April 01, 2011

Market Wrap For The Week Ending 1-Apr-2011

In This Week's Issue
• Weekly Snapshot
• Weekly Barometers
• Chart Of The Week
• The Untouchables
China's Ghost Cities and Malls

Weekly Snapshot
• Nasdaq & ICE launch a bid for NYSE that trumps previous Deutsche Boerse offer (WSJ)
• Ireland's banks need €24 bln ($34 bln) more to withstand future shocks (AP)
• U.S. nonfarm payroll employment increased by 216,000 in March (BLS)
• U.S. unemployment rate was little changed at 8.8% (BLS)
• The price of oil rose past $108 a barrel on Friday, highest since 2008 (AP)
• U.S. corn futures prices soared to their daily limit in Chicago (WSJ)
• Euro area annual inflation is expected to be 2.6% in March 2011 (Eurostat)
• U.S. Stocks saw the best first quarter since 1998 (WSJ)
• Opec set for $1000bn in export revenues if oil prices stay above $100 (FT)
• U.S. home prices fell for the seventh straight month in January (Reuters)
• Saudi Arabia intends to increase the number of oil rigs by 28% to 118 (Reuters)
• U.S. consumer confidence fell to 63.4 in March, from 72.0 in February (WSJ)

Weekly Barometers

st2011-0401   fx2011-0401

Chart(s) Of The Week
Friday’s employment data were encouraging and somewhat in line with the stock market recovery, albeit with a longer than the usual six-month time lag.  Earlier in the week, housing data suggested a slightly darker picture however.  This leaves a lot of questions open particularly when so much stimulus effort by the Fed has been on inflating asset prices.  While asset prices in general have been on the rise, housing is the 400 pound gorilla that no stimulus effort so far has been able to prop up.


To get a sense of what more realistic housing prices might look like, please consider the concept of price-to-rent ratios as displayed in the chart below.  A chartist might look at this trend and suggest that prices will revert to the mean over a longer period of time but that prices can also over and under-shoot the trend by a considerable margin (same logic applies to the chart above).


In hindsight, it also shows how insane it was to assume that housing prices must continue to climb when it was so much more expensive to buy than to rent.  Moreover, as the chart below shows, the US housing market was not the “most insane” of all real estate bubbles.


The Untouchables
It would be much more pleasant if this was about the movie “The Untouchables” but sadly, it’s about different kinds of Untouchables, namely Social Security, Medicare, Medicaid and Military Spending a.k.a. entitlements.  This warrants a revisit to our previous commentary on the state of USA Inc

With $1.2 trillion under management, PIMCO is one of the biggest players in the investment world.  When its founder Bill Gross speaks, the investment world usually listens.  Granted, one can never completely disregard the fact that a large market player is talking his book, but there seems to be a genuine concern by Mr. Gross that the business of capitalizing ever-increasing amounts of debt is driving this country over the edge.  In his Monthly Investment Outlook he notes:

This country appears to have an off-balance-sheet, unrecorded debt burden of close to 500% of GDP! We are out-Greeking the Greeks, dear reader.

His quote may sound far-fetched at first but it is not inconceivable that the Fed may face much higher borrowing costs if current discussions about the debt ceiling and budget deficits continue to focus on lame budget cuts which amount to no more than a tiny fraction of the current deficit.  Just to remind ourselves, a typically highly publicized debate on cutting say $10bn is only about 0.6% of the current $1.6 trillion deficit - meaningless.  In all this, politicians on both sides of the political spectrum continue to display a frightening lack of numerical proficiency. 

But fear not, the ongoing deficit discussions will eventually focus on the “Untouchables” not by choice but by necessity. Who knows when that tipping point arrives.  For now, let’s look at the 10-year treasury yields of some of the troubled European nations and take this as a reminder that our leaders are playing with fire and with the financial future of this great nation.

10-year Greek Yields


10-year Irish Yields



10-year Portuguese Yields


10-year Spanish Yields




China's Ghost Cities and Malls  
Please consider this fascinating documentary about the Chinese real estate market.

Good luck and good investing!

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