It is with a sense of anxiety that I am compiling this article as our national rugby squad is contesting the World Cup semi-final against the Argentinean Pumas this evening. South Africa has now moved to odds-on (5:6) favorite subsequent to yesterday’s shock defeat of France by England in the other semi. But no need to worry about which team will take the crown home if you view the video clip I posted a few days ago!
Back to business. Before highlighting some thought-provoking quotes from market commentators during the past week, let’s briefly review the markets’ action on the basis of economic statistics and a few performance charts.
On the economic front investors were heartened by some positive news releases calming markets further, as summarized in the table below. “The global economy is on a Goldilocks path: just enough liquidity and just enough growth,” said BCA Research in its Daily Insights. The key question, however, remains the extent of the US economic slowdown, with John Mauldin arguing for a slow-motion recession – GDP growth in the order of 1% for four quarters.
WEEK’S ECONOMIC REPORTS
Source: Gold Seeker Weekly Wrap-Up, October 12, 2007.
This week’s economic highlights include the NY Empire State Index on Monday, Net Foreign Purchases, Industrial Production, and Capacity Utilization on Tuesday, CPI, Housing Starts, Building Permits, and the Fed’s Beige Book on Wednesday, and Initial Jobless Claims, Leading Economic Indicators, and the Philadelphia Fed survey on Thursday.
Global stock markets
The global stock market rally went from strength to strength during the past week with especially emerging markets putting in red-hot performances and again recording new all-time highs. Mature markets, although still ending the week in positive territory, had a somewhat more subdued week. The major US stock market indices closed short of their recent record highs, but US small caps and REITS were out of favor and registered negative returns for the week.
Global fixed-interest and currency markets
Global bond yields were again higher across the spectrum of the yield curve as investors focused on economics reports pointing to improved business conditions compared with what was expected a few weeks ago in the wake of the credit crisis. The rate of the US 3-month Treasury Bill also moved higher as the realization dawned that a further reduction of the Fed funds rate at the FOMC’s meeting on October 30 and 31 was perhaps no longer on the cards.
The decline of the US dollar decelerated on the back of the prospect of interest rates remaining at current levels for longer. However, the US Dollar Index remained close to its all-time low of 77.657 achieved on Monday, resulting in talk about multilateral currency intervention rearing its head. The British pound came under further pressure as the UK economic outlook deteriorated.
The oil price rose to a new record high on the back of geopolitical concerns over Turkey possibly attacking Kurdish rebels in Northern Iraq, and a tightening of crude supply and little, if any, reduction in demand.
The precious metals complex prolonged its rally, with especially platinum and silver performing strongly. Copper, however, ended the week down by almost 2% as profit-taking set in and concerns about China raising interest rates again also played a role.
Now for some words (and pictures) from the investment wise to navigate through the markets’ cross-currents:
Jim Sinclair (MineSet): What makes you think the forces that got us here can extricate the economy from a selective recession?
Source: Jim Sinclair, Jim Sinclair’s MineSet, October 12, 2007.
John Mauldin: The slow motion recession
“By Slow Motion Recession I mean a condition where the economy slows for a long period but does not technically enter a recession. I am thinking of growth in the neighbourhood of 1% GDP for four quarters. That would be lower annual growth than the recessionary period of 2001 to 2002. The reason that it will be “slow motion” is that the cause of the recession is the housing crisis, and that is going to take 12 to 18 months to work out. If it were not for the housing crisis, we would be talking about trend GDP growth of 3% or so.”
Source: John Mauldin: Thoughts from the Frontline, October 12, 2007.
Economy.com: Survey of business confidence for world
“Global business confidence revived a bit in early October. All of the improvement occurred outside of the US, however, with Asian sentiment rebounding to its strongest level since April. US business confidence remains consistent with an economy that is not growing.”
Source: Moody’s Economy.com, October 8, 2007.
Asha Bangalore (Northern Trust): Fed most likely on hold at October 30-31 FOMC Meeting
“The minutes of the September 18 FOMC meeting were significantly more bearish about the economy compared with the minutes of the August 7 FOMC meeting. The minutes indicated that the FOMC regards the ’outlook for economic activity as characterized by particularly high uncertainty, with risks to growth skewed to the downside’. Financial conditions were seen as ’still fragile and that further adverse credit market developments could well increase the downside risks to the economy’.
“The FOMC has changed its view about inflation since the August meeting. It now sees the “inflation situation to have improved slightly and judged that it was no longer appropriate to indicate that a sustained moderation in inflation pressures has yet to be shown.
“The minutes excluded any type of explicit guidance about the timing of the next federal funds rate cut. Future actions would depend on how economic prospects were affected by evolving market developments and by other factors.”
Source: Asha Bangalore, Northern Trust’s Daily Global Commentary, October 9, 2007.
Richard Russell (Dow Theory Letters): Bull market remains incomplete
“Me, I’m bullish on the big picture. I believe we remain in a big bull market. Big bull markets end with the wholesale entrance of the public, they end amid almost mindless optimism, they end with massive volume, they end in exhaustion when the last group of bulls have spent their hard-earned money.
“I don’t think we’ve seen that kind of action or that kind of wildly bullish sentiment. I think we will see it in the months ahead. I don’t know whether we’ll see it next month or in the first quarter of 2008 or maybe we’ll even have to wait until late-2008 or early-2009.
“As I see it, this bull market remains incomplete, unfinished. I’m looking ahead to the completion, the true finish. That lies somewhere ’out there’. How we get there may be deceptive, it may be difficult, but we’ll get there. I repeat, we will get there!”
Source: Richard Russell, Dow Theory Letters, October 9, 2007.
Richard Russell (Dow Theory Letters): Sovereign wealth funds
“These (sovereign wealth funds) are the funds set up by various nations to invest outside their usual hoards of currencies (these hoards being composed largely of US Treasury bills, notes and bonds).
“We know that there is massive growth in the sovereign wealth funds, the total of which is heading towards the staggering sum of $17 trillion (that’s seventeen trillion dollars!). The major object of these funds will be to diversify out of fiat paper into items of tangible value. Is a large, well-situated corporation an item of tangible value? We … agreed that it is.
“We therefore believe that a major goal of the sovereign wealth funds will be to buy into and ultimately even take over many of the world’s leading corporations. This whole area is one that has received surprisingly little attention. Yet, it’s significance is truly momentous. It all has to do with the fragility of the whole system of fiat currencies. And the recognition that inflation or even hyper-inflation may be the wave of the future.”
Source: Richard Russell, Dow Theory Letters, October 12, 2007.
MarketWatch: S&P 500 earnings likely to turn negative
“Third-quarter earnings of S&P 500 companies have ‘a good chance’ of turning negative for the first time in five years on Thursday, after factoring in Wednesday’s profit warnings from a slew of energy stocks, Thomson Financial said.”
Source: Nick Godt, MarketWatch, October 10, 2007.
The Week (Wachovia Securities): Crowd sentiment suggests stock gains may slow
“The S&P 500 rose to a record high on Friday following the favorable employment report. With the economy looking like it can avoid a recession, we think the bull market will continue in its current exuberance band of 22 to 24 times trend earnings which implies an upper end potential for the S&P 500 of around 1 650 (+6%) over the next nine months. We raised our stock exposure to slightly overweight two weeks ago because two of our investment rules – Don’t fight the trend and Don’t fight the Fed – were firmly in support of stocks. However, we are reluctant to add more exposure at this time because of our third rule: Beware of the crowd at extremes. Our favorite gauge of stock sentiment, the Ned Davis Research Crowd Sentiment Poll is now well into the “extremely optimistic” zone at 66% bullish. Previous peaks in the sentiment poll have been around 70% during the past three years, which suggests some room for further upside in the current rally. But with sentiment now at an extreme, we suggest investors looking to increase stock weightings wait for sentiment to become neutral before adding more stock exposure.”
Source: Rod Smyth, The Week, Wachovia Securities, October 8, 2007.
Marc Faber: Bubble markets will tumble
“Investors have reached a crossroads: Either you believe that the expansionary monetary policies of central banks will lift asset prices further or you take the strongly contrarian view that they will not work and that the world will sink into a deflationary recession. I am a believer that money printing will work for some assets (precious metals and commodities in general) but not for others (housing, US equities measured in gold terms) and not for the economy.
“Emerging stock markets have fully recovered from their July/August declines and several markets are making new highs. However, market breadth has deteriorated and declining volumes are arguing for some caution. There is no doubt that we are dealing with bubbles in China and in India. Can these bubbles be inflated by another 100%? Possibly, if Taiwan and Japan in the 1980s serve as a model! However, risks are high (as they are for the Nasdaq 100) and once these markets tumble (and they will) the shaky global financial system will be tested one more time.”
Source: Marc Faber, AME Info, October 9, 2007.
Doug Casey: Central bank gold agreement
“… the Central Bank Gold Agreement, the Bank of International Settlements released an accounting yesterday which showed that in the third year of the current pact, which ended September 26, central banks parted with 475.75 tonnes of their holdings. Sales were higher than year two’s 395.8 tonnes but below year one’s 497.2. All three years were below the allowable limit of 500 tonnes. Furthermore, Spain, one of the biggest sellers this year, has said it is through and … Germany has no additional selling plans.”
Source: Doug Casey, Casey’s Daily Resource Plus, October 11, 2007.
Jim Sinclair (MineSet): $1 000 gold on the horizon
“The Fed’s comment on the FAKE employment figures as a demonstration of economic strength has resulted in a deceleration of the dollar decline as improved business conditions would imply higher interest rates. The problem is that the employment figures as part of operation “White Noise” are a statistically manufactured fabrication.
“Gold is fighting the $751 to $761 area of supply, but will overcome this area and move above $1 000. All of what you are seeing now is funds powered by black boxes running amuck hither and yon with no significance at all. The time for zig-zag is over just as it was in the middle of 1979. You may sell as a trading fiend, but one day soon gold will take off like a rocket to breach $1 000, most likely without you. This is the real thing. Sell only if you have a defined need for the cash. Otherwise stand pat and ignore the daily madness.”
Source: Jim Sinclair, Jim Sinclair’s MineSet, October 10, 2007.
BCA Research: Commodities – “just right”
“The global economy is on a Goldilocks path: Just enough liquidity and just enough growth. As long as the U.S. escapes recession, the current environment is positive for commodity plays. A falling US dollar directly supports commodity prices, and simultaneously curbs inflationary risks in the rest of the world via lower input prices in local currency terms. Furthermore, the Fed had begun to cut rates at a time when US narrow money growth is already booming.”
Source: Daily Insights, BCA Research, October 9, 2007.
David Fuller (Fullermoney): Multilateral currency intervention
“I have long maintained that multilateral intervention would eventually be required to stem the US dollar’s current downtrend. This is not an immediate prospect as the dollar is experiencing a technical rally at the moment, most of which is short covering. When short-term forex pundits on CNBC and Bloomberg are next unanimous in forecasting a further rally for the greenback, we will know that the market is long and vulnerable to the next decline.
“Multilateral intervention would only occur if the US dollar was accelerating lower, creating a crisis atmosphere. Central banks would use this opportunity to engineer a high-profile bear squeeze. If / when this occurs, forex traders will claim that it won’t work, because they are on the other side of the trade. Previously, they have backed off temporarily and then taken on the central banks once again, at considerable risk.
“The central banks may lose a battle or two, but never the war. They are the occasional, big, rough and tough players in the currency markets. After all, they can run unlimited losses, print more money if necessary, and are only answerable to themselves and there respective governments, which will have sanctioned the intervention. The central banks can also change the ‘rules’, by altering interest rates, if necessary, changing margin requirements or even releasing statistics to unsettle speculators (these stats can always be revised later). If you regard currency markets as a casino, then central banks are analogous to the House.”
Source: David Fuller, Fullermoney, October 8, 2007.
GaveKal: Asian countries changing exchange rate policies
“ … wherever we care to look around Asia, we see that the manipulation of currencies at an artificially low level is now the main reason behind the rapid growth of regional monetary aggregates. In turn, this growth in monetary aggregates is leading to a) rapid asset price increases, whether in equities or real estate; and b) creeping inflation.
“Asian countries that are serious about fighting the specter of rising inflation and rampant speculation on asset markets now have little choice but to slowly abandon their prior exchange rate policies. … one by one, countries seem to be adopting the belief that a stronger currency need not decimate their economies. In that regard, the example of India is particularly interesting: After letting the Rupee appreciate six months ago, the economy is booming, and the stock market keeps on making all-time highs. Better yet, the inflation rate has been falling in recent months (despite higher food and energy prices), which provides room for the authorities to start cutting rates. Undeniably, India is now in the midst of a tremendous triple merit scenario (higher currency, lower interest rates, booming asset prices) and we see no reason why the rest of Asia should not join this party.”
Source: Checking the Boxes, GaveKal Research, October 12, 2007.
GaveKal: Disappointment from Euroland
“Recent economic news out of Euroland has reaffirmed our concerns that Europe is likely to, once again, disappoint growth expectations. In fact, it is increasingly evident that both the manufacturing and services sectors are becoming weighed down by … headwinds …
“First and foremost, interest rates have now doubled since the end of 2005. Worse yet, real yields are now above nominal GDP growth. … contrary to popular belief, EMU exports are sensitive to exchange rates. Aside from weakening exports, Europe’s service industries are also starting to slow. In fact, Euroland services grew at the slowest pace in two years in September … Germany’s services sector is also looking particularly weak.
“All in all, we think the European economy is set to disappoint in the coming months, and we remain underweight.”
Source: Checking the Boxes, GaveKal Research, October 9, 2007.
Eoin Treacy (Fullermoney): Indian stock market – the dancing elephant
“The Indian stock market has appreciated at a rate which is unsustainable beyond the short term, but even when this acceleration spills over into a consolidation, the long-term potential will remain intact.
“The country’s demographics, a large educated workforce, coupled with a regulatory environment which continues to open up sets the stage for impressive GDP growth. However when this is coupled with massive projected infrastructure investment and an appreciating currency we have a recipe for impressive investment flows into the country. We are witnessing some of the result of this right now and the speed with which the benchmark Sensex has appreciated has taken everyone by surprise. This is not the time for opening new long positions but it is a time for watching the next reaction which will provide the next good buying opportunity.”
Source: Eoin Treacy, Fullermoney, October 12, 2007.