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Words from the (Investment) Wise for the Week That Was (August 24 - 30, 2009): Part II

Standard & Poor's: S&P/Case-Shiller Home Price Indices - home prices on an upswing in the second quarter
"Data through June 2009, released today by Standard & Poor's for its S&P/Case-Shiller Home Price Indices, the leading measure of US home prices, show that the US National Home Price Index improved in the second quarter of 2009.

"The chart above depicts the annual returns of the US National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller US National Home Price Index - which covers all nine US census divisions - recorded a 14.9% decline in the 2nd quarter of 2009 versus the 2nd quarter of 2008. While still a substantial negative annual rate of return, this is an improvement over the record decline of 19.1% reported in the 1st quarter of the year. The 10-City and 20-City Composites recorded annual declines of 15.1% and 15.4%, respectively. These are also improvements from their recent respective record losses of -19.4% and -19.1%.

"'For the second month in a row, we're seeing some positive signs,' says David Blitzer, Chairman of the Index Committee at Standard & Poor's. 'The US National Composite rose in the 2nd quarter compared to the 1st quarter of 2009. This is the first time we have seen a positive quarter-over-quarter print in three years. Both the 10-City and 20-City Composites posted monthly increases, as did most of the cities. As seen in both seasonally adjusted and unadjusted data, as well as the charts, there are hints of an upward turn from a bottom. However, some of the hardest hit cities, especially in the Sun Belt, show continued weakness.'"

Source: Standard & Poor's, August 25, 2009.

Asha Bangalore (Northern Trust): Sales of new homes advanced, inventories are shrinking
"Sales of new single-family homes rose 9.6% in July, after upward revisions for May and June. Purchases of new homes have risen in five of the first seven months of the year. Sales of new single-family homes are now up roughly 32% from a record low reading of 329,000 units registered in January 2009. On a regional basis, sales of new homes rose in the Northeast (+32.4%) and South (+16.2%), fell in Midwest (-7.6%) and was nearly steady in the West (+1.0%). The $8,000 credit for home buyers appears to have raised sales of new and existing single-family homes. Breakdowns of new home sales based on price ranges show a small increase in purchases of homes prices upwards of $400,000 and below $750,000.

"From a year ago, sales of new single-family homes are down only 9.3%; it is a significant improvement compared with double digit declines seen in recent months. The largest drop in the median price of a new single-family home for the cycle was in January 2009 (-45.5%).

"The inventories-sales ratio is encouraging because it declined to a 7.5-month mark, down from a cycle high of 12.4-months in January 2009. The median of this ratio during 1963-2000 is 6-month supply."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 26, 2009.

Clusterstock: New foreclosures dwarf new home sales
"New home sales are ticking up again, bringing some much-needed relief to the beleagured homebuilders. But watch out. Mark Hanson produced this chart, showing foreclosure starts against new home sales. As you can see, the new foreclosure starts jumped even more in July than new home sales, meaning trouble down the road for homebuilders - especially once that $8,000 first-time homebuilder tax credit runs out."

Source: Joe Weisenthal and Rory Maher, Clusterstock - Business Insider, August 27, 2009.

Asha Bangalore (Northern Trust): Defense and aircraft orders lift durable goods
"Orders of civilian aircraft (+107%) and defense items (+14.8%) led to the 4.9% jump of bookings of durable goods during July. Excluding aircraft and defense, orders of durable capital goods fell 0.3% in July after a 3.6% increase in June and a 4.3% gain in May.

"The main message from the ISM manufacturing survey, industrial production report, and orders of durable goods is that the factory sector is moving toward a complete recovery."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 26, 2009.

Financial Times: US "problem" bank list hits 15-year high
"The number of US banks at risk of failure is at a 15-year-high while the fund protecting depositors is at its lowest level since 1993, according to figures that highlight the spread of the crisis to the lower reaches of the financial system.

"The Federal Deposit Insurance Corporation, a banking regulator, on Thursday said the number of 'problem banks' had risen from 305 to 416 during the second quarter. The FDIC does not name the lenders on the 'problem list' but said that total assets of that group had increased from $220 billion to $299.8 billion in the three months through June.

"That relatively low figure suggests that after hitting large institutions which traded complex securities, the financial crisis and the recession are taking a toll on smaller banks that lend to businesses and consumers.

"Sheila Bair, the FDIC chairman, said on Thursday that while earlier losses in the industry were related to troubled residential loans and complex mortgage-related assets, there were now problems with more conventional types of retail and commercial loans that have been hit hard by the recession. 'These credit problems will outlast the recession by at least a couple of quarters,' she said.

"Thursday's news of a sharp fall in the FDIC's deposit insurance fund, which insures up to $250,000 per depositor in each bank, underscored the problems faced by regulators when contemplating the rescue or wind-down of institutions with trillions of dollars on their balance sheets.

"The agency said its fund had fallen to just $10.4 billion from $13 billion in the quarter, the lowest level since March 1993 when the US was in the middle of the savings and loans crisis. The fund has been depleted by bank failures: regulators have shut 81 banks this year.

"'In many important respects, financial markets are returning to normal,' said Ms Bair. 'Combined with the positive economic news in recent weeks, we're hopeful that this will lead to a moderation in credit problems in coming quarters. But, as our report shows, cleaning up balance sheets is a painful process that takes time.'"

Source: Joanna Chung and Francesco Guerrera, Financial Times, August 27, 2009.

Asha Bangalore (Northern Trust): Some market spreads are widening again
"At the short end, financial market spreads continue to narrow. However at the long end, the situation is different. Two representative long end market spreads - Moody's Baa less 10-year Treasury note yield and junk bond yield less 10-year Treasury note yield - have both widened during August 11-20. The reasons are not clear as economic reports strongly suggest that underlying fundamentals are improving. Concern about the nature of economic recovery and projected status of balance sheets of banks could be factors influencing these spreads."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, August 24, 2009.

Bloomberg: Leverage rising on Wall Street at fastest pace since '07 freeze
"Banks are increasing lending to buyers of high-yield company loans and mortgage bonds at what may be the fastest pace since the credit-market debacle began in 2007.

"Credit Suisse Group AG and Scotia Capital, a unit of Canada's third-largest bank, said they're offering credit to investors who want to purchase loans. SunTrust Banks Inc., which left the business last year, is 'reaching out to clients' to provide financing, said Michael McCoy, a spokesman for the Atlanta-based bank. JPMorgan Chase & Co. and Citigroup Inc. are doing the same for loans and mortgage-backed securities, said people familiar with the situation.

"'I am surprised by how quickly the market has become receptive to leverage again,' said Bob Franz, the co-head of syndicated loans in New York at Credit Suisse. The Swiss bank has seen increasing investor demand for financing to buy loans in the past two months, he said.

"Federal Reserve data show the 18 primary dealers required to bid at Treasury auctions held $27.6 billion of securities as collateral for financings lasting more than one day as of August 12, up 75% from May 6.

"The increase suggests money is being used for riskier home-loan, corporate and asset-backed securities because it excludes Treasuries, agency debt and mortgage bonds guaranteed by Washington-based Fannie Mae and Freddie Mac of McLean, Virginia or Ginnie Mae in Washington. Broader data on loans for investments isn't available."

Source: Kristen Haunss and Jody Shenn, Bloomberg, August 28, 2009.

Bill King (The King Report): Foreign assets in the US

"The above chart illustrates why the dollar is under severe pressure and the US financial and economic system is on life-support from the Fed as well as why Bernanke and his ilk will not divulge its records, ways and means to the public.

"It also shows that the Fed is between a rock and a hard place because as the Fed increases its life support (balance sheet/debt monetization) it will increase the desire of foreigners to jettison dollar-denominated assets. This is why there is no exit strategy for the foreseeable future."

Source: Bill King, The King Report, August 27, 2009.

Eoin Treacy (Fullermoney): Stock markets - give upside benefit of doubt
"There has been considerable debate about how the excess liquidity permeating rallies across asset classes and borders will be withdrawn. What seems clear is that changes will be made cautiously and economic recovery will be given precedence over worries about future inflation.

"The S&P 500 accelerated lower from September, lost consistency at the penultimate low and finally bottomed in March. It encountered brief resistance in the region of 1,000 and is now pulling away from that area. For months we have felt that the S&P's bull market hypothesis was more faith based than analytical because it had not yet completed its base like so many of the leading markets. This is no longer the case. Current action is consistent with bull market type activity..

"In the short-term, a sustained move back below 1,000 would be needed to check momentum. A fall back below 975 would break the progression of higher lows and pull into the previous May-June range. A sustained move below 900 would indicate an increased likelihood of base formation extension. In the absence of any of these factors, the upside can continue to be given the benefit of the doubt. As stock markets advance, 10,000 points on the Dow Jones Industrials is the next potential area of resistance.

"The Nasdaq has been trending consistently higher from the March lows and appears to be in the process of completing another small range. A sustained move below 1,560 would be needed to question the consistency of the advance.

"Favourable stock market conditions are evident all over the world with an impressive number of markets moving to new recovery highs this week. The FTSE-100 consolidated above the 4,500 for much of the month and broke upwards last week. A sustained move back into the base, with a fall below 4,500 would be required to hinder upside potential. Germany's DAX has a similar pattern with 5,000 being the operative level."

Source: Eoin Treacy, Fullermoney, August 25, 2009.

Richard Russell (Dow Theory Letters): Are we in a new primary bull market?
"The stock market is at all times subject to three trends (1) the primary or great tidal sweep of the market which can be likened to the tide of the ocean. (2) The secondary trend of the market, which can be compared with the waves in the ocean. And (3) The daily action, which can be likened to the ripples on the waves.

"Right now we are at a most unusual and rare juncture. I say this because at this time there are questions and arguments regarding both the primary trend of the market and the secondary trend.

"Are we in a new primary bull market now? Personally, I doubt it.

"As for the secondary trend, I'm having some second thoughts about the secondary trend. On July 23, 2009, the Transports finally confirmed the Dow in closing above its June 11 high. This was a signal that the secondary trend of the market had turned bullish. From July 23 onward, the market gathered strength as the secondary trend continues to extend.

"At this point, it's obvious that the secondary trend of the market remains strongly bullish. How far this counter-trend rally will carry is unknowable. I've been reluctant to recommend investing heavily in what I believe is a bear market rally or a correction against the prevailing primary trend. The great values haven't been there, and playing bear market rallies can be dangerous and stressful."

Source: Richard Russell, (Dow Theory Letters), August 25, 2009.

Brian Belski (Oppenheimer Asset Management): Reasons to be cheerful
"History shows that September is customarily the weakest month of the year for US equities - but this does not necessarily hold true following positive stock market performances during the summer, says Brian Belski, chief investment strategist at Oppenheimer Asset Management.

"He says that since the second world war, the S&P 500 has suffered an average September fall of 0.5%. But there has been a decided shift in seasonality patterns in the past 15 years.

"'Given the dramatic change in the financial system during this period, we believe the new pattern provides a more relevant comparison,' he says.

"'Seasonal patterns actually favour the market in the current environment. We have found that Septembers that follow positive summer months, such as the one we have seen this year, exhibit positive S&P 500 performance, on average.

"'In addition, the fourth quarter is typically a period of strength for the market regardless of summer performance.'

"Mr Belski notes that many investors are now anticipating a sizeable correction in the stock market following its strong ascent since March.

"'While we do not completely discount the possibility of some sort of market pullback given recent gains, we remain optimistic regarding market performance in the months ahead and expect the S&P 500 to finish the year above current levels."

Source: Brian Belski, Oppenheimer Asset Management (via Financial Times), August 24, 2009.

Bespoke: Missing in action - short sellers
"Last night [Wednesday] after the close, the major exchanges released their mid-month short interest data, or as some would say, their lack of short interest data. As shown in the chart below, the average short interest as a percentage of float for stocks in the S&P 1500 is currently at 6.9%. This is the lowest level since February 2007, when the average was 6.6%. In 2008, it was the bulls who argued that high levels of short interest were a reason the market should rally. With the recent data, however, it is now the bears who will argue that low levels of short interest suggest that investors are now too bullish."

Source: Bespoke, August 26, 2009.

Bespoke: Investors Intelligence hits most bullish level since January 2008
"... short interest as a percentage of float is currently at its lowest level since 2007. Another group of investors who have turned decidedly less bearish are newsletter writers. According to the weekly data from Investors Intelligence, bullish sentiment among newsletter writers is at its highest levels since January 2008. At the other end of the spectrum, bears are practically in complete hibernation. At a level of 19.8%, bearish sentiment is at its lowest level since late 2007. While it is still far from standing room only, the bullish camp is starting to attract a crowd."

Source: Bespoke, August 26, 2009.

Bespoke: Individual investors not as bullish as the pros
"In the last few days, we have noted how short interest is at multi-year lows and newsletter writers are more bullish than at any other time since the start of 2008. While the so-called pros are bullish, individual investors apparently need more convincing. According to this week's survey of the American Association of the Individual Investors (AAII), only 1/3 of investors surveyed are currently bullish, while nearly half (49%) are bearish. Based on these surveys at least, not everyone is bullish."

Source: Bespoke, August 27, 2009.

MoneyNews: Roubini missed the stock rally
"While perennial pessimist Nouriel Roubini has been prescient in predicting recent economic woes, investors sticking to his forecasts have suffered dearly since March.

"That's because he's been warning about continued problems in the economy while stock prices have soared.

"The New York University professor has been arguing for weeks that the economy is in danger of suffering a double-dip recession. And he hasn't yet recommended that investors plunge into stocks, Bloomberg notes.

"Yet the Standard & Poor's 500 Index has soared 53% from its March low.

"When the rally began, Roubini called it a 'dead-cat bounce', and in May he said the ascent may 'fizzle', Bloomberg reports.

"On March 9, Roubini said the S&P 500 was headed down to 600. Instead it has jumped 71% to 1,027 as of Wednesday morning.

"'We're looking at a bull cycle in phase one,' investment guru Laszlo Birinyi told Bloomberg.

"'No one wants to come out and say, 'This is a bull market.' Everyone's just dancing around the term.'

"Birinyi says Roubini may have missed the upward move because he concentrates on the economy rather than stocks.

"Roubini certainly isn't the only bear.

"Market sage Robert Prechter told Yahoo! News that recent stock gains represent a bear market rally and that the next wave will be down.

"'I think we'll definitely break the March 2009 lows, and I think the bear market will extend well into the next decade,' he says."

Source: Dan Weil, MoneyNews, August 26, 2009.

Clusterstock: The trashiest stocks are on fire
"Since the market hit its lows in early March, the trashiest, most beaten-down stocks have been the big winners. Some are arguing that the trash stocks have to slow down soon. But in the meantime, it looks like investors are reaching for the trashiest of the trash. Check out the crazy runs in Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG) and even the soon-to-be-liquidated GM over the last few weeks. This is the kind of behavior that might foretell the end of the junk rally."

Source: Joe Weisenthal and Rory Maher, Clusterstock - Business Insider, August 24, 2009.

Eoin Treacy (Fullermoney): Carry trades being reopened
"The unwinding of the yen carry trade, from September, forced large positions in speculative assets all over the world to be sold, contributing to the synchronous decline in the price of most financial assets and the corresponding advance of the yen and the dollar. This tumultuous event is now part of our history and conditions, particularly since March, have been conducive to carry trades being reopened.

"Investors in speculative higher yielding assets have seldom been provided with such a wide menu of potential carry trade currencies. Interest rates in the Eurozone, UK, USA and Japan are all at historically low levels. While we tend to concentrate on the main currency cross rates it is evident from a perusal of the major currencies that some classic destinations for carry trades such as New Zealand (USD, GBP, EUR, JPY) or Brazil (USD, GBP, EUR, JPY) have currencies that are appreciating in all four potential carry currencies.

"In the past, a US, UK or European investor would have had to borrow Japanese yen and invest them in a third country. This exposed them to currency fluctuations in two crosses. The current environment is simpler, exposing a domestic investor in one of these countries to a single cross rate.

"We have long said that in the competitive world of globalisation, no country wants a strong currency but some are more motivated to have a weak currency than others. The strength of carry trade destination currencies will increasingly become a political issue. New Zealand's government has already commented on the strength of Kiwi. The Kiwi has appreciated significantly in all of the crosses mentioned above but has only broke to new highs against the pound. This would suggest that the easiest part of the advance has already occurred and further improvement will have a greater near-term associated risk of reversion.

"Israel is the first country to raise rates following the credit crisis. Most of the potential carry trade funding economies are unlikely to raise interest rates before next year and when they do, rises are likely to be small and the pace slow. Destinations for carry trades are likely to be raising rates at the same time, and potentially faster, so the tightening of interest rate differentials is unlikely to be a major impediment to carry trades.

"Stocks, commodities and credits have all appreciated considerably over the last 6 months. While this move is not over, we are probably closer to the next larger reaction than we are to the next large advance. When some of the consistent trends that are currently evident roll over, profit taking may put upward pressure on carry trade currencies. Looking beyond a reversion to the mean, as long as interest rate differentials remain amenable and funding currencies relatively weak compared to their higher yielding counterparts, carry trades are likely to remain viable sources of funding."

Source: Eoin Treacy, Fullermoney, August 27, 2009.

Financial Times: High prices necessary for producing Chinese commodities
"For mining companies, the drop in commodities prices earlier this year has been, ironically, good long-term news. True, in the short term earnings have suffered and share prices have tanked. The FTSE 350 Mining Index was down 45% between August 2008 and January this year.

"But amid all the negative news there was, nonetheless, an encouraging clue about the limits of China's domestic commodities output that paints a brighter outlook for the natural resources sector.

"China's geological endowment is critical for commodities companies as Beijing attempts to cap imports - and prices - supporting its domestic output. China is rich in iron ore, bauxite, zinc, nickel, coal and crude oil deposits.

"Although the size of the country's geological endowment matters, what really makes a difference is the price at which Chinese companies can dig out the raw materials. Until this year, the country's capabilities were mostly untested as most of the recent increase in output came on the back of rising global prices since 2002.

"The drop in global prices earlier this year has now revealed that China can only sustain high domestic production when global prices are near record highs.

"As raw materials prices declined in late 2008 and early 2009, output from Chinese mines plunged because their mines were uncompetitive. This forced the country to rely heavily on imports, mopping up global surpluses and boosting prices.

"The poor resilience of China's local production to price crashes has been suspected for a long time. But the corroboration is great news for miners with high volume and low production cost assets, such as BHP Billiton and Rio Tinto."

Source: Javier Blas, Financial Times, August 24, 2009.

Bespoke: Oil to national gas ratio highest ever
"With oil rallying and natural gas continuing to plummet on a daily basis, the ratio of oil to natural gas is at its highest level since at least 1990 at 26.35. When the line is increasing in the chart below, oil is outperforming natural gas, and as shown, it has been doing that now since the end of 2008. The ratio is currently in uncharted territory, so who knows when we'll see some reversion to the mean."

Source: Bespoke, August 24, 2009.

GoldSeek: GATA presses Fed to give up its golden secrets
"Yesterday GATA's [Gold Anti-Trust Action] Washington-area law firm, William J. Olson P.C. of Vienna, Virginia filed with the Federal Reserve Board an administrative appeal of the Fed's most recent refusal to grant us access to the agency's records involving the US gold reserve.

"Really, why should any Federal Reserve record involving the national gold reserves be confidential, except perhaps records involving the most ordinary security of the reserve's vaulting? Plainly the Fed has knowledge of something that has been done with the gold reserve that the US government does not want the American people and the financial markets to know.

"Further, GATA's administrative appeal notes, the Fed's search of its records in response to our request was negligent, insofar as it did not cite at least one document involving gold swaps that is posted and publicly accessible at the Fed's own Internet site. That is, it seems that GATA's lawyers looked harder for the relevant documents than the Fed itself did.

"It strikes GATA as remarkable that the financial market commentators who most often disparage suggestions that central banks are intervening surreptitiously as well as openly in the gold market never have tried to put a critical question about gold to any central bank. Even big financial news organizations have failed to do this when reporting on the gold market. But if they ever did start asking critical questions, they would have to report that the Fed has some big secrets about gold. It is more justification for US Rep. Ron Paul's legislation to audit the Fed."

Source: Chris Powell, GoldSeek, August 23, 2009.

TheStreet.com: Christian - gold will hit $1,000
"Jeffrey Christian, managing director of CPM Group, argues that once investment demand surges, gold will skyrocket to $1,000."

Source: The Street.com, August 28, 2009.

Financial Times: The weather channel
"In the agricultural commodities market, nothing explains better the influence of weather than the difference between the price of tropical produce such as sugar and cocoa and crops such as wheat and corn.

"While sugar and cocoa hover at multi-decade highs, the price of wheat and corn is falling to its lowest since 2007.

"A poor monsoon in India and unseasonal rain in Brazil have hit sugar output in the world's two largest producers. Cocoa prices have suffered because of poor weather in Ivory Coast, which produces 40% of the world's cocoa.

"Meanwhile, the grains' growing season in the US and Europe has been almost perfect - timely rains in the spring, and sunshine and warm temperatures during the summer - after a delayed start. Yields for wheat are, according to the International Grains Council, 'unexpectedly good'.

"The corn harvest will not start until the autumn, but the scouters that check fields in the US midwest are reporting a large, if not record, crop.

"The fact that weather causes the price differences also helps to explain why hedge funds and investment banks have hired dozens of meteorologists in the past few years, seating them close to their traders.

"For agri commodities, weather research is now as important as research on consumption trends. Stay tuned to the weather channel."

Source: Javier Blas, Financial Times, August 27, 2009.

Financial Times: China tightening
"Not for the first time, there is a gap between what China says and what China does. Premier Wen Jiabao warned this week that the 'foundations of recovery are not stable . . . we cannot afford the slightest relaxation or wavering'. The subtext seemed obvious: that China's exceptionally loose monetary policy will continue for the foreseeable future.

"But a subtle shift is already under way. Monetary policy in China is not qualitative but quantitative. The People's Bank has a target interest rate but its focus is on economic growth and the assumed quantity of money needed to fund it. By that token, China has been tightening by stealth for a while.

"The banking regulator last month told lenders to raise reserves to 150% of their non-performing loans by the end of this year, up from 134.8% at the end of June. A communiqué last Friday canvassed views on deducting holdings of other lenders' subordinated or hybrid debt from supplementary (non-core) capital.

"Then there are softer measures, such as reminding banks to ensure that loans for investment in fixed assets actually end up there. The central bank also has raised money-market rates to drain liquidity. The effects of all this can be seen in the M2 measure of money supply, which was up 28% at the end of July, year on year, but which fell 3 basis points from the end of June.

"This is how China tightens: imperceptibly, by degrees. As Goldman Sachs points out, China's last tightening cycle began not when it raised rates in November 2004 but 18 months earlier when the central bank began to issue short-term bills to mop up excess cash. Listen to the rhetoric now, and you can almost hear the fluttering of doves. But look at the evidence, and it is obvious that hawks are gathering."

Source: Ben McLannahan, Financial Times, August 25, 2009.

Financial Times: Troubling signs in Japan ahead of vote
"Japan's consumer prices fell at a faster-than-expected pace in July and unemployment rose sharply, according to data released on Friday, as the country prepared to vote in a new government on Sunday to lead the economy's recovery.

"The jobless rate jumped to 5.7% in July from 5.4% in June - the highest level since records began in 1960 - as businesses continued to cut their workforce and new graduates joined the labour market.

"Rising job insecurity continued to weigh on private spending. Japanese household spending fell 1.3% compared with June on a seasonally adjusted basis while worsening deflation could further dampen demand. Last month, core consumer prices, excluding fresh food, fell 2.2% from a year ago, compared with a drop of 1.7% in June. The decline was the worst since records began in the early 1970s.

"'Much of the current bout of deflation is the result of huge falls in year-ago oil prices. However, these will dissipate, as oil prices have since risen. In fact, in six months time oil will likely be a strong positive contributor to headline inflation,' said Daniel Melser, economist at Moody's Economy.com.

"The economic data were worse than expected but unlikely to change the fact that most economists believe the economy has hit bottom.

"Japan, which emerged from recession in the second quarter, is expected to see another quarter of growth in the July to September period after volume of exports rose a seasonally-adjusted 2.3% in July from June.

"The long-ruling Liberal Democratic party is expected to face a landslide defeat in Sunday's general election as Japanese voters demand for changes in the way the country is run."

Source: Justine Lau, Financial Times, August 28, 2009.

Paul Biszko (RBC Capital Markets): Time up for Russia bears
"There is a growing sense that the worst is now over for Russia - but problems still lie ahead, says Paul Biszko, senior emerging markets strategist at RBC Capital Markets.

"'In late 2008/early 2009 Russia looked vulnerable to a full blown crisis,' he says. 'Its externally over-leveraged private sector was hit by both a sharp credit squeeze and a commodity price collapse.'

"He says three factors have been critical to the country's turnround.

"First, the risk asset rally and improved investor sentiment in the second quarter of this year helped halt capital flight and eased refinancing problems.

"Second, the partial oil price recovery and commodity bounce has improved both government and corporate cash flow.

"Third, the government acted relatively effectively in confronting a deep domestic liquidity shortage and stemming rampant panic, largely as it had a strong balance sheet coming into the crisis.

"'Although Russia's cash reserve cushion has been cut by a third, it is still relatively large at $400 billion - this remains its key near-term anchor, which should allow it to cope with any second-round crisis aftershocks,' Mr Biszko says.

"'We are not turning outright bullish on Russia, rather less bearish, at least on a three- to six-month horizon.

"'Our biggest concern is that Russia remains highly sensitive to recurring commodity price shocks, and its willingness/ability to reduce this vulnerability is questionable.'"

Source: Paul Biszko, RBC Capital Markets (via Financial Times), August 27, 2009.

Nationwide: UK house price bounce extends into August
"Commenting on the figures Martin Gahbauer, Nationwide's Chief Economist, said:

"'The price of a typical house rose for the fourth consecutive month in August, increasing by 1.6% on a seasonally adjusted basis. The 3 month on 3 month rate of change - generally a smoother indicator of the near term trend - rose from 2.7% in July to 3.3% in August, the highest level since February 2007. At

£160,224, the average price of a typical UK property is still slightly lower than 12 months ago. However, the annual rate of change rose further in August, from -6.2% to -2.7%. Over the first eight months of 2009, the seasonally adjusted index of house prices has risen by 3.2%, though relative to the October 2007 peak it is down by 14.4%.

"'The exceptionally low level of interest rates offers some explanation for why house prices have not repeated the very sharp falls of 2008. There are two main channels through which the low level of interest rates has impacted the housing market. First, mortgage payments for existing homeowners - especially those with tracker or standard variable rate loans - have been reduced substantially. Before the MPC began cutting rates, the average interest and principal payment per mortgage holder represented about 38% of the average post-tax labour income. Following the steep cuts in base rate, this has fallen to just 28% of post-tax income, despite historically high levels of outstanding mortgage debt.

"'The fall in debt servicing costs has meant that fewer homeowners are under immediate financial pressure to sell than might have been expected in a recessionary economic background with rising unemployment. Partly as a result, fewer second-hand properties have come onto the market than is normally the case in recessions, which has contributed to moving the balance of supply and demand more in favour of sellers over the course of 2009.

"'In addition to limiting the supply of second-hand homes, lower interest rates have also had an impact on the demand side. Even though house prices remain high relative to earnings, the fall in interest rates has improved the affordability of mortgages for those looking to buy a home. This helps to explain the strong rise in new buyer enquiries reported by estate agents for most of 2009. Although not all of these enquiries are turning into sales, house purchase transactions have continued to slowly increase from the record lows reached in late 2008.

"'At the moment, a rise in interest rates is probably still some way off. However, the eventual exit from exceptionally loose monetary policy could make the recovery in the housing market bumpier than some might expect after the last few months of price increases.'"

Source: Nationwide, August 27, 2009.

James Lord (Capital Economics): Israel's monetary policy
"The Bank of Israel's surprise interest rate rise on Monday is unlikely to send other central banks rushing to tighten - but the move is nevertheless of great interest, says James Lord at Capital Economics.

"'Although Israel is a relatively small economy, the BoI's response to the global crisis has been sophisticated,' he says.

"'It cut rates aggressively and implemented quantitative easing, leading to a large expansion of the monetary base.'

"Mr Lord also notes that Stanley Fischer, the BoI governor, is a former IMF deputy managing director and was US Fed chairman Ben Bernanke's PhD supervisor. 'Mr Bernanke is likely to watch closely given that his former tutor is implementing policies that may be relevant for the Fed's own exit from quantitative easing.'

"Indeed, the BoI started to unwind quantitative easing last month, while the rate of interest payable on commercial bank reserves will now rise - which is Mr Bernanke's preferred method for reversing any inflationary impact from the Fed's unconventional easing, Mr Lord says.

"'But we doubt the BoI's move has implications for other central banks. The BoI made clear rates went up to help anchor local inflation expectations. In most major economies, inflation is expected to stay low this year and next.

"'Also, central bankers at Jackson Hole made it clear that ultra-accommodative policy is likely to remain in place in the major economies for some time.'"

Source: James Lord, Capital Economics (via Financial Times), August 25, 2009.

Bloomberg: Zuma may be African Lula as anti-inflation move lures investors
"South African President Jacob Zuma was propelled into office this year by union support. So far, it is investors who are reaping the benefit.

"Zuma, who campaigned on promises to create jobs and slash poverty, began by removing two union foes: Finance Minister Trevor Manuel and central bank governor Tito Mboweni. He then named replacements who once worked for Manuel and Mboweni and who have favored their predecessors' economic policies, which labor officials say stifle growth and employment.

"That has some analysts comparing Zuma to Brazilian President Luiz Inacio Lula da Silva, who panicked investors with his anti-capitalist rhetoric when he came to power in 2003, only to implement market-pleasing measures later. Since Lula took office on January 1, 2003, Brazil's gross domestic product has tripled to become the world's eighth-biggest economy.

"'Zuma is pulling a Lula,' said Lars Christensen, head of emerging-market strategy at Danske Bank in Copenhagen. 'Zuma is a pragmatist. I can't see any big differences between Zuma's policies and those of his predecessors. No one expected that.'

"The president has maintained the inflation-fighting policies of his predecessor, Thabo Mbeki, has met investors to reassure them, has said that public spending may need to be curbed and has commissioned a study on using tax revenue more effectively. Yesterday, Gwede Mantashe, secretary general of Zuma's African National Congress, said labor unions have no undue influence over the president.

"South Africa's rand is the second best-performing emerging market currency of the 26 monitored by Bloomberg this year. The first is the Brazilian real. Ex-union leader Lula kept spending in check and named as central bank president a FleetBoston Financial Corp. executive who resisted pressure from some members of Lula's Workers' Party to immediately cut rates.

"Almost four months into his term, Zuma is adhering to the free-market approach that angered his union backers when implemented by Mbeki. Investors who were irked by Zuma's ties to labor now say Zuma's South Africa is looking like a good bet.

"Since the April 22 election, the rand has gained 13% against the dollar, the benchmark South African stock index has advanced 26% and credit default swaps, the cost of protecting against a default, have dropped by more than a third.

"'Zuma appears to be making very solid decisions,' said Joseph Rohm, fund manager of the $300 million Africa & Middle East Fund at T Rowe Price International Plc in London. 'We are encouraged that what was a business-friendly environment has been maintained.' He said he has been buying South African assets, though he declined to be more specific."

Source: Nasreen Seria, Bloomberg, August 28, 2009.

Financial Times: Ted Kennedy
"Edward Kennedy died on Tuesday night from the consequences of a brain tumour at the age of 77. He did not fulfil the ambitions of his dynastic family by becoming president of the United States, as one brother did and as another might have, both victims of the assassin's bullets, but he became a lion of the US senate, liked and admired by friend and foe alike."

Click here for the full article.

Source: Financial Times, August 26, 2009.

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