Pessimism Overides Strong Coorperate Earnings

New data compiled by Bloomberg highlights growing pessimism among analysts, which is beginning to worry investors as their attention shifts from strong cooperate earnings to macro-economic data and the potential of a double-dip recession.

• For the first time since 1997 fewer than 29% of ratings for stocks covered by brokerages worldwide are "buys", according to 159,919 recommendations compiled by Bloomberg.
• This flies in the face of strong cooperate earnings, recently announced in the Q2 earnings season
• the reason for this is because investors are becoming increasingly concerned with the global economic outlook, which as recent economic data suggest is looking "unusually uncertain" to quote Ben Bernanke chairman of Federal Reserve.
• This kind of sentiment is summed up perfectly by Paul Zemsky, head of IG Investment Management who says  "Boy theses companies look pretty good, earnings look OK, they have plenty of cash. What if there is a double-dip"
• Also the recent announcement by Intel saying that Q3 earnings will be lower than previous estimates only adds to investor fears.
• Additionally the report also shows that 54% of ratings for companies in the US, UK, Japan & Brazil are holds, clearly demonstrating a market that currently lacks conviction
• This case is highlighted further when investors today (Mon 30th August) gave back most of the gains that were accumulated on Friday - a "sell the rally" approach that seems to dominating the market of late.

Despite all this pessimism, analysts say that profits for companies in the MSCI World Index of 24 developed nations will gain 28% in the next year. This index currently trades at 11.5X forecast earnings, which is historically low given the fact that apart from the six months starting from October 2008 the index has never traded below 12.5X reported earnings.

Main Article at http://noir.bloomberg.com/apps/news?pid=20601109&sid=aJJjeB34wnHs&pos=10

Quants: The Alchemists of Wall Street - An Insight

Gillian Tett Presents the Case to Stress Test America's GSE's

Gillian Tett presents a telling argument as to why the America’s huge Government Sponsored Enterprises should themselves be stress testes.

Picture Source: http://sightsonpennsylvania.blogspot.com/2010/06/fannie-mae-and-freddie-mac-delist.html

• First she highlights that in the entire 2,300 page document relating to the recent financial reform bill there is unbelievably little detail of the mortgage giants Fannie Mae & Freddie Mac.

• This demonstrates a woeful lack of understanding around the origins of the financial crisis itself, but more specifically the US mortgage market, of which Fannie Mae and Freddie Mac make up a staggering $5,500bn of outstanding mortgages in US or approximately 50%.

• Since the 2008 nationalisation of these two institutions, $145bn of taxpayers’ money has gone into propping the GSEs up.

• However these could rise dramatically from this figure with estimates varying from $390bn to a whopping $1trn, which as Gillian Tett puts it makes the “woes of the Spanish savings banks seem almost tame”.

• Doubts remain as to whether there will ever be a stress test for these GSEs , due to fact that they are the only thing keeping the US mortgage market afloat.

• This is highlighted by the fact that 9/10 mortgages last year were underwritten by Fannie Mae and Freddie Mac

• Additionally if the Obama administration were to embark on a radical reform programme, this would inevitably lead to huge conflict between the government and Federal Reserve given the size of their holdings of mortgage backed bonds.

However despite all this, there is momentum building behind the scenes both in Washington and on Wall Street for overhaul of GSEs. With calls for banks to organise a mutual, private sector insurance scheme to guarantee mortgages without state support. However there remains a huge stumbling block, which is that any type of reform at present given the fragility of the US housing market may tip the country back into recession (just look at last week’s housing sales figures, which showed a huge 27% drop in July – a 10 year low)

Given the fact it was the markets that forced austerity on Greece and the Bank Stress Test in Europe, it may again decide the fate of the GSEs and the US mortgage market should the markets repeat the events of May this year.

http://www.bbc.co.uk/news/business-11075006

For the US Gold Reign's Supreme as Emerging Markets Shift away from the Dollar

An article in this weekend (28th/29th August) FT Magazine, shows that according to the World Gold Council 70% of US foreign currency reserves are made up of Gold, substantially more than any other country in the world. (see figures below)

1. US - 8,133.5 Tonnes
2. Germany - 3,407
3. IMF (who recently announced it was selling 160 on the market with just under 3,000 tonnes)
4. Italy - 2,451.8
5. France - 2,435.4
6. Russia after its buying spree last year now has 668 tonnes
7. ECB (European Central Bank) with 501 tonnes
9 UK - 310

As far as China is concerned, which given that it now produces more gold than any other country in the world comes 8th on the list. However that could change depending on US fiscal policy and whether China still continues to believe that US can manage its debt and continues to buy its treasuries.

As emerging market central banks continue to diversify their own portfolios, Rogoff co-author of This Time it’s Different says they “will probably raise the share of gold in their foreign exchange reserves”. This is because their shift from an over-reliance on the dollar to currencies such as the euro is not “sufficient diversification against the risk – which is low, but certainly non-trivial – of a generalised global inflation.

Statistics Show Why Britain's Welfare System Needs A Radical Overhaul

A recent report by the Sunday Times newspaper, published on July 25th highlights the worrying cost to taxpayers of current welfare system, which this year alone will account for nearly £200bn of government spending.

In the last decade under the Labour government welfare ‘benefits’ spending in Britain has spiralled out of control.

Figures compiled by the Treasury, DWP (Department for Work & Pensions) and Civitas show that between 2000 and 2010 welfare spending went from £132bn to £192bn. Perhaps what is more concerning is the amount of people as a percentage of the population that rely on the welfare system; in 1960, 5% of population received benefits in stark contrast to today where a shocking 29% of the UK population receive benefits of some kind. A breakdown of the figures show the £30bn alone in spent on jobseekers allowance, housing benefit and income support, which represent the three most common forms of welfare payments. The yearly cost to the taxpayer of people claiming disability benefits is £11.5bn, which is larger than the entire budget for the Home Office. Also highlighted in the figures is the amount of people that are currently unemployed which currently stands at 5.9m. An alarming trend in these figures is that 1.4m of these have claimed 9 out of the last 10 years.

Also highlighted in the Sunday Times report is that over 3,000 families are claiming benefits of £26,000 a year. A rising trend seems to be where three generations of families are living on benefits, which is now creating a substantial strain on government spending in a time of austerity. This is making life increasingly difficult for policymakers who are trying to wean entire generations of families of benefits. As a consequence of this, is that they are becoming accustomed to a life of idleness, which then creates its own set of problem; one is that they as a result of spending long periods out of work become increasingly unemployable as a result of their physical condition and secondly they rapidly lose the skills necessary to carry those jobs in today rapidly changing job market.

Labour’s Sure Start scheme was designed to give children in deprived areas of Britain’s communities a better start in life a so called ‘early intervention’ program; however this was criticised as an expensive political piece of social engineering. The Conservatives proposed in their manifesto a ‘big society’ approach, which has also received criticism.

A more effective approach that has been proposed is the possibility of getting private businesses to invest money in projects for children at an early stage in the hope of getting returns on their initial investment at a later date. A report was published by Smith Institute and the Centre for Social Justice, which was founded by Ian-Duncan Smith with the purpose of mending a ‘broken Britain’. A comparative study was also carried out in the US back in the 1960s titled the Perry pre-school study focusing on African-Americans, with positive results.

John Bird, the founder of the Big Issue presented research to David Cameron that demonstrated that among his homeless magazine vendors that it has cost the state more to keep them in care as children as it would have cost to send them to Eton. Showing that simply throwing money at the problem isn’t necessarily the answer.

Perhaps the financial crisis will have one lasting positive effect on the Britain’s welfare system. The reason being is that in the ‘age of austerity’ weaning over-reliant people of benefits will have to speeded up since Britain can no longer afford to maintain its current rate of spending in this area. This will in turn bring forward the increased activity from the private sector in helping alleviate Britain’s social problems, which have positive long term impact on Britain’s economy. As Allen has stated “early intervention is not only cheaper but more effective”.

Historians Deliver Damming Verdict on Brown's Premiership

In a poll of 100 academics, former Labour leader Gordon Brown comes in as the third worst Prime Minister in post-war Britain. This is the first poll of its kind to be released since the Labour party were defeated in the May general election.

Gordon Brown comes in 10th out of the 12 post World War 2 Prime Ministers in the UK. The reasoning behind the outcome in this poll was as a result of the huge amount of debt that was left behind when he left office. The poll does however look favourably on the role Brown played in the financial crisis. More bad news for the former PM and chancellor is that his rival Tony Blair came in as the third most successful Prime Ministers, with Margaret Thatcher coming second and Clement Attlee coming the top of the list, deemed to be the most successful PM in over the last half a century.

Picture Source: http://www.dailymail.co.uk/news/article-479780/Im-conviction-politician-like-Maggie-Brown-taunts-Cameron.html

Clement Attlee who came in top was PM between 1945-1951 and was a key architect in the establishment up the NHS and the Welfare State, both of which still remain today.

Harold Macmillan the leader during the "never had it so good" period of post-war Britain came in fourth place.

While Winston Churchill was in sixth place in this poll, it must be noted that it only takes into account his Prime Ministerial role in peacetime from 1951-1955. Winston Churchill remains in the vast majority of polls/studies and surveys carried out the most popular and successful PM in British history during his tenure in office during WWII.

Picture Source: http://priceofoil.org/2009/07/08/gore-invokes-spirit-of-churchill-to-fight-climate-change/

The role of the miners also played a deciding factor in the outcome of this poll, since Edward Heath came lower down the list than James Callaghan who governed during the "winter of discontent".

Finally in last place and voted as Britain's worst PM in post-war Britain was Anthony Eden who's catastrophic invasion of Suez, had long lasting implications on Britain's foreign policy and effectively ended Britain's prominence in world affairs.

Picture Source: http://www.mentalfloss.com/blogs/archives/21653

Kevin Theakston of Leeds University, who compiled the poll said a determining factor behind the outcome was the length of time the person had served in office. Pointing out that each of the top five PMs served at least six years in Number 10.

This article was originally published in the UKs Daily Mail newspaper on August 3, 2010

Relief Rally Monday and then Back Down to Earth Tuesday

(02/08/2010)

OK. So can someone explain to me what has changed so dramatically in the last 24hours to spark a 2-3% gain across global stock market indices?

1) US employment is still at stubbornly high levels

2) Weak economic data continues to point to subdued growth

3) Economic data that came out of China on Monday indicates their economy is also slowing, so why the substantial rise in mining stocks BHP (BHP Billiton), RTP (Rio Tinto) & VALE etc...

4) Europe’s financial system is still weak, despite what the stress test may indicate. As Jim Rogers highlighted last week on CNBC it was all just a PR campaign.

5) Weak housing and retail figures i.e. Home Starts/Construction/Sales & Consumer Confidence are both extremely weak.

6) Europe’s sovereign debt problems are still in background

7) Also what happened to Ben Bernanke’s comments last week saying the outlook for the US economy is “unusually uncertain”?

8) Lastly did investors just forget about the worst than expected GDP figures last week

+ the rather strangely the continuing rise in copper and oil prices, given subdued growth in both the US and Europe.

So taking all this into account. What I ask is reason for today’s rally, I get the funny feeling this is just a relief rally and that we will stay in this trading range for a while yet.

That is somewhere between 10,000-10,500 on the DOW JONES and 1080-1120 on the S&P 500.

Disclosure:
I continue to hold SDS (SPDR Ultra Short S&P 500( in my portfolio
Also have short positions in FXE (Currency Shares Euro Trust), ITB (iShares Dow Jones Home Construction & RTH (Retail HOLDERs)

(03/08/2010)

It’s amazing the difference a day makes in the financial markets.

Noticed a rare event today in the market, that is oil prices and thus energy stocks traded inversely to the market despite a string of bad economic reports. Most likely due to the continued pressure on the dollar.

Negativity seemed to burst back to life today as a couple of important companies missed analyst earnings estimates. They include #P&G, which shed some light on the weakness of the US consumer as they move away from named brands and switched to lower priced alternatives. Additionally #DOW missed earnings expectations, the biggest US chemical company.

Another round of negative economic data also stopped yesterday’s rally in its tracks.

1. Personal spending came in at 0%
2. Personal income again came in flat
3. PCE prices were also at 0%
So few positive signs there of a strengthening economy

Dan Cook an analyst at IG Markets put it perfectly in my opinion when he said that “it’s the same battle between positive earnings and negative underlying fundamentals in the real economy”. He also went on to say that the “outlook is pretty dark... It’s not dire, but growth will be slow and investors are starting to wonder where these companies will draw profits from next year”. It is not surprising that investors are worried by this when the likes of Factory Orders come in well below expectations falling 1.2% compared to a projected fall of 0.5%.

These two articles were originally published on the Community Board on the TradeFields application website. This can be viewed from the link to the right of this post.

NB: Any mention of holdings are purely fictional and refer specifically to my TradeFields account. However these holdings do represent my views on the overall economy.