Stock markets of emerging economies win as decade closes. This decade is nearly over, and results are in for equity markets. While the stock market in the U.S. stumbled, markets in developing economies enjoyed an avalanche of investment and handed back to investors huge returns. Brazil, Russia, India and China delivered returns in double -- occasionally triple -- digits as the broad U.S. market lost about a fifth of its value. The New York Times (29 Dec.)
Article link below, copy and paste to your browser. http://www.nytimes.com/2009/12/30/business/global/30emerge.html?hpw
Wednesday, December 30, 2009
Tuesday, December 29, 2009
Fed Turning Off The Liquidity Faucet
Fed aims to create tool for drying up excess liquidity. Preparing for a day it would need to put the brakes on the U.S. economy, the Federal Reserve is looking to launch a program for withdrawing excess liquidity from the financial system. The central bank would pay financial institutions interest on term deposits, probably ranging from one to six months. The Fed pays interest on banks' overnight deposits. "Term deposits would be one of several tools that the Federal Reserve could employ to drain reserves to support the effective implementation of monetary policy," the central bank said. Reuters (28 Dec.)
Wednesday, December 23, 2009
Why Stocks and the USD Are Now Moving Together
Historically, the USD and stocks have moved together. However, over the past two years, the dollar has in fact moved opposite stocks. Why?
The Good News Wasn’t Good For the USD
The very low USD interest rates meant that traders had no reason to want dollars when there was optimism/risk appetite, because there were much better yielding alternative currencies like the AUD or even EUR that would also benefit from growth. This buying of high yield currencies and selling low yield ones to fund these purchases is called carry trade.
Moreover the "good news" we’ve seen for the US economy over the past years DID NOT help unemployment and consumer spending, the very issues that were forcing the fed to keep stimulus flowing, rates low, and thus the USD a sell relative to other currencies. The "good news" was of the "less bad than expected" unemployment, spending, or corporate earnings data. Good for stocks, but not for the USD. Thus stocks would rise, investors would buy other FX and sell the USD to fund these purchases
What Has Changed?
As we’ve noted repeatedly, at least 1 of 3 things had to happen to stop the USD slide:
* A panic event, which bids up demand for low yield currencies like the USD as carry trades unwind with rising fear.
* Improvement in US economic fundamentals that improves expectations for interest rate increases (i.e. in employment and consumer spending)
* A decline in EUR fundamentals that weakens the EUR and thus causes the USD to rise, because these currencies move in opposite directions due to the EUR/USD comprising nearly a third of all FX trade by itself. That means for every 3 EUR bought a USD is sold and vice versa.
Recently, we’ve had all three. Most importantly, the ‘good news’ for the US economy was improving employment and spending conditions. Not only has the unemployment rate and rate of new job losses almost stopped, there is a surge in temporary hiring, which is believed to indicate employers are moving closer to hiring full time staff. Consumer spending has also risen.
This news suggests not only higher earnings, which are good for stocks, but also sooner than previously expected stimulus reduction and interest rate increases for the US. Rising US treasury yields have also fed this expectation, as rising stocks draw capital away from US government bonds, which forces their price down and thus their yield up.
Will this traditional relationship continue?
Whether this traditional relationship continues will depend on whether the US continues to see overall improvement in jobs and spending data, which is good for both stocks and the USD. (source: http://seekingalpha.com/article/179551-why-stocks-and-the-usd-are-now-moving-together)
The Good News Wasn’t Good For the USD
The very low USD interest rates meant that traders had no reason to want dollars when there was optimism/risk appetite, because there were much better yielding alternative currencies like the AUD or even EUR that would also benefit from growth. This buying of high yield currencies and selling low yield ones to fund these purchases is called carry trade.
Moreover the "good news" we’ve seen for the US economy over the past years DID NOT help unemployment and consumer spending, the very issues that were forcing the fed to keep stimulus flowing, rates low, and thus the USD a sell relative to other currencies. The "good news" was of the "less bad than expected" unemployment, spending, or corporate earnings data. Good for stocks, but not for the USD. Thus stocks would rise, investors would buy other FX and sell the USD to fund these purchases
What Has Changed?
As we’ve noted repeatedly, at least 1 of 3 things had to happen to stop the USD slide:
* A panic event, which bids up demand for low yield currencies like the USD as carry trades unwind with rising fear.
* Improvement in US economic fundamentals that improves expectations for interest rate increases (i.e. in employment and consumer spending)
* A decline in EUR fundamentals that weakens the EUR and thus causes the USD to rise, because these currencies move in opposite directions due to the EUR/USD comprising nearly a third of all FX trade by itself. That means for every 3 EUR bought a USD is sold and vice versa.
Recently, we’ve had all three. Most importantly, the ‘good news’ for the US economy was improving employment and spending conditions. Not only has the unemployment rate and rate of new job losses almost stopped, there is a surge in temporary hiring, which is believed to indicate employers are moving closer to hiring full time staff. Consumer spending has also risen.
This news suggests not only higher earnings, which are good for stocks, but also sooner than previously expected stimulus reduction and interest rate increases for the US. Rising US treasury yields have also fed this expectation, as rising stocks draw capital away from US government bonds, which forces their price down and thus their yield up.
Will this traditional relationship continue?
Whether this traditional relationship continues will depend on whether the US continues to see overall improvement in jobs and spending data, which is good for both stocks and the USD. (source: http://seekingalpha.com/article/179551-why-stocks-and-the-usd-are-now-moving-together)
Tuesday, December 22, 2009
Mortgage Payments Fall Behind
More homeowners fall behind. The number of borrowers that fell behind on their mortgages - including the most creditworthy - rose in Q3 as the percentage of current and performing mortgages dropped for the sixth consecutive quarter, a regulatory report said. Those that fell behind on their prime mortgage payments more-than doubled to 3.6% from a year ago. Such troubles could mount as banks and thrifts remain unable to match modifications with the number of struggling borrowers who need help. (source - SeekingAlpha.com, Wall Street Breakfast - Must Know News, 12-22-2009)
Monday, December 21, 2009
Fed Keeps Rates Low, Despite Rising Inflation
While the Federal Reserve's Open Market Committee (FMOC) met last Tuesday and Wednesday, both major U.S. inflation indexes were released. First, on Tuesday, the Labor Department announced that the November Producer Price Index (PPI) rose 1.8% (nearly a 24% annualized rate), due to an 8.7% increase in vegetables and 6.9% increase in energy prices, including a shocking 14.2% increase in gasoline prices.
The price of raw materials, known as "crude goods," rose 5.7%, which illustrates the inflationary impact of a weak U.S. dollar. Meanwhile, the core PPI, excluding food and energy, rose just 0.5% (6% annual rate), but economists were expecting only a 0.2% rise in the core PPI and a 1% rise in the overall PPI, so the November report was clearly a big surprise to those who wish the Fed to leave interest rates alone.
Then, on Wednesday, the Labor Department reported that Consumer Price Inflation (CPI) rose 0.4% in November, due largely to a 4.1% increase in energy prices. Excluding food and energy, the core CPI was flat. However, the "Owner's Equivalent Rent," which accounts for nearly 40% of the core CPI, will keep future CPI gains relatively muted, due to weak hotel rates, plus the ongoing housing and rental glut.
In the past 12 months, the CPI is now up 1.8% (and the core CPI is up 1.7%). As the CPI 12-month rate nears 2%, the Fed is going to come under increasing pressure to raise key interest rates in early 2010. But despite all this news of strongly-rising prices, the FOMC left rates alone on Wednesday, adding only that it intends to wind down its quantitative easing operations by February 1, 2010. The Fed also affirmed that it plans to terminate most of its domestic liquidity programs on that date, and others a few months later.
The Fed also said it was sticking to its existing plan to taper off and complete its scheduled $1.25 trillion purchase of mortgage-backed securities issued by Fannie Mae and Freddie Mac by March 31. Despite the Fed's intention to exit quantitative easing, the FOMC also made clear that it expects to keep interest rates at "exceptionally low levels" for an "extended period" and did not make any reference to rising inflation!
Some dovish members of the FOMC believe inflation is likely to remain so low that rate increases might not be needed until 2011. Others will want to move more quickly because interest rates are starting from such a low point. Financial markets anticipate the Fed will boost rates to 0.5% after mid-2010, based on federal funds futures. The Fed also acknowledged that the U.S. economy is picking up. I suspect that the faster the U.S. economy grows, the earlier the FOMC will raise key interest rates in the months ahead. (Navellier & Associates, 12-21-2009)
Here comes the late 70's and early 80's.
The price of raw materials, known as "crude goods," rose 5.7%, which illustrates the inflationary impact of a weak U.S. dollar. Meanwhile, the core PPI, excluding food and energy, rose just 0.5% (6% annual rate), but economists were expecting only a 0.2% rise in the core PPI and a 1% rise in the overall PPI, so the November report was clearly a big surprise to those who wish the Fed to leave interest rates alone.
Then, on Wednesday, the Labor Department reported that Consumer Price Inflation (CPI) rose 0.4% in November, due largely to a 4.1% increase in energy prices. Excluding food and energy, the core CPI was flat. However, the "Owner's Equivalent Rent," which accounts for nearly 40% of the core CPI, will keep future CPI gains relatively muted, due to weak hotel rates, plus the ongoing housing and rental glut.
In the past 12 months, the CPI is now up 1.8% (and the core CPI is up 1.7%). As the CPI 12-month rate nears 2%, the Fed is going to come under increasing pressure to raise key interest rates in early 2010. But despite all this news of strongly-rising prices, the FOMC left rates alone on Wednesday, adding only that it intends to wind down its quantitative easing operations by February 1, 2010. The Fed also affirmed that it plans to terminate most of its domestic liquidity programs on that date, and others a few months later.
The Fed also said it was sticking to its existing plan to taper off and complete its scheduled $1.25 trillion purchase of mortgage-backed securities issued by Fannie Mae and Freddie Mac by March 31. Despite the Fed's intention to exit quantitative easing, the FOMC also made clear that it expects to keep interest rates at "exceptionally low levels" for an "extended period" and did not make any reference to rising inflation!
Some dovish members of the FOMC believe inflation is likely to remain so low that rate increases might not be needed until 2011. Others will want to move more quickly because interest rates are starting from such a low point. Financial markets anticipate the Fed will boost rates to 0.5% after mid-2010, based on federal funds futures. The Fed also acknowledged that the U.S. economy is picking up. I suspect that the faster the U.S. economy grows, the earlier the FOMC will raise key interest rates in the months ahead. (Navellier & Associates, 12-21-2009)
Here comes the late 70's and early 80's.
Friday, December 18, 2009
Cash is King
Pimco makes major shift from government debt to cash. Pacific Investment Management Co.'s Total Return Fund made a big move from government debt to cash, signaling to analysts that the fund's managers anticipate interest rate hikes as the U.S. economy strengthens. The fund has increased its cash position to its highest level since the Lehman Brothers bankruptcy in September 2008. A company spokesman said the firm does not comment on its holdings. However, Pimco chief Bill Gross said recently that Treasuries are overvalued when weighed against the potential for inflation. Bloomberg (17 Dec.)
Wednesday, December 2, 2009
What Recovery?
Howard Davidowitz shares his view and more importantly his wisdom.
"The consumer is in worse shape since I was here last" in August, Davidowitz says, citing the following:
* Unemployment has exploded: "We've lost a ton of jobs since I was here last," Davidowitz says, noting the "real" unemployment rate is 17.5%. "That's an astounding number."
* Housing continues to sink: "The consumers' biggest asset is down trillions" in value while "foreclosures are exploding" and a huge percentage have negative equity -- 23% according to CoreLogic.
* Record numbers of consumer bankruptcies: The American consumer has "never been further behind...never defaulted more" on mortgages, student loans, auto loans, and credit card bills, he says.
* Poverty on the Rise: One in eight Americans and one in four children are receiving food stamps, as The NYT reported this weekend.
Link to webpage: (copy and paste to browser)
http://finance.yahoo.com/tech-ticker/article/381625/What-Recovery-U.S.-Consumers-Getting-%22Dramatically-Worse%22-Howard-Davidowitz-Says?tickers=RTH,XLP,XLY,WMT,TGT,HD%20,^DJI
"The consumer is in worse shape since I was here last" in August, Davidowitz says, citing the following:
* Unemployment has exploded: "We've lost a ton of jobs since I was here last," Davidowitz says, noting the "real" unemployment rate is 17.5%. "That's an astounding number."
* Housing continues to sink: "The consumers' biggest asset is down trillions" in value while "foreclosures are exploding" and a huge percentage have negative equity -- 23% according to CoreLogic.
* Record numbers of consumer bankruptcies: The American consumer has "never been further behind...never defaulted more" on mortgages, student loans, auto loans, and credit card bills, he says.
* Poverty on the Rise: One in eight Americans and one in four children are receiving food stamps, as The NYT reported this weekend.
Link to webpage: (copy and paste to browser)
http://finance.yahoo.com/tech-ticker/article/381625/What-Recovery-U.S.-Consumers-Getting-%22Dramatically-Worse%22-Howard-Davidowitz-Says?tickers=RTH,XLP,XLY,WMT,TGT,HD%20,^DJI
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