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Words from the (Investment) Wise for the Week That Was (May 25 - 31, 2009): Part II

Asha Bangalore (Northern Trust): Durable goods boosted by defense orders
"Orders of durable goods increased 1.9% in April, after a 2.1% drop in the prior month. The 23.2% jump in orders of defense goods lifted the overall total. Bookings of non-defense capital goods declined 2.0% and that of non-defense capital goods excluding aircraft also dropped 1.5%. On a year-to-year basis, orders of durables fell 26.6% in April compared with a 24.7% drop in March."

Source: Asha Bangalore (Northern Trust), May 28, 2009.

Bespoke: Rating agencies - sound and fury signifying nothing
"After S&P cut its credit outlook on the UK last week, we noted that listening to the ratings agencies is like making investment decisions based on last month's newspaper. In this weekend's Wall Street Journal interview, Dallas Fed President Richard Fisher seemed to agree with that sentiment:

"'I served on corporate boards. The way rating agencies worked is that they were paid by the people they rated. I saw that from the inside.' He says he also saw this 'inherent conflict of interest' as a fund manager. 'I never paid attention to the rating agencies. If you relied on them you got ... you know,' he says, sparing me the gory details. 'You did your own analysis. What is clear is that rating agencies always change something after it is obvious to everyone else. That's why we never relied on them.'

"If the US ever loses its AAA credit rating, does anyone really think the ratings agencies will be ahead of the curve?"

Source: Bespoke, May 26, 2009.

Financial Times: JPMorgan warns on credit card woes
"Jamie Dimon, JPMorgan Chase chief executive, warned on Wednesday that loss rates on the credit card loans of Washington Mutual, the troubled bank acquired last year by JPMorgan, could climb to 24% by the year end.

"In the past, credit card loss rates have tracked the unemployment rate but that relationship has been breaking down for more troubled credit card portfolios, such as the $25.9 billion in WaMu credit card loans.

"At the end of the first quarter, 12.63% of the WaMu credit card loans were deemed uncollectable by JPMorgan. The bank estimates that figure could reach 18 to 24% by the end of 2009, depending on economic conditions.

"Describing credit cards as JPMorgan's most challenged business, Mr Dimon said loss rates for the company's larger $150 billion portfolio of Chase credit cards could reach 9% in the third quarter and as much as 10.5% by the end of the year, depending on housing and unemployment trends. That compares with first-quarter charge-off rates of 6.86% on the Chase card portfolio.

"Mr Dimon said he believed that a new law restricting higher interest rates on delinquent credit card debt for the first 60 days could make credit cards more expensive in the future.

"Banks are repricing credit cards and cutting credit lines before the new rules take effect, pushing borrowers into distress in some instances, according to industry executives."

Source: Henry Sender and Saskia Scholtes, Financial Times, May 28, 2009.

CNBC: Bond market's volatility
"Many concerns about the rising Treasury yields continue to undermine the Obama administration's economic rescue plan, with James Galbraith, University of Texas; Jonathan Tisch, Loews Hotels chairman/CEO and CNBC's Steve Liesman."

Source: CNBC, May 29, 2009.

John Authers (Financial Times): Keep an eye on Treasuries
"Did the tide turn for US assets last week? For months, US Treasury bond prices have fallen, taking the dollar with them. The explanation was clear. Investors believed disaster had been averted. That meant taking greater risks once more and selling the secure US Treasury bonds bought during the panic.

"But the rise in bond yields and fall of the dollar took on new momentum last week, even as stock markets fell back. The 10-year bond yield hit 3.45%, a six-month high, while the dollar hit a five-month low.

"According to RBC, there were only 18 days in the past 20 years when the 10-year Treasury rose by 6 basis points or more, the dollar trade-weighted index fell 0.5 per cent or more and the S&P 500 fell more than 1.2%. None of them came from 2003 to 2008. But this happened on Thursday last week.

"The catalysts for the bad day appeared to be the news that dealers tried to sell the Federal Reserve far more bonds that day than the central bank was willing to buy, and the decision by Standard & Poor's to put the UK on review for a potential sovereign downgrade - seen as a stalking horse for making the same move for the US.

"A rating agency move is not a good reason to sell US assets. The US Treasury has taxing authority. If it were ever to default, the result would be disaster for virtually all other governments, many of which are in a more parlous fiscal state than the US in any case. So some of the fear surrounding the dollar is a little irrational.

"But concern about the bond market is more meaningful. It is vital to keep US rates down, to revive both the housing market and the health of the banks. That is why the Fed is buying bonds. If even this drastic action is not enough to keep rates low, then these policy aims are in jeopardy. Last week that concern clarified in traders' minds and it gave good reason to sell the dollar and US stocks."

Source: John Authers, Financial Times, May 29, 2009.

Eoin Treacy (Fullermoney): Government bonds in downtrend
"Government bonds were the safe haven of choice for large numbers of investors during the most panicky period of this crisis. Three-month yields hit negative territory on a number of occasions in December as investors stampeded out of 'risk assets' and into government backed securities. Longer-dated issues surged to important highs in late December, which coincided with a yield of 2.5% on the 30yr and 2% on the 10yr.

"Since then yields have almost doubled as the perceived need for a 'safe haven' has decreased and investors gradually begin to demand a great return for shouldering the risk of lending to governments in the process of massively increasing the supply of bonds.

"The spread between the 10yr and 2yr, commonly used as an approximation of the yield curve, hit a new high yesterday. In the past, an inverted yield curve has been a reliable lead indicator of recessions. This was borne out again between 2006 and mid 2007. However, peaks in the spread do not appear to reliably predict the end of recessions. In fact there appears to be a lag. The move to new high ground for this relationship is commensurate with the size and shape of this recession and when a peak becomes evident, it will likely lend confidence to investors.

"There is also now a marked difference with how investors are looking at inflation. In December the spread of 10yr yields over 10yr TIPS bottomed just above 0%. The spread has since rallied to almost 2% as investors weigh the risks of quantitative easing. There was also surely an element of hedging the potential for inflation while prices were so low in November and December. Since then prices have recovered to the 5yr average and are currently pressuring the lower side of the 5-month range.

"In the meantime, yields continue to rally from deeply oversold territory and are likely overdue a consolidation of recent gains. A sustained move below 3% would suggest a lengthier reaction. However, given the technical action, bond prices are likely to be shorts on significant rallies for the foreseeable future.

"While the government bond bubble may be in the process of bursting, corporate bond spreads are contracting rather swiftly. BBB Industrial spreads peaked in November near 440 basis points and have since fallen to 340. A sustained move back above 400 basis points would be needed to question potential for further contraction."

Source: Eoin Treacy (Fullermoney), May 28, 2009.

MarketWatch: Market ends the month with more gains
"May marks the third straight month of gains for the stock market. But will June bring more reasons for optimism? Sam Stovall, chief investment strategist for Standard & Poor's Equity Research, talks to Kelsey Hubbard about what the future might bring."

Source: MarketWatch, May 29, 2009.

Bloomberg: Barton Biggs says rally may push S&P 500 to 1,050
"Barton Biggs, the former chief global strategist for Morgan Stanley who runs the New York-based hedge fund Traxis Partners LP, talks with Bloomberg's Matt Miller about the outlook for stocks. The steepest rally since the 1930s for the Standard & Poor's 500 Index may push the benchmark to 1,050 and emerging markets will continue to rise, Biggs said."

Source: Bloomberg, May 29, 2009.

Bespoke: Sector performance during pullback
"The S&P 500 is down 3.89% since rallying 37% from March 9 through May 8. Below is a scatter chart showing sector performance during the 3/9-5/8 rally and during the current pullback. As shown, as performance during the rally gets better, it gets worse during the current pullback. So the sectors that rallied the most have generally pulled back the most.

"Financials are down the most of any sector since May 8 at -11.2%, but they were also up a whopping 110% during the rally. The Industrial sector has been the second worst since May 8 with a decline of 7.5%. Technology and Consumer Staples are the only two sectors that are up since May 8, so they've shown the best relative strength recently."

Source: Bespoke, May 28, 2009.

Financial Times: Small caps outperform in second half of recession
"For US equity investors, it has long paid to think small and cheap. Seemingly minor differences in returns for opaque and dowdy companies compound impressively over the years. In the 80 years ended in 2008, investing in a basket of US small cap value stocks compiled by Al Frank Investments would have turned $1 into $46,603 with dividends reinvested against $1,097 for large growth stocks.

"The final stages of a boom, though, are an inauspicious time to own small companies. As the economy slows, they are often the first to feel the pinch: small businesses tend to be biased towards cyclical industries and mostly do not have the luxury of international diversification. Also, as bull markets near their apex, inflows from naïve retail investors may be concentrated in the largest, most liquid shares. True to form, small caps began to underperform the broader US market just as the housing bubble peaked. From April 2006 to the end of 2008, they shed 32% of their value compared with just 24% for large stocks.

"Conversely, much of small stocks' historical edge comes from outperforming early in any recovery. Pinpointing the end of today's downturn, which has now lasted twice as long as average, is hardly necessary. And do not bother looking to official arbiters of these things - the last eight downturns were only declared to be over, on average, 15 months afterwards. The recent outperformance of small stocks may thus be a leading indicator of a recovery next year.

"Had an investor in previous recessions known ahead of time the day the recession would end and bought small stocks immediately, it would have been too late, according to research by Russell Investments. The best time to maximise returns would be six to nine months before. Separately, analysts at Merrill Lynch showed that small caps underperformed by four percentage points in the first half of a recession but outperformed by nine points in the second half. Ignore small caps only if you think the halfway point of this crisis is still not even in sight."

Source: Financial Times, May 25, 2009.

Barron's: Profits squeezed at the margin
"That things are getting worse more slowly is the essence of the bullish argument for the US economy and, by extension, corporate profits. After the nosedive of the past two quarters, the rate of decline will flatten out and give way to an eventual ascent by later this year.

"But that takeoff could be slower and later than assumed ...

"Smithers & Co. of London pointed out that the cyclical improvement in profitability would accrue less to equity holders than previous phases given the need to use those funds to bolster balance sheets.

"Deleveraging means paying down debt instead of paying out dividends or buying in stock. Indeed, as the pick-up in equity financing indicates, it means issuing new shares. 'The growth rate in of earnings per share thus is likely to be worse than that indicated by profit margins alone,' Smithers' report concludes.

"Those margins, far from being depressed, remain near historical highs, a point which both Smithers and Albert Edwards, Societe Generale's strategist, emphasize.

"Moreover, Edwards observes that the work of his colleague, quantitative analyst Andrew Lapthome, shows that bottom-up company analysts forecast an unprecedentedly mild contraction in profit margins in the midst of the worst recession since the Great Depression.

"'This just doesn't make sense to us,' Edward writes in his Global Strategy Weekly. 'Analysts are 'anchoring' on recent unprecedented high in margins as the new norm, instead of viewing them as bubble nonsense never to be seen again.'

"In the first-quarter reporting season now winding down, results exceeded expectations despite punk top-line growth. 'Clearly companies have been cutting costs aggressively. This helps explain why we have seen massive job cuts in recent months,' he adds. And with households' deleveraging and purchasing power eroding, corporate revenue growth will be hit further.

"Those who didn't get on board the rally that's taken the US stock market up by a third from its early March lows face 'career risk' if, like most, they lost a boatload of money last year. That suggests they'll try to ride winners to the extent they can. After mid-year, we'll see if they can keep flogging them successfully."

Source: Randall Forsyth, Barron's, May 28, 2009.

Bespoke: International revenues and recent stock performance
"When the US dollar experienced its big decline in the years leading up to the 2008 rally, stocks with high amounts of international revenues outperformed as businesses in other countries bought more goods from US companies. As the dollar made its comeback last year and earlier this year, stocks that generated most of their revenues domestically outperformed. But now that the dollar has pulled back again, the international revenue trade has made a comeback.

"We broke up the S&P 500 into deciles (50 stocks in 10 groups) based on a stock's percentage of international revenues and calculated the average performance of stocks in each decile since the May 8 market top. Over this same time period, the US dollar has declined quite a bit as well. As shown below, the 50 stocks with the highest percentage of international revenues are down just 1.3%, while the 50 stocks with the lowest percentage of international revenues are down 7.9%.

"Depending on which way you think the dollar will go from here, you can play stocks with high amounts of international revenues or low amounts."

Source: Bespoke, May 28, 2009.

Bespoke: BRIC countries continue to surge
"Russia's RTS stock index was up another 3.2% today [Friday], while China was up 1.71% and India was up 2.3%. The BRIC (Brazil, Russia, India, China) countries continue to surge higher in 2009, as they've far outpaced stock markets of so-called 'developed' countries. Below we highlight their year to date performance compared to the S&P 500. As shown, Russia is up a whopping 72.1% this year, followed by India at 51.6%, China at 44.6%, and Brazil at 39.7%. The S&P 500 is up 0.22%."

Source: Bespoke, May 29, 2009.

InvestmentNews: "Shake hands" with government, the Pimco guru advises
"The credit crises and recent market collapse have resulted in 'long-term changes that will establish a 'new normal',' Bill Gross said yesterday.

"The managing director and co-chief investment officer of Pacific Investment Management Co. made his comments during a keynote address at the Morningstar Investment Management Conference in Chicago, which was sponsored by Morningstar Inc. of Chicago.

"That means economic growth of between 1% to 2% over the next several years, relatively high unemployment in the range of 7% to 8% and accelerating inflation, Mr. Gross said.

"That will crimp asset-manager profits because they will have to contend with a low-return environment, he said.

"Among other things, Mr. Gross recommended that investors look overseas, particularly in Brazil, India and China. 'The growth will be in economies where consumers are a small portion of the economy,' he said.

"Domestically, Mr. Gross suggested investors 'shake hands' with government. Investors should look for what government is going to buy, and buy it first, he said."

Source: David Hoffman, InvestmentNews, May 29, 2009.

CNBC: Mobius - emerging markets due for correction
"The emerging markets are due for a correction, though it will be short-lived, says, Mark Mobius, executive chairman at Templeton Asset Management. He shares his outlook, with CNBC's Amanda Drury."

Source: CNBC, May 29, 2009.

The Wall Street Journal: If you think worst is over, take Benjamin Graham's advice
"It is sometimes said that to be an intelligent investor, you must be unemotional. That isn't true; instead, you should be inversely emotional.

"Even after recent turbulence, the Dow Jones Industrial Average is up roughly 30% since its low in March. It is natural for you to feel happy or relieved about that. But Benjamin Graham believed, instead, that you should train yourself to feel worried about such events.

"At this moment, consulting Mr. Graham's wisdom is especially fitting. Sixty years ago, on May 25, 1949, the founder of financial analysis published his book, 'The Intelligent Investor', in whose honor this column is named. And today the market seems to be in just the kind of mood that would have worried Mr. Graham: a jittery optimism, an insecure and almost desperate need to believe that the worst is over.

"You can't turn off your feelings, of course. But you can, and should, turn them inside out.

"Stocks have suddenly become more expensive to accumulate. Since March, according to data from Robert Shiller of Yale, the price/earnings ratio of the S&P 500 index has jumped from 13.1 to 15.5. That's the sharpest, fastest rise in almost a quarter-century. (As Graham suggested, Prof. Shiller uses a 10-year average P/E ratio, adjusted for inflation.)

"Over the course of 10 weeks, stocks have moved from the edge of the bargain bin to the full-price rack. So, unless you are retired and living off your investments, you shouldn't be celebrating, you should be worrying.

"Mr. Graham worked diligently to resist being swept up in the mood swings of 'Mr. Market' - his metaphor for the collective mind of investors, euphoric when stocks go up and miserable when they go down.

"In an autobiographical sketch, Mr. Graham wrote that he 'embraced stoicism as a gospel sent to him from heaven'. Among the main components of his 'internal equipment', he also said, were a 'certain aloofness' and 'unruffled serenity'.

"Mr. Graham's immersion in literature, mathematics and philosophy, he once remarked, helped him view the markets 'from the standpoint of eternity, rather than day-to-day'.

"Perhaps as a result, he almost invariably read the enthusiasm of others as a yellow caution light, and he took their misery as a sign of hope.

"His knack for inverting emotions helped him see when markets had run to extremes. In late 1945, as the market was rising 36%, he warned investors to cut back on stocks; the next year, the market fell 8%. As stocks took off in 1958-59, Mr. Graham was again pessimistic; years of jagged returns followed. In late 1971, he counseled caution, just before the worst bear market in decades hit."

Source: Jason Zweig, The Wall Street Journal, May 26, 2009.

BCA Research: US - devalue or deflate
"While the US dollar is becoming oversold and a short-term retracement is possible, we believe that the cyclical decline has further to run.

"In the aftermath of the burst credit/asset bubble, US policymakers face a choice: devalue or deflate. Indeed, governments around the world are facing similar conditions and are also attempting to reflate their economies. However, US reflationary policies are the most aggressive, which places the dollar at longer-term risk. The US fiscal deficit will top 14% of GDP this year and the Fed has already announced debt purchases which amount to 12.5% of GDP.

"Moreover, the FOMC minutes warned that the Fed is willing to increase its debt monetization operations. There are two ways that these policies are dollar negative. First, currency debasement/higher inflation means a lower nominal exchange rate in order to keep the real exchange rate stable. Second, the Fed's efforts to suppress bond yields will impact cross-border capital flows. As the US current account deficit is now entirely the result of the budget deficit, foreign purchases of Treasurys is the most important flow for the dollar.

"Bottom line: The continuation of current US policies could eventually raise investor concerns of a dollar debasement. While some short-term technical indicators are warning that the US dollar is becoming oversold, our Foreign Exchange Strategy service recommends investors hold core short dollar positions."

Source: BCA Research, May 28, 2009.

Financial Times: Bets against dollar highest since start of economic crisis
"Speculative bets against the dollar have risen to their highest level since the onset of the financial crisis.

"Positioning data from the Chicago Mercantile Exchange, often used as a proxy for hedge fund activity, showed that in the week ending May 19, bets against the dollar - short positions - versus the euro exceeded bets on dollar strength by 12,250 contracts.

"This net short position was the highest level since the week of July 15, when the dollar hit a record low of $1.6038 against the euro.

"Meanwhile, the net short position on the dollar versus the yen rose to 6,000 contracts, the highest since March.

"Analysts said the fact that net long positions in the Australian dollar also hit their highest level since July reflected the extent of deepening anti-US dollar sentiment among the speculative community.

"Ashraf Laidi at CMC Markets said considering that long positions in the euro and yen against the dollar were still about 11 times lower than their record highs, speculators had plenty of upside against the dollar in terms of quantity as well as price."

Source: Peter Garnham, Financial Times, May 26, 2009.

Ambrose Evans-Pritchard (Telegraph): China warns Federal Reserve over "printing money"
"Richard Fisher, president of the Dallas Federal Reserve Bank, said: 'Senior officials of the Chinese government grilled me about whether or not we are going to monetise the actions of our legislature.'

"'I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States,' he told the Wall Street Journal.

"His recent trip to the Far East appears to have been a stark reminder that Asia's 'Confucian' culture of right action does not look kindly on the insouciant policy of printing money by Anglo-Saxons.

"Mr Fisher, the Fed's leading hawk, was a fierce opponent of the original decision to buy Treasury debt, fearing that it would lead to a blurring of the line between fiscal and monetary policy - and could all too easily degenerate into Argentine-style financing of uncontrolled spending.

"However, he agreed that the Fed was forced to take emergency action after the financial system 'literally fell apart'.

"The Oxford-educated Mr Fisher, an outspoken free-marketer and believer in the Schumpeterian process of 'creative destruction', has been running a fervent campaign to alert Americans to the 'very big hole' in unfunded pension and health-care liabilities built up by a careless political class over the years.

"'We at the Dallas Fed believe the total is over $99 trillion,' he said in February."

Source: Ambrose Evans-Pritchard, Telegraph, May 26, 2009.

Bloomberg: Baltic Dry Index gains 5.9% to cap record monthly gain
"The Baltic Dry Index, a measure of shipping costs for commodities, climbed every day in May to post its biggest monthly advance on record.

"The index tracking transport costs on international trade routes added 196 points, or 5.9%, to 3,494 points, according to the London-based Baltic Exchange today. The gauge climbed 96% in the month.

"'It's amazing; the atmosphere is much more positive than it was a few months back," said Herman Billung, chief executive officer of Golden Ocean Management A/S, which operates Norwegian billionaire John Fredriksen's fleet of commodity carriers.

"'It's extremely dangerous to underestimate Chinese demand, which we've all had a tendency to do for a few years now.'
"As well as three straight months of record iron ore imports, Chinese shippers are stepping up purchases of coal and other commodities, Billung said by phone from Oslo today. Ships' asset values are climbing because of the rising market, he said."

Source: Alaric Nightingale, Bloomberg, May 29, 2009.

Financial Times: Opec bets on recovery to boost price
"The Organisation of the Petroleum Exporting Countries delivered on Thursday its most optimistic message about the global economy and the oil market since the start of the financial crisis last summer triggered a precipitous fall in prices from a record $150 a barrel to $30.

"'We are beginning to see light at the end of the tunnel,' Abdalla El-Badri, Opec secretary-general, said after the cartel agreed to leave its production level unchanged, betting that the global recovery would push oil prices to $75-$80 a barrel.

"'We are seeing [oil demand in] the US picking up,' Mr El-Badri added. 'But, above all, which is the most important, we are seeing demand in China and India and Asia as a whole.'

"Because oil demand was closely correlated with economic activity, Opec's cheerful view was a signal the global economy was slowly strengthening, analysts said.

"Ali Naimi, Saudi minister and one of the world's most senior energy policymakers, added to the upbeat sentiment, saying: 'The price is good, the market is in good shape and the recovery is under way, so what else could we want?'

"David Kirsch, an oil market analyst at PFC Energy, said in Vienna that Opec was leaving behind its worries about the global economy, last expressed at its March meeting. 'Opec is witnessing early signs of economic recovery and financial flows into commodities,' Mr Kirsch said.

"Opec delegates said that Saudi Arabia appeared confident that the flow of money into commodities - as investors worried about a pick-up in inflation or a further weakening of the US dollar - would help the cartel to support oil prices. Speculative flows, long an Opec foe, could turn into an ally, analysts said."

Source: Javier Blas, Financial Times, May 28, 2009.

Riccardo Barbieri (Banc of America Securities-Merrill Lynch): Higher oil won't derail recovery
"The recent rise in the oil price should not pose a threat to the global recovery - for now, believes Riccardo Barbieri, head of international economics at Banc of America Securities-Merrill Lynch.

"'As long as prices rise only moderately from here, say revisiting the $80 a barrel level by year-end, this would not pose severe risks for the advanced economies, while the emerging ones would be able to tolerate even higher levels, say $100, in due course.'

"He says the key issue is whether oil's increase is part of the 'reflation trade' seen in the equity and credit markets, or whether it reflects a significant rise in oil demand. 'It seems that the oil market has mostly responded to improving expectations concerning the timing of the recovery more than to an actual pickup in demand,' he says. 'The oil futures curve has flattened significantly in recent weeks, with late-2009 and 2010 contracts rising a lot less than the front ones.'

"Mr Barbieri references work by the bank's head of commodity research, Francisco Blanch, suggesting global inventories remain high and Opec is sitting on ample spare capacity. According to Mr Blanch, given the precarious state of the global economy, Saudi Arabia would boost production if prices moved up too quickly.

"'In terms of price, our house view is that the line in the sand for Opec could be at $80. While this level may well be exceeded, it would not be sustainable without a strong pickup in demand if Opec boosted its output.'"

Source: Riccardo Barbieri, Banc of America Securities-Merrill Lynch (via Financial Times), May 26, 2009.

Richard Russell (Dow Theory Letters): The three phases of a gold bull market
"Every major primary bull market takes place in three sentiment phases. The first phase of the gold bull market occurred around 1999 to 2005. This was the 'dirt cheap' phase of gold when only the true believers assumed positions. Old timers probably remember back in 2000 when I wrote that the listed gold shares were so ridiculously cheap that they could be bought and 'put away' as perpetual warrants.

"The second phase of the gold bull market started around 2005 and is still in force. This is the phase where the seasoned professionals and a few more sophisticated funds take their positions. It is in the second phase where we see the most painful secondary corrections. And it is in the second phase where the public first notices the persistent rise in gold. In the current area, gold is just starting to attract the attention of the public.

"Every major primary bull market that I have studied or lived through ends up with a wildly speculative third phase. This is the phase where the public and the crowd rushes head-long into the market. We saw this last in the years around 2000 when people bought any kind of tech stock. 'I don't care what it is, if it's tech, just get me in!'

"My belief is that we're now nearing the beginning of the third speculative phase of the great gold bull market. The huge secondary reaction that has held gold in its grip since early 2008 is coming to an end. Interestingly, this reaction has taken the form of a large head-and-shoulders bottoming pattern. Most recently, gold has been climbing (almost unnoticed) up the formation's right shoulder. If June gold can close above 1003, I believe that will signal the beginning of gold's third speculative phase."

Source: Richard Russell, Dow Theory Letters, May 26, 2009.

Ambrose Evans-Pritchard (Telegraph): Gold bugs at last have their perfect trinity
"The world's top hedge fund manager John Paulson has built a gold position of at least $5.5 billion, the biggest such move since George Soros and Sir James Goldsmith bet on Newmont Mining in 1993.

"Britain has become the first of the Anglo-Saxon 'AAA' club to face a downgrade. As feared, the cancer of bank leverage is spreading to sovereign cores.

"Gold prices tend to slide in late May and languish through the summer, because of the seasonal ups and downs of jewellery demand. The trader reflex would be to short gold at this stage after its $90 vault to $959 an ounce over the past month. They may think again this year.

"Paulson & Co has bought $2.9 billion in SPDR Gold Trust, the biggest of the gold exchange traded funds (ETFs), which now holds 1106 tonnes - three times the Brown-gutted reserves of the United Kingdom.

"Mr Paulson has also built up a $2.3 billion holding of Anglo Ashanti, Goldfields, Kinross Gold, and Market Vectors Gold Miners. The fact that he is launching a 'Paulson Real Estate Recovery Fund', reversing the bet against sub-prime securities that made him rich, tells us all we need to know about his thinking. This is a liquidity-reflation play.

"You can argue - as do UBS, Merrill Lynch, ING, and Capital Economics, to name a few - that massive global stimulus is merely struggling to off-set a massive deflationary shock.

"So how will gold fare in a 'Japanese' stalemate world where neither inflation nor deflation gets the upper hand? The eight-year rally that has lifted gold from $254 to $959 may lose momentum for a while.

"'The air is getting thin up here,' said John Reade, precious metals guru at UBS. 'Rich investors are no longer rushing out to buying gold bars as they did after the Lehman collapse. Still, we think it is highly significant that both China and Russia - two of the biggest holders of foreign reserves - are both buying gold,' he said.

Personally, I remain a gold bug out of fear that the most corrosive phase of this crisis lies ahead. ... gold has outperformed Wall Street's S&P 500 index by 500% so far this century, as if able sniff out trouble in advance. Such runs tend to finish with a 'parabolic' blow-off before they die. Mr Paulson may yet make another fortune, whatever his reason."

Source: Ambrose Evans-Pritchard, Telegraph, May 23, 2009.

Credit Suisse: Gold - how far can the rally go?
"Gold prices rallied over the past months, driven by investors, central banks or other hedgers looking for a safe haven. There is however still significant upside potential in the medium term, even if this safe haven effect has abated. Credit Suisse's commodity analyst Eliane Tanner explains why.

"Strong monetary demand coupled with a muted supply outlook should keep gold prices well supported over the next few months. However, the decline in jewelry demand should limit the medium-term upside potential, since it is likely to diminish quickly when prices increase too high or too fast. But in turn, jewelry demand is set to provide a floor to prices when investment demand abates, as the lower prices should see non-monetary demand recovering. Credit Suisse therefore forecasts gold prices between 1,100 and 1,200 dollars per ounce by the end of the second quarter of 2010."

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Source: Credit Suisse, May 25, 2009.

Ifo: Ifo Business Climate Index for Germany looking up
"The Ifo Business Climate Index for industry and trade in Germany rose once again in May. Although the firms have again assessed their current business situation more unfavourably than in the previous month, they have given clearly fewer poor assessments of their six-month business outlook. This points to a gradual stabilisation of economic output at a low level."

Source: Ifo, May 25, 2009.

Nationwide:UK house prices rise for second time in three months
"Commenting on the figures Martin Gahbauer, Nationwide's Chief Economist, said:

"'The price of a typical house rose by 1.2% in May, providing further evidence of some improvement in housing market conditions over the last few months. At £154,016, the average house price is still 11.3% lower than a year ago, although this marks a significant improvement from the annual decline of 15.0% recorded in April. The 3 month on 3 month rate of change - a smoother indicator of short-term price trends - rose from -3.0% in April to -0.5% in May and now stands at its highest level since January 2008.

"'Although the short-term trend in house prices has clearly improved from where it was at the beginning of the year, it is still too early to say that the market is turning definitively. During the downturn of the early 1990s, there were many months during which prices rose, only to fall back down again in subsequent periods.

"'In the current downturn, the combination of rapidly rising unemployment and tight access to credit implies that the last of the price declines has probably not been seen yet. Nonetheless, the improvement in house price trends is consistent with signs of stabilisation in several other economic indicators and suggests that any further price declines may occur at a less rapid pace than in 2008."

Source: Nationwide, May 29, 2009.

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