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August 16, 2009

Words from the (Investment) Wise for the Week That Was (August 10 - 16, 2009)
by Prieur du Plessis

During the week marking the second anniversary of the start of the credit crunch, stocks, copper, nickel, zinc and sugar recorded fresh 2009 highs. But the celebrations came to an abrupt end as caution crept back into investors' vocabulary on Friday when it dawned upon pundits that markets were running away from economic reality. On top of that, Chinese equities - a leading stock market on the way up - saw a reversal of fortune and declined to a five-week low.

This is where the Ecclesiastes-based lyrics of the Byrds's classic, Turn, Turn, Turn, started resounding in my head: "To everything (turn, turn, turn), There is a season (turn, turn, turn), And a time for every purpose, under heaven, A time to gain, a time to lose ..." (Click here for audio.)

Source: Mike Keefe (hat tip: The Big Picture)

Paul Kasriel, chief economist of Northern Trust, reports that the meeting statement of the Federal Open Market Committee (FOMC), released on Wednesday, was a bit more optimistic about the near-term economic environment, changing its language from "the pace of economic contraction is slowing" at the June 24 meeting to "economic activity is leveling out". However, the communiqué also said that household spending would be constrained by "sluggish income growth", in addition to the other constraining factors mentioned in the June 24 statement - "ongoing job losses, lower household wealth, and tight credit".

"Given our current view that the recovery is going to be subdued and uneven over the next several quarters, we do not expect any federal funds rate increases from the FOMC until June 2010, at the earliest," said Kasriel.

Shorter-dated US, UK and other government bond yields - securities that are sensitive to interest rate movements - declined on indications that benchmark interest rates would remain at low levels for an extended period of time. Longer-dated US yields also fell after the Fed announced that its Treasury purchase program would be extended until October. "The point is the Fed said it would keep the punch bowl open an extra month but it would not increase the punch that is already in the bowl. It will just dole it out in smaller increments over an extra month," remarked Bill King (The King Report).

To James Grant (Grant's Interest Rate Observer) the level of Treasury yields spells danger. He said: "Vacation-time thought experiment: With the knowledge that the US government will be borrowing as much as $3.5 trillion from the public in fiscal years 2009, 2010 and 2011, approximately matching the Treasury's cumulative borrowing between 1789 and 1994, would you have guessed that the yield on the 10-year Note would today be hovering in the neighborhood of only 3.7%? If 'yes' is your answer, you must not go away on vacation this month. You have too hot a hand to stay away from the office."

The past week's performance of the major asset classes is summarized by the chart below, showing risky assets starting to take a breather.

Source: StockCharts.com

A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.

The MSCI World Index (+0.1%) and MSCI Emerging Markets Index (unchanged) marked time last week, but are still showing solid year-to-date gains of +15.6% and +50.4% respectively. As weakness crept in towards the close of the week, the US and a number of other markets snapped a winning streak of four straight weeks. Emerging markets underperformed developed markets for the second week running since the beginning of May, indicating signs of risk appetite abating somewhat.

Top performers in the stock markets this week were Bulgaria (+9.4%), Lithuania (+6.7%), Estonia (+6.5%), Vietnam (+5.5%) and Venezuela (+4.5%). The top three positions were again occupied by countries from Eastern Europe that are still playing catch-up as the scare of a banking collapse in the region dissipates. At the bottom end of the performance rankings, countries included China (?6.6%, last week -4.4%), Nigeria (-4.5%), Luxembourg (-3.6%), Cyprus (-3.2%) and Israel (-2.8%).

After surging by 90.7% since the beginning of the year and notching up seven straight weeks of gains, the Chinese Shanghai Composite Index has now declined by 12.2% since its peak of August 4, taking the Index back to its early-July level. On Friday, the Index (3,047) dropped to below its 50-day moving average (3,103), but it is still comfortably trading above its 200-day line (2,420). The Rate-of-Change Indicator (black line in the bottom section of the chart) has broken below the zero line, thereby flashing a sell signal.

Source: StockCharts.com

Of the 94 stock markets I keep on my radar screen, a majority of 63% (last week 74%) recorded gains, 33% (21%) showed losses and 4% (5%) remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the winners for the week included Vanguard Extended Duration Treasury (EDV) (+5.2%), iShares MSCI Austria (EWO) (+4.4%) and WisdomTree Japan SmallCap Dividend (DFJ) (+3.8%).

At the bottom end of the performance rankings, ETFs included Market Vectors Solar Energy (KWT) (-5.8%), SPDR KBW Regional Banking (KRE) (?5.1%) and iShares Cohen & Steers Realty Majors (ICF) (-4.9%).

On the credit front, an indicator worth monitoring is the Barron's Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December, showing that bond investors are growing more confident and have started opting for more speculative bonds over high-grade bonds (albeit not to the extent to restore the ratio to pre-crisis levels). As to be expected, there is also a close relationship between the Index and the movement of the benchmark US stock market indices.

Source: I-Net Bridge

Economists of the ilk of John Mauldin (Thoughts from the Frontline) and Nouriel Roubini (RGE Monitor) warn that the coming "recovery" may be anemic and not much more than a "statistical recovery". In this regard, the quote du jour this week comes from Lawrence Mishel, president of the Economic Policy Institute, who described the situation as follows in The Washington Post: "Economists are using one concept of recession that is at total variance with how a normal human being thinks of it. A normal human being thinks of a recession as: You fell into a hole, and as long as you're in a hole, you're in a recession. Economists think of [a recession's end] as ... when the economy stops shrinking."

Other news is that the Federal Deposit Insurance Corp (FDIC) seized Colonial Bank on Friday - the sixth largest bank failure in US history. Additionally, regulators closed four more banks, bringing the tally of US bank failures in 2009 to 77, including 32 since July 1.

Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as "market", "economy", "bank", "prices" and "China" featured prominently. Interestingly, "recovery" also moved up the ranks as the global economy seems to have turned the corner.

The key moving-average levels for the major US indices, the BRIC countries and South Africa (where home is) are given in the table below. With the exception of the Chinese Shanghai Composite Index, which fell below its 50-day moving average on Friday, all the indices are trading above their respective 50- and 200-day moving averages. The 50-day lines are also in all instances above the 200-day lines and therefore not threatening the bullish "golden crosses" established when the 50-day averages broke upwards through the 200-day averages.

The steepening uptrend of a number of indices has become frothy and some degree of reversion to mean is probably overdue. I believe this process - which could take the form of either a pullback or a consolidation (i.e. ranging) pattern - might have commenced with the declines in China and elsewhere. The July lows are also given in the table, as these levels may offer support for a number of the indices.

Long-timer Richard Russell (Dow Theory Letters) said: "Some of the smartest and most successful men and women in the world disagree as to whether we are dealing with a correction in an ongoing bear market - or whether we are dealing with a new bull market. Nobody on the planet possesses the final, ultimate answer. I happen to believe we're dealing with an upward correction in an ongoing bear market, and that opinion is what keeps me on the edge of my seat. I'm worried about the economy, I'm worried about the future, and I'm worried about the market itself.

"Because this correction, so far, has been impressive, many analysts are calling it a 'cyclical bull market' instead of a bear market rally. I don't care what you call it, if I'm correct, if, indeed, we are in a rally in a bear market, I want to be on my guard. I went through a number of these 'cyclical bull markets' during the 1966 to 1980 bear market, and I saw a lot of investors lose their shirts when those various bear market rallies unexpectedly topped out."

Doug Kass (TheStreet.com), who accurately called the March bottom, is now outright bearish, saying: "The market optimism we are now experiencing in the expectation of a clean hand-over of the baton of stimulation from the consumer (2000-2006) to the government (2008-??) might be more short-lived than many believe, as the price of stimulation, regardless of whether its source is the private or public sector, holds the promise of being more of a growth retardant. With the debt supercycle continuing apace (but in a public sector context), the fragility and inherently unstable 'balance of financial terror' argue for a not-so-benign and extremely volatile stock market future.

"... the margin of safety is becoming ever more thin as the enemy of the rational buyer, namely optimism, reaches new heights. ... since a self-sustaining economic recovery appears doubtful, I do not believe we have started a new bull market. Rather, it is more than likely that economic growth will disappoint in late 2009/early 2010 as the domestic economy confronts many of the emerging secular challenges."

On Friday, I published a short post on Chinese equities and said: "... it looks if more downside is in store for the Shanghai Composite Index and it would not come as a surprise if lower Chinese equities serve as the catalyst for a well-deserved pullback in global stock markets." With world markets coming off the boil by the close of the week, China may already have started leading world markets lower. A much-needed pullback/consolidation of frothy markets looks likely - be cautious out there!

For more discussion on the direction of financial markets, see my recent posts "Stock markets disconnected from economy", "All eyes on Chinese equities", "Bob Prechter - 'Step aside' from long positions", "When will the rally end?", "Revisiting Bob Farrell's rule #9" and "More on Bob Farrell's rule #8. (And do make a point of listening to Donald Coxe's webcast of August 13, which can be accessed from the sidebar of the Investment Postcards site.)

Economy
The Recession Status Map below, courtesy of Dismal Scientist Economy.com, aggregates growth statistics from around the world and allows one to see at a glance which economies are in recession, at risk or beginning to recover. Click on the map to link to the interactive version.

Source: Dismal Scientist

Although the recessionary conditions still dominate, global business confidence turned positive last week for the first time since early last October. (The chart below uses a four-week moving average and is therefore not yet reflecting the break above the zero line.) "The gains in sentiment are evident across the entire global economy and all industries," said the latest Survey of Business Confidence of the World by Moody's Economy.com. Businesses' broad assessment of the current economic environment and the outlook into early 2010 are particularly upbeat. However, despite the steady improvement in confidence, the Survey results remain consistent with a global economy that is still in recession.

Source: Moody's Economy.com

The German and French economies unexpectedly bounced back in the second quarter - both grew at 0.3% in the three months to the end of June after having suffered four straight quarters of negative growth. This resulted in GDP in the Eurozone falling by only 0.1% in the last quarter. Meanwhile, the UK's GDP lags the OECD economies with a second-quarter decline of 0.8%."

A snapshot of the week's US economic reports is provided below. (Click on the dates to see Northern Trust's assessment of the various data releases.)

Friday, August 14
• The factory sector has turned the corner
• Inflation remains contained
• Consumer Sentiment Index dips again

Thursday, August 13
• Gasoline prices bring down total retail sales in July
• Jobless claims report - sum of continuing claims and special programs advances for second consecutive week

Wednesday, August 12
• FOMC meeting statement - the Fed defines "autumn"
• Trade gap widens while exports also advance

Tuesday, August 11
• Q2 productivity surge is temporary
• Small business optimism dips slightly in July

Also, Zillow.com reported (via Bloomberg) that almost one-quarter of US mortgage holders owed more than their homes were worth in the second quarter, expecting the figure to rise to as much as 30% by mid-2010 as job losses and foreclosures climb.

George Soros said in an interview with Reuters that the US economy had hit bottom and the current quarter would see positive growth due to the government's stimulus spending. He said he did not believe the economy needed further stimulus money, notwithstanding calls for a second round of spending [from the likes of Nobel laureate Paul Krugman].

Meanwhile, a survey by The Wall Street Journal among 52 economists (with 47 respondents) reported that 27 participants said the recession had ended and 11 expected a trough this month or next. "Only six economists expect the Fed to raise the federal funds rate, now between 0% and 0.25%, this year. Most expect an increase at some point in 2010, but more than a quarter of respondents don't see the rate moving until 2011 or later."

Source: The Wall Street Journal, August 11, 2009.

Week's economic reports
Click here for the week's economy in pictures, courtesy of Jake of EconomPic Data.

Click here for a summary of Wells Fargo Securities' weekly economic and financial commentary.

The US economic data reports for the week include the following:

Monday, August 17
Empire manufacturing
Net long-term TIC flows

Tuesday, August 18
Building permits
Housing starts
PPI

Wednesday, August 19
None

Thursday, August 20
Initial jobless claims
Leading economic indicators
Philadelphia Fed

Friday, August 21
Existing home sales

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global financial markets performed during the past week.

Source: Wall Street Journal Online, August 14, 2009.

"Listening to the market, maximizing the bets that turn out and minimizing those that don't, are the essence of how portfolio management works. Because nobody is right all the time, that discipline is the oft-overlooked secret of how real fortunes are made," said Jonathan Hoenig (hat tip: Charles Kirk). Let's hope the news items and quotes from market commentators included in the "Words from the Wise" review will assist Investment Postcards readers in making those fortunes.

For short comments - maximum 140 characters - on topical economic and market issues, web links and graphs, you can also follow me on Twitter by clicking here.

That's the way it looks from Cape Town. (Our entire household is down with flu, but fortunately a less harmful strain than H1N1, which is rife in the neighborhood. I guess this too will "turn, turn, turn", as the Byrds sang.)

Hat tip: Leo Kolivakis, Pension Pulse

Charlie Rose: A conversation with Kurt Andersen about his book "Reset: How This Crisis Can Restore Our Values and Renew America"

Source: Charlie Rose, August 10, 2009.

Financial Times: Eurozone data raise hopes for recovery
"The German and French economies unexpectedly bounced back in the second quarter, raising hopes that the worst of the economic crisis is coming to an end in the eurozone.

"The region's two biggest economies, which had each suffered four consecutive quarters of negative growth, both grew 0.3% in the three months to the end of June, figures showed on Thursday.

"The figures confounded economists who had predicted contractions in each country again after German gross domestic product plummeted 3.5% and French GDP shrank by 1.3% in the first quarter.

"As a result, GDP in the 16-nation currency bloc fell only 0.1% in the last quarter, the European statistics office said, cheering economists who had expected a decline of 0.5% after a drop of 2.5% in the previous quarter.

"The better than expected performance echoed that of the US economy, which shrank only 0.3% in the second quarter on a quarterly basis. But the UK saw its GDP shrink 0.8%, prompting criticism of the government's handling of the economy.

"Erik Nielsen, chief economist for Europe at Goldman Sachs in London, said: 'If you look at the US and Europe, pretty much everyone had a better second quarter than expected a few months ago - with the exception of the UK.'"

Source: Gerrit Wiesmann and Ben Hall, Financial Times, August 13, 2009.

Ifo: Improvement in economic climate for euro area
"The Ifo World Economic Climate for the euro area improved in the third quarter of 2009 for the second time in succession. The increase in the Ifo indicator was solely the result of more favourable expectations for the coming six months; the assessments of the current economic situation, in contrast, still remain at an historical low.

"The current economic situation is still assessed as definitely unfavourable in almost all countries of the euro area. The expectations for the coming six months, however, have brightened in the euro area. Especially in Germany, Austria, France and the Netherlands, the World Economic Survey (WES) experts anticipate a clear improvement, and in Italy, Portugal, Slovenia, Slovakia, Belgium, Spain and Finland they foresee at least a stabilisation of the economic situation in the coming six months. A continued pessimistic view, albeit somewhat weaker than in the previous quarter, prevails among WES experts in Ireland and Greece."

Source: IFO, August 12, 2009.

Alexander Redman (Credit Suisse): Food price inflation
"A fresh spike in food prices due to supply and demand imbalances could have serious implications for central bank policy, says Alexander Redman, strategist at Credit Suisse.

"He notes the sugar price is at its highest for more than two decades, rice trades at a large premium to its two-decade real average and wheat is close to the 20-year (constant 2009 dollar) average price.

"Mr Redman says a major factor behind the elevated sugar price is the poor Indian monsoon rainfall - which led to the country's driest June for 50 years.

"'This has clear implications for global food production volume and hence food price inflation, he says. 'India accounts for 22% of global rice production, 13% of sugar and 12% of wheat. This is important as global food supply is already very tight.'

"He says Emerging Europe, the Middle East and Africa are the regions most vulnerable to rising food prices, with food and agriculture net imports accounting for 0.6% of GDP. Asia collectively is able to feed itself while Latin America is a net exporter of food.

"'Russia, Turkey, Egypt and South Africa, among the EMEA region's principal economies, have inflation basket weightings of food in excess of 25%. Ultimately, central banks may be faced with the spectre of having to tighten monetary policy much earlier than would have been preferable in the current global economic environment.'"

Source: Alexander Redman, Financial Times, August 13, 2009.

MoneyNews: Faber - central banks blowing huge new bubble
"Investing guru and publisher of the Gloom, Boom and Doom Report Marc Faber remains a bear, predicting a stronger dollar, tightening in global liquidity and another correction in asset prices.

"When the S&P bottomed in March, the dollar was weak, notes Faber, who expects the next few months will be a period of dollar recovery and 'a correction time in asset markets' as the dollar strengthens.

"'The strong dollar means global liquidity tightening,' Faber told CNBC.

"'In a scenario where growth will be disappointing, I think emerging markets will be kind of vulnerable.'

"The worse the global economy, the more stocks could go up, Faber says, because the world's central bankers have become nothing more than money printers.

"'They're dangerous to the health of the global economy,' Faber says.

"'They created the Nasdaq bubble, the housing bubble, and now they want to create another bubble to bail them out.'

"Financial crises, Faber points out, usually lead to some fundamental change that purges the excesses that went before.

"But, he says, the Obama administration chose instead to bail out financial firms at the taxpayers' expense, leaving the country vulnerable to a bigger crisis in the next few years."

Source: Julie Crawshaw, MoneyNews, August 13, 2009.

Paul Kasriel (Northern Trust): FOMC statement - the Fed defines "autumn"
"We suppose the biggest news from today's FOMC meeting statement is that it put a time (sort of) certain on the end of its Treasury coupon buying binge - October. In the June 24 policy statement, the FOMC said that the Treasury coupon purchase program would wrap-up in the 'autumn'. In effect, the Fed is stretching out the 'weaning' period before it makes the market fend completely for itself in finding buyers for Treasury coupons in as much as the current pace of Fed purchases would have exhausted its allotment prior to October.

"One might argue that the longer the Fed keeps the buying program in place, the more latitude it might have in increasing the size of the program. Along with the consensus view (did you expect anything different from the Fed?), the FOMC is a bit more optimistic about the near-term economic environment, changing its language to 'economic activity is leveling out' from the June 24 meeting's 'the pace of economic contraction is slowing'. But not to get too exuberant about the outlook, the FOMC commented that household spending would be constrained by 'sluggish income growth', in addition to the other constraining factors mentioned in the June 24 statement - 'ongoing job losses, lower household wealth, and tight credit'.

"With the FOMC expecting 'that inflation will remain subdued for some time' and anticipating that 'economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period', it is obvious that it has no intention of hiking the federal funds rate target between now and September 22-23, the next scheduled Committee meeting. Given our current view that the recovery is going to be subdued and uneven over the next several quarters, we do not expect any funds rate increases from the FOMC until June 2010, at the earliest."

Source: Paul Kasriel, Northern Trust - Daily Global Commentary, August 12, 2009.

The Wall Street Journal: Economists call for Bernanke to stay, say recession is over
"Economists are nearly unanimous that Ben Bernanke should be reappointed to another term as Federal Reserve chairman, and they said there is a 71% chance that President Barack Obama will ask him to stay on, according to a survey.

"Meanwhile, the majority of the economists The Wall Street Journal surveyed during the past few days said the recession that began in December 2007 is now over. Battling the downturn defined most of Mr. Bernanke's term, which began in early 2006 and expires in January, and economists say his handling of the crisis has earned him four more years as Fed chief.

"'He deserves a lot of credit for stabilizing the financial markets,' said Joseph Carson of Alliance Bernstein. 'Confidence in recovery would be damaged if he was not reappointed.'

"The Journal surveyed 52 economists; 47 responded.

"After months of uncertainty, economists are finally seeing a break in the clouds. Forecasts were revised upward for every period, with 27 economists saying the recession had ended and 11 seeing a trough this month or next. Gross domestic product in the third quarter is now expected to show 2.4% growth at a seasonally adjusted annual rate amid signs of life in the manufacturing sector, partly spurred by inventory adjustments and strong demand for the 'cash for clunkers' car-rebate program.

"Many of the economists said there is little to be gained by changing the Fed chairman, especially considering the massive task at hand for the central bank as the economy emerges from the recession.

"'Continuity is critical as we emerge from this crisis. Otherwise we could slip back in again,' said Diane Swonk of Mesirow Financial. 'Bernanke is the best suited to undo what has been done when the time comes.'"

Source: Phil Izzo, The Wall Street Journal, August 11, 2009.

Chief Executive: CEO confidence shows marked decline
"Chief Executive magazine's CEO Index, the nation's only monthly CEO Index, dropped to 63 in July, after showing gradual improvement. All components of the index are down, with Employment Confidence taking the largest hit.

"February saw the lowest ebb of the overall CEO Confidence Index at 39.2 increasing to a peak in May of 75.7. Almost nine in ten leaders (88.8%) rated the Current Conditions Index as bad, an increase from June (86.3%) and May (81.6%).

"What's worse is that pessimism over employment is reaching new heights. The Employment Confidence Index declined 25% with 57% of CEOs expecting continued decrease in employment next quarter. Over 95% rate the current employment environment as bad - the highest level for 2009. Less than 5% think employment conditions are normal and virtually no one (0.4%) thinks they are good.

"The Capital Spending Index shows a majority of business leaders think capital spending will hold over the next quarter while a sizeable minority (39%) expect capital spending to drop. 'We're currently treading water', commented one respondent. 'Once the federal stimulus dollars stop (our life preserver), we'll sink to the bottom from exhaustion. It would happen anyway. The government is only delaying the inevitable. We need to go through the pain before we can get on the road to recovery.'

"CEOs sentiment is mixed on where we are in the slowdown. 33% believe the worst is yet to come, 35% believe the worst is happening now, and 29% believe the worst is behind us.

"The cause of renewed CEO pessimism has many sources. One respondent remarked, "Healthcare Reform, especially should President Obama's plan be approved will have devastating effects on the economy. Also, the Climate Bill [Waxman-Markey], if approved will have a significant negative impact on the economy.' Another commented, 'The foolish and politically motivated decisions of the Obama administration is having a permanent and profound effect on all business decisions people are making. There will be no 'rally'.' 'The current direction of the administration will deepen the downturn and strangle the private sector with increased taxation, unemployment and socialization of business in the US', observed a third CEO."

Source: Chief Executive, May/June 2009.

Reuters: George Soros - US economy has bottomed
"The US economy has hit bottom and the current quarter will see positive growth due to the government's stimulus spending, billionaire financier George Soros said on Tuesday.

"'I think it (the stimulus) has made a difference, the economy has actually bottomed and I think we are facing a positive quarter, and I think that is largely due to the stimulus,' he said in an interview with Reuters Television in New York.

"Soros said he did not believe the economy needed more stimulus money, despite calls for a second round of spending."

Source: Edward Krudy, Reuters, August 11, 2009.

The Washington Post: "A recovery only a statistician can love"
"The pile of economic data indicating that the worst of the recession is over just keeps growing. In the past few weeks, the government has reported that businesses last month shed the smallest number of jobs in nearly a year. The savings rate, after rising rapidly, held steady at levels not seen in at least five years. And from April to June, productivity surged to a six-year high.

"But the same data also explain why any recovery isn't going to feel like one anytime soon for millions of Americans. Its existence will be confirmed by statistics, but, over at least the next year, the benefits are unlikely to materialize in the form of higher wages or tax receipts or more jobs.

"'It's going to be a recovery only a statistician can love,' Wells Fargo senior economist Mark Vitner said.

"'Economists are using one concept of recession that is at total variance of how a normal human being thinks of it. A normal human being thinks of a recession as: You fell into a hole, and as long as you're in a hole, you're in a recession,' said Lawrence Mishel, president of the Economic Policy Institute. 'Economists think of [a recession's end] as ... when the economy stops shrinking.'"

Source: Annys Shin, The Washington Post, August 12, 2009.

Nouriel Roubini (Forbes): A "jobless" and "wageless" recovery?
"After severe job losses in early 2009, the pace of job losses slowed starting in April, and the July numbers have brought more respite. Non-farm payroll job losses were 247,000 in July. However, the private sector lost 254,000 jobs. This is considerably better than analysts expected (around 325,000) but not good enough to claim that we are in the middle of a strong and sustainable recovery.

"Looking at the recessions of the post-war period, average monthly job losses ranged between 150,000 and 260,000. Average monthly losses in this recession are still at 350,000. For the first four months of the year, the average was at 648,000. The improvement with respect to the first part of the year is clear. The improvement with respect to what we are used to seeing in recessionary periods is much less clear cut. The latest numbers are not exactly what you'd call good news, at least not in absolute terms. In relative terms, however - after skirting a near-depression - markets seem to consider 247,000 payroll losses a breath of fresh air.

"The increase in average weekly labor hours in July is certainly a positive sign. But it also shows that, when economic conditions begin improving, companies will increase labor hours and temporary workers and move workers from part time to full time. Only after that do they begin hiring new workers. So hiring is still a long way ahead. The decline in the unemployment rate from 9.5% in June to 9.4% in July was not due to an improvement in the employment situation but is explained by the large decline in the labor force (-422,000). Workers facing hiring freezes, fewer full-time jobs and jobs at lower wages are leaving the labor force.

"The economy has lost over 6.6 million jobs since the recession began, which is way above the job losses that we are used to seeing in recessionary periods when job losses have ranged between 1.5 million and 2.5 million. The large job losses of the past months and longer unemployment duration will continue to weigh on the economy in the coming months. The unemployment duration improved slightly in July from the record high witnessed in June, which is positive news.

"Unemployed workers are falling behind their debt payments, raising defaults on loans and making government mortgage modification programs ineffective. Default rates on various loans have already surpassed the unemployment rate. According to the Moody's credit card index report, published in May 2009, the credit card charge-off rate crossed 10% in May 2009 and is expected to reach a peak of 12% by the second quarter of 2010.

"For the labor market to stabilize, job losses need to slow to 100,000 to 150,000 per month, and jobless claims need to fall to around 400,000. Payrolls alone don't reflect the strength of the household sector. Labor compensation and work hours also function as indicators, and both of these have slowed sharply in recent months. Even as borrowing conditions remain tight and home prices continue to fall, the dip in labor compensation will continue to constrain consumer spending, notwithstanding any fiscal stimulus.

"In a severe, consumer-led recession like this one, the labor market is a leading (rather than lagging) indicator of economic recovery, and the consumer still drives the US economy (private consumption still makes up over 70% of GDP). A slowdown in the pace of job losses from 650,000 to 250,000 is welcome, but in no way offers comfort about a prompt comeback of the US consumer. This raises concerns about the strength and sustainability of any economic recovery that most people are expecting in the second half of 2009, and beyond."

Click here for the full article.

Source: Nouriel Roubini, Forbes, August 13, 2009.

MoneyNews: Rogoff - US may face second recession
"The United States faces a prolonged period of sluggish growth and perhaps another recession in the next five years, Harvard University economist Kenneth Rogoff said on Tuesday.

"The US recession that began in December 2007 is close to an end, and economic growth will hover near a sluggish 2% for the next five to seven years, he said.

"'We're going to be Japan-light,' he said in an interview, referring to Japan's years of sub-par growth after its financial crisis of the 1990s. 'We won't have a lost decade, but we will face some of the same challenges.'

"Rogoff, a former International Monetary Fund chief economist and an expert on banking crises, said the United States faces a 50-50 chance of a second recession in the next five years.

"Moreover, the commercial real estate market crisis remains a potential drag on growth.

"'Commercial real estate is a tsunami coming that's going to wipe out a lot of the small banks,' he said. 'It's unclear if any big players will be stressed out by it, which will depend on how the economy is doing.'

"Rogoff also said the United States will need to raise taxes soon as debt levels swell and interest rates rise. He expects to see a national sales tax in three years.

"'People just don't understand how much taxes are going to have to go up on the current trajectory we're on,' he said. 'People are still on the high that the government can back everything and not seeing what the costs are.'"

Source: MoneyNews, August 11, 2009.

CNBC: The Black Swan squawks
"Nassim Taleb, principal of Universa Investments and author of 'The Black Swan', discusses, the markets, the economy and whether Fed Chairman Ben Bernanke should be reappointed."

Source: CNBC, August 12, 2009.

CNBC: Krugman - more stimulus and investment drivers needed
"More stimulus measures and drivers for investment are needed to jolt the recovery process for the economy, says Paul Krugman, nobel laureate and professor of economics at Princeton University. He assesses the likelihood of an economic recovery with CNBC's Martin Soong."

Source: CNBC, August 10, 2009.

Continue to Part II

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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