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Words from the (Investment) Wise for the Week That Was (June 15 - 21, 2009): Part II

The Capital Spectator: A bull market in false dawns?
"Flat to a slight upside bias. That about sums up the prevailing state of inflation at the moment, based on this morning's latest from the US Bureau of Labor Statistics.

"Seasonally adjusted consumer inflation rose 0.1% last month, up from zero the month before and a modest decrease in March. On its face, that's good news, as it suggests that the risk of deflation, if not quite passed, is looking more and more like a shadow of its formerly threatening self. Meanwhile, inflation as a clear and present danger also remains thin as an imminent menace.

"We are in a transitory state, passing from severe danger to something less so. Anything's possible, of course, especially in the current climate. But barring some extraordinary and largely unexpected event, we're likely to press on through what we'll call a pre-recovery period, when the economic numbers improve relative to the recent past yet the numbers don't quite show the traditional bounce that typically accompanies the end of recessions.

"'The economy seems to be out of intensive care,' says David Shulman, senior economist at UCLA Anderson School of Management. 'The freefall stage in dropping output and employment seems to be over, but the economy is still sick.'

"The prospect of false starts in the data looks quite high in the months ahead. The good news on one day will be reversed by bad news the next, and quite a bit of treading water at other times. The transition state that carries us from recession to growth, in short, will last longer than usual. The evidence will be particularly obvious in the lagging indicators, employment being the most conspicuous example.

"Indeed, the labor market is still shrinking and will probably continue to do so in the months ahead, perhaps followed by an extended bottoming-out period over several quarters. The economy's capacity to create jobs is likely to come later and be more tepid than has typically been the case following the end of recessions in the post-war era.

"Extending the medical metaphor, Bruce Kasman, chief economist for JPMorgan Chase, predicts in BusinessWeek.com yesterday that 'the economy will return to growth but not to health'.

"Last week we wrote of the 'technical end' of the recession and our expectation that NBER would eventually get around to declaring the downturn's finish at, well, right about now, give or take a few months. That's good news relative to the recent standard of economic activity. But the technical demise of the recession isn't likely to bring easily recognizable good news on Main Street anytime soon.

"As frustrating as that outlook is, it's even more hazardous than is generally recognized. If we're facing an unusually long transition period, there are specific risks linked to this abnormal state of affairs. That includes figuring out how and when to adjust monetary policy to balance two conflicting forces: deflation and inflation. As the former gives way, the latter isn't likely to suddenly pop out and yell 'boo'. Nonetheless, the future inflation risk isn't trivial, given the massive liquidity that's been created of late and the historical lessons that go with fiat currencies.

"Tightening monetary policy too soon may risk choking off a nascent but weak recovery; waiting too long to raise interest rates may give inflation a solid foundation to thrive, an especially troubling thought, given the massive amount of debt incurred over the last 12 months or so.

"Overall, economic analysis faces unusually tough times in reading the incoming data and drawing reasonable conclusions about the implications for the future. As a basic example, our proprietary index of economic indicators, published in each issue of The Beta Investment Report, is currently flashing a robust sign of recovery, although this may be misleading because much of the rise has come from monetary policy and, so far, isn't convincingly corroborated in the real economy.

"In short, interpreting the economic outlook promises to be quite difficult going forward, much more so than usual. Beware: The risk of false dawns is rising."

Source: The Capitol Spectator, June 17, 2009.

Financial Times: Fed faces key policy decisions
"The sharp increase in both US bond yields and mortgage rates presents the Federal Reserve with two key decisions next week: whether to increase its purchases of Treasuries and whether to push back against expectations of early interest rate rises.

"With the US central bank unlikely to authorise large increases in Treasury purchases, the debate is between stopping at the declared $300 billion, or increasing this total modestly to enable a gradual phase-out.

"Some Fed officials think there could be merit in redirecting some money slated for purchases of mortgage-related securities towards Treasury purchases - giving it more latitude in this market without increasing overall purchases.

"Meanwhile, the Fed is likely to reiterate that it expects to keep rates near zero for an 'extended period', challenging market expectations of early tightening. But it will also repeat - and might sharpen - the message that it is not tied to any course of action.

"Fed hawks are getting edgy. 'As the economy recovers, even at a modest pace, resource demands will begin to increase,' Tom Hoenig, president of the Kansas City Fed, said on June 3. 'At this point the current level of monetary accommodation will need to be withdrawn.'

"But some Fed officials highlight the low level at which activity is stabilising. 'Not enough attention is being paid to how much ground we will need to cover before we return to our pre-recession level of activity,' said Sandra Pianalto, president of the Cleveland Fed, on June 4.

"The Fed leadership - which puts considerable weight on spare capacity - almost certainly shares this view. Officials probably do not expect to raise rates late this year or early next, assuming sub-trend growth, projected drag as the fiscal stimulus fades and the phasing out of some financial market programmes first. However, the statement may accommodate some of the hawks' concerns."

Source: Krishna Guha, Financial Times, June 14, 2009.

MoneyNews: Prechter - US likely to lose AAA rating
"Technical analyst Robert Prechter on Monday said he sees the United States losing its top AAA credit rating by the end of 2010, as he stuck by a deeply bearish outlook on the US economy and stock market.

"Prechter, known for predicting the 1987 stock market crash, joins a growing coterie of market heavyweights in forecasting the United States will lose its top credit rating as the government issues trillions of dollars in debt to fund efforts to bail out the economy.

"Fears about the long-term vulnerability of the prized US credit rating came to the fore after Standard & Poor's in May lowered its outlook on Britain, threatening the UK's top AAA rating. That move raised fears that the United States could face a similar risk, with the hefty amounts of government debt issued in both countries to pay for financial rescues causing budget deficits to swell.

"Prechter, speaking at the Reuters Investment Outlook Summit in New York, said he sees investors' confidence in an economic rebound fading, a trend that will drag the S&P 500 stock index .SPX well below the March 6 intraday low of 666.79 by the end of this year or early next.

"'There will be a leg down in stock prices, and it will affect all other areas,' including corporate bonds and commodities, said Prechter, who is executive officer at research company Elliott Wave International, based in Gainesville, Georgia.

"Prechter, who is known for his bearish views, has repeatedly forecast a steep decline in stocks this year, even as the stock market has rebounded from 12-year lows set in March as optimism about an economic recovery has risen.

"Despite the government and Federal Reserve's massive rescues for financial companies and securities markets, Prechter expects credit markets to clam up again as they did in the first phase of the global financial crisis and for the US economy to sink into a depression.

"The economy 'is obviously heading toward a depression', despite the government's efforts to dodge one, said Prechter."

Source: MoneyNews, June 16, 2009.

Asha Bangalore (Northern Trust): Index of Leading Indicators suggests worst is over
"The Conference Board's Index of Leading Economic Indicators (LEI) rose 1.2% in May after a revised 1.1% increase in the prior month. This is the best back-to-back performance of the index since the November-December 2001 period. On a year-to-year basis, the index declined 1.76%, the smallest drop since December 2007.

"The bottom for the year-to-year change appears to have occurred in March 2009 (-4.0%), which is subject to revision. On a quarterly basis, the trough of the year-to-year change of the LEI is probably the first quarter of 2009 (-3.91%), also subject to revision. The 3-month moving average of the index per se hit a low in March 2009 (98.2), with the latest 3-month moving average at 99.03. The 6-month change of the LEI was positive for the first time in two years. The main message from these numbers is that an economic recovery is not too far away."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, June 18, 2009.

Asha Bangalore (Northern Trust): Factory production and operating rate remain problematic
"Industrial production fell 1.1% in May after a downwardly revised 0.7% drop in April. Output at the nation's utilities and the mining industry fell 1.4% and 1.1%, respectively. Excluding these two sectors, factory production declined 1.0%, led by a 7.9% plunge in production in the auto industry. Production in the high-tech sector was down 0.9% in May.

"The operating rate of the factory sector at 65% in May is the lowest in the post-war period. The historically low operating rate of the factory sector offers support to maintain the current easy monetary policy stance of the Fed for an extended period."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, June 16, 2009.

Casey's Charts: Unemployment rate with and without the recovery plan
"This chart from innocentbystander.net clearly shows Team Obama's projections in the American Recovery and Reinvestment Plan are overly optimistic. May's 9.4% unemployment rate, a 25-year high, far exceeded expectations. But don't worry, your tax dollars are hard at work.

"About 1.6 million jobs were shed since the stimulus bill was passed in February, while the roughly $44 billion borrowed and spent from the recovery act has 'saved or created 150,000 jobs', claims the White House.

"As the president repeats his tales of an improving economy and spending our way back to prosperity, perhaps it's time to start reading between the lines."

Source: Casey's Charts, June 16, 2009.

Asha Bangalore (Northern Trust): Housing Starts - turning the corner?
"Home builders broke ground to construct more homes in May, both multi-family and single-family homes, compared with April. Housing starts increased 17.2% to an annual rate of 532,000 after posting a 12.9% drop in April and a 9.2% decline in March. The headline number reflects swings in the multi-family sector in both April (-49.4%) and May (+61.7%).

"The 7.9% jump in permits issued for single-family homes and the fact that it is the third monthly increase in the last four months strengthens the bullish outlook gleaned from production of new homes."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, June 16, 2009.

Asha Bangalore (Northern Trust): Significant improvement in current account deficit
"The current account deficit of the US economy was $101.5 billion in the first quarter from $154.9 billion in the previous quarter. This is the smallest deficit since the fourth quarter of 2001. The current account deficit as a percentage of GDP fell to 2.88%, the smallest in ten years.

"The deficit on goods declined nearly $55 billion from the fourth quarter of 2008 to $124.04 billion in the first quarter. This is the single largest quarterly narrowing of the deficit on goods on record.

"The significant improvement of the current account deficit places a smaller burden for raising funds from capital inflows. However, the large increase in the federal budget deficit requires the capital to continue flowing.

"Foreign owned assets (net capital inflows) declined $78.1 billion in the first quarter, following a decrease of $11.9 billion in the fourth quarter of 2008."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, June 17, 2009.

Asha Bangalore (Northern Trust): Subdued inflation data leaves room for Fed
"Inflation is not and will not be a top priority in Fed policy decisions in the near term. Inflation is a lagging economic indicator which peaks long after a recession is underway and gathers steam long after an expansion is visible. A convincing economic recovery and strong expectations of a growing economy are necessary for the Fed to consider suitable actions to prevent inflation.

"At present time, the enormous slack in the economy supports expectations of subdued inflation data, which is what we see at the moment. In May, the Consumer Price Index (CPI) edged up 0.1% after a steady reading in the prior month. The CPI is down 1.3% from a year ago, the largest drop since April 1950, mostly due to the sharp 27.3% drop in energy prices. The energy index rose 0.2% after posting declines in March and April. Food prices fell 0.2%, the fourth monthly decline."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, June 17, 2009.

Asha Bangalore (Northern Trust): Higher prices for energy and tobacco lift Wholesale Price Index
"The Producer Price Index (PPI) of Finished Goods rose 0.2% in May, following a 0.3% gain in the prior month. The 2.9% jump in the energy price index reflecting a 13.9% increase in gasoline prices and higher prices for heating oil combined with a 0.7% increase in cigarette prices led to an increase in the overall PPI. However, food prices fell 1.6% in May, following a 1.5% increase in April. Excluding food and energy, the core PPI of finished goods price index fell 0.1% in May, putting the year-to-year increase at 3.0%. The peak year-to-year increase of the core PPI was 4.7% in October 2008."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, June 16, 2009.

CNBC: Marc Faber - hyperinflation looming
"Why the US has a good chance of hyperinflation, with Marc Faber, 'The Gloom, Boom, & Doom Report' editor and CNBC's Erin Burnett."

Source: CNBC, June 19, 2009.

Reuters: US credit card defaults rise to record in May
"US credit card defaults rose to record highs in May, with a steep deterioration of Bank of America Corp's lending portfolio, in another sign that consumers remain under severe stress.

"Delinquency rates - an indicator of future credit losses - fell across the industry, but analysts said the decline was due to a seasonal trend, as consumers used tax refunds to pay back debts, and they expect delinquencies to go up again in coming months.

"'I find it hard to believe that it is really a trend. You need to see stabilization in unemployment before you see anything else,' said Chris Brendler, an analyst at Stifel Nicolaus. 'It is too early to see some kind of improvement.'

"Bank of America Corp - the largest US bank - said its default rate, those loans the company does not expect to be paid back, soared to 12.5% in May from 10.47% in April.

"The bank is paying the price of expanding rapidly in recent years and of holding one of the highest concentrations of subprime borrowers among the top card issuers, analysts said.

"In addition, American Express Co, which accounts for nearly a quarter of credit and charge card sales volume in the United States, said its default rate rose to 10.4% from 9.9%, according to a regulatory filing based on the performance of credit card loans that were securitized.

"Citigroup - the largest issuer of MasterCard branded credit cards - reported credit card chargeoffs rose to 10.5% in May from 10.21% in April.

"Credit card losses usually follow the trend of unemployment, which rose in May to a 26-year high of 9.4% and is expected to peak over 10% by the end of 2009."

Source: Juan Lagorio, Reuters, June 15, 2009.

Fox Business: Mortgage and credit delinquencies climb
"Perspective on the state of the credit and lending market from TransUnion Director of Consulting & Strategy Ezra Becker."

Source: Fox Business, June 17, 2009.

Gretchen Morgenson (The New York Times): Debts coming due at just the wrong time
"To get a fix on how much work remains to be done, consider the substantial amount of short-term debt coming due at financial companies in the next year or two. As you absorb these figures, keep in mind that many of the entities that bought this debt when it was issued aren't around now - they've either left the market or are gone, casualties of the crisis.

"As a result, they're not around to step up and buy the debt again. So issuers can't roll it over. They'll be forced to buy back the debt, at a time when they're already wallowing in other forms of troublesome debt and short on liquidity.

"Barclays Capital has analyzed financial company debt among US institutions coming due over the next decade. During the rest of the year, for example, roughly $172 billion in debt will mature; in 2010, an additional $245 billion comes due. That amounts to about $25 billion a month in debt rolling into a market with a shortage of buyers willing to invest in it.

"Of the $172 billion coming due by year-end, Barclays says, $123 billion was floating-rate debt. And of the $245 billion maturing next year, some $141 billion pays a variable rate.

"This much is evident: it is too soon to celebrate the end of the banking crisis. Less debt is the answer, but shrinking balance sheets is hard."

Source: Gretchen Morgenson, The New York Times, June 13, 2009.

China Daily: China's holding of US bonds drops first time in 11 months
"For the first time in 11 months China's holdings of US Treasury bonds fell - to $763.5 billion in April, US government data showed.

"The figure, down from March's $767.9 billion, was the lowest since June 2008.

"The decline in the China holding 'seems to stem from net selling of Treasury bills', said Chirag Mirani of Barclays Capital Research.

"On the whole, foreigners decreased holdings of Treasury bills by $44.5 billion in April, the data showed.

"As the largest holder of US Treasury bills, which are crucial to funding Washington's multi-trillion-dollar recovery plans, China had expressed concerns recently over what it called the safety of its dollar-linked assets.

"US Treasury Secretary Timothy Geithner traveled to Beijing about two weeks ago to reassure Chinese leaders, saying their money is 'very safe' despite the US budget deficit, which he pledged to cut.

"The United States has been running large budget shortfalls since the tenure of Democratic President Barack Obama's Republican predecessor George W. Bush.

"Obama administration officials estimate a deficit of $1.841 trillion for the 2009 budget and $1.258 trillion in 2010."

Source: China Daily, June 16, 2009.

BCA Research: US corporate credit quality warning
"Corporate credit quality remains weak according to our indicator, based on a composite of six key financial ratios from the non-financial corporate sector.

"The latest update to our Corporate Health Monitor confirms that the credit quality of the non-financial corporate sector has been in decline since the fourth quarter of 2006. Its persistent warning of weak balance sheet fundamentals in the current cycle should not be taken lightly. True, corporate spreads have narrowed sharply in recent months, but this largely reflects a reduction in the premium for liquidity and other factors unrelated to credit risk. The boost to corporate bond performance from this source is largely over. Any further compression in spreads must now come from a decline in corporate credit risk, which may take some time to unfold.

"Bottom line: We expect a significant deceleration in the relative outperformance of corporate bonds, until the outlook for corporate profits begins to improve."

Source: BCA Research, June 16, 2009.

Dhaval Joshi (RAB Capital): Pricing debt
"When it comes to pricing debt, investors who are overly focused on the huge levels of government borrowing are missing the point, says Dhaval Joshi, economist at RAB Capital.

"Government debt may be ballooning but corporate and household debt is shrinking, he says. 'So the total stock of debt in the economy is not rising. And the price of debt should depend on the supply of all debt, not just part of it.'

"Mr Joshi notes that one of the big holes that US government borrowing must fill has been left by the shutdown of the shadow banking sector.

"'Between 2004 and 2007, over $4,000 billion of mortgages were lent in the US. However, most of this did not come from the conventional banking system but from the shadow system, where mortgages were packaged into securities and sold on, rather than held on the banks' own books.'

"These securitised mortgages accounted for $1,900 billion of lending, equal to 13% of US GDP, he says. This mountain is now collapsing, as borrowers default and the underlying collateral (housing) plunges. Whether debt is reduced by default or repayment, it is a drag on demand, as spending power or net worth falls.

"'Governments must offset this with more debt, effectively acting as borrower of last resort. Markets should not focus just on government issuance, but look at the bigger debt picture. If they do, the recent rise in bond yields may be short-lived.'"

Source: Dhaval Joshi, RAB Capital (via Financial Times), June 18, 2009.

Bespoke: Barron's Roundtable head scratcher
"This weekend's Barron's provided a mid-year update to its annual 'Roundtable' report, and as the title of the article suggested, the consensus among panelists was that the market has come 'too far, too fast'. While that view is certainly not a minority opinion, we are confused with the logic behind it. As noted in the article, 'Many predicted at our January 5 confab that the stock market, oversold and under-loved, was due for a major bounce. Now they think stock prices have overshot corporate fundamentals and a correction is in order.'

"So on January 5, when the S&P 500 was at 927, the members of the Barron's Roundtable were looking for a major bounce. Now, with the S&P 500 up 2% since then, they think the market has come too far, too fast?"

Source: Bespoke, June 15, 2009.

Roubini (Yahoo, Tech Ticker): Nouriel Roubini's three reasons why stocks are bound to fall
"Believe it or not, Nouriel Roubini - professor at NYU's Stern School and Chairman of RGE Monitor - has some good news: aggressive government intervention prevented a great depression.

"The bad news: Roubini says the stock market rally is long in the tooth. (They don't call him Dr. Doom for nothing.) He points to three factors that will lead to a correction in the near future:

"1. Volatility and uncertainty will increase. Note: the CBOE Volatility Index is currently down more than 50% since the October panic.

"2. Corporate earnings will disappoint. He says the market is pricing in a robust 'V'-shaped recovery. However, when earnings miss expectations, buyers will turn into sellers, as was the case this week with FedEx.

"3. The global financial system still faces serious problems. Roubini thinks unemployment will rise to 11%, bank losses will increase across the globe, and the recession in Europe will get worse.

"The silver lining: Roubini isn't convinced the market will retest the lows."

Source: Yahoo, Tech Ticker, June 19, 2009.

David Fuller (Fullermoney): How much of a pullback lies ahead
"I maintain that new lows for Wall Street and most other OECD country stock markets in March 2009 were not dissimilar to the October 2002 trough during the base building process following the previous bear market. Monetary policy was accommodative back then and a strong rally followed to retest an earlier high within the developing base. Most of those gains were subsequently retraced during the build-up to the invasion of Iraq, when everyone feared that Saddam Hussein had weapons of mass destruction.

"The rally commencing in March 2009 occurred against a background of record monetary stimulus and it reflected a belated acceptance that the world was not going to experience a 1930s style depression after all. This was not exactly a conversion on the road to Damascus because a number of leading emerging (progressing) markets such as China and Chile had bottomed in October and were already in uptrends as the US's S&P 500 Index began to recover from its lows.

"Something very similar happened during the 2001 to 2003 base building process because leading markets at the time, such as India and Thailand had either not retested their lows in 2002, or were in a much stronger position as they completed bases shortly after the invasion of Iraq commenced.

"The S&P 500 rally from its March 2009 low was much stronger than its 2002 rally from the October trough. I attribute this to a realisation that the world was not ending, plus the market inflating success of quantitative easing, against the background of record cash levels for institutional investors.

"So, with the S&P 500 losing upside momentum, how much of a pullback might we see this time, considering that there is no obvious equivalent to the invasion of Iraq for investors to worry about, although the economic background is arguably much worse?

"I suspect we will see a bigger pullback, which lasts longer than most people expect. Technically, the stalk-like rally looks unbalanced compared to the earlier portion of the base formation, although I appreciate that this may seem like an esoteric point to some of you. Many of the optimists are recent converts, sucked in by a momentum move. I suspect that some of those 'green shoots' of spring will prove to have been no more than a mirage as a hot summer progresses.

"The risk, I maintain, is that we see a multi-month correction, of at least 10% but which could be 20% or more for some indices. Needless to say, this would weigh on sentiment. The good news is that it should ensure no change in monetary policy, which remains extremely accommodative. I also think that for the better performing emerging (progressing) markets to date, corrections may be little worse than mean reversion in terms of the 200-day moving averages."

Source: David Fuller, Fullermoney, June 16, 2009.

Bespoke: Market breadth pulls in
"The percentage of stocks in the S&P 500 above their 50-day moving averages fell to its lowest level in two months after yesterday's [Tuesday's] decline. As of this morning, 71% of the stocks in the index were trading above their 50-days.

"Health care, both consumer sectors, and telecom have seen the biggest decline in breadth, while the utilities sector has increased recently up to 91%. This increase in utilities breadth indicates that investors are rotating money into the most defensive sector as the market takes somewhat of a breather."

Source: Bespoke, June 16, 2009.

Credit Suisse: Market rally is more than an illusion
"The stock market rally which started in March is still continuing. And the signals from the financial sector are far less dramatic than some months ago. We asked Giles Keating, Head of Global Research at Credit Suisse, how bright the situation in the financial markets really is."

Click here for the article.

Source: Credit Suisse, June 15, 2009.

MoneyNews: Gabelli bullish on economy, stocks
"Mario Gabelli, chief investment officer at Gamco Investors, sees rosy times ahead for the economy and stock market.

"'Business is getting better, coming back to some normalcy,' he told CNBC.

"'Look at the consumer wealth,' Gabelli says. 'We all know about the housing, we all know about the stock market.'

"Replenishment of dwindled inventories will buoy the economy, he says. 'And then we get the stimulus checks,' Gabelli adds.

"'And then we have the global economy. China is going to work. (Its fiscal stimulus package) of $585 billion is going to work.'

"In the US, 'the economy ... is going to pick up slowly but surely. And 2010 and 2011 will be pretty good,' Gabelli says.

"As for the stock market, we're now at about 8,500 on the Dow Jones Industrial Average, he notes. 'Twelve years ago it was 8,500 ... In 10 years, 8,500 will look like a bargain, and it's a bargain today.'

"The best way to make money in the coming bull market: 'Plain old stock picking,' Gabelli says.

"'You look at specific stocks. Do I want to look at the broad market, do I want to look at fancy engineering?' he asks rhetorically.

"'We're back to old simple things, plain old stock picking. What makes money?'"

Source: Dan Weil, MoneyNews, June 15, 2009.

MoneyNews: Birinyi - the bull is here, get on
"Those who say this isn't a bull market are just plain wrong, says Birinyi Associates CEO Laszlo Birinyi, who expects the market to continue to climb for the next couple of years.

"'Anxiety is in the part of the people who have missed the rally,' Birinyi told CNBC. 'And they're trying to talk the market down so that they can get back in.'

"'The market can adjust and adapt,' Birinyi says. 'This time it's taken a little bit longer.'

"Right now, Birinyi says, the market is in a phase of getting better, which 'makes it hard to pick the best of the best'.

"He advises investors to buy individual stocks, not funds, especially those of exchange-traded variety.

"'We find that (on) 25% of the trading days, even the SPDRs don't track the S&P by 20 basis points or more.'

"Birinyi also finds exchange-traded funds (ETFs) 'terribly inefficient', noting that returns for investors who bought an oil ETF in the beginning of the year are now flat while oil as a commodity is up nearly 40%."

Source: Julie Crawshaw, MoneyNews, June 15, 2009.

Barry Ritholtz (The Big Picture): Are stocks cheap?
"Not really - but how 'not cheap' depends upon how you measure earnings and handle one time write downs.

First up: NDR:

"'Ned Davis Research looked at market valuations after bear markets since 1929. The firm found that in the first three months after bear markets, the market's P/E tends to climb by about 10%. And the multiple has traditionally expanded 22% in the first six months after a major market downturn.

"But since March 9, when the recent rally began, the P/E of the S&P 500 has jumped nearly 40%. Such a surge in P/E ratios may be warranted if the recession ends soon and profits recover quickly. While there are some signs that the worst of the recession may be behind us, few analysts expect profits to stage a major rebound. And, of course, it's still unclear whether the recession and the bear market have ended.'

"The article also notes, however, that stocks are not terribly cheap ex-one time write-downs. If we look at just operating earnings - excluding one-time write-offs - the P/E of the S&P500 is 22, hardly bargain priced.

"NDR also looks at P/E in an interesting way - instead of just adding up all the SPX earnings them dividing into price, they assess each individual stock P/E ratio. Then, they find the median P/E for the group - the midpoint, with 250 stock P/Es above and 250 stock P/Es below.

"The result? The median P/E of the S&P 500 is 15.6 - well above the median P/E of 12 in March, but below the market's historical median of 16.5."

Source: Barry Ritholtz, The Big Picture, June 14, 2009.

Barry Ritholtz (The Big Picture): Looking at corporate profits
"Ron Griess of The Chart Store takes a close look at SPX profitability and comes away unimpressed."

Source: Barry Ritholtz, The Big Picture, June 17, 2009.

Yahoo: Medvedev calls for new reserve currencies
"Russian President Dmitry Medvedev says the world needs new reserve currencies.

"Medvedev told a regional summit Tuesday that the creation of new reserve currencies in addition to the dollar is needed to stabilize global finances.

"Medvedev has made the proposal before. It reflects both the Kremlin's push for greater international clout and a concern shared by other countries that soaring US budget deficits could spur inflation and weaken the dollar.

"Airing it at a summit meeting underlined the challenge to US clout.

"Medvedev spoke at a summit of the Shanghai Cooperation Organization, which includes China and four Central Asian nations."

Source: Yahoo, June 16, 2009.

MoneyNews: Russia, China buy dollars, despite trash talk
"Recent talk from Russian and Chinese officials showing wariness about their huge dollar holdings and suggesting an alternative reserve currency has roiled financial markets.

"But while the Russians and Chinese are walking the walk, they aren't talking the talk.

"Brazil, Russia, India and China (BRIC, as Goldman Sachs termed them) went on the biggest dollar-buying binge in eight months during May, adding $60 billion to their reserves. That's according to data compiled by central banks and strategists, cited by Bloomberg.

"Brazilian officials have trashed the dollar just like the Chinese and Russians.

"So why the hypocrisy?

"First, these nations are protecting their exports. A stronger dollar makes their goods cheaper in dollar terms, boosting the exports.

"Second, the BRICs already have huge reserves of dollars, so a drop by the dollar would devalue their own holdings. The more they sell dollars, the less their remaining dollars will be worth.

"And finally, big dollar sales by the BRICs could exacerbate the global financial crisis.

"'It would be shooting yourself in the foot to sell US assets and move away from dollars too quickly,' Mitul Kotecha, Calyon's head foreign exchange strategist, tells Bloomberg.

'As much as we are seeing in terms of rhetoric, the central banks have so much exposure they will be very careful.'

"Most experts agree that the dollar isn't going anywhere. 'I think the dollar is the dominant currency for a while to come,' hedge fund legend George Soros told CNBC."

Source: Dan Weil, MoneyNews, June 12, 2009..

Bespoke: Commodity snapshot
"Even after a pullback in portions of the commodity sector over the last couple of weeks, most are still up year to date. As shown below, copper is up the most with a gain of 63.58%, and oil is not far behind at +60.85%. Platinum, silver, orange juice, coffee, and gold are the other commodities that are up year to date. Corn is down 5.76%, wheat is down 11%, and natural gas is still down the most at -26.98%."

Source: Bespoke, June 19, 2009.

David Fuller: Timing gold's next significant move?
"We have maintained a cautious view on gold and other precious metals since the key day reversal on 3 June. However the short-term overbought condition has been replaced by a short-term oversold reading, as one can see on the stochastics indicator, which in my view is useful after temporary contra-trend reactions, although it can be early.

"More importantly, gold's last rally towards $1,000 had been flattered by the USD's weakness. We know this because gold had not rallied against all currencies, which we look for as a signal that a major move is developing. Therefore Fullermoney has been looking for a consolidation, in line with quiet seasonal factors, which would balance bullion's big medium-term pattern, from March 2008 to the present. Given the comparatively quiet nature of gold's pullback over the last three weeks, I doubt that the previous reaction low near $865 will be tested.

"We have been looking for a reaction to the mid to lower $900 region. Consequently I now regard gold as being back in an accumulation zone, prior to renewed strength in 4Q 2009 and 1Q 2010. However the reaction low during this short-term consolidation is likely to come sooner. The clearest signal would be an upward dynamic."

Source: David Fuller, Fullermoney, June 19, 2009.

Bloomberg: Pickens says oil will average $80 to $85 a barrel
"Crude oil will rise to an average $80 to $85 a barrel in the coming year as inventories decline, billionaire investor T. Boone Pickens said in Calgary today.

"Natural gas will average about $7 per million British thermal units, Pickens, 81, the founder and chairman of Dallas-based BP Capital, said at an event sponsored by the city's Chamber of Commerce. Falling inventories will also lift gas, he later told reporters.

"'I bought a 12-month gas strip for $6.02 the other day and I expect to make $1 on it,' Pickens said during the presentation to about 700 people.

"The hedge-fund manager is promoting an energy plan that relies on US-produced natural gas to cut the country's dependence on foreign oil.

"'In this market you're going to see oil inventories work off,' Pickens said. 'There's no question what the Saudis want; they want a balanced market and they want $75 minimum for their oil.'"

Source: Reg Curren, Bloomberg, June 17, 2009.

Financial Times: World Bank raises China GDP forecast
"The World Bank raised its forecast for China's 2009 gross domestic product growth to 7.2% on Thursday, saying the apparent success of the government's stimulus package had improved the outlook from March - when the bank predicted 6.5% growth for the year.

"But the World Bank said a sustainable recovery was not yet assured, in spite of the government's Rmb4,000 billion ($590 billion) fiscal stimulus, and that Beijing might have little room for additional measures this year.

"'Government-influenced investment will strongly support growth in 2009. However, there are limits to how much and how long China's growth can diverge from global growth based on government-influenced spending,' said Ardo Hansson, the bank's lead economist for China. 'It is too early to say a robust, sustained recovery is on the way.'

"With government revenues falling and expenditure rising rapidly, the bank predicts that China's fiscal deficit will climb to almost 5% of GDP this year, well above the 3% budgeted by Beijing and a large jump from last year's deficit of 0.4%.

"'On current projections it is not necessary, and probably not appropriate, to add more traditional stimulus in 2009,' said Louis Kuijs, senior economist and main author of the quarterly update released on Thursday. 'One reason is that the fiscal deficit is on course to be significantly higher than budgeted this year and additional stimulus now would reduce the room for stimulus in 2010.'

"Market-based investment and consumption are unlikely to rebound until the rest of the world starts to recover convincingly and the collapse in Chinese exports is reversed. Chinese exports fell about a quarter in the first five months of the year from the same period a year earlier.

"China's economy grew 6.1% year-on-year in the first quarter, faster than any other leading country but well below the government's full-year target of 8%.

"The World Bank said it expected China's economy to grow 7.7% in 2010, a much slower pace than the 13% reached in 2007 and the 9% rate of last year.

"The bank estimates a full 6 percentage points of this year's 7.2% GDP growth will come from investment and spending either carried out by the government or directly influenced by it."

Source: Jamil Anderlini, Financial Times, June 18, 2009.

Albert Edwards (Société Générale): China bulls will be let down
"The wholehearted belief in China's economic recovery could turn out to be the biggest disappointment yet for investors, warns Albert Edwards, global strategist at Société Générale.

"'The ongoing enthusiasm for all things China reminds me of the way investors were almost totally blind to the fact the US growth miracle was built on sand,' he says.

"'We saw this same investor mania 13 years ago with the Asian Bubble, which the consensus thought was a growth miracle.'

"At the heart of Mr Edwards' scepticism lies doubts about the accuracy of official data releases.

"'The Chinese data is derided by economic commentators,' he notes. 'Many have highlighted that GDP growth seems inconsistent with other data, such as electricity output. Yet few dare to point out that the emperors' clothes might be absent - and when they do, they are met with robust official rebuttals.'

"'That is not to say that the fiscal stimulus has not had a beneficial effect on Chinese activity this year. What I question is the quaint notion that the Chinese economy can grow at a respectable rate when the rest of the world is in a deep recession.

"'I believe the bullish group-think on China is just as vulnerable to massive disappointment as any other extreme of bubble nonsense I have seen over the last two decades.

"'The fall to earth will be equally as shocking.'"

Source: Albert Edwards, Société Générale (via Financial Times), June 17, 2009.

Charlie Rose: Iranian election results
"Iranian election results with Nicholas Burns, Flynt Leverett, Abbas Milani and Hooman Majd."

Source: Charlie Rose, June 15, 2009.

You Tube: George Friedman - Iranian elections, Israel and the United States
"In the latest instalment of the Stratfor Insights video series, CEO George Friedman discusses the tense future of the Middle East following the recent Iranian elections. With Israel offering a Palestinian state on terms that are unacceptable to the Palestinians, and freshly re-elected Iranian President Mahmoud Ahmadinejad expected to continue his hard-line policies, how President Barack Obama moves forward merits close observation."

Source: You Tube, June 15, 2009.

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