January 15, 2011

Market Wrap: for the week ending 14-Jan-2011

Weekly Snapshot
• U.S. retail sales grew 6.6% in 2010 after falling 6.5 percent in 2009 (ESA)
• China raised its reserve ratio for banks by 50 bps, the 4th time in two months (Bloomberg)
• Ben Bernanke expects the U.S. economy to grow around 3% to 4% this year (AP)
• Germany's economy grew 3.6% in 2010, strongest rate since the country's reunification (WSJ)
• U.S. international trade deficit declined 0.3% in November 2010, to -$38.3 billion (ESA)
• Portugal paid yields of 6.7% on its latest ten-year bond issue (Economist)
• U.S. home foreclosures in 2010 top 1 million for first time (Reuters)
• Germany's GDP expanded 3.6% in 2010 powered by a rebound in investment (FT)
• Bank of China Ltd. is allowing customers to trade the yuan in the U.S.(WSJ)
• China's trade surplus narrowed by 6.4% last year to $183.1 billion (AP)
• China's central bank announced holdings of foreign cash and securities of $2.85T (WSJ)
• South Korea's central bank unexpectedly raised its key interest from 2.5% to 2.75% (AP)
• In 2010, 950 ETFs with assets of about $995Bn—were managed by 33 ETF managers (StateStreet)

Market Barometers 

st-2011-0114 fx-2011-0114

Chart Of The Week
As the discussions about an adjustment of the U.S. the debt ceiling continue, here’s a nice reminder as to how inconsequential some of the proposed budget measures are.  Granted, the $78bn proposed cuts in defense spending are a first step in the right direction. But in reality, this only amounts to just over 6% of the current deficit.  Somewhat more ludicrous are the proposed $5bn in cuts for public sector pay freezes.  Hello, that’s only 0.41% of the current deficit and leaves me with nothing more than a lame yawn.  Cutting defense spending might help but there are three other elephants in the room that no one is willing to attack: Medicare, Medicaid and Social Security.  Until these three elephants are tackled, it will be just more kicking the can down the road.

FT-US Debt
Source: www.ft.com/home/us

Recommended Read 
Please consider: Risk trades will test investors through 2011 by Stacy Williams. The author notes a trend of increasing correlations among asset classes ever since the collapse of Lehman Brothers in 2008.

Whereas in normal market conditions the price of any individual asset is driven by a multitude of forces relevant to it, in today’s markets, most assets are being driven predominantly by the same single factor. Through our analysis (conducted in collaboration with the University of Oxford Mathematical Institute) we have been able to isolate this influence – which we call the “global recovery factor” – and directly track its dominance in global markets through our RORO (Risk On – Risk Off) Index.

We have examined this phenomenon of higher correlations among different markets and asset classes before. The findings are aptly summarized in the charts below.

Markets[3]   divfailure3
Diverse15   Diverse22

Diversification then is off for now. But what can an investor do short of becoming a trader? Stacy Williams recommends:

First, they can be wary of any diversification they think they have and seek out the pockets that still exist. Second, irrespective of asset class, they can focus their energies on the shifting expectations that drive the global recovery trade. The “global recovery factor” can be traded directly through simple but judicious portfolio construction, and healthy returns are there to be had.

And finally, they should endeavour to track the dominance of this phenomenon. For when it starts to wane, as it surely must eventually, investment opportunities right across the asset classes will abound.

Recommended Video
Simon Johnson, Professor at the MIT Sloan School of Management has an interesting take on why US taxpayers effectively subsidized Goldman Sachs’ investment in Facebook.  Enjoy!

Good luck and good investing!

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