Thursday, April 29, 2010

McAlvany Weekly Commentary, April 28, 2010

The End of Globalization. A Continuing Conversation With Harold James

The Creation and Destruction of Value: The Globalization Cycle
-by Harold James

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Biggest VIX Jump Since 2008 May Be One-Day Wonder: Chart of Day

The U.S. stock market’s fear gauge probably will settle down in the next few days after its biggest one-day surge since October 2008, according to Bill Luby, editor of the VIX and More newsletter and blog.

The CHART OF THE DAY displays daily percentage changes in the indicator -- the Chicago Board Options Exchange Volatility Index, also known as the VIX -- during the past 18 months.

The VIX climbed 31 percent yesterday as Standard & Poor’s lowered Greece’s debt ratings to junk-bond status and downgraded Portugal, heightening concern that European government deficits will spark a global financial crisis. This was only the eighth increase of 30 percent or more since the CBOE introduced the gauge in 1993, according to data compiled by Bloomberg. (more)

Trump: Commercial Real Estate Won’t Crash

While commercial real estate has its problems, the sector isn’t headed for a crash, says property icon Donald Trump.

“Commercial real estate will be severe, but nothing like the housing (crisis) that almost imploded our whole economy,” he says.

The industry was actually in worse shape during the last downturn of the early 1990s, Trump says.

“We don’t have that much supply compared to 1990. The commercial real estate problem is largely a question of financing it.” (more)

Roubini: Euro Zone May Collapse Within Days

New York University economist Nouriel Roubini says the euro zone’s days may be numbered, and he’s not talking about some day far off in the future.

“In a few days, there might not be a euro zone for us to discuss,” he said at a Los Angeles conference sponsored by the Milken Institute, Reuters reports.

European policy makers may have to fork over 600 billion euros ($794 billion) in aid or buy government bonds to erase the debt crisis, economists tell Bloomberg.

Roubini says Greece can’t come up with the 10 percent spending reduction necessary to prevent its debt from exploding out of control. (more)

A Clear Warning Sign: Global Liquidity Is Drying Up!

In last week’s Money and Markets column I told you the majority of my indicators are signaling that the stock market has probably entered the last phase of its medium-term uptrend, which began in March 2009.

I went over price-to-earnings ratios (based on twelve-months trailing GAAP earnings) and dividend yields. Both metrics are showing a heavily overvalued market.

Today I want to add that “normalized earnings,” which try to even out the impact of the ups and downs in the business cycle, are strongly supporting this message.

Plus, I’d like to give you updates on what I discussed last week and tell you about one more important signal … (more)

Spain downgrade sparks European sell-off

Spain's debt has been downgraded in a further widening of Europe’s government debt crisis.

The move follows its reductions yesterday of Portugal and Greece, which sent shock waves through world markets.

Standard & Poor’s said its decision to downgrade Spain’s credit rating by one notch to AA from AA+ is due to its expectation that the country will suffer an “extended" period of subdued economic growth.

“We now believe that the Spanish economy’s shift away from credit-fuelled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed,” the S&P credit analyst Marko Mrsnik said. (more)

BNN: Dennis Mitchell Top Picks

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Contagion Getting Worse

So it’s looking pretty ugly across the pond this morning.

Spreads between the debt of fiscally troubled countries — Portugal, Ireland, Italy, Greece, Spain — are continuing to widen versus German debt, a sign of growing stress. The blowout in Greek vs. German spreads is getting downright comical. On 10-year bonds, it was at more than 1.90 percentage points earlier this morning, with the Greek 10-year yielding just under 12%. All told the spread between Greek and German 10-years is around 850 basis points. Yields on Greek two-year bonds are also soaring. At around 8:30 a.m. Tradeweb was quoting the yield on the Greek two year at more than 22%. (more)

Keiser Report with very special Hollywood guest

New Bloomberg Analysis Gives Income Investors Reason to Cheer

After some very tough years, income investors may finally rejoice. An analysis conducted by Bloomberg predicts that the current quarter will be the first time in years that no S&P 500 companies will cut or suspend their dividends. If true, it would mark the first such quarter since the second quarter of 2004, and it is certainly a bullish statement by US corporations. Earnings have steadily improved over the last year, and according to our data trailing twelve month reported earnings on the S&P 500 have increased 89% over the past year. Having heavily cut costs companies are flush with cash, and very few S&P 500 stocks are distressed or in need of a dividend cut to conserve capital. As a comparison, S&P 500 companies decreased dividend payouts by a record $52 billion in 2009. (more)

Gold Bubble?

“Gold remains as a safe haven during times of economic uncertainty,” maintains Frank Holmes, a perennial presence at our Investment Symposium. “In the 1970s, double-digit inflation rapidly eroded wealth, and these days there is a lingering fear of higher inflation as the federal government piles more debt onto its already groaning balance sheets.

“But a key difference is that gold has gained stature as a legitimate asset class for investors. During the 1970s run-up, investment demand peaked around 27 million ounces, about half of what it is today. Contributing to this demand are new investment vehicles, including gold-oriented mutual funds and bullion-backed ETFs, both of which have made it easier for investors to allocate a portion of their portfolios to the yellow metal.

“We also have greater affluence in the developing world, where people have traditionally turned to gold to store their wealth. Central banks in these countries, most notably China and India, have built up their gold holdings as a way to diversify their foreign reserves away from the dollar and other paper currencies.

“The chart below compares the price performance of gold bullion during the 1970s bull market (green line) to the current price trend (red). As you can see, the price line since the start of 1999, when gold was trading just under $300, has been far less volatile than during the earlier period.

“The 1990s dot-com era was a bubble, and likewise the 2000s housing market. But gold? We don’t think so.” Agora Financial