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Words from the (Investment) Wise for the Week That Was (August 17 - 23, 2009): Part II

Yahoo Finance: Top "Cash for Clunkers" trade-ins and new cars
"The Top Ten 'Cash for Clunkers' Trade-Ins:

1. 1998 Ford Explorer
2. 1997 Ford Explorer
3. 1996 Ford Explorer
4. 1999 Ford Explorer
5. Jeep Grand Cherokee
6. Jeep Cherokee
7. 1995 Ford Explorer
8. 1994 Ford Explorer
9. 1997 Ford Windstar
10. 1999 Dodge Caravan

"The Top Ten 'Cash for Clunkers' New Cars:

1. Ford Focus
2. Honda Civic
3. Toyota Corolla
4. Toyota Prius
5. Ford Escape
6. Toyota Camry
7. Dodge Caliber
8. Hyundai Elantra
9. Honda Fit
10. Chevy Cobalt"

Source: Sean Tucker, Yahoo Finance, August 19, 2009.

BCA Research: US core inflation finally breaking down
"Disinflation and positive real GDP growth in the second half of the year should provide a positive macro backdrop for the equity market.

"The resilience of core CPI inflation to recessionary conditions appears to be gradually breaking down (core inflation fell to 1.5% in July). It has been somewhat disconcerting that core inflation has been sticky, although this has been partly due to special factors such as tobacco tax hikes. Nonetheless, the chart shows that in past cycles most of the decline in inflation occurs after the recession ends, as economic slack affects inflation with a significant lag. Thus, the cyclical disinflationary phase is likely just getting started.

"Moderating labor cost growth and falling import prices highlight that "cost-push" inflation pressure is low and still easing. Commodity prices have increased, but there is little chance of this being passed on into consumer prices given the yawning output gap.

"Lower core inflation will help to contain long-term inflation expectations and make it easier for the Fed to keep the long end of the Treasury curve from rising prematurely (i.e. before the economy can handle higher rates). Thus the macro backdrop should be positive for riskier asset classes such as equities in the coming quarters."

Source: BCA Research, August 18, 2009.

Eoin Treacy (Fullermoney): Avoiding inflationary outcomes
"All of the debt that has been built up over the last decade will eventually be paid down in one shape or form. Increasing the government's portion of the total is helping to transfer some of the burden from the private sector. At the same time, quantitative easing is effectively diluting the value of the currency that debt is denominated in.

"Householders are relying on the success of these policies to reignite economic growth and in so doing, help them pay down their debt. Higher savings, lower expenditure, more taxes, smaller government and an absence of foreign wars would all help ease the burden of debt but are unlikely to provide the kind of stimulus that would see GDP back up in the pre-crisis 3% range.

"Faced with the unpalatable options of raising taxes and cutting expenditure or inflating the problem away, politicians have always favoured incorporating the latter in their solutions. Monetary authorities will continue to attempt to adjust the amount of liquidity to compliment the Velocity of Money regardless of other solutions.

"M2 surged in the last couple of years as the Velocity of Money plunged, ensuring the market remained liquid. However, Velocity of M2 edged upwards in June for the first time in a year. Consequently M2 expansion paused, ensuring that the multiple retains its trajectory. The advance in the Velocity of M2 is not yet enough to suggest recovery, further improvement is necessary to suggest such an outcome. (One should bear in mind that this is a lagging indicator by definition.) However, as long as these measures continue to be managed so that the multiple does not accelerate, inflationary fears are likely to be under control. However, a number of factors could upset this balancing act.

"Potential issues will arise when the economy begins to recover because by definition, Velocity of Money will begin to advance. Money Supply would have to tighten in this scenario if inflation is be kept under control but the debt burden will still be high and consequently consumer confidence will be fragile. Arguments for retaining the stimulus in this environment will be formidable but would serve to stoke inflationary pressures over the medium term.

"Surging commodity prices, as we saw last year, are another potential obstacle. A secular bull market in commodity prices, driven by a rising cost of production and increasing global per capita consumption is likely to produce periods when inflationary pressures become more problematic. The normal monetary response would be to raise rates and reduce Money Supply. However, this may be highly controversial if economic growth remains weak, as is likely to be the case in the medium term.

"Another potential impediment would be if the US dollar were to come under sustained selling pressure. This could be in response to domestic factors but is just as likely to reflect the relative performance of the US economy with that of its largest trading partners. Right now, most of the world's major economies are struggling to return to growth but those with less of a problem with excess leverage and debt are at a competitive advantage. Just how big this is will become evident over the coming years and the dollar could be a medium-term victim. Of course, in such a scenario, a sharply weaker currency would eventually help to support manufacturing and restore the USA's lost competitiveness.

"In the short-term, inflation in the broad sense is not a problem. Deflationary pressures predominate in wages, housing and retail. Inflationary pressures remain in public services and potentially in commodity prices. The opportunity remains to put policies in place that help to avoid an inflationary outcome to the credit crisis but one can be justified in questioning if the political will exists to implement what will surely by unpopular decisions."

Source: Eoin Treacy, Fullermoney, August 19, 2009.

Bespoke: Record low PPI
"In a reminder that the current economic situation is far from normal, today's [Tuesday] year/year change in the PPI (producer price index) came in at a record low of negative 6.8%. This is the lowest reading for the PPI going back to 1949, easily eclipsing the prior record low of -5.2% in August 1949."

Source: Bespoke, August 18, 2009.

Bloomberg: Scholes, Merton says banks should value assets better
"Myron Scholes and Robert Merton shared the 1997 Nobel price for economics, and they are now united in calling for banks to give more accurate valuations on their illiquid assets.

"Financial institutions should use mark-to-market accounting or list the hard-to-value securities on public exchanges whenever possible, Scholes said in a Bloomberg Radio interview yesterday. Scholes, winner of the Nobel with Merton for helping invent a model for pricing options, said investors need better data on prices to accurately value the debt and equity securities of banks.

"'I'd like to see us encourage many more securities held on the books of the banks be migrated to exchanges if possible,' he said. Doing so would 'allow for market discovery and market pricing as much as possible,' Scholes added.

"Banks that oppose new accounting standards on asset values want to conceal depressed prices, Merton wrote in the Financial Times yesterday. He composed the column with Robert Kaplan, a professor at the Harvard Business School along with Merton, and Scott Richard, a professor at the University of Pennsylvania's Wharton School.

"'This is not the way forward,' they wrote. 'While regulators and legislators are keen to find simple solutions to complex problems, allowing financial institutions to ignore market transactions is a bad idea.'"

Source: Jeff Kearns, Bloomberg, August 19, 2009.

Clusterstock: Credit may crunch again before getting back to normal
"It would be very unusual if we emerged from a credit crisis with a simple V-shaped recovery. (Or A-shaped if we think in terms of credit spreads)

"Going back to the Great Depression, we experienced a few sucker's rallies before credit markets ultimately normalized. As this chart from Econompic Data shows, while credit spreads have recovered from their recent spike, they may still get worse before getting better."

Source: Vincent Fernando, Clusterstock - Business Insider, August 19, 2009.

Financial Times: Bond issuance bursts through $1,000 billion
"Global corporate bond issuance has risen above the $1,000 billion mark - the first time it has broken through this threshold in a single year - with four months remaining of 2009.

"The boom is because of the difficulty companies face in obtaining bank loans and strong demand from investors, who can gain a big yield pick-up on corporate paper compared with government bonds.

"Investors have switched more of their cash into corporate bonds because they offer better returns than the low interest rates on bank deposits and savings accounts.

"Corporate bond issuance has risen to $1,103 billion so far this year, beating the annual record of $898 billion in 2007, according to Dealogic, the data provider.

"The jump in issuance has been seen in dollar, euro, yen and sterling-denominated deals.

"Volumes in dollar, euro and sterling have risen to record annual highs, only eight months into the year, while volumes in yen are close to record levels.

"Of the $1,103 billion raised this year, $989 billion, or 90%, has been in investment-grade bonds, with 30% issued by companies in the utilities and oil and gas sectors."

Source: David Oakley and Ed Hammond, Financial Times, August 18, 2009.

Financial Times: Corporate bond defaults hit record
"The number of companies defaulting on their debts has risen to record levels this year, according to Standard & Poor's, while investment returns for risky corporate debt have skyrocketed since January.

"S&P said 201 borrowers with $453.1 billion in debt have defaulted this year, exceeding the 126 defaults for all of 2008, which comprised debt worth $433 billion.

"It also surpassed the number of defaults from the comparable period in 2001, the previous worst year on record.

"'Recessionary economic conditions and ongoing uncertainty in the financial markets are pushing the number of corporate casualties higher,' said S&P.

"The defaults have not stopped speculative debt from being this year's best performing sector for investors as they look instead to a virtuous cycle that enables more financially strapped companies to refinance as the market rallies, a scenario that portends lower future defaults.

"'The number of defaults is impressive but, on an absolute month-to-month basis, it has been coming down steadily,' said Martin Fridson, chief executive of Fridson Investment Advisors. 'It makes sense that the market has been rallying since then.' He added: 'The virtuous cycle is a function of the high-yield new issue market reopening in response to the increased confidence in credit that provides the bridge for companies to get over any near-term maturities that could threaten their solvency.'

"US high-yield debt has generated a return of nearly 40% so far this year, outstripping the 10% rise in equities, while pan-European high yield is up 63%, according to data from Barclays Capital."

Source: Michael Mackenzie and Nicole Bullock, Financial Times, August 19, 2009.

MoneyNews: Hussman - investors guzzling Kool Aid
"John Hussman says if you look carefully at the economic data that shows improvement, and adjust it to reflect the impact of government outlays, it's hard to see anything other than continued deterioration in private demand and investment.

"'What we do see is a government that has run what is now a trillion dollar deficit year-to-date, representing some 7% of GDP,' Hussman writes in a note to investors.

"'That sort of tab will undoubtedly buy some amount of Kool-Aid, but it has been something of a disappointment to watch how eagerly investors have guzzled it down.'

"It is not at all clear that short-term, deficit-financed improvement spells economic growth, Hussman notes. 'This is like somebody borrowing money from their Uncle and then celebrating that their income has gone up,' he says.

"And while imagining a return to 2007 S&P 500 returns is pleasant, Hussman points out that investors should remember that those highs were based on profit margins about 50% above historical norms, combined with an elevated P/E multiple of about 19 against those earnings.

"'Even if the economy is poised for a sustained recovery here, the belief that those joint outliers will be quickly re-established goes against historical precedent,' Hussman says.

"Recent data dulled hopes for a consumer-led US recovery, a trend some forecasters see as part of the 'new normal' economy.

"Markets need to get used to 'a world without the US consumer as last resort', Alan Ruskin, chief international strategist at RBS Securities told Reuters."

Source: Julie Crawshaw, MoneyNews, August 17, 2009.

Bespoke: China falls down the country performance list
"Just a couple of weeks ago, China was riding high as the top dog in terms of global stock market performance in 2009. After a 20% decline in a matter of days, China is now just the third best performing BRIC (Brazil, Russia, India, China) country year to date. Russia is up 57.24% year to date, India is up 53.51%, and China is up 52.99%. But it could be worse for China. At least they're not down 50% year to date like Ghana.

"You can tell how much China has sold off versus the rest of the world by looking at its percentage from its 50-day moving average. China is one of just five countries that are up year to date and currently trading below their 50-day moving averages, and it is the second furthest below its 50-day (-10.34%) out of all countries behind only Nigeria (-11.97%)."


Source: Bespoke, August 19, 2009.

Jing Ulrich (JPMorgan): Correction for Shanghai
"The 17% slide in the Shanghai Composite index since August 4 is mainly a 'phase of correction' soon to run its course, says Jing Ulrich, chairman of China equities and commodities at JPMorgan.

"'The recent selling has been fuelled by concern about imminent policy tightening and stretched valuations,' she says. 'Economic data for July were reasonably strong, but a sharp fall in bank lending has stoked fears that liquidity could dry up in the second half.'

"Ms Ulrich believes bank lending will moderate this year but says this reflects the seasonal tendency of banks to front-load new loans. 'Liquidity conditions will remain favourable, as authorities may accelerate mutual fund approvals and insurance and pension funds could step up their equity purchases.'

"Official pledges to stick to a proactive fiscal policy and moderately loose monetary policy are believable, given the challenging outlook for exports and continued deflation, she says. 'We believe the A share market will resume its upward trajectory after this period of correction.

"'Since April, the share of demand deposits as a proportion of total household deposits has risen, suggesting investors are favouring liquid savings products in anticipation of possible investments. Last month the number of new individual stock trading accounts reached the highest since late 2007.'"

Source: Jing Ulrich, (JPMorgan via Financial Times), August 17, 2009.

Yahoo Finance, Tech Ticker: Professionals are buying the stock market rally
"After starting the week with a big knock, the stock market has resumed its rallying ways, with the Dow closing above 9300 on Thursday while the S&P again surpassed the 1000 level.

"Professional money managers are buying into the rally in a big way, according to a Merrill Lynch Survey of Fund Managers:

• 75% believe the world economy will improve in the next 12 months. That's the highest level in nearly six years and up from 63% in July.
• Average cash balances have fallen to 3.5%, the lowest since July 2007.
• 34% of managers surveyed are now overweight stocks, the highest since Oct. 2007.
• Risk appetite is also increasing, to the highest levels in two years.

"The contrarian in you probably thinks that signals a market top. But Barry Ritholtz, CEO of FusionIQ and author of Bailout Nation, isn't ready to call an end to the move. 'We've worked off lots of that oversold condition,' he admits, but that doesn't mean the rally can't continue for some time.

"Ritholtz, who told Tech Ticker in early March we were in for a monster rally, has 1,050-1,080 as an upside target for the S&P 500, with a slight chance it can go as high as 1,200. If the rally does extend to those outer limits, Ritholtz sees the Dow topping out 'somewhere around 12,000′.

"Regardless of your position, long or short, Ritholtz's key message is to remain cautious. 'This is a trading rally not a multi-year rally,' he says. Eventually something's got to give: 'We've never had six-month period before where we've lost two million jobs and the market's gained 50%,' he says. 'That's simply unprecedented.'"

Source: Yahoo Finance, Tech Ticker, August 21, 2009.

Barron's: Is the market forecasting a September storm?
"Certain indicators are warning that the stock market is in for a turbulent September. But are too many investors already betting that way? Barron's Mike Santoli reports."

Source: Barron's, August 17, 2009.

Eoin Treacy (Fullermoney): Current stock market advance is maturing
"From the point of view of an institutional asset manager, one would have to be convinced of the outright failure of every stimulus measure not to have begun to shift cash back into the market since March. With stock market indices moving higher, the risk of significantly underperforming one's benchmark is a real possibility with only four-months left in the year. Managers could, to a certain extent, have claimed 'force majeure' when one considers the speed and extent of the decline experienced last autumn, but choosing to remain un-invested as stock markets rally over a sustained period is difficult to excuse.

"At the beginning of any new bull market, disbelief is the predominant emotion because bearish arguments can be easily justified and we are often scarred by our most recent experience. As performance improves, bearish arguments become less convincing against the background of strong performance. This is characterised as the 'wall of worry' stage.

"Cash is a less than attractive asset right now, but anecdotal evidence suggests that many investors are waiting for an opportune moment to buy. The process by which investors move out of cash and into relatively risky assets is what fuels a bull market. When we have reached the next occasion when investors are fully invested the perception of risk will be lower but we will be closer to the next important peak.

"In the short-term, most markets have rallied impressively from the July lows and lost momentum in late July. China has had the largest decline but is now seeing more two-way action. Most other markets have been more sanguine, with a small number continuing to post new highs.

"In conclusion, the last three days has seen some considerable firming in a wide number of stock markets, with a number of important indices moving to new high ground. Pullbacks in a large number of others have so far been limited to small reactions. However, the current advance is maturing and trading has become choppier of late. Nevertheless, failed upside breaks or larger reactions, where applicable, are now needed to indicate that the expected larger reaction is unfolding."

Source: Eoin Treacy, Fullermoney, August 20, 2009.

MoneyNews: El-Erian - stock rally has hit a wall
"Mohamed El-Erian, the chief executive of top bond fund manager PIMCO, on Tuesday said the rally in US stocks had topped out because valuations have shot up too quickly.

"Asked if US stocks have hit a wall, El-Erian told Reuters Television: 'I think we have, and I think what you are seeing is a massive tug of war going on.'

"'On the one hand, pushing stocks higher are powerful technicals, the fact that very low yields on the front end have pushed cash out of the money market segment and into the risk assets,' El-Erian said. 'But on the other hand, the fundamentals are such that valuations are ahead of fundamentals. What you have seen over the last couple of days is a recognition that fundamentals matter.'

"El-Erian, who oversees $850 billion in assets for Pacific Investment Management Co, including equities, said US stock markets have been on a 'sugar high' as recent corporate earnings have surpassed expectations. But for the most part profitability has been driven by cutbacks in layoffs and capital spending, he said.

"Moreover, the nascent economic recovery in the United States faces massive headwinds, including high unemployment, which translates into a vulnerable consumer, and weak private demand.

"Pimco has reduced risk in its portfolio as the rally has 'gone too far', El-Erian said, adding the firm has been a net seller of mortgage debt over the past few weeks."

Source: MoneyNews, August 18, 2009.

Forbes: This recovery is no sugar high
"Just two months ago, the consensus among economists was that we would not see any significant economic growth until the end of this year, and that whatever growth we did see would be tepid, at least through the end of 2010.

"Now, with a plethora of economic reports showing a recovery has probably already begun - falling unemployment claims, rising housing starts, growing exports and Monday's Empire State manufacturing index - the conventional wisdom appears to have pivoted. Forecasts for second half growth have been increased. But, for the most part, this is a tempered optimism. Conventional wisdom is saying, 'All right Wesbury and Stein, it looks like you were right about the V-shaped recovery, but it can't last, it will eventually look like a square-root - a V followed by a plateau.'

"One theory supporting this view is that the inventory cycle will add to growth in the near term, but deleveraging and a weak job market will not allow this to build into a sustained recovery.

"Obviously, we disagree. Easy monetary policy must show up somewhere. While we do not always know where it will show up, in the next year or two a shrinking trade deficit, a turnaround in home building and a revival in business investment and consumption will all help economic growth continue.

"A second theory suggests that any recovery in growth we are seeing right now is due to government stimulus spending. This stimulus is expected to level out and therefore, the theory goes, it will no longer boost economic activity.

"But federal stimulus has little or nothing to do with the recovery. In fact, we count it as a headwind - the more government spends, the more it crowds out private investment and economic activity. Meanwhile, the threat of a major expansion in government power, into health care and carbon emissions, has also hurt prospects for growth.

"The real forces behind the recovery have been easy money, an end to the post-Lehman Brothers panic and the FASB's correction of mark-to-market accounting rules.

"While easy money can be thought of as a temporary positive - a sugar high, the end of panic and changes in mark-to-market accounting are more fundamental. What they do is take Armageddon off the table. As a result, the economy and the stock market can reflect the continued impact of technology and productivity. Our stock market model suggests fair value is substantially above current levels, even if interest rates rise as we are forecasting over the next few years.

"The way we see it, those who were pessimistic about stocks and the economy early this year are going through the classic five stages of grief. First, they denied a recovery was going to happen anytime soon. Then they lashed out with anger at those who spotted signs of the recovery. Now, they are bargaining, admitting the existence of the recovery that they did not see coming, but belittling it. Next, as things keep moving up, we can expect them to get depressed. We don't expect acceptance to fully set in until late next year."

Source: Brian Wesbury and Robert Stein, Forbes, August 18, 2009.

Telegraph: RBS uber-bear issues fresh alert on global stock markets
"Britain's Uber-bear is growling again. After predicting a torrid 'relief rally' over the early summer, Bob Janjuah at Royal Bank of Scotland is advising clients to take profits in global equity and commodity markets and prepare for another storm as winter nears.

"'We are now in the middle of a parabolic spike up,' he said in his latest confidential note to clients.

"'I expect this risk rally to continue into - and maybe through - a large part of August. What happens after that? The next ugly leg of the bear market begins as we get into the July through September 'tipping zone', driven by the failure of the data to validate the V (shaped recovery) that is now fully priced into markets.'

"The key indicators to watch are business spending on equipment (Capex), incomes, jobs, and profits. Only a 'surge higher' in these gauges can justify current asset prices. Results that are merely 'less bad' will not suffice.

"He expects global stock markets to test their March lows, and probably worse. The slide could last three months. 'A move to new lows is highly likely,' he said.

"Mr Janjuah, RBS's chief credit strategist, has a loyal following in the City. He was one of the very few analysts to speak out early about the dangerous excesses of the credit bubble. He then made waves in the summer of 2008 by issuing a global crash alert, giving warning that a 'very nasty period is soon to be upon us' as - indeed it was. Lehman Brothers and AIG imploded weeks later.

"This time he expects the S&P 500 index of US equities to reach the 'mid 500s', almost halving from current levels near 1,000. Such a fall would take London's FTSE 100 to around 2,500. The iTraxx Crossover index measuring spreads on low-grade European debt will double to 1,250."

Click here for the full article.

Source: Ambrose Evans-Pritchard, Telegraph, August 12, 2009.

Bill King (The King Report): Economy and stocks are disconnected
"The following chart from Financial Sense shows how disconnected the economy and stocks are."

Source: Bill King, The King Report, August 19, 2009.

Bespoke: AAII bulls drop at fastest rate since January
"If there is one takeaway from this week's sentiment survey by the American Association of Individual Investors, it's that the people who respond to the survey are prone to mood swings. After one big down day on Monday and a gap lower on Wednesday, this week's survey showed that the percentage of bullish respondents declined from 51.0% down to 34.1% for its largest one-week decline since January.

"While many would consider such a large decline in bullish sentiment to be a contrary indicator, the equity market's short-term performance (over the next week) has historically been mixed. Looking at the 26 prior weeks where bullish sentiment dropped by more than 15 percentage points since 2000, the S&P 500 averaged a move of 0.00% over the next week with positive returns exactly half the time. You'd be just as well off flipping a coin."

Source: Bespoke, August 20, 2009.

Bespoke: Moving on to Q3 earnings
"Now that the second quarter earnings season is behind us, we look ahead to the third quarter to see where expectations stand. Below we highlight the consensus estimate for Q3 year-over-year earnings growth for the S&P 500 and its ten sectors.

"As shown, the Financial sector is expected to see earnings grow by a whopping 617.8% from Q3 '08 to Q3 '09! For those that remember Q3 '08, it wasn't a pretty sight for the Financials, so the starting point shouldn't be too tough of a number to grow on. But 617.8% is still nothing to laugh it, and it is indicative of the significant turnaround the Financials have seen in less than a year.

"The S&P 500 as a whole is expected to see earnings decline by 21.8% in the third quarter. Consumer Discretionary is the only other sector expected to see year-over-year growth in the third quarter. Materials and Energy have the worst estimates at -69.2% and -66.7%, respectively."

Source: Bespoke, August 18, 2009.

Bloomberg: Pimco says dollar to weaken as reserve status erodes
"Pacific Investment Management Co., the world's biggest manager of bond funds, said the dollar will weaken as the US pumps 'massive' amounts of money into the economy.

"The dollar will drop the most against emerging-market counterparts, Curtis A. Mewbourne, a Pimco portfolio manager, wrote in a report on the company's website. The greenback is losing its status as the world's reserve currency, he said.

"'Investors should consider whether it makes sense to take advantage of any periods of US dollar strength to diversify their currency exposure,' Mewbourne wrote in his August Emerging Markets Watch report. 'The massive amounts of US dollar liquidity produced in response to the crisis' have helped reduce demand for the currency, he wrote.

"The Dollar Index, which tracks the greenback against a basket of currencies, has fallen 12% from this year's high in March as US authorities pledged $12.8 trillion to combat the recession. China, the world's largest holder of foreign-currency reserves, and Russia have both called for a new global currency to replace the dollar as the dominant place to store reserves.

"'While we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the US dollar as a store of value even in the absence of a single viable alternative,' Mewbourne wrote."

Source: Garfield Reynolds and Wes Goodman, Bloomberg, August 19, 2009.

Moneyweb: Jeffrey Nichols - key gold-price drivers
HILTON TARRANT: It's a warm welcome to Jeff Nichols, MD of American Precious Metals Advisors. Jeff, we've seen your latest opinion about the price of gold bullion. You are still extremely, extremely optimistic about the outlook for gold, calling a $2,000, $3,000 range. Why are you so bullish?

JEFFREY NICHOLS: Well, first let me say that this is a long-term forecast, and we expect gold to be moving up irregularly over the next few years. But the main reason for the bullish forecast is a number of points. No 1, we expect inflation in the United States and indeed in the major economies at some point to tick up, reflecting the very expansionary monetary policy that we currently have in place. I think if you look at the recent jump in gold this morning and overnight, it owes a lot to the statement by the Fed over the last couple of days that it was going to maintain its easy monetary stance with low interest rates and its policy of quantitative easing remaining in place for some time. And of course this means easy money and ultimately easy money means higher inflation. That's No 1.

But what makes it especially interesting is the fact that we now have these new ETFs, exchange-traded funds, which have brought hundreds of thousands of new investors into the gold market in a way that we've never seen before ... gold investments in a very important way and ETFs now already account for approximately 53 million ounces of gold having been taken off the market. And that's quite significant and we expect that to continue over the next few years.

HILTON TARRANT: Jeff, how important is the impact of jewellery, especially looking at the Indian market? We know that market is very price-sensitive, but still significant.

JEFFREY NICHOLS: Yes, and jewellery is one of the reasons why gold is not now already stronger in price. First, in the US and Western Europe and major industrialised nations jewellery demand has been hit hard by the worldwide recession, and the difficult financial straits that so many households now find themselves in. Not only is the man down, but we are seeing, which is really very new, a lot of secondary supply, old scrap coming back to the market from individuals and households that have old gold jewellery and are pressed for cash, and are trying to convert some of their jewellery into liquid cash. So there's been an infrastructure that has risen rather quickly. If you go into downtown London and New York you'll see many shops with signs in the window that say: 'We buy old gold'.

HILTON TARRANT: Well, Jeff, we have seen gold quite range-bound between almost the $890 level and the $990 level for most of this year - a very narrow band compared to other metals. Do you foresee a breakout, and what would cause a breakout?

JEFFREY NICHOLS: Well, I think we'll see a breakout before year end. Importantly the fourth quarter is typically a season of a positive time for gold - a think partly because the jewellery sector is gearing up for Christmas and jewellery demand tends to begin rising at that point. Also the seasonality of Indian demand is positive beginning in the autumn, and those two factors will make a big difference. But I think also the market has adjusted to the newer price level and the price points at which new supply comes into the market from secondary scrap or short-term investor selling is moving up and we'll see gold pop in the fourth quarter, probably over $1000/oz. Maybe it won't quite hold, but when it comes back down it will settle at a still higher low point than we've seen in the last couple of ups and downs.

HILTON TARRANT: Jeff Nichols is MD of American Precious Metals Advisors.

Source: Moneyweb, August 14, 2009.

Bespoke: Will oil break out or fail at resistance?
"At $72 and change, oil is currently trading at a key inflection point. As shown below, oil recently bounced nicely off of the bottom of its uptrend channel, and it is now butting up against resistance that formed when the commodity made its highs in June and July. If oil is able to break out above these short-term highs, there isn't much in the way of resistance until the $90 mark. With oil tracking so closely with the stock market recently, it's highly likely that the breakout will occur if the rally in equities continues."

Source: Bespoke, August 20, 2009.

Financial Times: Chinese commodity imports expected to slow
"Chinese commodity imports are expected to slow in the second half of the year from record levels as the impact of the country's stimulus package, arbitraging opportunities and stock-piling fade, according to a Royal Bank of Scotland report being published Monday.

"The market has been expecting a slowdown in Chinese imports for the past three months, but when data for July iron ore and crude oil imports were published last week, it showed another sharp increase to record highs.

"China's imports of commodities including copper, aluminium, coal, iron ore and crude oil surged in the first half of the year in spite of the economic slowdown, helping to push up world prices, which had collapsed in the aftermath of the global crisis.

"'China's commodity imports reached record highs in 1H09, buoying global commodity prices and confidence in China's economic recovery,' Ben Simpfendorfer, chief China economist for Royal Bank of Scotland, wrote. 'However, it is less clear what share of imports was intended for final domestic demand.'

"One of the reasons behind the import rises has been a slump in domestic production as low prices made high-cost mines uneconomic, particularly in the iron ore sector. BHP Billiton, the world's largest miner, said last week that up to 50% of China iron ore production was shut down in the first half of the year.

"As commodity prices rebound, miners and bankers forecast a reverse in that trend.

"Restocking by China's state commodity reserve bureau played a large part in the record import volumes, as did easy credit from state banks, which encouraged some firms to buy commodities speculatively, according to the report."

Source: Jamil Anderlini, Financial Times, August 17, 2009.

James Pressler (Northern Trust): Japan - the end of the latest recession?
"In line with most of the major industrialized economies (with the glaring exception of the US), the Japanese economy posted modest positive growth in Q2. The 0.9% gain breaks a four-quarter streak of economic contraction and allows politicians to declare the worst of the recession is over. But before anyone breaks out the sake, we should take a sobering look at what the rest of the year holds for both the economy and policymakers alike.

"It is hard to determine where policy will go in the coming months because the Japanese government could very well change hands. With national elections on August 30, the opposition DPJ looks set to kick the ruling LDP out of office and push through its own agenda. Today's GDP indicators are the last economic figures that LDP politicians can trumpet as 'proof' of recovery, and will likely not be enough to persuade the voting public.

"This being said, the DPJ is promising far more populist measures heavy on the public spending and generous on the tax breaks - public debt be damned - that all sound great in the short-term. If the new government pushes these through quickly, it could offer a quick burst of economic stimulus and sustain growth for another quarter or two. However, at some point those debts will have to be paid, and the DPJ could find itself creating yet another recession in the wake of its own recovery."

Source: James Pressler, Northern Trust - Daily Global Commentary, August 17, 2009.

Financial Times: Germany offers hope of global recovery
"Europe's biggest economy offered renewed hopes for a global recovery on Tuesday as the International Monetary Fund identified a 'nascent' but fragile upturn.

"Separately, the ZEW institute in Mannheim said that its closely watched survey of German investor confidence had jumped by 16.6 points to 56.1 points in August, the highest in three years.

"Also, Germany's IAB labour market institute said that the country was likely to emerge from this year's brutal downturn without suffering a large-scale increase in unemployment thanks to the government's policy of subsidising wages.

"Olivier Blanchard, IMF chief economist, wrote in a paper due to be published on Wednesday that a global recovery is under way but warned that US policymakers are walking a tightrope in timing the end of their fiscal stimulus.

"Mr Blanchard said that the US consumer was unlikely to step in to help growth when the fiscal stimulus was removed. He indicated that increased US exports to surplus countries in Asia were needed.

"But he said 'it is clear' that the rebalancing may not take place, 'at least not on the scale needed'."

Source: Tom Braithwaite, Bertrand Benoit and Ralph Atkins, Financial Times, August 18, 2009.

Paul Kedrosky (Infectious Greed): Beijing car sales tick to 1,200/day
"It is staggering the pace at which new autos are hitting the roads of Beijing, with the rate now touching 1,200 a day. After passing the US in terms of new car sales earlier this year, the citizens of China seem eager to make up for lost time in getting to developed world levels of auto penetration.

"Beijing reported the registration of 261,000 new cars in the first seven months, or about 1,240 daily, up 9% from the same period last year.

"China's vehicle sales posted a 63% year-on-year growth in July, which is usually the worst period of the year for auto sales, according to figures released by China Association of Automobile Manufacturers."

Source: Paul Kedrosky, Infectious Greed, August 16, 2009.

Fox Business: IRS Commissioner on UBS settlement
"IRS Commissioner Doug Shulman on the agreement from UBS to turn over the names of 4,500 Americans holding Swiss bank accounts to avoid taxes."

Click here for the full article.

Source: Fox Business, August 19, 2009.

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