Posts filed under “Think Tank”

If you sell it, they will come

‘If you sell it, they will come,’ is the US Treasury’s Field of Dreams mantra this week as they attempt to sell $205b of US debt most of which should be easy to sell as most have maturities of 5 years and less. If the stock market is right and the economy in the 2nd half of the year will have a strong rebound, then interest rates are going higher due to higher inflation and the demand on the part of foreigners, who own half our debt, and others for higher yields for the enticement of buying the enormous new supply. Goldilocks of strong growth and low inflation was 1990′s fiction. The US$ is falling to just shy of its lowest level since Dec ’08 vs the euro after the Aug German consumer confidence # was better than expected and rose to the highest level since July ’08. Hong Kong exports fell at the slowest pace since Nov ’08 and Asia stocks continue their melt up. June New Home sales are out at 10am.

Category: MacroNotes

Words from the (investment) wise July 26, 2009

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Source: Jerry Holbert, Comics.com, July 23, 2009.

Not only did the Dow Jones Industrial Index on Thursday breach 9,000 for the first time since January and the Nasdaq Composite Index notch up a streak of 12 consecutive advancing days, but other global stock markets, commodities, oil, precious metals, high-yielding currencies and corporate bonds also put in a stellar performance as a bullish mood prevailed.

Bonds and other safe-haven assets such as the US dollar and Japanese yen were out of favor as investors sought higher returns elsewhere. Also, the CBOE Volatility Index (VIX), or “fear gauge” was at its lowest level (23.1) since before the Lehman collapse in September.

The past week’s performance of the major asset classes is summarized by the chart below – a set of numbers that indicates an increase in risk appetite.

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Source: StockCharts.com

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 corporate results in the US rolled in, the American and most other markets closed the week in solid positive territory.

The MSCI World Index (+4.6%) and MSCI Emerging Markets Index (+5.2%) last week again added to the rally’s gains to take the year-to-date returns to +11.7% and a massive +45.3% respectively. Strikingly, the World Index advanced for ten straight sessions through Friday, whereas the Emerging Markets Index gained on nine of the past ten trading days.

The major US indices are all back in the black for the year to date, with each index having fallen for only one day last week. Prior to a slight decline on Friday, the Nasdaq Composite Index experienced its best winning streak since 1992 as it rose for 12 sessions in a row.

Click here or on the table below for a larger image.

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Stock market returns for the week ranged from top performers Romania (+11.1%), Russia (+9.5%), Egypt (+8.8%), Hong Kong (+7.9%) and Poland (+7.8%) to Greece (-3.6%), Bermuda (-2.5%), Jamaica (-2.0%), Côte d’Ivoire (-1.9%) and Bangladesh (-1.0%) at the other end of the scale.

Of the 97 stock markets I keep on my radar screen, a majority of 82% recorded gains, 15% showed losses and 3% unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

As an aside, the capitalization of China’s stock market is currently $3.2 trillion compared with $11.2 trillion for the US market, according to data compiled by Bloomberg. Mark Mobius, head of emerging markets at Templeton Asset Management, said (via MoneyNews) China might surpass the US as the world’s largest stock market in as little as three years, as China’s state-owned companies will sell new shares and the nation’s 1.4 billion people will put more of their money into the market.

Back to the corporate reporting season in the US. Of the 142 S&P 500 companies that have so far announced quarterly results, 111 came out ahead of earnings expectations, 10 in line and 21 below. While the earnings announcements thus far have been impressive at the headline level, the reports become less striking once one digs a bit deeper to discover that the earnings numbers often only beat estimates due to cost-cutting.

At the top line revenues are still deflating, indicating no pricing power. Specifically, 72 companies posted revenue that failed to live up to expectations. But the prospects are looking up as for the first time in quite a while many more companies are raising guidance versus lowering guidance.

John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the winners for the week included Claymore/MAC Global Solar Energy (TAN) (+17.9%), PowerShares Biotech & Genome (PBE) (+17.4%) and Market Vectors Solar Energy (KWT) (+15.9%). Among the country ETFs, Market Vectors Russia (RSX) (+ 12.5%) performed splendidly.

On the losing side of the slate, ETFs included “all things short” such as ProShares Short MSCI Emerging Markets (EUM) (-6.2%), ProShares Short QQQ (PSQ) (-5.0%) and ProShares Short Russell 2000 (RWM) (-4.9%).

As far as credit is concerned, the cost of buying credit insurance for US and European companies eased sharply during last week’s trading, as shown by the narrower spreads for both the CDX (North American, investment-grade) Index (down from 131 to 118) and the Markit iTraxx Europe Index (down from 107 to 95).

CDX (North America, investment-grade) Index

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Source: Markit

The quote du jour this week comes from Bill King (The King Report) who said: “Sorry, Mr. President – you ‘wasted a good crisis’. You, Ben, Hank, W, Little Timmy and Democratic Congressional leaders told Americans that the world would end unless US taxpayers mortgaged whatever little future remained in order to provide record stimulus now. You and your ilk said there was no time to delay. Remember you said ‘catastrophe’ would occur if there was no stimulus. You and your team boasted that millions of jobs would be created. No jobs yet. But Goldman Sachs and other insiders minted more money and numerous crony capitalists were able to salvage as much net worth as possible.

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Category: Think Tank

The Statistical Recovery

A lot of bullish commentators are talking about a recovery being in the works, and they may very well be right. But it is not going to look like any recovery worthy of the name. This week we look at what I will call The Statistical Recovery. But first we take a look at what China is doing, as we continue our look at the rest of the world and ponder whether it is time to brace ourselves for an extended bout with the Muddle Through Economy*. (And yes, there is an asterisk.)

Quickly, and importantly, tonight we are releasing the first in a new series of quarterly Conversations entitled Geopolitical Conversations with John Mauldin and George Friedman. We believe that these new Conversations will help you better understand not only the global political landscape but also how it affects the financial umbrella that we are under. In this first Conversation, we talk about the “exogenous” risks to the markets (those from outside the markets themselves) posed by the geopolitical world.

George and I are going to make it a regular quarterly gig. We will offer this service, which will be priced separately, at some point in the near future. Now, here is the important part: all current subscribers and anyone who subscribes now will receive these Geopolitical Conversations free, as a thank you. (Current members can log in now.) If you have not yet subscribed, you can do so and receive a discount, by clicking the link and typing in the code JM49 to subscribe for $149. This is a large discount from our regular price of $199; plus, we are including the bonus Geopolitical Conversations that are worth $59.

Further, we will post a separate interview next week that I have obtained permission to use from my friends at Casey Research, and which I personally found very valuable. When we launched Conversations, we promised eight interviews a year. We are now at six, and next week I will record the seventh with housing experts John Burns of John Burns Real Estate Consulting and Rick Sharga of Realty Trac, the two leading experts on housing in the country. There is SO much uninformed, simplistic misinformation in the media about housing that I thought subscribers might like to know what the real situation is.

When you subscribe, all of the past Conversations are there for you to review. I am going to make sure subscribers get way more than their money’s worth. You don’t want to wait another day to subscribe. And now, let’s jump into this week’s letter.

Can China Lead the Global Recovery?

China is growing by about 8% a year, which is amazing on the surface of it, as their exports are down about 20% (more in some sectors). How can that be? I continually read about how China is going to lead the world out of its global funk. And 8% growth in GDP does seem pretty strong. But we need to look a little deeper.

If I told you that the next US stimulus package would be $4.5 trillion dollars, mostly given to banks that would be forced to loan out the money quickly, do you think that might jump spending and GDP in the short term? Would you start looking for a few bubbles to be created? What about the dollar?

That is the equivalent of what China is now doing. The volume of credit that is flowing into China is
equivalent to one-third of their GDP. Banks that already have large problem-loan portfolios are now lending even more, in a very short time frame. China has severe capacity-utilization problems, as trade has sharply fallen; and the US consumer is unlikely to return to anywhere near the level of consumption that was the case in 2006.

The Chinese stock market is up 85% this year, and commodity and real estate prices are rising. And no wonder: the money supply shot up 28.5% in June alone. That money is looking for a home. My friend Vitaliy Katsenelson has written a very perceptive essay for Foreign Policy magazine, talking about the nature of the current growth in China.

“But don’t confuse fast growth with sustainable growth. Much of China’s growth over the past decade has come from lending to the United States. The country suffers from real overcapacity. And now growth comes from borrowing — and hundreds of billion-dollar decisions made on the fly don’t inspire a lot of confidence. For example, a nearly completed, 13-story building in Shanghai collapsed in June due to the poor quality of its construction.

“This growth will result in a huge pile of bad debt — as forced lending is bad lending. The list of negative consequences is very long, but the bottom line is simple: There is no miracle in the Chinese miracle growth, and China will pay a price. The only question is when and how much.”

I am going to quote at some length from Simon Hunt’s latest note. He travels very frequently to China and is one of the world’s true experts on the copper market. If you want to know something about copper, ask Simon. Copper, we are told, is the metal with a PhD in economics. If copper prices are rising, then the economy is booming. And historically, that has more or less been the case. But there may be reason to believe that PhD may be no more useful this time around than a regular Ivy League degree.

“The world community has come to see that China is its savior. Growth picked up sharply in the second quarter, but it is based on fixed asset investment and renewed speculative activity in the real estate sector. It is not what the actual GDP or IP [Industrial Production] numbers will show that matters, but the quality of that growth. Money is cheap with loans and credit freely available, so much so that China risks developing new bubbles in the stock and commodity markets and real estate. Speculation is based on the simple premise that prices must rise. Foreigners as well as domestic participants are feeding this frenzy, especially in metal markets.

“The frenzied loan and credit growth is unlikely to be cut back until the fourth quarter at the earliest. It
is not this year or next which worries us, but post 2010. What will China do when the world economy gets hit with its next big leg down?

“There is no better example of this speculative activity than what is being seen in the copper market. It is easy for global merchants, hedge funds etc to ship cathode into China and warehouse it outside the reporting system, so fuelling investors’ sentiments that copper demand in China is soaring and at the same time draining copper from the rest of the market.

“It is not so much industry which is doing this buying in China, but individuals, financial institutions and even small companies divorced from the copper industry who are buying and holding the metal because copper is a store of value and prices will go up is the common response. We updated our numbers for the first half of this year.

They are truly staggering. Over 1 million tonnes of cathode is sitting in China mostly outside the reporting system as a punt on rising prices.” (Emphasis mine)

If it is happening in copper it is likely to be happening in other commodity markets as well. If you are trading the metals, you should be aware that a quick drop could happen if demand falls off due to there being a glut of supply coming back onto the market.

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Category: Economy, Think Tank

King Report: Manufacturing Earnings

> ‘We’re all technicians now!’ Stocks again are so divorced from reality and economic fundamentals that investors must be technicians in order to capture upside and avoid the inevitable recoupling with economic and financial reality…Remember the last recoupling of a few quarters ago? Please recall the Goldman CFO, David Viniar, warned in early February 2008…Read More

Category: Earnings, Think Tank

Final July U of Michigan confidence

The final July U of Michigan confidence number was 1 point higher than expected at 66 and up from 64.6 in the preliminary reading but is still down from 70.8 in June which was the highest since Feb ’08. The improvement in the final survey was led by the Outlook component which rose 2.3 points…Read More

Category: MacroNotes

Be Careful What You Ask For . . .

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from…Read More

Category: Federal Reserve, Think Tank

Revenue misses continue

Revenue misses from MSFT, AMZN, KLAC, AXP and BNI has the futures below fair value but well off their lows as European stocks rallied at around 4am when Germany’s July IFO business confidence number was released and was almost 1 point more than expected rising to the highest level since Oct ’08. Also, the Euro…Read More

Category: MacroNotes

Nobody Likes Missing Out on History

Good Evening; Unless you’ve been in a cave or in meetings all day, you know by now that U.S. stocks were kited to new highs today. And that’s really all you need to know. There was a batch of reasons given, from economic data to corporate earnings, but the biggest reason for today’s surge was…Read More

Category: Markets, Think Tank

Existing Home Sales

June Existing Home Sales totaled 4.89mm annualized, 50k more than expected but May was revised down by exactly 50k to 4.72mm so taken together about in line. It is though the 3rd month in a row of gains and its at the highest level since Oct ’08 as both single family and condos/co-ops saw sales…Read More

Category: MacroNotes

NDX RSI at highest since Oct ’07

The Relative Strength Index (RSI, defined as a non trending indicator that measures the momentum of a security to determine whether it is in an overbought or oversold condition according to Bloomberg) of the NDX is at the highest level since Oct ’07. RSI is just a snapshot perspective of a particular move and doesn’t…Read More

Category: MacroNotes