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2010-09-08T11:28:00.000+08:00

Why Forex Volatility Hurts Retail Traders

2010-04-25T15:34:00.000+08:00

Why Forex Volatility Hurts Retail Traders
Retail versus Institution Separate Takes | Same Information

by Mark Whistler

Foremost, it is important to note that institutions move markets, not retail traders. However, with many institutional and retail traders acting at similar time, it would almost appear as if they were trading from the same signals. Upon first glance, it would appear as if traditional indicators do indeed provide reliable signals for market movements.

In reality though, traditional indicators (like MACD, Stochastics and CCI) are providing "false signals", especially on shorter-term time frames. Institutional order flow has nothing to do with 'technical signals' and is truly derived from perceived risk aversion and future fundamentals.

Despite the true reality at hand, some retail traders continue to believe traditional technical analysis accurately looks into the fundamental mindset. What you MUST understand though, is common retail technicals have nothing (at all!) to do with institutional trading and do not accurately look into the minds of institutional traders. At the core of the issue, common technicals never accurately see into the minds of institutions, simply because the technicals are derived from an empirical event that has already occurred (lagging indicator) within price action, while fundamentals attempt to mitigate fundamental risk of today, while attempting to step in ahead of possible fundamental events of tomorrow.

Retail traders often lose, because even if they are able to perceptively step into the minds of institutions, trading successfully commands the trader is not only able to see the true fundamental paradigm, but also know when and where to implement a position to capitalize on such. In non-technical language, one may be able to accurately distinguish that a particular currency will lose value over the next year because of deterioration in fundamentals; however, successfully acting on the information is much, much more difficult, when considering the inherent volatility within Forex markets today. Looking at our first image, readers will note the significant rally in the EUR/USD into December 2008. The euro's momentary recovery can be attributed to a dead cat bounce from torrid selling in the previous months, coupled with the momentary loss of belief the US Dollar would continue to avert risk throughout the global economic crisis. Conspicuously, even if traders were able to accurately predict the U.S. Dollar was about to boldly recover from late fall rally in the euro, blindly taking a position could have been devastating, if implemented based on fundamental outlook alone. The single daily candle highlighted in late December shows almost 400 PIPs of volatility, which should serve as empirical evidence of the excessive volatility at hand within Forex markets.

The larger issue is simply while institutions and retail traders may have unearthed similar fundamental information (though often institutions have greater clarity) retail traders who act on technicals or fundamentals alone, will constantly fall victim to the inherent volatility within Forex today.

What's more, the indicators retail traders act upon are often significantly different than that of institutional traders, something many are not even aware of.

For example, when looking at descriptions of services banks and institutional companies provide for larger FX participants, one will note the first two technical strategies/indicators are almost always Volume Weighted Average Price (VWAP) and Time Weighted Average Price (TWAP).

However, the charting packages most retail traders use almost never contain VWAP and TWAP, as indicators. In fact, even MetaTrader (arguably the retail standard), does not contain VWAP and TWAP preloaded. Traders can find the code in the back of this book, on the Internet, and on my Websites fxVolatility.com and WallStreetRockStar.com; however, the aforementioned are not delivered already installed within the software's various custom and traditional indicators. The point here is the main indicators institutional traders are not only looking at, but also acting upon, are rarely visible within the retail trader's world. Most often the retail trader must actually intentionally seek out the indicators; but how can one find what one does not even know exists?

There's even more to the story, and as readers are about to witness, the paradigm behind retail technical analysis may have been flawed from the start. Even worse, the common technical indicators most retail traders covet could even show greater amounts of false signals in the future.

Lock, Stock and Dogma

To understand why technical indicators are becoming more and more troublesome in volatile markets, one must take a step back from the entire situation and examine the "nuts and bolts" of the larger situation at hand.

Constance Brown just about says it all in her book titled Technical Analysis for the Trading Professional (McGraw Hill, 1999), where she asks:

"Why does it appear to us that conventional technical indicators are failing us as we approach the 21st Century? What has changed?"
- Constance Brown Technical Analysis for the Trading Professional

As a brief side note, while Brown's book is almost a decade old, the information is still extremely innovative, as she often examines the "truth" behind how and why indicators produce signals. Even more important, Brown also attempts to uncover how and why traders act on the information received.

In the case of failing technical indicators, Brown hypothesizes technical indicators are failing because too many people are acting on the same information - at the same time. She points out virtually every charting program comes with the same pre-loaded indicators, with the same pre-set variables. What's more, she also unmasks the unfortunate reality that many traders never even bother to question, or change the preset variables within the pre-loaded indicators. In essence, traders simply accept the "factory settings" within their indicators as dogma.

At first glance, it would seem common sense that many people acting on the same information – at the same time - would create a sort of 'self-fulfilling prophecy' within technical signals. However, the reality of the situation proves differently. Really, some people acting on the same information at the same time may create a slight amount of 'self fulfilling prophecy'; however, when too many people move in the same direction, at the same time, the real outcome is volatility. Think of it like this: If a troop of ten men run are running on the street together and suddenly need to stop before a busy street, all ten will likely be able to do so. However, if 1,000 men are running on a street and a few in front attempt to stop before a busy street, the mass of bodies in motion behind the will likely bump into one another, with the greater whole pushing the few in the front into the intersection. Someone call a paramedic.

Why would trading be any different? When a hundred thousand traders take the same position, at the same time, based on the same information, and suddenly the market moves just slightly opposite the herd's expectation, what will the obvious outcome be? You probably guessed it; the large mass-herd of traders moving in unison creates a pop of volatility as the collective whole attempts to switch directions.

Making matters worse, once the herd is pushed slightly into the intersection; electronic stop orders begin tripping across the world, like grids of lights rolling into darkness, as a mass blackout ensues. The "mass effect" of too many people acting on the same information, coupled with the domino effect of electronic stop orders being tripped globally, creates excessive volatility within intraday trading. While retail traders do not carry enough weight to propagate an all out "trend" in the world of Forex, they do create short-term volatility. I like to call it Herd Induced Intraday Volatility, or the "HIIV Effect."

Retail traders move like a swarm of bees and so when I see a clear signal from a common technical indicator on a 5, 15, or 30-minute chart, I look for the HIIV effect of volatility to begin stinging. By the way, with stop order rule changes coming (for U.S. retail Forex platforms) in July of 2009, the 'rolling blackout volatility' effect could wane, while overall reversal volatility could increase as traders hold losing positions as long as possible (it's just human psychology) until major critical technical points are hit.

While the removal of stop orders in U.S. trading platforms may help bolster longer periods of trending, major points reversal points could surface with fierce volatility...

HIIV Effect in Action

For traders having trouble believing the technical 'herd effect' I previously described actually exists, please take note of the following example.

(By the way, one needs to do nothing more than scan 5, 15 and 30-minute charts to discover plenty of examples of the HIIV effect.) Looking at Figure 2.2, traders will notice the 30-minute chart is clearly showing signs of a potential reversal pending, at least in terms of traditional technical indicators, like candlesticks and stochastics.

One cannot miss - even for a second - that the 30-minute chart is displaying three bearish candles (two red hangmen and one evening star). In addition, using the pre-loaded stochastic indicator (5, 3, 3) traders see a clear cross of the K-period (blue) under the D-period (red).

The aforementioned stochastics cross-under is occurring at the 80-line, the exact point many technicians believe produces a reversal. Seems like a clear short-entry point right? Hmm...

Look at Figure 2.3, which shows the EUR/USD rallied significantly after the appearance of the two hangmen, one evening star and a stochastics +80 cross-under.

There are two events occurring in this scenario:

First, institutional order-flow (read: fundamental mindset) likely believed the carry trade differential and risk facing oversold levels of the EUR/USD were prompting short covering and short-term relative range trend continuation, if even only for a moment.

Second, when the false signals appeared, many retail traders likely took short positions, expecting a larger reversal to ensue. However, when the reversal did not show, those same traders were forced to cover positions…en masse, thus helping fuel the torrid bull candle eight bars after our short signals (Figure 2.3). Often, when false signals surface, we see a slight amount of "wiggle" shortly after, while traders and institutions attempt to decipher the reality of the situation. As the dust begins to settle though and traders realize the technical indicator was false, a sharp move occurs as panic sets in. Again, the panic HIIV effect can be seen in Figure 2.3, eight bars after the final false hangman short signal.

The EUR/USD quickly (and sharply) rallied from the 1.3580 (roughly) area to the 1.3680 region in one 30-minute bar.

For the EUR/USD the aforementioned pop is 'faster than usual', thus we can infer many traders were caught going the wrong way. What's more, Figure 2.3 also shows stochastics trending downward during the bulk of the ensuing upward momentum, even after the false signals appeared.

Does all of this mean technical indicators can no longer be trusted whatsoever?

Not necessarily; however, there are a few critical points to consider. Foremost, common sense tells us that most retail traders attempt to take intraday positions, without taking much notice of long-term fundamentals. What this means is many traders likely take positions against the larger-trend, simply because their misunderstanding (or lack of will to do the proper research) hinders the mass contingency of "at home traders" from seeing the situation clearly. Moreover, retail traders often watch shorter-term timeframes, more often than they take note of the 4-hour, daily, weekly, and (even less often) monthly charts. Without a clue of the larger technical and/or inherent fundamental pictures, they are really just 'trading blind.'

Finding Sanity within the Chaos

What all of the previously mentioned translates to is an inferential conclusion where technical indicators (at least those commonly used by the mass army of retail traders) will provide false signals more often on shorter-term timeframes, over longer-term counterparts. Simply put, retail traders who are taking positions on shorter-term intraday timeframes (based on stock indicators), are actually making the situation worse, and only adding to intraday volatility – even more. It's important to note retail traders are not the sole blame for volatility, as many institutions can also make silly decisions as well. What's more, in today's trading environment, the historically transparent environment of fundamentals (GDP growth, inflation, interest rates and underlying economic reports) have many professional analysts scratching their heads with the added variables of present and future national debt, credit related (out of the blue) bombshells, inflation, deflation and risk aversion.

Thus, in the current Forex paradigm, the HIIV effect coupled with fundamental uncertainty are creating the "perfect storm" for erratic intraday movements and HIIV-derived volatility, contrary to traditional market-movement common sense.

When coming to terms with the fact that technical indicators are - indeed - failing in today's markets, many readers may perhaps be wondering if there is any way to truly put the odds back on their side? The answer is yes. The solution is three-fold. First, Retail traders can help remove uncertainty by spending more time attempting to learn and understand the larger fundamental paradigm, while also trying to perceive where future fundamentals will land. By doing so, retail traders are attempting to not only decipher why present volatility exists fundamentally, but also map future possibilities for seemingly unanticipated moves beyond today's price range.

Second, retail traders must also begin taking greater notice of institutional indicators such as VWAP (and other benchmarks), understanding that institutional order flow trumps all. Taking greater notice of VWAP (and other benchmarks) could provide at-home traders with superior insights into the institutional mindset and thus, potential future price action.

Third, retail traders must take the time to understand the philosophical and theoretical underpinnings of volatility/probability, while also seeing how the dynamics of markets demand the application of the principals of physics, helping put the odds of success back in their favor. All three aforementioned points could be of great benefit in helping defeat false technical signals, seemingly random price action, and the lack of volume/order transparency retail traders are faced with daily.

With everything we've covered in Chapter Two in mind, please make sure to remember common technical indicators (especially on shorter-term timeframes) are providing greater amounts of false signals, with each passing day.

It is arguable trading purely from technicals once allowed retail traders to clearly see the fundamental paradigm unfolding via price action; however, within today's Forex volatility, the bar for success has been moved much, much higher.

All participants must now pay attention to fundamentals, institutional-grade technicals, volatility/probability, and market-physics to truly trade profitably in the constantly changing markets of the 21st century..

Renminbi Revaluation?

2010-03-23T19:39:00.001+08:00

Chinese Currency Set To Rise

Robyn Meredith, 03.22.10, 3:55 AM ET
HONG KONG -- China will likely allow the value of its currency to appreciate by up to 5% in July or August, says Willy Lam, Adjunct Professor of History at the Chinese University of Hong Kong.

China and the U.S. are locked in an escalating war of words over currency policy, and it isn't likely to end the way the U.S. wants.

Members of Congress, along with economists including Nobel-prize-winner author and columnist Paul Krugman, are calling on China to allow its currency, the renminbi, to appreciate sharply. Some economists estimate it is undervalued by up to 40%, and argue that it is unfairly hurting American companies competing with cheap Chinese exports.

Other prominent economists -- including Morgan Stanley's Asia Chairman Stephen Roach, agree the Chinese currency is undervalued but say it helps American consumers at the expense of lowly paid Chinese workers, and say Americans should save more to fix the imbalance. Roach, the author of "The Next Asia," said on Bloomberg television last week "we should take out the baseball bat on Paul Krugman," in reaction to Krugman's calls for a sharp currency correction, likened to taking a baseball bat to China.

The colorful debate comes ahead of the April 15 deadline for the U.S Treasury Department to decide whether to name China a "currency manipulator." The renminbi has traded at 6.83 to the dollar since the beginning of the financial crisis in mid-2008.

Lam, the author of "Chinese Politics in the Hu Jintao Era," says China will resume its policy of allowing the currency to gradually appreciate, chiefly "to avoid this potentially debilitating showdown" with American politicians who blame China for economic weakness in the U.S. During the third quarter, most likely July or August, China will allow the renminbi to float within a narrow band, as long as the global economy seems then to have emerged from the crisis, Lam says. Lam expects the currency to rise by 3-5% over a 12-month period starting this summer.

From 2005 to 2008, Beijing allowed the renminbi to rise by 21% using just such a managed float currency system, in which it said it pegged the renminbi to a basket of currencies.

China is under domestic pressure to keep the renminbi stable at current exchange rates. Chinese exporters warned that if the renminbi appreciated by just 3%, 35 million garment industry workers would lose their jobs.

Lam also said that China's urbanization march -- in which up to 300 million people are expected to move from the countryside to cities in the next three decades -- would support rising consumer spending in China. He warned, however, that there is "irrational exuberance in the housing market" in China.

Lam's remarks came at a presentation to the Hong Kong General Chamber of Commerce on Monday.

China central bank to keep yuan basically stable

2010-03-06T21:26:00.000+08:00

On Friday March 5, 2010, 10:05 pm EST

By Zhou Xin and Benjamin Kang Lim

BEIJING (Reuters) - China's central bank pledged on Saturday to keep the yuan's exchange rate basically stable in 2010 and said it would be flexible in implementing its fairly loose pro-growth monetary policy.

The People's Bank of China has already ordered banks twice this year to increase the proportion of deposits they must hold in reserve, rather than lend out, in order to gently slow the red-hot economy and nip inflation in the bud.

But, unlike Australia or Malaysia, the central bank has yet to increase interest rates, leaving investors anxious for clues as to how rapidly it might withdraw the extraordinary monetary stimulus it has provided since late 2008 to prop up the world's third-largest economy.

"In order to be consistent with the relatively easy stance, the policies will be better targeted and more flexible," the PBOC said in a statement issued ahead of a news conference on the sidelines of the annual session of parliament.

"A variety of monetary policy instruments will be employed, and the mix and maturity structures of these instruments as well as strength of operation will be properly arranged," the English-language statement said.

The PBOC said it would ensure the banking system had adequate liquidity but said it would lean on banks to lend at a regular, even rhythm.

"Financial institutions will be guided to pace credit extension in a balanced manner to prevent excessive fluctuations between quarters and at the end of each month," the PBOC said.

INTERNATIONAL COOPERATION

The statement broke no new ground on the issue of the exchange rate of the yuan, also known as the renminbi (RMB).

To the dismay of Washington and Brussels, China has frozen the yuan's exchange rate at around 6.83 per dollar since mid-2008 to preserve the international competitiveness of its exporters.

But the PBOC merely restated the policy set out on Friday by Premier Wen Jiabao in his annual report to parliament.

"The formation mechanism of the RMB exchange rate will be further improved to keep the exchange rate basically stable at an adaptive and equilibrium level," the statement said.

The PBOC said it would promote regional currency and financial cooperation and step up coordination and communication with other central banks, particularly on major policy issues.

"This includes continuing participation in the G20 financial summit, in the G20 meeting of finance ministers and central bank governors, and in regular high-level strategic dialogues, including the Sino-U.S. Strategic and Economic Dialogue."

The Group of 20 advanced and developing economies, of which China is a member, is supplanting the Group of Seven industrial nations as the premier global economic policy forum.

The PBOC reaffirmed its goals of making the International Monetary Fund more representative and of working toward a more diversified international monetary system.

PBOC Governor Zhou Xiaochuan caused a stir last March by proposing that the Special Drawing Right, the IMF's in-house unit of account, might eventually displace the dollar as the world's main reserve currency.

Commerce Minister Chen Deming said it might take two to three years for China's exports to recover to the level reached before the global financial crisis struck in 2008.

Exports plunged 16 percent in 2009 and, to help them rebound, the ministry pledged in a statement to maintain stable export policies, including rebating tax on goods shipped overseas.

China has gained market share during the global downturn, drawing fire from critics who say Beijing is giving its exporters an unfair helping hand by holding down the value of the currency and other inputs such as land.

But Chen told a news conference that China's stimulus policies, including measures to boost exports, had helped the broader global economy and were in line with World Trade Organization rules.

(Writing by Alan Wheatley; Editing by Raju Gopalakrishnan)

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Billonaire Investor George Soros Questions the Euro’s Future

2010-02-28T13:06:00.001+08:00

Friday, February 26, 2010
By jason simpkins,
In an editorial penned for the Financial Times, billionaire investing icon George Soros said that while Greece could be salvaged by a makeshift financial-rescue package, bigger problems lie ahead for the euro.

According to weekend news reports, Germany’s finance ministry has sketched out a plan under which countries using the euro currency will provide between $27 billion and $33.7 billion (20 billion and 25 billion euros) in aid for Greece, which is teetering on the brink of default.

Soros says that "a makeshift assistance should be enough for Greece," but warns that the growing threats posed by other debt-laden, euro-member countries – particularly Spain, Italy, Portugal and Ireland – could prove overwhelming.

"Together they constitute too large of a portion of euroland to be helped in this way," Soros said. "The survival of Greece would still leave the future of the euro in question. Even if it handles the current crisis, what about the next one?"

This isn’t the first time during the ongoing financial crisis that the situation was slated to worsen before it improved. Almost exactly one year ago, while speaking at a Columbia University dinner, Soros warned – correctly — that the world financial system had effectively disintegrated, meaning the end of the economic misery was nowhere in sight.
In fact, Soros actually compared the financial crisis to the breakup of the Soviet Union, and said that the whipsaw effects of the crisis would prove to be more severe than the Great Depression.

"We witnessed the collapse of the financial system," Soros told the audience during his February 2009 speech. "It was placed on life support, and it’s still on life support. There’s no sign that we are anywhere near a bottom."

Soros cemented his reputation as an investing icon with The Quantum Fund, a hedge fund that’s often described as the first real global investment fund, which he and Jim Rogers founded in 1970. Over the next decade, Quantum gained 4,200%, while the Standard & Poor’s 500 Index climbed about 50%.

Gloom in Greece

Greece’s deficit swelled to 12.7% of gross domestic product (GDP) in 2009, way above the European Union’s 3% cap. Greece’s government leaders have pledged to reduce that nation’s budget deficit to 8.7% in 2010, but that goal won’t be easily met.

Flights were grounded and schools shuttered across Greece yesterday (Wednesday), as civil servants and private-sector workers went on a nationwide strike to protest EU-backed austerity measures. Police employed tear gas to quell uprisings involving 15,000-25,000 protestors in Athens, The FT reported.

According to Soros, the rescue plan for Greece has a key weakness: The euro is fundamentally flawed because there is no Treasury agency backing it.

"When the financial system is in danger of collapsing, the central bank can provide liquidity, but only a Treasury can deal with problems of solvency," he said. "This is a well-known fact that should have been clear to everyone involved in the creation of the euro."

For that reason a well-organized eurobond market is desirable – as are more-intrusive monitoring and institutional arrangements for conditional assistance, Soros said.

Citigroup Feeling the Hedge Fund Love

2010-02-18T08:40:00.000+08:00

According to this Bloomberg story, Citigroup (C) is getting a massive amount of love from the hedge fund community... along with Morningstar's mutual fund manager of the decade, Bruce Berkowitz. I wonder if the taxpayers will get a hand written thank you note from the speculator class (of which I am one!).

On the one side you have implicit taxpayer support, and on the other you have a Federal Reserve which has thrown American savers under the bus so that our oligarchs - Citigroup front and center - can make money in their sleep by borrowing from the Fed at nearly zero and charging the American people any figure over and above 0.25% for their borrowings. (Rob from the many to give to the few, reverse Robin Hood style.) Now this is a business model any competent first grader could handle at their lemonade stand, but let's bonus these banking executives up the wazoo (there are only a few on the planet who could run such a business corporate social welfare machine) for their incredible skill at navigating what is the biggest corporate handout in the history of the US.

I still have no idea how to analyze Citigroup (does it still have those infamous off balance sheet accounts, a la Enron?). But since the government says Citi is a cockroach that cannot be allowed to die, the investment community seems happy to pile on. Or perhaps they are all just copying John Paulson... "if Paulson says it's ok, it must be ok!". [Aug 26, 2009: Citigroup Surges on John Paulson Investment] (Click chart to enlarge)

Firms run by John Paulson, Eric Mindich and George Soros purchased almost half a billion shares in Citigroup Inc. last quarter as more than 120 hedge funds said they bought stock in the bank. Paulson & Co. reported a stake equal to 506.7 million shares in New York-based Citigroup, up from about 300 million at the end of the third quarter, according to a government filing yesterday. Mindich’s Eton Park Capital Management LP acquired 138 million shares, making the company its largest holding. Soros Fund Management LLC reported 94.7 million shares worth $313.4 million.
Citigroup stock bought by hedge funds outnumbered the amount sold by a ratio of more than 10 to 1 in the October-to-December period, with about 1.2 billion shares added on a net basis, according to Securities and Exchange Commission filings compiled by Bloomberg.
Fairholme Capital Management LLC, run by Bruce R. Berkowitz, named U.S. stock mutual-fund manager of the decade last month, bought 214.7 million shares valued at $710.7 million. Hedge fund manager Daniel Loeb’s 15-year-old Third Point LLC also took a new position, adding 25 million shares worth $82.8 million.
The shares traded for an average of $4.10 in the quarter, 24% above its closing price yesterday of $3.31, data compiled by Bloomberg show. Citigroup posted a $7.6 billion fourth-quarter loss on costs to exit the U.S. bailout program, giving the company its second straight unprofitable year. Chief Executive Officer Vikram S. Pandit booked an $8 billion pretax charge when he repaid $20 billion of bailout funds in December. Revenue missed analysts’ estimates as trading results fell from the third quarter, helping push the shares down 9.3% from their 2010 high. Taxpayers still own 7.7 billion Citigroup shares, and Pandit failed to restore the bank to profitability in his second full year in the top job.
Investors may be betting on a rebound in Citigroup after it lost as much as 94% of its value during the credit crisis. The purchases came in the same quarter that the third-largest U.S. financial company sold more than 5 billion new shares to help repay government bailouts.
Citigroup is forecast to earn 9 cents a share this year, or 2% of what it made in 2005, based on Bloomberg’s analyst survey. That’s partly because Citigroup has had to issue almost 23 billion new shares to bolster a weakened capital base. Investors who were shareholders prior to the financial crisis were left with about one-fifth of their original stakes.
Hedge funds may be speculating on a break-up of Citigroup into individual businesses, according to Diane Garnick, a New York-based investment strategist at Invesco Ltd. (IVZ), which manages about $400 billion. “The sum of the parts is worth less than each individual part,” said Garnick. “It is easier for investors to assign value to a company if it is broken up into its many component parts. In this market environment people are starting to reward single business unit companies.”

Roubini says Greece aid "step in right direction"

2010-02-11T11:06:00.000+08:00

Jennifer Ablan

NEW YORK (Reuters) - European officials' consideration to assist Greece is a "step in the right direction," but a loan from the International Monetary Fund would be more beneficial in the long run, economist Nouriel Roubini told Reuters Insider television on Tuesday.

CRISIS IN CREDIT

European governments have agreed in principle to help heavily indebted Greece, a senior German coalition source told Reuters on Tuesday, in what would be the first rescue of a euro zone member in the currency's 11-year history.

"It is a step in the right direction even if my favored choice for Greece is to get a formal IMF program," said Roubini, an economics professor at New York University who is known for his prescient call on the financial crisis.

"IMF lending is based on conditionality of achieving certain fiscal and structural goals. In the case of loan guarantees, it's very hard to make those loan guarantees conditional...you either give them -- or don't give them."

Roubini said the problems in Greece are the "tip of the iceberg" and that the high public deficit and loss of external competitiveness for a number of reasons is shared by Spain and Portugal -- and to some degree by Ireland and Italy.

But concerns go beyond Greece and other troubled euro zone members.

"Outside of the euro zone, we have decided in this financial crisis to socialize part of the private losses and now there is a massive releveraging of the public sector and also in many other countries -- the UK, Iceland, Japan and the United States," Roubini said. "The question of sovereign risk is going to become a critical issue in the next few years. This problem goes well beyond Greece and the euroz one."

Roubini said investors should avoid risky assets including corporate credit, commodities and equities, particularly because of their huge run-up in 2009 as well as the murky outlook for a strong economic recovery.

"Investors should be safe (rather) than sorry and stay in cash-like instruments or overweighting them," he said.

(Editing by Leslie Adler)

Gold, the Ultimate Bubble Says George Soros

2010-01-30T19:18:00.000+08:00

- MetalMiner - http://agmetalminer.com -

Posted By stuart On January 29, 2010 @ 10:00 am In Commodities, Macroeconomics, Precious Metals | No Comments

It seems all you have to do is make a couple of billion and the world hangs on your every word. Well maybe more than a couple and it helps if you have been proved right over many years. But the adage certainly holds true for George Soros, said by the Telegraph [1] to be arguably the most successful hedge fund manager in history. Mr. Soros is one of the great and good at Davos this week, and as usual he makes a lunch time speech to his guests that is fervently followed by most of the financial community.

His topic of conversation this year was appropriately bubbles and how, rather than avoid them, he actively seeks out bubbles to jump on board. Of course he dressed it up more prosaically, suggesting that although the world knows him as a hedge fund manager and philanthropist his real profession is philosopher according to Jacob Weisberg writing in slate.com [2]. The trick of piling into a bubble is when to get out and that rather than steer clear of them the investor should strive to understand them and use them as a money making opportunity.

Apparently, Mr. Soros was suitably reticent as to what new bubbles he was looking at but his observation that gold is the ultimate bubble has been widely reported. Huge amounts of money have flowed into gold over the last 18 months originally as a safe haven when the world was falling apart and more recently as a perceived hedge against dollar weakness and the potential for inflation. Soros is clearly of the opinion governments should be more worried about a double dip than inflation. Rather than worry about inflation taking off this year he suggests governments should maintain lax lending rules to allow the economy to recover; a premature tightening of credit and budgets when banks still have massive levels of refinancing and the probability of increased reserve requirements under new Basle rules could set off another round of failures and contraction. Dominique Strauss-Kahn, Managing Director of the IMF said [3] something similar this week when addressing a different group at Davos warning that banks have a massive round of refinancing in 2011-13 and should not be taxed too heavily now but should be given the chance to rebuild their balance sheets in preparation for what could be likened to the other side of the hurricane. So far the Fed is indicating the low interest rates will continue but the fragility of the recovery is clear from the reaction on equity and commodity markets to President Obama’s speech on what he intends for banks and the Chinese tightening of reserve requirements, all the markets have come off and in most cases quiet significantly.

No doubt Mr. Soros is as actively watched as Alan Greenspan once was by those trying to second guess his next move; they were nearly always unsuccessful with Mr. Greenspan and will likely be equally behind the curve with Mr. Soros. If the wily investor has shown one thing over the years it is that he is not going to share his gift for investment decisions with the world until after the event.

–Stuart Burns

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URL to article: http://agmetalminer.com/2010/01/29/gold-the-ultimate-bubble-says-george-soros/

URLs in this post:

[1] Telegraph: http://www.telegraph.co.uk/finance/financetopics/davos/7085504/Davos-2010-George-Soros-warns-gold-is-now-the-ultimate-bubble.html

[2] slate.com: http://www.slate.com/id/2242742/

[3] said: http://www.telegraph.co.uk/finance/financetopics/davos/7080262/Banks-must-raise-billions-to-fend-off-crisis-says-IMF.html

[4] Image: http://www.addtoany.com/share_save?linkurl=http%3A%2F%2Fagmetalminer.com%2F2010%2F01%2F29%2Fgold-the-ultimate-bubble-says-george-soros%2F&linkname=Gold%2C%20the%20Ultimate%20Bubble%20Says%20George%20Soros

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Soros Says Chinese Stocks Are ‘Overheating,’ Should Be Slowed

2010-01-29T18:40:00.000+08:00

January 28, 2010, 11:38 AM EST

By Margaret Brennan and Simon Kennedy
Jan. 28 (Bloomberg) -- Billionaire investor George Soros said China’s stock market is “overheating” and policy makers should seek to temper its gains.
“Right now, the Chinese market is overheating and they have to slow it down,” Soros said in an interview with Bloomberg Television today at the World Economic Forum’s annual meeting in Davos, Switzerland. “It remains to be seen how successful they are.”
After surging 80 percent in 2009, China’s benchmark Shanghai Composite Index has fallen this year as the government reins in credit growth to avoid asset bubbles and slow the world’s fastest-growing major economy.
The founder of the $25 billion hedge-fund firm Soros Fund Management LLC said there is “no attractive alternative” to the dollar, noting the U.K. is in “worse shape” than the U.S. and the euro has its “own problems.”
Soros repeated that the yuan is undervalued and allowing it to strengthen would be a “very appropriate thing” for the Chinese government to do. “If they don’t do it, there will be increasing pressure from the United States,” he said.
His concern about the value of Chinese stocks reflects the results of this month’s poll of investors and analysts who are Bloomberg subscribers, which showed 62 percent of respondents view China as a bubble. Three out of 10 investors said the country posed the greatest downside risk, ranking it the second- riskiest market behind the European Union.

Greek Deficit Woes

Greece will tackle the EU’s largest budget deficit without leaving the 16-nation euro area, Soros said. “I’m actually confident they will make it,” he said, adding that the alternative of quitting the single-currency bloc would be more painful than paring the debt.
Soros said the world economy remains at risk of a double- dip recession, citing any premature reversal of economic stimulus by policy makers as a trigger for a renewed slump. “It might dip again if you withdraw the stimulus too soon,” he said.
The investor who made $1 billion selling the British pound in 1992 urged policy makers to coordinate their regulation of finance or risk a splintering of markets.
“If we fail to do that, the global markets are going to break up,” Soros said. “Unless you have these common rules, each country is going to protect itself.”

--Editors: Jennifer Freedman, Julian Nundy

Roubini Predicts A Second Half Slowdown

2010-01-16T16:00:00.000+08:00

By Helen Kearney, On Wall Street
January 11, 2010
Renowned economist and author Nouriel Roubini said little to cheer advisors at today’s Investment Management Consultants Association conference in New York City, predicting an anemic U-shaped economic recovery in the U.S.

Despite a pick up in activity in the first half of this year, Roubini predicted a slowdown in growth in the second half as the effect of the government stimulus package begins to wane. He expected gross domestic product growth to fall to 1% or 1.5% in the second half of the year from approximately 3% in the first six months of 2010.

Roubini pointed to the high unemployment rate, continued deleveraging in the housing sector and the damaged financial and credit systems as further causes for concern. He also predicted the personal savings rate will gradually increase to 8% from its current 4%; and as consumption represents 70% U.S. GDP, it will likely affect growth negatively.

Growth could be boosted by additional government stimulus, but Roubini described this as a “damned if you do, damned if you don’t” situation. If the government backs off too quickly from its stimulus efforts, and private demand is still relatively weak, it risks pushing the economy into a double-dip recession as experienced by Japan in the late 1990s. However, if the government adds too much stimulus it may create unsustainable fiscal deficits and spur inflation.

Despite his bleak assessment for the U.S., Roubini predicted an even slower recovery in Europe and Japan. He sees governments in Europe already backing off from their stimulus efforts (mostly because many of these countries had a high level of public debt even before the crisis) and private demand is not yet strong enough to fuel the recovery without government help.

Asked by an attendee to pick one asset class that will hold up over the next decade, Roubini pointed to emerging markets. He sees a growth rate in emerging markets of 5% to 7%, versus 3% for advanced economies, and in particular favors China and India over other countries, such as Russia. Roubini believes China and India are more likely to continue with market-friendly economic policies.

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Dubai debt woes may hit U.S. property market

2009-11-28T15:52:00.000+08:00

Print | Close this window
Dubai debt woes may hit U.S. property market
Fri Nov 27, 2009 3:24pm EST

By Elinor Comlay and Jonathan Stempel - Analysis

NEW YORK (Reuters) - Dubai's debt woes could further unhinge an already fragile U.S. commercial real estate, as it illustrates the importance of that tiny country to global investors in an increasingly interconnected world.

A state-owned investment conglomerate Dubai World, with $59 billion of liabilities, set off a global stock market selloff this week after it said it wants to restructure its debt, including at its property subsidiary Nakheel.

"This downturn has had more of a global impact," said Tony Ciochetti, chairman of Massachusetts Institute of Technology's Center for Real Estate in Cambridge, Massachusetts.

"As I try to explain to my students, with a global economy, we're all attached at the hip financially in some way, shape or form," he added.

The Dubai news also cast doubt over the strength of the fledgling U.S. economic recovery, and the prospects for a bottoming of property prices.

On Friday alone, the Dow Jones U.S. Real Estate Index .DJUSRE fell 2.9 percent, nearly twice the decline of broader U.S. market indexes.

"Dubai may have to unload some very prestigious properties at distressed prices and this will drive the price of all commercial real estate lower," wrote Richard Bove, a banking analyst at Rochdale Securities in Lutz, Florida.

PRESTIGIOUS PROPERTIES

In the United States, Dubai World's portfolio includes several well-known properties, and the fallout could have a larger impact on the entire real estate market.

The company is a partner with casino operator MGM Mirage (MGM.N: Quote, Profile, Research, Stock Buzz) in the $8.5 billion CityCenter project, which would add 6,000 rooms to a Las Vegas Strip gambling corridor already saturated with unoccupied hotel rooms.

Nakheel, perhaps best known as the developer of Dubai's palm-shaped islands, also carries the Mandarin Oriental and W hotels in New York in its portfolio, and has a 50 percent stake in the Fontainebleau Miami Beach resort.

And, through its Istithmar affiliate, Dubai World controls the upscale retailer Barneys New York Inc DBWLDB.UL.

The main threat to U.S. commercial property from Dubai World woes may be "potential for contagion," said Sam Chandan, chief economist at Real Estate Econometrics LLC in New York.

"It has the potential to spill over into the broader perception of real estate development and real estate as being a very risky area for exposure," Chandan said.

Many have already been burned.

U.S. commercial real estate values have already fallen 42.9 percent from their 2007 peak, Moody's Investors Service said.

Last month, delinquencies on U.S. commercial real estate loans that were packaged into commercial mortgage-backed securities reached 4.8 percent, more than six times the year earlier level, according to Trepp LLC in New York.

In a November 23 report, Moody's analyst Nick Levidy said prices could bottom at 45 percent to 55 percent below their peak, implying an additional 5 percent to 28 percent decline, but in a "stress case" could drop 65 percent from their peak.

CURRENCIES AND SUBMARINES

Like U.S. investors, foreign investors were enticed through much of this decade to buy U.S. real estate aided by cheap credit and the hope that property prices would steadily rise for a long time.

Currency fluctuations also provided a boost.

And the U.S. dollar lost about one-third of its value against a basket of currencies .DXY since late 2002, making it easier for foreign investors to scoop up U.S. real estate even when valuations grew too rich for investors at home.

Dubai World's holdings go far beyond real estate. It has a 20 percent stake in Canada's Cirque du Soleil, and also invests in the global bank Standard Chartered Plc (STAN.L: Quote, Profile, Research, Stock Buzz) and New York boutique investment bank Perella Weinberg Partners.

Other investments go farther afield -- or under water. Dubai World is suing a former executive in a case arising from a wayward foray into submarine financing.

But Ciochetti suggested it is premature to quantify Dubai World's impact on U.S. commercial real estate.

"It is hard to focus on any one particular participant and then generalize about the whole market," he said. "It illustrates that very few places and participants in the commercial real estate market are totally exempt from the global economic crisis."

(Reporting by Elinor Comlay and Jonathan Stempel; Editing Bernard Orr)

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5 Big Reasons Why You Should Doubt The US GDP Growth

2009-11-01T21:28:00.000+08:00

It’s true, the 3.5 percent third quarter GDP growth could be a sign of good things to come… but most likely that’s not the case. Brian Sullivan of FBN has put together five reasons why the US is not recovering.

1. The money lost on stimulus spending - The 3.5 percent growth in GDP is roughly equal to an additional $112 billion dollars in output quarter-over-quarter, but we spent $173 billion on stimulus over that same period. Basically, GDP gained about 65 cents for every dollar spent on stimulus, not exactly a win.

2. The weak job market - In October the total number of people filing for some kind of unemployment rose to over 10 million for the first time in history, and no new jobs are replacing the ones that are lost.

3. Consumption is only up because of incentives - Cash for Clunkers, tax credits on energy efficient goods, and other programs have only temporarily goosed shopping. US consumer spending has already fallen again in September… for the first time in five months and by the largest amount in nine.

4. Housing tax credits - The National Association of Realtors says nearly half of the increase in home sales this year was due to tax credit. Unfortunately, the credit cost about $30 billion to execute and only generated about $11.6 billion in tax revenue. Roughly speaking, about three dollars were spent for every dollar brought in.

5. The weak dollar - Two notable problems here. First, foreign countries have been able to cheaply borrow the weak dollar in order to finance useful capital projects in places far away from the US. Second, the Chinese yuan’s dollar peg causes it to weaken when the dollar does. This means that China keeps its cost advantages and the US fails to see increased exports.

The economy is bound to be rough for some time to come. See these five points in their original context and with more details in Fox Business News’ coverage of the GDP jump that isn’t what it seems.

Roubini: Global Markets Could Soon Crash

2009-10-31T10:05:00.000+08:00

Newsmax.com

Roubini: Global Markets Could Soon Crash
Wednesday, October 28, 2009 4:02 PM

By: Dan Weil

The global markets are at risk of crashing when the dollar rebounds, says economist Nouriel Roubini.

Roubini, a professor at NYU, is credited with long predicting the financial collapse of 2007 and 2008.

“In the short run what’s happening is there’s a wall of liquidity, not just in the U.S., but around the world, that is chasing assets,” he told CNBC.

“It’s equities, it’s commodities, it’s credit, it’s gold, it’s emerging market asset classes.”

And what does that amount to? “Now we are in the mother of all carry trades," Roubini says.

“Everybody is shorting the dollar, borrowing and investing in assets all over the world.”

That activity helped push the greenback to a 14-month low.

But there’s a risk in this, Roubini says.

“People are borrowing at zero percent interest rates in the U.S. Effectively the rate of borrowing is negative, because we have the dollar falling. You have a capital gain,” he explains.

“You are buying any assets around the world. All these assets are perfectly correlated.”

Eventually, the dollar will rebound, Roubini says.

“Once the dollar stops falling, you have a sudden reversal of the dollar, you have to close your shorts, you have to dump assets, and you could have a market crash all over the world,” he says.

Most experts see a global crash as unlikely, but they say substantial problems remain.

Have we learned the appropriate lessons from the financial crisis?

“The early signs are mixed at best,” William Galston of the Brookings Institution writes on the think tank Web site.

© 2009 Newsmax. All rights reserved.

George Soros: The Guru Outlook

2009-10-31T09:51:00.000+08:00

This week’s Guru Outlook takes a look inside the mind of George Soros – one of the original masters of the global macro hedge fund universe. Soros, of course, became famous for breaking the Bank of England. Soros made a spectacularly leveraged bet against the British Pound which netted him over $1B in a day.

Soros rose to recent notoriety for predicting the financial crisis. He was far more bearish than most others and appeared to have a crystal ball with a play-by-play for each step of the crisis. Like some of the gurus we’ve spoken of lately, he wasn’t bearish all the way up. Soros saw the decline in markets as a buying opportunity and has taken the liberty to make billions for his investors on both the way down and the way up.

Although Soros has turned more bullish over the course of the last 6 months he has not lost sight of the forest for the trees. Much like Jeremy Grantham, Soros believes we are confronted with massive structural long-term problems – particularly in the United States. He believes U.S. consumers are in the middle of a long-term deleveraging process and earlier this month he described the U.S. banking system as “bankrupt”. He sees very weak consumer spending and a drag from the banking sector holding down global growth for years to come.

In a recent interview, he said the market is now very overextended and at substantial risk of another downturn. But that doesn’t mean the market will turn down immediately. Soros says the market is likely to remain buoyant throughout the remainder of 2009 and will likely face its reality of weak global growth in 2010. He says the rally has been driven by the government stimulus and little else. Soros says the recent uptick in bank earnings is essentially a fraud:

“Those earnings are not the achievement of risk-takers. These are gifts, hidden gifts, from the government.”

Soros recently said the move down in the dollar was unsustainable (he obviously reads too much TPC) and that its link to the Renminbi would reduce the overall decline. Despite this, Soros is betting big on all things “real”. In particular, Soros is betting big on oil related names. Soros has over 33% of his funds invested in energy related names. He recently announced large positions in Interoil (IOC) and Headwaters (HW). Soros’ largest positions remain PetroBasiliero (PBR) and Hess (HES) which both represent over 5% of his portfolio.

Soros was also a heavy investor in convertible bonds in recent quarters. Of particular interest were semiconductor names. Soros bought large bond stakes in RF Micro Devices (RFMD), LSI (LSI), and Linear Tech (LLTC).

You can see his latest 13-f filing here for more details on specific positions.

George Soros Expects a Double Dip Recession To Follow 2010 or 2011

2009-10-30T22:22:00.000+08:00

Posted on 10/30/09 at 8:23am

George Soros says he expects a double dip recession to follow 2010 or 2011. George Soros said the global economy may run out of steam.

Earlier this month, George Soros said that US will be "drag" on global economy. Soros also added that the US dollar should be allowed to fall to allow the US to adjust its current account deficit.

George Soros said if the dollar is managed properly, it can continue to be the preferred reserve currency.

George Soros has made his mark as an enormously successful speculator. The bulk of his enormous winnings is now devoted to encouraging transitional and emerging nations to become 'open societies,' open not only in the sense of freedom of commerce but—more important—tolerant of new ideas and different modes of thinking and behavior.

ProShares UltraShort 20+ Year Treasury (ETF) (Public, NYSE: TBT)

Jim Rogers, Marc Faber agree US dollar due for temporary rebound

2009-10-30T22:15:00.000+08:00

Author: BI-ME staff
Source: BI-ME
Published: Fri October 30, 2009 5:53 pm

INTERNATIONAL. Investment gurus Jim Rogers and Marc Faber agree to various degrees on many issues but the one thing uniting them this week is the future direction of the US dollar. They see a correction looming in the US currency.

Both Faber and Rogers have been warning about the effects of monetary and fiscal policies on the US economy, since the current rally has been mostly based on printed money, a kind of 'reverse Robin Hood policy' of governments, to steal from the peasants to give to the rich.

As with Faber, Rogers is mostly to be seen being interviewed on CNBC and Bloomberg Asia or Europe as they both live in Asia now and since their views are to put it mildly, somewhat negative on the prospects of a sustainable US recovery.

Marc Faber the Swiss fund manager and Gloom Boom & Doom editor said in a video interview Thursday at Barron's Art of Successful Investing conference that the US dollar is probably at a low point and could have “some kind of rebound”, but it remains in a “structural long term bear market” in terms of purchasing power.

Sadly, other currencies are not any better either, Faber said.

Legendary global investor and chairman of Singapore- based Rogers Holdings, Jim Rogers said a rally in the dollar may last for “a while” as equity and commodities markets decline.

Speaking in an interview with Bloomberg television in Singapore, Rogers said: “Everybody is pessimistic on the dollar. Whenever you have everybody on the same side of the boat, you know what you have to do. We may have a rally in the dollar, a decline in commodity prices or stock prices for a while.”

Rogers reiterated a long-held belief that printing money to help revive the economy would weaken the greenback and Treasuries. So any rally in the dollar won’t be sustainable, he says.

The dollar has weakened so far this year versus all but one of its 16 major counterparts, including a 5.7% drop against the euro. The currency traded at US$1.4812 per euro Thursday, after gaining 1.5% over the previous three days.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major US trading partners, fell to 76.090 yesterday, from 81.308 at the end of last year.

“The dollar is overdue for a rally,” Rogers said.

Investors have been reducing bets that the dollar will decline versus the yen and the euro. The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so- called net longs -- was 36,033 on October 20, compared with net longs of 43,367 a week earlier. Similarly, net yen longs were 31,185 on October 20, from 33,339 a week earlier, according to Bloomberg.

Rogers also said that he “certainly wouldn’t be buying US Treasuries” and “couldn’t imagine lending money to the US government for long periods of time.”

In his Barron's interview Faber also said there was “some kind of protectionism” going on in the world, for example the US, but he does not believe currency devaluation would solve anything as some tend to believe.

Since most investors are underweight on emerging markets, Faber recommends that now is a good time to increase the holding in emerging market stocks in countries such as Thailand and Vietnam, as price levels are still low and could “hold there for a long time.”

Faber also says cash at current zero percent rate is less attractive than equities in the long run.

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"The US Dollar is weak, its a symptom of inflation"

2009-10-27T22:04:00.000+08:00

Last Call to sell the US Dollar

2009-10-27T21:55:00.000+08:00

The World’s Hottest Market – And It’s Not China

2009-10-24T10:50:00.001+08:00

By Martin Hutchinson on October 23, 2009 | More Posts By Martin Hutchinson | Author's Website

Which global economy grew at an annual rate of 11% in the second quarter, and will report a second-consecutive double-digit advance when it reports on Monday?

Hint: It isn’t China.

But you are looking in the correct part of the world.

The economy in question is South Korea, which has enjoyed an astonishing rebound since it reached a recessionary bottom last winter. One factor in particular should nurture this rebound: The Korean economy wasn’t pulled down by the U.S.-led subprime mortgage crisis, which infected many foreign banks that invested in mortgage-backed securities - the Asian Tiger was pole-axed by a collapse in world trade in the first three months of this year.

At the nadir in March, South Korean exports were down 40% from the same point in 2008. The banking system also had a liquidity crisis that required a government bailout - not because of investments in toxic U.S. derivatives, but because of similarly lackluster credit card loans and dodgy mortgage rubbish of its own.

The South Korean won declined by 40% against the dollar during the 12-month-stretch that ended in February. It has since recovered about half that drop, so it remains undervalued.

But the overall outlook is highly upbeat. From its low point in December 2008, the Korea Composite Stock Price Index (KOSPI) is up 65%. Exports have recovered, particularly on the back of surging demand from China - a trading partner that is growing a bit more slowly than Korea, but that has considerably more muscle with 27 times the population.

Korea’s current account balance once again shows a healthy surplus. Credit-rater Fitch Ratings Inc., which had placed Korea on “credit watch” for a possible downgrade from it’s A+ rating, recently announced that the downgrade would be unnecessary, and said that Korea could expect to run a budget surplus in 2011.

That demonstrates Korea’s true investment allure: The country is well run. It elected a pro-business government led by President Lee Myung-bak in the beginning of 2008 (Lee’s term lasts until 2013), and that government has coped pretty well with the global financial crisis.

Since its trade agreement with the United States is on indefinite “hold” in the Congress of U.S. House Speaker Nancy Pelosi, D-CA., Korea recently signed a similar pact with the European Union, which may boost exports somewhat.

Like nearly everywhere else, Korea’s government spent on “stimulus” - but only moderately - so the budget deficit is only expected to reach 4.5% of gross domestic product (GDP) this year, according to The Economist magazine’s panel of forecasters.

In any case, Korea’s government spending as a percentage of GDP is one of the lowest of the world’s most-affluent developed economies. That means it will be much less of a burden than on the Korean economy than will similar outlays in the higher-spending Japan, United States and European Union.

The forecasters at The Economist expect Korea to advance at a 2.8% rate in 2010, but that forecast looks way too low. After all, remember that even in the difficult, post-Asian-contagion years of 1998-2008, Korea experienced average annual productivity gains of 4.3% - more than double the rate experienced by the U.S. economy during the same period.

At first glance, Korea’s stock market looks expensive, trading at 19 times earnings. However, the earnings concerned are from the bottom of the recession, when several of the big exporters were operating in the red. The market is still below its mid-2008 level, when the overall Price/Earnings (P/E) ratio was only 11.

One admittedly annoying reality is that most large Korean companies abolished their dividends during the credit crunch, and have yet to restore the payouts.

Even so, Korea’s economy is a big benefactor of the torrid growth being generated by its much-bigger neighbor - Mainland China - which is why some of Korean stocks are magnificent China plays.

There are several Korean stocks that trade as American Depository Receipts (ADRs) on the New York Stock Exchange, and in sufficient volume to make them suitable profit plays. My thoughts on each of these companies follow:

* KB Financial Group Inc. (KB: 51.80 -0.49 -0.94%): A financial group that owns the largest bank in Korea, KB was hit badly by loan losses and problems in its Kazakhstan subsidiary, and by its badly timed (October 2008) conversion into a holding company. It has rallied from its low, engineered a $900 million rights issue and currently trades at a P/E of only 8.8. In my view, however, it has a ham-fisted management team. HOLD.

* Korea Electric Power Corp. (KEP: 14.86 -0.19 -1.26%): Korea’s national electric power company recorded a loss in 2008 because of fixed tariffs. KEP’s steady growth should benefit from any acceleration in Korea’s economic growth rate, but it is forced to buy coal from overseas, which gives it a downside risk. Although it’s trading at only 54% of net asset value (NAV), but even so I think not. AVOID.

* KT Corp. (KTC: 16.72 -0.20 -1.18%): Formerly Korea Telecom, KT is Korea’s leading fixed-line telecom provider, which was privatized in 2002. It carries a P/E of 18 on its trailing earnings, and it was one of the companies that last year cut its dividend. What’s more, I don’t like the sector. AVOID.

* Posco. (PKX: 112.32 -1.05 -0.93%): Korea’s largest steel company, with a P/E of 15 on the company’s trailing earnings, Posco has a large export operation to China, making it a direct participant in the Red Dragon’s explosive growth. Posco is the world’s No. 3 steelmaker, and is the most efficient in terms of output/man hour. Like KEP, Posco will suffer from rising raw-materials prices - in this case, iron ore. That key ingredient to the steelmaking process has been cheaper this year than it is now, and the price appears set to keep rising. The stock is right now trading at three times its 2009 low, and 1.9 times book value (BV). HOLD/BUY.

* Shinhan Financial Group Co. Ltd. (SHG: 78.49 -1.97 -2.45%): The third-largest financial group in Korea, Shinhan provides commercial and investment-banking services, but without KB’s large Kazakhstan exposure. The ADR right now is trading at 10.5 times earnings and 1.1 times net asset value. BUY.

* SK Telecom Co. Ltd. (SKM: 17.48 +0.12 +0.69%): Korea’s largest mobile phone company, with operations in Vietnam, SK Telecom is trading at 11.8 times earnings. It recently sold back its China investment for $1.3 billion, so it is no longer a significant China play. It is less attractive than it once was, and I don’t like the sector, but it’s still a better value than fixed-line player KT. HOLD.

* Finally, you could look at the Korean exchange-traded index fund, the iShares South Korea ETF (EWY: 45.43 -0.04 -0.09%), which invests in the Morgan Stanley Capital International Korea Index. It has a P/E ratio of 13, but a yield after expenses of only 0.8%.

'I don't believe in gold,' says Nouriel Roubini

2009-10-23T22:01:00.001+08:00

Author: BI-ME staff
Source: BI-ME
Published: Fri October 23, 2009 2:58 pm

INTERNATIONAL. Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics (RGE), who predicted the current financial crisis two years ago, said gold can only go up on inflation or another depression.

Speaking in an interview with Dave Nadig of Index Universe (IU.com) Roubini said: "My view is to stay away from risky assets. Stay in liquid assets. I don’t know when the correction is going to occur, it could be a while longer, but eventually it will be a pretty ugly correction, across many different asset classes".

"I don’t believe in gold," Roubini said.

Explaining his reasons, Roubini added: "Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity. So there’s no inflation, and there’s not going to be for the time being".

"The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression".

"So all the gold bugs who say gold is going to go to US$1,500, US$2,000, they’re just speaking nonsense," Roubini said.

"Without inflation, or without a depression, there’s nowhere for gold to go," adding maybe it could happen in three or four years from now.

"But not anytime soon," he said.

Roubini has been expressing concerns for some time that the current price of gold looks overextended as deflation is likely to outweigh any risks of inflation in the near term.

For the next two years, deflationary pressure is going to be dominant, and it is going to become a time bomb down the line if and when we keep monetizing large deficits," he said.

"Unless we have high inflation, or...other risks like depression, gold looks toppy," he told a Reuters Investment Outlook Summit in June.

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10 Reasons to Invest in Asia

2009-10-17T10:21:00.000+08:00

10 Reasons to Invest in Asi..

Jim Rogers: The Next 10 Years

2009-10-14T20:12:00.001+08:00

Jim Rogers: The Next 10 Years
Written by Heather Bell - October 09, 2009 12:40 PM

I’m moving to China … possibly to live in a bunker. At least that was my inclination after listening to a presentation by Jim Rogers yesterday.

Now don’t get me wrong―Mr. Commodities wasn’t all doom and gloom. In fact, his talk was both informative and highly entertaining. But Rogers doesn’t sugarcoat things―he’s very matter-of-fact about his concerns and projections for the future. And most of them don’t bode well for the U.S.

I’ll be posting an interview with Jim Rogers on the site in the coming week, but for now, I just wanted to offer some highlights from his speech at ETF Securities' mini-conference and the Q&A that followed.

1. The 21st century belongs to China

According to Rogers, the 19th century was the era of the British Empire and the 20th century was the U.S.’ heyday. But the 21st century is China’s (though the rest of Asia is definitely going to get a boost too).

The reasons for this are many, but some points brought up by Rogers include the following:

1. The Chinese want to live like we do;
2. They are more eager to work;
3. They are better at saving;
4. There are 1.5 billion Chinese citizens (and 3 billion people in all of Asia), and we owe them money. They are, according to Rogers, “among the best capitalists in the world.”

There will be some setbacks, of course, Rogers says, but these are opportunities. “If you see setbacks in China, you should pick up the phone and get more involved,” he advised, before adding his favorite refrain, “The best advice of any kind that I can give you is to teach your children and grandchildren Chinese.”

China’s path to world domination started with Deng Xiaoping’s capitalist programs in 1978, and there hasn’t been any looking back since. Rogers views China’s dominance as nigh-on unstoppable except for one little thing: its water problem. There are parts of the country that are running out of water, and when the water disappears, Rogers points out, so does civilization. However, the country is acting aggressively to combat the problem, and he doesn’t view it as that much of a threat.

2a. Jim Rogers is not a Ben Bernanke fan

Yep, it’s a fact. No “Team Bernanke” shirts for Jim Rogers (who said to scattered applause during the Q&A session that if he was in charge of the U.S. economy he would “abolish the Fed and resign.”).

Rogers is appalled by the government’s actions—Bernanke’s in particular. The U.S. government’s strategy calls for the debasement of the dollar, he says, calling it a “horrible policy.” While he concedes it can work in the short term, it NEVER works in the mid- or long term.

“He’s going to run those printing presses until we run out of trees, because that’s the only thing he knows,” Rogers said of Bernanke.

Add that on top of the country’s rapidly growing astronomical debt, and Rogers believes you’ve got a recipe for disaster.

2b. The U.S. dollar is screwed

Consider this a corollary to point 2a. Its status as a reserve currency is teetering on a precipice, in Rogers’ opinion, and he’s not alone. In fact, so many people are selling dollars right now that he’s sitting tight, waiting for a possible—and ultimately unsustainable—rally in order to exit the market. Of course, if it fails to rally and just drops again …

“I’ll just have to panic and sell like everyone else,” Rogers said.

3. Commodities, commodities, commodities

OK, as mentioned before, there are 3 billion people in Asia, most of whom are aspiring to play the home version of the American Dream game show. And let’s face it: American society is largely about consumption. We like stuff―we buy it, we wear it, we eat it, we flaunt it, we sometimes even bedazzle it (yeah, Google that). So that’s a lot more consumption on the global level. Rogers notes that while consumption is expected to increase exponentially, not a lot of capacity has been added in the last few decades for a lot of commodities. Meaning, not a lot of new refineries have been built, and not a lot of new resources have been discovered or excavated for a variety of commodities.

In terms of oil, Rogers cites the fact that Saudi Arabia has not seen any new oil discoveries but has consistently said for the past two decades that its reserves are at 260 billion barrels (in which time it has sold 60 billion barrels). He also points out that farmers are a rapidly disappearing species. So to sum up―that’s a lot more people competing for diminishing resources (including the all-important energy and food). Basic supply and demand theory pretty much takes it from there.

“Commodities are the second-largest asset class in the world,” Rogers noted. And they are “the best anchor” for your portfolio, he adds.

Rogers says the typical life span of a commodities bull market is 18-20 years. We’re currently in year 11 right now. Yeah, it could end tomorrow, but that whole supply and demand imperative could also extend this bull beyond its typical time frame.

During the Q&A session, though, the conversation took a darker turn. One questioner asked if the increased competition for resources might lead to war, and Rogers allowed it was a possibility, though he hoped it would not come to that. He pointed out that when a rising power clashes with an established power, the result is usually war, and said that research consistently shows that resource shortages lead to war. So, sure, commodities shortages might start World War III, but if you invest in the commodities themselves, you might at least be in decent financial shape when the shelling stops—and I’m not being flippant at all. War drives up the costs of commodities.

4. U.S. government bonds are the next big bubble

Well, would you lend money to us? Rogers says short-term bonds are probably OK, but he advises getting out of anything with a longer maturity. He calls it “inconceivable” that anyone would lend money to the U.S. for 30 years at the going rate, and notes that the U.S. was a creditor nation as recently as 1987.

“Now the U.S. is the largest debtor nation in the history of the world,” he said.

And for bond portfolio managers, he had some very pointed advice: “Get a new job.”

5. Protect yourself

The underlying theme of Rogers’ entire speech was that the world is changing, and here are some things you should know if you want to come out the better for it (and for your family members, clients, etc., to also come out the better for it) financially. Based on Rogers’ observations, it seems recognizing that change is a key step, but so is adapting to it (see advice regarding learning Mandarin, for example). And in Rogers’ eyes, commodities are a good way to achieve this protection. No investment is certain of course, but right now, he thinks commodities look pretty darn good.

Best Comment Of The Night

Addressing one audience member’s question, Rogers asked if the young man were an MBA. The questioner admitted to holding an MBA and was promptly told he should swap his MBA for an agriculture degree from Texas A&M.

“You should become a farmer,” Rogers said.

That’s an old line for Rogers, but he added a new wrinkle. If you’re not going to become a farmer, you should open the first Lamborghini dealership in Iowa. Because with farmers closing in on extinction just as the world needs more food, that’s probably what they’ll be driving in a few years.

Warren Buffett on Investing in Gold

2009-10-09T14:43:00.000+08:00

About the shiny metal Warren once said:

"Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

You can add me to that list of head scratchers, although I do always keep just enough on hand to bribe the border guards if I had to.

Other metals, on the other hand — like copper, nickel, platinum, and silver — just seem to make more sense.

That doesn't make gold as trade wrong, mind you. It's just not quite my cup tea as a long-term investment — even as the price of gold tops $1000.

I bring this up because I received an e-mail from a reader that had this to share about an article I wrote in Wealth Daily last month about investing for retirement.

The letter came from a reader named David W:

Dear Steve,

I am in my 35th year as a CPA and financial adviser to high net worth individuals. Years ago I would have agreed with your assertions.
Today I say keep a minimum cash balance and go long gold and silver in large percentages.

Cheers,
David

Now first of all, I'd like to thank David for reading and for writing. Because the truth is I welcome others' opinions, even though I may not always agree with them. After all, I never said I had a crystal ball.

Even still, I just can't see why anyone would essentially go "all in" on gold and silver these days, especially with their retirement money.

Let's face it: speculation is one thing, but gambling with money you can't afford to lose is another thing entirely.

That being said, here's why I'm not as big on gold as Luke and David are. . .

Gold as a Long-term Investment

Primarily, the "go all in" side of the argument has always represented something of an Armageddon trade to me. Because in order for you to really profit from it in the long term, things would have to fall apart and stay that way.

In that regard, I don't know that I'll ever be that pessimistic about the future — even though I understand the dangers of debt, the printing presses, and a devalued dollar. In fact, I've written about all of them.

What's more, I've always wondered how the gold bugs planned to cash in on their big payday when it finally arrived. Personally, I would rather own 50 lb. bags of beans and rice.

I also never understood anyone who ever said that gold was a "can't lose investment" because somehow it's "real money," not a fiat currency.

You see, fiat is a word that the gold crowd loves to sprinkle on top of every argument, as if the dollars in my pocket are as illegitimate as crooked third-world dictator. Just because it sounds scary doesn't make it so.

The truth is gold as an investment is as fraught with risk as any share of stock, bond, or piece of real estate. You can and will lose money on the shiny metal if you buy the highs and hold on to it. It's just that simple.

If you doubt this fact, just ask anyone who bought gold at the peaks in last gold craze. Thirty years later, the price would have to reach around $2100 today for that person to break even on an inflation adjusted basis. . . and that's not including the carrying costs.

Keep in mind, gold is a static investment that produces no cash flow.

You Say Gold. . . I Say Stocks

Here's the real reason I prefer stocks to physical gold: Stocks offer investors, a piece of a pie that grows, not one that will always remain the same size.

That's the key difference for me — and why I would rather invest in a company with a bright future and dividend than a shiny piece of metal that might be the currency of the Apocalypse.

Now can stocks lose value? Of course they can. Over the course of the last 12 months, most of them have. But I have 5,000 of them to choose from. And if I do my homework, I'll find more winners than losers over time — my portfolio proves this.

On top of that, I can spread my risk across several different sectors, limiting the downside in markets that aren't correlated. And this is the real point in writing this article. When I want to sell, the market is always liquid enough for me to make an exit — something that is much more difficult to do with "hard assets."

I suppose if I were a gold guy. . . if I had to choose. . . I would rather own the miners than physical gold itself.

As for the shiny metal, I do think gold can go higher here without question. In fact, looking at the chart of gold it may be breaking out of a head-and-shoulders bottom, which would entail a price target of about $1300.

Food for thought — especially if what I'm reading about the Chinese demand for gold is true and continues to play out.

In the longer term. . . say the next 10 years. . . who knows.

But as I said earlier, gold really isn't my thing and I wouldn't go all-in on it.

Still, this is a trade that bears keeping an eye on. And if it develops, I would be more inclined to go long GDX — the Market Vectors Gold Miners ETF — or an individual miner.

As for my pal Luke, I can't wait to knock back a few beers with him at the Christmas Party this year.

I just hope we can both remember not to talk about gold. It drives my wife crazy.

Your bargain-hunting analyst,

steve sig

Steve Christ, Investment Director

The Wealth Advisory

P.S. When it comes to precious metals, there is one thing Luke and I definitely agree on: silver has more upside. To learn more about it, click here.

Marc Faber on the economy and financial markets

2009-10-07T21:51:00.000+08:00

Below is a wide-ranging interview with Marc Faber on four videos on CNBC TV18 in India in which he explains his views on inflation, currencies, commodities, stocks and more, all courtesy of Edward Harrison at Credit Writedowns.

Asset-based economy. In general, he thinks we are in an inflationary environment, whereas I think deleveraging is secular and means any inflation is only cyclical. But he shares my belief that zero interest rates induce money balances to move into consumption or into higher-yielding assets. He believes this is a boon over the medium term (if not the short or long term) for financial assets, whether they be stocks, bonds, commodities, real estate or art. And it is something that will continue, he says. Faber believes Bernanke will be loath to raise rates aggressively given his prior statements and writings.

Currencies. Faber takes the view, with which I agree, that the Fed’s easy money policies after 1998 flooded the global economy, especially emerging economies, with liquidity. This has led to asset bubbles. Hong Kong residential real estate is one example he cites. As a result, Faber thinks the US dollar is no longer overvalued at present levels. A snapback rally for the dollar resulting from oversold levels would be bearish for asset markets. But, longer term, Faber thinks the dollar is weak.

Equities. There has been a huge rally everywhere. He says he is not a buyer at these levels. However, as central banks are going to continue to print money, stocks could continue higher - but he would not bet on a blow-off rally from these levels.

Commodities. Faber thinks zero-rate levels make it extremely difficult to value anything. He poses the question: which would you rather own - the “US dollar at zero interest rates or a ton of gold or a ton of copper or a ton of crude oil?” Of course, commodities are supply constrained, whereas dollars are not, so there is a justification for buying them. But, he anticipates the commodity hoarding by China is about to end and that is bearish for industrial commodities as well as precious metals. As with other commodities, he thinks the huge run-up in oil could induce a setback. Long run, he is an oil bull because of limited supply.

Financial Crisis. He is disturbed by the fact that a crisis caused by excessive debt growth, especially as a result of Federal Reserve policy, has been allowed to pass with the same players in control. He says enjoy the ride for now. Longer term, this necessarily means the same bad policies will follow, which will lead to a system-wide financial collapse.

India. Faber is bullish longer term. Short term, there could be a correction. India is one of the best-protected countries because of less vulnerability to the export sector. He also believes the Reserve Bank of India has one of the best monetary policies in the world - supervising the financial system closely, relatively tight, and mindful not just of core inflation but also of other price levels like asset prices.

Soros Says ‘Basically Bankrupt’ Banks Restrain U.S.

2009-10-05T20:37:00.001+08:00

By Simon Kennedy and Rainer Buergin

Oct. 5 (Bloomberg) -- Billionaire investor George Soros said the U.S. economic recovery will be sluggish as “basically bankrupt” financial companies and indebted consumers impede it.

“The U.S. will be very slow in recovery,” Soros said in a panel discussion in Istanbul, where the annual meetings of the International Monetary Fund and World Bank begin tomorrow. “The United States has a long way to go.”

Financial companies in the Americas have written down or lost $1.1 trillion since the financial crisis began two years ago, while the U.S. savings rate has risen to its highest level in 24 years as consumers retrench. Soros signaled a stronger rebound in Europe, a view at odds with the IMF. The Washington- based lender last week said the U.S. economy will grow 1.5 percent next year, five times the pace of the euro area.

“Europe has been less damaged,” Soros said today. The European Central Bank may be faster than the Federal Reserve to start withdrawing stimulus, he said, adding that it is “too early, certainly for the United States,” for policy makers to start reversing their emergency measures.

Policy makers may struggle to revamp the regulation of the financial system now that the economy and markets are recovering, he said. “It will be very difficult to accomplish,” he said. “The crash of 2008 now seems like a bad dream and people like to treat it like a bad dream and forget about it and get back to business as usual.”

To contact the reporters on this story: Simon Kennedy in Istanbul at skennedy4@bloomberg.net; Rainer Buergin in Istanbul at rbuergin1@bloomberg.net
Last Updated: October 5, 2009 06:56 EDT

HSBC chief fears a second downturn

2009-10-05T14:36:00.002+08:00

Financial Times FT.com

HSBC chief fears a second downturn
By Patrick Jenkins, Banking Editor
Published: October 4 2009 23:27 | Last updated: October 4 2009 23:27

Michael Geoghegan, chief executive of HSBC, is so convinced there will be a second downturn in the coming months that he plans to delay any rush to expand the bank.

“Is this a V recovery or a W?” Mr Geoghegan asked in an interview with the FT. “[I think] it’s the latter. [If I’m right], we have to be very careful we don’t grow the balance sheet so far before the recovery has come only to write it back into the impairment line later on. I’m cautious about growing too fast.”

At the same time, Nani Beccalli – head of GE International, who runs the conglomerate’s businesses outside the US – said he was worried that talk of governments preparing exit strategies from the huge amount of cash they have poured into their economies was “premature”.

Mr Beccalli was one of the first business leaders to detect “glimmers of hope” in an interview with the FT in March.

His concerns come as policymakers face the dilemma of when to withdraw their stimulus packages. Act too soon and they could precipitate a double-dip recession, but act too late and there are worries about a return of inflation and sowing the seeds for the next crisis.

Mr Geoghegan was speaking after HSBC announced a shake-up of its governance 10 days ago. He is now responsible for strategic issues that previously lay with Stephen Green, chairman. “I’m not as convinced we’re through the worst as others are. The reality is that profits will be quite reduced.”

His comments come in spite of expectations that in his amplified role he will push HSBC to grow more aggressively.

HSBC insiders and advisers say the bank could aim for an acquisition in mainland China as a quick route to boosting its position in the country. Mr Geoghegan said when he was given his extra responsibilities that he would move his office to Hong Kong to better co-ordinate its push into China. The bank is aiming to become the first foreign company to list on the Shanghai stock exchange, possibly in the first half of next year.

Mr Geoghegan was also bearish on the outlook for banks’ regulatory capital – in particular the so-called tier one ratio that measures the top grade of capital as a proportion of risk-weighted assets, and the “core” tier one ratio that counts mainly equity. He said he expected the requirement for core tier one capital ratios to be “around the 10 per cent mark”. That is far higher than the 8 per cent that regulators have been suggesting in private.

HSBC is among the better capitalised banks, with a core tier one ratio of 8.8 per cent and headline tier one of 10.1 per cent.

Additional reporting by Richard Milne in London

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Chinese Yuan Band Widens - How Close Are We to A Free Float?

2009-10-04T12:36:00.001+08:00

Once again, as we have been forecasting for some time now, the People’s Bank of China made a move and widened the Yuan’s trading band. Planned perfectly to coincide with the weekend’s G8 finance minister’s summit and the Strategic Economic Dialogue with US Treasury Secretary Paulson next week, the highly anticipated decision continues to have broad implications beyond currency markets. Foreign exchange effects were immediate as the Japanese yen gained rapidly against the dollar shortly after the release.

So what didChina do?

-China widened the daily trading band against the dollar to 0.5%

The daily trading band, which represents a daily limit for appreciation or deprecation of the Chinese yuan against the US dollar, was widened to 0.5 percent from 0.3 percent effective May 21, 2007. The People’s Bank of China has enacted this measure amidst major pressure from its international trade partners of which US was the most aggressive voice. The main purpose of this change is to allow the yuan to rise against the US dollar faster, but given the small value of the actual band widening, markets should not expect wild fluctuations or rapid appreciation of the Chinese currency. The yuan has never moved the maximum range under the previous daily limit of 0.3 percent, as the biggest move this year against the dollar was a 0.22 percent gain on May 11. Furthermore, the 0.3 percent trading band has been a long standing one, as it was initially enacted in 1994. The People’s Bank of China and the Chinese government have stated previously that they would allow appreciation of the currency, but that it would be a slow process. Thus, we may expect continued widening of the trading band at a later date – compared to an outright revaluation of the yuan – leaving the issue is unlikely to fade from the limelight.

-China will maintain a managed float against a basket of currencies

The People’s Bank of China has said that their exchange management methods will not change, and a basket of currencies will still be used as a reference for the yuan exchange rate so as to avoid sharp fluctuations. Since the US, Euro-zone, Japan and South Korea are China's biggest trading partners, their currencies were naturally established as the main ones in the basket when the composition was initially revealed in August 2005. Also included in the calculation were: the Singapore dollar, the British pound, the Malaysian ringgit, the Russian rouble, the Australian dollar, the Thai baht and the Canadian dollar.

What motivates China to do this?

China has many reasons to want to revalue their currency. First and foremost the country wants to preempt any protectionist measures imposed against it by the US Congress. US legislators have been in a uproar, saying that an artificially weak currency has given China an unfair trading advantage against American competitors. The Congress recently showed its discontent with China’s $177.5 billion trade surplus by levying taxes on imports of coated paper. Although the move was largely symbolic as it comprised a tiny fraction of Sino-US trade, it was nevertheless a warning shot aimed at Chinese policymakers. Therefore, today’s announcement by the Chinese was partly diplomatic, intended to soothe tensions ahead a key meeting between Chinese Vice Premier Wu Yi and US Treasury Secretary Henry Paulson May 22-24 in Washington to discuss economic and financial issues, of which the value of the yuan will surely be a primary topic..

However, the Chinese decision may be driven as much by economic necessity as by political consideration. The move while not dramatic is a clear a gesture by the Chinese authorities signaling their willingness to move the yuan exchange rates closer to a free-floating model. The Chinese authorities now find themselves combating the growing asset bubbles in the Shanghai equity market and have become quite concerned about the possible fallout should it collapse. This policy change is just the latest attempt by the Chinese government to reign in speculative sentiment in the country by slowing inflationary pressures. Instead of simply viewing this policy change as a one off diplomatic event traders should consider the possibility that this may be a precursor to a more free-floating model of foreign exchange in China. Until recently most analysts believed that China would never consider a free –float solution given the enormous problems with non-performing loans in its banking sector. However, several years of double digit GDP growth, along with major recapitalization of its four primary banks through recent IPOs in Hong Kong, have radically changed the financial stability of this sector over the past year. With more than 1 Trillion dollars in foreign exchange reserves which most market observers believe will increase to 2 Trillion by end of 2008, China’s balance sheet appears rock solid, allowing monetary policymakers far greater freedom to entertain the idea of a more free-floating foreign exchange regime.

What does it mean for the markets?

Treasuries - China’s decision has ramifications for all of the financial markets. Notably, effects will be felt in the US treasury market as Chinese officials will likely continue their investment in US dollar based assets. Although their currency is widely managed by a basket of currencies, reducing the exposure to US treasuries, demand for US bonds will remain for the time being in controlling the band that still remains over the currency. The notion will help to suppress long term yields in the long bond market, exacerbating the already rising sentiment that Federal Reserve officials may be cutting rates at the end of the year.

Currencies - The increased demand for US treasuries and investments will be more than beneficial for the dollar, no question. However, the focus will be placed on the Japanese yen as pressure will likely come on the heels of the People’s Bank of China decision. For some time now, the global market place has demanded for further flexibility in the Chinese currency regime. Now that the trade band has been widened, economic leaders will want to see some tangible results from Japanese officials. Although central bankers have not intentionally suppressed the value of the yen, world leaders will want some answers for an undervalued currency and an increasing competitive advantage.

Stocks - The stock market should have a mixed reaction. Shares of companies such as Wal-Mart and Target have and will probably continue to be under pressure because the widening of the trading band means that their cost of imports will increase. So Wal-Mart and Target will either have to increase prices or take a cut out of profits. Comparatively shares of manufacturing companies that compete against China should rise along with shares of companies that are targets for Chinese acquisition. On one hand, the decision to widen the band would help boost the competitiveness of the American made goods on the open market as the price of Chinese exports would rise. On the other, an the same appreciated yuan makes its cheaper for Chinese companies to snap up US companies while at the same time giving them more political sway to a demanding US Congress. Both scenarios will ultimately help US companies attract investment interest as it benefits the bottom line.

Commodities - Commodity markets are set for a boost in demand for the short term as raw materials will now become cheaper for China based manufacturers. With a higher valued currency, producers and manufacturers will be able to not only afford more of the materials they need, but may increase their desire for raw materials in order to increase capacity and meet rising demand. The resultant effect will be higher prices in the commodity markets, with significant focus on base metals, especially copper and gold, and crude oil.

Is there more to come?

It was said before, and will be said again. More flexibility is on its way. Although the recent decision to widen the trading band was not as market moving as the July 21st revaluation, it shows that Chinese officials have a longer term plan to finally move the currency to a free floating status. The notion couldn’t come at a better time with global funds continuing to pile into any Chinese asset. The increase in foreign investment, a widening trade surplus and an overheated economy still leave the necessity for further adjustments in the short term, leaving the yuan to even greater appreciation.

Roubini Sees ‘Light at End of Tunnel’ of Recession

2009-10-03T20:41:00.000+08:00

By Timothy Homan

Oct. 2 (Bloomberg) -- New York University Professor Nouriel Roubini said that action by governments and central banks has led to a “bottoming out” of the global recession and that there is “light at the end of the tunnel.”

In the U.S., “there are signs right now that the recession might be close to over,” Roubini, who gained notoriety for predicting the global financial crisis, said today in Istanbul. While he sees a U-shaped recovery, there remains a “a risk” of “a double-dip recession.”

U.S. companies last month cut 263,000 workers, more than forecast, and the unemployment rate rose to a 26-year high, the Labor Department said today in Washington. Fed Chairman Ben S. Bernanke yesterday said economic growth may not be strong enough to “substantially” bring down unemployment.

“The recovery is going to be extremely anemic” in the U.S., Roubini said. “Growth will be below potential” and conditions in the labor market “are awful.”

The International Monetary Fund, which has shored up economies from Iceland to Pakistan in the past year, holds its annual meeting in Istanbul next week with its 186 member nations.

‘Deep Trouble’

“We will be dealing with the aftermath of the crisis for years to come,” IMF Managing Director Dominique Strauss-Kahn said today in a speech in the Turkish city. The IMF predicts the global economy will expand 3.1 percent in 2010, led by growth in Asia, after a 1.1 percent contraction this year.

“Right now, the main issue is the question” of reversing policies implemented to bolster economies from the crisis, Roubini said. Exiting from fiscal and monetary stimulus programs globally “is going to be a very difficult thing” and the timing of this is one of the factors that could lead to a double-dip recession.

He also said that some of the “optimism” in the financial markets “is excessive” and that the U.S. financial system is “still in deep trouble.”

For the period from 2007 through 2010, banks’ writedowns on nonperforming assets will be $2.8 trillion worldwide, the IMF said this week in its semi-annual Global Financial Stability Report. Losses on bad assets are projected to increase from July 2009 through next year by $470 billion for euro-area banks, $420 billion in the U.S. and $140 billion in the U.K., the report said.

The global economic recovery “is going to be difficult, it’s going to be slow,” Roubini said.

To contact the reporter on this story: Timothy R. Homan in Istanbul at thoman1@bloomberg.net

Last Updated: October 2, 2009 14:05 EDT

S&P 500 PE Ratio Analysis - September 2009

2009-09-22T16:41:00.000+08:00

By: Hans Wagner Tuesday, September 15, 2009 10:00 AM

The S&P 500 PE ratio is an important determinant of the value of stock market and the trend of the S&P 500. Historically, the S&P 500 PE ratio has a median of 15.7. Today, the S&P PE ratio is 139 based on a closing price of 1,044 on Friday, September 11, 2009. This assumes the trailing earnings for the S&P 500 companies as reported by Standard & Poor's for the four quarters ending June 30, 2009. A PE ratio at 139 is not sustainable. What is a reasonable PE ratio for the S&P 500 given our current situation?

The S&P 500 PE ratio reflects the performance expectations of the stock market. In the last three quarters, the PE ratio has leapt higher with the plunge in earnings of the S&P 500 companies. The fall in earnings overcame the drop in the value of shares in early March 2009.

Even with the recovery in the markets since the lows in March, the S&P 500 PE ratio remains very high as the trailing four quarters of earnings is so low. According to data from Standard & Poor's on the S&P 500, as reported earnings for 99% of all reporting companies, creates an S&P 500 PE ratio of 122.41 as of June 30, 2009. The trailing four quarters of earnings was $7.51. Two years ago the as reported earnings for the S&P 500 companies was $84.92 for the quarter ending on June 30, 2007. The S&P 500 PE ratio was 17.70. This plunge in earnings is what caused the S&P 500 PE ratio to rise so high. As shown on the chart below the S&P 500 PE ratio rose to 122 for the quarter ending June 2009. The estimates through the end of 2010 are from Standard & Poor's for earnings and the S&P PE ratio.

The U.S. has had three recessions since 1988 according to the National Bureau of Economic Research, the group that determines when the U.S. has had a recession. These recessions are depicted in red in each of the charts shown here.

Jim Rogers: I will sell all US Dollars

2009-09-22T11:03:00.000+08:00

Posted Sep 21, 2009 by ■ Andrew Moran
Outspoken investor Jim Rogers has warned for many years, like Peter Schiff and Marc Faber, that the United States economy is in total decline and that Asia is the land to put your money.

Infinite Unknown
Jim Rogers
Co-founder of the Quantum Fund and creator of Rogers International Commodities Index, Jim Rogers, told attendees at the China International Financial Services Conference (CIFSC) held in Guangzhou last week that he will sell all United States dollars, according to People’s Daily Online. For years now, Rogers has been telling media outlets and investors that he wants to get completely out of the US dollar and put his money in other sound currencies.
Rogers went on to say that the last 50 years the US government has taken a dive into astronomical debt and the each administrations continues to make the same mistakes. Rogers, who is a student of the Austrian School of Economics, has been a bull on China and commodities around the world.
In a message he has said for a long time regarding America’s economy and its currency, “[The] US dollar economy has encountered major problems, the dollar index fell to a new low, and it will continue to fall. If the dollar rebounds in the future, I will sell all the U.S. dollars. My whole family has moved to live in Asia. The story of the United States is over. A new story belongs to China.”
For several years, Rogers has urged people to learn to speak Mandarin, “It was smart to invest in Britain in 1807. It was smart to invest in the United States of America in 1907. It is now smart to invest in Asia in 2007.”
Right now, Rogers’s youngest daughter is learning mandarin and her caregiver only speaks mandarin to her.
At the conference, Rogers did not only talk about the United States but also Europe by stating they go into a vicious cycle of issue bonds – inflation, issue bonds – inflation and so on. “I will not by United States treasury bonds,” Rogers proclaimed, “because the government is constantly printing more banknotes.”
In a jest manner, Rogers believes the US will never lack US dollars. Nevertheless, he will buy oil and minerals and, of course, the stocks of those companies that “engage in a real economy.”
Author of “Hot Commodities” and economic commentator thinks the economic downturn in the US is still growing and continuing. At the present time, according to Rogers, there are more people to buy treasury bonds, interest rates will remain low but, eventually, in the long run, will dramatically rise.

Dollar becoming top carry trade currency

2009-09-16T20:21:00.001+08:00

Financial Times FT.com

Dollar becoming top carry trade currency

By Peter Garnham

Published: September 15 2009 18:49 | Last updated: September 15 2009 18:49

For years, the yen was the currency of choice to fund international carry trades. But is the dollar starting to take its place?

Analysts say negligible US interest rates, its quantitative easing measures and little sign that the country is set to withdraw from its ultra-loose monetary policy anytime soon leaves it in a similar position to Japan at the start of the decade.

Carry trade chart“This puts the dollar in exactly the same position as the yen back in 2001 and makes it naturally attractive as a carry trade funding currency,” says Simon Derrick at Bank of New York Mellon. “The dollar is the new yen.”

The carry trade strategy, in which low-yielding currencies are sold to finance the purchase of riskier, higher-yielding assets, was widely used in the years prior to the eruption of the financial crisis.

The low-yielding yen, and to a lesser extent the Swiss franc, were the most widely used as funding currencies, pushing them down to multi-year lows against a raft of currencies as risk appetite was supported by an abundance of liquidity and rallying asset markets. Indeed, both currencies rallied sharply as turbulence on global markets erupted last autumn and forced investors to unwind their positions.

But rather than lose their value as asset markets have shown renewed signs of strength and risk appetite has improved in recent weeks, both the yen and the Swiss franc have rallied against the dollar.

Indeed, the dollar fell to a seven-month low of Y90.18 against the yen earlier this week and on Tuesday hit a one-year low of SFr1.0318 against the Swiss franc.

The dollar has not just been weak against the yen and Swiss franc, however. After trading in a relatively narrow range over the summer months, the dollar was pushed out of its comfort zone last week, dropping to its lowest level for a year on a trade-weighted basis as trading volumes on the world’s currency markets moved higher.

Some analysts point to a change in dynamic that has made the dollar a more attractive funding currency to explain its recent fall.

Relationship between oil and dollar put to the test

The marriage of the dollar and oil is growing estranged, writes Greg Meyer.

The dollar index, which tracks the US currency’s progress against six others, has declined 2 per cent since late July and last week hit a one-year low. West Texas Intermediate oil, the US benchmark, has at the same time steadied between $65 and $75 per barrel.

Their divergence has snapped a longstanding correlation, for the time being at least. A weakening dollar generally accompanies higher oil prices. The International Monetary Fund said last year that over the long run, a 1 per cent depreciation of the dollar is connected to gains for oil of more than 1 per cent.

The relationship has a solid basis. Oil is bought and sold in dollars, forcing exporters to raise prices to compensate for a less potent currency. Some exporters also recycle oil revenue into other currencies. Hussein Allidina, commodity strategist at Morgan Stanley, said: “They buy Bentleys in euros and sell crude in dollars.”

Higher crude prices also worsen US trade balances, pressuring the dollar. Investors concerned that quantitative easing will lead to runaway inflation and debased currencies have also flocked to commodities as a hedge.

Many analysts predict a continuing decline in the dollar, combined with reinvigorated oil demand, will push oil prices higher. For now, an amply supplied oil market is repelling any price support from the currency. The International Energy Agency estimates oil stockpiles in highly industrialised countries were recently 4.6 per cent higher than last year’s levels, while demand is 1.8 per cent lower.

Mahmoud El-Gamal, an economics professor at Rice University in Houston, said: “Now that expectations of an economic recovery are widespread, we are back to people recognising the size of the US debt and ... fiscal deficits and back to the flight from the dollar.

“Because there isn’t enough of a rebound of real demand for oil and stockpiles have accumulated, we’re not seeing a spike in oil prices yet,” said Mr El-Gamal, co-author of the forthcoming book Oil, Dollars, Debt, and Crises: The Global Curse of Black Gold.

In the past, some big exporters have called for oil to be denominated in a basket of currencies to blunt the impact of dollar weakness, but to little avail.

José Sergio Gabrielli, chief executive of Petrobras, the Brazilian oil company, said: “The main variable to consider is the import structure of oil producing countries. If they have to buy most of their imports in US-dollar denominated prices, probably they will prefer to keep oil US denominated.”

While official US interest rates, such as those in Japan and Switzerland, are moored at levels close to zero, it is the rates on offer in the interbank market that are crucial in determining the profitability of carry trade strategies.

Last month, three-month dollar Libor lending rates fell below those of the yen and last week dropped below those of the Swiss franc for the first time since November, effectively making the dollar the cheapest funding currency.

Indeed, at just 30 basis points, three-month dollar lending rates are falling towards levels that led to two waves of yen-funded carry trades that weighed on the Japanese currency between 1996 and 1998, and then between 2001 and 2008.

The usual explanation for dollar weakness over recent months has been an improvement in risk appetite.

This weighs on the dollar as emboldened investors sell the currency to fund investments in higher-yielding assets elsewhere.

But some analysts believe this fails to adequately explain the secular drop in the dollar in recent weeks.

Indeed, Mitul Kotecha at Calyon says it is not clear that there was actually much further improvement in risk appetite last week.

The S&P 500 recorded its biggest weekly gain since July and equity volatility also declined, but other indicators painted a different picture.

Gold prices registered further gains above $1,000 a troy ounce. US Treasuries saw their strongest demand in almost two years for the $12bn 30-year note auction, while the earlier 10 year note auction also saw solid demand as well as strong interest from foreign investors.

Thus it has been a shift in funding rather than increasing confidence that has weighed on the dollar.

“A likely explanation for the drop in the dollar is that it is increasingly becoming a favoured funding currency, taking over the mantle from the yen,” says Mr Kotecha.

He says this is likely to continue to put pressure on the dollar: “Ultra-low interest rates suggests that the dollar will remain under pressure for a while yet, especially as the Federal Reserve continues to highlight that US interest rates are not going to go up quickly.”

Speculative positioning data seem to back up the shift against the dollar, revealing the extent of recent deterioration in dollar sentiment.

According to figures from the Chicago Mercantile Exchange, which are often used as a proxy for hedge fund activity, aggregate bets against the dollar versus the euro, yen, Swiss franc, sterling and the Australian, New Zealand and Canadian dollars last week rose to their highest levels since July 2008, when the dollar hit a record low against the euro.

But analysts say tracking the size of the carry trade, or whether or not risk appetite has improved sufficiently for it to return as a trading strategy is notoriously tough given the opaque nature of the currency markets.

Steve Barrow at Standard Bank says the fact that high-yielding currencies have rallied for most of this year while the traditional carry trade funding currencies – the yen and the Swiss franc – have not weakened throws up one of two conclusions.

“Either the carry trade has not returned and high-yielding currencies are strong in spite of any yield attraction, or another currency has supplanted the yen and the Swiss franc as the funding currency of choice,” he says. “If this is the dollar it could imply that the greenback is in real danger.”

Mr Barrow says it is certainly possible given the dollar’s weakness, negative positioning, and the fact that short-term US interest rates are down to Swiss and yen levels that the dollar has assumed the position of the carry trade funding currency of choice.

“It’s notoriously hard to find real data to determine the size of carry trades funded out of any currency, let alone the dollar. Hence, it has to remain the subject of conjecture,” he says. “Nonetheless, we feel that it is advisable to assume that this funding switch is happening.”

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A Currency Crisis Can Happen This Year Or Next

2009-09-14T22:49:00.002+08:00

'I Expect a Currency Crisis or Semi-Crisis': Jim Rogers
JIM ROGERS, BANKS, CRISIS, INVESTMENT, COMMODITIES, BANKING, RECESSION, DEPRESSION, OIL, ENERGY, DOLLAR, INTEREST RATE, LEHMAN BROTHERS, COLLAPSE, CURRENCY, YEN, COMMODITIES, SWISS FRANC

| 14 Sep 2009 | 07:18 AM ET
The worst of the economic crisis is not over and a currency crisis can happen this year or the next year, because the problem of too much debt in the system has not been solved, legendary investor Jim Rogers told CNBC Monday.

The current recovery is just a consequence of the fact that consumption fell so dramatically in 2008 and people have to buy things they need in 2009, Rogers told "Worldwide Exchange."

"How can the solution for debt and consumption be more debt and more consumption? How can that be the solution to our problems?," he said.

Video: Jim Rogers, CEO of Rogers Holdings, told CNBC Monday that when Lehman Brothers failed he thought “thank goodness they’re finally letting somebody collapse.”

"I would expect there to be a currency crisis or a semi-crisis this fall or next year. It's crony capitalism, Bernanke and Greenspan have brought crony capitalism to America … but that's not going to solve the world's problems," Rogers added.

There are still "gigantic amounts of horrible, horrible debt that hasn't been dealt with" in Central Europe, while hopes that China will pull the world out of recession are overblown, according to Rogers.

"China saved up a lot of money for a rainy day, it's raining and it's spending it," he said. "But China cannot pull out America or India or Europe from all this. Their economy is a 10th of the US. Hallelujah, let them do good things but they're not going to save the world."

The Federal Reserve has tripled its balance sheet and the US government's debt skyrocketed, which may cause currency problems next year, while protectionist tendencies have already started, he warned.

On Monday, China has requested World Trade Organization talks over US-imposed duties on Chinese-made tires, which China has branded protectionist.

"We're going to have some serious problems in currency markets, we're going to have serious problems in the world markets if we see protectionism rising and rising again," he said.

© 2009 CNBC.com
URL: http://www.cnbc.com/id/32837500/

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© 2009 CNBC.com

Jim Rogers on China's stocks: not the time to buy

2009-09-11T21:48:00.000+08:00

14:18, September 11, 2009

China's shares nearly doubled this year, and then plummeted 20 percent within a month. Reports asked investment guru Jim Rogers when is a good time to buy China stocks while he was attending the China International Financial Services Conference (CIFSC) held in Guangzhou on September 10.

Rogers says since 1999, he bought shares of China, and has never sold them. He believes that after ten years China stocks will still be rising, but at the same time he has sold all stocks from the other emerging market countries.

Last year in October, he bought shares in China again. But the Chinese stocks he bought were H-shares, B shares, and S shares. He has never bought A shares, since the A shares are too expensive, and perhaps one day, China's H shares, B shares, S shares and A shares will merger as one kind of stocks.

If signs of collapse appear in China's stock market, he would buy more Chinese stocks. He thinks this may occur in the near future, but not now, because although China's stock market is making adjustment, no one is selling Chinese shares in large quantities. Besides, China's stock market rose 80 percent in the past six months, prices have been too high, and I will not buy Chinese stocks at this time. After a year or two, I would consider buying Chinese stocks again.

By People's Daily Online

Copyright by People's Daily Online, All Rights Reserved

Peter Schiff on move in Gold,Silver and the US dollar

2009-09-04T21:33:00.000+08:00

Some Thoughts About the Pullback in Equities

2009-08-18T18:19:00.000+08:00

- The Big Picture - http://www.ritholtz.com/blog -

Posted By Jack McHugh On August 18, 2009 @ 1:12 am In Markets, Think Tank | No Comments

Good Evening: Global equities suffered a broad retreat today, with most of the damage centered in Asia. China in particular has been a standout to the downside of late, a situation I tried to call attention to last Wednesday. Including Monday’s 6% drubbing, the major Chinese indexes have declined 15% or more (the CSI 300, for example, is down almost 17.5%) since their intraday highs on August 4. The major U.S. averages have been slower to correct, with the benchmark S&P 500 down less than 4% since setting its high on August 7. Economically sensitive equities have been leading the way lower, and, with risk appetites are suddenly on the wane, I will offer some thoughts as to why the storm clouds of correction seem to be gathering in what was only last week a seemingly crystal blue sky. My preliminary conclusion would be that it appears sentiment has leaped ahead of the fundamentals.

With Chinese demand for commodities and the resulting economic growth figures in that nation increasingly under question last week, Thursday marked a bit of a turning point in perception. July retail sales in the U.S. were very disappointing, especially in light of the tailwind provided by the “Cash for Clunkers” program. Since U.S. consumption is the final resting place for much of the world’s excess production, the retail sales figures were particularly unwelcome in markets outside the U.S. Our markets would probably have retained their early losses on Thursday if not for some euphoric hoopla surrounding John Paulson’s reported purchases of certain financial stocks.

Mr. Paulson did indeed see the credit crisis coming — and profited handsomely from its arrival in 2007/08 — but the fanfare given his purchases of Bank of America, Regions Financial, and others seems a bit misplaced. After all, these purchases were made during the quarter ending June 30, and we have little to no idea what has become of them since that date. Furthermore, Mr. Paulson set up a separate fund vehicle in late 2008 with the expressed purpose of buying distressed financial companies. It’s hard to draw performance fees from T-Bills these days, and those investing in his new fund were likely happy to see Mr. Paulson add some fallen angels during Q2 to what might have previously been lightly populated quarterly statements. Thus, the names that caught this smart investor’s fancy are likely less a commentary about Mr. Paulson’s bullishness on the whole financial sector as it might be on the relative attractiveness of the specific companies in which he took a stake. Whatever the real story may be, the averages re-tested their August 7 highs with the ringing of Thursday’s closing bell.

Friday brought a surprising decline in the University of Michigan’s consumer sentiment survey, a fact which only underscored the nascent concern surrounding retail sales and the health of U.S. consumers. The major averages took a 1.5% tumble early Friday morning, only to have a late rally halve those losses at the close. But investors in Asian securities handled these two economic data points with far less aplomb this morning. Adding to the angst in the Far East was a less than stellar GDP report for Japan. The resulting damage then spread to Europe, and our stock index futures were indicating losses of more than 2% early this morning. Lowe’s, itself a model of retail spending, then laid an earnings egg before trading commenced in New York. Neither the first positive reading in months for the Empire manufacturing survey, nor a surprisingly decent TIC report could stem the tide of selling at today’s open.

U.S. stock market indexes were 2.5% the worse for wear within minutes this morning, and they never did recover this lost ground. The rallies were as tiny as they were brief, and an uptick in the Housing Market Index was quickly dispatched. The 50 mark is neutral, so when the wire services hailed a reading of 18 as “a new high for 2009!”, the news was properly viewed as being little more than the tallest of this year’s 8 dwarves. When the Fed later released a survey showing bank loan officers continued to tighten lending standards last quarter, it overshadowed all the other economic data points (see below). If credit is the lifeblood of economic activity, then the U.S. looks set to remain a couple of pints short until lenders once again start saying “yes!” to loan applicants.

After the early drop, stocks mostly went sideways for the rest of Monday’s session. The vaunted late day rally was a no show today, and the major averages went out with losses ranging from 2% for the Dow, to 3.5% for the Dow Transports. Treasury investors were already in fine spirits (last week’s auctions went well), and the weakness in equities further enlivened them. Yields fell between 3 and 9 bps as the yield curve flattened. The dollar enjoyed a knee-jerk, flight to quantity rally of 0.5% today, and commodities continued to sink. Hit hard last week, prices fell in every sector of the CRB today as that index posted a loss of 1.6%.

Stock Market Has Gotten ‘Overly Optimistic’: El-Erian [1]

As I left for home last Thursday evening, I really felt that what I was going to write about that night would prove useful for some readers. I had lined up both articles and data to support a conclusion that would be evident from the title alone: “Investor sentiment is way ahead of the economic fundamentals”. Alas, due to a last second change in my family’s social calendar, the bulk of the piece went unwritten. I toyed with the idea of trying to send out a brief version of it on Friday morning, but PIMCO’s Mohamed El-Erian beat me to it. As you’ll see from this story and its accompanying video, Mr. El-Erian’s comments rendered mine to somewhere just above copycat status. Given today’s worldwide downdraft in equities, however, I’ve decided to give last week’s thoughts another chance.

Massive headwinds restrain Consumer [2]
Retailers massively disappoint [3]

By the middle of last week, most economists and pundits were declaring the Great Recession over. Happier times lay dead ahead, at least in the eyes of the many economists who never saw our credit crisis coming. But I think U.S. consumers will be challenged to spend as much as they did when they had swollen amounts of equity in their homes and their stock market portfolios — not to mention access to overly easy credit. Now that equity values of all types still pale compared to those fetched only a year ago, and with credit standards still Scrooge & Marley tight, I have to agree with both Mr. El-Erian and the economists at BAC-MER when they conclude the 70% of the U.S. economy devoted to consumption will hobble GDP growth in the quarters ahead.

Investor Survey Results (an AAII exclusive) — Released August 17, 2009

Reported Date Bullish Neutral Bearish
August 13: 51.00% 16.00% 33.00%
August 6: 50.00% 14.84% 35.16%
July 30: 47.67% 20.93% 31.40%
July 23: 37.60% 20.00% 42.40%
July 16: 28.68% 24.26% 47.06%
July 9: 27.91% 17.44% 54.65%
July 2: 37.84% 17.57% 44.59%
June 25: 28.00% 23.20% 48.80%
June 18: 33.33% 20.24% 46.43%
June 11: 39.25% 21.50% 39.25%
June 4: 47.56% 15.85% 36.59%
May 28: 40.37% 11.01% 48.62%
May 21: 33.72% 20.93% 45.35%
May 14: 43.81% 20.95% 35.24%
May 7: 44.09% 22.58% 33.33%
April 30: 36.09% 20.30% 43.61%
April 23: 31.82% 29.55% 38.64%
April 16: 44.14% 20.00% 35.86%
April 9: 35.71% 20.00% 44.29%
April 2: 42.66% 20.28% 37.06%
March 26: 39.13% 18.48% 42.39%
March 19: 45.06% 16.67% 38.27%

Stock Bulls Increase as Survey Shows Most Optimism in Two Years [4]

If the foregoing analysis about the disconnect between the economic facts on the ground and the quoted prices for so many securities in the ether is on target, then what does investor sentiment tell us about the potential for a reversal of what have heretofore been growing risk appetites since March? I submit the table and article above. The table, courtesy of the American Association of Individual Investors (AAII), is meant to measure sentiment among individual investors. Unsurprisingly, this latest reading depicts the highest level of bullish sentiment since this bear market grew claws. The Bloomberg article you see below it attempts to measure the sentiment levels among institutional market participants. Here, too, are new highs, though still quite a bit below peak readings. If individuals and institutions are getting more bullish as the market goes higher, then who, pray tell, will be left to turn bullish?

Cramer: Why Media is Wrong About Market [5]

Enter CNBC’s Jim Cramer. Faced last week with what he considers undo pessimism in the media about the market in general and some of his favorite stocks in particular, the video above in defense of S&P 1000+ is nothing short of a rave. Cramer squawks so much about why everyone should be bullish that I think he should co-host with Mark Haines and Erin Burnett every morning. Cramer screams and rants that the media is simply too negative about the stock market, that investors should be thankful many of the companies mentioned aren’t going bankrupt. Agreed, Mr. Cramer; we’re all grateful. What price should we then feel safe in paying for a business where revenues are down and earnings exist only due to the type of cost cuts that can neither easily be repeated nor can be called a macro positive for the rest of the economy? His rant is a great example of just how market prices can become disconnected from reality — at least in the short run. No wonder sentiment measures peaked almost as soon as this broadcast aired. I guess no price is too high when a market is going higher, but there’s an old saying on Wall Street: “When you’re yelling, you should be selling”. Cramer was yelling last week at the highs. Hmmm; what should we at least think about doing next?

– Jack McHugh

Stocks Slide on Economy Concern; Yen, Dollar, Treasuries Gain [6]
Fed Says Banks Tightened Lending in Second Quarter [7]

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2009/08/some-thoughts-about-the-pullback-in-equities/

URLs in this post:

[1] Stock Market Has Gotten ‘Overly Optimistic’: El-Erian: http://www.cnbc.com/id/32415423/site/14081545
[2] Massive headwinds restrain Consumer : https://www.gpcresearch.ml.wallst.com//common/emaillink/pdf.asp?SSS_4146E3F48422094AB605C58F66994E29&pdf=pdf/Headwinds_constrain_consumers.pdf
[3] Retailers massively disappoint : https://www.gpcresearch.ml.wallst.com//common/emaillink/pdf.asp?SSS_BA6AA9CFFB43B938B5B88FA775E45EF6&pdf=pdf/Retailers_massively_disappoint.pdf
[4] Stock Bulls Increase as Survey Shows Most Optimism in Two Years : http://www.bloomberg.com/apps/news?pid=20601087&sid=aSYyB7dKTJRQ
[5] Cramer: Why Media is Wrong About Market: http://www.cnbc.com/id/32404887/site/14081545
[6] Stocks Slide on Economy Concern; Yen, Dollar, Treasuries Gain : http://www.bloomberg.com/apps/news?pid=20601087&sid=aNHdNnf9dDHY
[7] Fed Says Banks Tightened Lending in Second Quarter : http://www.bloomberg.com/apps/news?pid=20601087&sid=afw0L8L7C2UI
Click here to print.

Copyright © 2008 The Big Picture. All rights reserved.

Recession to end by December but mkt may correct: Roubini

2009-08-14T09:31:00.001+08:00

The US Federal Reserve in its meeting yesterday spoke about the US economy leveling out. Does Nouriel Roubini, chairman of RGEMonitor.com concur with that view?
Roubini, also known as Dr Doom for accurately forecasting the financial crisis beforehand, said the risk of the US economy slipping into a near depression had been eliminated due to the massive fiscal stimulation by the government.
“However, we are already now in the 20th month of this severe recession, the worse we have had since the last 60 years. It’s going to be over by December I believe, exactly 24 months as I had said long before.”
‘Current rally too fast too soon’
Roubini added that asset prices would have gone higher had there not been a significant rally due to the avoidance of the depression, lesser risk aversion and improvement in the global economic outlook. “The question is whether we are going to eye too much too soon, too fast compared to the improvement of the economic fundamentals and in my view there is a risk of a correction.”

Why Stocks Are Way Too Pricey

2009-08-10T08:54:00.001+08:00

By the Numbers by Jack Hough (Author Archive)

Stocks have swung so wildly over the past two years that their prices must seem to non-investors to be the product of whimsy rather than fundamentals like company earnings. The S&P 500 index, a broad basket of American shares, topped 1576 in October 2007 and plunged below 667 in March. Recently, it has loitered nervously near 1000.

Assuming the cold calculus of price/earnings ratios will soon win out over nerves in deciding the direction of shares, investors should consider what today’s P/E for the S&P 500 says about the future. Unfortunately, the numbers aren’t comforting.

Over the past 136 years, stocks have traded at an average price of just under 15 times trailing earnings. With the S&P 500 index at 1000, stocks are nearly at 25 times trailing earnings. (I’m including earnings for the second quarter of 2009 in the trailing number because most companies have already reported results for it.) So stocks look 67% pricier than usual.

Factor in Wall Street analysts' growth estimates for future earnings and there’s good news. Earnings over the next four quarters are forecast to jump 62%. By that view, stocks aren’t terribly overpriced. They’re just waiting for profits to catch up.

There’s just one problem. Analysts have historically demonstrated little ability to accurately predict earnings for the current quarter, to say nothing of the three quarters after that.

There is a more reliable way to adjust trailing earnings -- one that doesn't rely on any analyst guesswork. In their book “Security Analysis” (1934), Benjamin Graham and David Dodd recommend adjusting for swings in the business cycle by using a trailing 10-year average of earnings when calculating the market’s P/E. By my math, that puts the S&P 500 at 16.4 times earnings. Yale economist Robert Schiller, a proponent of the 10-year P/E, calculates his own version and on Aug. 3 got 17.6. Based on those measures, the market is only moderately expensive -- somewhere between 9% and 17% pricier than average.

However, the 10-year P/E could mislead if the prior 10 years produced skewed numbers. That is, if we’re coming out of 10 bubbly years, an average based on those years probably won’t reflect normality.

Have a look at the two tables below. Both show U.S. after-tax corporate profits as a percentage of national income -- the country’s profit margin, if you like -- as reported by the Bureau of Economic Analysis. The first chart includes numbers starting in 1999 and the second starts in 1929. Both end after the first quarter of 2009, when the nation’s profit margin was 7.5%. But the 10-year chart makes it look as though that level of profitability is below average, while the longer-term chart shows clearly that profits are, if anything, above average.

Even if we erase the effects of the Great Depression by starting the numbers at 1940, we get an average profit margin of 6.7%. Profits, in other words, might be 12% too high. That might seem counterintuitive given the dramatic slowing of consumer spending over the past year. In June, Americans saved 4.6% of their discretionary income up from less than 1% over four years ended 2008. But again, recent history misleads. The average savings rate going back to 1929 is 7.4%. American’s are spending sharply less than in recent years but well more than the historical average.

If we adjust the S&P 500’s trailing P/E ratio to account for the nation’s above-average profit margin, stocks are perhaps 28 times earnings or 87% overpriced.

There’s one more thing. Until now, I’ve been using a measure called operating earnings. It ignores certain non-recurring transactions like write-offs of bad debt and gains from asset sales. It’s common practice today to ignore such things based on the view that they don’t relate to ongoing business. But write-offs relate to a company’s prudence in issuing credit and the outcome of asset sales speak of the wisdom of past investments. Until fairly recently, investors counted everything when examining earnings. The 136-year P/E ratio I gave earlier (about 15) is based on as-reported earnings, warts and all, not prettied-up numbers that show what companies would have earned if not for this or that “special” event.

Besides, increasingly, the events aren’t so special. Standard & Poor’s publishes operating earnings and old-school “as-reported” earnings for its 500 index going back to 1988. In the late 1980s and early 1990s, operating earnings were sometimes less than as-reported numbers. Then companies got wise to the practice of trumpeting operating earnings to investors while quietly tucking bad news into as-reported earnings. For the past 14 years, operating earnings have been higher than as-reported earnings every quarter.

Much as I’d like to, I can’t use as-reported earnings for the market’s P/E. So devastating were bank losses over the past year that the sliver of profit left for the market would put shares at more than 130 times earnings. But if we want to make a fair comparison with the historic P/E for stocks, we should discount those operating earnings to bring them in line with what earnings used to be. Cumulatively since 1988, operating earnings have been 19% higher than as-reported earnings. If we discount trailing earnings by that much, the market’s P/E rises from 28 to about 35 -- yikes.

Keep in mind that in fiddling with trailing earnings, I’ve done only two things: adjusted for where the nation’s profit margin stands relative to its long-term average and adjusted them again to bridge the gap between dolled-up earnings and real ones. If I’ve been overly cautious -- if we assume, for example, that the nation’s higher profit margin represents a new normal and that operating earnings are, despite appearances, on the level -- we’re still back to 25 times trailing earnings. That's still two-thirds pricier than average. Meanwhile, high prices have shrunk the S&P 500’s dividend yield to 2.2%, less than half the average for stocks over the past two centuries.

Stock prices can easily rise from here, of course. The economy might expand faster than expected, inflation might devalue the money relative to all assets including stocks, or investors might simply follow one another into the decade’s third stock bubble. But prudent investors should raise cash and be highly selective in their purchases.

China reliance a risk for commodities: Roubini

2009-08-04T16:19:00.000+08:00

Mon Aug 3, 2009 6:46am EDT

By James Regan and Joseph Chaney

KALGOORLIE, Australia (Reuters) - China may have overstocked on commodities, risking a slowdown in buying and a correction in prices in the second half of this year, top economist Nouriel Roubini said on Monday, also reiterating that the global recession would continue until year-end.

Roubini, a New York University professor and one of the few economists who predicted the magnitude of the financial crisis, said he expected most commodity prices to continue a gradual recovery in step with rising general economic growth.

"The recession will continue to the end of the year," Roubini said at the Diggers and Dealers mining conference in Western Australia. But he added: "As the global economy moves toward growth as opposed to a recession, you are going to see further increases in commodity prices, especially next year."

Still, he warned there was still a risk of a second slump.

"In the short term there has been a massive stockpiling of commodities by China," he said. "My concern is that China might have accumulated an inventory of commodities that is probably excessive to the growth of their own economy."

China went on a buying spree after the global collapse in demand for oil, metals and other industrial staples, bulking up its domestic government inventories and snatching up overseas assets from Australia to Africa to Canada to safeguard growth.

A state-owned Chinese firm bought most of the assets of one of Australia's largest mining companies, OZ Minerals, in a $1.4 billion deal earlier this year.

Another, Chinalco, came close in a failed bid to double its stake in global miner Rio Tinto, after Rio struck a separate deal with fellow Anglo-Australian miner BHP Billiton.

China's refined copper imports, at 1.8 million tonnes in the first half, were up 160 percent on the same period a year earlier, while primary aluminum imports rose a stunning 16-fold. Chinese buying has helped drive up both Shanghai and London Metal Exchange prices this year, by around 80 percent on both LME and Shanghai copper and 75 percent on LME lead, 40 percent on zinc and nearly 20 percent on aluminum.

As a result, there is a risk commodities prices will slump again as China now slows its buying spree.

"The risk in the second half of this year is that the rate of accumulation in China must slow down -- one of the factors that a downside correction in commodity prices, however modest, may occur," Roubini said.

(Editing by Ben Tan)

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Dr Doom warns rally in global sharemarkets 'excessive'

2009-08-03T13:23:00.000+08:00

Elisabeth Behrmann | August 03, 2009
Article from: Dow Jones Newswires

ADVANCED economies are showing signs of bottoming in response to massive financial and fiscal government stimulus, Dr Doom says.
Dr Doom warns global shares rally 'excessive'

Risks: Economist Nouriel Roubini speaks at the Diggers and Dealers mining conference. Picture: Colin Murty
But the global economy will stay in a recession until the end of the year, says Nouriel Roubini, a prominent US economist.

"There is potentially light at the end of the tunnel, and advanced as well as emerging economies are showing signs of bottoming out of recession, but there is the risk of a double-dip recession in the second half of next year and into 2011," said Professor Roubini, a New York University economist who predicted the global financial crisis and who was dubbed Dr Doom by The New York Times.

The global economy would contract by 2 per cent in 2009, staying in a recession until the end of the year, but would grow by 2-3 per cent next year, he told delegates at the Diggers and Dealers conference in Kalgoorlie, Western Australia.

That will offer a boon to commodity prices, which should trend higher from current levels but still run the risk of a correction should the global recovery surprise on the downside.

"In addition to the green shoots, we see worrying signs. There's a risk of relapse, of a double-dip recession in the second half of next year," Professor Roubini said, tipping US house prices to contract another 13 per cent next year, on top of a drop in prices of 27 per cent since their highs in 2006.

With the US still the world's largest economy by far, consumption trends would be key for the global recovery, and signs from labour markets and the outlook for consumer demand remained worrying, he said.

"China cannot be the locomotive for global growth," Professor Roubini added.

He said he expected US unemployment to rise further to reach 11 per cent next year -- unemployment had reached 9.5 per cent in June -- and that, while the labour market continued to show signs of severe weakness, the US consumer would remain “shopped out” and keen to increase the rate of household savings.

"Industrial production is still falling due to the depletion of inventory and excess capacity," he said.

Given the massive amounts of excess capacity and glut in goods markets, deflation was the biggest risk to the global economy into next year, a scenario that would be bearish for the gold price in the short-term.

Meanwhile, massive government stimulus packages have boosted global asset markets and the recovery has weighed on the US dollar, but some of the gains "aren't on the basis of a recovery of economic fundamentals but liquidity," Professor Roubini said, dubbing the rally in sharemarkets "excessive".

With the global economy tipped to recover next year, commodity prices should benefit and trend higher.

However, there's a risk of correction should that recovery surprise on the downside, while waning Chinese restocking and strategic inventory builds during the second half of this year should take some steam out of commodity markets.

Turning to record levels of Chinese bank lending during the first half of this year, Professor Roubini said he wasn't concerned about a financial crisis on the scale of the US crisis happening in China, but said that excessive liquidity was wasteful and ultimately damaging to the economy.

The Chinese government's stepping up bank lending was necessary but it's time for the excessive lending to be scaled back, Professor Roubini told reporters.

"There's risk of non-performing loans in China but the increase in lending was necessary," he said.

VIX Watching: Flat as a Pancake Again?

2009-07-27T22:58:00.002+08:00

By Paul Amery

With the VIX (Chicago Board of Exchange Volatility Index) falling to the low 20s, it looks as though risk in the markets is subsiding again for the moment. However, whether the VIX will flatten out for a longer period is an entirely different matter.

Here’s a graph of the index from the beginning of 2007 to last Thursday’s close:

click to enlarge

The VIX is often described as the market’s “fear index” and the idea is to sell equities when it’s low (i.e., when investors are complacent) and buy when it’s high (when investors are fearful).

That’s easier said than done. If you had sold or shorted equities in January 2007, when the VIX (unbelievably, in hindsight) dipped below 10%, you’d have had an uneasy wait for most of the year until equity indices hit their high (the S&P 500 index reached its all-time intraday record of 1576.09 on 11 October). If you’d had deep enough pockets and could wait this period out then early 2007 would have been a good time to cut equity exposure.

Similarly, buying equities in October or November last year when the VIX jumped would have taken a great deal of courage in view of the general panic at the time. If you had bought, your nerves would then have been severely tested when the major indices declined further in the first quarter of this year. But, given that markets have embarked on a rally since then, buying at or near VIX levels of 80% would have paid off eventually.

Warren Buffett, anyone? His purchase of US$5 billion Goldman Sachs (GS) preferred shares in September looks in hindsight like an inspired move, though even Buffett must have been feeling nervous in November when Goldman ordinary shares hit a low of US$47.41. There was even a mini-panic in March this year that Berkshire Hathaway (BRK.A), Buffett’s investment vehicle, might be going bust, when its credit default swap spread hit over 5% per annum.

Now he’s sitting on a nice earner with income of 10% from the Goldman preferreds and warrants to buy an equal amount of common stock at US$115 per share. The bank’s shares closed last night at US$165.45, giving him a very handsome paper profit. The Wall Street Journal calculated last week that he’s up US$2.11 billion on the warrants alone, and his preferred holdings will be well in profit too as credit spreads on Goldman fixed income securities have contracted substantially since September.

Exchange-traded product investors can of course trade in volatility without taking directional bets on the equity market via iPath ETNs on VIX short-term and mid-term futures, launched in January this year.

With the decline in the VIX, these have been a poor investment so far. The indicative value of the iPath VIX mid-term futures ETN (VXZ) has fallen 15.65% since its launch on 29 January, while the value of the iPath VIX short-term futures ETN (VXX) has fallen 40.25% over the same period.

Most investors seem to prefer VXX to VXZ, by the way. The former has US$320 million invested, the latter only US$18 million.

The surprising difference between the returns of the two ETNs reflects their exposure to different maturities along the VIX futures curve. The VXX return is based on a daily rolling long position in first and second month VIX futures, while the VXZ return reflects a rolling position in fourth, fifth, sixth and seventh month VIX futures.

Because the decline in near-term futures contracts has been more extreme since January, the short-term VIX ETN has suffered accordingly in terms of price. This is the same “roll yield” effect faced by investors in ETFs/ETNs/ETCs based on commodities futures, so it’s worth being sure exactly how these instruments might perform before investing and being aware that your returns will not track the quoted spot VIX levels over time.

Whether we return to a 2007 scenario, when the VIX was flat as the proverbial pancake, is another matter. Perhaps the VIX decline is telling us that we’re approaching a top in equities and it’s time to cut back exposure—or to bargain hunt in VXX.

Original post

Roubini's Clarification, Comments on the Economy

2009-07-22T23:11:00.003+08:00

July 21, 2009
Nouriel Roubini was recently on CNBC (the video is provided below) discussing his views on the economy, and clarifying his recent comments last week that were interpreted as being more positive than earlier in the year. Some comments/observations from the interview include the following:

Roubini still believes the recession will last 24 months, causing it to be over by the end of this year.
The recovery will be weak, sub-par, and below trend, with 1% growth for a few years.
The "recovery" will feel like a recession, even if growth is positive.
The unemployment rate will peak around 11% next year.
Including partial employed/unemployed workers, the unemployment rate is over 16%.
We have seen the worst, given that the free-fall in the economy is over.
Nonetheless, even though we will not have an "L" shaped depression, we will also not have a "V" shaped recovery, and he has worries of a "W" shaped double dip recession.
The slow and lower growth are being driven in-part by current debt and spending levels.
There is a thin line as to when it is best to exit current monetary policy. This also adds risk.

A second stimulus bill is needed by the end of the year (we need to wait until later in the year to let the current stimulus start working).
The second stimulus should include more shovel-ready infrastructure projects.
If the second stimulus is too small, it will not be effective. If it is too large, the bond market will panic. He believes it should be around $200 billion.
He feels that the U.S. will be the first advanced economy to exit the recession. While China and India are seeing growth already, it will be weak until the G3 recover and start helping to drive their economies.
Equities, commodities, and credit markets have gone up too far, too fast.
There is possible downside surprise regarding marcoeconomic numbers, earnings, credit shocks.
The risk in the market is still on the downside. Investors should continue to stay away from risky assets.
The market will not test the lows of March (the levels of which were pricing in depression), but could see a sell-off below current levels and the March lows if his forecast of downward surprises in economic data come true (which he still expects to happen).

Roubini: Economic Recovery to Be 'Very Ugly'

2009-07-21T23:03:00.000+08:00

ROUBINI, ECONOMY, RECOVERY, EMPLOYMENT, STIMULUS,
CNBC.com
| 20 Jul 2009 | 05:57 PM ET

Nouriel Roubini, the economist whose dire forecasts earned him the nickname "Doctor Doom", told CNBC Monday that the economic recovery is going to be "very ugly."

"The recovery is going to be subpar," Roubini said. "I see a one percent growth in the economy in the next few years. There will also be 11 percent unemployment next year and the recovery is going to be slow. It's going to feel like a recession even when it ends."

Asked about his comments in a speech last week about the recession ending in 2009, Roubini said, "I've been saying all along the recession is going to last 24 months. It started in December of 2007 and my view is that it won't be over until December of this year."

Roubini has said those comments were taken out of context. Several business news outlets, picking up on a report initially from Reuters, cited Roubini as saying that the worst of the economic financial crisis may be over.

(Watch video for full interview)

When asked about the economy Monday, Roubini said, "We may be out of a freefall for the financial system," said Roubini. "We have seen the worst in that sense. But in my view there is a sluggish U shaped recovery that might go into a W double dip if we don't fix the problems in the economy."

Other comments from Roubini

On a second stimulus: "I think there will be another one toward the end of the year. We need to have more shovel ready labor intensive infrastructure projects. We'll need it."

On investing in today's markets: "A "Stay away from risky assets. I think from now on the surprise will be on the downside in areas like commodities."

On which country exits the global recession first: "The US should be the first, but emerging markets do have some movement."
© 2009 CNBC.com

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How High Is Too High for Commodities?

2009-07-20T20:42:00.001+08:00

By ANDREA HOTTER

LONDON -- Risk aversion is fading fast, benefiting commodities as fears of a "W"-shaped recovery recede, but market participants say the gains may be overdone.

Copper, gold and oil have all rebounded over the past several days as market bears have scrambled to unwind bets made when the global economic outlook appeared more gloomy.

At the same time, brokers, banks and speculative participants are opening their coffers to release spare cash. That fresh investment is helping to build momentum on the upside.

The markets consolidated its recent gains on Friday, with London Metal Exchange copper up about 10% and copper futures on Comex division of the New York Mercantile Exchange having rallied nearly as much .

Spot gold was up 3% and Comex gold futures gained 2.7%, while Nymex crude has gained 6.1%. Even LME aluminum, widely viewed as having the worst fundamentals of the metals complex, was up 8.6%.

Positive results from the broader corporate sector, such as Goldman Sachs Group Inc. and Intel Corp., added to the market's momentum last week. So have a weaker U.S. dollar and the illiquid summer market conditions.

Bloomberg News
But while growing willingness to take on risk bodes well for commodity markets, many industry observers feel the surge in prices is unfounded. The gains are built on a growing sense of optimism, rather than fundamental factors, they say, and will be short-lived.

"Whilst for many observers the current surge in prices may appear unfounded and entirely speculative in nature, for others there is the smell of opportunity in the air," said Alex Heath, head of base metals at RBC Capital Markets. He described investors as piling onto a "bandwagon" that is likely to lose momentum as the inevitable profit-taking kicks in.

The turnaround in the Chinese economy is impressive, with second-quarter gross domestic product rising 7.9%. Yet a closer look shows that the export sector of the Asian giant is weak.

Chinese policy makers have succeeded in reversing the slowdown in growth, but analysts are wondering how long this can be maintained. Other data on money supply, bank lending and capital inflows reveal very easy liquidity conditions, analysts noted, with concerns growing about the potential side effects.

Trading statements from commodity companies are expected to reveal that the markets are by no means out of the woods. The world's biggest aluminum producer, Alcoa Inc., kicked off earnings season with a $454 million loss -- better than expected, but still huge.

The largest platinum producer, Anglo Platinum Ltd., warned that its first-half earnings are expected to fall by 75%.

French oil company Total SA said its EuropeRan refining margins narrowed 64% in the second quarter as a result of weak demand for petroleum products, ample supplies of diesel in Europe and higher prices for heavier feedstocks. Analysts expected similar news from other European oil refiners.

These results offer only a look backward, and the third quarter could be a lot better. But the credit-rating company Fitch expects the global economic recovery to be "anemic" by historical standards, with "strong disinflationary forces for at least the next 24 months."

A slow recovery, however, doesn't seem to be preventing market participants from moving into commodities. Goldman Sachs, a huge force in the asset class, said Thursday that the sell-off seen in recent weeks "provides a compelling entry point."

Analysts expect commodities to eventually move in less of a pack, and more individually, as the fundamental factors affecting each market assert themselves.

Write to Andrea Hotter at andrea.hotter@dowjones.com

Robert Shiller Says Look Out Below! Again!

2009-07-20T20:36:00.001+08:00

Jul 19, 2009 10:46 pm
Font Size: Print EmailTweetThis
From NewsMax.com

Esteemed economist Dr. Robert Shiller was among the very few to warn of a housing bust before it happened.

Now he tells Newsmax and Moneynews.com that, although the housing market could be approaching a bottom, prices might remain in the “doldrums” for years to come as the United States remains in a “liquidity trap” comparable to the one it faced during the Great Depression.

Though stock market prices are valued fairly now, Shiller said, equities remain a “risky” investment because the United States has not turned the corner on its fiscal crisis. He warned that stock prices “could fall dramatically.”

Editor's Note: To see Dr. Shiller’s full video interview, Go Here Now.

Shiller is the co-creator of the closely watched S&P/Case-Shiller Home Price Indices. His books include "The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do About It."

During an interview in 2006 with Newsmax’s Financial Intelligence Report, Shiller accurately warned of a looming price bust in housing. During a recent interview, Newsmax.TV’s Dan Mangru asked Shiller where he sees the housing market going from here.

"In the United States, home prices have been dropping at a rapid clip," Shiller responded.

"However, in the latest S&P/Case-Shiller data, the rate of decline seems to be reduced, and in fact, in seven of our 20 cities, home prices were rising in April. So it does seem to me that we are getting closer to a bottom at the very least."

Last week, demand for home-purchase loans decreased and the unemployment rate now stands at 9.5 percent, Mangru pointed out, and asked: Are home buyers just scared?

"I think having really high unemployment is naturally scaring people," Shiller said.

"And we don't know that it's over yet. We had a really bad unemployment report, and unemployment could easily exceed 10 percent. People know that. That's one reason the personal savings rate has risen to 6.9 percent, levels we haven't seen in decades.

"Even though the confidence surveys seem to be relatively upbeat, I don't know if it really translates into willingness to purchase yet."

Unlike other analysts, Shiller doesn’t believe the key to a U.S. economic recovery lies in the housing sector. He argues that the United States should first get its credit markets in order and get banks lending money again.

He told Newsmax.TV he doesn’t think some proposals calling for increased tax credits for all home buyers is a good idea.

He sees the $8,000 tax credit for new home buyers as stimulative because it forces new home buyers into the market rather than existing homeowners who would put their existing properties up for sale.

In discussing the overall economy, Shiller said the United States had avoided an economic “catastrophe” because of intervention by the Federal Reserve and Treasury, but the nation remains in a “bad recession.”

Instead, Shiller foresees a “risk of a weak economy for years to come.”

He advises conservative investors, especially those who are retired and on fixed incomes, to be wary of stocks.

Shiller compared the country’s economic crisis to the same “liquidity trap” the United States faced in the Great Depression. The federal government needs to pump more economic stimulus, via increased spending or tax cuts, into the economy, he said.

He thinks the first stimulus wasn’t enough and has unwound too slowly.

Asked whether he sees the Fed's increase of the nation’s monetary base as inflationary, Shiller said no, at least for the near future.

However, he suggested that the economy could face “the possibility of substantial inflation” a “few years down the road.”

He believes that investing in commodities is a “smart thing to do,” regardless of whether inflation hits.

Editor's Note: To see Dr. Shiller’s full video interview, Go Here Now.

Will China pull America out of the recession?

2009-07-16T19:23:00.000+08:00

July 14, 1:22 PM · Alex Floum - Economic Policy Examiner

Many people - including me - hope that China's economic recovery will pull America out of the recession.

Will it work?

There are, indeed, many positive and bullish signs coming out of China.

But a fuller analysis shows that the picture is more complicated than many think.

For example, many commenatators points to China's enormous purchase of commodities as a sign that it has already recovered from its recession. China's commodity purchases have, in fact, been impressive.

For instance, China has bought up well over 90% of the world's supply of rare earth metals. See this, this and this.

And China's commodity purchases have, indeed, buoyed the economies of other countries, such as Australia.

However, a leading China commentator argues that the West has misread the meaning China's commodity buying spree:

Andy Xie, a Sino-bear and commentator for Caijing, said Western analysts are in for a rude shock if they think that China's surging demand for raw materials implies genuine recovery.

Commodity speculators have been using cheap credit to play the arbitrage spread between futures and spot on the oil markets. They have even found ways to trade lumber to iron ore by sheer scale of leverage. "They've made everything open to speculation," he said.

Mr Xie thinks the spring recovery is an inventory spike, to be followed a double-dip downturn into next year as stimulus wears off.

Moroever, there are indications that China's buying spree may be ending:

A key state planning official has signalled a halt to government buying of copper, aluminium and other high-value metals because prices have risen too high.

"We don't anticipate that the country will continue to build its reserves," said Yu Dongming, the head of the metallurgical department of the National Development and Reform Commission...

Zhang Bin, an economist with the Government's most influential advisers, the Chinese Academy of Social Sciences, warned that Beijing was leaning against Chinese speculative buying of a range of commodities including Australia's most lucrative exports, coal and iron ore.

"The commission is acting to reduce pressure on commodities prices and discourage over-production in heavy industry, including guiding steel production and reducing the building of excess capacity," Dr Zhang told the Herald.

"Too much increase in inventories of commodities is not a good thing because the economy is still not that strong and cannot consume this level of imports of iron ore and coal."

But what about stocks? China's stock market has recently outperformed that of many other countries.

As the Telegraph's Malcolm Moore notes:

Half of the 5.8 trillion yuan (£522bn) of stimulus loans issued by Chinese banks have flowed into the country's stock and property markets, inflating new bubbles, according to senior Communist officials

But there are indications that the Chinese government might curtail the bubbles, which could take the wind out of the Chinese stock market. See this and this.

The Telegraph's Ambrose Evans-Pritchard argues:

China's banks are an accident waiting to happen...

Fitch Ratings has been warning for some time that China's lenders are wading into dangerous waters, but its latest report is even grimmer than bears had suspected.

"With much of the world immersed in crisis, China appears to be one of the few countries where the financial system continues to function largely without a glitch, but Fitch is growing increasingly wary," it said.

"Future losses on stimulus could turn out to be larger than expected, and it is unclear what share the central and/or local governments ultimately will be willing or able to bear."

Note the phrase "able to bear". Fitch's "macro-prudential risk" indicator for China threatens to jump from category 1 (safe) to category 3 (Iceland, et al). This is a surprise to me but Michael Pettis from Beijing University says China's public debt may be as high as 50pc-70pc of GDP when "correctly counted".

The regime is so hellbent on meeting its growth target of 8pc that it has given banks an implicit guarantee for what Fitch calls a "massive lending spree"

And Bloomberg gave a mixed picture on China on June 1. After reviewing all of the bullish indicators, Bloomberg argued:

China’s banking sector is facing “grim credit and market risk” as corporate earnings fall because of an over- concentration of lending in certain industries and regions, the China Banking Regulatory Commission said today in its 2008 annual report.

Real estate is among industries that may default on loans, causing growing pressure on Chinese banks after economic growth dropped to the weakest in almost a decade, the statement said.

Similarly, Michael Panzner, after summarizing many positive signs, wrote:

Is the China recovery story all it's cracked up to be? Evidence suggests that might not be the case, and that the economic outlook remains less-than-upbeat, to say the least.

Ironically, another report published on Monday by the China Banking Regulatory Commission offers one reason for pessimism. According to the CBRC (via Dow Jones), "the country's economy faces growing downward pressure as the global financial crisis has yet to run its course." The regulator added that "the banking industry faces 'serious' credit and market risks as the domestic economy encounters its 'most difficult year in the new century.'"

That's not all. In a statement released today, a Chinese government official noted signs of trouble in a key sector. Vice Minister of Commerce Zhong Shan warned "exporters were facing 'unprecedented difficulties' at present and that the situation would not improve amid the global economic downturn," Reuters reported. 'It is increasingly difficult for us to make a quick turnaround, and the trade situation will not be optimistic in the second half of this year,' Zhong said in a statement on the ministry's website."

At least one closely watched data series also casts doubt on the notion that an economic revival is at hand. Last week, Reuters wrote that "the decline in China's power output accelerated in the first 10 days of May to 3.9 percent from a year earlier, the influential Caijing Magazine reported on Monday, providing the latest evidence that the Chinese economic recovery still lacks a solid footing."

In addition, "nationwide electricity consumption via major grids had fallen 4.3 percent in the first 10 days of May, also 0.7 percentage points sharper than that for the last 10 days of April, it said, confirming earlier local media reports. The power data is considered by some as more of a leading indicator than manufacturing and export data."...

According to the London Evening Standard, a leading energy analyst found strong evidence that the run-up in oil prices in recent weeks stemmed from stockpiling, or hoarding, by the Chinese. Neil McMahon of Bernstein Research concluded that the rise "'reflects not strengthening demand, but rather China's efforts to boost its strategic petroleum reserve."

Even businesses with potentially more of a direct stake in China's domestic economy are questioning the Asian nation's near term prospects. Citing the latest issue of Woman's Wear Daily, Bloomberg reported that U.K. luxury retailer Harvey Nichols plc is "staying away from mainland China as most consumers don't earn enough to buy its fashions and real estate prices in big cities are too high."

In sum, while the nation's growth strategy and comparative advantages may eventually prove the optimists correct, right now, at least, the China recovery story seems to have lots of holes in it.

Leading China expert Michael Pettis analyzed a Financial Times article written by Wang Qishan – Vice premier in the State Council and "presumably one of the top three or four economic policy decision-makers in China":

It starts out, correctly I think, by warning that the global crisis is far from over. “The global financial crisis is still spreading,” Wang warns, “The world economy is going to get worse before it gets better, and the situation remains serious.” ... China is the country that most desperately needs foreign demand to absorb its excess capacity. In a world of contracting demand, China is the country that is most likely to suffer from protection, for the same reason that it is the country that benefits most from absorbing other country’s badly-needed demand. In that case it is not enough to say that China is just doing what everyone else is doing (and never mind that it is much harder for foreigners to invest in China or sell to China than it is for China to do either abroad), since any dispute that resolves itself in greater trade protection hurts China worse than it hurts the other disputant...

Pettis then went on to respond to the statement by Chen Deming, head of China’s Ministry of Commerce, that Chinese exports need to remain the main engine in the Chinese economy:

I think in one sense Minister Chen is right – foreign demand is still the engine of Chinese growth – which is one of the reasons I am so pessimistic about medium-term growth . . . The fact that the editorial and the original article from which it was draw were both published, and seem to be arguing a case, gives some indication, I think, of the ferocity of the debate taking place about the nature of the stimulus package. One side says: Before we can fix the economy we need relief, and that is most likely to happen by reinforcing the existing economic structure. The other side says: The longer we take to postpone the adjustment, the worse. For the other side of the debate, Hu Shuli in last week’s Caijing insists that “Beneath the surface of China’s ‘warming’ economy are structural impediments to long-term growth that demand attention – now.” She dismisses the recent optimism about China’s “bounce” back with “The ‘warnming’ is more show than substance.” and she goes on to say:

Since we know that credit expansion is not the best economic healer, we should spend the coming days thinking about long-term approaches that will help China survive the crisis and pursue lasting development.

China is being forced to rebalance. It’s clear that, regardless of the angle from which we examine the situation, our economy is being squeezed by internal and external crises. Excessive consumption in the United States is a root cause of the global financial crisis. Instead of complaining about this fact, or even quietly congratulating ourselves, China must consider what to do if the United States learns its lesson and, for example, gradually raises its household savings rate. If external demand for Chinese goods is declining, how can internal demand rise?

At this juncture, structural adjustment should not be empty talk. It must involve a series of basic policies that deepen the nation’s economic reform. Structural adjustments can only follow the market’s lead and, for the most part, involve breaking up monopolies, opening the market wider, relaxing controls, and getting the pricing mechanisms right.
Instead of betting even more heavily on foreign demand to bail China out, in other words, China must urgently move towards policies that force the transition, even if those policies are painful in the short term. And it is not just Caijing that is voicing criticism about the current stimulus policies. A number of very prominent Chinese economists have been scathing (at least in private, so I cannot reveal their names) about the failure to have taken the appropriate steps when conditions were optimal, and are now insisting that to continue increasing reliance on foreign demand is going to create huge problems for China. Increasingly I am hearing people here say that, although few expect a “collapse”, whatever that means, China is facing its own “lost decade” of sub-par economic growth and a very difficult transition. As regular readers know, I am very inclined to agree.

So are the signs on balance good or bad for China?

China's economy does seem to be recovering more quickly than that of most other nations. But its recovery is not simple or without complications.

Investing in China: There are likely excellent investing opportunities in China today. But without the guidance of an expert on Chinese investments, putting your money in China might be a little like playing darts while wearing a blindfold.

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Alex Floum is an Examiner from the National Edition. You can see Alex's articles at: "http://www.Examiner.com/x-8198-Economic-Policy-Examiner"
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Roubini: Slow Recovery Starting

2009-07-15T21:40:00.001+08:00

Tuesday, July 14, 2009 8:17 AM

By: Julie Crawshaw Article Font Size

The pace of contraction is slowing, which means the economy is beginning to sort of recover, economist Nouriel Roubini said.

"After the sharp contraction in economic activity in 2009, growth will reenter positive territory only in 2010, and then at a very sluggish rate, well below potential," Roubini wrote in his blog at RGE Monitor.

Even if economic activity stops contracting by the end of 2009, that might not mark the official end of this recession, Roubini said.

“Recessions are not measured exclusively by GDP contractions,” he said.

“Unemployment, industrial production, real manufacturing, wholesale retail trade sales and real personal income (less transfer) are all considered when it is time for the National Bureau of Economic Research (NBER) to put dates around recession periods…,’’ Roubini said.

“U.S. real GDP will stop contracting at the end of 2009, but it is likely that many of the above indicators will not bottom out (or peak, in the case of unemployment) before mid-2010.’’

The Federal Reserve’s Open Market Committee recently voted to maintain the target federal funds rate for interbank lending at a record-low range of zero to 0.25 percent, and reiterated that it’s likely to keep rates at low levels "for an extended period" of time.

"I guess it's a committee that's decided they're content with what they've done and content to wait longer and see what effect these programs are having on the economy," Michael Feroli, economist at J.P. Morgan Chase, told The Wall Street Journal.

© 2009 Newsmax. All rights reserved.

Chinese pension fund may cut equities holdings: analysts

2009-07-14T17:03:00.000+08:00

BEIJING, July 14 (Xinhua) -- China's national pension fund, the Social Security Fund, may cut its stock holdings in the second half to avoid risk, as Chinese stock market climbed 63 percent this year and might have reached ceiling, analysts said Tuesday.

The fund, which is estimated to have invested around 16 percent of its 660 billion yuan (96.63 billion U.S. dollars) worth assets in stocks in the first half, had made a profit of 51.2 billion yuan (7.53 billion U.S. dollars), or 9.99 percent gains, from equity investment in the first half this year, according to a statement it released Friday.

"The market performance in the second half may be more volatile than the first half due to the uncertain macroeconomic outlook, hence the fund may cut its capital market holdings slightly," Liu Mingjun, fund analyst of China Cinda Securities, was quoted by China Daily as saying on Tuesday.

Bao Qing, analyst with Shanghai-based Donghai Securities, agreed with Liu, saying that the fund's better-than-expected performance in the first half and the volatility of the market in the coming months may see the fund cut its stock holdings slightly to ensure safer investment returns.

But analysts pointed out that the cut might not be that significant considering the fund's role as a market stabilizer, said the newspaper.

"The stock holdings of the fund is estimated be around 16 percent of its total portfolio in the first half, which is very low compared to some mutual funds, who invest as much as 70 percent of their portfolio in stocks," said Liu. "There is not much room for a big cut," he said.

The P/E Ratio Is Dead

2009-07-13T20:30:00.000+08:00

Published in Investing Strategy on 13 July 2009
2 comments

The cyclically adjusted P/E ratio is a better indicator of a cheap investment.

The conventional P/E ratio has two advantages; its ease of calculation (the current price of an asset, or market, divided by its historic earnings), and its ubiquitous use.

Although frequently quoted as an indicator of market valuation, and potential future returns, it has an irritating flaw; in boom times when earnings are high the P/E can appear reasonable and in times of bust the P/E can appear expensive.

Since profits revert to a mean over an economic cycle, it would appear more rational to smooth the P/E ratio to take account of this cycle and give a fairer picture of value. This is the objective of the cyclically adjusted P/E ratio (CAPE), and it has proved to be a reasonable indicator of future returns.
A long and profitable history

Warren Buffett attributes much of his success to learning investment from Benjamin Graham, the 'dean of Wall Street' and CAPE is first mentioned in his seminal work, "Security Analysis", published in 1934. In the book Graham, and co-author Dodd, recommended a CAPE using a moving average of earnings over not less than five, and preferably seven or ten years.

Try as I might, I can't find much evidence to suggest that Graham and Dodd provided extensive research into just how much better CAPE was to its alternative. In any case ,it appears to have been neglected for much of the 20th century until Yale professor Robert J. Shiller.
Irrational exuberance

Shiller developed the concept for his analysis of markets from the early 1990s, which culminated in his ground breaking book "Irrational Exuberance". Published with impeccable timing in 2000, it predicted a decade of low returns based on CAPE. Coincidentally, he also published a book on US housing in 2005 which forecast -- you guessed it -- substantial falls in that market. Shiller is worth listening to!

The validity of using CAPE as an indicator of long-term returns was demonstrated by Shiller in a 1996 paper, "P/E ratios as Forecasters of Returns". Further evidence of the power of CAPE, this time applied to individual shares, was provided in a book by analyst James Montier, "Behavioural Investing".

Montier and a colleague applied CAPE to buying (and short selling) low and high P/E shares from 1980 to 2005 using the MSCI World Index. The ten-year CAPE was significantly better at selecting under priced, and over priced, shares then the conventional P/E ratio. In fact, CAPE outperformed the market by 13% a year, compared to 5.5% outperformance using a one year trailing P/E.

In 2007, when the conventional P/E ratio was signalling the UK market to be fair value, renowned analyst Andrew Smithers, who uses the ten-year CAPE, argued that the UK market was 68% overvalued. Now that the market has retreated from those heights, it may well be appropriate to look at what the current CAPE is and what, if anything, it is signalling.
Is the UK market good value?

The current CAPE is near its long-term average and is signalling the market is fair value, but there may be better buying opportunities.

First of all a caveat. CAPE averages are only applicable to the US market and the S&P 500 in particular, where they can be calculated back to 1881. Because of changes in taxation, reliable earnings per share (EPS) over the long term, equivalent figures are unavailable for the UK market. However, since the UK has a high correlation with the US market, CAPE-based indicators should remain valid for the UK investor.

The long-term average of CAPE is about 16. In March, at the recent market low, CAPE reached 11.4 about 14% below the median low level of the last 26 recessions.

At the time of writing, CAPE stands at 15.3. Indeed for the last seven or eight months it has been below the average level. For the first time in 17 years. Yes, that's right. 17 years! This is certainly no hair-triggered daily, momentum type indicator we are talking about here.

So is the market a screaming buy? No. The consensus among CAPE followers seems to be that the market is about fair value. Business Insider's Henry Blodget reckons "over the next couple of decades, the S&P 500 will deliver an average long term return (6%-7% real)".

Meanwhile, the man himself, Robert J Shiller, reckons that CAPE may well overshoot on the downside. He'd start filling his boots when the CAPE hits 10 or less.

How do I see it? Well, the peak of CAPE in 2000 was 45, in 2007 it was 28. Now it's about 15. I'm inclined to invest now. As The Economist pointed out on 12 May, "anyone who bought shares in 1931, well before the market bottom the next year, still earned 6.9% over the next ten years. Almost bang on average." I love average.

All of Shiller's extensive data is available free on his website in excel format. You can also play around with a useful little calculator which reveals historic future returns on the S&P 500 at various ten-year CAPE levels.

Britain can’t afford another fiscal rescue, warns IMF

2009-07-12T17:04:00.003+08:00

Britain can’t afford another fiscal rescue, warns IMF
LONDON, July 12 — Britain is the world's only leading economy unable to budget for any kind of economic rescue package next year, the International Monetary Fund has warned.

In calculations that will spark further criticism over the state of the public finances, an IMF paper presented to world's leaders has laid bare how the UK's indebtedness has left it unable to provide the vital stimulus the economy could need over the next 18 months.

Every other G20 country apart from the UK and Argentina has been able to budget for temporary spending increases or tax cuts next year to help drag their economies out of recession, according to the paper, presented to a recent G20 meeting in Basel. Even Germany, whose finance minister Peer Steinbruck has accused the UK of "crass Keynesianism", plans to spend a full 2 per cent of its economic output on such measures next year.

The news underlines the fact that with Standard & Poor's having warned recently about the parlous state of the UK accounts, Britain has very little leeway to afford new emergency measures. However, sceptics will warn that it also makes it doubly likely that in the pre-Budget report this autumn the Chancellor will announce extra measures to keep Britain in line with its G20 counterparts.

The UK entered the recession with the worst structural budget deficit in the Western world, leaving it with little room to borrow in order to lessen the impact on profits and unemployment. Although the IMF last week said it now expects the British economy to return to growth next year, its calculations over the implications of the deficit underline the fact that any recovery will be tepid.

A Treasury spokesman said: "As the Chancellor has repeatedly said, we are supporting the economy now while living within our means, including by halving the deficit over five years."

As Labour and the Conservatives prepare themselves for a likely general election next June, political debate has become dominated by their respective plans to cut spending over the coming years. However, the IMF figures underline the fact that even before the threat of spending cuts, Britain is facing a comparative squeeze next year because of its fiscal position.

According to the IMF calculations, Britain is spending 1.5 per cent of gross domestic product on emergency measures this year, largely constituting the temporary VAT cut. This compares to 2 per cent in the US, 4.1 per cent in Russia and 2.7 per cent in Japan. The average stimulus within the G20 next year is 1.6 per cent, compared with Britain's zero per cent contribution.

The IMF has already warned the Government that its plans to cut public debt do not go far enough. In its most recent assessment of the UK economy, the IMF said the Chancellor must start paying back debt significantly earlier than projected in April's Budget. The organisation favours sharper spending cuts and bringing the Budget back into balance over an electoral term.

The Organisation for Economic Cooperation and Development has also made grim predictions about the state of Britain's public finances. It is forecasting the fiscal deficit next year will climb to 14 per cent of GDP, higher than Ireland or Iceland, and the worst in the industrialised world. — Daily Telegraph

Roubini and Shiller on U.S. Economy

2009-07-11T22:26:00.003+08:00

by CalculatedRisk on 7/11/2009 09:03:00 AM

A little Saturday morning video ... offered without comment.

Bloomberg - Roubini Says U.S. Recession Will Last Six More Months (Click here for full video)

00:00 Outlook for the U.S. economy, recession
07:07 Reasons for current economic condition
11:50 Unemployment rate; fiscal consolidation
18:29 Case-Shiller Index; green shoots in housing
30:05 Second stimulus package; consumer spending
34:43 Roubini, Shiller respond to questions.

Here is a short preview ...

A Spike In The Equity Risk Premium Suggests The March Lows Should Hold

2009-07-11T22:21:00.000+08:00

Last quarter, we dusted off the “Fed Model” to look at historical risk premiums and their relationship to earnings. At the commencement of earnings’ season we shall once again return to the Fed Model and examine the market reaction to spikes in risk premium.

Robert Schiller of Yale University has done extensive work on the P/E ratio of the S&P 500. Moreover he is gracious enough to post online his raw historical data on both the S&P 500 and long term bond yields. It is from this data that we have drawn the following analysis.

As a refresher, the term “Fed Model” was coined by Ed Yardeni when he referenced research the Federal Reserve conducted on the equilibrium between the yield on 10 year Treasuries and the earnings yield of the S&P 500 index. Simply stated, the Fed model suggests that the yield on 10 yr Treasuries should be equal to the earnings yield on the S&P 500. The earnings yield is simply the P/E ratio upside down or earnings divided by price.

more...

Soros Says China Will Help World Economy Recover From Recession

2009-07-11T11:04:00.004+08:00

By Katherine Burton and Thomas R. Keene

July 8 (Bloomberg) -- Billionaire George Soros called China “a positive force” that will help drive growth as the world emerges from the current economic crisis.

“For China, the crisis is something affecting them from the outside,” said Soros, 78, in a Bloomberg Radio interview. “They can stimulate their economy. They have reserves. They have a trade surplus. They will be one of the motors of the world economy.”

Soros, who is no longer involved in the day-to-day operation of his $24 billion New York-based Soros Fund Management LLC, has said the growth rate of the last 25 years won’t resume.

The International Monetary Fund said the global economic rebound next year will be stronger than it forecast in April as the financial system stabilizes. The Washington-based lender said in a revised forecast released today that the world economy will expand 2.5 percent in 2010, compared with its April projection of 1.9 percent.

China’s growth is forecast to accelerate to 8.5 percent next year, a percentage point more than the IMF expected in April, after slowing to 7.5 percent this year.

Soros warned that the current crisis won’t be solved only by boosting consumer and business confidence. U.S. banks are still holding a lot of bad assets and that will weigh on the economy, he said.

“There is a part of reality that can’t be manipulated,” he said.

Soros’s Quantum Endowment Fund has returned almost 18 percent this year through May after climbing 8 percent in 2008.

The financial crisis, which started with the collapse of the U.S. property market in 2007, has triggered more than $1.47 trillion of writedowns and credit losses at banks and other financial institutions and sent the global economy into its first recession since World War II, according to data compiled by Bloomberg.

Hedge funds are largely unregistered pools of capital that cater to wealthy individuals and institutions and allow managers to participate substantially in profits from investments. They try to make money in rising as well as falling markets.

To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net; To contact the reporters on this story: Thomas R. Keene in New York at tkeene@bloomberg.net;
Last Updated: July 8, 2009 15:07 EDT

Jim Rogers Sells Dollars, Plans to Short Treasuries (Update2)

2009-07-06T20:50:00.002+08:00

By Bob Chen

July 6 (Bloomberg) -- The dollar and U.S. Treasuries are both likely to slide as soaring government debt in the world’s biggest economy undermines confidence in its assets, according to Jim Rogers, chairman of Rogers Holdings.

“The government is printing lots of money and borrowing even more; that’s not the basis for a sound currency,” he said in a telephone interview today from Singapore. “The idea that anybody would lend money to the U.S. government for 30 years at 3 or 4 or 5 or 6 percent interest is mind-boggling to me.”

Rogers, the author of books including “Investment Biker” and “Adventure Capitalist”, said he holds fewer dollars than a year ago and plans to “short U.S. government bonds someday.” A short bet involves selling a security you don’t own with a view to buying it back after the price has fallen.

The U.S. is stepping up debt sales to finance a record budget deficit as it tries to spend its way out of a recession and that’s causing the supply of the securities to balloon. After more than doubling note and bond offerings to $963 billion in the first half, another $1.1 trillion may be sold by year-end, according to Barclays Plc, one of the 16 primary dealers that are obligated to bid at Treasury auctions.

U.S. debt lost 4.46 percent through June, according to Merrill Lynch & Co.’s U.S. Treasury Master index.The yield on benchmark 30-year notes reached 4.84 percent on June 11, the highest since 2007, and was 4.31 percent as of 2:02 p.m. in Tokyo. It sank to 2.51 percent in December, the lowest since sales of the security began in 1977, as the economic slump fueled demand for the relative safety of government bonds.

Swiss Franc, Yen

ICE’s Dollar Index, which tracks the greenback against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, has declined 1.2 percent so far this year after gaining 6 percent in 2008. It reached a three-year high of 89.62 in March and was recently at 80.37.

Rogers said he recently bought the Swiss franc and within the Asia-Pacific region his currency holdings include yen, Singapore dollars, China’s yuan as well as the Australian and New Zealand dollars. The Swiss franc reached this year’s low of 1.1965 per dollar on March 13 and recently traded at 1.0869.

Rogers, who predicted the start of a global commodities rally in 1999, forecast resources will again climb, saying they are one of the few asset classes where “fundamentals are improving.” The Reuters/Jefferies CRB Index of 19 raw materials has gained 7.1 percent so far this year, after losing 36 percent in 2008. It almost doubled in the nine years through 2007.

Sri Lanka, China

Stocks in Sri Lanka are the only equities Rogers said he would consider buying at the moment, adding that he plans to hold on to his holdings in China for many years to come.

Sri Lanka’s stock benchmark, the Colombo All-Share Index, has jumped 60 percent this year as the government’s defeat of the rebel Liberation Tigers of Tamil Eelam ended 26 years of fighting on the island. Only China’s Shanghai Composite Index has done better in Asia, surging 70 percent as the government’s 4 trillion yuan ($586 billion) stimulus plan helped combat an economic slump.

“Selling Chinese shares in 2009 would be like selling U.S. ones in 1909,” Rogers said. “My children were born in 2003 and 2008 and I expect them to hold my shares someday.” Rogers said he last added to his holdings of Chinese shares in the fourth quarter of 2008 and has not bought any stocks at all this year.

To contact the reporter on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net
Last Updated: July 6, 2009 01:05 EDT

Both Citigroup (C, C.P) and Berkshire Hathaway (BRK.A, BRK.B) continue to violate the law of one price.

2009-07-06T20:36:00.001+08:00

Citigroup

In previous posts (this is the most recent), I’ve pointed out that there are three ways you can purchase common shares of Citigroup:

* Simple: Buy shares of common stock.
* Preferred: Buy shares of preferred stock that will convert into common.
* Synthetic: Use call and put options to replicate the financial returns of owning common stock.

In a perfect world, these three approaches would give nearly identical prices. That’s the law of one price.

Over the past few months, however, Citi securities have been breaking that law. Investors who have been buying common shares have been significantly overpaying relative to the values implied by the prices of the preferred stock and options.

Those pricing differences have declined somewhat over time as the likelihood of the preferred conversion has risen and as the closing date has gotten closer (the offer expires July 24 and closes the following week).

Nevertheless, the spread in prices remains substantial. At Thursday’s closing prices you could have bought 1,000 shares of Citigroup for three different prices (using price quotes from Yahoo and ignoring transaction costs):

* Simple $2,880
* Preferred $2,517
* Synthetic $2,650

Note: The preferred calculation is based on the Series F, while the synthetic is based on options that mature in September 2009 with a strike price of $3.

In other words, investors in the common stock appear to be overpaying by as much as 14% relative to investors in the preferred. That’s down from the 18% I calculated in my previous post, but it is still much wider than normal for these kinds of deals.

As best as I can tell, the only explanation for this anomaly is the difficulty of shorting Citigroup common stock, coupled with some clientele effect that leads certain investors (presumably not the “smart money”) to buy only the common.

Berkshire Hathaway

Berkshire’s pricing anomaly is small compared to Citi’s, but still interesting. As I discussed in my original post, the source of the anomaly is that Berkshire Hathaway has two classes of shares: A and B. The B shares receive 1/30 the economic payoff of the A shares (there are also some differences in voting rights).

As a result, you might expect that the price of an A share should be about 30 times the value of a B share — the law of one price in action. And you would be right; the prices have often traded around a 30:1 ratio since the class B shares were introduced. But not always.

In recent months, for example, the ratio has increased noticeably, with Class A shares trading at a notable premium to the Class B:

Berkshire July

On Thursday, the ratio finished the day at 30.8. The A shares closed at $89,384, while the B shares closed at $2,893. At that price, 30 B shares would cost you $86,790, almost $2,600 less than a single A share. If you think that the prices will converge, you might be able to profit by shorting an A share and buying 30 B shares (that’s not a recommendation, and no I haven’t tried).

I originally thought the Berkshire anomaly might be a sign of stress in the financial markets; notice, for example, how the spread widened in the summer of 2007 and the fall of 2008. More recently, however, the wide spread has persisted despite calmer financial conditions. That suggests that the spread is being driven by Berkshire specific factors. A leading hypothesis — as suggested in several emails from readers — is that it may be related to Warren Buffett’s donation of Class B shares to the Gates Foundation.

Disclosure: As research, I am currently long a small amount of Citigroup preferred and short some call options on the common. I have no positions in Berkshire securities.

It’s back to the 1930s for US economy — Paul Krugman

2009-07-04T09:52:00.000+08:00

JULY 4 — OK, Thurday's jobs report settles it. We're going to need a bigger stimulus. But does the president know that? Let's do the maths. Since the recession began, the US economy has lost 6.5 million jobs — and as that grim employment report confirmed, it's continuing to lose jobs at a rapid pace.

Once you take into account the 100,000 plus new jobs that we need each month just to keep up with a growing population, we're about 8.5 million jobs in the hole.

And the deeper the hole gets, the harder it will be to dig ourselves out. The job figures weren't the only bad news in Thursday's report, which also showed wages stalling and possibly on the verge of outright decline. That's a recipe for a descent into Japanese-style deflation, which is very difficult to reverse. Lost decade, anyone? Wait — there's more bad news: the fiscal crisis of the states.

Unlike the federal government, states are required to run balanced budgets. And faced with a sharp drop in revenue, most states are preparing savage budget cuts, many of them at the expense of the most vulnerable. Aside from directly creating a great deal of misery, these cuts will depress the economy even further.

So what do we have to counter this scary prospect? We have the Obama stimulus plan, which aims to create 3.5 million jobs by late next year. That's much better than nothing, but it's not remotely enough. And there doesn't seem to be much else going on.

Do you remember the administration's plan to sharply reduce the rate of foreclosures, or its plan to get the banks lending again by taking toxic assets off their balance sheets? Neither do I.

All of this is depressingly familiar to anyone who has studied US economic policy in the 1930s. Once again, a Democratic president has pushed through job-creation policies that will mitigate the slump but aren't aggressive enough to produce a full recovery. Once again, much of the stimulus at the federal level is being undone by budget retrenchment at the state and local level.

So have we failed to learn from history, and are we, therefore, doomed to repeat it? Not necessarily — but it's up to the president and his economic team to ensure that things are different this time.

President Barack Obama and his officials need to ramp up their efforts, starting with a plan to make the stimulus bigger.

Just to be clear, I'm well aware of how difficult it will be to get such a plan enacted.

There won't be any cooperation from Republican leaders, who have settled on a strategy of total opposition, unconstrained by facts or logic. Indeed, these leaders responded to the latest job numbers by proclaiming the failure of the Obama economic plan. That's ludicrous, of course. The administration warned from the beginning that it would be several quarters before the plan had any major positive effects.

But that didn't stop the chairman of the Republican Study Committee from issuing a statement demanding: 'Where are the jobs?' It's also not clear whether the administration will get much help from Senate “centrists”, who partially eviscerated the original stimulus plan by demanding cuts in aid to state and local governments — aid that, as we're now seeing, was desperately needed. I'd like to think that some of these centrists are feeling remorse, but if they are, I haven't seen any evidence to that effect.

And as an economist, I'd add that many members of my profession are playing a distinctly unhelpful role.

It has been a rude shock to see so many economists with good reputations recycling old fallacies — like the claim that any rise in government spending automatically displaces an equal amount of private spending, even when there is mass unemployment — and lending their names to grossly exaggerated claims about the evils of short-run budget deficits. (Right now, the risks associated with additional debt are much less than the risks associated with failing to give the economy adequate support.)

Also, as in the 1930s, the opponents of action are peddling scare stories about inflation even as deflation looms.

So getting another round of stimulus will be difficult. But it's essential.

Obama administration economists understand the stakes. Indeed, just a few weeks ago, Christina Romer, the chairwoman of the Council of Economic Advisers, published an article on the “lessons of 1937” — the year that FDR gave in to the deficit and inflation hawks, with disastrous consequences both for the economy and for his political agenda.

What I don't know is whether the administration has faced up to the inadequacy of what it has done so far.

So here's my message to the president: You need to get both your economic team and your political people working on additional stimulus, now. Because if you don't, you'll soon be facing your own personal 1937. — NYT

China Pension Fund Chmn:US Dollar To Keep Lead Role Near Term

2009-07-03T20:05:00.001+08:00

BEIJING (Dow Jones)--The leading role of the U.S. dollar won't be weakened in the near future, and China's yuan may take more than 10 years to become a key currency in the global monetary system, the chairman of China's national pension fund said Friday.

Dai Xianglong is chairman of the National Council for Social Security Fund, which manages more than $70 billion in assets. He was also a former governor of the People's Bank of China.

Speaking at the Global Think Tank Summit, Dai said China's economy should grow faster in the second quarter than the first, when gross domestic product grew 6.1% from a year earlier.

The National Bureau of Statistics is scheduled to issue data for China's second-quarter GDP growth later this month.

Dai said China can achieve its official GDP growth target of 8% for this year.

He said he expects the U.S. and global economies to resume growth at the end of this year, but he added that growth in the U.S. is unlikely to rebound to 3%, and will likely remain sluggish for a long time.

-Liu Li contributed to this article, Dow Jones Newswires; (8610) 6588-5848; li.liu@dowjones.com

Roubini’s RGE Says Asia Corporate Bond Prices to Fall (Update1)

2009-07-03T19:58:00.000+08:00

By Katrina Nicholas

July 2 (Bloomberg) -- Southeast Asian investment-grade corporate bond prices will fall as companies struggle to refinance debt and revive earnings, according to RGE Monitor.
“Markets in Asia are operating on the assumption that in the second half things will improve,” Arpitha Bykere, RGE’s senior fixed-income analyst for the region, said in a phone interview from New York. “Our forecasts tell us yes, the second half will be better than the first, but there won’t be a significant improvement in company sales or credit liquidity.”
Spending in countries including Singapore, Malaysia and Indonesia will decline as more people lose their jobs, according to RGE, the analysis group chaired by New York University economist Nouriel Roubini, dubbed Dr. Doom for predicting the credit crisis. With a “double hit” of maturing debt and lower income from sales, corporate defaults will rise, Bykere said.
JPMorgan Chase & Co.’s Asian Investment-Grade Index has risen 12.5 percent this year while its spread over U.S. Treasuries narrowed 3.07 percentage points to 3.93 percentage points. Asia-Pacific bond sales excluding Japan rose 89 percent to $301 billion since Jan. 1 as investors recovered from the shock of Lehman Brother Holdings Inc.’s collapse in September, according to data compiled by Bloomberg.
Economic Contraction
The global economy will shrink 2.9 percent this year, more than an earlier forecast of 1.7 percent, the World Bank said on June 22. Singapore, weathering its deepest recession since independence in 1965, expects two in five companies to cut wages if conditions worsen, the Ministry of Manpower said on June 30.
Indonesia’s exports, which account for one-third of gross domestic product, fell 28 percent to $9.26 billion in May from a year earlier, the Central Statistics Bureau said yesterday. The economy of Malaysia, Southeast Asia’s third-biggest, shrank 6.2 percent in the first quarter as exports fell.
“Spreads for investment-grade corporates in Asia have narrowed when, on the whole, access to credit hasn’t improved very much,” Bykere said. “We believe this improvement doesn’t really match the fundamentals.”
While Singapore companies are more vulnerable to an export slowdown because they lack a large domestic market, their refinancing risk is lower than in neighboring states due to the concentration of banks in the city-state, according to Bykere.
“It’s much easier to meet with lenders because of the country’s position as one of Asia’s financial hubs,” she said. “While from an export point of view we are more bearish on Singapore, in terms of dealing with debt-related issues we are more bullish compared to other ASEAN countries.”
As well as Singapore the Association of Southeast Asian Nations, known as ASEAN, comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Thailand and Vietnam.
To contact the reporter on this story: Katrina Nicholas in Singapore at knicholas2@bloomberg.net
Last Updated: July 2, 2009 03:29 EDT

Roubini: Recession For Another Nine Months

2009-06-30T22:18:00.000+08:00

Tuesday, June 30, 2009 9:45 AM

By: Dan Weil

Economist Nouriel Roubini is living up to his Dr. Doom nickname. He sees continued woes ahead for the economy and financial markets.

"This recession … is going to last another six to nine months," he told Bloomberg TV.

"People are talking a lot about these green shoots. But if I look at macroeconomic data for employment conditions, sales and consumption, about industrial production, housing, I see more yellow weeds than green shoots," Roubini said.

By next year, oil prices will move toward $100, the economist said. In addition, the budget deficit will surge, and "therefore pressure on central banks to monetize is very significant, because otherwise long-term rates are going to spike much higher."

When recovery finally occurs, it will be "anemic and subpar," with U.S. growth registering 1 percent to 1.5 percent over the next couple years thanks to "fundamental imbalances in the housing sector, financial system, corporate sector and now the rising budget deficit," he told CNBC.

Unemployment might reach 11 percent, he said.

Roubini sees the risk of a double-dip recession, with negative economic growth late next year.

The effect on financial markets: "I believe there's going to be a significant market correction for equities, for commodities and even for credit," he said.

Some others have dire forecasts for the economy, too. "All these things (government policy) have a negative effect on the economy and are making recovery very difficult," financial author Stephen Moore told Moneynews.

Reports: China lending spree going to stocks, real estate; economists warn of bubbles

2009-06-29T22:36:00.004+08:00

http://www.latimes.com/business/nationworld/wire/sns-ap-as-china-lending-spree,0,1733183.story

By Associated Press

4:17 AM PDT, June 29, 2009

SHANGHAI (AP) — China risks frittering away its stimulus spending on speculation in stocks and real estate, reports said Monday, citing economists who say surging bank loans risk inflating risky asset bubbles.

The comments by prominent economists came as Shanghai's benchmark Composite Index hit another high for the year, gaining 1.6 percent, or 47.10 points, to 2,975.31. The index has gained more than 60 percent since the beginning of the year.

While recent gains in shares and property prices are a welcome respite for investors, putting funds meant for stimulus projects into speculative investments could undermine the government's effort to boost growth and reduce the economy's heavy reliance on exports.

About 20 percent of bank lending is going into stock speculation, and another 30 percent or so is going into the property market, state-run newspapers cited Wei Jianing, an economist with a Cabinet-level think tank, as saying.

China's economic planners have urged banks to issue loans to support the government's 4 trillion yuan ($586 billion) stimulus program, aimed at protecting the economy from the global slowdown by pumping money into spending on building airports and other public works.

Wei and other economists told a conference in Beijing that the huge flow of money into shares and property could be fueling risky, unsustainable price increases, China Business News and other reports said.

Through an intermediary, Wei refused requests Monday for comment. The reports said Wei cited estimates based on his research, but noted that his comments were his own personal opinion, not that of the Development Research Center, which is affiliated with China's State Council, or Cabinet.

State media reports last week said new bank lending in June is estimated to have surged by 1.2 trillion yuan ($175.7 billion).

Added to the 5.8 trillion yuan ($849 billion) in new bank loans in January-May, that would push new lending in the first half of the year to about 7 trillion yuan (over $1 trillion).

That is more than the total annual new lending for China for any year.

But warnings against misuse of such funds for other purposes, such as stock speculation, are appearing increasingly frequently in the state-controlled media — including one in Monday's People's Daily, mouthpiece of the ruling Communist Party.

"Extraordinary times call for extraordinary measures," said the commentary, which noted that much of the spending, even on construction projects, was unlikely to yield much of a return.

"However we must at the same time improve the lending structure and guard against risks to ensure that lending supports good quality economic development," it said.

Cramer's Predictions: The Rest of '09

2009-06-27T22:54:00.001+08:00

Posted By: Tom Brennan | Web Editor

cnbc.com

| 26 Jun 2009 | 09:35 PM ET

While media coverage may be reflective, Cramer said Friday, investors need to be predictive. Instead of simply reading today’s headlines, they need to figure out what the headlines will be six months from now. That’s the strategy he employed as a hedge fund manager, and he tries to teach viewers how it’s done on Mad Money.

This is how Wall Street operates – looking forward – and the approach is evident in the latest wave of research, which, as we approach July 1, has focused more and more on the second half of the year. Never to be left out, Cramer used part of today’s show to offer his own predictions for the third and fourth quarters.

First, foreclosures should peak, housing should bottom, and the biggest winners will be the banks. When the credit crisis was at its worse and homeowners were defaulting on their loans, their foreclosed homes weighed heavily on banks’ balance sheets. But as prices stabilize, and possibly even rise, those homes can be sold, fetching a decent market rate. That puts financials like Wells Fargo , which Cramer told viewers to consider buying, in great position for a rebound.

California, Florida, Nevada and Arizona comprise 50% of the US housing market, and they were the hardest-hit areas during the downturn. But over the past three months, prices in all four states have stabilized, and sales picked up significantly. That, too, is another reason to like certain banks, though Cramer thinks it also bodes well for NVR . This real-estate firm operates in the Washington, D.C. area, and it’s a play on increased hiring by the federal government. Cramer expects “huge upside surprises” from NVR, though he cautioned viewers to use limit orders when buying – NVR sells for $500 a share.

The news out of trucking these days shows manufacturing near an all-time low, which is why the Street has shunned stocks like Paccar . But Cramer said that’s all the more reason to like it. PCAR holds $4.65 in cash, has paid out $3.5 billion in dividends over the past 10 years, and he thinks the stock is “about to roar.” He predicted this $31 name would reach $40 in a month.

Other themes worth watching in the second half of 2009: smartphones, which will benefit Appleand its iPhone component makers; health care, now that President Obama’s proposed legislation looks less damaging than expected to the companies involved; and natural gas, because it’s so cheap.

Now, if you read today’s headlines, none of these picks would seem to make sense. But Cramer’s more concerned with the future. And while that poses some risks, those risks are an inherent part of investing. It’s just a question of how you manage them.

“If you want to make money,” Cramer said, “you need to take a chance. Sometimes you will be wrong, but if you never try…you'll never be right.”

Cramer's charitable trust owns Wells Fargo.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the Mad Money website? madcap@cnbc.com

URL: http://www.cnbc.com/id/31569651/

Roubini Sees No Economic Recovery Until 2011

2009-06-27T22:24:00.001+08:00

By James Fallows

The Atlantic
Thursday, June 25, 2009

Nouriel Roubini, the New York University economist who accurately forecast the bursting of the housing bubble and the resulting economic contraction, has become famous for his pessimism-he has been the gloomiest of the doomsayers. Which is what makes his current outlook surprising: Roubini believes that the Obama administration's policy makers-and especially the much-maligned Tim Geithner-have gotten a lot right. Pitfalls may still abound, but he is now projecting an end to the recession, and he sees growth ahead.

On March 28, 2007, Federal Reserve Chairman Ben Bernanke appeared before the congressional Joint Economic Committee to discuss trends in the U.S. economy. Everyone was concerned about the "substantial correction in the housing market," he noted in his prepared remarks. Fortunately, "the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained." Better still, "the weakness in housing and in some parts of manufacturing does not appear to have spilled over to any significant extent to other sectors of the economy." On that day, the Dow Jones industrial average was above 12,000, the S&P 500 was above 1,400, and the U.S. unemployment rate was 4.4 percent.

That assurance looks bad in retrospect, as do many of Bernanke's claims through the rest of the year: that the real-estate crisis was working itself out and that its problems would likely remain "niche" issues. If experts can be this wrong-within two years, unemployment had nearly doubled, and financial markets had lost roughly half their value-what good is their expertise? And of course it wasn't just Bernanke, though presumably he had the most authoritative data to draw on. Through the markets' rise to their peak late in 2007 and for many months into their precipitous fall, the dominant voices from the government, financial journalism, and the business and financial establishment under- rather than overplayed the scope of the current disaster.

With the celebrated exception of Nouriel Roubini, an economist from the Stern School of Business of New York University. At just the time Bernanke was testifying about the "contained" real-estate problem, Roubini was publishing a paper arguing that the depressed housing market was nowhere near its bottom, that its contraction would be the worst in many decades, and that its effects would likely hurt every part of the economy. In September 2006, with markets everywhere still on the rise, he told a seminar at the International Monetary Fund's headquarters that the U.S. consumer was just about to "burn out," and that this would mean a U.S. recession followed by a global "hard landing." An economist who delivered a response dismissed this as "forecasting by analogy." The IMF's in-house newsletter covered Roubini's talk as a curiosity, under the headline "Meet Dr. Doom."

Roubini is thus enjoying his moment as the Man Who Was Right, a position no one occupies forever but which he is entitled to for now. As markets have collapsed, the demand for his views and predictions has soared. He travels constantly, and late this spring I met him in Hong Kong to ask what he was worried about next.

Roubini, who is 50, has a tousled look, from his curly black hair to his rumpled clothing. The initial impression he gave was of total physical exhaustion. When he spoke, at mid-afternoon in Hong Kong, he would scrunch his eyes closed tight, as if forcing himself awake, and shove his suit jacket sleeves and shirt sleeves high up from his wrists to his forearms in the same effort.

You often see this paralyzing fatigue in people who've recently made the flight to Asia. What was unusual in Roubini's case is that even with eyes closed he kept emitting high-speed and complex answers, which proved on transcription to consist of well-formed sentences and logical sequences. They were delivered in an accent that is what you might imagine from someone who spent his first 20-plus years in Turkey, Iran, Israel, and Italy before going to the United States as a graduate student at Harvard. In a few cases, I later realized, the polish of his responses was because he was reciting passages from papers he had written, as if from an invisible teleprompter. But mostly he seemed to be drawing on data points and implications that were so much on his mind they could be processed and expressed even when the rest of him was spent.

The conversation was surprising in three ways: for the relatively high grades Roubini gave Treasury Secretary Timothy Geithner, generally the least-praised member of the Obama economic team; for the overall support (with one significant exception) he expressed for the administration's response to the economic crisis; and for his willingness to look far enough beyond today's disaster to speculate about the problems a recovery might bring. He was also full of advice about China's reaction to the world financial crisis, including the suggestion that its options are narrower than its leaders may grasp.

Roubini's compliments for Geithner were in the context of the intellectual and policy history of how the crash had developed and why its effects have been so severe. The dot-com and larger tech-industry crash of 2000 eliminated a tremendous amount of stock-market wealth. During the panicky sell-off of 1987, nearly a quarter of the New York Stock Exchange's total value was lost in one day. By comparison, defaults on subprime mortgages would seem more limited in their capacity to harm the economy. Why, then, had so much gone so deeply wrong?

Roubini said that the difference was partly "debt versus equity." That is, a loss of stock-market value is damaging, but defaults on loans, which put banks themselves in trouble, had a "multiplier" effect: "When there's a credit crunch, for every dollar of capital the financial institution loses, the contraction of credit has to be 10 times bigger." This was the process at work last fall, when banks that were concerned about their own survival cut off working capital to everyone else.

The more important difference between this crash and others, Roubini said, was that the speculative bubble involved so much more of the economy than the term "subprime" could suggest. "It was subprime, it was near-prime, it was prime mortgages," he said, warming up to rattle off a long list. "It was home-equity-loan lines. It was commercial real estate, it was credit cards, it was auto loans." The list was just getting started, and he used it to emphasize that almost every form of borrowing had been taken beyond reasonable limits, and that most forms of asset had been bid unreasonably high. And not just in the United States: "People talk about the American subprime problem, but there were housing bubbles in the U.K., in Spain, in Ireland, in Iceland, in a large part of emerging Europe, like the Baltics all the way to Hungary and the Balkans," and most parts of the world. "That's why the transmission and the effects have been so severe. It was not just the U.S., and not just 'subprime.' It was excesses that led to the risk of a tipping point in many different economies."

Roubini's case against Ben Bernanke and his predecessor Alan Greenspan is that they kept interest rates too low for too long-and downplayed the significance of the bubble they helped create. "They kept on arguing that this was a minor housing slump, and this housing slump was going to bottom out," he said. "They kept repeating this mantra that the subprime problem was a 'niche' and 'contained' problem." These were serious analytic errors, he said, of a sort that is common near the end of a bubble. "Bernanke should have known better, but it's not really about him. It's in everybody's interest to let the bubble go on. Instead of the wisdom of the crowd, we got the madness of the crowd.

"So when the proverbial stuff hit the fan in the summer of 2007, [the Fed and the Bush administration] were initially taken by surprise," he concluded. "Their analysis had been wrong. And they didn't understand the severity of what was to come. And all along, their policy was two steps behind the curve." He was much more respectful of the judgment that Timothy Geithner showed.

"You know, when Geithner became president of the New York Fed [late in 2003], the first eight speeches he gave were about systemic risk," he said. (Most were about the way the growing complexity and interconnectedness of financial systems made it harder to know the real degree of risk the entire financial network was exposed to, and how far regulation was lagging behind the quickly changing realities. Most read well in retrospect.) Behind this difference in tone, according to Roubini, was a deeper contrast in belief about what the government could or should do when it saw a financial bubble beginning to form.

About the response once a bubble collapses, most economists are in agreement. Central banks around the world have been lowering interest rates to near zero and pumping new money into their economies. But could they have done anything to forestall the need to? According to Roubini:

"Bernanke, like Greenspan, had this wrong attitude toward asset bubbles. The official philosophy of the Fed was: on the way up with a bubble, you do nothing. You don't try to prick it or contain it. Their argument was, How do I really know it's a bubble? And even if I tried to 'prick' a bubble delicately, it would be like performing neurosurgery with a sledgehammer."

The damage done in these boom-and-bust cycles, Roubini says, is greater than politicians and the media usually acknowledge. Stock-market averages eventually recover, as all buy-and-hold investors now keep telling themselves. (Except in Japan, where the main stock index stood near 39,000 in the late 1980s and is around 9,000 today.) But that doesn't take into account the damage done to the real economy by the swings up and down. "These asset bubbles are increasingly frequent, increasingly dangerous, increasingly virulent, and increasingly costly," he said. After the housing bubble of the 1980s came the S&L crisis and the recession of 1991. After the tech bubble of the 1990s came the recession of 2001. "Most likely $10 trillion in household wealth [not just housing value but investments and other assets] has been destroyed in this latest crash. Millions of people have lost their jobs. We will probably add $7 trillion to our public debt. Eventually that debt must be serviced, and that may hamper growth."

Was there any alternative? Yes, if central bankers had taken a "more symmetric approach" to bubbles, trying to control them as they emerged and not just coping with the consequences after they burst. Geithner, he says, was one of those who saw the danger: "While Ben Bernanke was talking about a 'global savings glut' as the source of imbalances, Geithner was talking about America's excesses and deficits. Like the Bank of England and the Bank for International Settlements, he was warning at the New York Fed that we had to be more nuanced in the approach of how you deal with asset bubbles."

The disagreements about proper bubble management are of more than historical interest, Roubini argues, because he sees the beginnings of another bubble already in view. He was more supportive on the whole than I would have expected about the Obama administration's financial plans. "I have to give them credit that, less than a month after they came to power, they had achieved three major policy successes," he said. These were passing the $800 billion stimulus plan, the mortgage-relief plan to reduce foreclosures, and the "toxic asset" plan to help banks clear bad loans from their books. He said that the initial version of the bank-rescue plan was "botched, because it was rushed," but that the later version was better. "On each of these things, you can criticize specific elements," he said. "But they did the big things, and those are the main parameters of what is a constructive policy response. For now, you have to deal with the problem you are facing. All in all I think the policy is going in the right direction."

But someday, the emergency will be over. Then the side effects of today's deficits-be-damned efforts to spend money and loosen credit will become "the problem you are facing." Roubini has been tart about the things public officials should have known and the dangers they should have foreseen three or four years ago. What, I asked him, are the decisions of 2009 that we will be regretting in 2012?

For the only time in our conversation, he sat without responding for a measurable interval. "The regrets could be many," he began. Uh-oh , I thought. "Even the best policies sometimes have unintended consequences." He then itemized three.

The first involved banks. Like Paul Krugman and others, Roubini had been warning that many banks were weaker than they seemed. Rather than trying to nurse them along, he said, the government should move straightaway to nationalization: "I'm concerned that we're not going to deal with the bank problem as we should," he said. "Some banks are insolvent. To prevent them becoming zombie banks, the government should take the problem by the horns and, on a temporary basis, nationalize them. Take over these banks, clean them up, and then sell them back to the private sector. Not doing that is one mistake we may make and regret."

Next, "monetizing the debt." This sounds similar to the complaint that the government is spending too much now and will regret it later on, which was the main Republican argument against the stimulus plans. Roubini's concern is different, and mainly involves the delicate process of turning off the extraordinary stimulus measures now being turned on full force.

"The Fed is now embarked on a policy in which they are in effect directly monetizing about half of the budget deficit," he said. The public debt is going up, and the federal government is covering about half of that total by printing new money and sending it to banks. "In the short run," he said, "that monetization is not inflationary." Banks are holding much of the money themselves; "they're not relending it, so that money is not going anywhere and becoming inflationary."

But at some point-Roubini's guess is 2011-the recession will end. Banks will want to lend the money; people and businesses will want to borrow and spend it. Then it will be time for what Roubini calls "the exit strategy, of mopping up that liquidity"-pulling some of the money back out of circulation, so it doesn't just bid up house prices and stock values in a new bubble. And that will be "very, very tricky indeed."

He mentioned cautionary recent examples. The last time the Fed tried to manage this "mopping up" process was after the recovery from the 2001 recession. To minimize the economic impact of the 9/11 attacks, following immediately on the dot-com crash, Alan Greenspan quickly lowered the benchmark interest rate from 3.5 percent, reaching 1 percent in 2003. By 2004 a full recovery was under way, and Greenspan began raising rates at what he called a "measured pace"-25 basis points, or one-fourth of 1 percent, every six weeks. "That implied it would take two and a half years until they normalized the rate," Roubini said. "And that was one of the important sources of trouble, because at that point money was too cheap for a long time, and it really fed the bubble in the housing base." So the lesson would be, when a recovery begins, get rates back to normal, faster.

"But that is very tricky," he continued, "because if you do it too fast, when the economy is not recovered in a robust way, you might end up like Japan and slump back into a recession. But, of course, if you do it too slowly, then you risk creating either inflation or another asset bubble." The great difficulty of making these fine distinctions is part of the "brain surgery with a sledgehammer" argument against attempting to intervene at all.

In Roubini's view, there is no choice but to intervene. "We have to do what's necessary to avoid a real depression," he said. But he added that it is not too soon to lay plans for avoiding the consequences of too much money flowing rather than too little.

Roubini had recently been in China and met officials there. We talked about the bind that the world economic slowdown had created for China's leadership-not despite but because of its huge trade surpluses and foreign-currency holdings. Many Chinese commentators have blamed American overborrowing and excess for dragging them into a recession. But even they realize that the very excess of American demand has created a market for Chinese exports. Chinese leaders would love to be less dependent on American customers; they hate having so many of their nation's foreign assets tied up in U.S. dollars and subject to the volatility of American stock exchanges. But for the moment, they're more worried about keeping Chinese exporters in business. To do that, they want to prevent their currency from rising. And for reasons laid out in detail in a previous article ("The $1.4 Trillion Question," January/February 2008 Atlantic), the mechanics of finance require them to keep buying U.S. dollars and entrusting their savings to the United States. "I don't think even the Chinese authorities have fully internalized the contradictions of their position," Roubini said.

I agree. But I can report that for these past six months, virtually every economic conference I've heard of in China and every special supplement in a Chinese business publication has been devoted to the changes the country would have to make in order to reduce its vulnerabilities.

I asked Roubini whether, similarly, American authorities and the U.S. public appreciated the contradictions in their own position. He answered by returning to the damage caused by boom-and-bust cycles and the need to find a different path.

"We've been growing through a period of time of repeated big bubbles," he said. "We've had a model of 'growth' based on overconsumption and lack of savings. And now that model has broken down, because we borrowed too much. We've had a model of growth in which over the last 15 or 20 years, too much human capital went into finance rather than more-productive activities. It was a growth model where we overinvested in the most unproductive form of capital, meaning housing. And we have also been in a growth model that has been based on bubbles. The only time we are growing fast enough is when there's a big bubble.

"The question is, can the U.S. grow in a non-bubble way?" He asked the question rhetorically, so I turned it back on him. Can it?

"I think we have to ." He paused. "You know, the potential for our future growth is going to be lower, because of the excesses we've had. Sustainable growth may mean investing slowly in infrastructures for the future, and rebuilding our human capital. Renewable resources. Maybe nanotechnology? We don't know what it's going to be. There are parts of the economy we can expect to lead to a more sustainable and less bubble-like growth. But it's going to be a challenge to find a new growth model. It's not going to be simple." I took this not as pessimism but as realism.

SOURCE: http://www.theatlantic.com/doc/200907/roubini

Jim Rogers says has no short positions, selling dollars

2009-06-27T22:21:00.000+08:00

Thu Jun 25, 2009 4:49am EDT

SINGAPORE, June 25 (Reuters) - Investor Jim Rogers said on Thursday that he sees prolonged economic problems and while he did not see much worth buying, he is not shorting any assets either.

He repeated a previous comment that he is selling his U.S. dollars and that commodities were the best investment bet.

"I have no shorts for one of the first times in my life," Rogers, a co-founder with George Soros of the Quantum Fund, told Reuters TV in Singapore. "On the other hand I don't see much to buy."

He said huge borrowing by governments, particularly in the United States and Britain, would hurt their currencies and lead to future problems, though he picked the Canadian dollar CAD= as one of the "soundest" currencies. "I've got out of my pounds. I will be getting out of my (U.S.) dollars soon," he said, repeating his view that commodities were the best place to be with metals having gained more than stocks this year and long-term potential for soft commodities.

"I'd rather be a farmer than a stockbroker for the next couple of years," he said. "No-one you went to school with became a farmer... so we have a shortage of farmers."

Rogers, who lives in ethnically Chinese Singapore, co-founded the Quantum Fund in 1970. The fund, since closed, returned 4,200 percent in the next decade, compared with a 50 percent gain in the S&P 500 index.

"If you're in London you're in the wrong place at the wrong time... You gotta move east." (Writing by Neil Chatterjee; Editing by Neil Fullick)

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