January 30, 2010

Market Insights - 30 January 2010

Dear Friends & Fellow Investors

Here  is the latest issue of Market Insights. As always, please email any questions to: . 

In This Week's Issue
• Weekly Snapshot
• Chart Of The Week
• Weekly Barometers 
• Flight To Safety Again? 
• A Statistical US Recovery
• Recommended Video 
• Reminder For The Busy Professional 

Weekly Snapshot
• US consumer sentiment index rose 1.6 points to 74.4 for January (Bloomberg)
• EU Officials signal last resort backing for Greece (FT)
• Euro falls to 6 month low of 1.3860 against US$ on concerns about Greece (eSignal)
• US real GDP rose at an annual rate of 5.7% in the fourth quarter of 2009 (ESA)
• Fed Chairman Ben Bernanke won Senate confirmation for a second term (Reuters)
• Bank of China announced new share offering which could raise up to $30bn (Economist)
• Household saving rate down to 15.8% in the euro area and 13.7% in the EU27 (Eurostat)
• US durable goods order in Dec-09 increased 0.3% to $167.9 billion (ESA)
• Greek 10-year yields reached a high 7.25%, a record spread of 3.6% points over US Bonds (FT)
• FOMC maintains federal funds rate at 0 to 1/4% likely to continue for an extended period (FRB)
• Avatar has become the highest grossing film with sales of $1.859bn (FT)
• UK finally out of recession showing Q4 growth of 0.1% (FT)
• US new home sales in Dec-09 fell 7.6% from Nov-09 and declined 8.6% from Dec-08 (ESA) 
• US Consumer Confidence at 55.9 (1985=100), up from 53.6 in Dec-09 (Conference Board)

Chart Of The Week 
Bill Gross of Pimco offers a fascinating read in his Investment Outlook February 2010.  The chart below is courtesy of www.pimco.com. Special attention is given to the countries within “The Ring of Fire.” Those countries have potential for public debt to exceed 90% of GDP.


Weekly Barometers 
Our new section shows a graphic overview of the major markets (click on chart for larger image).

Stock Weekly  FXWeekly

Flight To Safety Again?  
With the exception of the US Dollar which gained about 1.5% in each of the past two weeks, essentially everything else had a rough couple of weeks. Among the major indices, China (-4.45%)  and Silver (-4.65%) ended up at the bottom of the table this week. What just happened? Isn’t this supposed to be a V or U shaped recovery?

The fact that all major asset classes and the major market indices showed a near perfect negative correlation to the US Dollar brings back memories of the credit crisis. To make money in recent weeks, you had to buy Dollars and sell everything else. 


Along with a few volatility spikes in the past two weeks, risk aversion crept back into institutional portfolios. For many traders, this meant liquidating their risk and emerging market positions and returning to the US Dollar again, the illusive safe haven currency.


In the short-term, this means additional pressure on currencies and commodities. But the main rationale for the major carry trade of 2009, i.e. borrowing US$ in favor of higher yielding currencies such as the Australian $, is still prevalent. There is still about a 3% interest rate differential between the two currencies. All other things being equal and in the absence of major detrimental factors for Australia’s economy, this carry trade will resume once more when the dust settles. Although a slightly more risky position in the short run, long term purchases of foreign currencies with favorable deposit rates over the near zero US$ rates still sound like a good hedge against the dreaded deterioration of the US administration’s fiscal position. We shall examine a convenient method to achieve this type of hedge in an upcoming newsletter.

A Statistical US Recovery
Last week, we looked at the World Bank forecast for Global Economic Prospects in 2010.  The report suggested global average growth rates of 2.7% (2010) and 3.2% (2011).  This week’s announcement that US real GDP rose at an annual rate of 5.7% in the fourth quarter of 2009 sounds encouraging.  But concerns prevail about a renewed deleveraging process as seen in falling commodity and stock market prices recently. Where is the problem then?

For starters, the better than expected US GDP number might just be another data point in what some economists have termed a “statistical recovery”.  There are a number of reasons to be skeptical.

The majority of the growth came from the rebuilding of inventories.  Consumer spending effectively decreased in the 4th quarter as stimulus programs as the "Cash for Clunkers" had ended. But the overall impact of government stimulus spending cannot be denied.  In fact, it may have been a major contributor to GDP growth in the last two quarters. Yet, there is limited long-term return from temporary government spending.  Repaving roads and/or building bridges to nowhere are simply spending not investment in long-term productive capacity.  As the stimulus dries up, those positive effects on GDP will simply disappear.

Equally concerning are the effects of a still declining labor market.  As we pointed out before, the US economy needs to create at least 100,000 jobs each month just to keep up with the demographics of a still growing population.  Until there is a return to an increase of payrolls in the low six figures, do not expect any positive effect on GDP from the consumer. 

Perhaps the most troublesome factor in our view however, is debt. The current and future debt levels and the leverage with which central banks and governments are still proposing to spend their way to prosperity is mind-boggling.  Excessive debt was the root of the credit crisis; more debt and more leverage is not the solution!  Over-indebted and over-leveraged governments and entire economic sectors must eventually de-leverage themselves and become somewhat fiscally responsible if they want to be able to continue to (re)finance their ongoing obligations.  With regard to “Uncle Sam” embarking on a policy of fiscal responsibility, the following scenarios come to mind:

The spending part of the equation does not appear to have any realistic footing.  Mr. Obama’s proposed three year spending freeze does not cover big ticket items such as Defense, Medicare, Medicaid and Social Security nor can it put a cap on the cost of servicing its own debt.


How about the income side of the equation?

The options for increasing government revenues are equally limited.  Any kind of meaningful tax increase would be political suicide in this fragile economic environment. 

In terms of a fall-out from too much debt, the recent Greek debt crisis can serve as a preview of what might happen in a larger context, albeit being a remote possibility.  If the Greek situation worsens, Europe and the ECB will have to intervene and serve as a lender of last resort. This may put a halt on the rise of Greek government bond yields, perhaps even lower rates back in line with the rest of Europe.  However, the Euro will weaken further as risk capital gets out of Greek debt the longer the crisis prevails.  Furthermore, a similar fate may fall upon Italy, Portugal, Spain and Ireland.   If the ECB were to abstain from intervening, an increase in interest rates for all countries of the EU would be a certainty.

In terms of applying similar scenarios to the US, there is of course no lender of last resort for the US and its central bank, nor is there any for the US Dollar, a currency backed by nothing other than faith and confidence. Japan and China, the largest creditors to the US, don’t appear to be willing or able to increase their purchases of US Treasuries.  In fact, China has decreased the net holdings of US Treasuries since last summer.  Who else would “pick up the tab” in case of further US financing needs?

If the US economy were to recover rapidly, as hinted by the latest GDP data, the US government might see an increase in revenues.  But as a result of higher growth, interest rates would have to go up and consequently the cost of servicing the huge debt mountain would go up as well, possibly canceling out any increase in revenue from higher growth rates. 

By contrast, slipping back into a recession poses massive concerns as well.  For if additional stimulus money was allocated to jump start the economy again, the US government’s credibility in the international arena would face a major blow and an imminent rise in interest rates combined with a crash in the bond market and the US Dollar would ensue. 

Although completely understandable and increasingly popular from the taxpayer’s perspective, punitive taxes, salary caps and bonus claw-backs may open yet another can of worms.  The US administration might find itself in a dark alley, being unable to finance some of its debt from the foreign banks and financial institutions who would come to realize that doing business in the US is simply too risky and/or prohibitively expensive.

Perhaps the least popular scenario from the administration’s point of view, doing nothing and letting markets play out a natural de-leveraging process, would have been, and probably still is, the best and most cost-effective solution in the long-term.  Yes, the US and perhaps the global economy would fall back into a recession and it will cause some institutions to fail.

However, the world economy won’t fall off the proverbial cliff.  Consider the aftermath of the Asian financial crisis of 97/98. Markets crashed, asset prices tumbled, and bankruptcies were allowed to run their course – a few years later, those countries and many of the companies who had been severely impaired by the crisis came back leaner, stronger and more competitive.  If, by contrast, the US were to continue following the Japanese solution, it could be facing a similar two decade period of sub-par growth and miserable market returns only to end up with higher debt levels still.  Bill Gross’ “ring of fire” is not looking that unrealistic after all...

Recommended Video
Jeff Rubin, the former Chief Economist of CIBC World Markets and the author of “Why Your World Is About To Get A Whole Lot Smaller” has an interesting angle on the longer term trend for oil, the economy and globalization in general.  Although this somewhat lengthy interview from Nov-09 does not reflect the short-term market climate, one should consider Mr. Rubin’s thought process in terms of assessing a longer term personal investment strategy.   More importantly, as a business owner, one might consider some of his prognoses critically important for potentially seismic shifts in mid-to-long term business strategies.  In his words: “distance will cost money” – be prepared.

Reminder For The Busy Professional
Please consider Why the Internet Is So Distracting by Jeff Stibel. 
Neither rocket science nor particularly ground breaking new info, but this HBR Blog post is a good reminder for us super-busy modern professionals to take a step back once in a while.  What are the true productivity gains achieved from new technologies?  Take the Internet for instance, an immense resource and the raison d'être for more and more businesses in an increasingly inter-connected world.  Yet, are we really smarter and more efficient in achieving our objectives and in doing our jobs?  There are immense advantages to being online 24/7 but there are also too many distractions from unqualified and unsubstantiated talk and mindless information overflow – all that noise that we all should be filtering out but often cannot.  While I do not believe that a Four Hour Work Week (as promoted by Tim Farris) is anywhere close to realistic, there are definite upsides to working less hours and working smarter instead of working more.

On that note, enjoy your week-end and TURN OFF THE MACHINE for a while!

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 communication 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.

January 23, 2010

Market Insights - 23 January 2010

Dear Friends & Fellow Investors

Here  is the latest issue of Market Insights. As always, please email any questions to: . 

In This Week's Issue
• Weekly Snapshot
• Chart Of The Week
• More On China 
• Global Economic Prospects 
• Recommended Read & Video 
• MBA Reality Check

Weekly Snapshot
• Goldman Sachs 2009 net income surged to $13.4bn (FT)
• Industrial new orders up by 1.6% in Euro area (Eurostat)
• Obama calls for new restrictions on size and scope of big banks a.k.a. "Volcker Rule" (WSJ)
• World Bank expects Global GDP to grow 2.7% this year and 3.2% in 2011 (World Bank)
• Euro under pressure as markets fear wider impact of Greek crisis on Euro area (Eurointelligence)
• US building permits in December 2009 were 653,000, an increase of 10.9% from November (ESA)
• US Producer Price Index moved up 0.2% in December, seasonally adjusted (BLS)
• US Housing starts in December fell back 4.0% after rebounding 10.7% in November (Bloomberg)
• China orders its banks to temporarily halt lending to slow credit growth (FT)
• Russia's Central Bank started buying Canadian Dollars to diversify its Forex reserves (FT)
• China grew 10.7% y/y in Q4 of 2009, accelerating from a 9.1% y/y growth rate Q3 (Economy.com)
• US Leading Economic Index (LEI) increased 1.1% percent in December (Conference Board)
• Sugar price reaches 29 year high at 29 cents per pound (FT)
• Bank of Canada leaves rates at a record low 0.25%, scales back money market operations (Reuters)

Chart Of The Week 
A reminder of how US creditors changed during the decade (Click on chart for larger image).


* Caribbean Banking Centers include Bahamas, Bermuda, Cayman Islands, Netherlands Antilles and Panama (BVI since 2006).
** Oil exporters include Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria.

More on China 
China continues to make news these days.  Unabated economic growth has put the country at the forefront of global economic power players.  It is now back to double-digit growth barely a year after the worst recession since the Great Depression hit all major financial markets and economies. But despite economic progress, China also continues to mystify foreigners, in particular foreign investors. Personally, I claim no knowledge of understanding Chinese politics, its society and its people nor would I be in a position to advise on the merits of investing in China.  Yet, with growth rates at about 10% and a re-ignited property boom, one could easily be tempted into investing - perhaps a Chinese focused Mutual Fund or ETF? But let us take a step back first...

Investing in China, whether directly or via one of the many investment vehicles, comes with a long list of caveats.  Even the big multi-nationals (most recently Google) could sing a litany of songs about corruption, red-tape, cultural and language issues, all of which can weigh heavily on investment returns. And how about all the fabulous stories of growth, exuberance and unheard-of property prices? 

I find it tough enough to trust the official economic numbers of the US or the European Union, how much more must one question official data from a command economy like China. So let's forget about everything that China says and focus on a few things they have done and continue to do as we speak.  I will use a few charts to help illustrate some important milestones....

As late as 1981, China started to actively massage its exchange rate versus the US$ with a clear long-term objective:  To devalue the Renminbi to gain a massive competitive pricing advantage for their exports. In 1981, when the US and Europe were united in fear that Japan would be the dominant global economic powerhouse, the Renminbi was trading around 1.5 versus the US Dollar.  In subsequent years, the currency was allowed to depreciate allowing the USD/CNY rate to reach up to 8.7 Yuan per US Dollar. A few years back, when the then US Treasury Secretary Paulson argued that the Chinese currency was about 40% undervalued, it was quite an understatement in historic perspective.


From a macro perspective, the exchange rate movements of the Renminbi are in stark contrast with those of Japan and Germany, two similarly export-driven economies that saw their country rise from economic insignificance after WWII to major export nations by the 1970s and 80s.  As their economies grew, so did their exchange rate gain in value against the US$, particularly after the Bretton-Woods agreement was abandoned and currencies were allowed to freely float in the early 70's. The example of the Japanese Yen clearly shows how the Japanese Yen gained about three times the value against the US$ just before Japanese Equities reached their all-time high in 1990. 


China, by contrast, embarked on an export-driven model with a simple principle:  produce as much as possible and sell it as cheap as possible.  Aided by the 8:1 pricing advantage achieved between 1980 and the mid-90s, China was able to undercut all competing countries while still retaining massive profit margins.  The downside to this policy however was rampant domestic inflation. Exporting goods at unrealistically low exchange rates means one has to import everything else (e.g. raw materials for goods of production) at much higher prices. With the credit crisis in 2008, those inflation fears came to a halt when the world's asset prices united in a deleveraging process across all asset classes.

But with massive stimulus from the Chinese government using ultra-loose monetary policy, China quickly regained all losses from 2008. (Ed. Note: A big plus of a command economy over a democratic, semi-free market economy is quite simply that things can get done very fast.  When China orders its banks to lend, they do lend)  Net result: an economy so hot that a number of Chinese Banks were now ordered to stop lending, at least until the end of the month. 

Liu Mingkang, head of the China Banking Regulatory Commission (CBRC), said in an interview Jan. 20 that several Chinese banks had been asked to restrain their lending after proving to have inadequate capital reserves. Chinese media reports claimed that new bank loans so far in January have risen to as high as 1 and 1.5 trillion yuan ($146-$220 billion) — approaching or equaling the massive hike in January 2009. As a result, several major Chinese commercial banks (whose names were not given) were given oral commands to stop new lending for the rest of the month.

As far as China is concerned, inflation is definitely back on and along with that, renewed speculation about the revaluation of its currency.  Whether China will let its currency appreciate or not is no longer the question but rather when it will do so.  That of course is the Million Dollar question and I wish I had an answer. While I cannot foresee when this will happen, there are some additional signs that China is preparing for a second phase of gradual or managed currency revaluation: 

An early sign came last year when Brazil and China agreed to use their own currencies in trade rather than settling their dues in US$.  A further sign was the fact that the Bank of China, as well as some other Central Banks started to convert more of their foreign currency holdings into a basket of currencies including Euro, Swiss Franc and Japanese Yen.  However, a development that went somewhat under the radar was the fact that China stopped buying US treasuries by the middle of last year.  As the chart below shows, China has embarked on a decade long buying spree of US Treasuries increasing their holdings from about $71Bn in 2000 to over $800bn in May 2009.  Since last summer however, no net purchase were added, instead their holding decreased by over $10bn since. This may indicate a trend of further divesting of US treasuries.


Going back to the prospects for the CNY versus US$, it has been at the same level of about 6.8 since July 2008, barely moving an inch in either direction.  It may very well stay there for an extended period of time. However, all other things being equal, the currency revaluation might just be the right valve to keep Chinese domestic inflation under control.  Lastly, in case you were not aware of this, the Chicago Mercantile Exchange (CME) has recently started offering Chinese Renminbi Futures and Options.  There is of course also an ETN (CNY) allowing you to express your opinion on the future of this currency with your wallet.  But please be aware of potential risks of trading these instruments - they are not for the novice investor.  If you like more info on these instruments or any other currency products, please email me.

Global Economic Prospects
The World just published its annual report on Global Economic Prospects 2010: Crisis, Finance, and Growth.  The complete report can be downloaded here.

Based on the report findings, the worst is behind us and the world economy should get back on its feet with average growth rates of 2.7% (2010) and 3.2% (2011). But despite its volume (some 180 pages) and in-depth coverage of various possible scenarios affecting all countries, one has to wonder about some of the assumptions made in a rather positive assessment of world economic growth going forward. Running the risk of over-simplifying, I do wonder why there is not a single region expected to experience economic contraction, even under a deeper recession scenario. Curious...

WB Forecast

Recommended Read
Please consider David Altig’s Blog post:  It's jobs, not discouraged workers
One might not agree with Mr. Altig’s assumption that some 500,000 discouraged workers might come back to the labor pool now causing additional competition among the unemployed.  What is perhaps more concerning is the fact that this pool of discouraged workers seems to be expanding. 

Chart: Courtesy of http://macroblog.typepad.com/macroblog/

Recommended Video 
Never shy to cause some raised eyebrows, James Altucher has done it again when he says the 'American Dream' Is a "Scam".  He notes that most people neglect to factor in the substantial (hidden) cost of owning a home when considering housing as a pure investment. Please consider this interesting interview:

MBA Reality Check
Harvard Business Review just published: The Best-Performing CEOs in the World
Very interesting to see who is on that list and even more interesting to learn what their backgrounds are.  As a Business School graduate, I often wonder about the merits of an MBA degree, considering the time, effort and substantial capital that went into the education.  Going through the list of  Top50 CEOs, I noticed that only 15 out of 50 (less than a third) had a formal business education.  Although I still consider business school one of the best investments I ever made, one has to wonder what these Non-MBAs know that isn’t taught in business school and whether or not that skill can be taught at all?

Next time you consider an investment, you may wonder what makes people like Steve Jobs such an “out of the box” thinker; perhaps the same thought process could be used when analyzing your next investment.

On that note, good luck and 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 communication 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.

January 16, 2010

Market Insights - 16 January 2010

Dear Friends & Fellow Investors

Here  is the latest issue of Market Insights. As always, please email any questions to: . 

In This Week's Issue
• Weekly Snapshot
• Chart Of The Decade
• Previewing 2010 
• About Inflation
• 2010 Oil & Energy Prices
• The Shape Of Jobs To Come

Weekly Snapshot
• Financial firms are on track to pay over $145 billion in bonuses for 2009 (WSJ)
• US consumer prices rose 0.1% in December and increased 2.7% annually (BLS)
• Euro area annual inflation up to 0.9% (Eurointelligence)
• Intel reported a fourth-quarter profit of $2.3 billion beating estimates (AP)
• China’s exports in December rose by 17.7% compared with December 2008 (Economist)
• Germany said its economy shrank 5% in 2009 and probably stagnated in the Q4 (WSJ)
• Germany's 2009 budget deficit was 3.2% of gross domestic product (WSJ)
• Financial Crisis Inquiry Commission began first hearings in Washington (FT)
• European Central Bank keeps rates steady at 1% (Eurointelligence)
• Obama proposes new levy on large banks and financial companies (Economist)
• Industrial production up by 1.0% in euro area (Eurostat)
• US Retail sales in December 2009 decreased 0.3% from November to $353.0 billion (ESA)
• US trade deficit in November 2009 increased 9.7% to $36.4 billion (ESA)
• Google threatens to quit China “no longer willing” to censor results on its Chinese site (FT)

Chart Of The Decade
Here’s another decade chart comparing important events with the exchange rate of the Euro versus US$.


    Click on chart for larger image

Previewing 2010  
Last week’s jobs report and some of the mixed economic news this week put a bit of a damper on the markets.  Germany’s 5% drop in GDP came as a clear reminder of the ongoing disconnect between the financial markets and the real economy.  As we pointed out last week, a sustainable recovery must find a sound footing in the real economy i.e. via a healthy labor market.  More jobs will lead to more consumption which will lead to more realistic company earnings.  The crowd on Wall Street is still relatively bullish but there are also increasing numbers of forecasters who do not believe in a V-shaped recovery.  Gerald Celente of the Trends Research Institute has a much more sobering outlook for 2010 calling for a depression rather than a recovery.  While one might not agree on the timing of a depression this soon after markets have rebounded, one should consider the possibility that the 2008/09 recession did not complete its course and further deleveraging is needed before real sustainable growth can resume.   I leave it up to your judgment as to whether his forecast is plausible.  However, whichever way the economy may turn in 2010 and beyond, I could not agree more with his recommendation of going back to basics.  A bit more frugality cannot be bad; becoming more conscious of the way we consume, wasting less and saving more would also mean living healthier.  On that note, I’ll check on those fruit trees in my backyard.

About Inflation
As the Bureau of Labor Statistics reported, the consumer price index, the broadest and official measure of consumer inflation, increased 2.7%  over the last 12 months before seasonal adjustment.  Although the debates among various camps of economists continue as to whether we are experiencing inflation or deflation, the most simple measure on a personal level would be to compare your personal expenses and general living standard with our personal wealth or income.  Are you feeling the pinch when looking into your wallet?  Most of us do as wages have generally not kept up with rising price levels.  Shadowstats.com has an alternative way of measuring inflation and this alternative CPI measure feels a lot closer to reality.


Chart: Courtesy of ShadowStats.com

2010 Oil & Energy Prices
Please consider the Short-Term Energy Outlook provided by US Energy Information Administration (EIA)

Highlights from the report are:

EIA expects that the price of West Texas Intermediate (WTI) crude oil, which averaged $62 per barrel in 2009, will average about $80 and $84 per barrel in 2010 and 2011, respectively.  EIA's forecast assumes that U.S. real gross domestic product (GDP) grows by 2.0 percent in 2010 and by 2.7 percent in 2011, while world oil-consumption-weighted real GDP grows by 2.5 percent and 3.7 percent in 2010 and 2011, respectively.

Escalating crude oil prices drive the annual average regular-grade gasoline retail price from $2.35 per gallon in 2009 to $2.84 in 2010 and $2.96 in 2011.  Pump prices are likely to pass $3 per gallon at some point during the upcoming spring and summer.  Projected annual average diesel fuel retail prices are $2.98 and $3.14 per gallon, respectively, in 2010 and 2011.

EIA expects the annual average natural gas Henry Hub spot price for 2010 to be $5.36 per thousand cubic feet (Mcf), a $1.30-per-Mcf increase over the 2009 average of $4.06 per Mcf.  The price will continue to increase in 2011, averaging $6.12 per Mcf for the year.

The annual average residential electricity price changes slightly over the forecast period, falling from 11.6 cents per kilowatthour (kWh) in 2009 to 11.5 cents in 2010, and then rising to 11.7 cents per kWh in 2011.

Projected carbon dioxide (CO2) emissions from fossil fuels, which declined by 6.1 percent in 2009, increase by 1.5 percent and 1.7 percent in 2010 and 2011, respectively, as economic recovery contributes to an increase in energy consumption.

Along with the forecasts came an interesting chart showing crude oil prices based on the estimates from the short-term energy outlook (STEO) as well as the current futures prices on the New York Mercantile Exchange (Nymex).  Ranges are calculated on an assumption that crude oil futures prices have a volatility of 95%.  This would mean that a relatively wide band is given for possible price changes in 2010 ranging from $45 to $162.


The rather wide price range assumes we see the same volatility levels as depicted towards the end of 2008.


However, with current volatility below 30% and assuming that prices may fluctuate somewhat less than in 2008, we would consider an average price volatility of 60% to be sufficient.  The resulting price band is then narrower with outliers between $65 and $113.  Based on that, we expect energy markets to be somewhat  volatile but to remain in the narrower price band.  Unless another massive deleveraging process takes place, it is hard to conceive that prices would return to levels in the $40 range.  Taking a stab, we predict an oil price between $80-$100 by the end of this year. 


The Shape Of Jobs To Come
In our previous assessments of economic trends, we concluded that a sustainable US recovery is only viable if more jobs are created domestically. The same could be said for much of the developed world.  No jobs = much less consumption which also spells trouble for the BRIC countries, at least in the medium term.  Where then should these jobs come from?

The answer, not surprisingly, lies in innovation.  The much needed job growth is invariably going to happen with the creation of new technologies and new industries.  Presumably, many of the fastest growing future jobs are not invented yet. Rohit Talwar and Tim Hancock of Fast Future Research published a fascinating report of a survey on the future of jobs.  The survey narrowed down a list of 20 jobs: 

1.    Body part maker
2.    Nano-medic
3.    ‘Pharmer’ of genetically engineered crops and livestock
4.    Old age wellness manager/consultant
5.    Memory augmentation surgeon
6.    ‘New science’ ethicist
7.    Space pilots, tour guides and architects
8.    Vertical farmers
9.    Climate change reversal specialist
10.  Quarantine enforcer
11.  Weather modification police
12.  Virtual lawyer
13.  Avatar manager / Devotees Virtual teacher
14.  Alternative vehicle developers
15.  Narrowcasters
16.  Waste data handler
17.  Virtual clutter organiser
18.  Time broker / Time bank trader
19.  Social 'networking' worker
20.  Personal branders

A more detailed description of these jobs is available here.  The full report can be accessed here.

Reading through this report, I found "The Science and Technology Timeline 2010 – 2030" (pages 104-120) most fascinating.  These are the much needed scientific breakthroughs upon which future job growth would be based on.  Sounds like science fiction? Not really, considering the advances and the fast pace of technological change we have witnessed in the last two decades.

In terms of finance jobs, an important driver for change may be rooted in shifting perception of money and wealth.  Already, companies are experimenting with new forms of compensation (perhaps as a result of the recent financial crisis) which may eventually trigger a paradigm shift in people's attitudes.  The relatively small list of future finance jobs implies that traditional finance might actually get the much needed overhaul and that new forms of compensation and monetary systems may come forward.  Time being the ultimate form of value, particularly for people who have money, could indeed turn into a new monetary form called time credit.  Good-bye investment banker - say hello to the "time banker".

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 communication 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.

January 09, 2010

Market Insights - 9 January 2010

Dear Friends & Fellow Investors

Here  is our first issue of Market Insights for 2010.
As always, please email any questions to: . 

Wishing everyone a healthy and prosperous New Year!

In This Week's Issue
• Weekly Snapshot
• Chart Of The Decade
• Cautious Optimism 
• The Decade In A Nutshell
• A Decade In Graphs
• More Of The Same?
• Some Things Never Change

Weekly Snapshot
• U.S. employers unexpectedly cut 85,000 jobs in December (Reuters)
• US unemployment rate remains at 10.0% in December (Briefing.com)
• Euro area unemployment rate up to 10.0% in November (Eurostat)
• Euro area GDP up by 0.4% and EU27 GDP up by 0.3% (Eurostat)
• UK interest rates remain unchanged at 0.5% (Economy.com)
• Cold weather helped push the price of oil to $83.52 on Wed, a 15-month high (Economist)
• FOMC left rates unchanged in a range of zero to 0.25% (WSJ)
• Fed still plans to buy $1.43 trillion of housing-finance debt through March (Business Week)
• Industrial new orders down by 2.2% in euro area (Eurostat)
• Euro area inflation at 0.9% (Eurointelligence)
• Google revealed their own smart phone "Nexus One" competing with Apple’s iPhone (WSJ)
• US pending home sales plunged 16% in November (Bloomberg)
• Spanish unemployment nears 4m, nearly 20% of workforce (FT)
• Dubai opened the $1.5 billion Burj Khalifa tower, the world’s tallest building at 828 meters (FT)

Chart Of The Decade
Some of the events of the past decade as compared with the chart of the S&P500 during the period.  


    Click on chart for larger image

Cautious Optimism
So here we are at the dawn of a new decade wondering what the next ten years might bring while looking back at a period that has left many with deep financial scars.  Turbulent would be an understatement when describing the events of the first decade of the 21st century.  But despite of it all, we’re still around and, realizing that the world has not fallen of a cliff just yet, a fair amount of optimism should be in order when locking at the challenges ahead of us. 

Particularly the US which, most would agree, was the cause and epicenter of the financial crisis of 2008/09, is looking comparatively untarnished considering the extent of the deleveraging that took place.  Look no further than Japan, which recently completed the 2nd decade of its mega-bear market, to feel comparatively fortunate.  At the end of 1989, the Japanese Stock Index Nikkei peaked at almost 39,000; today, 20 years later, it is still hovering just above 10,000, a little more than a quarter of its peak value then.  


Looking ahead then, the rest of the world should be cautiously optimistic but also be mindful of the fact that two decades of near zero interest rates and various other measures similar to quantitative easing haven’t helped the Japanese Stock Market rebound. Instead, it left the country with a record deficit.

The Decade In A Nutshell
Essentially a continuation of the dotcom bubble, housing was the new investment fad of the rather volatile “Noughties” (00’s).  In continuation with the 90’s, a large part of the world's demand for goods was created by the US consumer who became the locomotive for global production of goods and the main engine of the world economy as a whole.  A slight problem was the fact that all this consumption was mainly created through credit and not through production and savings, the traditional way of generating wealth.

For a long while the scheme worked like this: China  (to a lesser extent India and other developing nations too)  supplied the US consumers with all the goods they wanted and even provided the financing for a near two-decade spending spree.  This symbiotic relationship created a fairly stable equilibrium which was beneficial to everyone.  The US enjoyed a long period of extremely high standard of living - much greater than it should have been given the underlying GDP.  Meanwhile, China created lots of jobs and Chinese citizens saved money.  The country modernized its infrastructure, gave birth to potentially the largest ever middle class, and it is now on the verge of being the dominant economic super power in the world.   The US, once the largest creditor in the world has become the largest debtor.  In September 2008, China took over Japan as the number one creditor to the US and it is currently holding nearly $1 trillion in US Treasuries in addition to some $2 trillion in Foreign Currency Reserves, the majority of which are also in US Dollars. 

 US Creditors
Source: Department of the Treasury/Federal Reserve Board

As a result of the financial crises this symbiotic creditor/debtor relationship broke down when the credit stopped flowing.   Central Bankers and world leaders, spearheaded by the US administration, have done a good job in pumping massive amounts of money into the system.  “QE” (Quantitative Easing), “Government Bailouts” and “Too Big To Fail” became the most uttered phrases of the past two years.  Things have stabilized since and the global economy is breathing again.  However, huge amounts of additional debt has been created (at the expense of future generations) in order to “save” some of the largest institutions which are now “Too Larger To Fail”.

A Decade In Graphs 
Please consider these graphs as reminder of some of the developments during the past decade.

Nominal_returns  Real_returns


Gold  Oil

 US_China Brazil-India

More Of The Same? 
Taking a glimpse ahead, a sustainable solution cannot be a continuation of the cheap credit environment.  This will invariable result in the same bubbles that caused the crisis to begin with. The basis of this odd symbiosis of American Über-Consumer and the tremendous growth of the BRIC (Brazil, Russia, India, China) countries was a "drugged" system with the drug being "cheap credit".   As we learned, that was not sustainable.  The system has failed and cannot serve as a model for the future.

To kick-start another period of extended world growth, demand has to come from somewhere.  The world is waiting for China and India to create this vast new middle class and to act as the new engine for consumption and economic growth.  That might take time however. 

Europe has its own economic struggles and surplus nations like Germany and France are extremely reluctant to spend.  Don’t expect them to spend more than they have...

The US consumer is cash strapped and banks are still very reluctant to lend.  Friday’s employment data are less than encouraging, particularly if one digs a little deeper into the reports.  The official unemployment rate is unchanged at 10% but the "real" unemployment rate (U6 includes: discouraged, marginally attached and non-voluntary part-timers) rose to 17.3%.  Worse yet, long-term and permanently unemployed are at an all-time high.  The previous and current US administration believe in continued stimulus but it remains questionable how much of that stimulus is going to find its way into the real economy.  Conceptually, the renewed deficit spending is like trying to get a drug user (US economy/US consumer) off the drugs by injection them with more drugs – Nice!  Not very effective though in the long term.  To make matters worse, at some time in the future governments cannot afford to pump endless money into the system. Unless the US and Europe can create substantially more jobs, consumers will simply have to save more and consume less.  As a result, companies will have a hard time achieving the projected earnings at which current valuations are based on.

2010 will be a difficult year for the real economy and real people. Despite further possible stock market gains, we don’t expect a true recovery until more people are back at work.  Having said all that, global interdependencies have become increasingly complex and no one can truly fathom how much would be at risk if the US and/or Europe would fall back into a protracted recession.   The developing countries, most of all China, are not yet able to support their current economy from domestic demand.   Therefore it is in everyone’s interest to strive for economic improvement in the  US.  With regard to the two-decade stock market misery in Japan, one should hope that the US markets will not fall into the same hole.  If nothing else, one can never under-estimate the entrepreneurial spirit, drive and conviction of the American people.  Being an underdog for a change might bring out the best of innovations and new businesses that can make a sustainable recovery happen.  Here’s to a brighter decade!

Some Things Never Change 
The year has barely started and we’re back to revelations about the (mis)management of dealing with the credit crisis.  Once again the target of the controversies is Mr. Geithner.  Please consider this Bloomberg story Geithner’s Fed Told AIG to Limit Swaps Disclosure (Update3) along with the video below:

Good luck and best wishes for a prosperous New Year!

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