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

Bespoke: Sector trading ranges - nearing overbought levels
"In the chart below, we highlight the current levels of each S&P 500 sector with respect to their normal trading ranges. Red shading indicates that the sector is overbought (with dark red indicating extreme overbought levels), while green shading is indicative of an oversold reading.

"Over the last week, the S&P 500 and each of its sectors have moved closer to overbought levels. There are currently four overbought sectors, no oversold sectors, and six sectors in neutral territory. Given the Nasdaq's brief push into positive YTD territory yesterday, it's no surprise that the Technology sector is the most overbought one in the market. Health Care, on the other hand, is the furthest from overbought levels. It is currently attempting to recover from the sell off that took place in late February after the release of the Obama budget plan.

"Over the coming weeks, it would not be surprising to see investors rotate out of the tech sector, which is nearing extreme overbought territory, and into the less extended Health Care sector."

Source: Bespoke, March 27, 2009.

Bloomberg: Mobius says stocks at beginning of a bull market rally
"The next bull market rally has begun and there are bargains in every emerging market following a record slump in stocks, Templeton Asset Management's Mark Mobius said."

Click here for the article.

Source: Bloomberg, March 23, 2009.

Bloomberg: Roubini - stocks will drop as banks go "belly up"
"US stocks will fall and the government will nationalize more banks as the economy contracts through the end of 2009, said Nouriel Roubini, the New York University professor who predicted last year's economic crisis.

"'The stock market is a bit ahead of the real macroeconomic and financial news,' Roubini, a professor at NYU's Stern School of Business and the chairman of consulting firm Roubini Global Economics, said in an interview with Bloomberg Television in London today. 'We'll have some major banks going belly up that will need to be taken over.'

"The global equity rebound in March that sent the Standard & Poor's 500 Index to its best monthly advance in 17 years is a 'bear-market rally' and US Treasury yields will 'remain relatively low' as investors flock to the safest assets, Roubini said. Treasury Secretary Timothy Geithner's new plan to remove toxic debt from financial companies won't be enough for insolvent banks, he said.

"Roubini's outlook contrasts with predictions this week from Templeton Asset Management's Mark Mobius and Traxis Partners' Barton Biggs, who said that equities are poised to rally as government efforts to revive the economy and banking system begin to work. Investors are 'way too optimistic' about the prospects for a recovery in the economy and earnings, Roubini said."

Source: Michael Patterson and Maithreyi Seetharaman, Bloomberg, March 26, 2009.

MarketWatch: Keeping hope alive - bear market rally or new bull market?
"Is it possible to have too much of a good thing? Mae West didn't think so, though I have it on reliable authority that she wasn't talking about the stock market.

"And when it comes to rallies off of market lows, it is indeed possible for stocks to overdo it. That at least is the argument being made by at some of the investment newsletter editors I monitor.

"According to them, bear market rallies are almost by their very nature powerful and impressive. If we were to endow the bear market with intent, we would say that the very purpose of a rally is to draw as many gullible investors back into the market before the next leg down commences.

"... whatever else you say about the rally that began two weeks ago, it has indeed been 'violent' and has occurred with 'amazing rapidity'.

"To gauge just how violent and rapid it has been, I compared the rally since March 9 to a composite of the stock market's behavior over the first two weeks of all bull markets since 1900.

"To come up with a list of those bull markets, I followed the lead of Ned Davis Research, the institutional research firm. For them, a bull market requires one of three conditions to hold: (1) at least a 30% rise in the Dow Jones Industrial Average in 50 calendar days, (2) at least a 13% rise in the Dow in 155 calendar days, or (3) at least a 30% reversal in the Value Line Geometric Index.

"Since the beginning of 1900, according to the research firm, there have been by this set of criteria no fewer than 34 bull markets.

"It turns out that the recent rally has been markedly more powerful than the average beginning of prior bull markets. Over the last two weeks, for example, the Dow has gained 18.8%. The Dow's average gain over the first two weeks of past bull markets, in contrast, has been 8.4%, or less than half as much.

"In fact, of the 34 bull markets identified by Ned Davis Research, only one of them produced a greater gain in its first two weeks than in the recent rally. That was the one that began on November 13, 1929, and is hardly one that the bulls would want to brag about. That bull market lasted just five months and led to an increase of just 48% in the Dow - making it one of the most modest of bull markets in the sample, despite have one of the most impressive returns in its first two weeks.

"These historical comparisons don't automatically mean that the market's strength over the last two weeks is just a bear market rally, of course. But those comparisons do highlight the possibility that the recent rally, impressive as it otherwise is, will in the end prove to be just a bear market rally."

Source: Mark Hulbert, MarketWatch, March 24, 2009.

Jeffrey Saut (Raymond James): Bear market rally or something more?
"In recent weeks, copper, steel, and energy prices have crept higher. Additionally, building permits and housing starts have come in better than expected. Meanwhile, tax refunds are up 13.3% when compared to this time last year, which is probably why retail sales have stabilized despite rising unemployment.

"Only time will tell, but it feels like the economic deterioration is no longer accelerating? Could it be that the huge increase in money supply, negative real interest rates (inflation adjusted rates) and the reintermediation we have been speaking about are beginning to have a positive impact on the economy?

"The stock market might just be sensing that, having leaped off of a generational oversold condition into a 20%, ten-session, upside stampede that produced four 90% upside days (March 10th, 12th, 17th, and 18th) within a two week period. Such enthusiastic buying has tended to be associated with the start of new bull markets. Yet as the Lowry's service notes, 'Our 2002 study of 90% days showed that the start of new bull markets are typically identified by a single 90% upside day, representing a rush of enthusiastic buyers which typically calms down after the first dramatic day. On rare occasions, two 90% upside days have been recorded in the first 30 days of a new bull market.'

"While we are cautious, we remain hopeful and continue to favor the upside until proven wrong, which is why we are still 'long' various indexes and have selectively been accumulating stocks."

Source: Jeffrey Saut, Raymond James, March 23, 2008.

Richard Russell (Dow Theory Letters): Get used to bear market rallies
"Moving on to the stock market, subscribers will have to get used to bear market action. In bear markets, counter-intuitively much of the time is spent with stocks rising, due to the frequent upward correction. For instance, during the horrendous 1929-32 bear markets there were no less than nine 15% rallies, the average lasting 15 days.

"During the 1937 to 1942 bear market, there were nine rallies of 15% or more with the average correction lasting 82 days

"During the 1946 to 1949 bear market there were two 15 % or more rallies averaging 57 days each.

"During the recent 2000 to 2002 bear market there were three 15% or more rallies averaging 5 days each.

"From November 2009 to January 2009 there were two rallies, one short and one longer one that stopped just short of 15%.

"So we have to get used to rallies in the bear market. One difficulty in dealing with bear rallies is that they can end as suddenly as they started. This is because bear market rallies don't end with a period of distribution. The buying just stops, and down they go. This is opposite to bull market advances that usually terminate after a period of deliberate distribution."

Source: Richard Russell, Dow Theory Letters, March 24, 2009.

David Fuller (Fullermoney): Don't look to Wall Street for the lead
"The US stock market is the big elephant in the room, casting a long shadow, but it seldom leads market moves. New bull markets are led by emerging economies, subject to governance, with their better valuations near the lows, competitive currencies, superior GDP growth prospects and comparatively thin markets. ... growing list of market indices which bottomed in October and November, and have now broken up out of their trading ranges during the current rally. This is very bullish action and the way new uptrends commence.

"Many other stock market indices tested their lows established last year and found good support near those levels, evidenced by their persistent rallies towards the upper-middle of their ranges. This is consistent with base formation development. Lastly, most of the stock markets that clearly broke beneath last year's lows earlier this month have not maintained those downward breaks. Further rallies by these indices would also confirm base development.

"Long-dated government bond markets are no longer performing. Everyone knows that their yields are not attractive for any economic environment other than a deflationary depression. Some of the money currently in bonds came from stock markets and will return to equities as confidence improves. Corporate bonds are performing and they are a lead indicator for equities.

"Copper is leading industrial commodities higher, as it did in 2003.

"Lastly, the US dollar and yen in particular are weakening against yield / resources currencies such as the Australian and New Zealand dollars. This indicates that carry trade deleveraging has not only ended but is also reversing.

"Returning to global stock markets, I maintain that the bear market mostly ended in October and November. The January to early-March sell-off looks like a successful test of support from last year's lows for most non-Western stock markets.

"I do have some remaining concern over Wall Street and its leash effect. However, technology is a leading indicator and the tech-heavy Nasdaq 100 Index did not break downwards. The S&P 500 Index did not maintain its break beneath the November low and is pushing above psychological resistance at 800. A move above 880 would, in my view, confirm a significant downside failure and resumption of the yearend base formation development.

"Interestingly, stock markets have been extending this month's rally against a background of short-term overbought indicators. This indicates that bears are being squeezed and that bulls are emboldened. I have previously mentioned that a significant rally would be indicated by its persistence. We now have some distance between current levels and the early-March lows, which should provide a cushion of support during the next consolidation.

"In conclusion, if the bear market is not continuing, the new bull market is already underway, although most people do not yet realise it. However this will not be fully confirmed, as I have said before, until the majority of stock markets are trading above rising 200-day moving averages. Moreover, even though the balance of technical evidence increasingly suggests that a new bull market is gradually commencing, this does not mean that all of the developing bases can support uptrends at this time. The leading Asian emerging markets and South American resources markets may actually be commencing uptrends, but many others are likely to extend their bases in coming months."

Source: David Fuller, Fullermoney, March 26, 2009.

BCA Research: Demystifying Chinese holdings of US assets
"In an unusual disclosure, Chinese Premier Wen Jiabao publicly expressed his concerns about the safety of China's holdings of US assets, putting the country's massive yet largely furtive foreign exchange assets into the spotlight.

"Our research finds that China currently has about 64% of its foreign reserves in US assets, a level that has declined gradually from as high as 84% in 2003. The majority of Chinese holdings of US assets are risk free and long-term in nature, but there has been a clear trend in China's reserve holdings that shows a persistent increase in exposure to risky assets and non-US assets over the past five years.

"Although, China's net purchases of risky US assets have dropped sharply since mid-last year, while its net purchases of Treasurys have jumped. This underscores the authorities' reduced risk appetite amid the ongoing global storm. Their reserve diversification process could accelerate again when global financial markets stabilize. Importantly, China's net purchases of short-term US Treasurys have jumped dramatically over the past year, accounting for the majority of the country's total net purchases of US government paper. This is an unprecedented development and a situation that warrants close attention going forward."

Source: BCA Research, March 23, 2009.

The Wall Street Journal: China takes aim at dollar
"China called for the creation of a new currency to eventually replace the dollar as the world's standard, proposing a sweeping overhaul of global finance that reflects developing nations' growing unhappiness with the US role in the world economy.

"The unusual proposal, made by central bank governor Zhou Xiaochuan in an essay released Monday in Beijing, is part of China's increasingly assertive approach to shaping the global response to the financial crisis.

"Mr. Zhou's proposal comes amid preparations for a summit of the world's industrial and developing nations, the Group of 20, in London next week. At past such meetings, developed nations have criticized China's economic and currency policies.

"This time, China is on the offensive, backed by other emerging economies such as Russia in making clear they want a global economic order less dominated by the US and other wealthy nations.

"However, the technical and political hurdles to implementing China's recommendation are enormous, so even if backed by other nations, the proposal is unlikely to change the dollar's role in the short term. Central banks around the world hold more US dollars and dollar securities than they do assets denominated in any other individual foreign currency. Such reserves can be used to stabilize the value of the central banks' domestic currencies.

"Monday's proposal follows a similar one Russia made this month during preparations for the G20 meeting. Like China, Russia recommended that the International Monetary Fund might issue the currency, and emphasized the need to update 'the obsolescent unipolar world economic order'."

Source: Andrew Batson, The Wall Street Journal, March 24, 2009.

Bespoke: Gold testing downside support
"Just one week after the Federal Reserve devalued the dollar by announcing that they would start buying US Treasuries, one would think gold would be in rally mode and in overbought territory. However, while gold had an initial spike following the Fed's announcement, since then the yellow metal has come back down to earth. Gold is currently close to testing its 50-day moving average, which is a level that has provided reasonable support over the last few months. If that level fails to hold, the next level of support is around its 200-day moving average at 859."

Source: Bespoke, March 25, 2009.

Platts: Chinese buying spree sparks fears of base metal shortage in Asia
"Robust Chinese demand could result in a supply shortage of base metals in Asia even as the rest of the world grapples with low demand, market sources said this week.

"Japanese copper smelters producing a total 120,000 mt/month of copper cathode have sold out of April-May shipments. Two smelters producing 20,000-40,000 mt/month each said they may be able to offer spot cargoes in June.

"Asia's copper market has tightened as a result, sources said. Premiums for Japanese copper for prompt shipment within 60 days have risen to $150/mt plus London Metal Exchange cash CIF Shanghai this month, from $80-100 mt/plus LME CIF Shanghai in February.

"There is no shortage yet, and no copper consumer in Asia has yet been forced to curtail production of coils or cables due to a shortage of copper feedstock, sources said.

"But if demand in recession-hit Japan does start to pick up unexpectedly, Asia may suffer shortages, impacting smaller consumers in particular that have no protection from long term contracts."

Source: Mayumi Watanabe, Platts, March 27, 2009.

David Fuller (Fullermoney): Where do oil prices go from here?
"The consensus view is usually a contrary indicator. Near the July 2008 peak at just under $150, many analysts were forecasting $200 and higher. This trend extrapolation was often influenced by their firms' and clients' own speculative positions, not least in tracker funds. Around $40, the consensus was for $25, suggesting sizable short positions.

"Price charts gave a very good signal that crude oil's bull run was over in mid-July 2008 and since December we have interpreted the ranging price action as base formation development centred on $40. I do not assume that the lows will be retested and the base might even have been completed. If so, the next reaction and consolidation, representing the first step above the base, would most likely encounter support at $47 or higher.

"Historically, demand for crude oil has only experienced a small decline during deep recessions. Global consumption of crude continued to rise during the 2001-2002 recession, albeit at a slower rate. We are currently seeing a dip in demand but as Matthew Simmons points out, it is only slight and mostly in terms of consumption in the US.

"Meanwhile, OPEC has reduced supplies, while worldwide exploration and development of oil reserves has been curtailed by low prices and financing difficulties in the global recession. The search for viable alternatives has become a priority for oil-importing countries but it is a slow process.

"Energy is a Fullermoney secular theme and our view is that it has become a bull play once again, in all its various forms. The short to medium-term risk is probably limited to additional base formation development before significant uptrends occur. That will mark the return of commodity price inflation."

Source: David Fuller, Fullermoney, March 24, 2009.

Ifo: Further decline in the Ifo Business Climate Index
"The Ifo Business Climate for industry and trade in Germany has cooled again somewhat in March. The firms have reported a further worsening of their current business situation. With regard to the business outlook for the coming six months, they are again slightly less pessimistic. An economic turning point has not yet been reached, in the opinion of the survey participants."

Source: Ifo, March 25, 2009.

CEP News: Fall in German PMIs starts moderating
"German manufacturing and services output continued to contract at severe rates in March. However, the pace of contraction unexpectedly eased over the month, Markit Economics noted.

"On Tuesday, Markit Economics reported that the German manufacturing purchasing managers rose to 32.4 in March, up modestly from February's 32.1 level. Economists had expected the PMI to fall back to its record low 32.0 level.

"Output in the services sector also showed unexpected strength, as reflected in the services PMI rising to 41.7 from February's 41.3 level. Expectations had been for a fall to an all-time low of 41.0.

"Taking the two PMIs together, the composite index came to a two-month high of 37.7, up 1.4 points from February's figure.

"'The rise in the headline composite index provides some tentative hope that the downturn has passed its nadir,' Markit economist Mark Smith said."

Source: CEP News, March 24, 2009.

CEP News: ECB may turn to "unconventional policy" if rates reach limit
"The European Central Bank may take unconventional measures if its key policy rate hits its lower boundary, ECB Governing Council member Nout Wellink said on Thursday.

"'The ECB could use unconventional monetary policy, on top of the unusual expansion already implemented, if the interest rate instrument can't be used further because of [almost] reaching the zero-rate limit,' Wellink said in the Nederlandsche Bank's annual report.

"The policy maker also said that months of negative price growth could not be ruled out in the euro zone. '[Negative inflation] isn't a problem in itself as long as consumers don't continuously postpone spending in the hope on further price declines,' Wellink said.

"Wellink also said that the global economic environment is unprecedentedly uncertain.' He added, 'The financial system has been under unprecedented pressure since August 2007."

"However, the central banker said that it was 'not unrealistic to expect that the world economy will get going' by next year."

Source: CEP News, March 26, 2009.

Financial Times: Take-up of City offices at new low
"Take-up of new offices in the City of London has fallen to its lowest for more than 20 years as the slowdown in the economy has reined in financial services businesses from expanding and moving to new buildings.

"There has been just 220,000 sq ft of new occupied space in the Square Mile since the beginning of the year, half the previous lowest office take-up during the last recession, when 500,000 sq ft was let in the third quarter of 1991.

"The economic downturn has hit the City office market hard, with many businesses looking to cut staff and reduce office occupation. Some are also looking to sub-let their own space.

"According to data compiled by Atisreal property consultancy since 1987, the vacancy rate in the City is 12.4%, or 10m sq ft, still significantly less than the last recession, when a fifth of offices were empty.

"Even so, there are a number of new buildings set for completion in the next two years that will add to those figures.

"City rents have also fallen sharply. Dan Bayley, head of national sales and lettings at Atisreal, said that prime rents were now about £45 per sq ft, down about a third from the peak of the market in 2007 when offices were being let at about £67.50 per sq ft.

"Mr Bayley said: 'With rents continuing to fall, landlords are experiencing further pain. However, the positive factor is that a number of occupiers really are seeing value for money and, like the West End, may start seeing more activity in the coming quarters.'"

Source: Daniel Thomas, Financial Times, March 22, 2009.

CEP News: BOJ minutes reveal steps to buy assets
"The Bank of Japan's minutes from the February 18-19 meeting revealed the bank felt that buying corporate bonds was necessary to stabilize financial markets.

"At the meeting, the central bank held the target rate unchanged at 0.1% as expected, but also announced further measure to boost corporate financing.

"The bank said it would begin purchases of corporate bonds and extend the period of time they will buy commercial paper. The bank has met since then and expanded their purchases of Japanese government bonds."

Source: Megan Ainscow, CEP News, March 23, 2009.

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