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August 09, 2009

Words from the (Investment) Wise for the Week That Was (August 3 - 9, 2009): Part II
by Prieur du Plessis

CNBC: July jobs report analysis
"Employers cut 247,000 jobs in July, far less than expected and the least in any month since last August, providing evidence the economy is turning. Mark Zandi of Moody's Economy.com, Diane Swonk of Mesirow Financial, Robert Barbera of ITG and the CNBC news team share their analysis."

Source: CNBC, August 7, 2009.

Asha Bangalore (Northern Trust): ISM non-manufacturing index shows mild decline
"The ISM Non-Manufacturing Survey results of July show a mild decline in the pace of activity. The composite index fell to 48.1 from 48.6 in the prior month. The index tracking new orders declined to 46.4 in July from 47 in the prior month. The responses of survey participants stressed 'uncertainty' and 'caution' about business conditions."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 5, 2009.

Asha Bangalore (Northern Trust): Factory orders higher
"Factory orders rose 0.4% in June compared with a 1.1% gain in the prior month. The June increase in factory orders reflects a revised 2.2% drop in bookings of durables and a 2.7% jump in orders/shipments of non-durables. The inventories-shipment ratio fell to 1.42 in June from 1.45 in the prior month. The cycle peak for the inventories-shipments ratio appears to have occurred in January 2009 (1.46). Factory inventories have declined for ten consecutive months ended June. Therefore, as the economy gathers steam a large increase in inventories should not be surprising."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 5, 2009.

Asha Bangalore (Northern Trust): ISM manufacturing report - overall tone is positive
"The ISM manufacturing survey for July shows a distinct improvement, with several of the sub-indexes posting readings exceeding 50. Index levels above 50 indicate growth, while readings below 50 denote a contraction in factory activity. In July, indexes tracking production, new orders, supplier deliveries, inventories, exports, backlogs, prices, and imports posted above 50 readings. The employment (45.6 vs. 40.7 in June) and inventories indexes (33.5 vs. 30.8) also advanced in July but they are holding below 50.0. Historically, the composite index crosses fifty at the end of a recession or several months after a trough is established.

"As the table shows, with the exception of the early part of the post-war period, the ISM composite index and indexes measuring new orders, production, and supplier delivery recorded readings above 50.0 after the trough of a business cycle. If history is a guide, today's survey results of the factory sector sets up grand expectations for the economy and the factory sector. Additional data will be needed to confirm that the factory sector and economy are both turning around."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 3, 2009.

Asha Bangalore (Northern Trust): Jobless claims data are mildly positive
"Initial jobless claims fell 38,000 to 550,000 during the week ended August 1. Continuing claims, which lag initial claims by one week, rose 69,000 to 6.31 million. The insured unemployment rate has held steady at 4.7% for four straight weeks.

"Recipients of the Extended Benefits and Emergency Unemployment Compensation should be added to continuing claims to get the whole picture. Claims under these two programs lag initial jobless claims by two weeks and continuing claims by one week. The sum of seasonally adjusted continuing claims and seasonally unadjusted claims under the two special programs stands at 9.48 million, with the peak at 9.72 million (week ended June 27). Continuing claims have peaked and the year-to-year change of seasonally unadjusted initial claims is showing a decelerating trend."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 6, 2009.

The New York Times: Prolonged aid to unemployed is running out
"Over the coming months, as many as 1.5 million jobless Americans will exhaust their unemployment insurance benefits, ending what for some has been a last bulwark against foreclosures and destitution.

"Because of emergency extensions already enacted by Congress, laid-off workers in nearly half the states can collect benefits for up to 79 weeks, the longest period since the unemployment insurance program was created in the 1930s. But unemployment in this recession has proved to be especially tenacious, and a wave of job-seekers is using up even this prolonged aid.

"Tens of thousands of workers have already used up their benefits, and the numbers are expected to soar in the months to come, reaching half a million by the end of September and 1.5 million by the end of the year, according to new projections by the National Employment Law Project, a private research group.

"Unemployment insurance is now a lifeline for nine million Americans, with payments averaging just over $300 per week, varying by state and work history. While many recipients find new jobs before exhausting their benefits, large numbers in the current recession have been unable to find work for a year or more.

"Calls are rising for Congress to pass yet another extension this fall, possibly adding 13 more weeks of coverage in states with especially high unemployment. As of June, the national unemployment rate was 9.5%, reaching 15.2% in Michigan. Even if the recession begins to ease, economists say, jobs will remain scarce for some time to come.

"'If more help is not on the way, by September a huge wave of workers will start running out of their critical extended benefits, and many will have nothing left to get by on even as work keeps getting harder to find,' said Maurice Emsellem, a policy director of the employment law project."

Source: Erik Eckholm, The New York Times, August 1, 2009.

Paul Kasriel (Northern Trust): Real consumption expenditures in reverse in June
"Real personal consumption expenditures (PCE) contracted by 0.1% in June after being unchanged in May. But real PCE is set to rev into forward gear in July due, in part, to the Car Allowance Rebate System (CARS), aka, 'cash for clunkers'. This program was operative for only the last week of July, but it helped light motor vehicle sales accelerate 15.8% in July to an annualized pace of 11.2 million units. With clunkers lined up outside new car dealers' lots waiting for their turn to be crushed, the Senate is likely to go along with the House and authorize an extra $2 billion to the program. This should help boost or maintain car and truck sales in August.

"Thus, it is likely that real PCE will see some growth in the third quarter. In turn, it is highly likely that real GDP as a whole will see some growth in the third quarter. But some of the expected third-quarter PCE and real GDP growth will have been 'borrowed' from the fourth quarter.

"Nominal personal income, which grew 1.3% in May, contracted by 1.3% in June. A lot of seniors got a one-time $250 gift from Uncle Sam in May, which helped boost May's personal income. June personal income was held back not only because seniors did not get another special gift but also because nominal wage and salary income dipped by 0.4%. With the 0.5% increase in nominal PCE and the 1.3% decline in nominal personal income, the saving rate slipped back to 4.6% in June vs. its 6.2% level in May.

"In fits and starts, the personal saving rate is headed back up toward its more normal level of 8%. As households venture out along the investment risk curve with their past savings and future saving, away from government-guaranteed deposits, personal saving will translate into increased corporate spending."

Source: Paul Kasriel, Northern Trust - Daily Global Commentary, August 4, 2009.

Paul Kasriel (Northern Trust): June pending home sales - more evidence that trough in sales is behind us
"Signed contracts on sales of existing homes increased 3.6% in June after an upwardly-revised 0.8% increase in May. The June data marks the fifth consecutive monthly increase in pending home sales. The pending-home-sales index is now at a two-year high. Of course, one of the reasons the sales are pending is that the buyers have to qualify for mortgages, a more difficult endeavor today than was the case a few years ago when the only requirement was a pulse - and that was more of a guideline than an absolute rule.

"I remain skeptical that the lows in house prices have been put in. But as for sales, I do believe we have seen the lows for this housing depression. There is a lag between when sales and starts pick up and when the GDP component 'residential investment expenditures' respond. But if we can believe Monday's June nominal construction expenditures data, which showed an increase in residential construction expenditures, we are at or near a low for this GDP component."

Source: Paul Kasriel, Northern Trust - Daily Global Commentary, August 4, 2009.

MoneyNews: Buffett - Housing problems over in 18 months
"Warren Buffett thinks most of the country's housing woes will be over by the end of next year.

"'We're not too good at avoiding challenges, but we're marvelous at surmounting them,' Buffett told a crowd that had gathered in Des Moines to help a family-founded firm unveil one of the 10 largest furniture showrooms in the country.

"Looking around the store, he added, 'I don't see how anyone can be a pessimist about the future of the country.'

"On the mounting federal debt, he observed, 'It is not dangerous where we are now. It may be dangerous where we are going.'

"And Buffett had this to say about taxes: 'I would make the tax rates a little more progressive. I would help my cleaning lady and take a little more out of me.'"

Source: Julie Crawshaw, MoneyNews, August 3, 2009.

MoneyNews: Deutsche Bank - half of US mortgages underwater by 2011
"The percentage of US homeowners who owe more than their house is worth will nearly double to 48% in 2011 from 26% at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

"Home price declines will have their biggest impact on prime 'conforming' loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.

"'We project the next phase of the housing decline will have a far greater impact on prime borrowers,' Deutsche analysts Karen Weaver and Ying Shen said in the report.

"Of prime conforming loans, 41% will be 'underwater' by the first quarter of 2011, up from 16% at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties' value, up from 29%, it said.

"'For many, the home has morphed from piggy bank to albatross,' the analysts said."

Source: MoneyNews, August 6, 2009.

The Epoch Times: US food stamp list tops 34 million
"For the first time, more than 34 million Americans received food stamps, which help poor people buy groceries, government figures said on Thursday, a sign of the longest and one of the deepest recessions since the Great Depression.

"Enrollment surged by 2% to reach a record 34.4 million people, or one in nine Americans, in May, the latest month for which figures are available.

"It was the sixth month in a row that enrollment set a record. Every state recorded a gain in participation from April. Florida had the largest increase at 4.2%.

"Food stamp enrollment is highest during times of economic stress. The US unemployment rate of 9.5% is the highest in 26 years.

"Average benefit was $133.65 in May per person. The economic stimulus package enacted earlier this year included a temporary increase in food stamp benefits of $80 a month for a family of four."

Source: The Epoch Times, August 6, 2009.

The New York Times: Despite bailouts, business as usual at Goldman
"Lloyd Blankfein has a story about the cataclysm that nearly brought down all of Wall Street. It goes something like this: One by one, lesser banks were swept away by the financial storm of 2008. And as the floodwaters rose, no one, not even Goldman Sachs, seemed safe.

"The question, in Mr. Blankfein's eyes, was how high the water would rise. But Washington stepped in with all those bailouts before the surge reached Goldman.

"The story, which was recounted by several friends and colleagues, represents a sobering private admission from Mr. Blankfein, Goldman's chief executive.

"Publicly, it is a different story. Now that Goldman is minting money again, the bank insists that it was never in any real danger. Mr. Blankfein, in an e-mail message this week, disputed his private account, saying Goldman's survival was never in doubt. Other Goldman executives reject the notion that the bank was rescued at all.

"'We did not have a near-death experience,' said Gary Cohn, Goldman's president. The government saved the financial industry as a whole, but it did not save Goldman Sachs, he said.

"Rarely has the view from inside a company been so at odds with the view outside it. Could Goldman Sachs have lived if all those other giant banks had failed? Could it alone survive financial Armageddon?

"Goldman executives are dismissive, even defiant, when critics argue that the bank is playing a heads-we-win, tails-you-lose game with American taxpayers. And yet the questions keep coming. Last month the story of Goldman's postcrisis success - and conspiracy theories surrounding it - leapt from the business pages to the cover of Rolling Stone.

"The idea that nothing has changed for Goldman Sachs strikes many outsiders as absurd. In this era of mega-bailouts, Goldman is widely perceived, on Wall Street and in Washington, as too big and important to fail. If its bets pay off, Goldman profits and its employees get rich. If its bets go bad, ultimately taxpayers will have to pick up the bill.

"'Many observers on the market believe that Goldman and others of its size now have a free insurance policy,' said Elizabeth Warren, the chairwoman of the Congressional oversight panel for the $700 billion bailout fund. 'Whether they do or not is less important than the fact that many in the market believe they do. That means at some level Goldman is playing with the American taxpayers' future.'

"Goldman executives dispute suggestions that high-stakes market gambles are behind its big profits - $3.4 billion in the second quarter. And they are dumbfounded when people like Ms. Warren suggest companies like Goldman, which paid back its bailout money last month, now operate with an implicit taxpayer guarantee.

"After so many wrenching changes on Wall Street and in the economy, it might come as a surprise that the post-bailout Goldman is virtually indistinguishable from the pre-bailout one."

Source: Jenny Anderson, The New York Times, August 5, 2009.

Financial Times: SEC set to target flash trading
"The US Securities and Exchange Commission is preparing to clamp down on lightning-fast 'flash' trades made on electronic trading systems amid growing concerns that the practice puts some investors at a disadvantage.

"Mary Schapiro, SEC chairman, said on Tuesday that she had instructed her staff to find 'an approach that can be quickly implemented to eliminate the inequity that results from flash orders'.

"The SEC has been looking into flash orders - in which some exchanges allow traders a look at share order flows a fraction of a second before the broader market - as part of a review of so-called 'dark pools', anonymous electronic trading venues that do not display public quotes for stocks. Ms Schapiro's statement underscores the agency's intention to respond quickly to market concerns.

"Flash orders have stoked the ire of some lawmakers, including New York Senator Charles Schumer, who last month started urging the SEC to ban the practice altogether. Mr Schumer said on Tuesday that Ms Schapiro had personally assured him that the agency plans to put a ban in place.

"'It is also important to make sure flash orders aren't just the tip of an iceberg lurking in the dark reaches of the market,' he said. 'There is a lot of mystery about what goes on in dark pools and in the realm of high-frequency trading generally.'

"Any proposals involving flash orders would have to approved by the full commission and be open to public comment."

Source: Joanna Chung and Michael Mackenzie, Financial Times, August 4, 2009.

Financial Times: Market for leveraged loans hits 12-month high
"The prices of the most traded risky European and US loans have reached their highest levels for more than a year, in a further sign of improving conditions in credit markets.

"Over the past week, European leveraged loan prices reached 89.11% of face value, a high not seen since July 10, 2008, according to Standard & Poor's LCD and Markit.

"The same is true for riskier US loans, for which the average price bid rose above 90% of face value for the first time since June 24, 2008.

"Growing confidence in an economic recovery was further highlighted by a fall in a key barometer of financial stress, the spread between three-month dollar Libor - the rate banks charge each other to borrow - and three-month US Treasury bills. This so-called TED spread fell to its lowest level for two years on Monday - 29.3 basis points - having reached a high of 464 basis points last October.

"The loans rally has been fuelled by growing demand for credit this year. David Shaw, co-head of European leveraged finance at Barclays Capital, said the rise in secondary leveraged loan pricing would support the issue of new leveraged loans.

"The rally in loan prices above a key threshold of 80-85% of face value will also reduce pressure on collateralised loan obligations, complex funds that pool loans, which at the height of the credit boom accounted for 60% of the demand for leveraged loans."

Source: Anousha Sakoui, Financial Times, August 3, 2009.

Mark Schofield (Citi): Bond yield curve is flattening
"Last week's US Treasury auction results point to the start of a new trend for the yield curve - a sustainable and structural flattening, says Mark Schofield, head of interest rate strategy at Citi.

"He notes that two dismal auctions of short-dated bonds, which some took as a sign that demand for US debt was drying up, were followed by a blow-out sale of seven-year notes, which were swept up at well below the prevailing yield.

"'We have seen similar behaviour at the bottom of virtually every rate cycle over the past 20 years,' Mr Schofield says. 'But this time, the size of the demand shift was probably exaggerated by very low yields at the short end.'

"He says the move further out along the curve by yield-oriented investors has effectively left them taking on duration risk for the wrong reasons at the wrong point in the cycle.

"'Once the cycle turns, yields will rise sharply, although longer maturities should hold up until shorter paper offers something closer to normal long-term average returns.

"'Investors who think the Fed staying on hold will keep the curve steep and who expect to have time to reposition once the Fed's intentions become clearer would do well to remember that in the 2003-5 cycle, the curve completed 30% of its eventual flattening before the first rate hike and 65% within six months of the first move.

"'This flattening could ultimately rival the moves of 1992-4 and 2003-5."

Source: Mark Schofield, Citi (via Financial Times), August 4, 2009.

Barnaby Martin (Bank of America-Merrill Lynch): A good year for corporate bonds
"The rally in the corporate bond market might have reached its fourth month but sufficient catalysts remain for another half-year of strong returns, says Barnaby Martin, credit strategist at Bank of America-Merrill Lynch.

"'Bond spreads have yet to retrace back to pre-Lehman levels, leaving a strong valuation proposition still on the table,' he says. 'Credit fund inflows have jumped to very high levels and new cash is likely to push secondary market spreads tighter over the summer as supply tails off.'

"Mr Martin also points to a more favourable macro outlook as upgrades to earnings and economic growth filter through. While acknowledging that there are risks from growth being either too weak or too strong, he says a moderate recovery scenario should be good for credit.

"'For bullish investors, one decision to make is whether to buy lower-rated bonds or to extend in maturity. While lower-rated credit still offers value, investors should not overlook duration.

"'Bond curves are currently very dislocated due to poor secondary market liquidity and new issue focus. As liquidity improves in the secondary market, we expect curves to normalise, just as credit default swap curves have.'

"'In the 2002-2004 recovery, long-dated bonds handsomely outperformed lower-rated bonds. We believe increasing duration makes sense in many issuers.'"

Source: Barnaby Martin, Bank of America-Merrill Lynch (Financial Times), August 6, 2009.

Bespoke: Credit default swap prices down but still elevated
"The credit default swap (CDS) became a buzzword during the financial crisis as their prices soared and some firms that wrote them had to be bailed out in part because they would never be able to actually pay them out if default actually occurred (think AIG). Below we provide a chart of an index that measures CDS prices for 125 North American investment grade credit vehicles. As shown, the index rose from 50 to more than 250 from September 2007 to early 2009. Since then, however, the index has declined 38.86% as the S&P 500 has risen 48%. While the drop has been significant, it's still above pre-Lehman bankruptcy levels. While many investors are looking beyond the problems that occurred last fall and winter, credit market traders have not yet priced in a full recovery on Wall Street."

Source: Bespoke, August 5, 2009.

Financial Standard: Faber - danger signs ahead but bargain stocks a-plenty
"Leading contrarian investor Dr. Marc Faber wears his 'ultra bearish' cap in his Australian visit, predicting another financial crisis could happen in the next five to 10 years - but even that doesn't mean there aren't any investment opportunities, particularly in Asia.

"Visiting Australia as a guest presenter for Treasury Asia Asset Management (TAAM), Dr. Faber said that the Federal Reserve's policy in the past decade only added to the market volatility. By keeping rates artificially low and pumping money into the system, equities, markets and economies will face 'unintended consequences', including another financial crisis in the next five to 10 years.

"This crisis has not been fully cleansed out of the system, he said.

"He repeated his bearish views of the US dollar, which he believes will approach zero (not overnight, but it will happen) while many Asian currencies will rise on the back of a continually improving Chinese currency.

"Against that environment, he highlights various investment themes including going long on gold and silver (sovereign funds will likely buy gold when interest rates are around zero), corporate bonds and Asian equities (many markets in Asia are near 20-year lows).

"Tapping on socio-demographic trends, Faber is bullish on healthcare stocks in Asia, infrastructure stocks, commodities, REITs in emerging economies and tourism stocks ('every hotel will soon have a Chinese restaurant in it," he said).

"As uncorrelated investments to more established equity markets, Faber also sees opportunities in plantations and farmland (in Latin America and Ukraine), Japanese banks and new regions including Cambodia and Mongolia.

"In short, Faber believes that based on how economies and markets fared over the last few years, a new world has emerged where it is now the poor countries driving global consumption and global markets.

"But for many fund managers who believe they can take a breather now that the GFC has passed, Faber believes US and European stock markets are still overvalued relative to the lows reached in previous recessions.

"'The ultimate crisis is still ahead of us,' he said."

Source: Michelle Baltazar, Financial Standard, August 6, 2009.

Bespoke: Key ETF performance
"Over the last month, all asset classes except for the dollar and fixed income have been on a tear. There are lots of green arrows in the table below that show the recent performance of key ETFs.

"The S&P 500 tracking SPY ETF is up 14.24% over the last month, and most foreign ETFs are up even more. Australia (EWA), Brazil (EWZ), Canada (EWC), Germany (EWG), Mexico (EWW) and Russia (RSX) are all up more than 20%.

"Materials (XLB) and Financials (XLF) have been the two best performing sectors over the last month with gains of about 25%. Telecom (IYZ), Health Care (XLV) and Utilities (XLU) have gone up the least. And most commodities ETFs are up more than 10% as well.

"If you've been long and strong, you've got to have a smile on your face after a run like this."

Source: Bespoke, August 5, 2009.

Bespoke: Year to date sector performance
"With the S&P 500 now up 10.77% year to date, there are still two sectors that are down for the year - Utilities and Telecom. These are defensive sectors so the fact that they're underperforming in an up market isn't surprising. Only three sectors are outperforming the S&P 500 so far this year - Technology (+37.13%), Materials (+31.37%), and Consumer Discretionary (19.32%). While the Financial sector has gained the most since the March 9 bottom, it is only up 5.88% year to date since it was down so much in the first two months of the year. If the rally continues, look for the outperformers to continue to do well and the defensive sectors to underperform."

Source: Bespoke, August 3, 2009.

Eoin Treacy (Fullermoney): Impact of low interest rates on stock markets
"The global stock market universe can be broken up into two distinct groups; those that bottomed in October and November and those that hit important lows in March 2009. Subscribers will be familiar with this separation which we have highlighted repeatedly. Interest rates have fallen to record low levels across the OECD and have pulled back significantly in a number of other economies.

"In a bull market, rising interest rates serve to eventually choke off speculative demand and are often one of the prime reasons behind an index or sector topping out. Counter wise, following a bear market, when interest rates have arguably bottomed conditions are ripe for asset prices to appreciate. This spread of the US 10yr - US 2yr is currently testing its 20yr highs and is indicative of the condition of the US yield curve where banks can earn 250 basis points by borrowing at the short end and lending at the long end. At some point in the future, this spread will become inverted once more but that is likely to be a number of years from now.

"Interest rates remain a tailwind for stock markets at current levels ... and currently offer no impediment to stock markets. This will not always be the case and as they advance over time, they will offer an increasingly powerful headwind."

Source: Eoin Treacy, Fullermoney, August 6, 2009.

Bespoke: Q2 sector earnings growth
"While stocks have reported much better than expected numbers this earnings season, the year over year change in earnings has still been pretty bad. Overall, S&P 500 earnings are down 31.7% versus Q2 '07. Energy has seen the biggest decline in earnings at -67.9% (finally Financials don't top the list), followed by Materials (-65.1%), Financials (-45.9%), and Industrials (-34.1%). These four are all underperforming the S&P 500 in terms of earnings. Six sectors are doing better than the index as a whole, and only two have seen year over year earnings growth - Health Care and Utilities."

Source: Bespoke, August 3, 2009.

Bespoke: Guidance turns positive
"Probably the most bullish aspect of this earnings season has been guidance. After three quarters where companies guiding lower far outnumbered companies guiding higher, the trend has reversed to the positive side. As shown, 8.4% of companies reporting earnings have raised guidance in Q2, while 6.1% of companies have lowered guidance. Just two quarters ago, 15.7% of companies lowered guidance, while just 2.66% raised guidance."

Source: Bespoke, August 7, 2009.

MoneyNews: Biggs - S&P will climb another 22%
"The Standard & Poor's 500 Stock Index will climb by 22% as the global economy emerges from its recession buoyed by improving consumer spending and housing markets, according to investor Barton Biggs.

"Japanese stocks will also be attractive buys, also on expected improved consumer spending there as well as increased exports to China.

"'I'm still bullish,' Biggs, who runs New York-based hedge fund Traxis Partners, told Bloomberg radio.

"'We're going to have a pretty strong recovery in earnings both this year and next year.'

"In the United States, cost cuts at companies will eventually lead to better earnings. In Japan, elections are scheduled to take place next month and the new government will inherit an economy that is ripe for recovery.

"'They're going to really try to stimulate consumer spending,' Biggs said of the new Japanese government."

Source: Forrest Jones, MoneyNews, August 5, 2009.

Richard Russell (Dow Theory Letters): What I really think is going on
"We tend to forget that every move, large or small, in the stock market is entitled to a correction. I believe that the rise from the March lows is simply a correction of the huge bear market decline which preceded it.

"Normally, a secondary correction will recoup one-third to two-thirds of the ground lost during the preceding bear leg. To refresh your memory, the preceding bear leg carried from 14 164.58 on October 9, 2007 to 6 547.05 on March 9, 2009 - a total loss of 7,617 points. A one-third correction would carry the Dow to 9,083. A two-thirds recoup of the bear market losses could take the Dow back to 11,619.

"Subscribers should know that following the famous 1929 crash which took the Dow from 381 to 198, a correction took the Dow back to 294 in early 1930. That correction turned the entire investment community bullish. The public piled back into the market. However, the correction had nothing to do with an improving economy. In fact, the great 1929-1930 correction was followed by the greatest market wipe-out and economic depression in history.

"I don't think the current rally is part of a new bull market for the following reasons:

(1) At the March lows there were none of the typical indications of a bear market bottom.

(2) At the March lows, valuations were far too high, and totally atypical of a bear market bottom.

(3) At the March lows sentiment was far too optimistic.

(4) Lowry's Buying Power Index was too high compared with other bear market bottoms.

(5) Weeks after the supposed March 'bear market bottom', Lowry's Buying Power Index dropped to a new low - below its low at the March 'bottom'. In the 76-year history of Lowry's, this has never happened following any true bear market bottom.

"To sum up, I don't think the March low was the beginning of a new bull market, rather I believe it was the start of a correction of the preceding huge bear market decline. Then why is the bull in the box? Answer: Because the secondary trend has clearly turned up.

"Because of the strange background, I'm now being very cautious, this despite the Dow Theory bull signal. My suggestion is that my subscribers do the same. The market will always be there, and there will be more attractive times to load up on stocks. Remember, at this time we have a background of a weak dollar and weak bonds (meaning rising interest rates).

"Could the current upward correction be a sister to the 1929-1930 correction that followed the great crash? Is it a prediction of better times or is it just a normal correction following a huge bear market decline? I believe it is part of a normal correction of the 7,617 Dow points lost during the bear market decline of 2007 to 2009. There's something spooky about the action - I don't care for it."

Source: Richard Russell, Dow Theory Letters, August 4, 2009.

Bespoke: Percentage of stocks above 50-day moving averages
"There are currently 435 stocks in the S&P 500 trading above their 50-day moving averages (87%). While this is a high number indicating broad market breadth, it still hasn't reached the high seen during the spring rally when it got all the way up to 92%. During that rally, the percentage of stocks above their 50-days remained around 85% to 90% for a couple of months. We've just gotten back up to 87% in the last few days, so the bulls are hoping for another round of internal strength.

"The Financials have roared all the way back into first place based on this breadth indicator with a reading of 96%. Many investors had given up on the sector after it jumped out of the gate so fast and then stalled. Over the last couple of weeks, the Financials have definitely caught a second wind. Consumer Discretionary has also come back quite a bit, and it ranks second with a reading of 93%. The rest of the sectors are in the 80s except for Telecom, which is at 56%."

Source: Bespoke, August 6, 2009.

Reuters: Lingering fear likely to hold up a wall of cash
"The sustainability of 2009's financial market recovery will hinge to a large degree on investors continuing to switch out of their cash holdings, a move that is by no means certain.

"Fund trackers EPFR Global note that in the first six months of this year there were net outflows from money market funds amounting to $193 billion, some $107 billion alone in June.

"This is what has been behind much of the rally that has seen global equities gain more than 50% since early March and other riskier assets such as corporate and emerging market debt soar.

"The question is whether it will continue at the same pace.

"There is certainly the potential for it to do so. The cash redemptions seen this year compare with a massive net inflow into money markets of nearly $461 billion in 2008.

"So although survey sampling makes direct comparisons difficult, it is a reasonable assumption to make that around 60% of last year's flight-to-quality inflows are still in place.

"If that low-yielding but relatively safe money were to tip into equity markets or other risk assets, a new global bull market would no longer be a question but a fact.

"Ranged against this, though, is a combination of factors - from the type of investor in cash to just plain fear of losses - that is likely to mitigate against a sudden flood of new investment.

"Indeed, there is some evidence - from both EPFR and Merrill Lynch's latest fund manager survey that the pace of cash redemption has slowed or even reversed very slightly."

Source: Jeremy Gaunt, Reuters, July 29, 2009.

BCA Research: US dollar - no long-term bottom
"The sharp rally at the end of 2008 pushed the trade-weighted US dollar to overvalued levels. As a result, the dollar still has more cyclical downside that should eventually see it weaken to deep undervalued levels.

"Since the breakdown of Bretton Woods in the early 1970s and the move to floating exchange rates, there have been only two major bottoms in the dollar: The late 1970s and the early 1990s. These bottoms shared two common features. First, the dollar had fallen to deep undervalued levels. Second, the US current account balance had improved markedly, moving to a small surplus position.

"These two conditions are not currently in place. While the US current account deficit has narrowed, it remains much wider than the levels seen at the dollar lows of the late 1970s and early 1990s. Moreover, the recent improvement in the US current account is entirely cyclical and the structural outlook has actually worsened with the plunging national savings rate. Specifically, the falling national savings rate means that US trend growth will be lower and it will come with a wider current account deficit.

"Bottom line: We do not believe the conditions for a major low in the dollar are in place yet. The dollar is not undervalued and due to the weak cyclical state of the economy, continued US policy reflation should see the trade-weighted dollar index overshoot to new lows in the months ahead. Stay strategically short dollars."

Source: BCA Research, August 4, 2009.

Daragh Maher (Calyon): Sterling the recovery currency
"Sterling is the most undervalued of major currencies against the dollar argues Daragh Maher, FX strategist at Calyon.

"Mr Maher says sterling is undervalued using both a fundamental economic equilibrium approach and purchasing power parity analysis.

"Furthermore, speculators still remain positioned for further sterling weakness against the dollar. This means there is greater scope for the pound to appreciate if sentiment turns positive towards the currency as investors scramble to cover those positions.

"Mr Maher says the combination of a sharp contraction in global demand, a collapsing UK housing market and a UK banking crisis all took their toll on activity in the UK economy, and the pound was punished accordingly.

"But conditions have changed, he argues.

"'Policy stimulus is helping drive a recovery in the UK,' says Mr Maher. 'The catalyst for a re-think on sterling is already evident with early signs of improvement in the economic cycle and the financial sector.'

"Low interest rates have eased pressure on many indebted households, while house prices have begun to stabilise. The credit crunch may also be easing, with UK banks indicating an intent to increase credit availability to households.

"'We continue to target $1.75 in sterling against the dollar by the year-end, and $1.90 by the end of 2010.'"

Source: Daragh Maher, Calyon (via Financial Times), August 3, 2009 .

TheStreet.com: Gold bulls rev up
"Natalie Dempster, Head of Investment for the World Gold Council, expects a strong gold market for the rest of 2009 driven by investor demand and dollar weakness."

Source: TheStreet.com, August 6, 2009.

Bloomberg: Roubini says commodity prices may rise in 2010
"Commodity prices may extend their rally in 2010 as the global recession abates, said Nouriel Roubini, the New York University economist who predicted the financial crisis.

"'As the global economy goes toward growth as opposed to a recession, you are going to see further increases in commodity prices especially next year,' Roubini said today at the Diggers and Dealers mining conference in Kalgoorlie, Western Australia. 'There is now potentially light at the end of the tunnel.'

"Roubini, chairman of Roubini Global Economics and a professor at NYU's Stern School of Business, joins former Federal Reserve Chairman Alan Greenspan in seeing signs of recovery. Commodity prices gained the most in more than four months on July 30 as investors speculated that the worst of the global recession has passed and consumption of crops, metals and fuel will rebound.

"'The things he was saying provide good indicators for our business,' Martin McDermott, a manager for metals project development at SNC-Lavalin Group Inc., Canada's biggest engineering and construction company, said at the conference. 'The commodities that we're involved with, being copper, nickel, gold, iron ore, all seem to have positive signs and we hope to take advantage of that.'

"Roubini predicted on July 23 that the global economy will begin recovering near the end of 2009, before possibly dropping back into a recession by late 2010 or 2011 because of rising government debt, higher oil prices and a lack of job growth.

"China will meet its target of 8% growth in gross domestic product this year, Roubini said.

"A rise in commodity prices may help the Australian dollar, Roubini said today, adding he is 'bullish' on the currency. Countries including Australia, New Zealand and Canada have so-called commodity currencies because raw materials generate more than 50% of their export revenues.

"'The recovery will continue slowly, slowly over time,' Roubini said today. The global economy may contract 2% this year and swing to growth of 2.3% next year, he said."

Source: Rebecca Keenan and Jason Scott, Bloomberg, August 3, 2009.

Financial Times: Raw material price rises "just the beginning"
"'The financial crisis has been addressed, the commodity crisis has not,' warned Goldman Sachs on Thursday, predicting that this year's rise in prices was 'just the beginning' of another rally which was 'ultimately likely to be even more extreme' than those seen in the past.

"'The reality is that the commodity problem is one of supply shortage due to years of under-investment,' said Goldman. 'This chronic problem has been exacerbated during the financial crisis by tight credit conditions and large price declines, which impacted producers.'

"Goldman predicted that, as the global economy recovered, commodity markets would return to the same conditions as mid-2008 when severe supply constraints drove prices sharply higher.

"Goldman said a co-ordinated policy response, similar to that which followed the financial crisis, would be required to resolve commodity shortages."

Source: Chris Flood, Financial Times, August 6, 2009.

The Motley Fool: A conversation with T. Boone Pickens
"It's no secret that America is at an energy crossroads. Energy prices are only expected to increase, and relying on foreign oil could pose a national security threat. Renewable energy seems like a possible alternative, especially with government incentives - yet capital markets aren't permitting it right now.

"To gain some perspective on the multitude of issues that plague the energy space, I spoke with T. Boone Pickens, oil tycoon, champion of the Pickens Plan, and chairman of hedge fund BP Capital.

"Pickens says he's moving forward with the Pickens Plan, despite having to postpone his wind farm project because of clamped capital markets and difficulties surrounding transmission of energy generation. Aside from the plan, the billionaire says the Commodities Futures Trading Commission's (CFTC) potential regulation to limit trading in the oil futures markets doesn't faze him. Pickens says he thinks oil is going to $75 a barrel by year-end - and higher in the longer term.

"We also discussed Pickens' favorite energy companies to invest in. After crashing in 2008, Pickens - who has a 20% stake in his hedge fund - has seen his fund's energy futures fund rise 79% this year, while his energy equity fund is up 14%."

Click here for an edited transcript of the interview.

Source: Jennifer Schonberger, The Motley Fool, August 4, 2009.

Financial Times: BoE boosts quantitative easing programme to £175 billion
"Fresh doubts about the strength of the UK economic recovery emerged on Thursday after the Bank of England's rate-setting committee surprised markets by voting to pump an extra £50 billion into the economy.

"The bank's monetary policy committee voted to extend its so-called quantitative easing programme of buying government and corporate bonds from £125 billion to an unexpectedly large £175 billion, while holding interest rates at 0.5%.

"After the meeting, Mervyn King, governor of the Bank and Alistair Darling, chancellor of the exchequer exchanged letters about the expansion of the asset purchase facility - the government programme of gilt and corporate bond acquisitions.

"The decision came despite an array of brighter economic data this week, with upbeat survey results suggesting that the economy was emerging from recession. But the central bank said the 'recession appears to have been deeper than previously thought' in the UK, although it noted that the pace of contraction had moderated.

"Stocks rose as investors bet that the extra support would help the banks while gilt yields fell in the belief that the extra funds signalled any interest rate rise was even further away than had been thought.

"The European Central Bank also kept rates on hold as it made clear it had no intention of stepping up action to combat continental Europe's recession.

"Jean-Claude Trichet, president, hinted strongly that the ECB forecast would be revised next month to show quarterly positive growth returning earlier than mid-2010, as envisaged. 'A flat level of growth' was possible this year, he said in a Reuters interview on Thursday night."

Source: Vanessa Houlder and Jennifer Hughes, Financial Times, August 6, 2009.

MoneyNews: China will not tighten money until west does
"China will not tighten monetary policy before developed nations do so, because it first needs a recovery in exports to support the economy, a government researcher said in remarks published on Friday.

"Zhao Zhongwei, an economist at the Chinese Academy of Social Sciences, a government think-tank in Beijing, also said that easy credit was vital to stimulating private sector investment to drive the economy after a boost from public spending wears off.

"The timing of China's exit strategy from its loose monetary policy would largely depend on the pace of its export recovery, he said.

"'China's external demand is still facing uncertainty, despite recent signs of a pick-up in developed economies,' he said in an article published in the official China Securities Journal.

"China has begun to mop up liquidity at the margins after a record surge in bank lending fueled concern about bubbles forming in the country's stock and property markets.

"Separately, another senior government researcher was cited by Xinhua news agency as saying that China is considering new ways to promote private sector investment in tandem with Beijing's massive stimulus program."

Source: Reuters (via MoneyNews), August 7, 2009.

Financial Times: China's growth figures fail to add up
"China's gross domestic product figures are among the world's most closely watched since they can move markets or boost hopes of an imminent recovery.

"But the latest set of first-half numbers provided by provincial-level authorities are far higher than the central government's national figure, raising fresh questions about the accuracy of statistics in the world's most populous nation.

"GDP totalled Rmb15,376 billion ($2,251 billion) in the first half, according to data released individually by China's 31 provinces and municipalities, 10% higher than the official first-half GDP figure of Rmb13,986 billion published by the National Bureau of Statistics.

"All but seven of the regions reported GDP growth rates above the bureau's first-half figure of 7.1%. At the start of the year, Beijing set 8% as China's growth target for the year.

"With the rest of the world looking to China as a beacon of expansion, the discrepancy is a reminder that statistics there are often unreliable and manipulated regularly by officials for personal and political purposes.

"In recent years, provincial figures have suggested consistently the world's third-largest economy is bigger than Beijing's published estimate, but the discrepancy appears to have widened this year.

"Even state-controlled media reports and editorials have in recent days raised questions over their accuracy.

"The Global Times, controlled by the People's Daily, the Communist party mouthpiece, reported that the public reacted with 'banter and sarcasm' to NBS figures showing average urban wages in China rose 13% in the first half to $2,142.

"It quoted an online poll showing 88 per cent of respondents doubted the official numbers.

"An editorial on Tuesday in the China Daily, the government's English-language mouthpiece, quoted another survey that found 91% of respondents sceptical of official data, up from 79% in 2007."

Source: Jamil Anderlini, Financial Times, August 4, 2009.

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Dr Prieur du Plessis
investmentpostcards.com

With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.

He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).

Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.

Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.

Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.

In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).

Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.

Copyright © 2008-2009 Dr Prieur du Plessis

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