Economics: Global Stock & How Long a Retrench?

Which way will the globe roll

Blog Note: The attached article is from Prieur du Plessis at http://www.investmentpostcards.com. Prieur is kind enough to allow Thai Intelligent News to publish his analysis. Just one comment that Prieur is Pooky’s favorate stock market analysis-and as you know with Pooky, it is only the best that she follows.

By Pooky, this blog economics journalist

The following is a quick summary of the situation with the global stock market. We just want to add that the article, was “Tagged” as China, Japan, US, and Emerging Market. Oddly, Europe was left out of the “Tagged” picture. For our readers, starting on the first of last Jan, the EU just appointed the first EU foreign minister and the entire European area central bank is now solidly tied together.

As this blog have mentioned before, in-tra emerging market trade and investment, that will dominate emerging markets, will not yield similar “Comparative Advantage” from trading and investing with the advanced countries. Therefore, emerging markets will have to rely a great deal on its internal engine. What is worrying, is like the Thai central bank just pointed out, that the inflow of funds will take emerging economies too rapidly into the inflation territory.

Meanwhile, Korn, Thailand’s global class financier, just said over the weekend, that the Thai stock market can go up another 60 points or 60% this blog does not have a clue what he actually said. But watch out for Korn, he needs a good showing for politics-unfortunately what is good for politics may not be good for your wallet.

The following is a wrap up of the market by Prieur:

“Words from the Wise” this week comes to you in a somewhat shorter format as I do not have access to all my normal research resources while spending a few days with the gnomes in Geneva (also see my post “Blogging gone AWOL – to Switzerland“). Although the commentary is not as comprehensive as usual, a full dose of excerpts from interesting news items and quotes from market commentators is included.

With investors’ hopes of an economic recovery that might have gotten ahead of reality, the Dow Jones Industrial Index experienced its largest one-day drop (-0.9%) of the year in a sell-off on Friday – unnerved by China starting to rein in liquidity and cautious earnings guidance – causing the benchmark U.S. indices to register a fourth down-week over an eight-week period. Not surprisingly, the CBOE Volatility (VIX) Index, also referred to as the “fear gauge” of U.S. stocks, gained 1.2% over the week.

Providing “entertainment” of a dubious kind and reminding one of the 1933 Pecora Commission, the Financial Crisis Inquiry Commission on Wednesday started interrogating four of Wall Street’s top executives in Washington and promised to use wide-ranging powers to establish the causes of the financial crisis and pursue any wrongdoing.

Meanwhile, Christina Romer, who heads the president’s Council of Economic Advisers, said (via MoneyNews) the payment of big year-end bonuses for bailed-out financial institutions would be “ridiculous” and “offensive” and “is going to offend the American people. It offends me”.

Similarly, according to The Canadian Press, President Barack Obama said with reference to his proposed plans to impose a levy on big financial institutions to recoup some of the costs of the financial crisis:

If the big financial firms can afford massive bonuses, they can afford to pay back the American people.

17-01-10-01

Source: Steve Sack, Comics.com

The past week’s performance of the major asset classes is summarized in the chart below – a set of numbers indicating a degree of risk aversion has crept back into financial markets. Steps by the People’s Bank of China to tighten liquidity by increasing the bank reserve requirement ratio and raising inter-bank interest rates negatively impacted oil and other commodities, causing the first decline in five weeks.

Click to enlarge:

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Source: StockCharts.com

A summary of the movements of major global stock markets for the past week and various other measurement periods is given in the table below.

The MSCI World Index and the MSCI Emerging Markets Index declined by 0.2% and 0.6% respectively during the past week. Among mature markets, Japan (+1.7%) bucked the trend and added a seventh consecutive week of gains – coinciding with a weaker yen over the period. (Also see my post “What to expect from Japan’s new finance minister“.) Among emerging countries, Russia (+7.2%) performed solidly, while China (+0.9%) also eked out a gain after having to balance adverse monetary developments in that country with impressive trade data early in the week.

Notwithstanding the huge rally since the March lows, only the Chile Stock Market General Index – again a solid performer on the expectation of a positive election result – has been able to reclaim its 2007 pre-crisis peak and is now trading 8.1% higher. Mexico could be the next country to eliminate the bear market losses.

As far as the U.S. indices are concerned, Wall Street managed to hit 16-month highs on Monday and then again on Thursday, but reversed course on Friday as traders closed positions before the Martin Luther King long weekend, pulling indices into the red.

Seven of the ten economic sectors (as measured by the SPDR exchange-traded funds [ETFs]) closed lower for the week, with the defensive sectors outperforming the cyclical ones. Health Care (+1.4%), Consumer Staples (+0.8%) and Utilities (+0.6%) returned gains, whereas all the other sectors were under the water. Small caps, in particular, led the way down on Friday.

Click here or on the table below for a larger image.

17-01-10-03

Top performers among stock markets this week were Estonia (+15.6%), Venezuela (+9.6%), Lithuania (+8.7%), Kazakhstan (+7.2%) and Kenya (+5.7%). At the bottom end of the performance rankings, countries included Greece (-7.9%), Jamaica (-6.7%), Cyprus (-6.5%), Luxembourg (-4.9%) and Portugal (-1.2%).

Greece on Thursday announced an ambitious three-year plan to curb its runaway budget deficit but failed to convince skeptical markets that its targets for growth and fiscal reform were feasible,

reported the Financial Times.

Of the 96 stock markets I keep on my radar screen, 53% recorded gains (last week 79%), 41% (15%) showed losses and 6% (6%) remained unchanged. The performance map below tells the past week’s rather bullish story

Emerginvest world markets heat map

Click to enlarge:

17-01-10-04

Source: Emerginvest (Click here to access a complete list of global stock market movements.)

John Nyaradi (Wall Street Sector Selector) reports that as far as ETFs are concerned the winners for the week included iShares MSCI Japan (EWJ) (+4.8%), Claymore/Delta Global Shipping (SEA) (+3.6%), Vanguard Extended Duration Treasury (EDV) (+3.3%) and iShares MSCI Austria (EWO) (+2.7%).

At the bottom end of the performance rankings, ETFs included Claymore/MAC Global Solar Energy (TAN) (-8.7%), PowerShares WilderHill Clean Energy (PBW) (-7.2%), Claymore/AlphaShares China Real Estate (TAO) (-6.6%) and United States Oil (USO) (-5.7%).

Referring to the modern robber barons, or “banksters”, and Obama’s proposed bank tax to recoup bailout costs, the quote du jour this week comes from long-timer Richard Russell, writer of the Dow Theory Letters. He said:

Obama is fighting two wars, the war in Afghanistan and the war in Iraq. Now he’s got a third war going, the war on Wall Street. He’s joining the populist fury over Wall Street and its bonuses. It’s ‘payback time’, and Obama proposes a $90 billion tax on Wall Street’s banks.

The Prez utters the words the crowd loves to hear, ‘We want our money back, and we’re going to get it.’ Obama’s words dovetails with Democrats’ worries that they would be blamed for the recession and the debts. Blame it on Wall Street, and get even with those greedy devils; maybe tax the greedy devils out of existence or at least tax their stinkin’ bonuses away. As Obama’s assistant Rahm Emanuel put it, ‘Its a shame to let a good crisis go to waste.’

The $90 billion Obama will extract from Wall Street won’t even begin to shrink the monster deficit the Fed has run up. Let the next administration (probably Republicans) deal with that problem.

How the lie of the land has changed! The Financial Times Saturday headlined an article: “Obama is right to clobber Wall Street”.

Next, a quick textual analysis of my week’s reading. This is a way of visualizing word frequencies at a glance. As to be expected with the banking shenanigans moving to center stage, “banks” commanded poll position.

17-01-10-05

The major moving-average levels for the benchmark U.S. indices, the BRIC countries and South Africa (where I am based in Cape Town when not traveling) are given in the table below. With the exception of the Shanghai Composite Index (discussed above), the indices in the table are all trading above their 50-day moving averages, with all the indices also comfortably above their respective key 200-day moving averages.

As far as the S&P 500 Index is concerned, an upward sloping trend line extends from the August lows. A break below this line’s support level of 1,080 (and the December low of 1,092) could signal a deeper pullback.

Click here or on the table below for a larger image.

17-01-10-06

Last week I discussed a long-term chart of the S&P 500. Let’s now also consider monthly data, going back to 1998, for the 10-year Treasury Note. As shown below, the MACD oscillator provided a sell signal about seven months ago and Treasuries are still classified as being in a primary bear market.

Click to enlarge:

17-01-10-07

Source: StockCharts.com

This raises the question of when rising long-term rates start ruining the equity party. David Fuller (of Fullermoney) commented:

For me, a sustained move above 4% by ten-year Treasuries will be equivalent to a yellow caution light for equity investors. Above 5%, stock markets could be in dangerous territory, as we saw in the last cycle.

I will continue to view U.S. Treasury 10-year yields as a lead indicator. Currently, they are still in a ’sweet spot’. However, when they move higher I will monitor stock market indices, particularly for Wall Street, even more closely for signs of fatigue in the form of inconsistencies, not least a loss of upward momentum.

Looking beyond the low-growth economies of mature countries, Jeremy Grantham of GMO said (via Fortune):

I think there is a nascent bubble in emerging markets. Over the next three to five years, emerging markets are likely to sell at a handsome premium P/E because of the respect for their higher GDP growth.

To which money man Bill Gross, head honcho of PIMCO, added (according to Fortune):

If you’re looking for growth, you should venture outside the U.S.. Brazil, China and other Asia equities are the cherry on top of the melting sundae. It’s not only their internal economies; they’re in better shape from the standpoint of reserves and balances. Ten years ago Brazil was a basket case and beggar. Now it has hundreds of billions of dollar reserves.

Back to the U.S. stock markets, John Hussman (Hussman Funds) is treading carefully with the current stock market make-up, saying:

There’s no denying that the beliefs of investors have been far more important, in the intermediate term, than economic realities, which are revealed more slowly and sporadically. Yet despite the high level of bullishness here, the market has gained only a few percent beyond its September highs. Most of what we are seeing now is a tendency to make marginal new highs, back off slightly, and then recover that ground enough to register another marginal new high.

As I’ve noted frequently, when market conditions are characterized by unfavorable valuations, overbought conditions, over-bullish sentiment, and upward yield pressures, the market’s tendency is exactly that – to make continued marginal new highs for some period of time, followed by abrupt and often steep losses virtually out of nowhere.

As we embark on the earnings season, the S&P 500 as a whole is expected to grow by 62.1% in Q4 2009 versus Q4 2008. As shown in the graph below, courtesy of Bespoke, the bulk of the growth is expected to come from the Materials and Financial sectors – the only two sectors with Q4 growth expectations that are higher than the S&P 500. Technology and Consumer Discretionary are the other two sectors expected to see growth. On the other hand,

Energy and Industrials are both expected to see earnings decline by more than 20% in the fourth quarter, while Telecom is not far behind at -19.2%. Health Care, Consumer Staples, and Utilities are all expected to see a drop of about 5%,

said Bespoke. (Click to enlarge)

17-01-10-08

Source: Bespoke, January 12, 2010.

I do not have much to add to my conclusion of last week and repeat it:

It goes without saying that the strong rally since March is bound to be followed by a correction at some stage. But rather than pre-empting (and more often than not getting it wrong as a result of short-term noise), I will be guided by the longer-term charts and the yield curve to identify a major top. Meanwhile, I am watching valuations carefully, and specifically how the Q4 earnings reports stack up. (See my post “Earnings into focus“.)

Although I am treading with caution after the 74% rally in the mature markets and 108% in emerging markets, I am not ignoring good old stock-picking, and specifically those companies with strong balance sheets that will be growing their dividends over time with a reasonable degree of certainty.

Economy

Global business sentiment has remained largely unchanged since the summer, consistent with a global economic recovery that is holding its own but is not gaining significant traction. Confidence is generally stronger in South America and among business services firms and weakest in North America and among those that work in real estate,

according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com. Businesses are most upbeat when responding to broad questions about current conditions and expectations through mid-2010, but remain cautious when responding to specific questions about sales, pricing, inventories and hiring.

Click to enlarge:

17-01-10-09

Source: Moody’s Economy.com

Meanwhile, sovereign debt default looms, according to George Magnus, senior economic adviser at UBS Investment Bank. He said (as reported by the Financial Times):

Concerted fiscal restraint could trigger another recession, but the lack of it could end up in bigger default risks. Even Japan, now into its third ageing decade, may be vulnerable, while some eurozone countries, though sheltered from currency turbulence, may yet falter in their deflation commitments and compromise the integrity of the single currency as we know it. The U.K. still lacks a credible debt management strategy, and the U.S. cannot take investor goodwill for granted.

Interestingly, the Financial Times says mounting fears about government debt has now caused the cost of insuring against the risk of debt default by European nations to exceed that for top investment-grade companies for the first time.

It now costs investors more to protect themselves against the combined risk of default of 15 developed European nations, including Germany, France and the U.K., than it does for the collective risk of Europe’s top 125 investment-grade companies,

according to indices compiled by data provider Markit.

A snapshot of the week’s U.S. economic reports is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)

Friday, January 15
•Inflation – “Don’t worry, be happy”, for now
•December industrial production – mixed news from the nation’s factories

Thursday, January 14
•December retail sales – mixed news, focus on details necessary
•Ballooning Treasury deficits – it takes both outlays and receipts to tango
•Total continuing claims matter the most

Wednesday, January 13
•Recent Fed rhetoric and highlights from the Beige Book

Tuesday, January 12
•Trade deficit widens in November, volume of trade maintains upward trend

Monday, January 11
•Inflation expectations approach pre-crisis range

The latest Beige Book, published on Wednesday in preparation of the next Federal Open Market Committee (FOMC) meeting on January 26-27, indicates a modestly improving economy.

Regarding the benign CPI numbers, Asha Bangalore (Northern Trust) said:

The Fed continues to be a sweet spot with regard to inflation and can continue to focus on economic growth for several more months. Although the Fed has begun examining the ways in which inflation emerges at the December Federal Open Market Committee (FOMC) meeting, the more vigorous debate and concern about inflation is topic for several months ahead.

The Federal Reserve is unlikely to raise interest rates before next year,

Richard Clarida, global strategic adviser for money manager PIMCO, told Bloomberg (via MoneyNews).

The Fed has never hiked until they have seen a sustained decline in unemployment. By the Fed’s own forecast, that is at least a year away. I don’t think the Fed’s going to do anything with rates until 2011 or perhaps very late in 2010.

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Date Time (ET) Statistic For Actual Briefing Forecast Market Expects Prior
Jan 12 08:30 AM Trade Balance Nov -$36.4B -$31.0B -$34.6B -$33.2B
Jan 13 10:30 AM Crude Inventories 1/08 3.70M NA NA 1.33M
Jan 13 02:00 PM Fed’s Beige Book
Jan 13 02:00 PM Treasury Budget Dec -$91.9B -$97.0B -$92.0B -$120.3B
Jan 14 08:30 AM Initial Claims 01/09 444k 450K 437K 433K
Jan 14 08:30 AM Continuing Claims 1/2 4596K 4725K 4750K 4807K
Jan 14 08:30 AM Retail Sales Dec -0.3K 1.0% 0.5% 1.8%
Jan 14 08:30 AM Retail Sales ex – auto Dec -0.2% 0.5% 0.3% 1.9%
Jan 14 08:30 AM Export Prices ex – agriculture Dec 0.5% NA NA 0.6%
Jan 14 08:30 AM Import Prices ex – oil Dec 0.4% NA NA 0.4%
Jan 14 10:00 AM Business Inventories Nov 0.4% 0.5% 0.3% 0.4%
Jan 15 08:30 AM Core CPI Dec 0.1% 0.1% 0.1% 0.0%
Jan 15 08:30 AM CPI Dec 0.1% 0.2% 0.2% 0.4%
Jan 15 08:30 AM Empire Manufacturing Survey Jan 15.92 5.00 12.00 4.50
Jan 15 09:15 AM Capacity Utilization Dec 72.0% 72.3% 71.8% 71.5%
Jan 15 09:15 AM Industrial Production Dec 0.6% 1.0% 0.6% 0.6%
Jan 15 09:55 AM Michigan Sentiment Jan 72.8 71.5 74.0 72.5

Source: Yahoo Finance, January 15, 2010.

Click the links below for three research reports from Wells Fargo Securities:

Weekly Economics & Financial Commentary (January 15, 2010)
Global Chartbook (January 2010)
Monthly Economic Outlook (January 2010)

U.S. economic data reports for the coming week include the following:

Tuesday, January 19
•Net long-term TIC flows

Wednesday, January 20
•Building permits
•Housing starts
•Core PPI
•PPI

Thursday, January 21
•Jobless claims
•Leading indicators
•Philadelphia Fed

Markets
The performance chart for various financial markets usually obtained from the Wall Street Journal Online is unfortunately not available this week.

Final words
Morris King “Mo” Udall, American politician (19221998) said:

If you can find something everyone agrees on, it’s wrong.

(Hat tip: David Fuller.)

Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist readers of Investment Postcards in guarding against popular (and often wrong) market views.

That’s the way it looks from an icy cold Geneva (from where I will be making my way back to Cape Town on Monday).

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