Posts filed under “Think Tank”
Today’s Fusionomics report on Gold:
Gold jumped to above $1039 on dollar weakness, a Bank of America supportive report and strong Indian jeweller demand. That’s above the previous record intra-day high of $1034, hit on 17th March 2008. Indeed, factors that could still drive the gold price higher:
1. An increase in inflation fears, which have played only a small part in the rally so far.
2. A creeping loss of confidence in paper currencies and the US dollar.
3. The psychology of the market. The headlines that gold is setting new record highs in nominal terms will inevitably draw attention to the fact that gold is still trading well below the all-time high of around $2,300 in real (inflation-adjusted) terms, which was seen briefly in 1980. This will encourage talk of the potential for further explosive price gains.
The upshot is that don’t be surprised to see gold break still higher in the coming weeks. However, a mix of unfounded inflation fears, conspiracy theories and speculative demand looks more like the ingredients for a speculative bubble than the grounds for a sustainable increase in prices. Recall that after peaking at around $850 on 18th January 1980, gold quickly slumped to $650 by the end of January and below $500 again by April. While consolidation will likely occur, key support levels at these breakout points may hold leading to gradual higher gold prices over the intermediate/long term. The focal point of such a scenario would be pinned on the US Dollar.
Contact Peter Greene for more information about institutional research & trading:
> Citigroup and BAC jump on Friday afternoon; JPM and then the S&P 500 followed: > > Stocks tanked on Friday with the ugly employment report. But stocks rebounded, led by a big rally in major banks stocks. Yesterday Goldie touted the big bank stocks. Did you get a Friday afternoon call? The S&P 500…Read More
Lakshman Achuthan is co-founder and managing director of the Economic Cycle Research Institute (ECRI), an independent organization focused on business cycle analysis and forecasting in the tradition established by ECRI’s co-founder, Geoffrey H. Moore. ECRI maintains business cycle chronologies for 20 countries around the world other than the U.S. Lakshman is the managing editor of ECRI’s forecasting publications and regularly participates in a wide range of public economic discussions.
He is a member of Time magazine’s board of economists, the New York City Economic Advisory Panel and serves as trustee on a number of non-profit boards. Lakshman is the co-author of Beating the Business Cycle: How to Predict and Profit from Turning Points in the Economy.
For decades, the prevailing wisdom held that the way to sleep at night was to buy and hold stocks for the long term while ignoring market gyrations. But investors who had implicit faith in this philosophy of long-term investment had a rude awakening during the Great Recession.
Even the remarkable rally from the March 2009 market low has not repaired all the damage to their investment portfolios. In despair, many have concluded that the investment climate is just too uncertain to trust their hard-earned dollars to the vagaries of the stock market. That is a great pity, because managing the risk to a stock portfolio is not as hard as most believe.
The simple fact is that the worst bear markets are normally associated with recessions. Therefore, if possible, you should sell your stocks in anticipation of a recession, and buy stocks ahead of a recovery.
Fortunately, good leading indexes are designed to flag recessions and recoveries before they arrive. (See our comments from April of this year). Not all leading indexes are created equal, but the best of them can help avert much of the damage that recessions wreak on stock portfolios. ECRI’s leading indexes are a case in point.
We can put into perspective the asset inflation we are seeing in many different asset classes that has been achieved in part due to a depreciating US$ by analyzing the returns in the S&P 500 and DJIA for 2009 in terms of gold (real money as opposed to fiat). This highlights again the nominal gains…Read More
“In late ’08 and early ’09, the cash rate was lowered quickly, to a very low level, in expectation of very weak economic conditions and a recognition that considerable downside risks existed. That basis for such a low interest rate setting has now passed, however. With growth likely to be close to trend over the…Read More
U.S. stocks rebounded today, aided by a rally in financials. Why was the group strong? Because a team of analysts at a well-known Wall Street firm upgraded the large banks sector. And why did they do that? Bloomberg gives us the lowdown in “Wells Fargo, Biggest U.S. Banks Raised by Goldman”:
Wells Fargo & Co., JPMorgan Chase & Co. and the biggest U.S. banks were raised to “attractive” from “neutral” by Goldman Sachs Group Inc., which said share prices don’t reflect prospects for earnings growth.
“We believe this difference in earnings power hasn’t been fully reflected in share prices,” New York-based analysts led by Richard Ramsden wrote in a note to clients today. “We estimate that normalized earnings for large banks are 39 percent higher than in 2007 despite the 36 percent decline in share prices.”
Wells Fargo, based in San Francisco, was upgraded by Goldman to “buy” from “neutral” after its tangible assets per share increased 70 percent in the second quarter. “The reason is simple: Wells bought Wachovia at a depressed price,” Ramsden said. Banks have increased earnings with acquisitions that will add to earnings over the “long term,” he said.
Wow, pretty powerful stuff, eh? Then again, maybe not. You see, if you go back and look at what Goldman said in late-January, when most bank stocks were trading at far lower levels than they are now, the firm wasn’t exactly upbeat on the group. Again, Bloomberg had the details in “U.S. Banks May Be the ‘New Utilities,’ Goldman Says”:
Large U.S. banks risk becoming the “new utilities” as governments introduce greater regulation and force lenders to increase capital ratios, Goldman Sachs Group Inc. analysts said.
Return on equity at the biggest U.S. banks will be limited by higher capital requirements and greater regulatory controls, analysts led by Richard Ramsden in New York said in a report to clients today. The measure of how effectively banks invest earnings may shrink to between 10 percent and 12 percent, from the 15 percent banks generated between 1990 and 2006, they said.
U.S. Bancorp was cut to “sell” because the Minneapolis- based company, while “a good bank,” is already highly valued, the analysts wrote. Goldman also re-instated its sell rating on Citigroup Inc., saying “investors should avoid the stock given no core earnings power clarity.”
Bank of America Corp. was cut to “neutral,” the same rating given Morgan Stanley, Wells Fargo & Co. and PNC Financial Services Group Inc. The analysts recommend buying JPMorgan Chase & Co., which they said may show earnings improvement as the economic cycle turns.
Large banks, particularly Citigroup, U.S. Bancorp and Bank of America, have “thin” capital cushions compared with Goldman’s estimates for losses in the industry, the note said.
The question of whether banks in the aggregate are lending or not gets partially answered every Friday when the Fed releases the assets and liabilities of the US commercial banks and if they are not, what they’re doing with their deposits. For the week ended Sept 23rd, commercial and industrial loans outstanding fell for a…Read More
Former Morgan Stanley analyst Andy Xie explains why the crisis is leading to other problems, including bubbles . . .
The financial crisis taught crucial lessons about the dangers of bubbles, loose regulation and debt. It’s a pity we didn’t learn.
Lehman Brothers collapsed one year ago. The U.S. government refused a bailout and warned other financial institutions to be careful. The government felt other institutions had already severed their dealings with Lehman’s investment network, and that a collapse could be walled in.
Little did the government realize that the whole financial system was one giant Lehman. The securities firm borrowed short-term money to punt in risky and illiquid assets. The debt market supported the financial sector, believing the government would bail out everyone in a crisis. But when Lehman was allowed to collapse, the market’s faith was shaken.
The debt market refused to roll over financing for financial institutions. Of course, financial institutions couldn’t unload assets to pay off debts. The whole financial system started teetering. Eventually, governments and central banks were forced to bail out everyone with direct lending or guarantees.
The Lehman collapse strategy backfired. Governments were forced to make implicit guarantees explicit. Ever since, no one has dared argue about letting a major financial institution go bankrupt. The debt market is supporting financial institutions again only because they are confident in government guarantees. The government lost in the Lehman saga, and Wall Street won.
So Lehman died in vain. Today, governments and central banks are celebrating their victorious stabilizing of the global financial system. To achieve the same, they could have saved Lehman with US$ 50 billion. Instead, they have spent trillions of dollars — probably more than US$ 10 trillion when we get the final tally — to reach the same objective. Meanwhile, a broader goal to reform the financial system has seen absolutely no progress.
First, let’s look at the most basic objective of deleveraging the financial sector. Top executives on Wall Street talk about having cut leverage by half. That is actually due to an expanding equity capital base rather than shrinking assets. According to the Federal Reserve, total debt for the financial sector was US$ 16.5 trillion in the second quarter 2009 — about the same as the US$ 16.6 trillion reported one year earlier. After the Lehman collapse, financial sector leverage increased due to Fed support. It has come down as the Fed pulled back some support, creating the perception of deleveraging. The basic conclusion is that financial sector debt is the same as it was a year ago, and the reduction in leverage is due to equity base expansion, partly due to government funding.
Category: Think Tank
The 10 year TIPS reopening auction was solid and bidding was aggressive. The yield was about 5 bps below expectations and the bid to cover of 3.12 was the highest since Jan 1999 and well above the average over the past two years of 2.17. Indirect bidders totaled 44%, slightly below the July auction of…Read More
The Sept ISM services index hit 50.9, almost 1 pt more than expected, up from 48.4 and is the first time above 50 since Sept ’08 and implies expansion in the non manufacturing sector. Business Activity rose almost 4 pts to 55.1, the highest since Oct ’07 (measures the direction of change, not the degree)…Read More