September 30, 2009

More lovely stories about banks

Banks are making it very difficult not to hate them these days.  Borrowing at near zero percent and lending at 30% sounds like an easy way to make money.  A disillusioned consumer took his battle with Bank of America public.  Here is her story on Youtube.

September 26, 2009

Market Insights - 26 September 2009

Dear Friends & Fellow Investors

Here is our new issue of market insights.
In case of questions, please email: .  Enjoy reading!

In This Week's Issue
▪   Weekly Snapshot
▪   Chart Of The Week
▪   Signposts Of Things To Come
▪   The Good Stuff
▪   Interesting Read
▪   Are (US) Equities Overvalued?
▪   Fed's Balance Sheet
▪   Taxpayer Funds At Work
▪   Recommended Video

Weekly Snapshot
• New U.S. home sales rise 0.7% in August (AP)
• US consumer sentiment rose more than 3 points from mid-month to 73.5 (Bloomberg)
• US Durable goods in August decreased $4.0 billion or 2.4% to $164.4 billion (U.S. Census)
• Germany’s IFO Index rises for the sixth month in a row to 91.3 (Eurointelligence)
• The SEC promised to “vigorously pursue” its case against BofA (Economist)
• US existing home sales declined 2.7% in August compared with a 7.2% rise in July (AP)
• Muammar Gaddafi delivers 100 minute speech to UN general assembly (
• New jobless claims in the US drop unexpectedly to 530,000 (AP)
• Industrial new orders up by 2.6% in euro area (Eurostat)
• FOMC Meeting: US fed funds rate was left unchanged in its range from 0.00% to 0.25% (
• US Leading Economic Index increased 0.6% in August, following a 0.9% gain in July (Conference Board)

Chart Of The Week
A reminder of where we stand... 

Major Foreign Holder of US Debt

Data as of July-2009. Source:

Signposts Of Things To Come
Please consider:  HSBC finally gets its way about Hong Kong and HSBC chief to be based in Hong Kong

Every now and then, there are little markers giving us a glimpse of where the global economy might be heading 10, 20 or 30 years from now.  The above chart is a good indicator and so is the seemingly benign move by HSBC to relocate its chief executive (back) to Hong Kong.  You may recall that HSBC bought Midland Bank, one of the largest UK banks, in the early 90s.  The move raised some eye brows then particularly because Hong Kong was going to revert to Chinese control after 1997.  Regulators, encouraged by public fears over the safety of their deposits, urged HSBC to move its headquarters from Hong Kong to the UK, where they still are at the moment.  Now that the chief executive is back in Hong Kong, it shows that one must look East to get a glimpse of the future. Capital certainly seems to be looking eastward.

And, as John Gapper somewhat amusingly adds:

"the notion of ringfencing UK deposits to make sure they are not used for risky lending in far-off places is back in fashion as a way of handling future bank collapses. The difference is that the country from which UK depositors are supposed to be protected is the US, not China."

As a reminder, take a look at the graphic below from our previous newsletter in March.  In reality, HSBC has never really been a UK bank but rather a Chinese one, as the name Hongkong Shanghai Banking Corporation suggests.  This now gives China the 4 largest banks, by market cap.


Source: Complete data and additional yearly charts available at:

The Good Stuff
Please consider:  Congress Takes On Credit Ratings

I have long advocated that the inherent conflicts of interests at credit ratings agencies have been a major factor contributing to the financial crisis.  Sadly, the regulators only seem to come to this conclusion after most of the damage has been done.  Inertia, complacency, dis-incentives are perhaps some of the reasons why it takes bureaucratic organizations forever to make a move.  It takes determination and a lot of courage to make a difference, this is another example.  An individual can make a difference and greater public awareness is needed to support individuals who are willing to go against the grains. Speaking of conflicts of interest...

Interesting Read
Please consider: F.D.I.C. May Borrow Funds From Banks

As the New York Times reported, the F.D.I.C., experiencing its own version of a possible cash-flow bottleneck, is considering plans that to borrow funds from some of the Banks it regulates. While this may be somewhat of a relief for tax payers, lets cut through the clutter for a second here and consider what this really means: Massive potential conflicts of interest!

Can a regulator objectively regulate when it owes money to an institution it needs to oversee? What happened to: Never bite the hand that feeds you?


Are (US) Equities Overvalued?
Please consider the recent FT article: Equities are overvalued and carrying too much risk

The S&P 500 peaked at 1,080.15 midweek before drifting lower and closing the week at 1044.38.  This gives the US benchmark Index a year-to-date return of just over 16%, a great return by any standard.  Further, the Index is up over 57% compared to its low 666.79 in early March.  A consequence of this sudden rise from the ashes (the eerie 666 low of the S&P500), the market has now returned to risk levels of 2007. 

As David Rosenberg notes:
Six months and 60 per cent later, there is yet again, in 2007 style, tremendous risk in this market. Never before has the stock market surged this far, this fast, between the time of the low and the time the recession (supposedly) ended. What is "normal" is that the rally ahead of the recovery is 20 per cent. This market is now trading as if we were in the second half of a recovery phase, yet it has not even been fully ascertained the downturn is over.

The author continues in his analysis and projects, "based on the same 2 per cent growth rate the corporate bond market is discounting", a level of 842 as a possible target for the S&P500. 

David Rosenberg’s assessment makes sense. The relatively high multiples in the S&P need to be justified by the real economy eventually.  This week's subdued durable goods orders would suggest that at least some sectors in the economy might not be showing the kind of growth rates (i.e. 4% real economic growth in the coming year) that could justify these high price levels relative to earnings. 

In addition to the fundamentals urging us to be cautious, Technical Analysis can make an equally plausible case for retracements to the same 842 level of the S&P.  If 1,080.15 holds on the upside, Fibonacci retracement levels would indicate a range of 922 all the way down to 824 as possible targets on the downside.  There are of course several support level in between and a good test will be if the 1,000 level holds.


Fed’s Balance Sheet
We have expressed concerns about the size of the Fed’s balance sheet on a number of occasions.  They’re still at it, throwing billions and trillions at the problem.

From the FOMC Statement September 23, 2009:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt.  The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.  As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.

What’s more concerning than those twelve-figure numbers is the fact that we don’t know exactly where the money is being thrown at. Correction, some of it is known…

Taxpayer Funds At Work
I came across an excellent Blog doing remarkable investigative work to promote greater public awareness.  Please consider:  Taxpayer funded signing bonus at Freddie Mac?

As Michelle Leder reports, Freddie Mac’s newly named CFO, Ross J. Kari, gets the following package:

▪ annual compensation of $3.5 million (this includes $675K in salary, $1.6 million in something called “additional annual salary” and $1.1 million in a target incentive)
▪ a $1.95 million signing bonus
▪ immediate buyout of Kari’s house (or perhaps houses)
▪ reimbursement for travel between Washington D.C. and Kari’s residences in Ohio, Washington and Oregon

Granted, this compensation package seems relatively tame compared with those of major financial institutions.  However, I have problems with signing bonuses in general.  No disrespect to Mr. Kari, but nobody deserves to be paid just to show up for work.  Compensation at the executive level should always be tied to performance.  I firmly believe in giving the right incentives.  But if someone can get substantially more money working for a quasi government institution instead of working in the private sector AND gets paid in advance, sometthing is wrong.  More to the point, what possible incentives will he have to perform?

Give Mr. Kari the benefit of a doubt and let him get to work for a few years.  If he manages to de-lever the bloated mortgage lender and bring some form of reasonable competitiveness back to this institution, then he can have his millions; but not before we see some of Mr. Kari’s talents at work.

Recommended Video
Controversial as he may seem, Peter Schiff has made some very good calls in the past.  Most recently, he called for an end to the US rally and predicted that Gold would rise to $5,000 per ounce.  

Discounting his recent political ambitions here, lets put some of his seemingly outrageous predictions into perspective. Take a look at Peter Schiff's Mortgage Bankers Speech from Nov. 13th 2006.  The entire speech is almost an hour, but it is highly recommended including some very remarkable comments which all make sense in hindsight.

Good luck & good trading!

Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this website be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance.

September 25, 2009

Schiff’s Predictions

The always outspoken Peter Schiff is not shy about making controversial predictions.  Ever-so blunt in his market assessments, he predicts Gold might hit $5,000 per ounce.  See yesterday’s interview at tech|ticker.

September 24, 2009

Opposing views from Peter Schiff and Ken Fischer

Views on the state of the economy couldn’t be more polarized these days.  Please consider two very interesting and equally controversial commentaries. 

Peter Schiff: Debt was the problem that lead to the crisis and more debt will make things only worse...

Meanwhile, Ken Fischer says: We need more debt and more leverage to get us out of the crisis.

Who’s right, who’s wrong?

September 23, 2009

CME Announces the Launch of Long-Term U.S. Treasury Bond Futures

The CME Group announced the launch of long-term Bond Futures or "Ultra" Treasury Bonds, beginning in early first quarter 2010.  Interesting development in response to increased investor demand while the US Government is in ever increasing need of finance.  Inquiring minds wonder if this is one of those sign posts of things to come...

I can’t help thinking about the last time we observed the launch of a new futures contract, then with significant ramifications.  It was early 2006, at the height of the real-estate bubble, when the CME launched housing futures.  Is this a similar signal indicating yet another bubble?

September 22, 2009

FDIC Dilemma

As the New York Times reported today, the  F.D.I.C. ,  experiencing its own version of a possible cash-flow bottleneck, is considering plans that to borrow funds from some of the Banks it regulates. 

While this may be somewhat of a relief for tax payers, lets cut through the clutter for a second here and consider  what this really means:  Massive potential conflicts of interest! 

Can a regulator objectively regulate when it owes money to an institution it needs to oversee?

What about: Never bite the hand that feeds you?


September 20, 2009

Market Insights - 20 September 2009

Dear Friends & Fellow Investors
Here is a new issue of market insights.
In case of questions, please email: .  Enjoy reading!
In This Week's Issue
▪   Weekly Snapshot
▪   Chart of the Week
   The Good Stuff
▪   Interesting Read
▪   Speaking of which...
▪   More on ETFs
   Currency Markets
▪   All that glitters is Gold
Weekly Snapshot
• Fed considers sweeping rules to regulate pay at banks (NY Times)
• Gold hit a new yearly high at $1,024 on Thursday, only $8 shy of all-time high (eSignal)
• The Federal Reserve reported that American households were $2 trillion in Q2 (Martketwatch)
• US Judge rejects $33 million deal settlement over Merrill Lynch Bonuses (NY Times)
• Euro area external trade surplus reaches 12.6 bn euro (Eurostat)
• US housing construction up 1.5%; surge in apartment building offset a decline in single-family activity (AP)
• US industrial production rose 0.8% in August, more than expected (Marketwatch)
• Bernanke said that the worst U.S. recession since the Great Depression was probably over (Reuters)
• US producer price inflation in August spiked 1.7% after dropping 0.9% in July (Bloomberg)
• US retail sales increased 2.7% in August. Consensus only expected an increase of 1.9% (
• European Commission: deficit-to-GDP ratio could be higher than the previous 6% estimate (Eurointelligence)
• Germany issued a $4bn bond denominated in US Dollars, only the second time in history (FT)
• European Central Bank nets €900m from crisis lending (FT)
Chart of the Week
Gold reached a new high for the year on Thursday, just shy of the all-time high of $1,032 from last year.  To get a sense of what $1,000 an ounce means, take a look at this historic chart going back to 1972.


The Good Stuff
We have been crying foul over the failings of CEOs, bankers, regulators and politicians for some time now.  But every now and then, someone in a position of power gets it right and shows that one can make a difference. Please consider: Judge Rejects Settlement Over Merrill Bonuses.
Not only did "Judge Rakoff refuse to approve a $33 million deal that would have settled a lawsuit filed by the Securities and Exchange Commission against the Bank of America".  He went one step further and "accused the S.E.C. of failing in its role as Wall Street’s top cop by going too easy on one of the biggest banks it regulates. And he accused executives of the Bank of America of failing to take responsibility for actions that blindsided its shareholders and the taxpayers who bailed out the bank at the height of the crisis."
Much applause to a man of courage who looked at this $33 million deal with a sense of realism in the context of the hundreds of billions of dollars that have been pumped into financial giants as part of the TARP program.  $33 million is a lot of money but it's really just small pocket change, the equivalent of a parking ticket, annoying but nothing more than a small inconvenience for one of these financial giants.  To put this amount into perspective, consider that John Thain, former CEO of Merrill Lynch, spent $1.2 million in corporate funds to renovate two conference rooms, and his office (for disclosure, he later on apologized and repaid the company). 
Throwing some more numbers around, John Thain also approved $5bn in accelerated bonus payments just days prior to closing the deal with Bank of America.   With all the trillions and billions that are floating around these days, we sometimes forget the significance of big numbers.  It helps to remember that $1 billion is 1,000 x $1 million  and  $33 million is only 0.66% of $5 billion...
By contrast, make a mistake on your tax return and you could easily see a penalty of 10% or more.  What if the SEC had asked for something in the order of 10% of $5 billion i.e. $500 million? That would have also been equivalent to more than half of the entire SEC budget for 2009 (see Market Insights 15 August 2009). One has to wonder whether regulators and officials really understand the significance of large numbers.  Judge Rakoff certainly did and once again, Kudos to someone who did the right thing.

Interesting Read
Please consider: Lawmakers' inside advantage to trading  (also available in Audio Format).
After last year's financial crisis, the question as to whether capitalism and free markets are still desirable or whether they are actually viable, continues. A growing number of Americans today feel that free market capitalism is dead, others fear that they are on an unstoppable path towards socialism.  Personally, I would argue that truly free markets never existed in the first place, at least not in recent history.  Free markets should be free, as the name suggests, but were they ever?  There may have been extended periods of time when markets were relatively untamed and a twisted form of capitalism reigned, most recently the years leading up the burst of the housing market. 
Although the proponents and critics of "free capitalism" couldn't be further apart these days, one major common ground should be a desire to have a "level playing field for everyone".  And one should think that insider trading would not be tolerated under any form of government or political regime but as the Marketplace article above uncovers...
"Insider trading is among the biggest of big-time no-no's. If you know something not everybody else does, you just aren't allowed to act on it. Corporate executives know there are laws against it. But there's nothing that says that lawmakers can't act on inside information they get just by doing their jobs."
Whether Americans will go down the path of socialism, revert to a pure capitalist society or whether the US will remain in its current hybrid form, we should heed the famous phrase from George Orwell's Animal Farm: "All animals are equal, but some are more equal than others".
Speaking of which...
The website devotes an entire section to the question of whether insider trading by congressional members should be allowed.  As their research suggests, political insight puts senators at an unfair advantage and they document their findings as follows:
US Senators' average annual stock performance beat the market average by approximately 12.3%, while stock purchases made by corporate insiders on average outperform the market by 7.4% and stock portfolios of the average US household underperform the market by 1.5%.
Assuming we can rely on this data, the returns of US senators puts them way ahead of some of the best fund managers.  On average, more than 70% of fund managers DO NOT outperform the market.   So how did they do it?  Pure genius or did they have some help along the way? 
Between 1993 and 1998, the S&P500 went from 435 to 1,229, an average annual return of about 30% which means US Senators returned over 42% on average.  Why can't the government hire these geniuses to run the Fed and the Treasury; the financial crisis may have been averted...

More on ETFs
Please consider: Complex ETFs hold up despite concerns
This recent article in the Financial Times highlights the same concerns we expressed for quite some time now: Certain ETFs, particularly the more complex ones, are confusing and may need additional disclosures. Better yet, they should not be offered to inexperienced retail investors. As we repeatedly pointed out, these ETFs only match the “daily returns”.  Although mathematically correct, this means the complex ones are not meant to be held long-term.
“The important thing for investors to understand is that leveraged and inverse ETFs reset on a daily basis,” says John Gannon, Finra senior vice-president for investor education. “If they hold them for longer than a day, they are unlikely to see the return they expected.”  He gave an example of a leveraged ETF that tracks the S&P 500. Some investors believe that if the S&P 500 is up 10 per cent for the year, the leveraged ETF will return 20 per cent. “That is not the case,” says Mr Gannon. “These funds only double the daily return.”
The article also highlights another significant issue.  Despite the fact that there is growing concern and a seemingly wider public awareness of the pitfalls of some ETFs, investor demand remains strong.
Of the 767 ETFs trading in the US, 127 are leveraged and/or inverse, according to Morningstar. The funds have seen nearly $9bn in flows this year on a net basis while daily trading volumes average “hundreds of millions of shares each day”, Mr Sapir says. “This tells us that the funds are viewed by many as a useful part of portfolios for certain investment strategies.”
Equally concerning is another aspect in the way these financial instruments are offered.  Dan O’Neill, Direxion Funds’ president and chief investment officer declared that  “the funds are sold properly as short-term, tactical products. We do all we can to convey that message.”
I thought, let’s put that to a test to see if we can find that "message".
Using an online trading account, I did two trades.  First, I placed an order to buy 100 shares of SPY, the ETF tracking the S&P500, which also happens to be the first ever ETF and still one of the least expensive ones in terms of its expense ratio.  This ETF is not leveraged and trades just like an ordinary share.

SPY Order
Next, I placed an order to buy 100 shares in DOG, the inverse ETF of the Dow Jones Industrial Index.  This ETF is tracking the inverse of the Dow and the fund is using futures and other derivatives to achieve the opposite of the returns of the Dow.

DOG Order

There is no difference in the way these orders were placed even though "SPY" is a traditional ETF that can be held long-term while "DOG" falls into the category of complex ETFs.  There are no other warnings or hints that would suggest this ETF would behave any different from a traditional ETF.  Declaring that investors should read the prospectus before investing is not enough in my opinion - financial institutions should be able to convey a simple message that "certain ETFs are short-term tactical products and that they may not be suitable for all investors".
How difficult can it be to put up additional warnings or better yet to prequalify investors the same way, one has to pre-qualify to trade stock options.  Financial institutions obviously want a piece of the pie in the huge revenue streams from any popular financial product.  It would only be natural for them to try everything they can do to sell these ETFs, the more the better. 
However, this highlights yet another regulatory failure.  Before setting up an ETF and selling it to the public, the funds have to go through a rigorous regulatory approval process, at least so it would seem.  Have the regulators not figured out that inverse and leveraged ETFs are inherently more risky and should therefore have additional disclaimers and higher hurdles in place? 
In the meantime however, buying shares as well as buying any kind of ETF is as easy as 123.  As the popular E*trade commercial suggests, a baby can do it…

Currency Markets

The US Dollar drifted lower during the week and touched 76.01 on Thursday, a new low for the year and just a hair above the technical support level of 75.89.  As the US Dollar showed continued weakness, several other major currencies approached new highs for the year.  Euro (1.4767), Swiss Franc (1.0276), Australian $ (0.8775),  New Zealand $ (0.7159), Singapore $ (1.4094) all reached their highest level against the US$ for 2009.


The US$ is currently approaching an important technical level where some profit taking could cause temporary retracements. Fundamentally however, there are several reasons why the US$ may come under continued pressure.   As I mentioned last week, the significant interest rate differential of some currencies (Aussie and New Zealand $) over the US$, is enticing investors to do carry trades.  Further, the fact that the US government continues to print money is making some investors and holders of US Debt increasingly nervous.  But the inquiring mind also considers another factor, a sort of eerie silence of Central Banks.  As FT correspondent Jennifer Hughes points out in her recent Short View, the silence of the Central Banks who are traditionally very outspoken when their own currencies appreciate above certain target rates, suggests that these Central Banks seem to be comfortable with the current US Dollar weakness.  Since neither the US nor other Central Banks have declared any target rates or plans for intervention in the currency markets recently, one has to wonder how far these Central Banks are willing to let US Dollar fall.  The famous line:  "The Dollar might be our currency but it is your problem" speaks volumes.
All that glitters...
Gold reached another yearly high at $1,024 on Thursday and is now dangerously close to the all-time high of $1,032 in March 2008.  Looking at the historic long-term "chart of the week" above we get a sense of the current price level in historic terms.  Outside of a brief episode in the late 70's and early 80's, Gold really did not move.  It drifted sideways for two decades.  Starting in 2002 it embarked on an unprecedented bull run topping $1,000 by now for the third time.  We looked at several pros and cons of further gold price increases last week, all of which are still valid today.  I would like to give some additional food for thought.

The chart above depicts the movement of Gold in relation to the US$ Index, as you can see it has been essentially a mirror image for the past 5 months.  Since Gold is priced in US Dollars, any decrease in the value of the US$ would make Gold less valuable in other currencies.  Hence to keep Gold at the same price level in other currency terms, Gold has to rise. 
On the other hand, Gold is now at a level that increasingly tempting to take some profits.  A recent Bloomberg article explained that the IMF Board approved the sale of 403.3 Metric Tons of Gold.  At current price levels, that sale would yield about $13 billion. It will be interesting to see how these sales affect the markets.
Good luck & good trading!


Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this website be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance.

September 17, 2009

2009-09-17 Market Recap

Markets Price Day High Day Low Change % Change
Euro 1.4741 1.4767 1.4689 0.0033 0.22%
Japanese Yen 91.06 91.62 90.51 0.17 0.19%
British Pound 1.6449 1.6568 1.6426 0.0033 -0.20%
Swiss Franc 1.0281 1.0359 1.0276 0.0038 -0.37%
Australian $ 0.8722 0.8775 0.8689 0.0005 -0.06%
Canadian $ 1.0643 1.0676 1.0590 0.0025 -0.23%
Chinese Yuan 6.8272 6.8275 6.8260 0.0015 0.02%
Gold 1013.20 1024.00 1010.77 -1.00 -0.10%
Silver 17.24 17.66 17.21 -0.11 -0.65%
Oil Futures 72.39 73.16 71.66 -0.12 -0.17%
Natural Gas 3.47 3.90 3.44 -0.29 -7.77%
S&P 500 1065.49 1,074.77 1,061.20 -3.27 -0.31%
DJI 9,783.92 9,854.58 9,749.46 -7.79 -0.08%
NASDAQ 2,126.75 2,140.60 2,118.50 -6.40 -0.30%
Nasdaq 100 1,721.09 1,732.42 1,714.33 -2.64 -0.15%
Volatility Index 23.65 24.07 22.79 -0.04 -0.17%
10 Year T-Note 3.40 3.50 3.39 -0.07 -2.10%

September 15, 2009

2009-09-15 Market Recap

Markets Price Day High Day Low Change % Change
Euro 1.4682 1.4685 1.4660 0.0022 0.15%
Japanese Yen 91.03 91.05 90.78 0.02 0.02%
British Pound 1.6473 1.6513 1.6453 0.0013 -0.08%
Swiss Franc 1.0332 1.0350 1.0330 0.0013 -0.13%
Australian $ 0.8664 0.8669 0.8629 0.0032 0.37%
Canadian $ 1.0715 1.0737 1.0718 0.0008 -0.07%
Chinese Yuan 6.8275 6.8300 6.8289 0.0024 -0.04%
Gold 1008.97 1009.40 1006.57 3.07 0.31%
Silver 17.08 17.13 16.99 0.11 0.65%
Oil Futures 70.68 70.68 70.14 -0.25 -0.35%
Natural Gas 3.42 3.46 3.36 0.10 3.01%
S&P 500 1052.63 1,056.04 1,043.42 3.29 0.31%
DJI 9,683.41 9,713.71 9,580.93 56.61 0.59%
NASDAQ 2,102.64 2,106.93 2,086.16 10.86 0.52%
Nasdaq 100 1,699.53 1,703.46 1,688.46 5.77 0.34%
Volatility Index 23.42 24.27 23.07 -0.44 -1.84%
10 Year T-Note 3.45 3.49 3.43 0.05 1.35%

September 13, 2009

Market Insights - 13 September 2009

Dear Friends & Fellow Investors

Here is our new issue of market insights.
In case of questions, please email: . Enjoy reading!

In This Week's Issue
▪ Weekly Snapshot
▪ Chart of the Week
▪ One Year after Lehman's Collapse
▪ Interesting Read
▪ Signposts of Things to Come - Greater Transparency?
▪ Currency Markets
▪ All that glitters is Gold

Weekly Snapshot
• China recorded a $15.7 billion trade surplus in August, up from $10.6 billion in July (
• Russia's GDP fell 10.9% y/y in the second quarter, after falling 9.8% in the first quarter (
• US$ Index falls to 76.46 on Friday, the lowest level in 2009 (eSignal)
• US consumer confidence index for September rose to 70.2, higher than expected (Reuters)
• Switzerland is world’s most competitive economy, based on index of the World Economic Forum (Economist)
• WEF's ranking of the “soundness” of banks shows America at 108th position, behind Tanzania (Economist)
• US Census Bureau said the poverty rate jumped to 13.2%, the highest level since 1997 (Reuters)
• Brazil's GDP up 1.9% from previous quarter (Economist)
• Bank of England holds rates at 0.5% (FT)
• US mortgage rates dip to 3-month low (Reuters)
• September 9 marks six months, since the low of equity markets in this recession (FT)
• US trade gap expanded 16.3% in July, the biggest month-to-month increase since February 1999 (Reuters)
• China car sales up 90% year-on-year in August (FT)

Chart of the Week
The World Economic Form published their annual index of global competitiveness. Interesting to see that none of the BRIC countries (Brazil, Russia, India, China) are in the top 20. China is ranked 29th, India 49th, Brazil 56th and Russia in 63rd place. As always, rankings depend on the parameters and the validity of data where available. In my humble opinion however, it is rather questionable whether these WEF rankings reflect reality from a business perspective. Judging from my own experience, I would not place the US nor the Western European countries anywhere near the Top Ten since I feel they have lost their competitive edge many years ago.

I am curious to get some feedback from the readers as to which countries you would rank in the Top Ten. You can download the complete list at:; the full report is available at:

Data Source:

One Year after Lehman's Collapse...
One year ago, on September 15, 2008, Lehman Brothers, one of the premier global financial institutions, collapsed. There is ample coverage everywhere as to the impact this event had on the financial crisis.

To name a few: How Lehman's Collapse Changed Wall Street, History will judge Lehman mistake harshly, Lehman Had to Die So Global Finance Could Live

The discussion continues as to whether it was a mistake to let Lehman's collapse while rescuing Bear Sterns, Fannie Mae, Freddie Mac, AIG as well as pumping enough money into many other financial institutions. That decision remains as controversial as the funds that went into the massive bail out efforts and the decision making process as to how bailout funds were allocated. Many, including Professor Elisabeth Warren, chair of the congressional oversight panel, still question the US policy responses to the financial crisis (see Market Insights - 22 August 2009 and Prof. Warren's Interview).

To put things into perspective, let's look at how the markets faired since then. Below is a comparative chart of the major global stock market indices. Most markets except for China reached a low point in early March. Since then, equities showed a strong up-trend. The emerging markets are in positive territory since then, with China leading the way gaining over 40% since September 11, 2008. Interesting side note here, China, India and Brazil have all turned positive, while the major Western developed countries are still on their way to reach the levels of one year ago. If stock prices were the main indicator of "competitiveness", the chart above would be practically turned upside down. By comparison, the worst performers were US Markets (-17%) and Swiss Market Index (-15%) while China (+40%) Brazil (+14%) and India (+14%) weren't even in the Top 20.

Interesting Read
Please consider: Goldman chief says banks lost control

I don't know if it's a sign of the times that public figures and high profile executives can make a mockery out of facts and get away with it, or whether the general public is just at a point of complete disillusionment and ambivalence to simply not care anymore. Or maybe we are all just too stupid to comprehend the complexities of markets, valuations and compensation.

I have no quarrels with rewarding brilliance, hard work and the all the qualities that drive innovation, progress and improvements of society as a whole. But for someone like Lloyd Blankfein, CEO of Goldman Sachs, to come out in public and admit that "banks lost control of the exotic products they sold in the run-up to the financial crisis, and that some of the instruments lacked social or economic value" or to say that "multi-year bonuses should be outlawed and that senior staff should receive large proportions of pay in stock, rather than cash" is beyond my comprehension. Let's not forget that Goldman Sachs had bonus accruals amounting to $11.4bn in the first half of 2009, profits quite possibly derived, at least in part, from some of the instruments that "lacked social or economic value"...

What's worse, a brief glimpse at Mr. Blankfein's compensation is rather revealing in this context.

In 2007, Mr.Blankfein received $73.7M total pay.


In 2008, Mr.Blankfein received considerably less but still a respectable $25.8M total compensation.


Between 2003-2008, Mr. Blankfein received a total of $136.7M while the company's stock went down 20%.

Ironically, Goldman Sachs has been one of the better performing financial institutions and who knows, Mr. Blankfein may be one of the most brilliant CEO's on Wall Street. Without going into detail of competing banks' CEO compensation, figuring an average decline of financial stocks of about 60% in the same time period, we can assume that their track record must be worse. Is anyone of you aware of Mr. Blankfein or other big time CEO's paying back their compensation for 2007 or 2008? That would be something worth considering a "social and economic value" for tax payers. Anyone interested to dig deeper?

Signposts of Things to Come - Greater Transparency?
Please consider: BlackRock to launch trading platform

BlackRock, after its acquisition of Barclays Global Investors, is soon to be the largest money management firm with $3 trillion under management. The firm is now planning to launch its own global trading platform that will allow them to effectively cross-sell securities internally.

"The plan is still in its early stages, but its outlines are already clear. If some BlackRock clients are selling a security and others are buying, the group can “cross” those trades internally without going through Wall Street. BlackRock does not intend to take any fees for this service, since the whole point is to save its clients money, according to people familiar with the plan."

What does this mean?

If the plan is implemented, BlackRock would effectively "make markets" in traditional securities such as stocks and bonds but more likely in various sorts of derivatives - that's where most of the financial gravy is. In fact, most investment banks have been doing that, but this plan would enable them to do so on a much bigger and global scale, across any kind of asset class and presumable out of the reach of effective regulatory oversight. Making a market in a security and doing an over the counter trade is nothing new. Foreign Exchange Markets trade several trillion dollars each day "over the counter". Nothing wrong with that, it provides immense liquidity in securities and assets where price discovery is easily obtained. Where it does make life difficult for clients is in the area of certain derivatives, particularly the more complex derivatives which are often sold in bundles similar to insurance products and derived from complex mathematical models.

Perhaps the more important question is whether this move creates another "too big to fail" scenario. When securities and derivatives are traded off-exchange, the clients bear the counter-party risk of the transactions. In other words, if a large enough client of of BlackRock fails, or worse even, if BlackRock were to face a liquidity crunch, you could see events unfolding similar to those of last year. Perfect timing, one year after Lehman's collapse and amidst calls for greater transparency, this move is effectively creating the opposite.

The only sensible way to provide greater transparency is to trade derivatives on a centralized exchange. Of course there are downsides to exchange trading, particularly the need to standardize financial instruments and somewhat less choices for customers. However, as investors painfully realized, less complex financial instruments and less choice may have been exactly what could have prevented the massive financial implosion when the underlying asset prices of these obscure derivatives started to fall.

There are lots of other concerns, not least of which include conflicts of interest - how would you feel if your mutual fund was also making markets and effectively establishing prices in the investments they took? Going back to transparency, it does provide transparency, incredibly valuable transparency from an internal risk management and business perspective as such; but only for BlackRock not for its customers and certainly not for regulators.

We previously discussed the poor record of some US regulators most recently examining the SEC blunders in the Madoff case. Imagine 10 regulators from 10 different jurisdictions trying to regulate transactions and financial instruments that are many times more complex...

I am hopeful that this move by BlackRock will come under intense legal and regulatory scrutiny. However, with $3 trillion in assets, this firm can afford the best lawyers and lobbyists to push this through. Perhaps the best we can do is to raise public awareness, particularly among those who may be doing business with this giant money manager. This much concentration of assets within one global player is frightening.

Talk about too big to fail...

Currency Markets
The US Dollar has come under increased pressure this week falling to a new low for the year and closing the week at 76.68. The next technical support level would be just above 75. Failing that support, the Dollar Index could retest the low points of last year.

Last week, we examined the Australian Dollar which continued to move upwards, reaching another high for the year and closing Friday at 0.8633. The Aussie is now just 14% away from its all-time high versus the US$. The technical hurdle at the 0.85 level from last week was clearly not strong enough and we are now looking at new resistance levels around 0.8858 and the psychological level of 0.9000 as next stops. Perhaps more relevant than technical considerations are two major fundamental factors impacting the way forward. As a commodity currency, the Australian Dollar continues to benefit from a strong demand in commodities and metals all of which are available in this natural resource-rich country. Furthermore, at an almost 3% interest rate differential over the US$, the Aussie is looking increasingly attractive for international investors hoping to lock in some gains from the more advantageous deposit rates. As financial markets continue to stabilize, this rate differential may provide further impetus towards a retest of the highs during 2008.

All that glitters is Gold
Gold continues to shine reaching a new high for the year at $1,011.90 on Friday. The precious metal is now up almost two-fold within a two-year time frame. It is also closing in on last year's all-time high of $1,033.90.

The discussion on whether or not to own gold continues especially at these levels. Supporters of a continued price rise in Gold include those who believe that Gold is an ideal hedge against inflation, a protection against general market risk as well as a protection against a possible decline in the value of the US Dollar. There are also some supporters who argue that the price of Gold, adjusted for inflation, is currently where it was 26 years ago in today's money. Put differently, the previous peak of Gold in 1980, after adjusting for inflation, would be over $2,000 today indicating plenty of room for further upside.

On the other hand, you can appreciate the arguments of supporters of deflationist views indicating that price pressures at these levels may not be sufficient to drive Gold much higher. Another view was eloquently expressed by Edward Morse, head of economic research for LCM Commodities during a recent interview on techticker when he argued that despite the unusual place Gold has as a safe-haven commodity, it is also an industrial commodity. As such, the industrial demand for Gold at $1000 an ounce would diminish and keep prices in check. He then forecasted that Gold would continue trading range bound with $1,000 being the upper band of the range.

Gold at these levels also continues to attract retail investors and another discussion entails the question as to what would the best way to buy and own Gold - physical Gold, Gold certificates, Gold futures, Gold ETFs, Gold mining stocks etc. All have pros and cons but please remember that there is a cost associated with most of these Gold investments; despite the current low interest rates, making it more affordable to hold Gold, the opportunity cost of owning the precious metal makes it less attractive in the long run. Please carefully consider those costs when assessing possible investments in Gold or Gold related instruments.

Good luck & good trading!

Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this website be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance.

September 11, 2009

2009-09-11 Market Recap

Markets Price Day High Day Low Change % Change
Euro 1.4562 1.4635 1.4554 0.0017 -0.12%
Japanese Yen 90.68 91.77 90.21 1.08 -1.18%
British Pound 1.6654 1.6741 1.6643 0.0003 0.02%
Swiss Franc 1.0384 1.0400 1.0340 0.0001 -0.01%
Australian $ 0.8636 0.8678 0.8607 0.0004 0.05%
Canadian $ 1.0760 1.0794 1.0716 0.0017 -0.16%
Chinese Yuan 6.8290 6.8302 6.8277 0.0000 0.00%
Gold 1005.30 1011.95 994.60 9.80 0.98%
Silver 16.73 16.98 16.64 0.10 0.60%
Oil Futures 69.11 72.90 68.82 -2.83 -3.93%
Natural Gas 2.99 3.42 2.93 -0.27 -8.32%
S&P 500 1042.73 1,048.18 1,038.40 -1.41 -0.14%
DJI 9,605.41 9,649.85 9,571.56 -22.07 -0.23%
NASDAQ 2,080.90 2,088.93 2,070.02 -3.12 -0.15%
Nasdaq 100 1,685.46 1,689.68 1,674.14 -0.70 -0.04%
Volatility Index 24.15 24.33 22.48 0.60 2.55%
10 Year T-Note 3.34 3.36 3.27 0.00 0.03%