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Words from the (Investment) Wise for the Week That Was (March 2 - 8, 2009)

"Down, down, deeper and down". So goes the chorus of a Status Quo song, but it is eerily starting to sound like the stock markets' anthem.

Another week and another plunge of equities on fears about the intensity of the global recession and renewed skepticism regarding the beleaguered financial sector. And, yet again, flight-to-safety trades such as the US dollar (at a three-year high) and government bonds took center stage.

Our family yesterday celebrated my son's eighth birthday. While the kids were amusing themselves in pirate garb, the parents engaged in a more subdued deliberation about the exhausting stream of ugly news on the financial front. Interestingly, never in a career of 26 years have I had so many people sympathizing with my "day job" as investment manager. Will the arrival of food parcels at my front door perhaps herald a bottom in the stock market?

Back to the past week's action on the markets. Globally, stocks were generally in the red, as summarized by the week's movements of the MSCI Global Index (-7.1%, YTD -24.2%) and the MSCI Emerging Markets Index (-2.2%, YTD -13.9%). As far as mature markets are concerned, European countries like Italy (+15.6%), Denmark (-11.7%), Belgium (-10.0%) and Holland (-9.2%) were on the receiving end of the selling orders.

The FTSE Eurofirst 300 Index touched the lowest level in its 12-year history, whereas the Japanese Nikkei 225 Average (-5.2%) came to within a stone's throw of a 26-year low.

But a few bourses also up put a good show, mostly among emerging markets. The Russian Trading System Index (+5.8%) and Chinese Shanghai Composite Index (+5.3%) brought some joy to investors, while Eastern European markets like Poland (+2.9%) and Romania (+2.3%) rebounded. (Click here to access a complete list of global stock market index movements, in local currency terms, as supplied by Emerginvest.)

As shown in the table below, the major US indices suffered another miserable week, recording eight losing weeks out of nine in 2009 and falling to 12-year lows. The Dow Jones Industrial Index's 2009 year-to-date decline of 24.5% is by far the worst start to a year after 44 trading days since 1900. According to Bespoke, there have been 19 previous years where the Dow was down 5% or more at this point, and only four of those years ultimately finished in positive territory.

The Dow is currently down by 53.2% since its peak of October 2007. Chart of the Day points out that since 1896 only the bear market that started in 1929 has produced a larger slump.

On the exchange-traded fund (ETF) front, John Nyaradi (Wall Street Sector Selector) reports that "all things short" was again the theme of the week, with ProShares Short Financial (SEF) leading the way with a gain of 18.1%. Other inverse leaders were ProShares Short Russell 2000 (RWM) (+10.0%) and ProShares Short MidCap 400 (MYY) (+9.3%).

Among "long" ETFs the notable leaders were iShares MSCI Taiwan Index (EWT) (+5.0%) and US Oil (USO) (+3.5%).

Notwithstanding supply concerns, government bond yields in the US, UK and Germany declined as investors continued their flight to safety. Yields of 10-year Treasuries, Bunds and Gilts were down by 15, 58 and 20 basis points respectively.

In the case of the UK, the Bank of England introduced quantitative easing as its new monetary tool and unveiled an ambitious plan to buy UK government paper by printing money. Speculation rose that the Federal Reserve may also commence a program of buying longer-dated government securities. In typical David Fuller style, he offered the following advice to governments: "The patient is hemorrhaging on the operating table; do anything and everything to resuscitate (inflate) this deflating body."

On the credit front, Markit's spreads show that the cost of insuring corporate debt against default has increased markedly throughout the world over the past month. This is illustrated by the movement in the spreads (expressed in basis points) for the five-year credit derivative indices listed below.

• CDX (North America, investment-grade) Index: up from 196 to 250
• CDX (North America, high-yield) Index: up from 1,458 to 1,824
• Markit iTraxx Europe Index: up from 161 to 204
• Markit iTraxx Europe Crossover Index: up from 1,065 to 1,150
• Markit iTraxx Japan Index: up from 400 to 528
• Markit iTraxx Asia ex Japan IG Index: up from 363 to 462
• Markit iTraxx Asia ex Japan HY Index: up from 1,210 to 1,325

Next, a tag cloud of all the articles I have read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as "banks", "economy" and "markets" dominated the list, whereas "China" seems to be gaining more prominence by the week.

Having breached the November 20, 2008 and October 2002 lows, the Dow and S&P 500 have fallen significantly below their respective 50- and 200-day moving averages, as shown in the customary table summarizing important chart levels. The large deviations of the moving averages point to a massively oversold situation - almost like a spring that is stretched too far. Meanwhile, I have added the July 1996 lows to the table as these levels are now in sight of the indices.

According to Thomas Lee, US Equity Strategist at JPMorgan, retracing 12-year lows for the Dow is an incredibly rare event (see chart below). "Besides the retest of 1997 lows seen on Monday, this has only happened two other times, on April 8, 1932, and December 6, 1974," said Lee (via The Big Picture). It is noteworthy that the 12-year low in 1932 was three months before the end of the bear market and the one in 1974 was exactly the low for that bear market.

Barry Ritholtz added: "Hitting a 12-year low is by no means proof the bear market is over. And, two prior examples do not make a sufficient sample. [But] the oversold nature of the market, as well as the virtual straight down drop that brought us here, does present a real possibility of a strong market rally."

The precipitous stock market declines are reflected in the results of this week's survey of investor sentiment by the American Association of Individual Investors (AAII), courtesy of Bespoke. Investors are now at their most bearish levels since the start of the survey in 1987 with 70.27% of respondents currently in the bearish camp - a necessary prerequisite for a major market low.

James Montier, strategist of Société Générale, said (via FT Alphaville): "We have long argued that the final stage of the de-bubbling process is revulsion. This phase is characterized by overwhelmingly cheap asset prices. Recent price moves in the UK and European stock markets have taken us to levels that have generally been associated with revulsion. Of course, cheap markets can always get cheaper, but for the long-term investor this may provide an excellent entry point."

Montier's preferred valuation measure is the so-called Graham and Dodd price-earnings ratio that pitches the share price against a 10-year moving average of reported earnings. On this basis, the S&P 500 Index is currently trading at 13.6 compared with an average of 18 since 1871 and a typical "bargain basement" level of 10. (Keep in mind that this indicator dropped to 5 in the Great Depression.)

As usual, some interesting thoughts were also contributed by Richard Russell (Dow Theory Letters): "The stock market doesn't live in a vacuum. This huge decline in less than two years is telling us (me) something. It's a warning. I think it's a warning of very hard times to come, maybe as difficult as those times we saw during the Great Depression.
"I know that I stand pretty much alone with this scenario. I don't think most Americans see or even envision the potential danger ahead. They don't believe in the 'truth of the stock market'. Over 60 years of studying the stock market and the economy, I've learned to believe the 'language of the market'.

"I know that great bull markets and great bear markets tend to overrun at the extremes. Let me leave you with one thought - prepare for the extremes. Just as the bull market that ended in 2007 rose to the extremes, I believe this bear market will go to the extremes."

At this juncture, short-term movements are almost impossible to predict, although the sell-off over the past few days - a capitulation in some respects - could nourish the long-awaited tradeable rally. Also, Lowry's 90% down-days, like we experienced on Monday and Thursday, are often followed by two- to seven-day bounces. But we are not yet at the point where we leave the defeated bear's carcass behind, although each downward move brings us closer to the eventual bottom.

For more discussion about the direction of stock markets, also see my recent posts "Video-o-rama: Gloomy investors shun risky trades", "Technical talk: Bounce not that impressive ...", "Louise Yamada: Don't 'venture into the waters'" and "Stock market performance round-up: Nowhere to hide". (And do make a point of listening to Donald Coxe's weekly webcast, which can be accessed from the sidebar of the Investment Postcards site.)

"A pall continues to hang over global business confidence as it has since sentiment collapsed last fall. Confidence remains near a record low," said the latest Survey of Business Confidence of the World conducted by Moody's Economy.com. "Most worrisome is the recent collapse in pricing power - a record over one-third of respondents now say they are cutting prices for their goods and services."

Confidence is uniformly weak across all industries and regions of the globe, as highlighted in a recent Forbes article by Nouriel Roubini (RGE Monitor): "With economic activity contracting in 2009's first quarter at the same rate as in 2008's fourth quarter, a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation).

"The scale and speed of synchronized global economic contraction are really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging-market economies are on the verge of a fully-fledged financial crisis, starting with emerging Europe."

The European Central Bank's growth projections for the Eurozone were significantly lowered from a range of -1.0% / 0.0% to a range of -3.2% / -2.2% for 2009, while for 2010 the range was revised from +0.5% / 1.5% to -0.7% / +0.7%, incorporating the possibility of an extended recession. As a result, the ECB lowered its refinance rate by 50 basis points to 1.50%, bringing its cumulative rate cuts to 275 basis points since mid-October 2008.

In an attempt to restore flagging confidence, the Bank of England also cut its target interest rates by 50 basis points to 0.5% and announced plans to start quantitative easing by printing money to purchase government bonds and other securities with an initial amount of £75 billion.

On a more positive note, China's manufacturing Purchasing Managers' Index (PMI) strengthened for a third consecutive month in February, climbing to 49.0% from 45.3% the previous month. As discussed in a recent post ("China - better days ahead") and as shown in the graph below, China's improving PMI seems to indicate that the country might have seen the worst of its GDP growth statistics in this cycle. (The Hong Kong PMI is used as a proxy of the Chinese PMI prior to 2004.)

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

March 06
• February employment report underscores severity of recession

March 5
• Productivity decline reflects GDP revision
• Factory inventories-sales ratio registers new high
• Jobless claims - decline is noteworthy but too early to identify as a turning point

March 3
• Bernanke hints more may be necessary and notes that "premature removal of fiscal stimulus could blunt recovery"
• Auto sales decline once again
• The decline of the Pending Home Sales Index suggests home sales remain under stress

March 2
• Consumer spending gains strength in January, but underlying fundamentals raise questions
• ISM Manufacturing Survey - insignificant gain in February
• Construction spending - non-residential and public components deteriorate more
• Affordability - silver lining of housing sector

Commenting on the payroll employment data, Asha Bangalore (Northern Trust) said the statistics need to be evaluated within the context of the growth of the labor force. "The chart below takes into account the growth of the labor force and indicates the extent of job losses in each recession in the post-war period from the peak of payroll employment to the end of a recession. The 3.17% drop in payroll employment in the current recession of 14 months is the largest percentage drop in jobs since the 1957 recession."

At the same time, Bangalore said there was a silver lining in the housing market that might have been overlooked. As shown in the chart below, the Housing Affordability Index of the National Association of Realtors shot up to a record high of 166.8 in January. Also, the Obama administration has made available details of theHomeowner Affordability and Stability Plan, which raises expectations of improvement in the housing market.

Week's economic reports

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

Date Time (ET) Statistic For Actual Briefing Forecast Market Expects Prior
Mar 2 8:30 AM Personal Income Jan 0.4% -0.2% -0.2% -0.2%
Mar 2 8:30 AM Personal Spending Jan 0.6% 0.4% 0.4% -1.0%
Mar 2 8:30 AM Core PCE Jan 0.1% 0.1% 0.1% 0.0%
Mar 2 10:00 AM Construction Spending Jan -3.3% -1.6% -1.5% -2.4%
Mar 2 10:00 AM ISM Index Feb 35.8 33.5 33.8 35.6
Mar 3 10:00 AM Pending Home Sales Jan -7.7% -3.5% -3.5% 4.8%
Mar 3 2:00 PM Auto Sales Feb - NA NA NA
Mar 3 2:00 PM Truck Sales Feb - NA NA NA
Mar 4 8:15 AM ADP Employment Change Feb -697K -580K -630K -522K
Mar 4 10:00 AM ISM Services Feb 41.6 42.0 41.0 42.9
Mar 4 2:00 PM Fed Beige Book - - NA NA -
Mar 5 8:30 AM Productivity -Revised Q4 -0.4% 1.1% 1.0% 3.2%
Mar 5 8:30 AM Unit Labor Costs Q4 5.7% 3.4% 3.8% 1.8%
Mar 5 8:30 AM Initial Claims 02/28 639K 650K 650K 670K
Source: Yahoo Finance, March 6, 2009.

The US economic highlights for the week include the following:

Source: Northern Trust

Click here for a summary of Wachovia's weekly economic and financial commentary.

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

Source: Wall Street Journal Online, March 6, 2009.

"Every man has a right to his opinion, but no man has a right to be wrong in his facts," said legendary investor Bernard Baruch. Hopefully the "Words from the Wise" reviews will assist Investment Postcards readers to get the facts right, and provide some fodder for formulating sensible opinions. But remember the golden rule: don't take investment decisions that will keep you from a good night's sleep.

That's the way it looks from Cape Town.

Dateline: Jim Rogers on the economy, markets
"George Negus speaks with Singapore-based financier, Wall Street veteran and former business partner of George Soros, Jim Rogers."

Source: Dateline, March 1, 2009.

Bloomberg: Jim Rogers - China stimulus can't pull world out of "hole"
"China cannot pull the world economy 'out of the hole' through its stimulus spending alone and the global recession is not going to end anytime soon, investor Jim Rogers said.

"China's parliament convened today in its annual meeting in Beijing, where Premier Wen Jiabao reiterated the government's pledge to 'significantly increase' investment in 2009 to help counter the slowest growth in seven years. He didn't announce any new stimulus spending.

"'China can't solve the world's problems,' Rogers, the author of 'A Bull in China: Investing Profitably In The World's Greatest Market', said in a phone interview today. 'China is a wonderful and growing economy but it cannot pull the world out of the hole.'

"Wen's report to lawmakers, the equivalent of a US State of the Union speech, reiterated the country's 8% growth target. That's more optimistic than the International Monetary Fund's forecast that the nation's economy will expand 6.7%, the least in almost two decades.

"'One question people keep asking is can China bring the whole world along out of this recession,' said Lee King Fuei, a Hong Kong-based portfolio manager at Schroder Investment Management, which oversees about $158 billion worldwide. 'The fact that they're even asking this question tells me they're being unrealistic.'

"Rogers, chairman of Singapore-based Rogers Holdings, said he hasn't bought any Chinese stocks since November as valuations are not attractive.

"The Hang Seng China Enterprises Index, which tracks Chinese companies mostly traded in Hong Kong, is valued at 8.9 times reported earnings. Valuations fell to 7.4 times the week ended October 24, the lowest in almost seven years, according to Bloomberg data. The Shanghai Composite's 20% gain this year also made it the best performer among 91 benchmark indexes tracked by Bloomberg.

"'I haven't bought any Chinese stocks since November and haven't sold anything either,' Rogers said. 'I'm waiting for cheaper prices. I'm not buying Chinese shares at these levels.'

"Rogers added he remains 'extremely bullish' on agriculture and that 'commodities are the only sector in the world where the fundamentals are improving'."

Source: Chua Kong Ho, Bloomberg, March 5, 2009.

Nouriel Roubini (Forbes): US financial system is effectively insolvent
"For those who argue that the rate of growth of economic activity is turning positive - that economies are contracting but at a slower rate than in the fourth quarter of 2008 - the latest data don't confirm this relative optimism. In 2008's fourth quarter, gross domestic product fell by about 6% in the US, 6% in the euro zone, 8% in Germany, 12% in Japan, 16% in Singapore and 20% in South Korea. So things are even more awful in Europe and Asia than in the US

"There is, in fact, a rising risk of a global L-shaped depression that would be even worse than the current, painful U-shaped global recession. Here's why:

"First, note that most indicators suggest that the second derivative of economic activity is still sharply negative in Europe and Japan and close to negative in the US and China. Some signals that the second derivative was turning positive for the US and China turned out to be fake starts. For the US, the Empire State and Philly Fed indexes of manufacturing are still in free fall; initial claims for unemployment benefits are up to scary levels, suggesting accelerating job losses; and January's sales increase is a fluke - more of a rebound from a very depressed December, after aggressive post-holiday sales, than a sustainable recovery.

"For China, the growth of credit is only driven by firms borrowing cheap to invest in higher-returning deposits, not to invest, and steel prices in China have resumed their sharp fall. The more scary data are those for trade flows in Asia, with exports falling by about 40% to 50% in Japan, Taiwan and Korea.

"Even correcting for the effect of the Chinese New Year, exports and imports are sharply down in China, with imports falling (-40%) more than exports. This is a scary signal, as Chinese imports are mostly raw materials and intermediate inputs. So while Chinese exports have fallen so far less than in the rest of Asia, they may fall much more sharply in the months ahead, as signaled by the free fall in imports.

"With economic activity contracting in 2009's first quarter at the same rate as in 2008's fourth quarter, a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation). The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging-market economies are on the verge of a fully fledged financial crisis, starting with emerging Europe."

Click here for the full article.

Source: Nouriel Roubini, Forbes, March 5, 2009.

Prison Planet: Celente - US has entered "The Greatest Depression"
"Trends research analyst Gerald Celente, who has risen in prominence on the back of his deadly accurate economic predictions, says that the collapse of financial markets heralds the start of 'The Greatest Depression'.

"In his latest Trend Alert bulletin, Celente attacks mainstream pundits who falsely predicted a market bottom and the start of a recovery, noting that conventional analysts have been proven 'dead wrong' again and that, 'There will be no turn around in the second quarter of 2009 or 2010 or 2011.'

"'The global financial system, built on endless supplies of cheap money, rampant speculation, fraud, greed, and delusion is terminally ill and will not be coaxed into remission by stimulus packages nor restored to health by government buyouts and bailouts,' writes Celente.

"The most positive prediction that Celente makes is that the Dow will not reach zero, a tongue in cheek reaction to yesterday's record plunge which saw the Dow rolled back to 1997 levels well below 7,000.

"Celente warns that the first signs of real panic are starting to set in, unrest that will cause governments to 'take draconian measures to prevent total economic collapse and public panic'.

"'Expect massive bank failures, runs on banks, and bank holidays,' writes Celente. 'Even if deposits are FDIC insured, quick access to money is by no means assured. At minimum, have reserves on hand for emergencies,' he forecasts.

"Celente cites gold as one of the few investments that will continue to rise in value, eventually reaching $2,000 an ounce and beyond.

"Celente's dire forecasts were initially scoffed at by the media but as the crisis has worsened, his credibility has soared.

"Celente, who successfully predicted the 1997 Asian Currency Crisis, the subprime mortgage collapse and the massive devaluation of the US dollar, told UPI in November 2007 that the following year would be known as 'The Panic of 2008′, adding that 'giants (would) tumble to their deaths', which is exactly what we have witnessed with the collapse of Lehman Brothers, Bear Stearns and others."

Source: Paul Watson, Prison Planet, March 3, 2009.

BCA Research: US Capital Assistance Program - a costly necessity
"It is difficult to estimate how much capital the government will need to inject into the financial sector under the Capital Assistance Program (CAP), but the number will likely be substantial.

"The Chairman of the FDIC, Sheila Bair, contends that US banks are well capitalized. However, she must be referring to the multitude of small banks, rather than large banks (i.e. there are many small banks that are well capitalized).

"The top 20 financial institutions have a thin capital cushion of only 3.4% (defined as tangible capital/total assets). In other words, it would require a writedown of total assets of only 3%-4% to wipe out all tangible capital for the largest banks.

"The FDIC data on the broader banking universe confirms that the capital cushion of large banks is much less than their smaller counterparts. Moreover, toxic assets are concentrated in large financial institutions. Level 3 assets represent 5.5% of total assets and are 62% larger than tangible capital, for the top 20 institutions.

"The implication is that the stress tests will likely reveal that many of these institutions are not properly capitalized even in the base-case economic scenario (not to mention the worst-case scenario). We suspect that the authorities are publicly downplaying the amount of recapitalization that is likely to be required, but behind closed doors they must realize that the CAP will be a large sinkhole for taxpayer funds. Indeed, the Administration has 'penciled in' another $750 billion for bank support in its budget proposal for the next fiscal year.

"Bottom line: The final cost of the bailout plan announced last week will be dramatic. Nonetheless, it is a critical element in ending the financial crisis and stabilizing the economy."

Source: BCA Research, March 4, 2009.

Bloomberg: Ron Paul - Government needs to get out of the way and let the market sort itself out

Source: Bloomberg (via YouTube), March 3, 2009.

CNBC: Roubini - nationalization debate is moot
"The debate isn't about nationalization anymore, says Nouriel Roubini, chairman of RGE Monitor. He tells CNBC's Martin Soong and Sri Jegarajah that the real discussion is whether banks should be wholly or partially nationalized."

Source: CNBC, March 3, 2009.

The Wall Street Journal: "Bad Bank" funding plan starts to get fleshed out
"The Obama administration, filling in some of the blanks in its bank bailout, is considering creating multiple investment funds to purchase the bad loans and other distressed assets that lie at the heart of the financial crisis, according to people familiar with the matter.

"The Obama team announced its intention to partner with the private sector to buy $500 billion to $1 trillion of distressed assets as part of its revamping of the $700 billion bank bailout last month. It's central to the administration's efforts to unglue credit markets, alongside a Federal Reserve program aimed at spurring consumer lending in areas such as credit cards and home loans that will be officially launched Tuesday.

"No decision has been made on the final structure of what the administration is calling a private-public financing partnership, but one leading idea is to establish separate funds to be run by private investment managers. The managers would have to put up a certain amount of capital. Additional financing would come from the government, which would share in any profit or loss.

"These private investment managers would run the funds, deciding which assets to buy and what prices to pay. The government would contribute money from the $700 billion bailout, with additional financing likely coming from the Federal Reserve and by selling government-backed debt. Other investors, such as pension funds, could also participate. To encourage participation, the government would try to minimize risk for private investors, possibly by offering non-recourse loans.

"... the government wants to encourage private investors to buy up the assets in a way that would come closer to setting a market price where no market currently exists. Some within the administration believe establishing multiple funds could help with that goal. The funds would most likely target all types of assets, such as mortgage-backed securities, rather than focusing on one specific type of distressed security."

Source: Deborah Solomon and Jon Hilsenrath, The New York Times, March 3, 2009.

AFP: FDIC warns US bank deposit insurance fund may tank

"The Federal Deposit Insurance Corporation is warning banks that its deposit insurance fund could dry up this year amid rising bank failures although the deposits would remain fully backed by the government.

"The head of the Federal Deposit Insurance Corporation, Sheila Bair, in a letter to bank chief executives dated March 2, defended the FDIC's plan to raise fees on banks and assess an emergency fee to shore up the fund and maintain investor confidence.

"Bair acknowledged the new fees, announced Friday, would put additional pressure on banks at time of financial crisis and a deepening recession, but insisted they were critical to keep the insurance fund solvent and protected.

"'Without these assessments, the deposit insurance fund could become insolvent this year,' Bair wrote.

"The FDIC chief said in the letter that the rapidly deteriorating economic conditions raised the prospects of 'a large number' of bank failures through 2010."

Source: AFP (via Google), March 6, 2009.

Bloomberg: Gary Shilling says US getting "close" to depression

"Gary Shilling, president of A. Gary Shilling & Co., talks with Bloomberg's Peter Cook about the outlook for the US economy. Shilling also discusses the labor market, housing and the government's economic stimulus efforts."

Source: Bloomberg, March 6, 2009.

CNBC: Fed Chairman Bernanke's testimony to House committee
"Federal Reserve chairman Ben Bernanke discusses the stress in the markets and the significant decline in the economy with the House Financial Services Committee."

Source: CNBC, March 3, 2009.

Asha Bangalore (Northern Trust): Bernanke hints more may be necessary
"Chairman Bernanke's testimony before the Senate Budget Committee was noteworthy in two respects.

"One, he hinted that more policy action may be necessary when he noted the following: 'The goal of the fiscal package is not just to provide a one-time boost to the economy, but to lay the groundwork for a self-sustaining, broad-based recovery. Historical experience strongly suggests that without a reasonable degree of financial stability, a sustainable recovery will not occur. Although progress has been made on the financial front since last fall, more needs to be done.

"'As you know, in response to ongoing concerns about the health of financial institutions, the Treasury recently announced plans for further steps to ensure the strength and soundness of the financial system and to promote a more smooth flow of credit to households and businesses. The plan would use the remaining resources appropriated to the Treasury under the Emergency Economic Stabilization Act - approximately $350 billion - and also involve additional spending to support the activities of Fannie Mae and Freddie Mac.

"'Whether further funds will be needed depends on the results of the current supervisory assessment of banks, the evolution of the economy, and other factors. The Administration has included a placeholder in its budget for more funding for financial stabilization, should it be necessary.'

"Two, he also indicated that any early consideration of reducing the accommodation from easy monetary and fiscal policy action carries the risk of stopping the recovery process. In other words, caution is the key. Here is the excerpt from the testimony: 'In particular, the Congress will need to weigh the costs of running large budget deficits for a time against the possibility of a premature removal of fiscal stimulus that could blunt the recovery. We at the Federal Reserve will face similar difficult judgment calls regarding monetary policy.'"

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

Asha Bangalore (Northern Trust): Employment report underscores severity of recession
"The February employment report is bleak, with the unemployment rate at 8.1% versus 7.6% in January. In February, 651,000 jobs were lost, with the total job losses since the recession commenced in December 2007 amounting to 4.38 million. A little over one-half of the losses (2.6 million) have occurred in the last four months. This staggering decline in employment is the largest four-month loss of jobs since the war-related drop in jobs during the latter half of 1945.

"Even so, the sharp plunge in payroll employment needs to be evaluated within the context of the growth of the labor force. The chart below takes into account the growth of the labor force and indicates the extent of job losses in each recession in the post-war period from the peak of payroll employment to the end of a recession or after 14 months whichever is applicable (recessions vary in duration). The 3.17% drop in payroll employment in the current recession of 14 months is the largest percentage drop in jobs since the 1957 recession."

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

Bloomberg: Hatzius sees US unemployment rate rising into 2010
"Jan Hatzius, chief US economist at Goldman Sachs, talks with Bloomberg's Julie Hyman about today's February US jobs report and the US economy. The unemployment rate jumped in February to 8.1%, the highest level in more than a quarter century, as employers cut 651,000 jobs. Bloomberg's Peter Cook also speaks."

Source: Bloomberg, March 6, 2009.

CEP News: US Treasury unveils details of mortgage modification plan
"The US mortgage modification program will only apply to conventional mortgages that are owner occupied and primary residences, according to additional details released by the Treasury Department on Wednesday.

"The program announced last week aims to alleviate the terms of more than 7 million homeowners in the United States through smaller payments and debt reduction by banks.

"'It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets, just as we work to stabilize our financial system, create jobs and help businesses thrive,' said Treasury Secretary Tim Geithner in the Treasury Department's press release. 'Economic recovery requires action on all three fronts.'

"Lenders will have to reduce mortgage payments to no more than 38% of the Front-End Debt-to-Income (DTI) ratio, after which the government will match an additional reduction to 31% of this ratio.

"The program also includes reductions on principal for mortgage borrowers who make their payments on time, as well as incentives for lenders to participate in the program.

"Last week the Treasury also announced intentions to broaden portfolios on Fannie Mae and Freddie Mac."

Source: Erik Kevin Franco, CEP News, March 4, 2009.

Breitbart: 12% in US behind on mortgage or in foreclosure
"A stunning 48% of the nation's homeowners who have a subprime, adjustable-rate mortgage are behind on their payments or in foreclosure, and the rate for homeowners with all mortgage types hit a new record, new data Thursday showed. But that's not the worst of it.

"The reckless lending practices in states like Florida, California and Nevada that were the epicenter of the housing crisis are no longer driving up the nation's delinquency rate. Instead, the foreclosure crisis now is being fueled by a spike in defaults in states like Louisiana, New York, Georgia and Texas, where the economies are rapidly deteriorating and thousands are losing their jobs.

"A record 5.4 million American homeowners with a mortgage of any kind, or nearly 12%, were at least one month late or in foreclosure at the end of last year, the Mortgage Bankers Association reported. That's up from 10% at the end of the third quarter, and up from 8% at the end of 2007."

Source: J.W. Elphinstone, Breitbart, March 5, 2009.

Asha Bangalore (Northern Trust): Home sales remain under stress
"The National Association of Realtors Pending Home Sales Index (PHSI) fell 7.7% to 80.4 in January, after a 4.7% increase in December. The PHSI leads actual sales of existing homes by one-to-two months. The pickup in PHSI during December was not reflected in sales of existing homes in January (-5.3%). The Mortgage Purchase Index during the first three weeks of February was down roughly 20% from the first three weeks of January. There is only a small chance the increase in the PHSI in December may translate into actual sales in February."

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

Asha Bangalore (Northern Trust): Auto sales decline once again
"Sales of autos dropped to annual rate of 9.12 million units in February versus 9.54 million in the prior month. The February sales pace of autos is the lowest since December 1981 when 8.849 million units were sold. Consumer spending in January rose 0.4% after adjusting for inflation, which pointed to the possibility of less-than-expected weakness in consumer purchases in the first quarter. However, today's auto sales numbers dampens these expectations somewhat."

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

Barry Ritholtz (The Big Picture): Vehicle sales halve
"The data on vehicle sales continues to be nothing short of abysmal:

• GM's sales fell 53%
• Ford's sales dropped 48%
• Toyota's declined 40%
• Volkswagen US fell 18%
• Nissan sales dropped 37%
• Mercedes-Benz posted a 21% decline
• BMW's total car sales fell about 24%
• Honda sales dropped 40%

"Hyundai Motor was the sole automaker to post a month over month sales gain (down 1.5% year over year)."

Source: Barry Ritholtz, The Big Picture, March 3, 2009.

Asha Bangalore (Northern Trust): Jobless claims - too early to identify a turning point
"Initial jobless claims for the week ended February 28 fell 31,000 to 639,000. Is the previous week's reading of 670,000 initial jobless claims, the peak for the current cycle? It is premature to identify the latest decline as the turning point, particularly given the weakness of the US economy."

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

Asha Bangalore (Northern Trust): ISM Manufacturing Survey - insignificant gain in February
"The ISM Manufacturing Survey results for February show signs of stability, for the most part. The composite index was up slightly (35.8 versus 35.6 in January) from the prior month. The factory sector remains mired in weak economic conditions, but the good news is that sub-indexes are close to the levels seen in January, with the exception of the employment index."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 2, 2009.

Asha Bangalore (Northern Trust): Consumer spending gains strength in January
"Consumer spending, after adjusting for inflation, rose 0.4% in January, after posting only one monthly gain (November 2008) since June 2008. Among the three major components of consumer spending, purchases of non-durables (food, clothing, gasoline, shoes) increased 0.7% in January with food and gasoline outlays accounting for a large part of the increase in consumer spending in January. A 0.3% increase in services and a 0.2% gain in purchases of durables (cars, furniture, appliances) were also noteworthy.

"Personal saving as a percentage of disposable income was 5.0% in January. The spike in the saving rate in May/June 2008 was related to the tax rebates of 2008. On a monthly basis, the personal saving rate in January 2009 is the largest since March 1995.

"Net worth of households and the saving rate move in opposite directions. Given the large loss in net worth of households, the rising unemployment rate, and uncertainty in the economy, it is not surprising that the saving rate has risen in the past few months."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 2, 2009.

Casey's Charts: Shop till you drop
"Americans have fueled the world's economic engine for decades. But the deflating housing bubble has dropped home sales by 31% and housing prices by 25% in two short years, leaving the home equity credit well tapped dry.

"With consumers losing access to credit and incomes being threatened by rising unemployment, the spending spree has come to an end. As a result, retail sales have fallen 11% since June, GDP contracted by 6.4% in the fourth quarter, and consumer confidence is the lowest on record. The economy is barely running on fumes, and Washington has now become the 'spender of last resort'."

Source: Casey's Charts, March 5, 2009.

Reuters: Food stamp enrolment jumps to record 31.8 million
"A record 31.8 million Americans received food stamps at the latest count, an increase of 700,000 people in one month with the United States in recession, government figures showed on Thursday.

"Food stamps, which help poor people buy groceries, are the major US anti-hunger program, forecast to cost at least $51 billion in this fiscal year ending September 30, up $10 billion from fiscal 2008.

"'A weakened economy means that many more individuals are turning to SNAP/food stamps,' said the Food Research and Action Center. Last summer food stamps were renamed the Supplemental Nutrition Assistance Program, or SNAP.

"The average food stamp benefit is $115 a month for individuals and $255 a month per household.

"In April, food stamp benefits will increase temporarily by 13% under provisions of the recently enacted economic stimulus law. Ellen Vollenger of the Food Research and Action Center said some families will see increases of $80 a month."

Source: Charles Abbott, Reuters, March 5, 2009.

Bloomberg: Hidden pension fiasco
"Public pension funds across the US are hiding the size of a crisis that's been looming for years. Retirement plans play accounting games with numbers, giving the illusion that the funds are healthy.

"The paper alchemy gives governors and legislators the easy choice to contribute too little or nothing to the funds, year after year.

"The misleading numbers posted by retirement fund administrators help mask this reality: Public pensions in the US had total liabilities of $2.9 trillion as of December 16, according to the Center for Retirement Research at Boston College. Their total assets are about 30% less than that, at $2 trillion.

"With stock market losses this year, public pensions in the US are now underfunded by more than $1 trillion.

"That lack of funds explains why dozens of retirement plans in the US have issued more than $50 billion in pension obligation bonds during the past 25 years - more than half of them since 1997 - public records show.

"The quick fix for pension funds becomes a future albatross for taxpayers."

Source: David Evans, Bloomberg, March 3, 2009.

The Razor's Edge: AIG and Hank - the divorce is final
"Hank Greenberg, the long time leader of insurance giant AIG, is reportedly suing the company as he believes mismanagement and even fraud have cost him $2 billion personally. The financial media has jumped on this story with vigor as it purportedly entails anger, greed, and betrayal.

"Former AIG CEO Hank Greenberg is now suing the embattled company. He's accusing the company of securities fraud. Yesterday, AIG posted that unbelievable loss, $62 billion. Greenberg's lawsuit claims that AIG's material misrepresentations and omissions led him to buy shares in his deferred compensation participation plan.

"Greenberg lead AIG for more than 40 years until he came under pressure to leave the company because of fraud charges from the New York Attorney General, Elliot Spitzer. He now claims that he was encouraged to buy stock in AIG at more than $50 per share and was mislead by the current management as to just how bad the collateralized debt on AIG's balance sheet would turn out to be.

"The dispute arose from an investor conference in December of 2007, when the company's stock was trading in the high $50's. Greenberg claims that management seriously downplayed the risks to the company and shareholders, and that their auditors had already told AIG about a 'material weakness'."

Source: The Razor's Edge, March 3, 2009.

Financial Times: Bank of England plans to buy gilts

Click here for the article.

Source: John Authers, Financial Times, March 5, 2009.

Bespoke: Same markets, different year
"So much for those hoping that a change in the calendar year would also bring about a change in the direction of the market. After two more months of huge declines for global equity markets, 2009 is looking just like 2008, if not worse.

"Below we highlight the year to date performance for 83 equity markets around the world. As shown, just 10 countries are up year to date, with China leading the way at 14.97%. Venezuela, Colombia, Abu Dhabi, and Israel have also managed to register gains so far this year.

"Unfortunately, there are twice as many countries already down 20% year to date as there are countries that are up. Puerto Rico is down by far the most at -54%, followed by Qatar (-36.6%), Romania (-34%), Ukraine (-30%), and Kenya (-29.7%).

"Of the G-7 countries, Canada is doing the best this year with a decline of 9.62%. Germany has been the worst G-7 country with a decline of 21.74%. And with a decline of 18.62%, the US ranks in the bottom 30% as far as 2009 performance goes."

Click on the thumbnail for a larger image.

Source: Bespoke, March 2, 2009.

Bespoke: 2009 - by far the worst start to a year since 1900
"The Dow's current decline of 23.21% is by far the worst start to a year for the index this many days in since 1900. The second worst year at this point was 14.25% in 1920. There have been 19 prior years where the Dow was down 5% or more at this point, and only four of those years ultimately finished in positive territory.

"Below we highlight the five years where the Dow started the year down 10% or more at this point. In 1920, the Dow continued lower for the rest of the year, but in the three other years, the market ended higher from the level that it was at 41 trading days in.

"One positive is that 1933 is one of the five years that started off down 10% this many trading days in. While this did occur during the Great Depression, it was also FDR's first year in office. With many comparing Obama and his plans to FDR and the New Deal, it's interesting that the market got off to a very bad start in 1933 after he was elected, but reversed when he took office (in March) and finished his first year 66.7% higher! We can only hope that 2009 turns out that way, even though it doesn't say much for 2010, 2011, 2012, etc."

Source: Bespoke, March 3, 2009.

Bespoke: Top strategists still expecting a 46% gain from here
"While two more Wall Street strategists lowered their year-end S&P 500 price targets recently, collectively they're still looking for a 46% gain from the index's current levels.

"As shown below, UBS, Goldman, and Credit Suisse have now lowered their year-end price targets since the start of the year. The UBS move from 1,300 to 1,100 makes Deutsche Bank the most bullish with a target of 1,140. Barclays has the lowest price target of 874, which would be a 27% increase from here."

Source: Bespoke, March 5, 2009.

CNBC: Yamada - Dow could hit 4,000
"Louise Yamada, managing director at Louise Yamada Technical Research Advisors, tells CNBC hope is not an investment strategy. Her primary target for the Dow is 6,000, and her secondary target is 4,000."

Source: CNBC, March 6, 2009.


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