Chris Waltzek of GoldSeek Radio talks to Lindsey Williams.
TD Waterhouse’s, Senior U.S. Equity Analyst, Ryan Lewenza, has just released their latest U.S. Equity Strategy Quarterly (Q3/11) Update report.
· The equity markets performed poorly in Q3 as risky assets came under pressure due to an escalation of the Eurozone sovereign-debt problems and mounting concerns over a potential U.S. recession.
· The U.S. economy is facing numerous challenges, however it’s our view that the European sovereign debt issues remain the largest risk to the global economy and stock markets.
· Some interesting proposals to solve the European debt problem have been discussed recently, including increasing the European Financial Stability Facility (EFSF) from its current €440 billion to potentially €2 trillion and/or possibly implementing a European equivalent to the Troubled Asset Relief Program (TARP), by injecting billions into European banks. It is encouraging to see lawmakers becoming more focused on these issues, however we remain skeptical of a long-term successful solution.
· Much has changed in the last quarter, with the U.S. equity market discounting slower economic growth and possible contagion effects from Europe. As a result, we are lowering our year-end price target for the S&P 500 to 1,250 from 1,365 previously.
· From a longer term perspective we view current market valuations as attractive with the S&P 500 trading at 11.7x 12-month trailing earnings.
· With the S&P 500 in a confirmed downtrend and trading below its key 50 and 200-day moving averages, we continue to maintain a cautious near-term technical view of the U.S. stock market.
· While we believe the S&P 500 is susceptible to additional near-term pressure, we emphasize that seasonality is about to improve dramatically for the North American equity markets. With the markets coming under pressure recently, and positive seasonality fast approaching, we believe there is a good chance for a year-end rally.
· With odds of a U.S. recession increasing, we are further reducing portfolio risk by increasing utilities and telecom to overweight. With the upgrades, our overweight sectors are information technology, health care, utilities and telecommunications. We’ve lowered our energy weight from overweight to market weight. Financials, materials, and consumer discretionary remain underweight. Consumer staples and industrials remain at market weight.
Posted on 12 October 2011.
About This Week’s Show:
-Gold is money and therefore increases it’s buying power during a deflation (contrary to popular belief)
-Question: How can the economy ever recover if the Fed stops injecting it with new stimulus? Answer: If left to the natural business cycle, the PRICE of all things adjusts to a lower equilibrium which prompts spending once again
-Why does the Fed want us to fear inflation and to “fight it at all costs” when some of the most productive era’s in history have been during deflationary periods?
I have consistently contended that Federal Reserve chairman Ben Bernanke is something akin to a mad scientist who, in his development of new "tools" to manage monetary policy, is probably unaware of all the nuances and ramifications of the new tools he is developing. Indeed, one problem with one of his new tools may be about to blow up in his face.
It turns out that Bernanke's decision to pay interest on reserves held at the Fed by member banks has some twists to it that make what he is doing likely illegal. The blog Uneasy Money points this out in a post titled, Is the Federal Reserve Breaking the Law:
Balances maintained at a Federal Reserve bank by or on behalf of a depository institution may receive earnings to be paid by the Federal Reserve bank at least once each calendar quarter, at a rate or rates not to exceed the general level of short-term interest rates.
As I said to David Pearson in my reply to his comment, I am flabbergasted by this. The Fed is now paying 0.25% interest on reserve balances while and the interest rate on 3-month T-bills is now 0.01%. Yet the statute states in black letters that the rate that the Fed may pay on reserves is “not to exceed the general level of short-term interest rates.” In fact, as can be easily seen on the Treasury’s Daily Yield Curve webpage, only on rare occasions was the 3-month T-bill rate as high as 0.25% in 2009 and it has been consistently less than 0.20% for most of 2009 and all of 2010 and 2011.
Got that? The Fed, as I have pointed out a number of times, is paying interest to bankers many times what is available in the marketplace and this turns out to be illegal.
Now it just so happens that the Congressional wording is a bit sloppy and says the pay out of "earnings" instead of interest, and you can be sure Bernanke is going to attempt to dance on the head of this pin , but the spirit of Act is clear, Fed member banks aren't supposed to be receiving payouts from the Fed that are greater than what they can get in the open market.
In other words, Bernanke is breaking the law, and one would think that now that this is public, he will have to cease paying interest at 0.25% to Fed bank members.
And as for him getting the law change, good luck to Bernanke trying to get new legislation through Congress, with the current anti-bankster sentiment in the country. Is there a Congressman around who will vote to allow the Fed to pay banks 25 times the current market rate?
This is where the atomic bomb explodes. Since Bernanke started paying interest on reserves (especially excess reserves),excess reserves have climbed from a few million to $1.6 trillion. If Bernanke stops paying interest at 0.25%, the money is likely to fly out of excess reserves and into the economy quicker than you can say, "hyper-inflation fiat money".
Maybe Bernanke will find a way to squirm out of this mess or simply ignore the law, the way recent Presidents have ignored many laws, but it will be nice to know that when the trials come Bernanke will be up there, with the other lawbreakers, having to explain why he ignored the law and paid the banksters interest 25 times greater than what is allowed by law.
In a piece of news that can not be taken well by students of Dr. Copper, the FT reveals for the first time that China's estimated copper inventories, based on numbers from the China Non-Ferrous Metals Industry Association, were 1.9 million tonnes at the end of 2010 which is almost double the lower end of the consensus estimate of 1.0-1.5 MM tonnes (and, as the FT points out, "more than the US consumes in a year). So while copper is doing its high beta thing on the nth short squeeze day in stocks, the smart money is starting to bail for very obvious reasons. And if the reasons are not obvious, this means that "The estimates, which were announced at a recent meeting of the International Copper Study Group but have not been made public, imply that real Chinese copper demand may have been lower than thought in recent years." In other words, and to all who are still confused by why Zero Hedge jokes at each and every iteration of economic growth driven by "inventory stockpiling", this is nothing other than trying to do at the national level, what Goldman and JPM do at the LME level each and every day: hoard and sell, only in China's case it is more hoard and forget. Alas, when China itself is the only real marginal buyer (not to mention that millions of domestic businesses operate using Letters of Credit backed by copper), things get very, very ugly, and explains why China has been so secretive about this number.
The CNIA estimated that Chinese copper stocks, not including those kept at Shanghai Futures Exchange warehouses, stood at 1.768m tonnes at the end of 2010, up from 1.218m in 2009 and 282,000 in 2008. SHFE inventories were 132,000 tonnes in 2010, putting China’s total stocks at 1.9m tonnes.
Other than exchange stocks, copper is held as working inventory by China’s manufacturing sector as well as by merchants, investors and the State Reserve Bureau, Beijing’s stockpiling agency. However, analysts, investors and traders are sceptical, noting that the world’s largest copper importer and consumer has an interest in inflating the size of its stockpiles, which could push prices down. The CNIA declined to comment.
That loud whooshing sound is long copper PMs sucking in air as they scramble to find the proper spin for this shock. Such as this one:
“Whatever the Chinese say that stocks are, in the end they still need copper,” said George Cheveley, metals and mining portfolio manager at Investec Asset Management.
Yes they will. And they will use the millions of tonnes they have in storage, not buy in the open market. Of course, this means that China will continue to buy US Treasurys and not diversify entirely to commodities. The opportunity costs of continued copper demand, however, is the difference between the 10 Year at 2% and 12%...
Below is an overview of five firms that faced the above challenges and were nearly ruined by them, but ended up experiencing impressive comebacks.
Money center banking giant Citigroup got itself into severe trouble by investing in, what was described by the New York Times as, "securities that were created by financial engineers in the great wave of innovation." More than $300 billion in troubled loans on its balance sheet sent the stock down to a split-adjusted $15 per share, in early 2009 and required close to $50 billion from the government, to help it survive.
Citigroup remains fast at work to sell off its remaining bad assets. This soured book, which ended up being much larger than original estimates, is being referred to as Citi Holding assets and was most recently whittled down by another 34%, during the second quarter. The stock has recovered to $27 per share, though it was recently above $50 per share, prior to a recent round of market uncertainty.
Credit card firm American Express also saw its stock plummet at the height of the credit crisis. Its share price fell to nearly $10 per share in March 2009, on fears that soured credit card loans in its $75 billion loan portfolio would ruin its balance sheet. However, unlike Citigroup, AmEx remained firmly profitable throughout the downturn, even though charge-offs hit close to 10%.
AmEx's miscue was to increase its loan book too aggressively, prior to the credit crisis. It ended up accepting nearly $4 billion in government TARP funds, but looked to pay it back only a few months later. The stock has recovered to close to $50 per share and its credit card businesses have also experienced near complete recoveries.
Tech giant Apple Inc. has a storied history. The firm is relatively new by most corporate measures, having been founded in 1976. It is credited with being one of the first companies to introduce desktop computers and had a large market share in the early 1980s. Founder Steve Jobs left the firm in 1985 and the firm saw its market share steadily erode, as rival IBM and Windows-based computers slowly took over. Apple's market share fell from the double digits to less than 5% in 1996 and continued to dwindle into the 2000s.
Jobs returned in 1996, but it wasn't until the introduction of the iPod in 2001 that it started a stunning reversal of fortune. Apple's stock basically caught fire in 2003, rising from less than $8 per share to almost $400 per share, today. The iPod, and related iTunes store, revolutionized the music industry, as has the iPhone in mobile phones and iPad for tablet computers, for an impressive and lasting impact on three different segments of the technology industry.
Las Vegas Sands
Founded in 1998, casino giant Las Vegas is an even newer firm than Apple. Its flagship casino, the Venetian, opened in Las Vegas in 1999 and was followed by the Sands Macau in 2004; then came the Palazzo and Venetian Macau, in 2007. This aggressive building, which peaked just before the credit crisis, nearly ruined the firm. In 2007, capital spending reached nearly $4 billion, even though Las Vegas Sands reported an earnings loss and generated only about $128 million, from its existing operations.
Overbuilding and a hefty debt load sent the stock to under $2 per share in early 2009, as investors feared a bankruptcy filing. However, capital infusions from founder Sheldon Adelson and outside investors, and a ramping down of spending, ended up saving the company. Today, the firm is one of a few operators in Macau and has other growth ambitions in Asia. Its stock has recovered to more than $40 per share.
Satellite radio leader, Sirius XM, also flirted with a bankruptcy filing a couple of years ago. The stock fell to 12 cents per share in January 2009, as losses mounted and fears grew, that a plummet in automotive demand (where most of Sirius's service stems from) would bring the company to financial ruin. A heavy debt load would have surely meant a trip into bankruptcy court, but media mogul John Malone ended up saving Sirius with a $530 million investment, in February 2009. The move gave his firm, Liberty Media, an estimated 40% stake and a fair amount of future capital for Sirius to rely on. Today, Sirius XM's stock is only at about $1.50 per share, but that is up more than ten times from its low.
The Bottom Line
Of the above examples, Apple's recovery stands out as the most impressive, as it didn't require a bailout or outside help to revive its fortunes. Overall, a desperate firm will take any path necessary to survive. Companies including Bear Stearns, Lehman Brothers, Sharper Image, and Palm Inc, weren't nearly as lucky.
When it comes to the way we think about money, I've noticed there are two kinds of people: those who think $1,000 is a lot of money, and those who think $10 is a lot of money.
I fall into the second category. But I'm not especially frugal. I have a fairly nice car, I take a vacation every year, and it isn't too hard to convince me to drop a few hundred dollars on a great pair of shoes now and then. I've never even clipped a coupon. But I've also maxed out my retirement savings, bought a house, and live without debt — all on an average salary for where I live.
What I've done isn't extraordinary, but it does seem somewhat rare. That said, I think most people can accomplish this fairly easily. All you have to do is live and die by two simple rules...
1. Pay Yourself First: The Best Kind of Cliché
"Pay yourself first" is a very common piece of financial advice. It's simple enough to follow, but that doesn't make it easy.
If you can save $200 per month at a 6-percent interest rate, you'll have more than $200,000 in 30 years. At the very least, you'll have a great savings fund at the ready for whatever life may bring. But how can you come up with that cash when you barely have any money left between paychecks?
The answer is to take that money off the top. And yes, it'll sting a bit at first.
I've made a habit of taking contributions to my retirement and savings account right off the top of each paycheck on the very day it hits my bank account. I try to cut pretty deep too, leaving myself just a little more than I need to pay for expenses.
This works on two levels: It forces me to really budget to meet my basic expenses while keeping extra cash out of easy reach. I can still retrieve the money from my savings account if I happen to need it, but because I have to make a decision to transfer funds, they usually stay put. I allow myself to spend whatever I don't need for expenses on whatever I like — if I don't spend it by the time my next paycheck comes, I roll that into savings too.
I also save any additional money I get. I think a raise, tax return, or bonus can go two ways. It can raise your standard of living, or it can raise your standards. Rather than creating more expenses to suck up these extra dollars, I live the same way day to day and tuck the extra money away for something better.
2. Practice Mindful Spending
Having some leeway in your paycheck isn't a given, but I think many people have more wiggle room than they realize.
This is what I mean when I say that I think $10 is a lot of money. When I decide to buy something, it's a decision, not an impulse buy. I want to spend my money on things that really have value for me, not just things that are convenient or appealing at the moment. So while I can buy something nice once in a while — without guilt — I have a hard time going out for lunch or buying (you guessed it) a latte.
Less expensive purchases are an easy mental hurdle to get over because they're so small it seems that they could hardly amount to anything. The truth is, these seemingly insignificant purchases can easily amount to, or exceed, that $200 you may be aiming to save.
If you spend $4 every morning on a latte, and $12 each work day for lunch, this adds up to $80 per week — for a grand total of $4,160 per year. If you earn $50,000 per year, that's a full month of your salary. Do you really want all that money to amount to a bunch of coffee and Subway sandwiches?
This isn't to say that no one should ever buy a latte. But if I spend this kind of money every week, I don't have anything to devote to my savings. That's a sign that these seemingly small indulgences just aren't affordable, at least for me.
This is why I've also decided not to opt for cable TV or an extensive cell phone plan. I don't feel that I live like a pauper. After all, I have money saved that I can turn to not only in an emergency, but also to pay for things that I feel really add enjoyment to my life, rather than just distracting me for a few hours or days — and steadily subtracting dollars from my bank account.
What Are Your Rules?
Over time, I've learned to save money as diligently as I pay my bills. I also try to spend what's left as mindfully as I can. I can't say I always succeed, that I never overspend or that I'm not often tempted to break my rules.
Nevertheless, I'm sticking to the strategy that has kept me out of debt, and helped me save enough to meet some key financial goals — and still have some fun. I know of other people who've done even better by employing these rules much more stringently than I do. As for me, I'll keep saving up for my next big purchase by keeping all the little ones in check.
Well at least they are transparent about it. Chinese stocks of the banking kind, shot up overnight as an investment arm of the Chinese government, came into the market to buy buy buy. At this point one has to wonder with the Fed intervening in bonds and herding savers into risk assets, various EU countries with short bans on financials, the Japanese central bank buying REITs and such, and now the Chinese outright buying stocks, where there is any price discovery happening on the globe. All artifical, all the time – paper printing prosperity reigns.
More importantly, this appears to be more fallout of the massive Keynesian plan to flood the economy with stimulus during the global financial crisis. We asked back then if China was simply following the Greenspan policy of kick the can down the road [Feb 16 2009: Is China Pulling an Alan Greenspan?] [May 27, 2009: How is China Spending their Stimulus... and How Many Loans Will go Bad?]- usually we are early on these things, asking the question two years ahead of the fallout. And just like Greenspan’s (and now Bernanke’s) policy, eventually the can kicks back. [Jun 2, 2011: China Now Beginning to Feel Hangover from Lending Boom of 08/09 - Government May Assume Some Local Debt] So all you can do as a central bank and government is simply pour more steroids on the problem.
Yes, outflows in domestic equities may be traditionally perceived as a contrarian signal, but when they hit 23 out of 24 weeks for a total of $106 billion (and the one weekly inflow was $715 million) one has to start getting concerned about the cash levels of the broader mutual fund space which as had been pointed out recently are already at all time lows. In the week ended October 5, domestic equity funds saw an outflow of $4.3 billion, which brings total 2011 outflows to a total of $93 billion. What was just as notable about the week is that while traditionally we have seen rotation from equity assets into fixed income, in the past week a whopping $6.2 billion was withdrawn from taxable bond funds as well, implying that the ever increasing volatility not only means retail has thrown in the towel on stocks but that the already painfully low yields in bonds are forcing the long-term investors to get out of the market in its entirety.
by Asha Bangalore, vice president and economist at The Northern Trust Company.
The recent trend of consumer spending is lackluster and, in fact, worrisome such that Chairman Bernanke has mentioned it in speeches over the past month. Real disposable personal income has posted a meager 0.3% gain in August 2011 (see Chart 1) and consumer spending shows a noticeably decelerating trend. The obvious reply to answers about the reasons for soft growth in consumer spending is related to lack of hiring.
A reduction of household debt is an important adjustment process which is playing a role in the muted trend of consumer spending. Households are focused on rebuilding their net worth following significant losses. Pessimism about asset price gains lifting their net worth has led to the old fashioned route of deleveraging and saving. Outstanding household debt as a percentage of disposable income is trending down after registering a historical peak in the second quarter of 2007 (130.34%, see Chart 2). This ratio stood at 114.6% in the second quarter of 2011. Essentially, the economy has experienced four years of voluntary and involuntary (foreclosures) deleveraging. Hypothetically, if household debt to disposable income were to stabilize at its long-term average of 76%, it would imply a significant reduction of debt over an extended period. The direct impact would be slower growth of consumer spending, particularly in an environment of tepid economic growth.