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Words from the (Investment) Wise for the Week That Was (March 23 - 29, 2009)

Following Fed Chairman Ben Bernanke's "money printing" announcement of last week, the action stayed on Capitol Hill with Treasury Secretary Timothy Geithner detailing his Public Private Investment Program (PPIP) as well the initial salvo on "new rules of the game" for the US's broken system of financial regulation.

The US Treasury on Monday morning announced its highly-anticipated Private Public Investment Program (PPIP), rekindling investors' hopes that the worst might be over for the beleaguered banking sector and the global economy is close to a bottom.

Up to $1.0 trillion will be spent in an attempt to support the balance sheets of financial institutions by removing toxic assets - mostly mortgage-backed securities. The Treasury plans to invest between $75 billion to $100 billion from its existing Troubled Asset Relief Program (TARP), and also to establish a separate initiative that will use the Fed's Term Asset-backed Securities Lending Facility (TALF) and Federal Deposit Insurance Corporation (FDIC) funding to finance the PPIP.

Source: About.com

In reaction to the Obama administration's plan, global stock markets extended their gains and the US dollar reclaimed a stronger footing, but government bonds suffered from indigestion on issuance worries and the haven appeal of commodities waned. The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com.

Stock markets, led by financials, surged on the unveiling of the Treasury's plan to deal with troubled assets, adding to the gains of the rally that commenced on March 10 (see table below). The Dow Jones Industrial Index moved up 497 points (+6.8%) on Monday, its fifth largest one-day point gain and 23rd biggest one-day percentage gain on record.

Although stocks succumbed to profit-taking towards Friday's close, indices nevertheless managed to register a third straight week of gains - only the third time since the bear market began 78 weeks ago. With two trading days to go, March has the potential of producing the third best monthly return for the broad market since 1950.

Elsewhere in the world stocks also performed strongly, with the MSCI World Index gaining 4.4% (YTD -10.4%) and the MSCI Emerging Markets Index ahead by 6.9% (YTD +4.3%). These indices have risen by 19.8% and 21.8% respectively since the low of March 9. Returns ranged from top-performers Peru (+17.4%), India (+12.6%) and Hong Kong (+10.0%) to Uganda (-5.7%), Côte d'Ivoire (-4.7%) and Bangladesh (-4.4%), which are still languishing in the red.

The Shanghai Composite Index (+3.9%) had another good week and remains at the top of the field for the year to date with a 30.1% gain in US dollar terms. (Click here to access a complete list of global stock market movements, in local currency terms, as supplied by Emeginvest.)

Emerging markets are showing mature markets a clean pair of heels, as can be seen from the rising trend line of the MSCI Emerging Markets Index relative to the Dow Jones World Index since late October. The fact that developing countries are now outperforming the developed ones is a sign that global investors are beginning to take more risk - a necessary ingredient for stock markets in general to improve further.

Source: StockCharts.com

As far as US exchange-traded funds (ETFs) are concerned, John Nyaradi (Wall Street Sector Selector) reports that the strongest funds this week were Claymore/MAC Global Solar Energy (TAN) (+32.1%), Market Vectors Solar Energy (KWT) (+25.8%) and iShares Dow Jones US Home Construction (ITB) (+20.8%). On the other end of the performance scale United States Natural Gas (UNG) (-12.6%), PowerShares DB Agriculture Fund (DBA) (?4.6%) and iShares Silver Trust (SLV) (-3.4%) performed poorly.

Among the ten US economic groups, the Financial Select Sector SPDR (XLF) (+12.3%) led the way, with defensive funds such as Health Care Select Sector SPDR (XLV) (+3.0) and Utilities Select Sector SPDR (XLU) (+1.8%) falling behind, as one would expect in a rising market.

In the coming week, as reported by the New York Times, the US administration is likely to extend more short-term aid to General Motors and Chrysler, but impose a strict deadline for bondholders and union workers to make concessions that would help the ailing automakers become viable businesses and avert bankruptcy.

Also on the agenda next week, is the summit of the Group of 20 in London - a "make or break event", according to George Soros (via Reuters). In addition to the one-time increase of the IMF's resources, there ought to be substantial annual special drawing rights (SDR) issues, say $250 billion, as long as the global recession lasts, he said. SDRs are an international reserve asset created by the IMF in 1969 that has the potential to act as a super-sovereign reserve currency.

Next, a quick textual analysis of my week's reading. No surprises here with key words such as "banks", "market", "assets" and "plan" featuring prominently.

The nagging question remains: is the stock market rally for real, or is it just an upward correction in a bigger bear market? The worrying aspect is the rapidity with which the price increases have occurred. To gauge just how "violent" it has been, Mark Hulbert (MarketWatch) compared the rally since the March 9 lows to a composite of the stock market's behavior over the first two weeks of all bull markets since 1900. The graph below indicates that the market is perhaps in need of catching its breath.

Regarding specific "targets", Adam Hewison of INO.com prepared a short technical analysis presentation dealing with key levels. Click here to view the clip. As shown in the table below, the 50-day moving averages have been cleared for all the major US indices and the early January highs (not shown) are the next targets. On the downside, the levels from where the nascent rally commenced on March 9 should hold in order for the upward trend to endure.

Kevin Lane, technical analyst of Fusion IQ, said: "We think the S&P 500 can still rally up to the 850-860 in the near term on the heels of the unwinding of the deeply oversold conditions, the large piles of sideline liquidity, and additional money managers are allocating to stocks so as not fall too far behind their benchmarks. At the aforementioned S&P 500 level some more aggressive profit-taking is likely to ensue and it may be a good time to take some chips off the table (i.e. lock in some profits). We would then look to reallocate on the next aggressive pullback."

The graph below shows the percentage of S&P 500 stocks trading above their 50-day moving averages. Altogether 66% of the stocks are currently trading above their 50-day lines. This is getting close to the 80% (overbought) level seen at prior peaks during this bear market.

Source: StockCharts.com

Short-term movements aside, more bulls are coming to the fore by the day. According to Bloomberg, Mark Mobius, executive chairman of Templeton Asset Management, said the next bull market rally has begun. Also, Barton Biggs, the former chief global strategist for Morgan Stanley who now runs New York-based hedge fund Traxis Partners, last week predicted the S&P 500 may jump by 30%-50%. Similarly, Jeff Saut, strategist at Raymond James, argued that the "odds are pretty good stocks have seen their lows".

From across the pond, London-based David Fuller (Fullermoney) said: "I feel that it is a defining rally .... increasing evidence that the bear market mostly ended last November. However, while Wall Street is the big elephant in the room, casting a large shadow in terms of influence, it is certainly not the leader. Fullermoney themes, led by Asian emerging markets and South American resources markets, definitely bottomed out in October and November. Many have also gone on to complete base formations.

"In the short-term, stock markets are technically overbought so we can expect a pause and consolidation. However, if the S&P 500 Index can hold onto approximately half of its gains from this month's lows, this would provide further evidence of recovery potential for the medium to longer term."

On the other hand, Richard Russell (Dow Theory Letters), who has been studying markets since the 1950s, remains bearish: "The most helpful insights I've received during the course of this bear market are the Lowry's statistics and comments. From the latest Lowry's statistics I can see that although the Buying Power Index (demand) has risen sharply, the Selling Pressure Index (supply) has given ground rather grudgingly. Normally, if we were at the start of a new bull market, Selling Pressure should be collapsing. It is not.

"The conclusion is that there remains a surprising amount of Selling Pressure (supply) for this bear market advance to wade through. This is typical bear market rally action. Normally, prior to the start of a new bull market there will be an extended period in which the Selling Pressure Index slumps, indicating that sellers have exhausted their desire to sell. The inference is that we are experiencing a purely technical situation ..."

One of the great concerns for the stock market rally is that the credit markets, the target of the rescue operations, are still far from "normal". This was again seen during the past week when the US 30-day Treasury Bills dipped below zero on Thursday.

I believe stock markets are in a bottoming phase, but that this may take a while to play out. This is not a juncture at which one should go all-out bullish or bearish. Taking one step at a time, the next hurdle is the release of potentially ugly earnings and guidance announcements in April. By then a clearer picture should also start emerging on the results of the Fed's medicine and whether credit markets are thawing and confidence is beginning to improve.

For more discussion about the direction of stock markets, also see my recent posts "Video-o-rama: Risk appetite rekindled on hope of better days", "Stock markets: Keep an eye on confidence measures" and "Technical Talk: Stocks nearing short-term resistance". (And do make a point of listening to Donald Coxe's webcast of March 20, which can be accessed from the sidebar of the Investment Postcards site.)

"Global businesses remain remarkably pessimistic. Businesses say that sales fell sharply last week to a new record low and pricing power continues to evaporate as close to one third of businesses say they are cutting prices for their goods and services," said the latest Survey of Business Confidence of the World conducted by Moody's Economy.com.

According to RGE Monitor, the World Trade Organization said the collapse in global demand would drive trade volumes down by 9% in 2009 - the biggest contraction since World War II. Trade in developed countries would fall by 10% while in developing countries it would shrink by 2-3%. The fall in global trade in 2009 will be the first negative annual decline since 1982 led by the contraction in global growth, slump in manufacturing activity and capex, and crunch in trade finance. This might be exacerbated by growing protectionist measures around the world.

European business confidence has never been as dark and is near record lows, as indicated by the March Ifo Business Survey for Germany.

On a light-hearted note, the Financial Times reported last week that lingerie sales in Britain were looking better than the retail sector as a whole. One CEO in the industry told the FT that couples were staying home more and women were investing in "adventurous apparel" to cheer themselves up during the economic downturn. (Hat tip: US Global Investors - Weekly Investor Alert.)

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 27, 2009
• Consumer spending in Q1 most likely to show an increase

March 26, 2009
• Minor Q4 GDP revisions, corporate profits plunge
• Jobless claims - persistent upward trend remains in place

March 25, 2009
• New home sales - notable pickup in sales, but more is necessary
• Durable goods orders - glimmer of strength emerges but it is tentative

March 24, 2009
• Home prices - meaningful turnaround?

March 23, 2009
• Treasury's Public-Private Investment Program - aims to unclog credit markets and promote credit extensions
• Existing home sales advance - noteworthy for several reasons

The past week witnessed a trend of better-than-feared economic reports. Of the twelve reports released, only three were weaker than the consensus forecast. Bespoke said: "While none of these reports can be classified as 'good', the fact that they are beating expectations is a positive sign. The next test will come this week when we get the first look at reports for the month of March. Will the relative strength follow through, or was the recent string of reports just an aberration?"

"We've passed the period where every indicator is plummeting, and that's good news," said Nariman Behravesh, chief economist at IHS Global Insight (via The Wall Street Journal). "We may not be exactly at the turning point, but we're getting pretty close to it."

Source: The Wall Street Journal, March 28, 2009.

What are the policy actions required in the US and abroad to lead to a recovery of the global economy and prevent an L-shaped global near-depression? Nouriel Roubini (RGE Monitor) summarized the following steps:

• Much more massive unorthodox monetary policy easing;
• Much more fiscal stimulus;
• Resolution of the banking crisis via a takeover of insolvent institutions and recapitalization and removal of toxic assets from the solvent but illiquid and undercapitalized ones;
• Actions to reduce the credit crunch and restore credit growth to creditworthy firms and households;
• Direct reduction - rather than restretching - of the debt burden of insolvent households;
• Tripling of IMF resources and financial help to emerging-market economies that are at risk of a liquidity crisis or a broader financial crisis; and
• Other measures of regulatory forbearance to reduce the procyclicality of the credit cycle (appropriate changes to mark-to-market, reduction in capital adequacy ratios, reduction of the countercyclical role of downgrades by rating agencies).

"Avoiding the L is possible, but it will require much more coherent and aggressive policy actions in the US, China and all over the world," concluded Roubini.

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 23 10:00 AM Existing Home Sales Feb 4.72M 4.43M 4.45M 4.49M
Mar 25 8:30 AM Durable Goods Orders Feb 3.4% -2.5% -2.5% -5.2%
Mar 25 8:30 AM Durables, Ex-Transportation Feb 3.9% -2.1% -2.0% -5.9%
Mar 25 10:00 AM New Home Sales Feb 337K 305K 300K 322K
Mar 25 10:30 AM Crude Inventories 03/20 +3300K NA NA +1942K
Mar 26 8:30 AM Initial Claims 03/21 652K 645K 650K 644K
Mar 26 8:30 AM Q4 GDP - Final Q4 -6.3% -6.6% -6.6% -6.2%
Mar 26 8:30 AM GDP Price Index Q4 0.5% 0.5% 0.5% 0.5%
Mar 27 8:30 AM Personal Income Feb -0.2% -0.1% -0.1% 0.2%
Mar 27 8:30 AM Personal Spending Feb 0.2% 0.3% 0.2% 1.0%
Mar 27 9:55 AM Michigan Sentiment Mar 57.3 57.0 56.8 56.6
Source: Yahoo Finance, March 27, 2009.

In addition to an interest rate announcement by the European Central Bank (Tuesday, April 2), 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 27, 2009.

Lau-Tzu said: "Those who have knowledge, don't predict. Those who predict, don't have knowledge." Wise words indeed, but hopefully the "Words from the Wise" reviews will assist Investment Postcards readers with their research to cast some light on the lie of the investment land.

That's the way it looks from Cape Town (where I am about to embark on a long-haul flight to New York and San Diego).

Source: Walt Handelsman

CNBC: Geithner & toxic assets
"Treasury Secretary Timothy Geithner discusses his plan to deal with financial institutions' toxic assets, with CNBC's Erin Burnett."

Part 1

Part 2

Source: CNBC, March 23, 2009.

CEP News: US Treasury unveils PIPP
"The US Treasury announced Monday morning it will spend up to $1.0 trillion in a bid to provide support to the balance sheets of financial institutions and support the 'toxic debt' market, which includes mostly mortgage-backed securities.

"The US Treasury will invest between $75 billion to $100 billion from its existing Troubled Asset Relief Program, and it plans to set up a separate initiative which will use the Federal Reserve's Term Assets Backed Securities Lending Facility and FDIC funding to finance the highly anticipated Private Public Investment Program (PPIP).

"Five different private public funds will bid on toxic assets and sell them to the broader public. Meanwhile, the Federal Deposit Insurance Corporation will guarantee private-sector loans for these purchases, while the US Government will invest side by side with private equity using taxpayer capital.

"In a press conference following the official announcement, Treasury Secretary Timothy Geithner said he expects significant interest from the private sector, a sentiment which was confirmed by PIMCO's Bill Gross following the announcement.

"Geithner said that while there is no doubt that the US government is taking risk with the PPIP, the taxpayer stands to make substantial returns on the investments. He also said that the Treasury should be able to implement the PPIP quickly."

Source: CEP News, March 23, 2009.

BCA Research: Some hope for the US bank sector
"The Public-Private Investment Program (PPIP) is a significant positive step forward in restructuring the troubled US banking sector.

"The Treasury confirmed earlier this week its intention to remove toxic 'legacy' assets from bank balance sheets in order to improve the health of financial institutions and restore the flow of credit throughout the economy.

"Perhaps the most nagging issue facing policymakers in their efforts to solve the credit crisis has been what price to pay banks for their toxic assets. Too low a price would prompt further significant writedowns and could lead to additional bank failures. Too high a price would cheat taxpayers and reinforce previous bad investment decisions. The Treasury's plan attempts to solve the issue by creating a public-private partnership, which determines asset prices using an auction process, while at the same time ensuring adequate financing (backed by the FDIC) and allowing the taxpayer to share in some of the upside.

"The plan does not directly support home prices, but it may stem the slide in real estate assets held by the banks. Even if the purchase of legacy assets leads to further writedowns, the government stands ready to contribute additional equity capital through its Capital Assistance Program (CAP) to maintain the bank as a going concern. Thus, creeping nationalization remains a possibility for those banks with a high proportion of legacy assets. Bank bonds, however, would seem to be well supported under this plan."

Source: BCA Research, March 25, 2009.

The Wall Street Journal: Will the removal of assets make them any less toxic?
"Barrons Bob O'Brien talks about how the government will try to help the ailing economy by helping banks with toxic assets. This raises many questions including whether government help will chill public-private initiative."

Source: The Wall Street Journal, March 23, 2008.

Nouriel Roubini (RGE Monitor): Obama's toxic-asset plan shows promise
"So to clarify my view point: I see the Geithner plan as being relevant to banks that are solvent. For those that are found - after stress tests - to be insolvent I see as the proper solution to nationalize them and clean them up to prepare them for reprivatization.

"The stress test should do a triage between banks that are illiquid and undercapitalized but solvent given the provision of capital and liquidity and those that, under a reasonable stress scenario are effectively insolvent.

"Those that are insolvent should be nationalized.

"Those that are solvent will still have many toxic assets that need to be disposed of; and the Geithner plan provides a way to properly dispose of the toxic assets of solvent banks.

"So my partial support of the Geithner plan - with all the appropriate caveats - is consistent with the complementary idea of nationalizing the insolvent financial institutions. The bad assets of insolvent banks that are nationalized could be separated from the good assets and then worked out by the government; or they could be sold to private investors through an auction mechanism along the lines of the Geithner plan; or they could be sold - together with the good assets - to the investors purchasing a privatized bank that was temporarily privatized (along the lines of the Indy Mac deal where the investors purchasing the bank received a government guarantee on the bad assets after a first loss)."

Source: Nouriel Roubini, RGE Monitor, March 24, 2009.

Tech Ticker (Yahoo Finance): James Galbraith - Geithner plan "extremely dangerous", banks "massively corrupted"
"Professor James Galbraith didn't pull any punches on TechTicker this. He hates the Geithner plan, calling it 'extremely dangerous'. He says the banks may game the plan to bid up the prices for their own crap assets and that getting bad assets off their books won't get them lending again. Like Paul Krugman, Galbraith thinks the FDIC should just put the banks into receivership and have the banks' subordinated bondholders pick up some of the cost of restructuring them."

Part 1: Getting crap assets off bank books won't save economy

"Aaron Task, TechTicker: Like it or not, many people seem to be resigned to the idea there's no alternative to the public-private investment fund scheme Treasury Secretary Geithner detailed this morning.

"That's hogwash, says University of Texas professor James Galbraith, author of The Predatory State. Of course there's an alternative: FDIC receivership of insolvent banks.

"So why isn't the Obama administration pushing for FDIC receivership? 'Political influence of big banks,' the economist says."

Part 2: Massive corruption

Source: Tech Ticker, Yahoo Finance, March 23, 2009.

Bloomberg: Nobel Prize winners clash on prospects of Geithner's plan
"Treasury Secretary Timothy Geithner has a good chance of succeeding with his plan to cleanse banks of toxic assets, says Michael Spence, co-winner of the 2001 Nobel Prize in economics. Paul Krugman, the newest laureate, is so sure Geithner will fail that he's full of 'despair'.

"Even winners of the highest awards in economics can't always be right. Which prediction proves correct depends in part on whether private investors can be enticed to bid on as much as $1 trillion of illiquid loans and securities that banks are now stuck with.

"'This program is crucially dependent on the private sector as participants and price setters," said Spence, who shared the Nobel Prize with George Akerlof and Joseph Stiglitz for a theory that found some government intervention can make markets more efficient. 'It could work,' Spence said in a telephone interview yesterday.

"That's not an opinion shared by 2008 Nobel laureate Krugman. 'The real problem with this plan is that it won't work,' Krugman, said in his New York Times opinion column yesterday.

"Geithner appears to be going back to the 'cash for trash' approach of his predecessor as Treasury Secretary, Henry Paulson, Krugman said. 'This is more than disappointing. In fact, it fills me with a sense of despair.'

"Instead of financing the purchase of illiquid assets, the government should guarantee many bank debts, take control of 'insolvent' firms and clean up their books, similar to what Sweden did in the 1990s, Krugman said.

"While Spence, a Stanford University professor and former business-school dean, has more confidence in Geithner, even he isn't positive the Treasury secretary can pull it off.

"The Treasury plan 'is a little complex to implement,' Spence said. 'I assume the Treasury has done its homework, and has people lined up' to commit private capital to Geithner's public-private partnerships, he said.

"Stiglitz, speaking at a conference in Hong Kong today, said the plan 'risks a major increase in our national debt.'

"'You can take the bad assets off the banks, but where are they going to go?' said Stiglitz, who served as chairman of former President Bill Clinton's Council of Economic Advisers. 'The one place for them to go is to the taxpayers.'"

Source: Scott Lanman and Vivien Lou Chen, Bloomberg, March 24, 2009.

Bill King (The King Report): TAPS - creating a derivative on derivatives
"Geithner's plan effectively creates 'calls' on banks' toxic assets. The US taxpayer will underwrite losses in this program. The call premium will be the private equity risk; the buyer gets the upside appreciation. The taxpayer provides the funding/leverage.

"Bill Gross sees private investor risk of 4% to 5%. This is the call premium for the toxic assets.

"Let's think through this plan and the probable consequences.

"Everyone knows that solons are trying to engineer massive asset inflation. So if we are running a bank why would we sell any asset that has a chance to reflate?

"We would only sell assets that we deem hopeless. Are there enough private equity patsies to buy calls on assets that we deem have a low probability of increasing substantively in value?

"Most call buyers do not intend or wish to own the underlying assets. They are interested in a levered gain. So even if the toxic assets are inflated enough in value to produce a gain for the 'call' buyers, what patsies will appear as a dumping ground for the call buyers?

"Geithner's toxic asset scheme is a repo with a call option. And unless end-user patsies appear at some point, the toxic assets will return to sender and the US taxpayer.

"We are in this mess due to excess derivatives and leverage. Ironically or absurdly, Geither's toxic asset plan & solution (TAPS) creates a derivative on derivatives (toxic paper) and increases the leverage on levered toxic assets! You can't make up stuff like this.

"Unfortunately for solons their expediency just delays the inevitable negatives. Solons have created extremely positive expectation for the TAPS. If the scheme does not go exceptionally well, the consequences will not be pretty ... BTW, $1 trillion is not nearly enough.

"The first TAPS auction will probably go well because solons will exert intense pressure on the community to play nice. Entities that are already adjuncts of the Fed or Treasury, like PIMCO and Black Rock, will be subjected to enormous pressure to stand and deliver."

Source: Bill King, The King Report, March 24, 2009.

CEP News: FDIC's Bair says some US banks could be beyond help
"Federal Deposit and Insurance Corporation (FDIC) head Sheila Bair said Monday that some US financial institutions may be beyond help from US government agencies, and some banks will close.

"In a conference call with reporters, Bair touted the US Treasury's plan introduced this morning to remove toxic assets from banks' balance sheets.

"The public/private partnership to buy these assets and resell them to the public won't necessarily be a 50/50 split, she said.

"Bair said the highest priority will be given to high-risk real estate loans, because the problems are with these assets.

"She said the most difficult part of the program will be to price the assets properly, but that government agencies will find the best possible structure to do so, adding that she expects the program will be profitable."

Source: CEP News, March 24, 2009.

The New York Times: Battles over reform plan lie ahead
"Outlining a far-reaching proposal on Thursday to rebuild the nation's broken system of financial regulation, the Treasury secretary, Timothy F. Geithner, fired the opening salvo in what is likely to be a marathon battle.

"'Our system failed in fundamental ways,' Mr. Geithner told the House Financial Services Committee. 'To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game.'

"On the surface, both the lawmakers who listened to the Treasury secretary and the financial industry's lobbying groups made it sound as if they completely agreed with Mr. Geithner's call for what he described as 'better, smarter tougher regulation.'

"But in fact industry groups are already mobilizing to block restrictions they oppose and win new protections they have wanted for years. Even though Mr. Geithner carefully avoided specific details, laying out mostly broad principles for overhauling the system, financial industry groups are identifying issues they plan to pursue and lining up well-connected lobbyists and publicists to help make their cases.

"If history is any guide, Mr. Geithner's proposals will start an equally intense battle among the regulatory agencies themselves - including the alphabet soup of banking regulators, the Securities and Exchange Commission and the Federal Reserve - to stay in business and enhance their authority.

"Hedge funds and private equity funds, which have been almost entirely unregulated, would have to register with the SEC and tell it about their risk-management practices. Many financial derivative instruments, like credit-default swaps, would come under supervision for the first time.

"Mr. Geithner's most specific proposal, which Democratic lawmakers hope to pass in the next few weeks, would allow the federal government to seize control of troubled institutions whose collapse or bankruptcy might jeopardize the broader financial system."

Source: Edmund Andrews, The New York Times, March 26, 2009.

CNBC: JPMorgan's Dimon on meeting with Obama
"Jamie Dimon, CEO of JPMorgan, sits down for an exclusive interview with CNBC's Erin Burnett. Dimon discusses the meeting he and other bank CEOs had with President Obama."

Source: CNBC, March 27, 2009.

News N Economics: Real money supply: surging in some countries, not so much in others
"The Fed's recent and extreme policies have made people nervous about inflation. They should be, but just not right now. Key central banks recently added hydrogen to their engines in the form of quantitative easing, causing high-powered money to surge. However, the multiplier is collapsing, and therefore, the new base is simply a measure to keep the money supply afloat. Some economies, though, are showing worrisome trends in their money growth rates.

"The chart below illustrates the 6-month annualized growth rate of the broad measure of real money in the US, the UK, Japan, and the Eurozone. In spite of the massive surge in the US monetary base, 231% over the last 6 months, the real US money supply grew just 22.6% over that same period. Can you imagine what would have happened had the Fed not eased so substantially? Troublesome deflation. The money multiplier is collapsing as banks hoard cash and consumers and firms pull back.

"Furthermore, like the Fed, the Bank of England (BoE) is engaged in quantitative easing, resulting in a similar 6-month money growth rate, 22.8%. The ECB and the Bank of Japan (BoJ) are still increasing their broader measures of real money on a 6-month basis, but at a much slower rate. Admittedly, the BoJ is engaging in alternative policy measures, but the ECB and the BoJ are not pulling out all of the 'easing stops' as are the Fed and the BoE."

Source: Rebecca Wilder, News N Economics, March 24, 2009.

Reuters: Soros - G20 a "make or break" event for markets
"The Group of 20 nations meeting next week is a 'make or break event' for the global markets, investor George Soros said on Wednesday.

"'Unless it comes up with practical measures to support the countries at the periphery of the global financial system, markets are going to suffer another sinking spell just as they did on February 10, 2009, when the authorities failed to produce practical measures to recapitalize the United States banking system,' Soros said in testimony to the Senate Foreign Relations Committee.

"Soros said President Barack Obama could help make the G20 meeting a success by raising a possible solution that would involve increasing the amount that developing countries - from Eastern Europe to Africa - can effectively borrow from the International Monetary Fund.

"The urgent task of re-inflating the global economy has to be carried out mainly by the IMF, 'imperfect and beleaguered as it is, because it is the only institution available,' Soros said.

"While the IMF's resources were likely to be doubled at the G20 meeting of big developed and developing countries, that would not provide a systemic solution for the developing world, Soros said.

"But a systemic solution was readily available in the form of special drawing rights (SDRs), an international reserve asset created by the IMF in 1969 that has the potential to act as a super-sovereign reserve currency.

"In addition to the one-time increase of the IMF's resources, there ought to be substantial annual SDR issues, say $250 billion, as long as the global recession lasts, he said."

Source: Reuters, March 25, 2009.

Asha Bangalore (Northern Trust): Minor Q4 GDP revisions, corporate profits plunge
"Real GDP is estimated to have dropped at an annual rate of 6.3% in the fourth quarter of 2008. This is virtually unchanged from the earlier estimate of a 6.2% drop of real GDP. In 2008, real GDP increased 1.1% after a 2.03% increase in 2007.

"On a Q4-to-Q4 basis, the 0.85% drop in real GDP in the fourth quarter is the first decline in real GDP since the 1990-91 recession. The economy is expected to post another sharp quarterly reduction in real GDP in the first quarter of 2009 (-6.1%), with these two quarterly declines chalking up to be the weakest quarters of the current recession."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 26, 2009.

Asha Bangalore (Northern Trust): Consumer spending in Q1 most likely to show increase
"Contrary to our earlier expectations, consumer spending in the first quarter is most likely to show an increase. The sharp upward revision of inflation adjusted consumer spending in January (+0.7% versus +0.4% in the original report) is the main reason for this revision. Nominal consumer spending moved up 0.2% in February after a 1.0% increase in January. However, after adjusting for inflation, consumer spending fell 0.2% in February. A conservative assumption for March results in an overall increase of consumer spending in the first quarter of 2009 of roughly 0.6%-0.8%. This in turn will result in a modification of the headline GDP forecast, which we are working on as of this writing.

"The near term trend of consumer spending is most likely to be weak owing to the severe declines in payroll employment."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 27, 2009.

Asha Bangalore (Northern Trust): Durable goods orders - glimmer of strength emerges
"Orders of durable goods increased 3.4% in February after a downwardly revised drop in January of 7.3% (originally estimated as a 4.5% decline). The 35.3% increase in orders of defense items and the 6.6% jump in bookings of non-defense capital goods excluding aircraft stand out in the report. Orders of aircraft (-28.9%) and autos (-0.6%) dropped but that of machinery (+13.5%), computers (+5.6%), and appliances rose (+1.6%) during February. The main message is that the pickup in orders of durables is significant but consistent monthly gains will be necessary to declare that the factory sector has pulled out of the current doldrums."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 25, 2009.

Asha Bangalore (Northern Trust): New home sales - notable pickup but more is necessary
"Sales of new homes rose 4.7% to an annual rate of 337,000, following an upward revision of sales in January and December. On a regional basis, sales of new homes increased in the South (+9.7%) and West (+6.6%) but fell in the Northeast (-3.3%) and Midwest (-9.1%). The fact that sales advanced in February is noteworthy but additional monthly gains will be necessary to reduce the inventory of unsold new homes and bring about stability in this sector.

"Sales of new single-family homes are down 43.8% in February from a year ago, after a 47.7% plunge in January. Sales of new homes have dropped 75.7% from the peak in July 2005. The trough for new home sales appears to be January 2009, for now.

"The median price of a new single-family home declined 18.1% from a year ago in February, the largest year-to-year drop on record. The median price of a new single-family home has fallen 23.5% from the peak in March 2007, also the largest peak-to-trough decline on record.

"Additional declines in prices of new homes are nearly certain given the large inventory of unsold new homes. The good news is that the inventory unsold homes fell slightly to a 12.2-month mark from the record high of 12.9 months in January."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, March 25, 2009.

CEP News: Fed's Rosengren says programs will lower consumer, business loan costs
"Recent actions by the Federal Reserve should help lower the cost of credit to consumers and businesses, according to Boston Fed President Eric Rosengren speaking before the House Financial Services Committee on Monday.

"While credit availability continues to be a significant source of concern for the Federal Reserve, the Fed has 'acted proactively and creatively to address these concerns,' said the central banker."

Source: Erik Kevin Franco, CEP News, March 23, 2009.

Zillow: Federal Reserve announcement drives mortgage rate drop
"Driven by the news that the Federal Reserve plans to spend an additional $750 billion to buy mortgage-backed securities, the weekly average rate borrowers were quoted on Zillow Mortgage Marketplace for thirty-year mortgages fell to 5.06%, down from 5.21% the week prior, according to the Zillow Mortgage Rate Monitor."

Source: Zillow, March 24, 2009.

Financial Times: Ron Paul - believer in small government predicts 15-year depression
"Pension trustees and insurance company portfolio managers look away now. Your increased commitment to government bond holdings in recent times is about to blow up spectacularly.

"At least, that is the view of Ron Paul, the US congressman who ran against John McCain in last year's Republican Party presidential nomination.

"His is a minority view. Yields on government bonds worldwide have been falling fast over the past few months and in the UK, the commencement of 'quantitative easing' this month sent bond prices soaring.

"But the credibility of both western governments and their currencies is waning, and has been ever since the gold standard was abandoned in 1971, says Mr Paul. And that means even 'safe' investments are far from safe, he claims.

"'People will start to abandon the dollar as current and past economic policies create a steep rise in interest rates,' Mr Paul says.

"'If you are in Treasuries, you will need to be watchful and nimble to time your escape.'

"Unfortunately, cashing out will not protect the value of investments, he insists, because 'fiat' currencies will all decline over the coming years as measures to try to haul the world economy out of recession fail. 'The current stimulus measures are making things a lot worse,' says Mr Paul.

"'The US government just won't allow the correction the economy needs.' He cites the mini-depression of 1921, which lasted just a year largely because insolvent companies were allowed to fail. 'No one remembers that one. They'll remember this one, because it will last 15 years.'"

"And don't even mention shares to Mr Paul: 'The last place you want to be is in the stock market,' he says. 'It may not bottom out for 10 years - just look at Japan.'"

Click here for the full article.

Source: Phil Davis, Financial Times, March 22, 2009.

Financial Times: Credit market concerns
"While equities responded strongly to the Treasury's plan to get bad loans off banks' balance sheets, the rally in credit markets was more muted, says FT's Aline van Duyn."

Source: Aline van Duyn, Financial Times, March 24, 2009.

Bespoke: S&P 500 sector breadth measures
"The S&P 500 is currently trading 3.73% above its 50-day moving average, while the average stock in the index is 5.34% above its 50-day. This is a positive breadth measure. Below we provide the same analysis for the ten S&P 500 sectors.

"As shown, the Energy sector has the most positive breadth with a difference of +4.58% between the average stock's distance from its 50-day versus the sector's distance from its 50-day. Consumer Discretionary ranks 2nd, followed by Technology and Telecom.

"On the negative side, the Financial sector as a whole is trading 10.12% above its 50-day, while the average stock in the sector is 5.06% abvoe its 50-day. Only two sectors remain below their 50-days after this significant market rally and they are both defensive in nature - Health Care and Utilities."

Source: Bespoke, March 26, 2009.


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