpojumiem? Visas šīs atbildes izklausās vienlīdz naivi un aplami. Vienīgais, ko šādam cilvēkam varētu ieteikt neliekuļojot, ir — pagaidīt aptuveni gadu, kamēr civilizētajā pasaulē sākas ekonomikas augšupeja, un tad iemainīt mirušās vecmāmiņas laulības gredzenu pret vienvirziena biļeti līdz Dublinai (Londonai, Varšavai, Tallinai) sev un savai ģimenei.Tragic ...
WASHINGTON (Dow Jones)--U.S. home prices rose a seasonally-adjusted 0.7% in February from January, the Federal Housing Finance Agency said Wednesday. The agency said that it had revised downward the home price increase it reported for January to 1.0% from 1.7%. For the twelve months that ended in February, home prices fell 6.5%, FHFA said. The index is calculated using the purchase prices of homes backing mortgages that have been sold or guaranteed by Fannie Mae (FNM) and Freddie Mac (MAC). It does not included prices used for home refinancings.It is clearly bullish and does not matter that the S&P/Case-Shiller Indices are running the other direction so far, and even accelerating to the downside ... Just trust the Man and Word!
La Jolla, CA.--Lenders filed a record number of mortgage default notices against California homeowners during the first three months of this year, the result of the recession and of lenders playing catch-up after a temporary lull in foreclosure activity, a real estate information service reported.Similar message from RealtyTrac at Bloomberg:
April 22 (Bloomberg) -- California and Florida metropolitan areas led the U.S. in foreclosures in the first quarter as unemployment and falling property values deepened the housing recession, RealtyTrac Inc. said.This is a bit strange, but who cares? Also to be found at Bloomberg:
April 22 (Bloomberg) -- Freddie Mac Acting Chief Financial Officer David Kellermann, 41, was found dead early today in the basement of his home in a Washington suburb, police said.
Is it not obvious that credit markets are improving and consumer is in good shape?
April 21 (Bloomberg) -- Treasury Secretary Timothy Geithner said the “vast majority” of U.S. banks have more capital than needed, stoking a rally in stocks as investors await results of stress tests on the balance sheets of the biggest lenders. “Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators,” Geithner said in testimony to a congressional oversight panel on the government’s financial-rescue program. He added that there will be a “series of options” for lenders deemed to need additional money at the conclusion of the tests. Geithner also said there are signs of “thawing” in credit markets and some indication that confidence is beginning to return. His remarks reflect an improvement in earnings in several lenders’ results for the first quarter, and a reduction in benchmark lending rates this month.Blue line is S&P500 Financial sector, red line is S&P500 Equity Index, intra-day chart by Yahoo.com, click to enlarge.
One area where there is clearly a lot of hope at present is that the recent production cutbacks have been so deep that they have run off unwanted inventory. Many commentators believe that the process has been completed and they therefore expect GDP to bounce back in the second half of this year as production schedules are adjusted back upwards.
There is much more in the Hoisington ...
Over the next decade, the critical element in any investment portfolio will be the correct call regarding inflation or its antipode, deflation. Despite near term deflation risks, the overwhelming consensus view is that “sooner or later” inflation will inevitably return, probably with great momentum. This inflationist view of the world seems to rely on two general propositions. First, the unprecedented increases in the Fed’s balance sheet are, by definition, inflationary. The Fed has to print money to restore health to the economy, but ultimately this process will result in a substantially higher general price level. Second, an unparalleled surge in federal government spending and massive deficits will stimulate economic activity. This will serve to reinforce the reflationary efforts of the Fed and lead to inflation.
These propositions are intuitively attractive. However, they are beguiling and do not
stand the test of history or economic theory. As a consequence, betting on inflation as a portfolio strategy will be as bad a bet in the next decade as it has been over the disinflationary period of the past twenty years when Treasury bonds produced a higher total return than common stocks. This is a reminder that both stock and Treasury bond returns are sensitive to inflation, albeit with inverse results.
(Reuters) - NEW YORK, April 17 (Reuters) - A weekly measure of U.S. future economic growth slipped, while its annualized growth rate climbed to levels last seen in October 2008, indicating that economic recovery is probable in the coming months, a research group said Friday.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index slipped to 107.2 for the week ending April 10 from 107.4, which was revised lower from 107.9.
But the index's annualized growth rate -- which has seen nearly a six-month upswing -- rose to negative 19.7 percent from the prior week's rate of negative 20.9 percent, revised lower from negative 20.6 percent.
It was the highest yearly growth reading since the week of Oct. 17, 2008, when the rate plunged to a 33-year low of minus 17.1 percent, according to ECRI data.
"With the upturn in Weekly Leading Index growth continuing for over five months now, growth in U.S. economic activity will begin to improve in short order," said Lakshman Achuthan, managing director at ECRI.
The weekly index level fell because of higher interest rates and weaker housing activity and was partly offset by higher commodity prices, Achuthan said.
Our supply estimates for this year have been thrown off kilter by the crisis. It appears that at this rate, we will see a record level of annual issuance (more than the €200bn seen in 2001), most likely by the time the third quarter is over. The data shows that corporates have raised a large amount of cash - and judging by the capex cuts, lower M&A and job losses, they are hoarding this cash in case the current sunnier outlook turns duller. It has been a grab fest of epic
...and gains of $422 million from the widening of the firm’s credit spread on certain structured liabilities.So, if you are the problem, make money by shorting yourself!
As a last report, here are what I view as 10 of the most important investment guidelines I've learned in my time at the firm:
- Income is as important as are capital gains. Because most investors ignore income opportunities, income may be more important than are capital gains.
- Most stock market indicators have never actually been tested. Most don’t work.
- Most investors’ time horizons are much too short. Statistics indicate that day trading is largely based on luck.
- Bull markets are made of risk aversion and undervalued assets. They are not made of cheering and a rush to buy.
- Diversification doesn’t depend on the number of asset classes in a portfolio. Rather, it depends on the correlations between the asset classes in a portfolio.
- Balance sheets are generally more important than are income or cash flow statements..
- Investors should focus strongly on GAAP accounting, and should pay little attention to “pro forma” or “unaudited” financial statements.
- Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce.
- Investors should research financial history as much as possible.
- Leverage gives the illusion of wealth. Saving is wealth.
We believe that this cycle is anything but a typical one, and that managers who look backward for guidance are likely to destroy value for their clients. In our opinion, now more than ever, it is imperative to be forward looking and to understand the changing environment in which companies operate. We believe this is a cycle in which the strong will not only survive but also get stronger. A common view is that lower-quality companies provide the best offense during the early stages of an economic recovery. It is our view, however, that in a world where financial leverage will be more difficult to access, and more costly, the next economic upturn will be characterized by industry leaders gaining market share, expanding their competitive leadership, and leading the way in a stock market upturn. The elements that comprise our investment focus are honed to identify such companies. While many of these leadership companies have been viewed as having defensive characteristics during the downturn of the past six quarters, we believe they will come to be viewed as the new offensive ones.
Global growth expectations surge. . . and broadenWell, China and banks?
The April FMS prints the most optimistic reading on global growth since 2004. A net +24% of investors believe the global economy will strengthen over the next 12 months. China remains the principal catalyst but growth optimism has now broadened out to all regions, including previous laggards Europe and Japan.
Risk appetite rallies as bank fears ease
Our risk appetite indicator climbed to a 12-month high. Asset allocators are less pessimistic on equities, sharply cutting their underweight to 17% from 41% in March. Overweights in bonds were trimmed. Cash overweights fell to net 24%, the lowest since late-2007, lowering average cash balances to 4.9% from 5.2%. Even hedge funds raised net equity exposure to an 8-month high of 25%.
Emerging markets the preferred vehicle to play catch up
Playing catch-up with the rally in equity markets, global investors massively raised GEM exposure (to +26% from +4%) to augment a longstanding US overweight (+14%). The Eurozone (-29%) and Japan (-36%) continue to be shunned.
Bank sentiment & China optimism force cyclical rotation
The sharp rally in banking stocks in recent weeks has been met by a dramatic reduction in U/W positions on global banks to 26% from the record 48% in March. Better sentiment on banks and growth optimism has unlocked a classic sector rotation out of staples, telcos, pharma and utilities into industrials, consumer discretionary and industrials. Technology is now the most preferred global sector.
Apocalypse averted: reluctant, not euphoric, bulls
Apocalyptic bearishness in the March FMS aided & abetted a major equity rally. The April FMS shows investors believe the worst is over and extreme defensive positions have been cut. But there is no bull market euphoria: PMs remain underweight risk, equities & cyclicals and cash levels remain high – as such the survey supports a "grind higher" view. Bulls now require support from April/May G7 economic data. The bears are reliant on China and banks disappointing.
Stocks – Depression fear continues to be removed
One month ago investors were fearing unlimited downside risk, but the subsequent public initiatives (TALF, PPIP, softer mark-to-market rules & G20) have cancelled such “systemic risks” and ignited a very strong global recovery led by Asia, LatAm and e.g. with the S&P500 Banks Index gaining 113%! Further, this removal of economic depression risk remains supported by a stock sector rotation towards early cycle sectors signalling that the financial business cycle slowdown is at the bottom! Now, the macro economic situation remains dire which will keep “bears” alert to any fading buy momentum, but with the Nasdaq bourse in a bullish breakout from a five-month old trading range buy momentum remains intact. Finally, we perceive that odds continue to improve that we have witnessed important long-term lows, and looking beyond the short to medium term we expect that LatAm and Asia will fall less during setbacks and rally more subsequently and that the IT sector (with lots of intangible values) remains very attractive.
Bonds – Relief pressuring the long end
Market observers perceive that it is only a matter of time before ECB will join Fed, BoE, SNB and BoJ in exercising quantitative easing, and the Euribor/Eonia spread is responding by trading at pre-Lehman Bros. levels. With the macro situation very fragile central banks will continue “printing” new money and nursing the yield curve in support of the housing market and maintain high prices at which to sell the enormous amounts of government bonds. Now, this “manipulation” is currently counterbalanced by evidence that global investors are pricing in that we are at the bottom of the financial business cycle causing investors to remove their overexposure in bonds. Overall, two dominating investment themes continue to exist: 1) global recession and dovish central banks i.e. bullish bonds and 2) the fear of a major bond bubble i.e. bearish bonds. Combining these two investment themes with evidence that the financial business cycle is close to its bottom long bonds hold increasingly unattractive risk/reward relations!
Commodities – Industrial metals continue to outshine gold
We remain very influenced by recent weeks’ evidence that the global financial business cycle slowdown is close to its bottom – not least as this occurs in conjunction with industrial metals indices in their strongest recovery following the post 2008 crash and gold having settled down! With speculative futures traders still heavily short positioned in copper the recovery in industrial metals should continue… and gold to underperform.
Currencies – Will traders continue to dislike GBP?
Although GBP has recovery versus major currencies it still remains very disliked among investors and forecasters in general. To us it appears a surprise that GBP hasn’t benefitted more from recent weeks’ constructive turnaround in the market perception of global “visibility” ignited by the public initiatives (TALF, PPIP, softer mark-to-market rules & G20) which seam to have cancelled widespread fear of “systemic risks”. Now, with more global “visibility” and capital being allocated away from the most secure financial instruments we believe that speculative futures traders’ short GBP positions are at risk of a short GBP squeeze! Elsewhere, USD could be in a prolonged price range oscillating between current popularity of: 1)“old US dollar collapse theorists” and 2)“US business cycle well ahead of Europe’s first recession with a euro currency”.
Michael Santoli notes in this week’s Barron’s, “All this said, the market’s run has, by now, gotten ahead of every storied, momentous, bear-killing liftoff rally from history, according to Brown Brothers Harriman’s Andrew Burkly, including those of 2002, 1982, 1974, 1932 and even 1937 – ’38 being that now-familiar analog this market period still closely resembles.” Gotten ahead of itself indeed, for the 24-session, 28.6% rally has left 84.8% of the stocks in the S&P 500 above their respective 50-day moving averages and consequently very overbought. Therefore, just as we were aggressively bullish five weeks ago today on CNBC, we are now aggressively cautious, thinking the envisioned “buying stampede” is long of tooth.