Archive for March, 2009

Low Volume Pullback = Healthy Market

Monday, March 30th, 2009

We've had a great month so far for the market. Yes, today was a downer, but the good news is that it was on low volume. A low volume pullback just means that the traders got scared and don't yet believe we are fully in rally mode. That is a good thing for those of us that feel we are in a multi-week rally that will take us to the 200-day moving average.

So what is good? I like visuals, so if you look at the chart above:

1. You will see that since this blog called the intermediate low in early March, the red volume bars on the selloff days are smaller than the green volume bars on the rally days. That means that more people are buying than selling – a significant change in psychology that is self fulfilling, just like it was during the crash. The more people that are buying, the more people on the sidelines are drawn into being buyers.

2. We pulled back to the 50-day moving average. If we hold it (and the future right now after market are positive) this can put in a new layer of support that will allow us to move higher as buyers reappear.

3. The bears are everywhere on TV today saying that the rally is over and we are headed back to the lows. People who switch their views from wildly positive to wildly negative in two trading sessions are not to be believed. They have no thesis for their views. Our thesis has been explained in detail in the post in early March where we called for the intermediate term low and nothing has changed to alter the thesis.

Days like today are gifts to those that missed the early chance to buy into the rally. We, however, used our call in early March to get clients fully invested. We have been repositioning portfolios to take advantage of the transformation in the market. The sectors that have been strong are the traditional sectors that perform well during the healing phase transitioning to new bull phase of the market.

Its an exciting time in the market – don't be scared, embrace it!


The Maltese Falcon

Sunday, March 29th, 2009

Proving that there is more to life than investing, I highly recommend you participate in this year's The Big Read. The Libraries in Champaign/Urbana have chosen The Maltese Falcon. I just finished reading it and can recommend it.

You can find a listing of all the activities for the Champaign/Urbana 2009 Big Read here:


Robert Reich Explains Obamanomics

Sunday, March 29th, 2009

Great opinion piece from Robert Reich explaining Obamanomics and comparing to Reaganomics. I've always like the former Clinton Labor Secretary. He clearly has a point of view that aligns with the Democratic Party and Keynesian Economics, but he is not at all vitriolic in his explanations. If only more of the media and politicians from both sides of the aisle were as straight forward and used.

After reading the article, I am still not clear on how we get to the 3.6% of GDP spending that he says we can expect – particularly in light of the Congress plans to permanently implant hundreds of billions of dollars of spending on pet initiatives into the fabric of the economy. However, I have learned not to doubt the sincerity of Robert Reich. If he says it, much like the late Paul Simon, I an certain he believes it to be true.

Unfortunately, I see a showdown in the future with Congress, much like both Bill Clinton and Jimmy Carter experienced, that kept them from achieving much of their stated agendas. Anyway, Reich does a good job explaining the thesis behind Obamanomics and its goals.

Now we wait to see if we can achieve growth, social equity, lower taxes, and a reduced deficit under this system.


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Obamanomics Isn't About Big Government

The president's focus is on improving human capital.

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    Twenty-eight years ago, Ronald Reagan used the severe economic downturn of 1980-82 to implement an economic philosophy that not only gave force and meaning to a wide range of initiatives but also offered a way back to sustained economic growth. Is there a similarly powerful animating idea behind Obamanomics?

    [Commentary] Chad Crowe

    I believe there is — and it's not a return to big government.

    The expansive and expensive forays of the Treasury and the Federal Reserve Board into Wall Street notwithstanding, President Barack Obama's 10-year budget (whose projections may prove wildly optimistic if the economy fails to rebound by early next year) presents a remarkably conservative picture. In 10 years, taxes are expected to fall to around 19% of GDP, a lower level than the late 1990s. Spending is expected to drop to around 22.5% of GDP, about where it was under Ronald Reagan — including nondefense discretionary spending at about 3.6% of GDP, its lowest since data on this were first collected in 1962.

    The real distinction between Obamanomics and Reaganomics involves government's role in achieving growth and broad-based prosperity. The animating idea of Reaganomics was that the economy grows best from the top down. Lower taxes on the wealthy prompts them to work harder and invest more. When they do so, everyone benefits. Neither Reagan nor the apostles of supply-side economics explicitly promised that such benefits would "trickle down" to everyone else but this was broadly understood to be the justification.

    Reaganomics surely marked the beginning of one of the longest bull markets in American history and generated enormous gains at the top. But its benefits were not widely shared. After the Reagan tax cuts, growth in the median wage slowed, adjusted for inflation. After George W. Bush's tax cuts in 2001 and 2003, the median wage dropped. Meanwhile, an increasing share of total income went to the top 1% of income earners. In 1980, before Reagan took office, the highest-paid 1% took home 9% of total national income. By 2007, before the economy melted down, the richest 1% was taking home 22%.

    Obamanomics, by contrast, holds that an economy grows best from the bottom up. The president proposes to increase taxes on the highest 2% of income earners starting in 2011. Those tax increases will fund more Pell grants allowing lower-income children to attend college, better pay for teachers that show they're worth it, broader access to health care, improved infrastructure, and more basic research. These and related expenditures are designed to help Americans become more productive. You might think of it as "trickle up" economics.

    The key is public investment. Reaganomics did not view any public spending as an investment in the future except when it came to spending on the military. Hence, since 1980, federal spending on education, job training, infrastructure and basic research and development (apart from defense-related R&D) have all shrunk as a proportion of GDP. And apart from a modest expansion of health insurance available to poor children, there has been no significant attempt to make health insurance broadly affordable to Americans.

    Obamanomics is premised on the central importance of public investments in the productivity of Americans. The logic is straightforward. Capital
    no longer remains within the borders of a nation where it is saved. It moves to wherever around the globe it can get the best return. Some of it flows as highly liquid investments that slosh across borders at the slightest provocation, as we're witnessing in the current financial crisis. But much takes the form of direct investments in new plants and equipment, telecommunications systems, laboratories, offices and — most important of all — jobs. Such capital goes to nations that can deliver high returns either because labor is cheap and taxes and regulations low or because labor is highly productive: well educated, healthy and supported by modern infrastructure.

    In this way, every nation faces an implicit choice of whether its strategic advantage will lie in low costs or high productivity. For the better part of the last three decades America's job strategy has tended toward the former. But this inevitably exerts downward pressure on the real wages of a larger and larger portion of our population.

    Only those Americans whose parents can afford to give them a high-quality private education and health care, and who can situate themselves in locations with excellent infrastructures of telecommunication, transportation, public health and safety, have been able to link up with global capital on more positive terms. But not even they are entirely secure economically, because they face growing shortages of talented people they can rely on within easy reach, and can't entirely avoid the disadvantages of a deteriorating public infrastructure, such as ever more congested roads and airports.

    Obamanomics recognizes that the only resource uniquely rooted in a national economy is its people — their skills, insights, capacities to collaborate, and the transportation and communication systems that link them together. Public investment is the key to attracting long-term private investment so that a nation's people can prosper.

    Bill Clinton understood this but failed to do much about America's deteriorating public investments because he came to office during an economic expansion, when the major worry was excessive government spending leading to inflation. Mr. Obama comes to office during the biggest downturn since the Great Depression, and his plan represents the largest commitment to public investment in 30 years.

    Regulation, done correctly, is also a form of public investment because it enables consumers and investors to be confident about what they're receiving, and ensures that the side-effects of trades don't harm the public. Reaganomics assumed that deregulated markets always function better. They do in many respects. But when they don't, all hell can break loose, retarding economic growth.

    Energy markets were deregulated and we wound up with Enron. Food and drug safety has been neglected, resulting in contaminated products that have endangered consumers and threatened whole industries. Financial markets were deregulated and we now have a global meltdown. Obamanomics, by contrast, views appropriate regulation as an essential precondition for sustainable growth.

    Under Reaganomics, government was the problem. It can still be a problem. But a central tenet of Obamanomics is that there are even bigger problems out there which cannot be solved without government. By building the economy from the bottom up, enhancing public investment, and instituting reasonable regulation, Obamanomics marks a reversal of the economic philosophy that has dominated America since 1981.

    Mr. Reich is professor of public policy at the University of California at Berkeley and a former U.S. Secretary of Labor under President Bill Clinton.

    The World Starts to Devalue the Dollar

    Saturday, March 28th, 2009

    Below is an article from Australia's Business Day. It appears that right on the heals of China calling for an end of the dollar as the world's reserve currency, the United Nations is now following suit.

    This, just before a meeting of the G20. Should make for some fireworks. If the dollar is dumped as the reserve currency that will throw a major wrench in the government's plan to debase the dollar to inflate us out of our massively growing debt.

    Could this be why the Obama administration is now saying there will not be any middle class tax cuts as promised during the campaign (from a press release by Peter Orszag, Office of Management & Budget Director)? Are we trying to demonstrate to the world our fiscal prudence?

    I don't think this will get any traction, but it bears watching.


    UN proposes new global currency reserve

    March 28, 2009

    A United Nations panel of economists has proposed a new global currency reserve that would take over the US dollar-based system used for decades by international banks.

    The proposal comes on the heels of the controversial call by China's central bank governor, Zhou Xiaochuan, to create a new world currency reserve to replace the US dollar as part of a sweeping overhaul of global finance, which is suffering its worst crisis since the Great Depression of the 1930s.

    China and many developing countries blame the crisis on US mishandling of overextended mortgage loans and investments in them.

    "A new global reserve system… with regular or cyclically adjusted emissions calibrated to the size of reserve accumulations, could contribute to global stability, economic strength and global equity," the panel said in a document released in New York.

    The call was issued at the end of a three-day conference at UN headquarters in New York on Friday.

    Earlier this week, the US said it was open to enlarging the International Monetary Fund's (IMF) currency reserves, but insisted the dollar would remain "the world's dominant reserve currency".

    The call comes just days before the world's 20 largest economies (G20) were to meet in London to chart a way out of the global recession.

    The UN panel said a new global reserve would be "feasible, non- inflationary and could be easily implemented". It said it would help lessen the difficulties now caused by unbalanced adjustments between surplus and deficit countries.

    The 22-member panel is headed by Nobel Economics Prize laureate Joseph Stiglitz, a frequent critic of past US fiscal policy.

    "The nature of this crisis has opened up opportunities for change that I think would not have been conceivable even a few months ago," Stiglitz said on Thursday.

    The panel made several recommendations to deal with the financial crisis, which it said requires the cooperation of rich and poor nations together to take strong and effective actions to stimulate their economies.

    Stiglitz said there has been a growing consensus among UN members that the US dollar-based financial system is problematic. But he warned that the idea of a new global reserve is still a concept that panelists are debating.

    He said the current system was "relatively volatile, deflationary, unstable and (had) inequity associated with it".

    "Developing countries are lending the United States trillions dollars at almost zero interest rates when they have huge needs themselves," Stiglitz said. "It's indicative of the nature of the problem. It's a net transfer, in a sense, to the US, a form of foreign aid."

    The panel, known as the Commission of Experts on Reform of International Finance and Economic Structures, was established by the UN General Assembly last year to deal with the widening economic and financial crisis.

    The panel believes the creation of a new global reserve would help poor countries through an improved credit system, built on a system of special drawing rights (SDRs) set up by the International Monetary Fund after World War II.

    China's call for a replacement of the US dollar has made the UN proposal for a new currency reserve stronger. Some panelists suggested the SDRs could be used as a new standard of a global reserve currency.

    Perfect Action in our Rally

    Wednesday, March 25th, 2009

    Our rally continues. Today was great action – its called backing and filling – as the market moves up giving weak hands a chance to sell, and strong hands a chance to buy. It is also a great opportunity to reposition portfolios.

    We have been using upswings to sell weaker holdings that don't fit into our current strategy (focusing on Ag, Tech, Financials, Energy, Gold) and buying stocks in our areas of focus on downswings.

    Looking at the chart, you can see that the market put in at least an intermediate bottom a bit over two weeks ago. If you've been reading this blog, you will recall the entry the day prior to the bottom where we noted that many conditions precedent to a bottom were present.

    We are now at the phase in the rally where we consolidate the gains. Its healthy and needed for this rally to continue for the next 3 to 6 weeks. We'll likely fall back a bit and give investors who have cash on the sidelines a chance to get invested. That will keep the rally moving forward. The technical indicators show that we are currently overbought, so we are preparing for the pullback. If you are sitting on cash, you will get the chance to buy – if you haven't bought yet, its best to wait until the pullback.

    We have some headwinds ahead of us in the intermediate term. Earnings season is coming up and it won't be pretty. That will put downward pressure on stocks as investors worry about the future. But, it won't derail us from touching the 200 day moving average around 950 on the S&P 500.

    Keep the faith!


    China Wants to Dump Dollar as Reserve Currency

    Tuesday, March 24th, 2009

    There is a story in today's Wall Street Journal that has the potential to negatively impact the dollar at a time when our own policies are designed to devalue it. A devaluing dollar means more inflation, so it is something we should all watch.


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    • MARCH 24, 2009

    China Takes Aim at Dollar


    BEIJING — China called for the creation of a new currency to eventually replace the dollar as the world's standard, proposing a sweeping overhaul of global finance that reflects developing nations' growing unhappiness with the U.S. role in the world economy.

    The unusual proposal, made by central bank governor Zhou Xiaochuan in an essay released Monday in Beijing, is part of China's increasingly assertive approach to shaping the global response to the financial crisis.

    China's a Bellwether


    David Semple of Van Eck Emerging Markets Fund outlines opportunities in China's real-estate and retail sectors, along with greater stability in Russia. But the situation in Eastern Europe is still uncertain. Polya Lesova reports.

    Mr. Zhou's proposal comes amid preparations for a summit of the world's industrial and developing nations, the Group of 20, in London next week. At past such meetings, developed nations have criticized China's economic and currency policies.

    This time, China is on the offensive, backed by other emerging economies such as Russia in making clear they want a global economic order less dominated by the U.S. and other wealthy nations.

    However, the technical and political hurdles to implementing China's recommendation are enormous, so even if backed by other nations, the proposal is unlikely to change the dollar's role in the short term. Central banks around the world hold more U.S. dollars and dollar securities than they do assets denominated in any other individual foreign currency. Such reserves can be used to stabilize the value of the central banks' domestic currencies.

    Monday's proposal follows a similar one Russia made this month during preparations for the G20 meeting. Like China, Russia recommended that the International Monetary Fund might issue the currency, and emphasized the need to update "the obsolescent unipolar world economic order."

    [Dollar Dominated]

    Chinese officials are frustrated at their financial dependence on the U.S., with Premier Wen Jiabao this month publicly expressing "worries" over China's significant holdings of U.S. government bonds. The size of those holdings means the value of the national rainy-day fund is mainly driven by factors China has little control over, such as fluctuations in the value of the dollar and changes in U.S. economic policies. While Chinese banks have weathered the global downturn and continue to lend, the collapse in demand for the nation's exports has shuttered factories and left millions jobless.

    In his paper, published in Chinese and English on the central bank's Web site, Mr. Zhou argued for reducing the dominance of a few individual currencies, such as the dollar, euro and yen, in international trade and finance. Most nations concentrate their assets in those reserve currencies, which exaggerates the size of flows and makes financial systems overall more volatile, Mr. Zhou said.

    Moving to a reserve currency that belongs to no individual nation would make it easier for all nations to manage their economies better, he argued, because it would give the reserve-currency nations more freedom to shift monetary policy and exchange rates. It could also be the basis for a more equitable way of financing the IMF, Mr. Zhou added. China is among several nations under pressure to pony up extra cash to help the IMF.

    [Zhou Xiaochuan, governor of the People's Bank of China.] Reuters

    Zhou Xiaochuan, governor of the People's Bank of China.

    John Lipsky, the IMF's deputy managing director, said the Chinese proposal should be treated seriously. "It reflects officials' concerns about improving the stability of the financial system," he said. "It's interesting because of China's unique position, and because the governor put it in a measured and considered way."

    China's proposal is likely to have significant implications, said Eswar Prasad, a professor of trade policy at Cornell University and former IMF official. "Nobody believes that this is the perfect solution, but by putting this on the table the Chinese have redefined the debate," he said. "It represents a very strong pushback by China on a number of fronts where they feel themselves being pushed around by the advanced countries," such as currency policy and funding for the IMF.

    A spokeswoman for the U.S. Treasury Department declined to comment on Mr. Zhou's views. In recent weeks, senior Obama administration officials have sought to reassure Beijing that the current U.S. spending spree is a short-term effort to restart the stalled American economy, not evidence of long-term U.S. profligacy.

    "The re-establishment of a new and widely accepted reserve currency with a stable valuation benchmark may take a long time," Mr. Zhou said. In remarks earlier Monday, one of his deputies, Hu Xiaolian, also said the dollar's dominant position in international trade and investment is unlikely to change soon. Ms. Hu is in charge of reserve management as the head of China's State Administration of Foreign Exchange.

    Mr. Zhou's comments — coming on the heels of Mr. Wen's musing about the safety of China's dollar holdings — appear to be a warning to the U.S. that it can't expect China to finance its spending indefinitely.

    [The Haves and Have Mores]

    The central banker's proposal reflects both China's desire to hold its $1.95 trillion in reserves in something other than U.S. dollars and the fact that Beijing has few alternatives. With more U.S. dollars continuing to pour into China from trade and investment, Beijing has no realistic option other than storing them in U.S. debt.

    Mr. Zhou argued, without mentioning the dollar by name, that the loss of the dollar's de facto reserve status would benefit the U.S. by avoiding future crises. Because other nations continued to park their money in U.S. dollars, the argument goes, the Federal Reserve was able to pursue an irresponsible policy in recent years, keeping interest rates too low for too long and thereby helping to inflate a bubble in the housing market.

    "The outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system," Mr. Zhou said. The increasing number and intensity of
    financial crises suggests "the costs of such a system to the world may have exceeded its benefits."


    People past the headquarters of the central bank of the People's Republic of China in Beijing Feb. 16, 2009.

    China Global Currency

    China Global Currency

    Mr. Zhou isn't the first to make that argument. "The dollar reserve system is part of the problem," Joseph Stiglitz, the Columbia University economist, said in a speech in Shanghai last week, because it meant so much of the world's cash was funneled into the U.S. "We need a global reserve system," he said in the speech.

    Mr. Zhou's idea is to expand the use of "special drawing rights," or SDRs — a kind of synthetic currency created by the IMF in the 1960s. Its value is determined by a basket of major currencies. Originally, the SDR was intended to serve as a shared currency for international reserves, though that aspect never really got off the ground.

    These days, the SDR is mainly used in the IMF's accounting for its transactions with member nations. Mr. Zhou suggested countries could increase their contributions to the IMF in exchange for greater access to a pool of reserves in SDRs.

    Holding more international reserves in SDRs would increase the role and powers of the IMF. That indicates China and other developing nations aren't hostile to international financial institutions — they just want to have more say in running them. China has resisted the U.S. push to make an immediate loan to the IMF because that wouldn't give China a bigger vote. Ms. Hu said Monday that China, which encourages the IMF to explore other fund-raising options, would consider buying into a bond issue.

    The IMF has been working on a proposal to issue bonds, probably only to central banks. Bond purchases are one way for the organization to raise money and meet its goal of at least doubling its lending war chest to $500 billion from $250 billion. Japan has loaned the IMF $100 billion and the European Union has pledged another $100 billion.

    It is a Rally – Here's what we think and what we are doing

    Thursday, March 19th, 2009

    Hard assets are leaping higher today as the investment world believes two things: (1) Ben Bernanke will single handedly rescue the economy – sending early cycle commodity stocks higher based upon the view that demand will soon be showing up in financial statements; and (2) that the monetization of treasury bonds by the Fed will be highly inflationary when coupled with the monetary stimulus already in the system.

    We are seeing gold, oil, agriculture and industrial metals companies, as well as early cycle industrials, move nicely higher today in the face of a small pull back in the broader market. The defensive stocks (Proctor & Gamble, Johnson & Johnson – i.e., consumer staples and health care) are down today as money rotates to the cyclicals.

    This is great news for us as we have been positioned for a recovery, buying the early cycle stocks during the Lehman Brothers crash in the fall and the Geithner crash this winter.

    Adding to the strength in the oils is a realization that a lot of production capacity has been shuttered and one big source (the North Sea) is dangerously close to complete meltdown.

    Below is a Dow Jones article describing the problems in the North Sea. Be prepared for higher oil prices in the near term as a knee jerk reaction drives prices closer to breakeven.

    For now, we are continuing to stick with the view that we have put in at a minimum an intermediate term bottom and are rallying toward the 200 day moving average (S&P 950; Dow 9000). We've been reviewing accounts with cash to get them invested to take advantage of this rally – sorry for the lack of blog posts – and determining what we will sell as we get close to the target levels at the 200-day moving average to generate some cash again.

    Busy time, busy time…


    UPDATE: UK Oil, Gas Exploration Faces Collapse

    Thu, Mar 19 2009, 10:19 GMT

    LONDON (Dow Jones)–Investment and exploration in the U.K. North Sea oil and gas basin could collapse this year because of high costs and a funding drought, said the head of the country's oil and gas industry lobby Thursday.

    Investment could have halved within two years and exploration and appraisal of new reserves in 2009 could fall to a third of the 2008 level, Oil and Gas U.K. Chief Executive Malcolm Webb told a special session of the U.K. parliament's Energy and Climate Change Committee in Aberdeen, Scotland.

    "Since 2004, costs have doubled and the rate of tax charged on new developments has risen to 50%," Webb said. "With sources of credit drying up, the amount of capital available has drastically reduced and the falling competitiveness of U.K. projects means investment could halve in the next two years."

    "To prevent these challenges in the short term wreaking long-term damage on the industry's productive capacity, Oil and Gas U.K. believes the government should take measures to unfreeze the flow of debt and credit facilities from banks," he said.

    "It should also bring forward access to tax relief on exploration costs for small companies to the point where the well is drilled, as already happens in Norway, so that these sums can be re-invested in immediate activity. It must also use the value allowance it has already proposed to eliminate the 20% supplementary charge on corporation tax from all new projects," Webb said.

    He said these proposals wouldn't lose the taxpayer money, because the increase in activity would make up for any fall in existing revenue.

    Oil and Gas U.K. represents 81 companies who explore for and produce oil and gas in U.K. waters and companies in their supply chain.

    In the third quarter of 2008, the most recent period for which government figures are available, the U.K. produced almost 90% of its own oil demand and 86% of gas demand. However, the North Sea has been extensively developed and production from most fields in is rapid decline.

    The U.K. North Sea has some of the highest finding and development costs in the world, so its commercial viability has been hit hard by the more than $100 per barrel fall in the oil price since last year.

    One of the largest North Sea producers, BP PLC (BP), said last month that its North Sea business is unsustainable at current prices. It has opened talks with key contractors and suppliers about reducing costs.

    Small companies who were responsible for the bulk of new exploration in the region have also struggled to raise new capital since the financial crisis unfolded. The U.K. subsidiary of Canada's Oilexco Inc (OIL.T), which was the most active driller in the area, declared bankruptcy late last year.

    Company Web site:

    -By James Herron, Dow Jones Newswires; +44 (0)20 7842 9317;

    Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: You can use this link on the day this article is published and the following day.

    (END) Dow Jones Newswires

    March 19, 2009 06:19 ET (10:19 GMT)

    Research Note from Swiss Investment Bank UBS

    Friday, March 13th, 2009

    UBS Investment Research on Gold dated March 10:

    "Using a proprietary econometric model we have generated a probability cone for the future possible price path for gold. Using different environments for the level of inflation volatility, US dollar and absolute level of inflation we have determined that future returns on gold are likely to be positively asymmetric, with potential upside to US$2,500/oz.

    Exposure to gold recommended
    Our asset allocation team has moved gold to overweight from neutral. Given the
    broad uncertainties in the current macro climate we believe that investors should look to gold given its historic tendency to act as a hedge against these risks.