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Words from the (Investment) Wise for the Week That Was (April 6 - 12, 2009): Part II

Bespoke: Rally check-up
"The S&P 500 broke above its highs from last week today, which confirms a continuation of the uptrend that started back on March 9. Since then, the S&P 500 is up 25.5%.

"Five sectors have outperformed the overall market since March 9, while five have underperformed. Financials are up the most at 60.3%, followed by Consumer Discretionary (36.3%), Industrials (34.4%), Materials (32.1%), and Technology (29.8%). All of the outperforming sectors are cyclical in nature.

"Health Care has rallied the least at just 11.9%. Consumer Staples, Energy, Utilities, and Telecom are the other four sectors that have underperformed the S&P 500 during the rally."

Source: Bespoke, April 9, 2009.

Robert Buckland (Citigroup): Earnings outlook - don't adjust your set
"Global stock markets have entered the 'twilight zone' - the phase of a recession when earnings keep falling but share prices stabilise, says Robert Buckland, equity strategist at Citigroup.

"'The profits outlook for 2009 remains dire,' he says. 'The global recession has already driven trailing corporate earnings around the world down by 29% from the end-2007 high, but we think that this still represents only just over half the likely 50% peak-to-trough fall. We don't expect this profits cycle to bottom until 2010.'

"He notes that Japan has overtaken the US as the leader in the global earnings downturn. 'Partly due to the strong yen, Japanese earnings are now down 60% from the November 2007 global earnings peak. US earnings are down 37% and Europe ex-UK is down 34%. UK and emerging market earnings have held up best, partly as a result of higher weightings in commodity stocks. Sterling's weakness has also helped prop up UK earnings.'

"'But Mr Buckland suspects that global equity valuations are generally cheap enough to withstand this onslaught of bad news. Investors should not get too bearish when equities fall sharply or too bullish when they rise sharply.

"'While it is sensible to gradually raise exposure to risk assets through the twilight zone, there is no rush. The time to turn a wholesale buyer of cyclicals and seller of defensives is when the earnings cycle bottoms.'"

Source: Robert Buckland, Citigroup (via Financial Times), April 8, 2009.

Clusterstock: 140 years of bull and bear markets
"Doug Short has created a nice snapshot of 140 years of market history. It's a logarithmic chart, so it shows the impact of percentage rather than absolute price moves, and prices have been adjusted for inflation. Note that the chart is price-only: It does not include the impact of dividends.

"Key points:

• Bull and bear markets have always been with us (duh)
• The market spends about half the time above trend and half below trend (duh)
• The market has been above trend for about 20 years (ruh roh)
• The trough-to-peak 18-year bull market that peaked in 2000 (+666%) was the biggest in history by a mile (ruh roh)
• In the 5-year bull market in the middle of the Great Depression (1932-1937), the S&P jumped 266% (five years is a long time - don't want to miss that)
• 20 years after the 1929 peak, the S&P traded at half its 1929 value (ruh roh)

And here are the moves in table form:

Source: Henry Blodget, Clusterstock, April 6, 2009.

Barry Ritholtz (The Big Picture): Rosenberg - rally too flashy for our liking
"David Rosenberg, the soon-to-be former economist for Merrill Lynch, had a very prescient commentary last week about the 25% four-week rally.

"As for this 25% rally in three weeks - the consensus has swung to the view that this is a real inflection point. One warning. We saw this happen in late 2001 and early 2002 too ... big, big rally; early cyclicals flew; the markets thought we were in for a V-shaped recovery ... it was longer away than many at the time believed and many were burnt as a result. And keep in mind that the 'second derivative' on growth began to improve in the fourth quarter of 2001, and the S&P 500 still did not bottom for another year.

"Currently, the equity market is priced for $70 on earnings on a going-forward basis, or a 75% rebound. And with retailing stocks up 30%, leisure/accommodation up 35%, and the homebuilders up 40%, the market is priced, amazingly, for a revival that is led by the consumer! (in fact, the only S&P sector that is now trading at P/E multiples that are at post-2001 highs is the consumer cyclical group). If we see that in the next year, we will be the first to hang up our Hewlett Packards. Being up 25% in a year and staying bearish ... well, shame.

"Achieving that in less than a month - come on. Too flashy for our liking.

"In fact, let's learn from history. The only times we have ever seen the stock market surge close to this much in such a short time frame were: December 1929, June 1931, August 1932, May 1933, July 1938 and September 1982.

"Only in September 1982 and in May 1933 was the equity market embarking on a new bull phase. But guess what? By the time the S&P 500 surged 25%, it had already crossed above its 200-day moving average. So call us when the S&P 500 crosses the 1,000 mark - another 20% to go. That is how deeply entrenched this particular bear market has been - that even after this massive rally, the onus is still on the bulls! Consider as well that on four of the six occasions that the equity market staged such a huge rally over such a short time period, it relapsed. So we are going to wait this out, acknowledging that we could be late to the party. We still feel the downside risks are too high to be involved."

Source: Barry Ritholtz, The Big Picture, April 6, 2009.

Bespoke: Estimated Q1 '09 earnings growth
"At the start of the last earnings season, estimates for Q4 '08 YoY growth for the S&P 500 were at -20%. The actual number came in at close to -60%. For Q1 '09, estimates are much more negative at -37.3%. The only question now is whether estimates are still too bullish or too bearish. As shown in the chart below, estimates for Q2 '09 and Q3 '09 get better but are still negative.

"Looking at Q1 '09 sector estimates, Consumer Discretionary is expected to see YoY earnings decline by 103%. Materials are at -76%, followed by Energy (-58%) and Industrials (-39%). Utilities, Health Care, and Consumer Staples are all expected to see earnings decline by less than 10%."

Source: Bespoke, April 7, 2009.

Los Angeles Times: Grim market milestone - dividend cuts outnumber increases
"A new measure of American shareholders' pain in this bear market and recession: The number of US companies cutting cash dividend payments in the first quarter exceeded the number of firms that raised dividends, according to Standard & Poor's.

"Since S&P began collecting dividend data in 1955, cuts have never outnumbered increases in any quarter - until now.

"A total of 367 companies reduced or eliminated their payouts last quarter, up 342% from the 83 reductions in the first quarter of 2008, S&P said.

"The number of firms increasing their dividends last quarter plunged to 283, down 53% from 598 a year earlier.

"S&P's dividend survey covers about 7,000 US companies.

"Dividend payments are a function of current earnings and of companies' faith in future earnings. On both counts, executives are sending a grim message by hacking their payouts or by holding back from raising dividends.

"The total reduction in payments in the first quarter amounted to an annualized $77 billion in lost income to shareholders."

Source: Tom Petruno, Los Angeles Times, April 7, 2009.

Richard Russell (Dow Theory Letters): What are the markets trying to do?
"The market situation has seldom been more confusing. Many analysts are convinced that we are in a new bull market. Others (me included) believe we are in a bear market correction (rally).

"Because of the confusion, I'm going to step out and make a few guesses (might as well, since nobody really knows what's going on).

"(1) I believe that we're in a secondary (upward) correction of a bear market. I'm going to guess that this correction could rise further or at least last longer than most people are expecting. A bear market rally is supposed to convince the majority that a new bull market has started. The rally will often continue until a large number of investors are back on board, and then the bear will kill them as it fades away, leaving the new optimists high and dry and with losses.

"(2) Gold is in a downward correction of its primary bull market. Gold may decline or stall until it convinces the majority of gold-fans that the gold bull market has died. Holders of 'paper gold' and gold futures and options will be frightened out of their holdings. What we're experiencing now is the big correction that often occurs prior to the third speculative phase in gold. Holders of physical gold (coins, bars) will do best, since they will tend to hold on to their gold positions no matter what.

"So what are the markets trying to do? They're doing what they always do, keep investors in the equity bear market and keep investors out of the gold bull market. Why would they do that? Because that's the very nature of markets. Markets tend to thwart the majority. And that's logical and self-evident. If markets existed to make money for the majority, then most market participants would be millionaires, and we know that sadly, that is not the case."

Source: Richard Russell, The Dow Theory Letters, April 7, 2009.

Reuters: Mobius sees China as good investment target
"Templeton Asset Management's veteran fund manager Mark Mobius sees China as a good investment target because, besides its fast economic growth, China has treated smaller stakeholders in state-owned companies well ...

"'The Chinese government has shown itself very fair in its treatment of minority shareholders,' Mobius told Reuters in an interview on Tuesday.

"'When there was an acquisition from a parent company, they make sure there was a fair price and so forth.'

"Mobius also said there were opportunities in China because its economy is expanding the fastest among the BRIC nations, which refers to Brazil, Russia, India and China. He said he expected the Chinese economy to grow 7-8% this year.

"China has a geographical advantage as it can obtain technology from Japan and Korea, he said. It can also rely on countries such as Australia, Indonesia, Vietnam and Thailand for natural resources to help grow its economy, he said."

Source: Reuters (via Investorazzi), April 7, 2009.

Yahoo Finance, Tech Ticker: Soros - dollar's strength a measure of system's "sickness", euro will remain viable
"George Soros is a man of many skills. The billionaire has been very successful as an author, philanthropist, and as a force in liberal politics.

"Arguably Soros' greatest skill - and undoubtedly where he made his fortune - is as a speculator, specifically in the realm of currencies. Soros is best known as 'the man who broke the Bank of England' for his infamous short bet against the pound in 1992. Less known but nearly as successful was his 1985 'Plaza Accord' bet that the dollar would fall against the yen.

"So when George Soros talks currencies, people listen. In the accompanying clip, he provides insights on three of today's big currency questions:

Will the dollar maintain its status as the world's reserve currency?

Is there are risk of a breakup of the Eurozone?

Is he still short the British sterling today?"

Source: Yahoo Finance, Tech Ticker, April 7, 2009.

John Authers (Financial Times): Falling yen - measure of risk-taking
"If you need a measure of how much optimism has returned to world markets, look at the yen, says John Authers."

Click here for the article.

Source: John Authers, Financial Times, April 6, 2009.

Financial Times: IMF urges eastern EU to adopt euro
"Crisis-hit European Union states in central and eastern Europe should consider scrapping their currencies in favour of the euro even without formally joining the eurozone, according to the International Monetary Fund.

"'The eurozone could relax its entry rules so countries could join as quasi-members, without European Central Bank board seats, says the fund.

"'For countries in the EU, euroisation offers the largest benefits in terms of resolving the foreign currency debt overhang [accumulation], removing uncertainty and restoring confidence.

"'Without euroisation, addressing the foreign debt currency overhang would require massive domestic retrenchment in some countries, against growing political resistance.'

"Disclosure of the confidential report, prepared about a month ago, could reignite a fierce debate over strategies to assist central and east Europe.

"Even though global leaders hailed last week's G20 summit as a success, eastern Europe's challenges remain. The IMF report was compiled to support a campaign by the fund, the World Bank and the European Bank for Reconstruction and Development to persuade the EU and eastern European states to back a region-wide anti-crisis strategy, including a regional rescue fund. The campaign failed amid widespread opposition from both west and east European states.

"Eurozone members also oppose easing the eurozone's entry rules, as does the ECB."

Source: Stefan Wagstyl, Financial Times, April 5, 2009.

John Authers (Financial Times): Gold loses lustre
"Gold's desirable properties are a part of popular culture. It is indestructible and, throughout recorded history, people have believed in it.

"But it yields nothing, making it hard to value or to compare with other assets. If its price moves sharply, those who want to know what it is worth have nothing to hold on to.

"Gold has just undergone a sharp correction, taking it down 14% from $1,000 per ounce, which it briefly hit in February, before a slight bounce on Tuesday. Why?

"Supply and demand have a role. Talk of International Monetary Fund gold sales at the G20 summit dented prices. So did anecdotal evidence that individuals were selling their gold, notably in India where there is heavy retail demand for gold and where gold in rupee terms rallied throughout the crisis, making sales attractive.

"Gold is an inflation hedge but inflation expectations cannot explain this sell-off as it has coincided with a rise in inflation expectations, as derived from prices of inflation-linked bonds.

"Much of the sell-off is down to returning risk appetite, which can also be seen in the equity rally. But comparisons with other commodities suggest there is more to gold's sell-off.

"The oil price in gold terms has been stable over history but not recently - from the top of the oil bubble last year until the start of gold's correction a few weeks ago, oil fell by some 77% relative to gold.

"Platinum, a precious metal that should have a lot in common with gold, dropped 55% in gold terms from its recent peak, while copper, an industrial metal, fell 66%. All remain significantly cheaper in gold terms than they were at the outset of the financial crisis almost two years ago.

"This suggests that the gold price had raced ahead of itself as investors looked for insurance during the crisis and also suggests that the correction could go further."

Source: John Authers, Financial Times, April 7, 2009.

David Fuller (Fullermoney): Gold is in awkward phase
"I have previously mentioned that gold was in an awkward phase as the 'Armageddon, economic collapse and mayhem' buyers since October 2008 drift away and have yet to be entirely replaced by those who want a hard currency. Additionally, pending IMF sales have not helped sentiment recently.

"Also, with a stock market rally underway, and some appetite for risk returning, gold faces more competition. Additionally, people struggling to pay bills, not least those from India, Western Europe and the USA, have been swapping gold trinkets for ready cash. A metallurgist friend with a jewellery store in a prosperous section of Massachusetts says that the gold scrap trade has kept him in business over the last year. Lastly, this is a quiet time for gold, which tends to do best on average in 1Q and 4Q.

"The charts show that after encountering resistance near last year's high, gold has broken some support near $900. It is also oversold on short-term stochastics and approaching the 200-day MA, which turned upwards not long ago. I do not know whether or not this will offer support as the overall pattern is rangebound, albeit within a long-term upward trend. Nevertheless, I have often mentioned that I personally regarded gold as a buy on easing.

"I will hold onto my personal gold investments, which include futures. I suspect that we have seen most of the correction. More importantly, an upward dynamic and sustained move back above $900 is currently required to signal that the gold price is rising once again."

Source: David Fuller, Fullermoney, April 9, 2009.

Financial Times: Gold could "easily" return to $1,000
"Gold prices could 'easily' re-attain the $1,000 an ounce level this year and could even push through the $1,100 barrier, setting a new record high, according to GFMS, the precious metals research consultancy that released its Gold Survey 2009 today.

"GFMS said that it was 'only a question of time' before investment demand proved sufficiently powerful to overcome weak fabrication demand, particularly in the gold jewellery market, and surging scrap supplies, the twin obstacles which have managed to halt the advance in gold prices short of the $1,000 an ounce level.

"Although the spur for safe haven buying of gold from concerns over the stability of the banking sector might wane as the credit crisis eases, GFMS said investors would increasingly focus on a new worry: the probable inflationary consequences of the fiscal and monetary policies being adopted by governments in response to the global financial crisis.

"'Investors who are currently sitting on record amounts of cash will be looking for a secure inflation hedge for which purpose gold fits the bill perfectly,' said Philip Klapwijk, chairman of GFMS.

"Inflows into the gold market reached $26 billion last year, a relatively small amount compared to the flows into mainstream asset classes but enough to drive gold prices to record levels.

"Mr Klapwijk said last year's inflows could be 'dwarfed' if gold's appeal to investors widened substantially on the back of government's willingness to attempt an inflationary solution to the current global economic crisis.

"... GFMS said the solidity of the US dollar was also likely to be questioned by investors concerned about the ability of the US authorities to finance the explosion in government debt

"Following the collapse of Lehman Brothers in September of 2008, GFMS said there had been a ground swell in investment in physical gold, reflecting distrust in financial institutions, and general desire for wealth preservation, with this buying centred on western Europe and North America.

"This desire for gold in physical form was illustrated by the 40% rise in minting of official coins last year while gold bar hoarding rose 62%.

"GFMS said there had been an explosion of buying interest in gold last year but this had been offset by the general sell-off across commodity markets that was prompted by fears global growth would slow dramatically and the need to raise cash to cover margin calls or losses elsewhere.

"'Without these outflow from the OTC and futures markets, chiefly from hedge funds, gold prices might well have achieved fresh highs in the final months of 2008,' said Mr Klapwijk."

Source: Chris Flood, Financial Times, April 7, 2009.

CNBC: Oil headed to $40?
"Investors should brace themselves for the long aftershock of oil trending towards $40 a barrel, says Daniel Yergin, Cambridge Energy Research Associates chairman."

Source: CNBC, April 6, 2009.

CEP News: Euro zone GDP falls by a record 1.6% in fourth quarter
"Overall economic activity in the euro zone fell at a faster rate than expected in the fourth quarter, with weakness reported across the board.

"According to Eurostat final estimates, euro zone GDP fell by a record 1.6% quarter-over-quarter in Q4, down from both the 1.5% decline expected and Q3's 0.2% slide.

"Weakness was widespread, the statistics office said.

"Investment levels fell 4.0% in the fourth quarter, overshadowing both the 3.7% decline expected and preliminary estimates of -2.7%. Household consumption also lost ground, slipping 0.3% quarter-over-quarter. However, expectations had been for a more severe fall of 0.4%, up 0.5 percentage points from preliminary estimates.

"Exports declined 6.7% in quarterly terms, adding to the third quarter's 0.2% slide, while imports decreased by 4.7%, reversing the previous period's 1.3% rise.

"Conversely, government expenditure surprised to the upside, rising 0.4% in the fourth quarter. Preliminary estimates had suggested a decline of 0.6%.

"On an annualized basis, overall economic activity contracted 1.5% in the fourth quarter of 2008, revised down from preliminary estimates of -1.3%. In the previous quarter, GDP had increased 0.6% annually.

"Over 2008 as a whole, GDP rose 0.8% in the euro zone, down notably from 2007's 2.6% increase."

Source: CEP News, April 7, 2009.

Ambrose Evans-Pritchard: (Telegraph): Swiss slide into deflation signals the next chapter of this global crisis
"Swiss consumer prices fell 0.4% in March (year-on-year). Swiss CPI will be minus 1% at least by July, nearing the level where spending psychology changes. By the time you have a self-feeding spiral, it is too late.

"'This is something that we must prevent at all costs. The current situation is extraordinarily serious,' said Philipp Hildebrand, a governor of the Swiss National Bank.

"The SNB is not easily spooked. It is the world's benchmark bank, the keeper of the monetary flame. Yet even the SNB's hard men have thrown away the rule book, taking emergency action to force down the exchange rate of the Swiss franc.

"Here lies the danger. If other countries try to export deflation by this means, we will face a second phase of the global crisis. Taiwan is already devaluing. Korea, Singapore, and Sweden all seem tempted to follow. Japan is chomping at the bit.

"'We don't fully realise in the West what a catastrophic collapse Japan has suffered," says Albert Edwards, global strategist at Société Générale. 'The West has dumped a large part of its economic downturn onto Japan by devaluing against the yen.'

"This is about to go into reverse as Tokyo hits the ping-pong ball back across the net. 'As the unfolding collapse in the yen gathers pace, the West will see its green shoots incinerated to dust,' he said.

"Ultimately, I suspect this crisis may mark the moment when the Swiss franc loses its safe-haven role. Credit default swaps (CDS) measuring risk on five-year government debt have reached 127 for Switzerland, higher than Britain at 118. Norway has the world's lowest CDS at 48, reflecting its status as a petro-democracy.

"Switzerland's banks are over-leveraged. Loans to emerging markets equal 50% of GDP (half to Eastern Europe). Banking secrecy is dying. Fortunately for the Swiss, they have built up $700 billion in net foreign assets for a rainy day. What we risk now is a game of deflation "pass-the-parcel" worldwide. The economic establishment was caught off guard from 2003 to 2007 because it overlooked the way that Asia's unbalanced relationship with the West was feeding a credit bubble. It may be caught again as the same warped structure leads to a chain of (panicked) devaluations.

"Enjoy the 'bear-trap' rally on global bourses this spring. But remember, we have only just begun to see the mass lay-offs and hardship caused by this slump. The politicians will act to save their skins. Markets may not like the result."

Source: Ambrose Evans-Pritchard, Telegraph, April 5, 2009.

Financial Times: Ireland unveils emergency budget
"Ireland's finance minister warned on Tuesday that the nation faced 'the challenge of [its] life', as he slapped higher taxes on the middle classes in an emergency budget aimed at tackling the spiralling economic crisis.

"Brian Lenihan outlined plans to set up a national asset management agency to take over an estimated €80-€90 billion of bad loans extended by local domestic banks to developers and property companies that now look as if they will not be able to repay.

"Bankers said Ireland would be the first European Union country to adopt a so-called 'bad bank' model to clean up the balance sheets of its main banks in the hope this would restore lending to the real economy.

"Mr Lenihan acknowledged that the move 'will result in a very significant increase in gross national debt'. But he said the cost of servicing the debt would be met 'as far as possible from income accruing from the assets of the new agency'.

"Forecasting an 8% fall in Ireland's economic output this year, the finance minister said he had to tackle soaring government borrowing and called on political opponents to 'set aside narrow sectional interests' and support the tax increases.

"Referring to the Irish electorate's shock rejection of the European Union's Lisbon treaty last June, he said 'economic success had fostered a false sense of invincibility' and warned that the country was now facing 'the challenge of this nation's life'.

"Standard & Poor's, the rating agency, last week downgraded Ireland's sovereign debt. Even after Tuesday's measures, Mr Lenihan forecast government borrowing would be the equivalent of 10.75% of gross domestic product - more than three times the limit on countries joining the euro."

Source: John Murray Brown, Financial Times, April 7, 2009.

CEP News: China's economy to bottom out in 2009, World Bank says
"Signs are emerging that China's economy could be on track to reach a bottom by mid-2009, according to a report from the World Bank.

"A half-trillion dollar stimulus package announced by the Chinese government in November is expected to begin this year and fully take hold by 2010, fueling the country's economic growth, the World Bank said in its semi-annual review of the region's economic health.

"'Thanks to the substantial policy stimulus, China's economy should continue to grow significantly in a very challenging external environment,' the report said.

"China's economy is expected to grow by 6.5% in 2009, down from the 9% growth rate seen in 2008. The World Bank estimates the stimulus package will add 4.9 percentage points to GDP growth.

"The Chinese recovery could potentially lead to a regional stabilization, the report noted. However, it cautioned that China still heavily relies on exports to world markets that are still contracting, which would hinder a sustainable recovery.

"'The measures the authorities have taken to counteract the crisis across the region are helping to cushion the impacts on the most vulnerable people,' World Bank Vice President for the East Asia and Pacific region Jim Adams said in a release.

"The report warns that weaker growth in the region will slow the pace of poverty reduction, with indigence expected to increase in Cambodia, Malaysia and Thailand this year."

Source: Stephen Huebl, CEP News, April 7, 2009.

Financial Times: Japan unveils $154 billion stimulus plan
"The Japanese government is to provide Y50,000 billion in loan guarantees to government affiliated financial institutions to buy stocks in the market as part of a record stimulus plan that will cost the government Y15,400 billion.

"The size of the new package, which amounts to 3% of GDP, highlights the government's intention to act aggressively to combat the debilitating impact of the global recession on the Japanese economy.

"It will give 'a large stimulus to the domestic economy', said Richard Jerram, chief economist at Macquarie in Tokyo.

"The package also includes a tax break on up to Y40m of 'gift' money parents provide their children to buy a house.

"Details of the new stimulus plan, which also includes measures to stimulate solar energy, encourage more lending to corporations and support the unemployed, will be unveiled on Friday.

"Using fiscal policy aggressively 'will damage the already poor fiscal position but tolerating extended deflation and recession would probably be worse for the path of government debt,' he said.

"Takeo Kawamura, chief cabinet secretary told the Japanese media the government would likely have to issue construction bonds and deficit bonds of Y11,000bn to pay for the additional spending."

Source: Michiyo Nakamoto, Financial Times, April 9, 2009.

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