August 18th, 2011 Newsletter
Dear Friends,
Tangents:
I spent the afternoon at a seminar held in Vancouver on “The Current State of the Canadian Economy,” hosted by Bloomberg and CFA/Vancouver. The keynote speaker was Dr. Farid Novin from the Bank of Canada. In spite of recent market turmoil, Dr. Novin is optimistic on the Canadian economy and specifically B.C.’s future economic growth prospects. He was more cautious in his comments on the current European situation. Ken Hoffman spoke on commodities and Timothy Lee spoke on fixed income. All agreed the current state of the financial world is unprecedented. Mr. Lee remarked this month marks the 40th anniversary that Nixon severed the dollar’s to gold.
This year is also the 150th birthday of the US dollar. The FT recently wrote, ”After a stormy childhood, it spent much of its 20th century prime as the unquestioned linchpin of global finance, particularly during the Bretton Woods era when it was tied to gold. Today the greenback is the primary reserve currency, largely because of tradition and lack of alternatives.
In 1861 people getting paid in the untried new paper currency initially were wary, sending its value sharply lower versus specie. The phrase ‘not worth a Continental’ – a reference to paper dollars issued to finance the Revolutionary War eight decades earlier – showed their skepticism about fiat currency. They feared the dollar, created to finance the Union’s war against 11 rebel states that had issued their own dollar three months earlier, would suffer the same fate.
In fact the dollar almost vanished several times. Yet the flowering of the US economy in subsequent decades, and the need for liquidity during panics, revived its fortunes. The longer it hung around, them more it became accepted as ‘legal tender’. Federal Reserve notes, a 20th-century development, eventually replaced original greenbacks backed by the Treasury, but the name stuck….Hard-money types say that (when the dollar’s link to gold was severed) began the dollar’s decrepitude, but perhaps they are wrong…”
Gary brought home some wonderful ripe peaches last night that picked up on his way home from work. He was telling me that when he was a kid growing up on Ellen Street in Kitchener – there were so many kids around – and the Heller’s, who lived on Ellen Street, had a peach tree in their back yard, and cherries and…they used to steal the peaches. And they did other things like walk on the posts that separated the lawns from the road, trying to balance themselves in a straight line, and climb up on roof tops in winter and jump off the roofs into the snow piles below. And he was wondering aloud – now why would we do that? I suggested it was a way to expend the pent-up energy of youth and maybe if there were more ways for kids to do stuff like that today, society wouldn’t have as many angry young people doing the stuff they’re doing today.
Photos of the day
August 18, 2011
Egyptian children play as their family awaits Iftar, the meal to break their fast at sunset, during the holy month of Ramadan inside the Al-Azhar mosque, in Cairo, Egypt. Tara Todras-Whitehill/AP.
Market Commentary:
Canada
By Matt Walcoff
Aug. 18 (Bloomberg) — Canadian stocks fell, led by energy producers, after the U.S. reported bigger increases in initial jobless claims and consumer prices than most economists had forecast and Morgan Stanley cut its forecast for global growth.
Suncor Energy Inc., Canada’s largest oil and gas producer, lost 6.5 percent as crude futures sank 5.9 percent. Teck Resources Ltd., the country’s biggest base-metals and coal producer, dropped 6.7 percent as copper fell. Royal Bank of Canada, the country’s largest lender by assets, decreased 2.4 percent on concern that European banks lack sufficient capital.
The Standard & Poor’s/TSX Composite Index fell 392.9 points, or 3.1 percent, to 12,186.71.
“We haven’t seen the job numbers in the States pick up,”
Robert “Hap” Sneddon, president of money manager CastleMoore Inc. in Oakville, Ontario, and the Canadian Society of Technical Analysts, said in a telephone interview. “If we have a double- dip in the States, it’s going to affect Canada.”
The index dropped 2.8 percent this month through yesterday as oil futures lost 8.5 percent with data indicating a slowdown in the global recovery. The S&P/TSX’s August decline was the second-smallest among major developed-market stock benchmarks behind Australia’s S&P/ASX 200 as a surge in gold stocks partially canceled out retreats in other industries.
First-time unemployment claims in the U.S. totaled 408,000 last week, the Labor Department said today in Washington.
Thirty-seven of 41 economists in a Bloomberg survey had forecast a lower number. The U.S. consumer-price index rose 0.5 percent in July, the department said. Economists had estimated inflation of 0.2 percent, according to the median forecast in a Bloomberg survey.
Crude oil fell the most in more than a week and copper lost 1.7 percent in New York. Suncor dropped 6.5 percent to C$29.67, the lowest since April 2009. Canadian Natural Resources Ltd., the country’s second-largest energy company by market value, declined 5.1 percent to C$34.29. Cenovus Energy Inc., Canada’s fifth-biggest energy company, slumped 7.1 percent, the most since it began trading in November 2009, to C$32.92.
Trican Well Service Ltd., the country’s largest oilfield- services company, tumbled 8.3 percent, the most since July 2009, to C$21.69. Precision Drilling Corp., Canada’s biggest drilling company by market value, plunged 9.6 percent to C$12.41.
Teck decreased 6.7 percent to C$39.49. Ivanhoe Mines Ltd., which is building a copper and gold mine in Mongolia with Rio Tinto Group, retreated 6 percent to C$19.15. Sherritt International Corp., which produces base metals, coal and oil, sank 9 percent, the most since June 2009, to C$5.13.
Forty-one of 43 S&P/TSX financial companies fell after Lars Frisell, chief economist at Sweden’s financial regulator, said it won’t take much for interbank lending to freeze and the Wall Street Journal reported that U.S. regulators were scrutinizing the American operations of Europe’s largest lenders to assess their vulnerability. Morgan Stanley cut its forecast for global growth this year to 3.9 percent from 4.2 percent.
Royal Bank declined 2.4 percent to C$50.45. Toronto- Dominion Bank, Canada’s second-biggest lender by assets, lost 3.3 percent, the most since May 2010, to C$74. Manulife Financial Corp., North America’s fourth-largest insurer, decreased 6.1 percent to C$13.07.
Stocks extended their losses after the U.S. National Association of Realtors said existing-home sales fell to the lowest level since November last month and the Federal Reserve Bank of Philadelphia’s monthly index of its regional manufacturing industry dropped to the lowest since March 2009.
Semiconductor designer Mosaid Technologies Inc. soared 23 percent to a 10-year high of C$39.22 after technology-patent owner Wi-LAN Inc. made an unsolicited bid of C$38 a share for the company. In a statement, Mosaid said it is evaluating the offer. Wi-LAN decreased 5.9 percent to C$6.67.
Fertilizer producers retreated as corn and wheat futures fell. Potash Corp. of Saskatchewan Inc., the world’s largest company in the industry by market value, dropped 4.2 percent to C$51.90. Agrium Inc., a fertilizer producer and farm retailer, declined 3.9 percent to C$78.19.
Contract electronics manufacturer Celestica Inc. lost 8.5 percent, the most since February 2009, to C$7.44. North American technology stocks retreated after NetApp Inc., a maker of data- storage products, reported first-quarter sales that trailed the average estimate of analysts in a Bloomberg survey and Hewlett- Packard Co. forecast fourth-quarter earnings below its average estimates.
Open Text Corp., Canada’s largest software company, rallied6 percent to C$54 after Bloomberg News reported that it is in talks to buy Autonomy Corp. After markets closed, HP said it will purchase the Cambridge, England-based software maker.
Yoga-wear retailer Lululemon Athletica Inc. slumped 7.8 percent to C$47.47, extending its three-day retreat to 17 percent, the most since May 2009. Urban Outfitters Inc. Chief Executive Officer Glen T. Senk said Aug. 15 he is “a little concerned” about sales at the company’s Anthropologie chain of women’s clothing stores. Executives at Abercrombie & Fitch Co., the teen-clothing retailer, said yesterday expenses will keep rising this year.
US
By Rita Nazareth
Aug. 18 (Bloomberg) — U.S. stocks tumbled, sending the Dow Jones Industrial Average down more than 400 points for the fourth time this month, on concern the global economy is slowing and speculation that European banks lack enough capital.
Caterpillar Inc. and FedEx Corp. fell at least 4.9 percent, pacing losses in stocks most-tied to the economy, as a Philadelphia-area manufacturing index sank to the lowest since 2009, jobless claims and consumer prices rose, and existing home sales slid. Bank of America Corp. and Citigroup Inc. fell more than 6 percent, following a plunge in European lenders. Hewlett- Packard Co. sank 6 percent after cutting its earnings forecast.
The Standard & Poor’s 500 Index slumped 4.5 percent to 1,140.65 at 4 p.m. in New York. All 10 groups in the S&P 500 dropped at least 1.2 percent, and only 10 stocks in the benchmark gauge advanced. The Dow fell 419.63 points, or 3.7 percent, to 10,990.58. Treasuries rallied, pushing 10-year yields to a record low. About 11.6 billion shares changed hands on U.S. exchanges as of 4:27 p.m., 44 percent more than the three-month average, according to data compiled by Bloomberg.
“It’s almost like a worldwide buyers strike,” Michael Mullaney, who helps manage $9.5 billion at Fiduciary Trust in Boston, said in a telephone interview. “There’s a general malaise on global economic activity. People continue to downgrade their expectations on growth. There’s concern about funding problems. That’s making us very nervous and we want to take risk out of portfolios at least for the immediate future.”
Today’s stock rout erased more than $600 billion of U.S. market value. The S&P 500 has tumbled 16 percent from its April 29 high, matching the retreat between April 23 and July 2, 2010, previously the biggest contraction of the bull market that began in March 2009. The decline from April 29 through Aug. 8 left the S&P 500 within 29 points of entering a bear market. European shares and the Russell 2000 Index entered a bear market last week, falling at least 20 percent from their previous highs.
“The massive exodus from risk markets reflects heightened concerns with a possible recession and the accelerated loss of trust in policymakers,” Mohamed El-Erian, chief executive officer and co-chief investment officer at Pacific Investment Management Co., the world’s biggest manager of bond funds, wrote in an e-mail. “Importantly, such worries will now be compounded by concerns about technical damage to key markets. The risk is of a rapidly deteriorating negative feedback loop of weakening fundamentals, inadequate policies and bad technicals.”
Global stocks tumbled today after Morgan Stanley cut its forecast for global growth this year, citing an “insufficient” policy response to Europe’s sovereign debt crisis, weakened confidence and the prospect of fiscal tightening. The bank estimates expansion of 3.9 percent, down from a previous forecast of 4.2 percent, according to a report dated today.
The U.S. and Europe are “dangerously close to recession,”
Morgan Stanley analysts including Chetan Ahya said in the note.
“Recent policy errors, especially Europe’s slow and insufficient response to the sovereign crisis and the drama around lifting the U.S. debt ceiling, have weighed down on financial markets and eroded business and consumer confidence.”
U.S. equities slumped after a report showed that the Federal Reserve Bank of Philadelphia’s general economic index plunged to minus 30.7 this month, the lowest since March 2009, from 3.2 in July. The August gauge exceeded the most pessimistic projection in a Bloomberg News survey in which the median estimate was 2. Readings less than zero signal contraction in the area covering eastern Pennsylvania, southern New Jersey and Delaware. Government data also showed that more Americans than forecast filed applications for unemployment benefits last week, while the cost of living climbed in July by the most in four months. Separately, the National Association of Realtors said that sales of U.S. previously owned homes unexpectedly dropped in July, reflecting an increase in contract cancellations due to strict lending rules and low appraisals.
The Morgan Stanley Cyclical Index of companies most-tied to economic growth slumped 6.8 percent as all of its 30 stocks retreated. The Dow Jones Transportation Average of 20 stocks, also considered a proxy for the economy, tumbled 6.1 percent. A gauge of homebuilders in S&P indexes declined 6.7 percent.
Caterpillar, the world’s largest construction and mining- equipment maker, slumped 4.9 percent to $83.33. FedEx, operator of the world’s biggest cargo airline, sank 5.9 percent to $74.46. PulteGroup Inc., the largest U.S. homebuilder by revenue, decreased 11 percent to $4.16.
American banks tumbled, following losses in European financial shares, as Sweden’s financial regulator said his country’s lenders must do more to prepare for a worsening in Europe’s debt crisis. The KBW Bank Index of 24 stocks retreated 5.6 percent. Bank of America, the largest U.S. lender by assets, sank 6 percent to $7.01. Citigroup dropped 6.3 percent to $27.98.
Banks also slumped after the Wall Street Journal reported that American regulators are intensifying scrutiny of the U.S. arms of Europe’s largest banks amid concern about the region’s debt crisis, citing people familiar with the matter.
Hewlett-Packard dropped 6 percent to $29.51 after jumping as much as 8.3 percent earlier. The world’s largest computer maker forecast fiscal fourth-quarter and full-year earnings that missed analysts’ estimates as lackluster consumer spending failed to offset corporate purchases of printers, computers and servers. Hewlett-Packard confirmed it’s considering a spinoff for its PC business and that it has agreed to buy software maker Autonomy Corp. for $10.3 billion. Gauges of energy and raw-material producers slid at least 5.6 percent. Oil, wheat and copper led declines in commodity markets on concern that slower economic growth will weaken demand for raw materials. Gold surged to a record as investors fled stocks for the perceived safety of the metal.
Alcoa Inc., the largest U.S. aluminum producer, decreased 6.1 percent to $11.51. Exxon Mobil Corp. fell 4.3 percent to $70.94.
Treasuries surged, pushing yields to record lows, as investors seek a refuge in the world’s safest securities on concern global growth is slowing and speculation inflation will remain subdued.
“The bond market is indicating certainty of a recession,”
Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel Nicolaus & Co., which oversees more than $115 billion in client assets, said in a telephone interview.
“Uncertainty regarding recession risk puts S&P 500’s earnings estimates in peril of drastic cuts, repricing stock market valuations and expectations lower.”
Since the third quarter of last year, companies in the S&P 500 have earned $774.3 billion, according to data compiled by Bloomberg, pushing per-share profit to $91.44 as of yesterday from $74.97 on July 2, 2010.
Analysts have underestimated U.S. earnings for eight straight quarters, with S&P 500 companies beating forecasts by an average of 5.1 percent in the three months ended in June. At the start of the last recession, their projections for overall profit proved 8.2 percentage points too high in the third quarter of 2007, and 33.5 points too high in the fourth. That was the biggest miss ever, according to data compiled by Bloomberg.
Most U.S. stocks declined yesterday, wiping out an earlier advance, amid speculation that the Fed may not consider another economic stimulus program to avert a recession.
Bernanke’s pledge last week to keep interest rates near zero percent until mid-2013 was “inappropriate policy at an inappropriate time,” Charles Plosser, president of the Fed Bank of Philadelphia, said yesterday in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.
Dallas President Richard Fisher said the central bank shouldn’t enact policy to protect stock investors. Both officials dissented from the Fed’s Aug. 9 statement.
“It’s ugly out there,” Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, said in a telephone interview. His firm oversees $550 billion. “It’s a combination of concern of a potential recession and the lack of policy tools to fight it. Until people see a bottom, they are not going to buy stocks. There will be pressure on the equity market until we see a solid policy response.”
U.S. stocks may slip to new lows in the next few weeks, setting the stage for a rally of more than 20 percent in the S&P 500, Tom DeMark, the creator of indicators meant to identify turning points in markets, said in an Aug. 16 interview. The S&P 500, which closed at 1,193.89 yesterday, will probably drop below the 11-month low of 1,119.46 set on Aug. 8 before surging above 1,363.61, its peak on April 29, according to DeMark.
U.S. and European options gauges surged. The VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped 35 percent to 42.67. The VStoxx Index, which measures the cost of protecting against declines in the Euro Stoxx 50 Index, snapped a five-day losing streak. It climbed 35 percent, the most since May 2010, to 47.17. Volatility gauges in Hong Kong, South Korea, Japan and India also rose.
The selloff in U.S. stocks may be close to ending with valuations so low they could withstand a 15 percent decline in profits, said Barton Biggs, the hedge fund manager who said this month he was selling shares. The tumble in stocks shows that investors expect a slowing economy to spur analysts to lower earnings estimates, he said.
Earnings at S&P 500 companies are forecast to climb 17 percent to $99.08 a share in 2011 and 14 percent to $112.90 in 2012, estimates compiled by Bloomberg show. The index is trading at 12.4 times profits in the last 12 months, 24 percent below its five-decade average.
“It’s very possible, in the grand scheme of things, that what we’re seeing is the classic retest of the lows of 10 days ago,” Biggs said on Bloomberg Television today. “We may be in the process of making an important bottom.”
Have a wonderful day everyone.
Be magnificent!
In your veins, and in mine, there is only one blood,
The same life that animates us all!
Since one unique mother begat us all,
Where did we learn to divide ourselves?
-Kabir, 1440-1518
As ever,
Carolann
The glow of inspiration warms us;
it is a holy rapture.
-Ovid, 43 BC- 18 AD