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These posts have some very interesting reading in retrospect drillinto. Thanks for collecting them together. No-one can say we haven't been warned!

Starting from the article by Tony Jackson / Financial Times / July 24 2007 who provided a warning about the link between the credit market and equity market saying it was just a matter of "when" (in this case about 20 days to last August's drop!).

Then the article on August 17 by By Evan Davis Economics editor, BBC News
which describes how the hedge funds can add to the problem.....:p:

However, this article by Amy Brinkley Chief risk officer, Bank of America Source: CNN, 19 August 2007 caused me concern.

We knew these corrections would come. The surprise is the degree of volatility and the effect on liquidity, especially short-term liquidity. The very substantial changes in the financial markets over the past five years have presented new challenges. We have new players: foreign investors, hedge funds, and private equity firms. And we have new products--more complex products than in the past. The changes do distribute risk more broadly, but they've contributed to the uncertainty. Getting a handle on where the risk is isn't as easy as it used to be when banks made loans that defaulted when they were bad. These more complex products are less transparent, so it's difficult to determine the value. And the hedge funds are less transparent. The uncertainty creates a higher level of risk aversion. That, in turn, creates liquidity risk. People want to sit on the sidelines until they think they have it all figured out.

Where does it go from here? The longer there's risk aversion, the greater the impact on the markets. The oversupply of leveraged loans will take a few months to go through the system. The subprime issues will continue to be problematic through 2008. But these are healthy corrections for the long term. We don't see broad signs of weakness in the economy, and that's what matters most. Global economic growth is expected to remain strong. The U.S. economy continues to be sound. One of the most important indicators is low unemployment, at 4.6%. We're seeing steady gains in personal income. There's a continued acceleration in exports. And corporate balance sheets are strong.
Click to expand...

The problem with this is that the claims made in the last paragraph seem to becoming unravelled. So where do we go from here?.................
 
Stick to OZ !

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Political Risk Analysis: Democratic Republic of Congo

By Our Risk Reporter from Risk Bureau
www.minesite.com
March 28, 2008

There is no point pretending that doing business in the phenomenally resource-rich Democratic Republic of Congo will get easy any time soon. The political complexities of the country tend to defeat even the most optimistic well wisher. Joseph Kabila was voted in as president of the DRC in November 2006, in the country’s first multiparty elections for 40 years. However, the veneer of democracy belies the truth.
The Democratic Republic of Congo is a poor country, divided along ethnic and geographical lines, and has been oppressed for decades by home-grown dictators and neighbours coveting its immense mineral wealth. On 23rd January, the warring rebels and militias in the east signed a ceasefire deal, which it is hoped will bring a halt to one of Africa’s deadliest conflicts, at its height between 1998 and 2003. But despite the formal end of the country’s war, warring parties in the country’s eastern borderlands continue to defy the government in Kinshasa.

The January peace pact was signed by Tutsi rebels loyal to renegade General Laurent Nkunda, by the government of President Kabila and by several militia and armed groups from the country’s North and South Kivu provinces. But a recent report by the International Rescue Committee – a hands on NGO, which having been founded in 1933 goes back further than most - disclosed that, despite billions in aid, the deployment of the world’s largest peacekeeping force, and the country’s recent ‘democratic’ elections, around 45,000 people continue to die each month in Congo, chiefly from starvation and disease.

Although a technical peace is now in place, it will take more than a signed piece of paper to secure peace for this troubled country.

The army is divided - substantial sections are opposed to the new political order. The level of integration of soldiers into the brigades in North Kivu, largely controlled by a rebel group backed by Rwanda called the Congolese Rally for Democracy (RCD), remains a worry. North Kivu has been the epicentre of the violence that has gripped the country for well over a decade. The situation is compounded because the loyalty of the troops in South Kivu is unclear.

Yet, the DRC remains a vital investment destination, given its mineral wealth. Mining companies waited with a degree of apprehension for the long-delayed review of mining licences, and in February, got an inkling of what they can expect. The gist of the review is that Kinshasa will try to take as much as it can from the mining companies while simultaneously increasing government control over the sector. The announcement was finessed by the vice-minister of mines who noted that it was the authorities’ intention to ‘weed out illegal contracts’ written during the country’s civil war. There’s some justice behind that aspiration, although this being Africa things are slightly more complicated, and not all the war’s dubious contracts are being re-investigated in as much depth as they might have been.

Thus, Anvil Mining, a Toronto-listed copper miner in the DRC has been asked to pay a cash bonus of US$150 million to the state mining company, Gecamines; another Toronto-listed miner, First Quantum Minerals, learnt from the review commission that its title to its copper and cobalt project at Kolwezi was ‘improperly structured’. Ther are also serious doubts around major projects controlled by AngloGold Ashanti and Freeport McMoran. The dilemma for foreign mining interests is whether to renegotiate their contracts with Kinshasa at an individual level, or to go down the legal route. The latter could take years, and protracted disputes could turn out to be a blessing for China, as the recent infrastructure-for-commodities deal won by Chinese companies, worth $9 billion, suggests. Indeed, the World Bank advised anyone who was listening back in November 2007, that “any decisions to annul, renegotiate, amend, or adjust mining contracts should not be contemplated lightly”.

Even as the review of mining licences was disclosed, hundreds of miners employed by the state mining company, Gecamines, clashed with police in Katanga province. Their grievance: as casual miners they are afraid of losing their livelihoods as the government seeks to sell mining concessions to foreign investors. Complexities abound.

Experienced hands in the DRC will be well acquainted with the several challenges of doing business in the country. The banking system is said by some to have effectively collapsed. There’s no real protection of property rights, and that’s not just because of endemic corruption, but also because the government has a propensity to expropriate property. That state of affairs is further exacerbated by a weak, and far from independent judiciary. Furthermore, the few functioning roads are crisscrossed with militia roadblocks, each attempting to extort a separate toll on traffic. It would be too much to expect in the short to medium term that Joseph Kabila’s government can improve governance as well as the business climate, or that the necessary structural reforms will be delivered any time soon.

Forecast: Tough business environment

The challenges facing Joseph Kabila’s government are huge. It needs, as a matter of urgency, to get a handle on the divisive regional tensions, ethnic divisions, a factional army and dangerous militias. The country depends on its mineral wealth to bring in foreign investment, but as the recent review of mining contracts shows, contracts can be manipulated. More importantly, only a small handful of corrupt Congolese have thus far been enriched by the country’s mineral wealth, and there is little evidence to suggest that this corruption will abate in the short-term. The brutalisation of an entire nation has been years in the making, and this unfortunately, affects the reality on the ground.

Investment Outlook: Tough
 
SATURDAY, MARCH 14, 2009
UP AND DOWN WALL STREET

No Safe Haven
By ALAN ABELSON | Barron's (USA)

Why the bullish consensus on China is wrong. Beware the decoupling myth.

ANY WEEK THAT BERNIE MADOFF GOES TO JAIL and has an excellent shot at spending the next 150 years there, or that General Motors tells Uncle Sam it doesn't need two billion more of the taxpayers' hard-earned smackers (well, not just yet anyway), or that the stock market goes up four whole days in a row, or that Jim Cramer gets his ears boxed by Jon Stewart, can't be all bad.

Amid such an awesome, luminous constellation of splendid and unaccustomed uplift, it's tough to single out one piece of good news that outshines the rest. But our vote would have to go to the miracle leak that revived investor spirits and restored their hopes, along with a measure of happiness and even flickerings of greed -- faint, but welcome nonetheless -- as moribund stock markets awoke from one end of the planet to the other.

For this miracle leak the world is indebted to Vikram Pandit, the CEO of Citigroup , who -- as you probably already know (any a good journalist, we take considerable pleasure in telling you what you already know) -- wrote an internal memo that was solely for the eyes of anyone who can read (which may very well exclude a number of his fellow bankers).

Besides breathing new life into equities virtually everywhere they're traded, the leak can lay claim to being miraculous on another score, too. For truly amazing is the fact that its contents would incite anyone with even the most cursory knowledge of finance to buy stocks.

Essentially, Mr. Pandit's memo relayed the less-than-startling revelation that if you disregard, as any polite person is obligated to, the $301 billion of toxic assets sitting atop its balance sheet like a grinning monster waiting to pounce and the something like $45 billion our munificent government out of the goodness of its heart has poured into Citi's rather strained coffers, plus a few other pesky details, it's making a profit!

It could be, of course, that what so elated investors was not so much Mr. Pandit's profits epiphany, but the possible broader inference to be drawn from it: In calculating earnings, don't muddy things up by including costs and taxes and other piddling annoyances. On that basis, investors, staring wistfully at their drooping portfolios, might have figured -- their pulses suddenly bounding -- that maybe those dead dogs might fetch something after all, and rushed to average down.

The question does come to mind, however: If Citi is, as Mr. Pandit asserts, turning a profit, why has it been putting the arm on the government for those big-buck infusions? And, while we're asking, why has its stock been hovering around $1 and the cost of insuring it against default risen 200% so far this year?

Believe us, we're not trying to spoil anyone's fun. The memo, whatever its flaws, undeniably turned around a market that almost everyone agreed was horribly oversold. (Any number of those folks have been saying that for months and months; we trust they were not foolish enough to act on their advice.) The only thing that makes us a little leery of the idea that we're actually witnessing one of those brisk bear-market rallies that carry stocks 20%-to-25% higher is that good-old-everyone expects it.

The fundamentals remain pretty bleak. Jobs continue to vanish at an alarming rate. Consumers are under remorseless pressure, psychologically and financially. The collapse in housing is still very much in force, and so is everything bad that issues from it.

None of this precludes a nice bounce. But it virtually preordains that a nice bounce will be followed by a not-so-nice break.

"THE BULLISH CONSENSUS IS 'RHUBARB, poppycock, bilge, balderdash and piffle.' " Thus spake not Zarathustra but Albert Edwards, who, thank heavens, is better-humored than Friedrich Nietzsche. Even so, like the old German philosopher, in utterance he favors plenty of shock and a paucity of awe.

The particular bullish consensus to which Albert, who labors for Société Générale, took such gentle exception has to do with China and, more specifically, whether it could artfully dodge the wicked economic slump that is rapidly embracing the globe. He voiced his decidedly unequivocal doubts in a commentary penned a couple of weeks ago, and, so far, he has had no reason for regrets.

Yes, we're quite aware that the Beijing brass insists that once its half-a-trillion-dollar-plus stimulus program is in full swing, the country will start to race ahead big-time again, and wind up the year with 8% growth. Chinese data are often spongy, especially when they make for unpleasant reading. And we don't think we're being ungenerous when we suggest that you might do worse than give the official estimate of this year's GDP a haircut of, oh, say, 50%.

This less-than-exuberant prospect was only reinforced by the recent disclosure that China's pride and joy -- its extraordinary trade balance -- has rather abruptly taken a big dive -- indeed, the worst ever: to $4.8 billon in February, from $39.1 billion in January and over $8 billion in the same month last year. Exports, the dynamo of China's spectacular growth since it began its true emergence as an economic power some three or so decades ago, shrank by a formidable 25.7% last month, accompanied by a whopping 24.1% drop in imports.

As to the much-heralded $585 billion stimulus effort that's supposed to kick-start the Sino-economy, it appears to be directed largely to infrastructure, where it is least needed, rather than to consumption, which could use juicing up.

Premier Wen Jiabao allowed on Friday, at the wind-up of a powwow of the National People's Congress (the moniker of what passes for a legislative body in China's one-party-rules-all political system), that his nation's economy had lost some of its "vitality" and, with an admirable lack of subtlety, laid the blame on Uncle Sam's profligate borrowing and spending.

Mr. Wen has cause to be, as he put it, "a little worried," since China holds, at last count, some $696 billion of those borrowings in the form of U.S. Treasuries. From an investment standpoint, this holding hasn't been exactly a gangbuster, off around 2.7% since the year began.

But, as it happens, worried as he might be about his country's exposure to the possible consequences of its huge hoard of our IOUs, it's not entirely clear what, beyond scolding us for our profligacy, Mr. Wen can do about it.

A shift into other governments' bonds doesn't seem too attractive (Germany's and France's, for example, are off more than three times as much as our Treasuries), and the Chinese haven't fared very well venturing into our equity market (think Blackstone, where its investment of over $10 billion has been cut in half).

Moreover, any precipitous dumping of Treasuries would do serious damage to the sizable chunk of that $696 billion pile of such paper it would inevitably still be holding.

It might stop adding to its stash of Treasuries, of course, but even here, the symbiotic relationship between the U.S. and China -- we buy the stuff they turn out and they lend us the money to do so -- makes that a pretty dicey alternative.

As Morgan Stanley's Stephen Roach trenchantly observed recently, while "the original excesses were made in America," where consumers went on a wild binge, fueled by the credit and housing bubbles, the rest of the world, and particularly China, "was delighted to go along for the ride."

To feed our voracious appetite for consumption, we ran massive trade and current deficits, importing surplus savings from abroad. And that, he laments, seemed a perfect fit for the developing countries of Asia, whose exports exceeded a record 45% of the region's gross domestic product in 2007.

What's more, it was China "that led the charge," boosting its exports to 40% of GDP, double the percentage seven years earlier.

And while Beijing is prodding the banks with some success (this is, remember, a "command economy") to lend more liberally, a lot of the companies to which loans are going seem to be stockpiling the dough. For that matter, the absence of anything resembling a real safety net in China compels its populace to save rather than spend, manifestly a mixed blessing for an economy straining for recovery.

As strongly intimated by the swoon in exports, the savage global slump already has left its ugly imprint on China. Countless plants have been shut down, and millions have lost their jobs, sending many of them straggling back to the rural areas whence they came. Aggravating the plight of these restive souls is that the country has fallen prey to a major drought.

Mr. Wen has vowed, if necessary, to toss more of the nation's $2 trillion in foreign reserves at the economy, should that $585 billion already pledged fail to do the trick. And we're not predicting an apocalypse for China any more than we are for our struggling fair land.

Pure and simple, our point is that, contrary to the wishful notion so widely bruited about Wall Street, China is scarcely invulnerable to the powerful vortical pull of the global recession. It is not slated to somehow regain its momentum and prosper on its own.

And so we heartily concur with Albert Edwards that the bullish consensus that China might just be the place for anxious investors to ride out the storm is poppycock, if not piffle.
 
UP AND DOWN WALL STREET

More Meltdown
By ALAN ABELSON / Barron's(USA), 11 April 2009

It's only the middle innings of the great housing bust. Three cheers for Mr. Bass.

CARL BASS IS OUR KIND OF GUY. LET US HASTEN TO confess, we don't know Mr. Bass, apart from the fact that he earns his daily bread running Autodesk , which does some $2 billion a year designing and servicing software, and whose stock was a hot number until it got killed by the bear market (12-month high, 43; 12-month low, a hair under 12; current price, 19 and change). In other words, until last week Mr. Bass was, so far as we were concerned, just another corporate honcho.

What brought our attention to Mr. Bass and won him our instant esteem was an item in the latest screed by our Roundtable buddy and indefatigable tech-watcher, Fred Hickey. More specifically, it directed us to February's conference call with analysts, occasioned by release of the company's earnings for the final quarter of its fiscal year, ended Jan. 31.

Mr. Bass kicked off the proceedings, as Fred noted, by telling the telephonically assembled analysts the bad news. Not only were the bum results a far cry from what he had grown accustomed to, but, he sighed, "the global economic downturn is now significantly impacting each of our major geographies and all of our business segments." The turn for the worse, he made it clear, included emerging countries where business had been robust, like China and India. And, he added, the immediate outlook was more than a touch murky.

None of which deterred an analyst, champing at the bit for good news, from asking whether there were any regions left to exploit that so far had proved immune to the global slump. "Well," responded Mr. Bass, "I think Antarctica has been relatively immune, maybe Greenland, as well, although not Iceland, as we all found out."

Besides the pleasure of finding a CEO with a sense of humor and, equally important, one who doesn't suffer foolish questions gladly, the exchange struck us as symptomatic of the insatiable yearning of Wall Street, in general, and sell-side analysts, in particular, to uncover some sliver of bullishness beneath the dismal surface of the unvarnished truth.

That touching tendency to mistake dross for gold has been much in evidence in this spirited stock-market rally, five weeks running and still kicking. And it has by no means been restricted to analysts; it has infected market strategists and portfolio managers, to say nothing of economists (which is about all one can say about them without resorting to invective).

Even the most unfavorable news, from the relentless shrinkage in corporate earnings to the inexorable rise in unemployment, is all too often blithely shrugged off with the observation that "it wasn't as bad as expected," while neglecting to identify by whom. Nor does it seem even passing strange to the growing ranks of wishful bulls that banks that went begging to Uncle Sam for bailouts and were rewarded with billions have magically discovered, come the earnings reporting season, that, by gum, they're suddenly remarkably solvent (or should we say, seemingly solvent; just disregard several trillion dollars' worth of ugly stuff on their collective balance sheet, please).

We realize, of course, that Washington is on the case. And we feel for the poor, anonymous soul charged with the task of almost daily sending aloft still another trial balloon to rescue the banks. But we suppose she or he does gain a measure of satisfaction from the fact that even if the balloon goes nowhere but poof, more often than not it provides a fresh fillip to the markets.

Indeed, if anything, this whirlwind activity by the administration's economic team, this profusion of blueprints for recovery, so many of which are rapidly discarded or revised or embroidered, by all rights should be giving widows and orphans the jitters rather than prompting them to take the plunge. For it smacks of confusion or panic or both.

Believe us, we're impressed by the vigor of the rally and it's gone much further and faster than we expected. And we think those hearty types agile enough to have played the big bounce deserve a big pat on the back. That doesn't mean, though, that we think it's for real or sustainable.

What would cause us to change our minds is some credible evidence that the dark forces that wrought this dreadful recession are starting to dissipate. Instead, it pains us to relate, we see rough going in the months ahead. And that suggests to these rheumy eyes a disappointed market resuming its skittish ways.

BACK IN MARCH OF LAST YEAR, WE RAMBLED on about a piece on housing by T2 Partners, a New York money-management firm. The report weighed a ton, but its heft was made more than palatable by a profusion of easily accessible bold-face tables and charts and a lucid text happily free of equivocation. We waxed enthusiastic about the analysis (and no, we hadn't been drinking). It was, of course, quite bearish.

Well, the T2 folks recently issued a follow-up to that prescient analysis, again festooned with nifty graphics and graced with straight-from-the-shoulder narration. They're still bearish and still, we think, on the money. That original report, incidentally, has blossomed into a book by Whitney Tilson and Glenn Tongue, who run T2 (you'll never guess how they got the name for their firm); the book is called More Mortgage Meltdown and is slated to be published next month (end of public-service announcement).

In their latest tome, the T2 pair begin with a crisp summary of why and how housing collapsed, in the process wreaking havoc on both the credit market and the economy. Among the usual culprits, most of which by now have had the cruel harsh spotlight of publicity turned mercilessly on them, Wall Street comes in for special mention and, in particular, its critical role in disseminating collateralized debt obligations and asset-backed securities, or -- as they're respectively, if no longer respectfully, known -- CDOs and ABSs.

Those structured monsters, note Tilson and Tongue, were a "big driver" of the surge in financial outfits' increasingly bloated profits. To produce ABSs and CDOs, Wall Street needed "a lot of loan product," of which mortgages proved a bountiful source. It's unfortunately quite simple to generate ever-higher volumes of mortgages. All you need do is lend at "higher loan-to-value ratios, with ultra-low teaser rates, to uncreditworthy borrowers, and don't bother to verify their income and assets."

The only catch is that the chances of such a mortgage being paid off are just about nil, a trifling caveat that bothered neither lenders nor pushers one whit. The result of that cavalier approach, as we all have reason to lament, in the end has been anything but happy: Today, mortgages securitized by Wall Street represent 16% of all mortgages, but a staggering 62% of seriously delinquent mortgages.

As for home prices, the T2 duo reckon, the unbroken monthly decline since they peaked in July 2006 will continue to make buyers hesitant and sellers desperate, while the "tsunami of foreclosures" will maintain the huge imbalance of supply over demand. In January, they point out, distressed sales accounted for a formidable 45% of all existing home sales and, they predict, there will be millions more foreclosures over the next few years.

They expect housing prices to decline 45%-50% from their peak (currently, prices are down 32%) before bottoming in mid-2010. They warn that the huge overhang of unsold houses and the likelihood that sellers will come out of the woodwork at the first sign of a turn argues against a quick or vigorous rebound in prices. Nor is the economy likely to provide a tailwind, since T2 anticipates it will contract the rest of this year, stagnate next year and grow tepidly for some years after that.

The first stage of the mortgage bust featured defaulting subprime loans and their risky kin, so-called Alt-A loans. Together with an additional messy mass of Alt-A loans, the next phase will be paced by defaulting option adjustable-rate mortgages, jumbo prime loans, prime loans and home-equity lines of credit.

All told, Tilson and Tongue estimate losses suffered by financial companies from mortgage loans, further swelled by nonresidential feckless lending, will run between $2.1 trillion and $3.8 trillion; less than half of that fearsome total has been realized. Which is why, they contend, we're only "in the middle innings of an enormous wave of defaults, foreclosures and auctions."

We don't want to leave you with the impression that the T2 guys are cranky old perma-bears. They aren't. At the end of their report they point out that "the stocks of some of the greatest businesses, with strong balance sheets and dominant competitive positions, are trading at their cheapest levels in years." Nothing wrong with the companies themselves, they believe; rather, the stocks got beat up mostly because of the cruddy market and soft economy. Victims, as it were, of the bearish trends.

The names they like that fall into that not exactly overly crowded category are familiar enough: Coca-Cola , McDonald's , Wal-Mart , Altria , ExxonMobil , Johnson & Johnson and Microsoft . That doesn't exhaust their portfolio picks, but those are the ones they obviously think are best suited to ride out any resurgence of the bear market.
 
SATURDAY, APRIL 18, 2009
UP AND DOWN WALL STREET

Don't Bank on It
By ALAN ABELSON | Barron's | USA |

The banks have been the spark plug of this powerful stock-market rally, but past may not be prologue. Goldman's missing month.

THE AMAZING RANDI. WE'D NEVER HEARD OF THE CHAP UNTIL last week, when we were indulging in an old habit that began way back when we were a copy boy (the journalistic equivalent of a galley slave) and took to passing some of the grudgingly little downtime allotted to us poring over the obituaries. Our interest was not born solely of innate ghoulishness, but nurtured also by the fact that an obit provides a highly compressed and often fascinating biography of those noteworthy souls who have recently departed from the ranks of the quick.

In this instance, the subject was not the Amazing Randi, but John Maddox, a British editor of considerable renown who transfigured a stuffy magazine named Nature into a scintillating science journal. Mr. Maddox, by all description an unflaggingly imaginative and energetic editor broadly versed in the sciences, was graced with a flair for the unorthodox and a sharp nose for bamboozle.

Back in the late 1980s, he published a piece by a French doctor claiming remarkable qualities for an antibody he had studied, but only on the condition that an independent group of investigators chosen by Mr. Maddox monitor the doctor's experiments. Among the investigators he chose was the Amazing Randi (né James Randi), a professional magician whose knowledge of science may have been limited but whose knowledge of hocus-pocus was peerless. The poor doctor's goose was cooked.

Mr. Maddox's engaging inspiration got us to thinking, gee, wouldn't it be great to have an Amazing Randi handy to help uncover the voodoo that has caused investors virtually en masse to suspend disbelief. We're referring, of course, to their marvelously revived tendency to slip on their rose-colored glasses, which for so long had been gathering dust on the shelf, when viewing corporate fortunes or the economy at large.

Take for example, dear old Goldman Sachs , which has enjoyed a mighty burst of enthusiasm among Street folk that has sent its shares sprinting to the vanguard of this smashing stock-market rally; an enthusiasm, moreover, that has spilled over to other banks and their financial kin. No argument, the firm has handsomely outperformed its few surviving rivals, none of which is blessed with Goldman's deft trading skills or tight Washington connections.

Goldie reported earnings of $1.8 billion for the first quarter. In doing so, it got a lucky boost from its switch from a fiscal year ending November to a calendar year. The shift came in response to statutory fiat, as part of Goldman's change to a commercial bank, a prerequisite to gaining eligibility for all those lovely billions in loans and guarantees the government has been showering on banks.

That $1.8 billion in March-quarter profits was a heap more than its analytical followers expected, and, as intimated, a sparkling demonstration of Goldman's vaunted trading agility (from what we can gather, it made a bundle in part by timely shorting bonds). The switch in its fiscal year took December out of the first quarter and made it an isolated, stand-alone month, relegated to an inconspicuous assemblage of bleak figures far in the rear of the company's 12-page earnings release.

As it happens, Goldman lost some $780 million in December, a tidy sum that obviously would have taken a lot of the gloss off its reported first-quarter performance. And, who knows, it might have even drained some of the zing that the surprisingly good results lent the stock.

But, in any case, the very next day, the spoilsport credit watchers at Standard & Poor's threw a bit of cold water on the shares by venturing that, in light of the soggy economy and unsettled capital markets, it would be "premature to conclude that a sustained turnaround" by Goldman was necessarily in the cards.

The financial sector, as even the most cursory spectator of the investment scene doubtless is aware, has provided the crucial spark to this powerful bear-market rally. And, in particular, the return from the very edge of the abyss by the banks in the opening months of this year has revived fast-swelling bullish sentiment.

The question naturally arises: How did the banks, so many of which seemed to be slouching toward extinction, get their act together to the point where they were in the black in January and February?

In search of an answer, we turned up an intriguing explanation for this magical metamorphosis by Zero Hedge, a savvy and punchy blog focusing on things financial. Not to keep you in suspense, Zero Hedge fingers AIG , that repository of financial ills and insatiable consumer of taxpayer pittances, as the agent of the banks' miraculous recovery.

But not quite the way you might think. As Zero Hedge explains, AIG, desperate to hit up the Treasury for more moola, decided to throw in the towel and unwind its considerable portfolio of default-credit protection. In the process, the badly impaired insurer, unwittingly or not, "gifted the major bank counterparties with trades which were egregiously profitable to the banks."

This would largely explain, according to Zero Hedge, why a number of major banks actually, as they claimed, were profitable in January and February. But the profits, it is quick to point out, are of the one-shot variety, and, ultimately, they entailed a transfer of money from taxpayers to banks, with AIG acting as intermediary.

Lacking any deep familiarity with the arcana of credit swaps and the like, we can't swear to the accuracy of this analysis. But shy of conjuring up the Amazing Randi and have him unveil the truth, it strikes us as plausible -- and easily as persuasive as many of the various explanations we have come across for the surprising and rather mysterious turn for the better by the banks.

If by chance it proves out, it just might act as a sobering influence, and not just on the financial sector.

FRANKLY, WE'RE AS BORED WITH THIS BEAR market as anyone. And we fully understand, after a year of brutal pummeling, the frantic hopefulness with which investors respond to the inevitable bounce, especially when it's as robust as this one has been.

And we understand, too, their eagerness to grasp at the flimsiest hint of recovery and to strain to put a good face on every twist and turn of the economy, no matter how ugly. But we fear -- as some tunesmith crooned long ago -- wishing won't make it so.

There's nothing obviously wrong when investors, confronted by what seems to be a sold-out market and tired of sitting on their hands, decide to take a fling on a bear-market rally. And it certainly has been rewarding for virtually anyone who a month or so ago did just that. But an awful lot of folks don't have the time, the discipline, the nimbleness or the spare cash for that sort of hit-and-run investing.

And the danger resides in being carried away by a momentary spate of quick gains and turning a blind eye to the riskiness of the market, which now is a heck of a lot greater, if only because the advance has carried price/earnings ratios to elevated levels -- something above 20 on the Standard & Poor's 500 -- or to the critical negatives in the economy.

David Rosenberg of Bank of America/Merrill Lynch (we can't believe we said the whole thing) last week offered some worthwhile observations on the stock market and the economic landscape that just happen to buttress our own reservations.

He points out that the two groups that paced the sharp upswing were financials and consumer cyclicals, in which there are, respectively, net short positions of 5 billion and 2.7 billion shares. Which strongly suggests that not an insignificant part of the rally has been provided by shorts running for cover.

He also points out that the Russell 2000 small-cap index is up 36% since the March low, and has outperformed the S&P by some 980 basis points. As David says, "the last time it pulled such a massive rabbit out of the hat" was in the stretch from late November to early January, and the major averages proceeded to make new lows two months later.

Another amber light he spots is investor confidence. Over the past five weeks, he reports, Rasmussen, which takes a daily reading, has seen its investor-confidence index surge 32 points, an unprecedented climb in so short a span. This could be, he suspects, a "fly in the ointment for a sustained equity-market rally."

David has four markers that will signal to him that the economy is finally making the turn and starting an extended expansion. The first is home prices. The second is the personal-savings rate. Marker No. 3 is the debt-service ratio, and No. 4 is the ratio of the coincident-to-lagging indicators of the Conference Board.

Aggregating those four markers, he calculates that we are roughly 44% of the way through the adjustment process. That is a tick up from where we were last month. However, the improvement, he laments, has been very modest and very slow.

We should add that he also stresses that it's critical for both the economy and the market that payrolls stop shrinking. All the talk about jobless claims "stabilizing" is so much poppycock, he snorts. That number of claims, he notes, is still consistent with monthly payroll losses of around 700,000. As with industrial production, which is also in a vicious slump, employment must stop falling before a recession typically ends.

"Call us when claims fall below 400,000," he says, which is his estimate of "the cut-off for payroll expansion/contraction."

Until then, he warns, "the recession will remain a reality. Rallies will be brief, no matter how violent, and green shoots are a forecast with a very wide error term attached to it."
 
THURSDAY, APRIL 23, 2009
UP AND DOWN WALL STREET DAILY

Bank Profits and Other Fantastic Tales
By RANDALL W. FORSYTH | Barron's | USA

Bizarre accounting rules make numbers look better, but the market isn't fooled any more.

YOU REALLY CAN'T MAKE THIS STUFF UP. That cliché truly is wearing thin as the credit crisis drags on, but it remains as apt as ever.

Never more so, in fact, than as the wave of first-quarter bank earnings rolls in. At first, the stock market was bedazzled by the gains being posted during what was supposed to have been the darkest days ever seen in the history of finance. But the legerdemain that produced those numbers is no longer impressing the stock market.

As our colleague, Alan Abelson, wrote in the print edition of Up & Down Wall Street this week, it appears banks were beneficiaries of the travails of none other than American International Group (ticker: AIG.)

As AIG looked to hit up Uncle Sam for more money, it decided to close out billions of credit default swaps on exceptionally generous terms to the counterparties. The latter would include the biggest names on Wall Street and the City of London, who got to book outsized profits. But the market is belatedly coming to the realization that this windfall is unlikely to be repeated, so there's less to the first-quarter results than meets the eye.

Yet even stranger is the positive effect felt by the likes of Citigroup (C) and others from the flip side. Just as banks get a boost from the write-up of their assets, they get a fillip from the write-down of their liabilities.

Such is the unintended, Alice-in-Wonderland effect of mark-to-market accounting.

Dick Bove, the dean of bank analysts, now with Rochdale Securities, explains how mark-to-market accounting can thoroughly distort profits. To wit:

"Bank A sees the quality of its debt deteriorate. That means, under mark-to-market accounting, that it is able to buy the liabilities back at a discount and report a big profit.

"Bank B sees the quality of its debt improve. That means it is not able to purchase its debt at a discount because its debt has risen in price and this results in a big loss.

"In sum, the bank with weakening quality reports a profit and the bank with improving quality reports a loss. This, of course, makes no sense."

Citi fell into the former category and benefited. Conversely, Morgan Stanley (MS) had the misfortune of seeing its credit strengthen, so it reported weaker-than-expected earnings Wednesday and slashed its dividend to shore up its capital position.

Bove contends that everybody was all for mark-to-market accounting when it punished the banks when it artificially depressed its assets. Now that it is artificially reducing the value of banks' liabilities, mark-to-market accounting is being criticized for inflating banks' profits.

It's a "lose-lose" situation for banks, he concludes, and may now be eliminated, he says.

That may be an exaggeration, but Bove is unequivocally correct when he points out mark-to-market accounting obscures the cash flowing through the banking system. That is, how much banks are earning on the loans they make relative to how much they have to pay on the deposits they take in. Stuff a simple guy like me can grasp.

On that score, the numbers are simply awful. Capital One (COF) Wednesday fell 8.4% after conceding its loan-loss estimates for 2009 were too low. The major issuer of credit cards reported a first-quarter loss of $112 million after adding $124 million to its loan-loss reserves.

That follows earlier news from Bank of America (BAC), which reported blow-out overall earnings but admitted to deteriorating credit fundamentals -- about as stark an example of the upside-down bank reporting there's been this quarter.

To cite another cliché, Abraham Lincoln said, "You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time."

The surge in first quarter earnings fooled only some of the people and only for a short time.

The big banks have to confront the conundrum that their best consumer customers are embracing the new frugality and are paying down their credit cards as fast as they can. Getting out from under 18% or higher interest charges is absolutely the best investment American households can make, but it deprives banks with their most profitable business.

Conversely, the banks' strapped customers are defaulting in soaring numbers, resulting in mounting losses. Even if banks charge 18% or more, they're losing more than that when borrowers lose jobs and can't repay. So banks are reacting by cutting credit lines, further crimping consumers.

Meanwhile, Washington is leaning on banks for their consumer-unfriendly practices of jacking up interest rates on folks when they're reeling from falling employment, incomes and house values. The government has even more to say to the banks now that they're wards of the state.

All that's pretty simple and straightforward, unlike the three-card-monte effect of mark-to-market accounting on banks' profits.

Given that banks have led the stock market's advance since early March, you've got to wonder about their leadership abilities from here.
 
MONDAY, MAY 18, 2009
UP AND DOWN WALL STREET

No Pig Heaven
By ALAN ABELSON | Barron's (USA)

The stock market missed a chance for a sentimental rally. Bad news brewing for health care.

WHAT MAKES TRYING TO GUESS HOW THE STOCK market will react to some unexpected piece of news such exciting sport is that the blamed thing more often than not is guided by a rationale all its own to which ordinary beings are not privy. A timely case in point is the suggestion by an Australian virologist that the swine-flu epidemic might have been caused by the accidental release of the virus from a laboratory carrying on genetic experiments.

One would think the very possibility of pigs being exonerated as the source of the epidemic would trigger a celebratory rally, since hogs have long occupied an important and unique place in Wall Street's bestiary, along with bulls, bears and sheep. For hogs are a transfigured species that bulls, bears and sheep turn into when they lose their senses. In short, that oink you hear may be your inner self.

Now, granted, the global health-care establishment was quick to pooh-pooh the Aussie researcher's notion, but that is hardly surprising considering that he was, by implication, fingering one or more of its members as having been severely negligent. But, in any case, the market is rarely reluctant to let facts stand in the way when it conjures up a reason to rally.

Don't get us wrong: We didn't expect it to go hog-wild over the possible exculpation of swine as the progenitor of the flu. But a nice, discreet show of sympathy in recognition of a long-standing kinship certainly seemed in order.

To be fair, investors had a full plate of news to weigh that may have distracted them from any purely sentimental gesture, such as President Obama's remarkable revelation that China might grow tired one of these years of lending us money (who knew?). And that, he posited, might pose a serious threat to our ability to continue to happily live beyond our means. Wow! And just to show he means to do something serious about it, he plans to limit this fiscal year's federal budget deficit to a mere $1.84 trillion, instead of the $2 trillion widely expected.

Over in the legislative arena, meanwhile, Nancy Pelosi, boss of the House of Representatives, admitted she had been briefed on harsh interrogation measures in 2003. But, she explained, the CIA flat-out lied to her and told her waterboarding was a favorite among prisoners with pool privileges, so she held her tongue (which, for Nancy, is real torture).

Another bit of intelligence out of Washington was also pretty much ignored, which is rather a pity because it seemed to us to offer an intriguing possibility for investors eager to get a bit of an edge on the crowd in the delicate business of picking stocks. And that was the disclosure that two SEC lawyers apparently had been making profitable use of non-public information, as the bureaucratic boilerplate dubs it, to trade stocks.

Unfortunately, their names weren't disclosed, but the more active of the pair made something like 247 trades during the past two years. These are enterprising types, and it isn't inconceivable they, or some of their like-minded colleagues, might welcome the opportunity to branch out and provide investment advice to nice folks like you -- for a fee, natch -- based on their access to inside information. When we learn more, like who they are and the details of their past performance, we'll be only too happy to pass it along (gratis, of course).

We most certainly don't want to convey the impression that the market has been completely unresponsive to what's happening out there in the real world. The hard numbers on the damage being wrought to auto dealers -- GM informed 1,100 of those franchisers they'll be sacked next year, while Chrysler plans to give the boot to close to 800 -- did dampen animal spirits a tad last week. Another reminder, that for all the exultation that recovery may be just around the corner, it's proving a mighty long corner.

Lest you think we're perennially gloomy, let us disabuse you. We emphatically do not hold with Bob Prechter's forecast to the Market Technicians Association that equities still are at risk of falling between 50% and 80%. We'd hazard that the market won't lose more than a third of its current value, barring anything really bad happening. Feel better?

TOM GALLAGHER and Andy Laperriere, who put out the invariably informative Policy Report for Ed Hyman's ISI Group, provided an early heads-up on the health-care program being crafted by the House Energy and Commerce Committee. In its present form, at least, it promises to be anything but healthy for a host of providers in that fast-growing sector and, Tom and Andy say, "potentially devastating to managed care."

More specifically, by their reckoning, the bill could occasion a "massive shift from commercial, employer-based coverage to government coverage." An exchange would be created to set up and enforce standards for health care. At the start, the exchange would be open to individuals and employees of small business. But, in due time, it would be made available to workers for large companies as well.

One of the choices on the exchange would be a public plan modeled on Medicare. The public plan probably would pay Medicare rates to providers, which, Tom and Andy point out, are 20% to 30% less than commercial rates, obviously a big incentive for consumers to switch. For HMOs, they logically venture, that could mean a "tremendous loss of market share."

They caution that the measure being worked up is by no means the final word on what eventually might become law. But, they contend, "it highlights the risk to health-care stocks." All the more so, since most of the features in the bill "track the white paper" released last fall by Senate Finance Committee Chairman Max Baucus, a major force in the administration's push to overhaul health care.

ONE REASON THE STOCK market lost some of its steam last week, as more than one strategist pointed out, was that the curtain pretty much came down on earnings reports for the first quarter. Although a dispassionate viewer might wonder after perusing that wave of reports why anyone was particularly impressed by results that at best weren't bad as feared, overall they were anything but plump pickings.

According to good old Standard & Poor's, the latest tally on the 500 companies comprising its index offered painful proof that first-quarter earnings were nothing to write home about. The tally, which includes outfits accounting for a trifle over 90% of the constituents' market value, showed the majority suffered lower earnings than in January-March last year and the aggregate decline was more than one-third.

On a per-share basis, first-quarter earnings on the index came in a tad over $10. We're still looking for $40 or a couple of bucks higher for the full year, which means the S&P 500 is selling comfortably over 20 times 2009 earnings. Tell us, again, please, why, with the economy still in the pits, that is a raging bargain.

LOUIS LOWENSTEIN died last month. From his post as a professor at Columbia University specializing in business law, Louis kept a skeptical eye cocked on Wall Street and its multiple sins. Unlike most academics who turn their gaze on the investment scene, he had met a payroll and his exceptions to dubious Street practice and corporate shenanigans were grounded in a wonderful mix of pragmatic experience and exquisite intelligence.

Louis, with whom we chatted from time to time, was particularly exercised over the increasing tendency of investors to succumb, often in response to the Street's urgings, to the lure of short-term trading (that was long before day-trading had its 15 minutes of fame). He was also an earnest and eloquent advocate for individual shareholders, who he felt were given the short end of the stick by everyone from giant brokerage firms to mutual-fund managers.

He was a gentleman and a scholar and, however uninhibited in criticism when he spotted shabby behavior and bad actors, we always found him warm and encouraging. In so many ways, he was an irreplaceable spectator of the investment scene, a one-of-a-kind professional and learned gadfly, and his luminous presence will certainly be missed, not least by us.

While we are in a eulogistic mood, we'd like to say a few kind words about L. William Seidman, who died last week. Bill was an accountant who did a number of stints in Washington and somehow retained a remarkable impulse to speak the truth, no matter how politically incorrect or damaging to the folks he was working for. He was named head of the Federal Deposit Insurance Corp. in 1985 and was there when the great savings-and-loan bubble burst, which he handled with remarkable skill, dispatch and aplomb, shutting down dozens on dozens of bankrupt thrifts in the process.

Just as Louis Lowenstein battled for the individual investor, Bill Seidman waged a gallant fight on behalf of bank depositors. He also ran the Resolution Trust Co., set up in 1989 to snare what he could of the assets of failed thrifts to repay the billions of taxpayer funds spent on cleaning up the mess and here, too, he did a great job.

Bill was a man of many parts. Beyond his considerable government labors, his resume included vice chairman of Phelps Dodge, dean of the business school of Arizona State, talking head on TV, magazine publisher and author. We remember reviewing one of his books for the Sunday Times Book Review. As we recall, we described it as lively and informative, but the writing clunky. Monday morning we got a phone call from Bill, thanking us in his own inimitable clunky fashion.

They don't make them like him anymore -- and we can't think of a higher compliment.
 
MONDAY, MAY 25, 2009
UP AND DOWN WALL STREET

Do Be Wary of Green Shoots
By RANDALL W. FORSYTH | Barron's (USA)

Hold your horses on calling a new bull market -- the bear has several years to go.

BLAME THE BRITS. WHEN STANDARD & POOR'S SUGGESTED last week that the credit of the United Kingdom mightn't be exactly sterling because of its deficits and bailouts, it cast a worse light on America's standing. But an even worse blight has spread across the Atlantic.

It's said we are two nations separated by a common language, though English is hardly the lingua franca it once was on these shores. Be that as it may, Yanks have adopted a turn of phrase originated on the other side of pond, the "green shoots" that keep popping up everywhere.

It was originated by former British Chancellor of the Exchequer Norman Lamont, who was quoted as spotting green shoots in the British economy back in 1991, recalls Mark Turner, who heads the Pentagram Fund, a hedge fund that scored a 70% return in last year's collapse. Of course, Lamont would go on to oversee the ignominious withdrawal of the pound from the European Exchange Rate Mechanism the next year, which netted an infamous $1 billion windfall for George Soros.

So, why the attraction of green shoots? One can only speculate that they must be in some ways intoxicating. Perhaps not the shoots exactly, or the stems or seeds, but the leaves of a certain plant. Those might be smoked or otherwise ingested to bring about a euphoric effect. From what I've read, the current crop is far more potent than the commodity available in years past. How else to explain the mind-bending notion that an economy that is declining less quickly is somehow improving?

Yet, in a world going to pot, nothing should be dismissed. Prior to the resounding rejection by California's voters of various patches for the state's budget deficit, Gov. Arnold Schwarzenegger seemed open to a legislative proposal to legalize marijuana and tax it. Now facing a $21 billion budget deficit, the "Governator" isn't in a position to just say No to anything.

As an alternative, the state's treasurer called on the federal government to guarantee California's borrowings in a way the Ford Administration declined to do back in the New York fiscal crisis of the 1970s. That, of course, led to the immortal New York Daily News headline, "Ford to City: Drop Dead."

Having bailed out the banks and provided a lifeline to Chrysler and General Motors, how does Washington tell California, the eighth-largest economy in the world, to drop dead? That's the slippery slope that America's credit rating is on.

LAST YEAR, MANY CELEBRATED THE 40TH anniversary of the tumultuous events of 1968, a year that changed history, at least in the view of Baby Boomers who date it in terms of BE and AE (Before Elvis and After Elvis.)

Market historians have been pointing to 1938 as an antecedent for this year's action, as Mike Santoli has noted in his Streetwise column. So, too, has Louise Yamada, the doyenne of technical analysts, who now counsels clients via her LY Advisors after her long career at Smith Barney. Citigroup (C), in one of its many deft moves before it became a ward of the state, decided to axe Smith Barney's highly regarded technical-analysis group back in the middle of the decade.

"It is almost uncanny the degree to which 2002-08 has tracked 1932-38," Yamada writes in her latest note to clients. She has posited in her so-called Alternate Hypothesis that the structural bear market would be less like its most recent predecessor, from 1966-82, and more like 1929-42.

So the dot-com collapse parallels the Great Crash and its aftermath, followed by a rather nice recovery in 2003-07, similar to 1933-37. The parallels continue, with the collapse from late last year into this March tracing a similar, sickening trajectory to late 1937-38, as illustrated in Louise's chart nearby. That drop led to a strong reaction rally, not unlike the current one, for a total gain of 60%. But that was broken into three segments: an initial rally of 46%, similar to the move from the March lows. Then we saw a 10% pullback, not unusual in a rally, then another gain of 22%.


From there comes the hard part. Starting in November 1938, there was a 22% drop, qualifying for the 20% rule-of-thumb definition of a bear market; then a rally of 26%, fitting the definition of a bull market, into the fateful month of September 1939, the start of World War II.

Then came a series of bull and bear trades -- down 28%, up 23%, down 16%, up 13%, and the final decline into 1942 of 29%. After this nauseating roller-coaster ride, the market was down 41% from the 1938 highs (analogous to where we are now) to the 1942 lows.

The positive aspect of this, writes Yamada, is that the arduous process permitted individual stock consolidations to develop over years ultimately provided the base for a bull market in 1942.

But, she emphasizes, that means investors probably face years of frustration if they think a new, sustained bull market has begun. Structural bear markets typically last 13 to 16 years. Given the declines that have been suffered so far -- topped only by 1929-32 -- the structural bear has several years to go to complete the repair process.

As for the current rebound, it is rather like a bungee jump, with an elastic snap-back after a terrifying plunge. And it has been a kind of worst-to-first move.

David Rosenberg, ensconced at Gluskin Sheff in Toronto after years of distinguished duty as Merrill Lynch's North American chief economist, observes that the best performers have been the lowest-quality stocks or those with biggest short interest. "In other words, this was a rally built largely on short-covering, pension-fund rebalancing and the emergence of hope wrapped up in 'green shoot' data points," he contends. That makes its sustainability in doubt.

But the move has left many on the platform as the train pulled out of the station, including some of the biggest swingers in hedge funds, who are known in the market just by their first names.

WHAT IS LIKELY TO DISAPPOINT THE BULLS is the pace of recovery in corporate profits, according to the perspicacious Smithers & Co. of London. Earnings per share -- the sustenance of equity investors -- will be hampered by punk economic growth ahead and the need to repair corporate balance sheets.

Investors had come to regard the record profit margins of recent years as the new norm. Last year's were above average, despite the general perception they were squeezed.

Profits typically grow when the economy is expanding above trend, and vice versa. With U.S. growth likely to stabilize at only 1% into 2010, the outlook for earnings is apt to be, in a word, lousy.

Apart from the economic forces on profits, financial forces -- depreciation, leverage, interest costs and taxes -- are likely to push earnings per share down, Smithers observes. Deleveraging means share issuance rather than buybacks -- a reversal of the trend of recent years that worked to the benefit of corporate chieftains' bonuses. "The growth rate of earnings per share is thus likely to be worse than that indicated by profit margins alone," his report logically infers.

The bottom line, as it were, is that when the economy recovers, the benefits to corporate earnings accruing to stockholders will be disappointing. That could make for a frustrating equity market until the healing is complete, a moment that, as Yamada's profile suggests, could be years away.
 
MONDAY, JUNE 1, 2009
UP AND DOWN WALL STREET

Read All About It
By ALAN ABELSON | Barron's (USA)

DAVID ROSENBERG, EX OF MERRILL LYNCH, is now chief economist and strategist (but a great guy nonetheless) of Gluskin Sheff, a money-management firm based in Toronto. (Dave, as we've mentioned before, hails from Canada.) Anyway, we're pleased to report, he's churning out what he calls his market musings and data deciphering (he's afflicted, poor chap, with a penchant for alliteration).

Crossing the border hasn't caused Dave to miss a beat. After perusing his latest batch of communiques, we can attest he's as sharp and incisive as ever, if anything maybe a touch more. He's that rare bird in the investment business who's skeptical without being invariably negative; who like Lord Keynes changes his mind when the facts change; who has firm convictions without being dogmatic and is able to convey his reasoning without resorting to gibberish. He also has a neat sense of humor.

We were particularly struck in his latest screed by his apostasy on government bonds. In true contrarian fashion, he takes issue with the increasingly popular notion that we've been witness to a bubble in Treasuries. "The Treasury market was never in a 'bubble,' Dave says. "Nothing that is fully guaranteed and pays a coupon semi-annually with no call or prepayment risk goes into a 'bubble' just because it was expensive at the yield's low."

He elaborates: "Sentiment never got wildly bullish; the public never became enamored of Treasuries; there were no widespread ownership or 'new paradigm' thoughts. At the lows in yield, there were legitimate concerns over a depression-like economic backdrop and deflation." But the Treasury market never met "the classic characteristics of a bubble," a la dot-com or housing.

Sounds reasonable to us.

Dave, we might add, in his most recent commentary points out that the delinquency data for the first quarter, courtesy of the Mortgage Bankers Association, were decidedly miserable. The overall mortgage-delinquency rate rose to a new high of 9.12%, from 7.88% the previous quarter and 6.35% in the corresponding three months last year. Subprime delinquencies shot up to 24.95%, from 21.88% in the final quarter of '08, while prime delinquencies rose to 6.06%, from 5.06% in last year's fourth quarter (and 3.71% in the like year-earlier stretch).

As Dave comments, "A year ago, the markets and the financials would have taken a big hit on data like this. But, heck, when the government steps in to guarantee the longevity of the large commercial banks," investors simply shrug off the bad news.

Still, he reflects, such dreary data are eloquent evidence of "the deteriorating level of credit quality, fully 18 months into this crisis." In short, don't do anything foolish.
 
September 17th, 2009

China’s coming magnificent bubble

James Saft
http://blogs.reuters.com/great-debate/2009/09/17/chinas-coming-magnificent-bubble/


If and when China makes its currency convertible and opens its financial system the stage will be set for a bubble that should make the dotcom and housing booms look tame.

China has recently signaled its key aspirations: for a greater international role for the renminbi and for Shanghai to become a great financial capital. Neither is imminent, but both imply, if not require, a series of steps that, taken in combination with China’s legitimately great potential for growth, could lead to a bubble of magnificent and dangerous proportions.

Magnificent in that, like the dotcom bubble or the railroad boom in the U.S. in the 19th century, a bubble in domestic China is directionally right and will build useful things which will change the world. A bubble, after all, needs a good story and China has one of the best ever.

Dangerous because, like the housing bubble, it will inevitably go too far and could take down banks and banking systems globally.

Perhaps rather than dotcom or housing, the most useful template for China is closer to home; namely the Japanese bubble which preceded its ongoing malaise, according to Dylan Grice, a strategist at Societe Generale in London.

“In the medium term we face the mother of all asset bubbles in China. The fundamental story is a good one; there are just lots and lots of people to sell to,” Grice said.

“If you drop a ton of liquidity on people it is possible that they will do rational things with it, but more likely they will do something pretty stupid.”

The parallels are strong. Both China and Japan successfully industrialized and opted for high-savings, low-consumption economies which concentrated on exports, exporting capital and keeping their currencies artificially weak. The result in both cases was a huge stockpile of U.S. Treasuries.

Both, too, scared their western clients and competitors witless. Remember U.S. autoworkers ritually burning Japanese cars? This of course was mingled with admiration and a sense that the global balance of power was changing, giving bubble thinking a strong push.

Japan slowly and over a long period liberalized its capital account; allowing the yen to float freely and deregulating financial markets.

Grice points out that during some of the 1980s the world fell in love with the yen, figuring that Japan’s new ascendancy meant that it would rise and rise. As a result Japan Inc. could in effect borrow in dollars, swap it into yen and get paid for the privilege. Much of the money found its way into the stock market, sending stocks to stratospheric levels and reinforcing the bubble illusion.

The Nikkei index of stocks went to the moon and Tokyo residents ended up needing 100-year mortgages to afford tiny apartments.

GOOD AND BAD BUBBLES

Of course, that is not where it ended with Japan, which had its bust and which is still struggling with deflation, though that is in part a function of a shrinking workforce.

Japan liberalized its financial system and currency arrangements under strong pressure from the United States.

China almost certainly has more relative real power today and there is every sign that it will open up on its own terms and to its own schedule.

But open it probably will.

Chinese officials have expressed a desire for the renminbi to play a great role in world trade, naming 2020 as a date by which it can play the role of a reserve currency.

That is almost certainly going to require deregulation of financial markets, something also needed if Shanghai is to become a global financial capital.

China now buys Treasuries not because it thinks they are good value, but because those purchases maintain a competitive currency, not to mention protecting existing holdings. As that ends, much of the money will seek out high returns, and as the renminbi strengthens international capital will doubtless pile on and pile in.

That kind of liquidity and deregulation, in combination with strong national pride and a legitimately fantastic story, is a step-by-step recipe for a bubble. So it proved in Japan, so it likely will be in China.

A look at recent experience in China only underlines this. Speculation is rife and billions in government mandated loans have leaked into stock market bets.

China’s government undoubtedly understands all of this and is surely determined to maintain control. They may not find it that easy. Getting rich, as we’ve seen in the United States, is a heady business and it is easy to start to believe your own press.

As the momentum builds and the money rolls in it will be easy to see it as a great country meeting its prosperous destiny.

Given the size of the opportunity and the strength of the story, China’s bubble will be huge. Investors would do well to avoid being in the immediate vicinity when it bursts.
 
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The job at the background is very complex but presentation of the results is simple and user friendly. There are six trading signals posted. These are BUY-IF, BUY CONFIRMED, SELL-IF, SELL CONFIRMED, HOLD and WAIT. The signals are accompanied by daily commentaries. The commentaries are automatically generated for each signal and are revised in case of signal failures. A multiple factor weighting scheme assign stars to all the stocks ranging between zero and five. The average success of five star stocks is a very impressive
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