12 January 2009

Last week: Bond Bears and Silver Bulls

Boomtime Wiseguys

Agents took potential buyers out for the day: a harbour cruise, lunch at Cockle Bay, and then to a table at the Liberal Party's Millennium Forum fund-raisers.

After an introduction to the former prime minister John Howard, a customer felt more confident about taking on the risks of the property market, agents say.

At The Waterfront, investors needed little money to buy in. They could lay claim to an unbuilt apartment priced at more than $500,000 simply by taking out a "call option", often for as little as $2000. These options, more commonly associated with sophisticated financial markets than apartment developments, gave the buyer the right, but not the obligation, to buy the property at a later date for a set price.

Part of the appeal was that it was initially thought the buyer could avoid paying stamp duty on the flat. The State Government closed this loophole but agents and developers continued to promote the options as a way of getting buyers in the door.


Global stock markets reversed course during the last three days of the first full trading week of 2009 as investors were confronted with dreadful economic data, escalating layoffs and a bleak earnings outlook.

As investor sentiment soured, the MSCI World Index and the MSCI Emerging Markets Index declined by 2.5% and 1.7% respectively during "turnaround week".

The US stock markets - leaders among mature markets since the November 20 low - were on the receiving end of the selling orders and recorded relatively large weekly losses of 4.8% for the Dow Jones Industrial Index and 4.4% for the S&P 500 Index. On the other end of the performance scale, Brazil (+11.8%) and Ireland (+11.0%) brought investors cheer. (The Dublin ISEQ Index was the worst bear market performer, losing 76.8% from June 2007 to November 2008.)


BCA Research: FOMC Minutes - Fed's balance sheet to balloon further
"The Minutes from the mid-December FOMC meeting confirmed that policymakers are very concerned about the possibility of a prolonged economic slump and a sustained bout of deflation.

"With the fed funds rate virtually zero, the Minutes highlighted that the policy focus would shift to unconventional tools. The first such tool is communication strategy. This includes signalling that the policy rate would stay 'exceptionally low for some time', in order to keep longer-term borrowing rates low.

"The Fed also would reinforce its commitment to keep inflation from falling below 'desired levels' on a sustained basis, in order to avoid an unwelcome rise in real rates of interest if expectations for deflation mushroom (as occurred in Japan).

"The second major unconventional tool is quantitative easing, in which the Fed's balance sheet and excess bank reserves would grow as needed while purchasing large amounts of assets (including Agencies and Agency-backed MBS).

"Although not mentioned in the Minutes, the Fed's next move could be to purchase high-quality corporate bonds if yields on these instruments do not fall in the near term. Bottom line: Investors should expect falling private sector bond yields and a long period of zero short-term rates."

Source: BCA Research, January 8, 2009.

Trader Dan (JS Mineset): Fed monetizing US agency debt
"The reason they [the Fed] are being forced into buying the debt is because no one else wants it. We have been charting this for some time by monitoring the Custodial data from the US Federal Reserve system.

"... chart ... see how foreign central banks are dumping Fannie and Freddie debt in large amounts onto the market. Without the Fed monetizing that debt, there would be a significant drop off in the amount of funds for mortgages.

"The Fed is going to need every bit of that $500 billion they are going to create out of thin air to acquire what the foreign central banks are unloading."

Source: Trader Dan, JS Mineset, January 5, 2009.

Asha Bangalore (Northern Trust): December employment report - further deterioration of labor conditions
• Civilian Unemployment Rate:7.2% in December versus 6.8% in November, cycle low is 4.4% in March 2007.

• Payroll Employment:-524,000 in December versus -584,000 in November, net loss of 154,000 jobs after revisions of payroll estimates for October and November.

• Hourly earnings:+5 cents to $18.36, 3.7% yoy change versus 3.8% yoy change in November; cycle high is 4.28% yoy change in December 2006.

"The Fed is expected to stay on hold for all of 2009 in terms of implementing monetary policy changes via adjustments of the target federal funds rate but other non-interest avenues to support/ease financial market conditions remain open. The details of the employment report are grim and provide ample evidence for proponents of a large fiscal stimulus package to revive economic activity."

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, January 9, 2009.

Paul Kedrosky (Infectious Greed): There's unemployment, and then there's unemployment
"I have been sent this Reuters story from yesterday umpteen times, so I may as well post it, as well as the underlying graph. The gist: If unemployment were being measured the same way as it was during the Depression, the US would be well on its way to similar numbers.

Bespoke: New bull market for oil
"Based on the standard bull/bear market move of 20%, oil is already well into a new bull market with its move of 44.7% since its closing low of $33.87 on December 19. Since 2000, the average oil bull market has seen the commodity rise 89%, while the average bear has seen oil decline by 39%.

"The 88-day decline in oil from 9/22 to 12/19 of 72% was by far the steepest drop the commodity has ever seen without a 20% rally. The last four bull and bear markets in oil have all come within 6 months, highlighting the extreme volatility in the commodities market.

"As shown in the bottom chart, the number of days that the last four market cycles have lasted has been much lower than normal. It's likely that we'll continue to see these big swings in short periods of time until the financial markets cool down."

CHINA'S central bank said yesterday that it plans to implement a pilot program that would settle overseas trade with the Chinese currency instead of the US dollar.

The People's Bank of China will expand financial cooperation with overseas economies and "properly deal with the global financial crisis," the central bank said.

"We'll actively join international efforts to tackle the global financial crisis while safeguarding national interests," the central bank said.

It pledged to implement a pilot program that the State Council announced last month.

China will allow the yuan to be used for settlement between Guangdong Province and the Yangtze River Delta, China's two economic powerhouses, and the special administrative regions of Hong Kong and Macau, according to the central bank.

Meanwhile, exporters in the Guangxi Zhuang Autonomous Region and Yunnan Province in southwestern China will be allowed to use the yuan to settle trade payments with members of the Association of Southeast Asian Nations.


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