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Words from the (Investment) Wise for the Week That Was (Oct 26 - Nov 1, 2009): Part II

Asha Bangalore (Northern Trust): Durable goods orders - mixed performance in third quarter
"Orders of durable goods rose 1.0% in September after a 2.6% drop in August. In the third quarter, overall orders of durable goods rose at an annual rate of 12.3%, after a 4.00% gain in the second quarter following substantial declines in the fourth quarter of 2008 and the first quarter of 2009. A similar picture of recovery is applicable to orders of non-defense capital orders excluding aircraft."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, October 28, 2009.

Asha Bangalore (Northern Trust): Total continuing claims are stabilizing
"Initial jobless claims were virtually unchanged at 531,000 during the week ended October 24 from the 530,000 reading of the prior week. Continuing claims, which lag initial claims by one week, fell 148,000 to 5.945 million, marking the fourth consecutive weekly decline. A part of this drop is attributed to the expiry of 26 weeks of eligibility for unemployment insurance.

"Upon the completion of 26 weeks, recipients can collect unemployment insurance under the Extended Benefits Program and Emergency Unemployment Compensation Program. Therefore, the true size of recipient of unemployment insurance is a sum total of recipients under these various programs. Data for the special programs lags initial jobless claims data by two weeks. During the week ended October 10, total continuing claims inclusive of seasonally adjusted continuing claims and those under the special programs dropped to 9.84 million from a revised peak of 10 million during the week ended October 3. This decline is noteworthy because it the first positive sign in the labor market after several weeks. We should be able to confirm the improvement as additional data become available."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, October 29, 2009.

Asha Bangalore (Northern Trust): Consumer confidence slips in October, job situation is main driver
"The Conference Board's Consumer Confidence Index dropped to 47.7 in October from 53.4 in the prior month. The two sub-indexes, Present Situation Index (20.7 vs. 23.7 in September) and the Expectations Index (65.7 vs. 73.7) fell in October. The early University of Michigan survey results for the Consumer Sentiment Index also showed a decline.

"Consumers continue to view the labor market in unfavorable light. The number of respondents indicating that 'jobs are hard to get' rose (47.6 vs. 47.0 in September) while those responding 'jobs are plentiful' declined (3.4 vs. 3.6 in September). The net of these two indices moved up in October to 46.2 from 43.4 in September. Historically, there is a strong positive relationship between the net of the indexes about the job market and the unemployment rate. The latest information about a pessimistic perception of the labor market implies that a higher unemployment rate is likely in October. This confirms widely projected information."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, October 27, 2009.

Asha Bangalore (Northern Trust): Sales of new homes decline, but inventories and prices remain favorable
"Sales of new single-family homes fell 3.6% to an annual rate of 402,000 in September after a downwardly revised gain in August. Sales of new single-family have moved up 22% from the cycle low reading of 329,000 in January 2009.

"It appears that existing homes inclusive of distressed properties were more attractive for new homeowners compared with new single-family homes in September. Sales of existing homes increased 9.4% in September. The combined sales of new and existing single-family homes have risen in six out of the last nine months and are about 21% above the cycle low seen in January 2009.

"Inventories of unsold new single-family homes have declined from a peak of 12.4-month supply in January 2009 to 7.5-months in the August-September period. The inventory-sales ratio was unchanged at the 7.5-month mark in September. The historical median of inventory of unsold new single-family homes is a 6-month supply.

"The median price of a new single-family home fell 9.1% from a year ago to $204,800 in September, representing a noticeable deceleration in the pace of price declines. Additional reductions in price, but at a slower pace are likely, given the large number of homes that are unsold. There will be setbacks and gains in the housing sector but the net result should be positive in the months ahead."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, October 28, 2009.

Standard & Poor's: Case-Shiller - home prices continue to improve
"Data through August 2009, released by Standard & Poor's for its S&P/Case-Shiller Home Price Indices, show that the annual rate of decline of the 10-City and 20-City Composites improved compared to last month's reading. This marks approximately seven months of improved readings in these statistics, beginning in early 2009.

"The chart above depicts the annual returns of the 10-City and 20-City Composite Home Price Indices, declining 10.6% and 11.3%, respectively, in August compared to the same month last year. Nineteen of the 20 metro areas and both Composites showed an improvement in the annual rates of decline with August's readings compared to July.

"'Broadly speaking, the rate of annual decline in home price values continues to improve' says David Blitzer, Chairman of the Index Committee at Standard & Poor's. 'The two Composites and 19 of the 20 metro areas showed an improvement in the annual rates of return, as seen through a moderation in their annual declines. Looking at the monthly data, 17 of the MSAs and both Composites saw price increases in August over July. While many of the markets remain down versus this time last year, the relative rate of decline has shown some real improvement."

Source: Standard & Poor's, October 27, 2009.

The Wall Street Journal: Gloom spreads on economy, but GOP doesn't gain
"Americans are growing increasingly pessimistic about the economy after a mild upswing of attitudes in September. But Republicans haven't been able to profit politically from the economic gloom, according to a new Wall Street Journal/NBC News poll.

"The survey found a country in a decidedly negative mood, nearly a year after the election of President Barack Obama. For the first time during the Obama presidency, a majority of Americans sees the country as being on the wrong track.

"Fifty-eight percent of those polled say the economic slide still has a ways to go, up from 52% in September and back to the level of pessimism expressed in July. Only 29% said the economy had 'pretty much hit bottom', down from 35% last month.

"But a dark national view of how everybody in Washington is conducting the public's business appears to be preventing Republicans from benefiting from concerns about the direction of the country or the Democrat-led government's handling of the economy, as the minority party often does.

"In fact, disapproval of the Republican Party actually has ticked upward, along with the public's general pessimism. Asked which political party should control Congress after next year's midterm elections, Democrats now hold a clear edge over the GOP, 46% to 38%, a month after the Republicans were nearly as popular. In September, the Democratic edge was 43% to 40%.

"'There was a bounce-back surge for Republicans, and that's stalled,' said Bill McInturff, a Republican pollster who conducted the Wall Street Journal/NBC News poll with Democratic pollster Peter Hart.

"'The mood in America may be blue, but attitudes toward Washington are just jet black,' Mr. Hart said."

Source: Jonathan Weisman, The Wall Street Journal, October 28, 2009.

The Wall Street Journal: Geithner testifies on regulation
"The Federal Reserve should lose its authority to bail out big, failing financial firms like AIG and Bear Stearns under proposed reforms aimed at limiting the collateral damage from such failures, US Treasury Secretary Timothy Geithner said."

Source: The Wall Street Journal, October 29, 2009.

Financial Times: Draft law would extend Fed powers
"The Federal Reserve could order a financial institution to sell a risky division or stop dangerous trading activity if the central bank determined there was a threat to the US financial system, under a draft law released on Tuesday.

"The landmark bill drawn up by the Treasury and the House financial services committee sets up a council of regulators charged with snuffing out systemic risks and gives the government and the Fed sweeping powers over financial companies at home and overseas.

"The Fed would require systemically significant companies - including foreign groups that own a large or risky US subsidiary - to abide by 'heightened prudential standards'. These include leverage limits, liquidity rules and the drafting of a resolution plan, or 'living will'.

"Companies would be placed in the new category if the council deemed that 'material financial distress at the company could pose a threat to financial stability or the economy'.

"But the draft law goes further than expected - allowing the Fed to require any systemically significant company to 'sell or otherwise transfer assets or off-balance sheet items to unaffiliated firms, to terminate one or more activities, or to impose conditions on the manner in which the identified financial holding company conducts one or more activities'.

"If that does not save a company, the government could seize it and force rival banks that have more than $10 billion in assets to repay any taxpayer money used to seize or wind up their competitor."

Source: Tom Braithwaite, Saskia Scholtes, Aline van Duyn and Francesco Guerrera, Financial Times, October 28, 2009.

Financial Times: Fed chief warns banks on capital
"Ben Bernanke, chairman of the Federal Reserve, placed capital at the centre of his recipe for improving the financial system's safety on Friday, putting banks on notice that they faced a possible capital surcharge or higher equity buffers.

"In a speech to the Boston Fed, Mr Bernanke said the capital raisings that followed the bank 'stress tests' were important, but needed to go further to help prevent future failures.

"Tier one common equity ratios increased to 7.5% at the end of June this year from 5.3% at the end of last year.

"'Options under consideration include assessing a capital surcharge on these institutions or requiring that a greater share of their capital be in the form of common equity,' he said.

"Institutions whose collapse could threaten the entire system would be forced to go even further, possibly being required to issue contingent capital - hybrid securities that convert from debt to common equity at times of financial stress.

"Economists who advocate the introduction of the requirement believe it would help, not only by reinforcing the capital base for when a bank gets in trouble, but also as it would prompt holders of the securities - who want to avoid conversion - to exert pressure on executives to avoid risky behaviour.

"Increased capital requirements look likely to be one of the few elements of the Obama administration's regulatory reform plan to survive unscathed after the industry's huge lobbying effort and wrangling in Congress."

Source: Tom Braithwaite, Financial Times, October 23, 2009.

Financial Times: Why sovereign bond yields will explode
"For nearly two decades, every credit crisis has been palliated with a further wave of leverage, kicking off a new economic cycle. Can this work again? I think not. In this post-credit crisis world, some things will be permanently different.

"It will not be business as usual for government bond prices. That is because current bond yields and the increasing insolvency of our rulers are the biggest disconnect in financial markets today. This comes from two factors: quantitative easing by central banks and the collapse of credit demand by the private sector. Neither are permanent features of the economic landscape.

v"Some will note that, when Japan's bubble economy collapsed, it was able to run huge budget deficits and raise outstanding government debt from 60% to 140% of gross domestic product, while still experiencing a fall in bond yields from 8% to 1%.

"But this 'miracle' was only possible because Japan's household savings were huge and invested at home. Japan did not need foreigners to fund its government deficits. Even today, foreign ownership of Japanese debt is only 6% compared with 50% for US government paper.

"But Japan's household savings rate has collapsed due to an ageing population who no longer save. This low saving rate is something death must undo, not the politicians or monetary policy. So, if Japan is now running budget deficits at double- digit percentage rates of GDP, it can no longer use low-cost excess domestic savings to do so.

v"The Japanese 'miracle' of the 1990s cannot be repeated in the US, the UK or even in Japan this time. The US and the UK will still have very low domestic savings rates with government debt heading towards 100 per cent of GDP. Neither is likely to suffer from prolonged deflation as Japan did. And both the US and the UK are heavily dependent on foreigners for financing that debt. So Treasury and gilt yields will rise sharply and the dollar and the pound will slide."

Source: David Roche, Financial Times, October 26, 2009.

Reuters: PIMCO's Gross - Fed programs end may pressure debt
"Bill Gross, the influential manager who runs top bond fund PIMCO, warned on Monday that the prospect of an end to the Federal Reserve's debt buyback programs could add selling pressure to several credit markets, including US Treasuries.

"Asked about the risk that a recovering US economy hurts Treasury investors, he said 'there's not a heightened sense of concern, but there is some concern'.

v"'It's obvious that the programs in the United States, the Federal Reserve buyback programs … those purchases and that purchasing power will cease within the next three to four months,' Gross told a Canadian business television channel.

"'So, to the extent that that's gone, then perhaps the upward influence in terms of those longer-term Treasuries will be felt more strongly in the next several quarters.'"

Source: Jeffrey Hodgson, Reuters, October 26, 2009.

Richard Russell (Dow Theory Letters): Two possibilities for stock markets
"We are now watching one of two possibilities. The frustrating part of it is that at this time there is absolutely no way of knowing which of the two scenarios is the correct one. Personally, I favor the first scenario which I will now describe.

"(1) The primary trend of the stock market and the economy remains bearish. The advance from the March lows represents a correction or a rally in the bear market. The rally now appears to be in trouble. In fact, the rally may now be in the process of topping out. If this is indeed a rally in a continuing bear market, then in due time the Dow and the majority of stocks will decline and violate their March lows. If both the Industrials and Transports violate their March lows, it will be a signal that the primary bear market has been reconfirmed. However, if both Averages decline, and then rise to new highs, this will be a very bullish indication. It will be a sign that I have been wrong, and that we are probably in a bull market.

"(2) This is the second possible scenario. A bull market started from the March lows, and the advance from the March lows was the first leg of a new bull market. The first leg of the new bull market may now be in the process of topping out. If so, we will have to monitor the decline very carefully. If the decline develops into a secondary reaction and then halts, what comes next is crucial. Following the decline, if both Averages then head higher and break out to new highs, we will know that we are in a new bull market.

"I might add that either way, if the market now declines substantially, I think it will have the effect of turning investors and consumer sentiment even more fearful than it presently is. In which case, consumers will cut back even more on their buying and at the same time boost their desire to save and reduce their debts.

"Admittedly, the first scenario would be a disaster. The disaster would be if the entire advance from the March low were to be wiped out. That would mean that we've been in a primary bear market all along, and that the advance from the March low was simply an upward correction in an ongoing bear market. If so, then it's just a matter of time before the Dow and a majority of stocks break below the March lows, in which case the bear market would be in full force again.

"If the first scenario comes to pass, this would be a disaster, but we must deal what the market gives us. A violation of the March lows by both Industrials and Transports would mean that really hard times lie ahead and that deflation will dominate the US and probably the rest of the world. Furthermore, it would mean that all the trillions that the Obama administration has spent have gone for naught."

Source: Richard Russell, Dow Theory Letters, October 29, 2009.

David Fuller (Fullermoney): Stocks to correct by 10-15%
"Currently the stock market reaction that we have often mentioned and associated with the anniversary of last year's meltdown is underway, albeit slightly later than anticipated, and rapidly morphing into a correction for some stock market indices which had led the rally. Interestingly, China may be a template for what occurs, since it has led the recent corrective phase, as mentioned previously.

"At this stage of the bull cycle, I think a correction of approximately 10-15% for developed country stock markets and somewhat more for emerging markets would be good news for investors with cash to invest. Such a mean reversion towards rising 200-day moving averages would blow the recent froth off valuations and stem talk of an early change in monetary policy.

"Equities could then benefit from a second wind for the rally created by what should be good year-on-year comparative figures for GDP and corporate profits during 4Q 2009 and 1Q 2010. Conversely, if stock markets were to surprise us and extend their upward trends in early November, they would be discounting a bullish outlook for the next two quarters, leaving markets more susceptible to profit taking during the next round of favourable economic news.

"Meanwhile, very clear upward dynamics and follow through, similar to what we saw in the second half of July, are now required to check the current reactions / corrections."

Source: David Fuller, Fullermoney, October 28, 2009.

MoneyNews: Smithers - S&P 500 40% overvalued
"The Standard & Poor's 500 Index is heading for a fall because it's 40% overvalued.

"Banks will probably sell more shares to raise the cash they need and drag down the index, said Andrew Smithers, economist and president of research company Smithers & Co., in an interview with Bloomberg.

"'Markets are very vulnerable to an end of quantitative easing,' said Smithers.

"'Central banks, they've got to stop (buying) some time and if that happens everything will come down.'

"Smithers presciently warned investors off stocks in 2000 at the beginning of a bear market that growled on for two years.

"The heavy infusions of cash into credit markets by the Fed, the Bank of England, and other central banks around the world to save the collapsing financial system may soon stop, Smithers points out.

"Central bank purchases of debt and troubled assets may have worked short term, Smithers suggests.

"But now, as purchases have slowed and may stop altogether, he's raising a red flag.

"'Quantitative easing has set off another sharp, and so far containable, asset bubble,' he said.

"'But if it gets too high and starts to come down then we'll go straight back (into recession).'"

Source: Marc Davis, MoneyNews, October 26, 2009.

Barry Ritholtz (The Big Picture): Rally getting tired?
"I have been pretty steadfastedly bullish throughout most of this move upwards.

"Given the recent market action, I am now starting to pull in my horns a bit, as this rally looks to be getting a little tired and showing signs of technical deterioration.

"We may yet see a new high in this move off of the lows (though that is not guaranteed). However, I see a significant increase in the odds for a fairly substantial correction - in the 5-15% range - over the next 60 days.

"5 factors are making me more cautious:

1) Over the past four days, we have had three failed rallies;

2) The number of new highs on the major indices is contracting;

3) Stocks seem to be reacting far less enthusiastically to earnings beats then they had been;

4) The Transports have been acting squirrelly lately;

5) The S&P is forming an ascending wedge.

"Note: This is not a major call, it looks to me like more of a minor reversal. (Sometimes, those can evolve into something more serious). The reason I expect it to remain modest/contained is the ongoing stimulus to the markets of zero percent interest rates …"

Source: Barry Ritholtz, The Big Picture, October 27, 2009.

MoneyNews: Morgan Stanley - this rally almost over
"According to Morgan Stanley euro analyst Teun Draaisma, we've got just a little bit more rally left, and then a long, low multi-year grind as money starts to get tight.

"The tightening phase may start in the next quarter or two, Draaisma observes.

"'We believe investors need increasingly to consider the implications of monetary and fiscal stimulus withdrawal,' he says.

"'We expect the first Fed rate hike in mid-2010, but the tightening turning point could come sooner, for instance through higher oil.'

"'The Fed language change ahead of the first hike, or a market timing sell signal, would indicate the start of that next phase, for us.'

"Draaisma says the start of tightening phases tends to lead to some indigestion and a defensive rotation in equity markets, for two quarters or more."

Source: Julie Crawshaw, MoneyNews, October 26, 2009.

Bespoke: Earnings trends
"The percentage of US companies beating earnings estimates currently stands at 74%, but below we highlight how this 'beat' rate has changed throughout earnings season. As shown in the charts below, as earnings season has progressed, the percentage of companies beating estimates has declined, while the percentage of companies missing estimates has increased.

"Just like a balance sheet, the 'beat' rate gives you a snapshot of where things stand at a single point in time, but it's the trend in this number that really matters. Right now, the fact that the 'beat' rate is high relative to other quarters isn't as important as the downtrend of the 'beat' rate throughout the current earnings season, and this is probably one reason that the market has been struggling."

Source: Bespoke, October 29, 2009.

Bespoke: Percentage of stocks above 50-Day moving averages falls sharply
"Only 43% of stocks in the S&P 500 are trading above their 50-day moving averages at the moment, which is below the low we saw at the end of September. The percentage isn't as low as it got during the July correction, but another day like today, and it no doubt will be.

"The percentage of stocks above their 50-days in the Materials sector has fallen the most, from nearly 100% above all the way down to just 17%. Financials and Technology have taken big hits as well. Energy and Consumer Staples both still have more than 70% of stocks above their 50-days, so they've held up the best on the recent declines."

Source: Bespoke, October 28, 2009.

BCA Research: Dollar breakdown = "go-global" theme breakout
"Following the recent consolidation phase, factors are falling into place for a breakout in the relative performance of global versus domestic focused stocks.

"While domestic demand is slowly reviving, global growth is already rebounding much faster, underpinned by the sharp recovery in emerging market economies (especially China). This trend should persist, as the deleveraging process continues in the US, while fully functioning financial systems in the emerging world foster renewed credit extension.

"The depreciating dollar represents another boon for globally-geared companies. A weakening U.S dollar is bullish for globally-sourced revenues as it cheapens prices for foreign buyers and boosts currency translation effects. Indeed, the trade-weighted dollar has a decent track record in leading relative corporate profitability, and the current message is positive.

"Bottom line: Continue to favor global over domestic stocks, given that relative profit drivers and valuations remain overwhelmingly in favor of globally-geared equities."

Source: BCA Research, October 26, 2009.

Bloomberg: Roubini says carry trades fueling "huge" asset bubble
"Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling 'huge' bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini.

"'We have the mother of all carry trades,' Roubini, who predicted the banking crisis that spurred more than $1.6 trillion of asset writedowns and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. 'Everybody's playing the same game and this game is becoming dangerous.'

"The dollar has dropped 12% in the past year against a basket of six major currencies as the Federal Reserve, led by Chairman Ben Bernanke, cut interest rates to near zero in an effort to lift the US economy out of its worst recession since the 1930s. Roubini said the dollar will eventually 'bottom out' as the Fed raises borrowing costs and withdraws stimulus measures including purchases of government debt. That may force investors to reverse carry trades and 'rush to the exit', he said.

"'The risk is that we are planting the seeds of the next financial crisis,' said Roubini, chairman of New York-based research and advisory service Roubini Global Economics. 'This asset bubble is totally inconsistent with a weaker recovery of economic and financial fundamentals.'"

Source: Michael Patterson, Bloomberg, October 27, 2009.

MoneyNews: Faber - in a decade, dollar will fall to zero
"The dollar, which recently dropped to a 14-month low of 0.67 euro before recently recovering, will ultimately fall to zero, says financial guru Marc Faber.

"Faber, publisher of the Gloom Boom & Doom Report, told Bloomberg, 'It will go to a value of exactly zero eventually, but not right now.'

"The dollar will drift for a while, with occasional rebounds, Faber says.

"'The other currencies aren't much better either. They are also paper currencies. But I think that against gold, it will continue to depreciate.'

"And when can we expect the dollar to be worthless?

"'Looking at Mr. Obama and his administration, it should already be there,' Faber says.

"'But I think it will take roughly 10 years until people really realize that the fiscal position of the US is a complete disaster.'

"Faber maintains that in about 10 years, 50% of US tax revenue will be used just to cover interest payments on the government debt.

"'That is unsustainable,' he says. 'Then you really are forced to print money.'"

Source: Dan Weil, MoneyNews, October 29, 2009.

Financial Times: Don't write off the dollar
"The bear case for the dollar may be well-known, but there are a number of reasons why it seems too early to bet on a collapse in the US currency in 2010, says Donald Rissmiller, chief economist at Strategas Research.

"First, he says, as long as floors remain in housing and consumer confidence, the US economic recovery is sustainable. 'Confidence eased slightly in October but remains above its recent low,' he notes.

"Second, he believes the saving/investment equation is not yet sufficiently imbalanced to suggest a dollar crisis is imminent.

"Furthermore, the debt-to-GDP ratio remains below the 100% level typically considered problematic. 'While there has been some talk of an eventual US debt downgrade, the timeframe still appears to be several years away.'

"Mr Rissmiller also argues the Federal Reserve will raise interest rates, while employing tools such as paying interest on reserves, leaving its balance sheet elevated. 'There's a lot of room for tighter US monetary policy before policy becomes 'tight',' he says.

"Also, foreign central banks could intervene in support of the dollar, given the global push for exports as a solution to the economic downturn.

"Finally, pegged and semi-pegged currency countries, such as China, have little incentive to disrupt the current trade system. 'Without inflation in developing Asia, there's little need to make drastic changes now,' he says."

Source: Donald Rissmiller, Financial Times, October 29, 2009.

CNBC: Bottom in for the dollar?
"A look at where the dollar is headed, with Dennis Gartman of 'The Gartman Letter'.

Source: CNBC, October 23, 2009.

Mineweb: China sovereign wealth fund speeding up investment - mining a target
"According to reports in the Chinese press, China's $200 billion sovereign wealth fund, China Investment Corporation (CIC) is stepping up its rate of investment in overseas companies and institutions to take advantage of what it perceives as longer term values resulting from the global financial crisis.

"China's People's Daily reports CIC chairman Lou Jiwei as saying that the fund was circumspect in its investment in 2008 as markets plunged investing only $4.8 billion outside China that year, but this year it has been investing around as much each month overseas as it did in the whole of 2008 with the main targets including mining, energy and real estate.

"While the principal purpose of the Fund is to create wealth for the country with its huge dollar surpluses there does also seem to be a dual approach in play, particularly with regard to the mining and energy sectors where an element of securing long term supplies for China's ever-growing industrial sector has to be an important factor.

"However as we have reported here beforehand, CIC, as well as various state-owned minerals sector companies, seem to be pushed by the Chinese government to work day and night to divest as much as possible in its surplus dollars in solid assets beneficial to the nation, as it sees the value of the US dollar declining almost daily.

"The purchasing power of CIC is huge. At the end of 2008 some 87.4% of its overseas investments were held in cash and cash equivalents. There have also been indications that the Chinese government is prepared to pump more funding into CIC should it be needed."

Source: Lawrence Williams, Mineweb, October 23, 2009.

Financial Times: Oil could exceed $100 next year
"Crude oil prices could push above $100 a barrel heading into 2011 due to a combination of a cyclical improvement in demand, the rapid weakening in the US dollar and strong global liquidity growth, says Francisco Blanch, head of global commodities research at Bank of America-Merrill Lynch.

"Demand in emerging markets is coming back with a vengeance, led by China, and will lend tremendous support to the global oil market in 2010.

"Mr Blanch notes that, with Brent trading around $79 a barrel, oil currently sits at a 47% discount to its record high and is lagging behind most other real and financial assets in the recovery.

"'A spike in oil prices above the $100-a-barrel level could create significant headwinds for the global economy,' he adds, warning that a sharp increase could also lead to a repetition of last year's price collapse.

"In spite of the weakening dollar and increased liquidity, he says the risk of a spike in the near term is low - 'physical fundamentals are simply not very supportive of higher oil prices'. In the US, Merrill notes demand seems to be improving but only relative to the dismal levels registered after Lehman Brothers' collapse last October.

"The other side of the Atlantic is not faring much better. 'The reality is that petroleum demand in Europe remains in the doldrums,' says Mr Blanch. That should change next year."

Source: Francisco Blanch, Financial Times, October 26, 2009.

Financial Times: Saudis drop WTI oil contract
"Saudi Arabia on Wednesday decided to drop the widely used West Texas Intermediate oil contract as the benchmark for pricing its oil, dealing a serious blow to the New York Mercantile Exchange.

"The decision by the world's biggest oil exporter could encourage other producers to abandon the benchmark and threatens the dominance of the world's most heavily traded oil futures contract. It is the main contract traded on Nymex.

"The move reveals the growing discontent of Riyadh and its US refinery customers with WTI after the price of the price of the benchmark became separated from the global oil market this year.

"The surge in oil inventories in Cushing, Oklahoma, where WTI is delivered into America's pipeline system, depressed the value of the WTI against other global benchmarks, throwing the global oil market into disarray.

"In January, WTI, which usually trades at a premium of $1-$2 a barrel to Brent, fell sharply, leaving it at a discount of almost $12 - a record gap. This dislocation in the market continued well into the summer.

"From January, Saudi Arabia will base the price of oil for its US customers on a new index developed by Argus, the London-based oil pricing company."

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

David Fuller (Fullermoney): Gold is "hard money"
"Gold shares are very volatile and usually sell at high valuations. For instance, the Philadelphia Gold Bugs Index (HUI US) saw a 16% correction this month before today's rally [Thursday]. In comparison, gold bullion has seen a reaction of 4.2%.

"In my experience, some of the investment managers who know the least about gold are most vehemently opposed to it. Several have told me that they 'hate gold', or words to that effect. The gist of their reason: 'If you are bullish of gold you expect everything else to collapse.' They view gold as the Armageddon story.

"I don't see it that way. I regard gold as 'hard money' in a fiat currency world. Unlike paper money which is often printed with abandon, gold is a supply inelasticity story.

"The best reasons for not investing in gold bullion, I believe, are because it has no yield, is hard to value beyond the eye of the beholder, and fluctuates in price. The later factor means that gold can be out of favour for a long time, as we saw from its bubble peak in 1980 until 2001.

"It can also be in favour for a long time and I maintain that it is in a secular bull market which is likely to end in a bout of gold fever at some stage. There is no sign of this euphoria today."

Source: David Fuller, Fullermoney, October 29, 2009.

Telegraph: Miners' debt problems threaten higher prices
"The debt burden means that companies cannot invest in bringing new capacity on stream and this is having a severe impact on future supply growth, the report says. Long-term fundamentals for metals and minerals demand remain robust, but supply is being curtailed and there is a real danger of a supply gap emerging in several metals and minerals.

"The study by the accountancy group tracked the performance of a sample of the world's largest listed mining and metals companies over almost three decades. It showed that debt levels remain a major concern across the mining and metals sector because of the dramatic levels of borrowing that occurred during the peak of the cycle in 2007 and 2008.

"Lee Downham, the firm's mining and metals partner, thinks the industry will struggle to bridge the future supply gap and he sees a return to equity funding instead of using bank borrowing in the sector.

"'We will see a return to equity as the major source of growth funding, together with innovative transactions less reliant on debt funding,' Mr Downham said. 'We also predict an increasing role for sovereign wealth and private capital and possibly even a return to initial public offerings and separate listings for individual mine projects.'

"The firm also believes that the debt burden will mean that acquisitions by listed mining and metals companies will more often be proposed on the basis of all-share swaps, with little or no cash element involved."

Source: Garry White, Telegraph, October 25, 2009.

Telegraph: Buy food - price rises are almost guaranteed
"There are two main drivers of commodity prices - supply and demand. This is just as true with soft commodities such as wheat, rice, sugar and cocoa as it is with copper and tin. The big problem for your weekly shopping budget in the future is that there are problems on both sides of the equation that are likely to squeeze prices higher, permanently.

"However, this also provides a great investment opportunity and now is a good time to buy into many areas of food production and distribution.

"In September, sugar prices hit a 28-year high after the failure of crops in India due to the poor monsoon season. Prices have fallen about 20% since then, but are still likely to charge ahead over the longer term.

"Cocoa prices are also close to a 30-year high after a mixed harvest in Ivory Coast. Production of the bean is expected to be 100,000 metric tonnes lower this year than the 1.22 million tonnes produced in the country last year.

"Weather is partly to blame for the cocoa problem - the other issue is the age of the trees. Older cocoa trees yield less cocoa.

"These multi-decade highs in food staple prices have been caused by constraints in the supply side of the equation. However, it is the demand side of the equation that provides compelling evidence that prices are trending upwards.

"In a recent report called The End of Cheap Food, analysts and economists from Standard Chartered have calculated that food production would need to rise by a staggering 70% by 2050 if the world's population is to remain adequately fed.

"The emerging market-focused bank argues that water will become scarcer and restricted availability of arable land will increase imbalances in food production, while rising biofuels production will deny an increasing amount of grain output for human consumption.

"Whilst food production will continue to rise, the gap between increasing demand and slowing supply will ensure food prices will rise - and stay high, it says."

Source: Garry White, Telegraph, October 25, 2009.

MoneyNews: Andy Xie - beware huge China property bubble
"China is encouraging property-market bubbles to stimulate growth and power past other countries hit by the global economic downturn, says Andy Xie, an economist formerly of Morgan Stanley Asia.

People are looking at the bubbles as a way to gain economic growth in the short term,' Xie said on Bloomberg Television.

"'They are not sure of long-term damages that they may suffer.'

"The Communist Party cabinet is carrying on with monetary and fiscal stimulus, even though the economy surpassed the government's forecasts for the first nine months of the year.

"As a result of that policy, property sales - and property values - have soared there, while America and Europe have struggled.

"The Chinese government financed a $585 billion stimulus package and banks extended a new record $1.27 trillion of credit. China's economy expanded 8.9% in the third quarter, while housing prices climbed at the quickest pace in a year.

"'Land prices have become so elevated,' said Xie, who accurately predicted in April 2007 China's looming equities downturn.

"'The economy has become so dependent on property and the prices are so high and it carries a lot of risk for the country going forward.'"

Source: Gene Koprowski, MoneyNews, October 26, 2009.

Financial Times: Brazil keeps economic excitement in check
"It is the kind of news that would normally spook investors: Henrique Meirelles, the governor of Brazil's central bank, is preparing to go into politics.

"The threat of political interference used to hang over Brazil's economy like a black cloud. Yet Mr Meirelles explains with customary aplomb that by joining the centrist PMDB, Brazil's biggest political party, he is only exploring possibilities. He may enter politics at next October's general election, perhaps running for the senate; he may stay at the bank; or he may rejoin the private sector.

"'I am merely taking an option on my future,' he tells the FT at the central bank's offices in Sao Paulo.

"Whatever his choice, investors appear unperturbed. Even a 2% tax on foreign portfolio investments, imposed last week to stem the rise of the currency, seemed unlikely to cause more than a pause in the flood of capital to Brazil this year. Brazil's benchmark Bovespa index dropped on the news but quickly rebounded, and the real continues to appreciate. It has gained 36% against the US dollar so far this year. The stock market is higher than before the collapse of Lehman Brothers.

"Hosting the 2014 World Cup and 2016 Olympic Games has added to Brazil's sense of arrival on the world stage.

"Other concerns must be addressed before the country fulfils its enormous potential. Former president Fernando Henrique Cardoso identifies four main challenges. 'Brazil suffers from a shortage of infrastructure, poor quality of education, environmental issues and crime.' Mr Cardoso's fears on that last point have been underlined by the violence in Rio's favelas.

"Such realism helps explain why Brazilian self-confidence is different from the swagger of fellow Bric countries, such as China and India. Rational optimism, rather than irrational exuberance, is what you encounter among Sao Paulo's bankers and business leaders."

Source: Lionel Barber, Jonathan Wheatley and John Paul Rathbone, Financial Times, October 25, 2009.

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