Monday, November 30, 2009

US Dollar Retreats as Easing Fears of Dubai Default Boosts Risky Assets

LONDON, Nov 30 (Reuters) - The dollar weakened on Monday after the United Arab Emirates said it would stand behind banks in Dubai, soothing concerns about a looming debt default and prompting investors to sell dollars for other currencies and assets like stocks and commodities.

Asian stocks and U.S. stock futures rose after the UAE central bank pledged to provide emerging support to the region's banks and as Dubai's oil-rich neighbor, Abu Dhabi, offered to provide selective support to Dubai companies.

Sunday, November 29, 2009

Market Sector Performance Last Week 11 27 09

The performance chart from the Wall Street Journal Online shows how different global financial markets performed during the past week.

(Click on chart to enlarge it for easier viewing)

Source: Wall Street Journal Online, November 27, 2009.

Thursday, November 26, 2009

Market Alert 11 26 09

Dubai Announces a Delay in Debt Repayment

US markets are bracing for a shakeup Friday after investors fled risk assets globally on concerns about Dubai's debt rescheduling.

Markets worldwide reacted to concerns about bank exposure to the debt, particularly in Europe, and fears it is a signal of greater problems in emerging markets.

US markets were closed, but the dollar was initially lower but bounced and traders said stocks pointed to a sharply lower opening on Friday.

(Click on chart to enlarge it for easier viewing)

Click on Link below to view video of news report

Monday, November 23, 2009

11 23 09 Market Comment

Last weeks 3 day market slide turned out to be just a minor correction. The S&P 500 has broken the 1100 barrier once again. The US Dollar has resumed its downward trend.

High yield bonds should follow the up move shortly.

Since the world currencies are the focal point of the current market it looks like gold should be included in more agressive portfolios.

Friday, November 20, 2009

11 20 09 Market Comment

A number of technical indicators are pointing to a short term pullback in the stock market. The US dollar has begun to strengthen a bit after a seven month slide, the Russell 2000 index (small company stocks) have been underperforming, and sentiment has turned a little negative.

I sold EWZ today, making a small profit. Taking some risk off the table at the moment is prudent. EWA may be next; we will have to see what happens next week.

I still believe the dollar will continue is decline after a brief rally. As you know the dollar and the stock market have been intertwined.

If we do get a significant correction I will take the opportunity to add some equity positions at more reasonable prices.

For now our low volatility bond and income funds are doing fine. Conservative investors need not worry about the day to day fluctuations of the stock market.

Tuesday, November 17, 2009

U.S. Economy Will Dodge a Double-Dip Downturn

Below is a reprint from an article by Don Miller, Associate Editor of Moey Morning.

U.S. Economy Will Dodge a Double-Dip Downturn, But Won’t Escape Unemployment Woes During 2010 Jobless Recovery

[Editor's Note: This is Part I of a two-part story that examines the U.S. economy's prospects for 2010. It's also the leadoff story for Money Morning's annual "Outlook" series, which will forecast the prospects for gold, oil, banking, and top investing trends in the New Year.
By Don Miller
Associate Editor
Money Morning

Historically, the U.S. stock market has been one of the key leading indicators of a U.S. economic rebound.
With the Standard & Poor’s 500 Index up more than 60% from its March lows – and the Dow Jones Industrial Average up nearly 40% – prognosticators are finally confident that the U.S. economy will dodge the “double-dip” recession that has been the focus of much fear since the Bush and Obama administrations launched their financial counterattacks on the worst financial crisis since the Great Depression.

But those same forecasters are reluctant to forecast a sharp economic rebound for 2010. In fact, as opposed to a classic “V-shaped” economic recovery that would accelerate as the year goes on, many economists are predicting that the rate of growth will slow as the New Year unfolds.

Forecasts from Standard & Poor’s Inc. (NYSE: MHP) and Goldman Sachs Group Inc. (NYSE: GS) illustrate this outlook. S&P recently projected average GDP growth of 1.6% for all of 2010, while top Goldman Sachs economists expect to see the U.S. growth rate decline from 3% early in the year to 1.75% by the fourth quarter.

“We don’t expect a V-shaped recovery; in fact we think that 2010 is going to be a bit slower in terms of annualized GDP growth than the second half of 2009,” Goldman Sachs Chief U.S. Economist Jan Hatzius said during a recent speech in New York City.

For analysts and economists who play the forecasting game, 2010 promises to be one of the toughest challenges in decades.

Unemployment has pierced the psychologically daunting 10% level, placing U.S. joblessness at its highest level in a quarter century. Serious questions remain about the strength of the country’s banking and financial systems. The U.S. dollar is under siege and inflationary concerns are at their highest levels in years. There’s massive uncertainty about the nation’s residential and commercial real estate markets. And even the stock-market rebound – one of the strongest in history – is considered suspect by some analysts: They worry that federal stimulus money and the U.S. Federal Reserve’s “zero-interest-rate policy” has forced bearish investors to become reluctant bulls.

Among the difficulties would-be forecasters currently face economists face is the fact that 4% of the economic growth in recent months is attributable to temporary factors, most notably the replenishing of inventories and government fiscal stimulus, Goldman’s Hatzius said. Those factors are likely to diminish by the second half of 2010, due to high unemployment, budget-conscious consumers, and overcapacity in the manufacturing sector and housing markets.

Despite these obvious difficulties, the outlook for 2010 is far from dismal. Among the bright spots:

• The stimulus seems to be having its intended effect – one reason the odds of a double-dip recession remain remote.

• The U.S. housing market – a crucial element of the consumer sector – is showing signs of bottoming out.

• The weak U.S. dollar is making U.S. exports highly competitive, giving a much-needed boost to American manufacturers.

• With their reluctance to hire, businesses are clearly operating in a highly cost-conscious zone – a reality that could bode well for corporate profits, and for stock prices.

• And the overall outlook for the U.S. economy is much better than it was a year or 18 months ago, and actually continues to improve – albeit slowly – a reality that can feed on itself to further bolster growth.

In this leadoff story in Money Morning’s Third Annual “Outlook” forecasting series, we’ll take a look at overall expectations for the U.S. economy for the New Year, will consider four key challenges, and will give you our take on each one. The areas that we’ll explore will include:

• Economic expectations and the odds of a double-dip downturn.

• The odds for maintaining growth with a “jobless recovery.”

• The outlook for business investment and spending.

• And the risks and rewards of current central bank policies.

Let’s take a look …

Handicapping U.S. Growth in 2010

A new survey concluded that top economic forecasters have grown in confidence that the U.S. recovery is sustainable. But those analysts also expect that growth will fall short of the typical post-recession rebound, the Blue Chip Economic Indicators newsletter reported in its November issue.

The U.S. economy should expand 2.7% next year, the consensus estimate of 52 economists polled by the newsletter. That’s an upward revision from the consensus prediction of 2.5% made just one month before.

“The major uncertainty surrounding the outlook for growth next year involves the degree to which private demand accelerates as the positive contributions to GDP from reduced business inventory liquidation and fiscal stimulus play out,” the newsletter said.

Those factors alone pose some significant challenges to a robust rebound. Add in the near-certainty that this recovery will be a jobless one – as well as the fact that most economists believe that U.S. growth will slow, and not accelerate – as 2010 progresses, and it might be overly optimistic to expect a growth rate of 2.7%, which is how well the economic often performs even during healthy periods.

How China Is Axing the U.S. Dollar…

Money Morning Chief Investment Strategist Keith Fitz-Gerald is forecasting growth of, at best, 2.0% in 2010, a key reason he continues to tell investors to look abroad for some of the most-profitable investment plays.

The U.S. economy “will be lucky to do 2.0% ” next year, Fitz-Gerald said. “The economy faces some very difficult challenges. There’s a slight chance – depending on what happens with some outside factors – that the U.S. could do 2.5%, but I really doubt it. China could actually pull us along [to higher-than-expected growth], but those are some long odds.”

That’s not to say that 2.0% growth is bad news. That’s more than enough to negate the odds of a double-dip recession. Indeed, after reviewing U.S. economic history all the way back to the 1850s, Deutsche Bank AG (NYSE: DB) economists recently found that double-dip recessions are exceedingly rare.

And Money Morning Contributing Writer Jon Markman notes that when these double-dip downturns do occur, they happen under circumstances quite different from the ones that we face today. Reprised recessions usually occur in concert with a fight against inflation.

“A repeat of the 1980s just isn’t in the cards,” Markman said.

Money Morning’s Outlook: Overall, the likelihood is that the U.S. economy will experience slow GDP growth. In terms of the average growth rate for the year, investors are most likely looking at a range of 1.0% to 2.0% for all of 2010, as a protracted jobless recovery extends the housing and banking crisis, puts a damper on wages, reduces consumption. And that growth rate will decelerate as the year progresses, meaning that it’s measure investors should watch closely.

U.S. Joblessness Will Stifle Consumer Spending

As we’ve all learned as far back as Econ 101, the U.S. marketplace is chiefly consumer driven. Historically, consumer spending spurred 60% of U.S. growth. In recent years, that number has surged as high as 70%. Given the U.S. economy’s avowed consumer focus – coupled with the near-certainty that we’re facing a jobless recovery – investors who are hoping for stronger-than-expected growth would best keep the champagne on ice, according to economist Joel Naroff.

“We need households to become a little more confident and businesses to start thinking about tomorrow so we can transition out of the government- and Fed-supported economy into a private-sector recovery,” Naroff, president of the Holland, PA-based Naroff Economic Advisors, said in a note to investors.

To that end, Naroff is concerned about the effect a jobless recovery could have on consumer spending.

“Can consumers save the day? Only if incomes grow solidly and that is not going to happen … businesses have some room to expand without hiring lots of new employees,” Naroff noted. “It could take four to five years for the unemployment rate to get back to full employment. There is little reason to expect that happy times are here again.”

The U.S. unemployment rate in October pierced the psychologically important 10% barrier for the first time since 1983, as employers made deeper-than-predicted payroll cuts.

It’s no surprise, then, that U.S. consumers in September cut their spending for the first time in five months, reducing their outlays for products and services by a hefty 0.5%.

Only one other time since World War II has the unemployment rate topped 10% – between September 1982 and June 1983. It hit 10.1% in September 1982, moving up from 9.8% the month before.

The economy, as measured by gross domestic product (GDP), was basically flat in summer 1982. But the economy at that time was actually getting ready to recover.

Then the economy began to surge in early 1983, fueled by tax cuts and, more importantly, substantial interest-rate cuts by the Federal Reserve. By the end of 1983, the unemployment rate was down to 8.3% and dropped to 7.3% in 1984 and 7.0% in 1985.

But that was then and this is now.

Although the official unemployment rate hit 10.2% last month, the employment outlook is actually much worse: If you factor in part-time workers who’d prefer a full-time position, and people who want work but have given up looking, the “real” unemployment rate is actually a record-high 17.5%.

That means that more than 16 million people are now out of work, compared to 6 million in 1982. In July – the last month the government released statistics – there were more than six officially unemployed persons for every job opening. Historically, the ratio is closer to 2-to-1.

What’s worse is that productivity is increasing as employers are successfully getting their existing staff to produce more in fewer hours – making it less likely they will start hiring.

Any improvements will come slowly. In the Blue Chip Economic IndicatorsNovember issue, 52% of the economists surveyed said the unemployment rate won’t fall back below the 7.0% level on a sustained basis until the second half of 2013 – and it may take longer than that.

Money Morning’s Outlook: The recession may technically have ended, but for the millions of unemployed workers the hard times are far from over. Given that almost one-fifth of the U.S. work force is unemployed or underemployed, don’t expect consumers to step up and step in if stimulus spending falls short, or ends. The upshot is that, from this vantage point, GDP growth for the New Year is likely to be severely constrained.

11 17 09 Market Comment

The stock market posted strong gains yesterday. High yield bonds were also up. Given the delay effect in high yield bond funds, they should also be up today regardless of the stock market direction.

The stock market is currently taking its lead from dollar weakness or dollar strength. If the dollar goes up the - market goes down and if the dollar goes down - the market goes up. This also is the case with commodities. The dollar has fallen so much lately that it is now time to watch for a dollar rebound. This rebound would be a negative for stocks and commodities. I will be taking profits in Brazilian and Australian ETFs if the dollar drops a bit more.

Conservative investors are primarily invested in low volatility bonds funds and need not be concerned about the day to day fluctuations of the stock market. All the bond funds we hold remain in an uptrend.

Thursday, November 12, 2009

1 12 09 Market Comment

Large cap stocks have been outperforming. Small and mid cap stock have underperformed lately. The declining volume and the poor performance of small caps relative to large caps should be taken as a warning of potential trouble for the stock market.

Fortunately, most of the low-volatility bond/debt mutual funds in which we are invested are still trending up.

Tuesday, November 10, 2009

Australian Dollar Forecast Nov 10

Our slightly more aggressive accounts have a 5% position in EWA (an Australian ETF). It acts as a hedge against the falling US Dollar and is generally a commodity play. The following news excerpt is useful information.

International Business Times Excerpt:

Australia: The Australian Dollar has opened another US Cent higher this morning, breaking through USD0.9200 after six consecutive positive sessions locally.The positive weekend sentiment on the AUD has been maintained and managed to outweigh the mixed data that was released yesterday on the Australian economy.

The overall impression is positive on the economy still. The labour market news saw the ANZ total job advertisements fall by 1.7% in October but the key take out is the annual sales are now improving.

These statistics are closely related with employment growth and there are pretty reliable signs the downturn in the official ABS official employment series may already be complete.

Housing demand surged in September with some of the strongest numbers seen.

So the scenario at the minute continues to be Australian Dollar news, more so than Greenback developments.

The US Dollar still seems soft, and until unemployment improves in the US, one thinks the A$ will continue its upward moves.

Commodity prices are key as always, with the Asian region's importance paramount to the Reserve Bank of Australia's views on the strength of the Australian economy.

LME Copper rose supported by a weaker US Currency, and reports the G20 would keep with current economic stimulus measures, potentially helping boost metal consumption, with further gains with lead, aluminium and nickel rising but zinc filled.

We see the AUD trading between 0.9250 and 0.9310 today and with a pretty bullish outlook.

Majors: The US Dollar had a mixed session after the G20 meeting increased speculation US interest rates will remain very low well into next year.

You have to ask yourself, why would the USD's steady decline stop? What would be the reason? It is becoming clear with recent FOPC and Fed Reserve statements that interest rates are on hold at record low levels until employment picks up in the US and if you're abetting person, mid 2010 seems a fair call.

So until then, the Greenback seems weak and will not heed the words of major OECD Finance Ministers complaining their currencies have appreciated too far and are placing too much pressure their export competitiveness.

These are bullish comments on our Australian position.

Monday, November 9, 2009

11 09 09 Market Comment

It appears likely that the recent correction is over. If that is the case, junk bonds should also resume trending up within a day or two, but probably not at the unsustainable pace of earlier in the year. Conservative investors may have to learn to be satisfied with 15-20% annualized rates of return for a while!

Did Modern Portfolio Theory Survive the Bear Market?

The following in an excerpt from an article by Arijit Dutta, associate director of mutual fund analysis with Morningstar.

 Two bear markets in one decade have shaken investors' faith in the tenets of Modern Portfolio Theory and the asset-allocation strategies the theory spawned. Critics say that blind faith in MPT led to lopsided asset allocation. The theory did not properly account for systemic risk, which caused investors to allocate too heavily in stocks, and now their portfolios will need years to get even.

Useful but Not Guaranteed

 Some investors leaned too heavily on MPT models as though they were all they needed, but those models still serve a purpose. Diversification is still a great way to reduce risk and earn a higher level of return in the long run. Studies show that asset allocation is still of tremendous importance, even after last year's meltdown.

In fact, most constructive ideas about improving asset allocation retain the basic framework of MPT. These ideas suggest practical tweaks to the theory, rather than any radical remedies. For example, one idea is to improve risk measurement. This means less reliance on the normal distribution and more on other distributions or approaches that entertain the possibility of extreme losses. A combination of lower allocation to especially risky assets and hedging tools can then be used to protect the portfolio. Another suggestion is to engage more in tactical or dynamic asset allocation. Rather than stay with a static allocation to equities, say, this approach involves shifting the mix based on macro views or valuation analysis.

By Arijit Dutta, associate director of mutual fund analysis with Morningstar.

Friday, November 6, 2009

11 06 09 Market Comment

The stock market experienced a mild correction in the last half of October. It has rallied back to recapture roughly half that decline. We will watch the market closely in the next few days. If the market can shrug off this morning’s disappointing economic news (10.2% October unemployment report) and continue to rally, the major indexes could challenge the recent uptrend highs within a week or two setting the stage for an important end-of year rally. If the market sells off from its current level, however, we could quickly retest the recent lows. Penetration of those lows would send a powerful signal to many portfolio managers that it is time to lock in gains for the year.

High yield bond and other low-volatility uptrending bond/income funds have weakened. Some have declined a little, but few have declined enough to trigger reasonable sell stops. For the moment we will not be adding new positions to any high yield bond funds or stock funds. We will wait to see how the market behaves for now.

Tuesday, November 3, 2009

October Market Scorecard

Monthly Market Performance Report

High Yield Bonds (aka: Junk Bonds) are the best performers for the month as well as for the year.