ABN AMRO Bank – Making More Possible
Accenture – High Performance. Delivered
Adidas – Forever sports
Adobe – Simplicity at work. Better by adobe.
AIG or American International Group Insurance Company – We know Money
Air Canada – A breath of Fresh Air
Allianz Group – The Power on your side
AMAZON.COM – Earth’s Biggest BookStore
ANDHRA BANK – “Much more to do, with YOU in focus.”
Apple Macintosh – Think Different.
ARCELOR – Steel solutions for a better world
AT&T – The World’s Networking Company
AVIVA LIFE INSURANCE – ” Kal par Control”
Bank of America – Higher Standards
Bank of Baroda – India’s International Bank
BANK OF RAJASTHAN – Dare to Dream
Barclays – Fluent in Finance; Its our business to know your business
BIG BAZAAR – Is se sasta aur Achcha kahee nahee milenga
BIOCON – The difference lies in our DNA
Birla Mutual fund – The name inspire trust
BLOGGER.COM – Push Button Publishing
BLOOMINGDALES – Like no other store in the world
BMW – The Ultimate Driving Machine
BOEING – Forever new Frontiers
Bombay Stock Exchange (BSE) – The Edge is Efficiency
BPCL – Pure for Sure
Bridgestone – Passion for exellence
British airways – The Way to Fly.
British Petroleum – Beyond Petroleum
BUSINESS INDIA – The Magazine of the Corporate World
BUSINESS TODAY – For Managing Tomorrow
BUSINESS WORLD – Play the Game
CAST AWAY – “At the edge of the world, his journey begins “
CEAT – Born Tough
CENTRAL – Shop. Eat. Celebrate
CHEVROLET AVEO – When Good is not good enough.
Chevron Corporation – Human Energy
CHIP – Intelligent Computing
CIPLA – Caring for life
CITI – The citi never sleep
CITIGROUP or CITIBANK – The Citi Never Sleeps
CNBC or NBC – Profit from it or Must see TV
COMPTRON and GREAVES – Everyday Solutions
Computer Associates – The Software that empowers the E-Business
CSC – Experence. Results.
DAIMLER CHYSLER – A future of Automobile
Dell – Easy as DELL.
Deutsche Bank – A Passion to Perform
DIGIT – Your Technology Navigator
DLF – “Building INDIA”
DR. REDDY’S LABORATORIES – ÿLife. Research. Hope
DUNLOP – Accelerate your soul
DUPONT – The Miracles of Science
EBAY – The World’s Online Market Place
EMC – Where information lives
Ford ICON – “The Josh Machine”
EPSON – Exceed Your Vision
Ernst and Young – Quality in Everything we Do
Essar corp – A positive a++itude
Exxon Mobil – Taking on the World’s Toughest Energy Challenges
FIAT – Driven by Passion. FIAT
FORD – Built for the Road Ahead
Essar – Gas and Beyond
GM – Only GM.
HAIER – Inspired Living
HINDUSTAN TIMES – The Name India trusts for News
HINDUSTAN PETROLEUM – Future full of energy
HOME DEPOT – You can do it. We can Help.
HONDA – The Power of Dreams
HP Invent – Everything is Possible
HSBC – The World’s Local Bank
HYUNDAI – Drive Your Way
IBM – ON DEMAND
IBM – ” I think, therefore IBM.”
IBP – Pure bhi. Poora bhi
ICICI Bank – Hum hain na!!!
Infosys – ” Powered by Intellect, Driven by Values; Improve your odds with Infosys Predictability”
Intel – Intel inside.
IOCL – Bringing Energy to Life
Jaguar – Born to perform
Jet Airways – The Joy of Flying
JVC – The Perfect Experience
Kingfisher Airlines – Fly the good times
KMART – The stuff of life.
Kotak – Think Investments. Think Kotak.
KROGER – Costs less to get more
LARSEN and TOUBRO – We make things which make India proud
LEE – The jeans that built America
Lexus – The persuit of perfection
Lehman Brothers – Where Vision Gets Built
LENOVO – We are building a new technology company.
LG – Life’s Good
Lufthansa – There’s no better to fly
Macromedia – What the web can be.
Malaysian Airlines – Going Beyond Expectations
MARUTI SX4 – “Men are Back”
Master card – There are some things money can’t buy. For everything else there’sÿMASTERCARD.
Max NewYork Life Insurance – Your Partner for life
McDowells Signature – The New Sign of Success.
MCX – Trade with trust
METRO – The spirit of Commerce
MERCK – Where patients come first
Metropolitan Life Insurance Company or Metlife. – Have You Met Life Today
Microsoft – Where Do You Want to Go Today ; Your Potential Our Passion
Michelin – A better way forward
MITTAL STEEL – Shaping the future of steel
Monster.com – Never Settle
MRF – Tyres with Muscle
NASDAQ – Stock market for the digital world
NDTV Profit – News you can Use.
NOKIA – “Connecting People”
NYSE (New York Stock Exchange) – The world puts its stock in us
ONGC – Making Tomorrow Brighter
Orange – The future is bright. The future is orange
Panasonic – “ideas for life”
PFIZER – Life is our life’s work
PHILLIPS – Sense and Simplicity
Prudential Insurance Company – Growing and Protecting your wealth
ARaymond – A Complete Man
Reliance industries Limited – Growth is Life
Rivolta – “Undress Code For Men”
Sahara – Emotionally yours.
SAMSUNG – Everyone’s Invited or Its hard to Imagine
SAMSUNG Mobile – Next is What?
SANSUI – Born in Japan Entertaining The World
SBI – SURPRISINGLY
SBI DEBIT CARD – Welcome to a Cashless World.
Servo – 100 % Performance. Everytime.
Singapore Stock Exchange (SGX) – Tomorrow Market’s Today.
SKODA – Obsessed with Quality since 1897.
SONY – Like. No. Other.
Speed – High Performance Petrol
Standard Chartered Bank – Your Right Partner
Standard Insurance Company Limited. – Positively Different.
Star Sports – We know your game
Sun Microsystems – The Network is the Computer
SUZLON ENERGY – Powering a Greener Tomorrow.
SYMANTEC – Be Fearless.
TATA MOTORS – Even More Car per Car
TCS – Beyond the Obvious
TESCO – Every Little Helps
Thai Airways – “Smooth as Silk”
THE DAILY TELEGRAPH – Read a Bestseller everyday
THE DAY AFTER TOMORROW – Where will you be
THE ECONOMIC TIMES – The Power of Knowledge
The Indian EXPRESS – Journalism of Courage
TIMESJOBS.COM – ” If you have a reason, we have the job “
TITANIC – Collide With Destiny.
TOSHIBA – Choose Freedom
TOYOTA – Touch The Perfection
Toyota Innova – All you Desire.
UBS – You and Us
Union Bank of India – Good People to Bank with
VIDEOCON – The Indian Multinational
VIZAG STEEL – Pride of Steel
VOLKSWAGEN – Drivers wanted
WILLS CLASSIC – “Discover a Passion”
Window XP – Do more with less
WALMART – Always low prices. Always.
Windows XP – Do More with Less
WIPRO – Applying Thought
ZEE NEWS – “Haqueqat Jaisi, Khabar Waisi”
Monday, November 30, 2009
India Economy Expands at Fastest Pace in Six Quarters
Nov. 30 (Bloomberg) -- India’s economy expanded 7.9 percent last quarter, the fastest pace in 1 1/2 years, giving the central bank room to withdraw more stimulus to check inflation.
Gross domestic product expanded 7.9 percent in the three months to Sept. 30 from a year earlier as manufacturing jumped 9.2 percent, the statistics bureau said in New Delhi today. That was more than all estimates in a Bloomberg News survey of 22 economists, where the median forecast was a 6.3 percent gain.
Indian shares and the rupee extended gains while bond yields rose following the GDP report, which came after Reserve Bank of India Governor Duvvuri Subbarao last week said there was a need to remove some of the “unconventional” steps implemented to support growth. Economies across Asia including Taiwan, South Korea and Singapore are performing better than expected as the region leads the world out of recession.
“India’s GDP growth is positioning for an upswing,” said Rajeev Malik, a Singapore-based regional economist at Macquarie Group Ltd. “A handle-with-care exit is on the cards.”
To steer India’s $1.2 trillion economy through the worst global financial crisis since the 1930s, Governor Subbarao has kept the central bank’s key reverse repurchase rate at a record- low 3.25 percent since April. Government spending and tax cuts took the value of stimulus measures to 12 percent of GDP.
Stocks Gain
That’s helped the economy recover and the benchmark Sensitive index on the Bombay Stock Exchange to climb about 72 percent this year. The Sensitive index increased 1.9 percent to 16,941.25 at 11:03 a.m. in Mumbai, while the yield on the benchmark 10-year government bond rose to 7.23 percent from 7.21 percent. The rupee gained to 46.45 per dollar from 46.51 before the report.
Inflation pressures are building as economic growth quickens and after the weakest monsoon rains since 1972 hurt farm output, pushing up food costs. The central bank forecasts inflation of 6.5 percent by March 31 from 1.34 percent in October and 0.5 percent in September. During 2008, the rate rose to almost 13 percent.
“Given the magnitude of easing and the speed at which inflation has bounced back, monetary policy will need to be tightened fairly soon,” the Paris-based Organization for Economic Cooperation and Development said Nov. 19.
Falling bond yields signal that investors don’t expect interest rates to rise this year.
‘Inflation Risks’
“We see inflation risks emerging and expect interest-rate hikes from January 2010,” said Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore.
In a debate in parliament on Nov. 26, Finance Minister Pranab Mukherjee said policy makers are balancing the need to create jobs against inflation concerns. The central bank started to withdraw monetary stimulus on Oct. 27 by ordering lenders to keep more money in government bonds.
Food inflation, which has climbed to 15.58 percent, is a politically sensitive issue in a nation where the World Bank estimates that three-quarters of the population live on less than $2 a day. Opposition lawmakers said last week that the government is obsessed with growth, allowing prices to spiral to the detriment of the poor.
By sustaining the second-fastest growth of any major economy, trailing only China, India is drawing investment from companies including South Korea’s Samsung Electronics Co. and French tiremaker Michelin & Cie, which said this month that it will add a factory in the southern state of Tamil Nadu.
High Savings
Prime Minister Manmohan Singh said this month that returning to the 9 percent growth pace that India averaged between 2004 and 2008 is “eminently feasible” in the medium term because a high national savings rate will aid investment.
Car sales climbed at a 33.9 percent annual pace in October and cellular operators, led by Tata Teleservices Ltd., added 16.6 million new subscribers. Lodha Developers Ltd., an Indian property company planning an initial share sale, said its home sales may climb about threefold this fiscal year as low interest rates encourage spending.
Rolls-Royce Motor Cars Ltd., which introduced the super- luxury “Ghost” model in India this month, said it has already received 25 orders for the model from New Delhi alone, equal to expected sales in Australia in a year.
“We are seeing strong expression of spending power in India,” said Brenda Pak, general manager, South and East Asia Pacific at Rolls-Royce. “India will be a very strong market for us in the years to come.”
Gross domestic product expanded 7.9 percent in the three months to Sept. 30 from a year earlier as manufacturing jumped 9.2 percent, the statistics bureau said in New Delhi today. That was more than all estimates in a Bloomberg News survey of 22 economists, where the median forecast was a 6.3 percent gain.
Indian shares and the rupee extended gains while bond yields rose following the GDP report, which came after Reserve Bank of India Governor Duvvuri Subbarao last week said there was a need to remove some of the “unconventional” steps implemented to support growth. Economies across Asia including Taiwan, South Korea and Singapore are performing better than expected as the region leads the world out of recession.
“India’s GDP growth is positioning for an upswing,” said Rajeev Malik, a Singapore-based regional economist at Macquarie Group Ltd. “A handle-with-care exit is on the cards.”
To steer India’s $1.2 trillion economy through the worst global financial crisis since the 1930s, Governor Subbarao has kept the central bank’s key reverse repurchase rate at a record- low 3.25 percent since April. Government spending and tax cuts took the value of stimulus measures to 12 percent of GDP.
Stocks Gain
That’s helped the economy recover and the benchmark Sensitive index on the Bombay Stock Exchange to climb about 72 percent this year. The Sensitive index increased 1.9 percent to 16,941.25 at 11:03 a.m. in Mumbai, while the yield on the benchmark 10-year government bond rose to 7.23 percent from 7.21 percent. The rupee gained to 46.45 per dollar from 46.51 before the report.
Inflation pressures are building as economic growth quickens and after the weakest monsoon rains since 1972 hurt farm output, pushing up food costs. The central bank forecasts inflation of 6.5 percent by March 31 from 1.34 percent in October and 0.5 percent in September. During 2008, the rate rose to almost 13 percent.
“Given the magnitude of easing and the speed at which inflation has bounced back, monetary policy will need to be tightened fairly soon,” the Paris-based Organization for Economic Cooperation and Development said Nov. 19.
Falling bond yields signal that investors don’t expect interest rates to rise this year.
‘Inflation Risks’
“We see inflation risks emerging and expect interest-rate hikes from January 2010,” said Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore.
In a debate in parliament on Nov. 26, Finance Minister Pranab Mukherjee said policy makers are balancing the need to create jobs against inflation concerns. The central bank started to withdraw monetary stimulus on Oct. 27 by ordering lenders to keep more money in government bonds.
Food inflation, which has climbed to 15.58 percent, is a politically sensitive issue in a nation where the World Bank estimates that three-quarters of the population live on less than $2 a day. Opposition lawmakers said last week that the government is obsessed with growth, allowing prices to spiral to the detriment of the poor.
By sustaining the second-fastest growth of any major economy, trailing only China, India is drawing investment from companies including South Korea’s Samsung Electronics Co. and French tiremaker Michelin & Cie, which said this month that it will add a factory in the southern state of Tamil Nadu.
High Savings
Prime Minister Manmohan Singh said this month that returning to the 9 percent growth pace that India averaged between 2004 and 2008 is “eminently feasible” in the medium term because a high national savings rate will aid investment.
Car sales climbed at a 33.9 percent annual pace in October and cellular operators, led by Tata Teleservices Ltd., added 16.6 million new subscribers. Lodha Developers Ltd., an Indian property company planning an initial share sale, said its home sales may climb about threefold this fiscal year as low interest rates encourage spending.
Rolls-Royce Motor Cars Ltd., which introduced the super- luxury “Ghost” model in India this month, said it has already received 25 orders for the model from New Delhi alone, equal to expected sales in Australia in a year.
“We are seeing strong expression of spending power in India,” said Brenda Pak, general manager, South and East Asia Pacific at Rolls-Royce. “India will be a very strong market for us in the years to come.”
India’s Economy May Grow at Fastest Pace in Year, Survey Shows
Nov. 30 (Bloomberg) -- India’s economy, the third biggest in Asia, probably grew at the fastest pace in a year because of record-low interest rates and tax cuts.
Gross domestic product rose 6.3 percent in the three months ending Sept. 30 from a year earlier, according to the median forecast of 19 economists in a Bloomberg survey. That would compare with 6.1 percent in the previous quarter. The statistics office will announce the number at 11 a.m. local time in New Delhi today.
Officials are weighing the threat from inflation against the risk that raising interest rates too quickly will undermine the recovery of the $1.2 trillion economy. India must withdraw monetary stimulus “carefully and strategically” to sustain growth, central bank Deputy Governor Subir Gokarn said in Mumbai on Nov. 24.
“India’s growth is being heavily driven by government stimulus,” said Nikhilesh Bhattacharyya, a Sydney-based economist at Moody’s Economy.com. “It’s way too soon to turn away from accommodative monetary and fiscal policies.”
To steer the nation through the worst global financial crisis since the 1930s, the central bank has kept the key reverse repurchase rate at 3.25 percent since April and government spending and tax cuts have taken the value of stimulus measures to 12 percent of GDP. That’s helped growth recover from a four-year low in the final quarter of last year and the benchmark Sensitive index on the Bombay Stock Exchange to climb about 70 percent this year.
Monsoon Rains
Inflation pressures are building as growth quickens and after the weakest monsoon rains since 1972 hurt farm output, pushing up food costs. The central bank forecasts inflation of 6.5 percent by March 31 from 1.34 percent in October and 0.5 percent in September. During 2008, the rate rose to as high as almost 13 percent.
“Given the magnitude of easing and the speed at which inflation has bounced back, monetary policy will need to be tightened fairly soon,” the Paris-based Organization for Economic Cooperation and Development said Nov. 19.
Falling bond yields signal that investors don’t expect interest rates to rise this year.
“We see inflation risks emerging and expect interest-rate hikes from January 2010,” said Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore.
Obsessed With Growth?
In a debate in parliament on Nov. 26, Finance Minister Pranab Mukherjee said policy makers are balancing the need to create jobs against inflation concerns. The central bank started tightening monetary policy on Oct. 27 by ordering lenders to keep more money in government bonds.
Food inflation has climbed to 15.58 percent, a politically sensitive issue in a nation where the World Bank estimates that three-quarters of the population live on less than $2 a day. Opposition lawmakers said last week that the government is obsessed with growth, allowing prices to spiral to the detriment of the poor.
By sustaining the second-fastest growth of any major economy, trailing only China, India is drawing investment from companies including French tiremaker Michelin & Cie, which said this month that it will add a factory in the southern state of Tamil Nadu, and South Korea’s Samsung Electronics Co.
Prime Minister Manmohan Singh said this month that returning to the 9 percent growth that India averaged between 2004 and 2008 is “eminently feasible” in the medium term because a high national savings rate will aid investment.
Car sales climbed at a 33.9 percent annual pace in October and cellular operators, led by Tata Teleservices Ltd., added 16.6 million new subscribers. Lodha Developers Ltd., an Indian property company planning an initial share sale, said its home sales may climb about threefold this fiscal year as low interest rates encourage spending.
Gross domestic product rose 6.3 percent in the three months ending Sept. 30 from a year earlier, according to the median forecast of 19 economists in a Bloomberg survey. That would compare with 6.1 percent in the previous quarter. The statistics office will announce the number at 11 a.m. local time in New Delhi today.
Officials are weighing the threat from inflation against the risk that raising interest rates too quickly will undermine the recovery of the $1.2 trillion economy. India must withdraw monetary stimulus “carefully and strategically” to sustain growth, central bank Deputy Governor Subir Gokarn said in Mumbai on Nov. 24.
“India’s growth is being heavily driven by government stimulus,” said Nikhilesh Bhattacharyya, a Sydney-based economist at Moody’s Economy.com. “It’s way too soon to turn away from accommodative monetary and fiscal policies.”
To steer the nation through the worst global financial crisis since the 1930s, the central bank has kept the key reverse repurchase rate at 3.25 percent since April and government spending and tax cuts have taken the value of stimulus measures to 12 percent of GDP. That’s helped growth recover from a four-year low in the final quarter of last year and the benchmark Sensitive index on the Bombay Stock Exchange to climb about 70 percent this year.
Monsoon Rains
Inflation pressures are building as growth quickens and after the weakest monsoon rains since 1972 hurt farm output, pushing up food costs. The central bank forecasts inflation of 6.5 percent by March 31 from 1.34 percent in October and 0.5 percent in September. During 2008, the rate rose to as high as almost 13 percent.
“Given the magnitude of easing and the speed at which inflation has bounced back, monetary policy will need to be tightened fairly soon,” the Paris-based Organization for Economic Cooperation and Development said Nov. 19.
Falling bond yields signal that investors don’t expect interest rates to rise this year.
“We see inflation risks emerging and expect interest-rate hikes from January 2010,” said Ramya Suryanarayanan, an economist at DBS Group Holdings Ltd. in Singapore.
Obsessed With Growth?
In a debate in parliament on Nov. 26, Finance Minister Pranab Mukherjee said policy makers are balancing the need to create jobs against inflation concerns. The central bank started tightening monetary policy on Oct. 27 by ordering lenders to keep more money in government bonds.
Food inflation has climbed to 15.58 percent, a politically sensitive issue in a nation where the World Bank estimates that three-quarters of the population live on less than $2 a day. Opposition lawmakers said last week that the government is obsessed with growth, allowing prices to spiral to the detriment of the poor.
By sustaining the second-fastest growth of any major economy, trailing only China, India is drawing investment from companies including French tiremaker Michelin & Cie, which said this month that it will add a factory in the southern state of Tamil Nadu, and South Korea’s Samsung Electronics Co.
Prime Minister Manmohan Singh said this month that returning to the 9 percent growth that India averaged between 2004 and 2008 is “eminently feasible” in the medium term because a high national savings rate will aid investment.
Car sales climbed at a 33.9 percent annual pace in October and cellular operators, led by Tata Teleservices Ltd., added 16.6 million new subscribers. Lodha Developers Ltd., an Indian property company planning an initial share sale, said its home sales may climb about threefold this fiscal year as low interest rates encourage spending.
Friday, November 27, 2009
6 Keys to Finding Momentum Growth Stocks
Momentum stock trading has been around for awhile and has been proven to a sound method for creating incredible wealth in the stock market. During the 1990s, for example, Clear Channel Communications went up 5,615%, Emulex rose 6,412%, Dell Computer went up 10,198%, Activision went up 13,819%, and Semtech rose 15,231%.
It is not uncommon to find stocks that accelerate in price that go on to make 100% to 300% returns in less than year or even in a few months. However, for beginning investors it can be a confusing and frustrating experience to find such stocks.
While many momentum stock traders all have different criteria when searching out tomorrow’s big winners there are typically six key steps when screening for a big winner.
They are:
Accelerating earnings or EPS (earnings per share).
Annual earnings up 25% or more in the last 3 years.
Minimum volume of 100,000 or at least increasing volume.
17% ROE (return on equity) or better.
Has leadership role in the market place.
Price at an all-time high.
Potential stocks for momentum trading should show strong fundamentals on there balance sheet and show that they are growing at an accelerated rate. By selecting stocks that are showing high EPS ratings and accelerating rates of growth over previous quarters you can be sure that you have a company that is growing out an above average rate. Wall Street loves earnings that are growing quickly and a company that does will be rewarded with institutional sponsorship by the big funds further causing share value to increase.
Momentum stocks also have shown that they are strong players in their market and prove there value by exhibiting strong annual earnings. Less than a 25% annual increase in annual earnings will not stimulate interest by the big mutual funds or investors resulting in a stock whose price will likely remain stagnant or increase in value at too slow a pace for momentum investing.
Stocks for consideration should have a daily average of 100,000 shares or at least see there average daily volume increase as the value of the stock rises. Any volume less than this shows little interest by the investment community and you could find yourself having trouble with liquidity in the stock if you need to sell and get out.
A potential stock should show a ROE of 17% or better. ROE is the net income divided by the number of shares held by investors. It shows the responsible return on capital by investors and the higher this ratio is the better for investors. In my opinion, this is one of the most important attributes for any stock investment.
Momentum stocks are also leaders in the market. When the major indices have declines true stock leaders exhibit strength by holding or even exceeding there highs or near there highs. When the major indices rally these leaders typically lead the rally and go on to make new highs and outpace the market.
Momentum stocks should also be traded at there all time highs. Buy trading at these levels at key technical entry points you are likely to ride the trend as the stock increases in share price. This type of characteristic increase your chances for profitability because a up trend in place is six times more likely to stay in place so you have the odds on your side.
You can stock for scans like these at Yahoo Financial or MSN Financial for free. Begin keeping a list of potential candidates and then track there performance. It may take a little practice but with time you will be able to spot the stocks that go on to make the big moves of 100% or more.
As with all types of investing keep in mind to cut your losers quickly and ride your winners with a good money management plan.
Good luck and good trading.
It is not uncommon to find stocks that accelerate in price that go on to make 100% to 300% returns in less than year or even in a few months. However, for beginning investors it can be a confusing and frustrating experience to find such stocks.
While many momentum stock traders all have different criteria when searching out tomorrow’s big winners there are typically six key steps when screening for a big winner.
They are:
Accelerating earnings or EPS (earnings per share).
Annual earnings up 25% or more in the last 3 years.
Minimum volume of 100,000 or at least increasing volume.
17% ROE (return on equity) or better.
Has leadership role in the market place.
Price at an all-time high.
Potential stocks for momentum trading should show strong fundamentals on there balance sheet and show that they are growing at an accelerated rate. By selecting stocks that are showing high EPS ratings and accelerating rates of growth over previous quarters you can be sure that you have a company that is growing out an above average rate. Wall Street loves earnings that are growing quickly and a company that does will be rewarded with institutional sponsorship by the big funds further causing share value to increase.
Momentum stocks also have shown that they are strong players in their market and prove there value by exhibiting strong annual earnings. Less than a 25% annual increase in annual earnings will not stimulate interest by the big mutual funds or investors resulting in a stock whose price will likely remain stagnant or increase in value at too slow a pace for momentum investing.
Stocks for consideration should have a daily average of 100,000 shares or at least see there average daily volume increase as the value of the stock rises. Any volume less than this shows little interest by the investment community and you could find yourself having trouble with liquidity in the stock if you need to sell and get out.
A potential stock should show a ROE of 17% or better. ROE is the net income divided by the number of shares held by investors. It shows the responsible return on capital by investors and the higher this ratio is the better for investors. In my opinion, this is one of the most important attributes for any stock investment.
Momentum stocks are also leaders in the market. When the major indices have declines true stock leaders exhibit strength by holding or even exceeding there highs or near there highs. When the major indices rally these leaders typically lead the rally and go on to make new highs and outpace the market.
Momentum stocks should also be traded at there all time highs. Buy trading at these levels at key technical entry points you are likely to ride the trend as the stock increases in share price. This type of characteristic increase your chances for profitability because a up trend in place is six times more likely to stay in place so you have the odds on your side.
You can stock for scans like these at Yahoo Financial or MSN Financial for free. Begin keeping a list of potential candidates and then track there performance. It may take a little practice but with time you will be able to spot the stocks that go on to make the big moves of 100% or more.
As with all types of investing keep in mind to cut your losers quickly and ride your winners with a good money management plan.
Good luck and good trading.
Thursday, November 26, 2009
Analysis of Company Profit Margin (Gross, Operating & Net Profit Margin)
Corporations and their shareholders are determined to make profits from their business operations and make a good return on their investment (ROI). In order to make good profits, a firm needs to be run efficiently and have sufficient cash flow to meet current liabilities and short term debt (liquidity). You as a small scale investor need to investigate the profitability of a company in order to determine if it is both liquid and it is being run efficiently. The way to do this is by calculating the various profit margin ratios available. We look at a few below:
i) Gross Profit Margin
The Gross Profit Margin illustrates the profit a company makes after paying off its Cost of Goods sold (cost of inventory). Gross Profit Margin illustrates to us how efficient the management is in using its labour and raw materials in the process of production. The formula for Gross Profit Margin is:
Gross Profit Margin = (Sales - Cost of Goods Sold) / Sales
Firms that have a high gross profit margin are more liquid and thus have more cash flow to spend on research & development expenses, marketing or investing. Avoid investing in firms that have a declining Gross Profit Margin over a time period, example over 5 years. Once you calculate the gross profit margin of a firm, compare it with industry standards. For example, it does not make sense to compare the profit margin of a software company (typically 90%) with that of an airline company (5%).
ii) Operating Profit Margin
The Operating Profit Margin will illustrate to you how efficiently the managers of a firm are using business operations to generate profit. This ratio also shows the success rate of these managers. The formula for Operating Profit Margin is:
Operating Profit Margin = Earnings before Interest & Taxes / Sales
For example, consider a firm that has $2 million sales this year and an EBIT (Earnings before Interest & Taxes) of $450,000. What is the Operating Profit Margin?
Operating Profit Margin = 450,000 / 2,000,000
Operating Profit Margin = 22.5%
The higher the Operating Profit Margin, the better. This is because a higher Operating Profit Margin shows the company can keep its costs under control (successful cost accounting). A higher Operating Profit Margin can also mean sales are increasing faster than costs, and the firm is in a relatively liquid position.
The difference between Gross Profit Margin and Operating Profit Margin is that the gross profit margin accounts for only Cost of Goods sold, but the Operating Profit Margin accounts for both Cost of Goods sold and Administration/Selling expenses.
iii) Net Profit Margin
Net Profit Margin tells you exactly how the managers and operations of a business are performing. Net Profit Margin compares the net income of a firm with total sales achieved. The formula for Net Profit Margin is:
Net Profit Margin = Net Income / Sales
For example, consider a firm that has an annual net income of $500,000 while the total sales achieved during the year amount to $2,200,000. What's the Net Profit Margin?
Net Profit Margin = 500,000 / 2,200,000
Net Profit Margin = 22.7%
Once you calculate the net profit margin of a firm, compare it with industry standards. For example, typical software companies have a Gross Margin of 90% (as mentioned above). However, the NET profit margin is only 27%. That's a huge difference right there and it tells us that the marketing/administration costs of software companies is huge! However, this also tells us that operating costs and cost of goods sold of software companies is relatively low.
i) Gross Profit Margin
The Gross Profit Margin illustrates the profit a company makes after paying off its Cost of Goods sold (cost of inventory). Gross Profit Margin illustrates to us how efficient the management is in using its labour and raw materials in the process of production. The formula for Gross Profit Margin is:
Gross Profit Margin = (Sales - Cost of Goods Sold) / Sales
Firms that have a high gross profit margin are more liquid and thus have more cash flow to spend on research & development expenses, marketing or investing. Avoid investing in firms that have a declining Gross Profit Margin over a time period, example over 5 years. Once you calculate the gross profit margin of a firm, compare it with industry standards. For example, it does not make sense to compare the profit margin of a software company (typically 90%) with that of an airline company (5%).
ii) Operating Profit Margin
The Operating Profit Margin will illustrate to you how efficiently the managers of a firm are using business operations to generate profit. This ratio also shows the success rate of these managers. The formula for Operating Profit Margin is:
Operating Profit Margin = Earnings before Interest & Taxes / Sales
For example, consider a firm that has $2 million sales this year and an EBIT (Earnings before Interest & Taxes) of $450,000. What is the Operating Profit Margin?
Operating Profit Margin = 450,000 / 2,000,000
Operating Profit Margin = 22.5%
The higher the Operating Profit Margin, the better. This is because a higher Operating Profit Margin shows the company can keep its costs under control (successful cost accounting). A higher Operating Profit Margin can also mean sales are increasing faster than costs, and the firm is in a relatively liquid position.
The difference between Gross Profit Margin and Operating Profit Margin is that the gross profit margin accounts for only Cost of Goods sold, but the Operating Profit Margin accounts for both Cost of Goods sold and Administration/Selling expenses.
iii) Net Profit Margin
Net Profit Margin tells you exactly how the managers and operations of a business are performing. Net Profit Margin compares the net income of a firm with total sales achieved. The formula for Net Profit Margin is:
Net Profit Margin = Net Income / Sales
For example, consider a firm that has an annual net income of $500,000 while the total sales achieved during the year amount to $2,200,000. What's the Net Profit Margin?
Net Profit Margin = 500,000 / 2,200,000
Net Profit Margin = 22.7%
Once you calculate the net profit margin of a firm, compare it with industry standards. For example, typical software companies have a Gross Margin of 90% (as mentioned above). However, the NET profit margin is only 27%. That's a huge difference right there and it tells us that the marketing/administration costs of software companies is huge! However, this also tells us that operating costs and cost of goods sold of software companies is relatively low.
India Mahindra Satyam hit by new charges; outlook uncertain
* Investigators say Satyam fraud may be bigger than revealed
* Analysts say Mahindra Satyam a risky bet until restatement
* Shares plunge as much as 18 pct in two days
BANGALORE, Nov 26 (Reuters) - Mahindra-Satyam (SATY.BO) shares fell to a 4-month low on Thursday, before recovering, on concerns over its outlook after Indian investigators filed new charges over accounting fraud that hit Satyam earlier this year.
"Investors are playing a blind game until the audited numbers are out. There could be more skeletons hidden in the closet," said HDFC Securities' head of private client group V.K. Sharma, who is advising clients to stay away from the stock until there is further clarity.
The stock topped the volume chart, with about 30 million shares traded, nearly three times its average daily volume over the past 90 days. It ended up 2.4 percent at 92.75 rupees.
Mahindra Satyam, earlier known as Satyam Computer Services, was acquired by Tech Mahindra (TEML.BO) in April after the company was hammered by India's biggest corporate fraud, which came to light in January. [ID:nBOM476146]
V. V. Lakshmi Narayana, deputy inspector general of India's Central Bureau of Investigation, told Reuters the extent of the fraud at Satyam could be much larger than the 71.36 billion rupees ($1.5 billion) that founder Ramalinga Raju had confessed to in a letter in January.
"All investigations into the accounting and auditing part of the business have been completed, and we are now going to look into the money diversion from the company," Narayana, who is part of the team probing the fraud, said from Hyderabad.
"Whatever Raju said is not the complete reality."
Narayana said the agency estimated losses suffered by investors in the wake of the fraud could be up to 140 billion rupees.
Mahindra Satyam, which has about 35,000 employees, hoped to restate its accounts by the middle of next year, Atul Kunwar, president of its global operations, said on Wednesday.
Vaibhav Sanghavi, director of Ambit Capital, said, "It's very difficult to assess the situation until the audited numbers are out."
Officials at Mahindra Satyam did not respond to requests by Reuters for comment. A Tech Mahindra spokesman declined comment.
Shares in Tech Mahindra (TEML.BO), a unit of tractor and utility vehicles maker Mahindra & Mahindra (MAHM.BO), ended down 1.2 percent, having earlier fallen as much as 6.5 percent to a 3-month low.
Kunwar also told the Reuters India Investment Summit on Wednesday that customer attrition had stopped and the company did not need price cuts to win new deals. [ID:nBNG159632]
On Tuesday, the CBI said it had filed a supplementary charge sheet containing new allegations against Raju and nine others associated with the outsourcing firm. [ID:nBOM490232]
New charges included that revenues had been inflated by 4.3 billion rupees by creating fake invoices and customers, and that forged board resolutions were used to get loans worth 12.2 billion rupees.
On Thursday, Bharat Kumar, a lawyer for Raju, told Reuters he could not comment as he had not received a copy of the additional charge sheet the investigating agency had submitted to the court.
* Analysts say Mahindra Satyam a risky bet until restatement
* Shares plunge as much as 18 pct in two days
BANGALORE, Nov 26 (Reuters) - Mahindra-Satyam (SATY.BO) shares fell to a 4-month low on Thursday, before recovering, on concerns over its outlook after Indian investigators filed new charges over accounting fraud that hit Satyam earlier this year.
"Investors are playing a blind game until the audited numbers are out. There could be more skeletons hidden in the closet," said HDFC Securities' head of private client group V.K. Sharma, who is advising clients to stay away from the stock until there is further clarity.
The stock topped the volume chart, with about 30 million shares traded, nearly three times its average daily volume over the past 90 days. It ended up 2.4 percent at 92.75 rupees.
Mahindra Satyam, earlier known as Satyam Computer Services, was acquired by Tech Mahindra (TEML.BO) in April after the company was hammered by India's biggest corporate fraud, which came to light in January. [ID:nBOM476146]
V. V. Lakshmi Narayana, deputy inspector general of India's Central Bureau of Investigation, told Reuters the extent of the fraud at Satyam could be much larger than the 71.36 billion rupees ($1.5 billion) that founder Ramalinga Raju had confessed to in a letter in January.
"All investigations into the accounting and auditing part of the business have been completed, and we are now going to look into the money diversion from the company," Narayana, who is part of the team probing the fraud, said from Hyderabad.
"Whatever Raju said is not the complete reality."
Narayana said the agency estimated losses suffered by investors in the wake of the fraud could be up to 140 billion rupees.
Mahindra Satyam, which has about 35,000 employees, hoped to restate its accounts by the middle of next year, Atul Kunwar, president of its global operations, said on Wednesday.
Vaibhav Sanghavi, director of Ambit Capital, said, "It's very difficult to assess the situation until the audited numbers are out."
Officials at Mahindra Satyam did not respond to requests by Reuters for comment. A Tech Mahindra spokesman declined comment.
Shares in Tech Mahindra (TEML.BO), a unit of tractor and utility vehicles maker Mahindra & Mahindra (MAHM.BO), ended down 1.2 percent, having earlier fallen as much as 6.5 percent to a 3-month low.
Kunwar also told the Reuters India Investment Summit on Wednesday that customer attrition had stopped and the company did not need price cuts to win new deals. [ID:nBNG159632]
On Tuesday, the CBI said it had filed a supplementary charge sheet containing new allegations against Raju and nine others associated with the outsourcing firm. [ID:nBOM490232]
New charges included that revenues had been inflated by 4.3 billion rupees by creating fake invoices and customers, and that forged board resolutions were used to get loans worth 12.2 billion rupees.
On Thursday, Bharat Kumar, a lawyer for Raju, told Reuters he could not comment as he had not received a copy of the additional charge sheet the investigating agency had submitted to the court.
Thursday, November 19, 2009
Gold shines at Rs 17,400
NEW DELHI: Firming global trend and melting domestic equities helped gold prices reach a new high at Rs 17,400 per 10 gram in the bullion market
here today.
Marketmen said the bullion market drew support from reports that gold in international markets surged to an all-time high of 1,153.90 dollar an ounce.
Besides, some investors were seen shifting from melting equity market to rising bullion for quick gains, boosting the demand for the metal, they said.
"The precious metals are more fancy of investors in domestic as well as overseas markets these day as a better option for making fast profits," said Rakesh Anand of R K Jewellers.
Marketmen said increased buying by stockists and jewellery fabricators for the ongoing marriage season was another factor that lifted the gold prices.
Standard gold and ornaments added another Rs 30 each to Rs 17,400 and Rs 17,250 per 10 gram respectively, while sovereign was unchanged at Rs 13,500 per piece of eight gram.
Silver ready remained steady at Rs 28,600 per kg in restricted buying, while weekly-based delivery strengthened by Rs 105 to Rs 28,200 per kg on speculators buying.
Silver coins continued to be asked around previous level of Rs 34,000 for buying and Rs 34,100 for selling of 100 pieces.
here today.
Marketmen said the bullion market drew support from reports that gold in international markets surged to an all-time high of 1,153.90 dollar an ounce.
Besides, some investors were seen shifting from melting equity market to rising bullion for quick gains, boosting the demand for the metal, they said.
"The precious metals are more fancy of investors in domestic as well as overseas markets these day as a better option for making fast profits," said Rakesh Anand of R K Jewellers.
Marketmen said increased buying by stockists and jewellery fabricators for the ongoing marriage season was another factor that lifted the gold prices.
Standard gold and ornaments added another Rs 30 each to Rs 17,400 and Rs 17,250 per 10 gram respectively, while sovereign was unchanged at Rs 13,500 per piece of eight gram.
Silver ready remained steady at Rs 28,600 per kg in restricted buying, while weekly-based delivery strengthened by Rs 105 to Rs 28,200 per kg on speculators buying.
Silver coins continued to be asked around previous level of Rs 34,000 for buying and Rs 34,100 for selling of 100 pieces.
OECD raises India 2010 GDP growth forecast
PARIS (Reuters) - Following is a summary of what the Paris-based Organisation for Economic Co-operation and Development had to say about non-members Brazil, India, China and Russia in its semi-annual Economic Outlook released on Thursday.
CHINA
In its previous forecast on June 24, the OECD had projected GDP growth of 7.7 percent this year and 9.3 percent in 2010.
Upgrading its outlook, it said domestic demand was set to remain strong thanks to highly stimulative economic policies and buoyant consumption spurred by improving employment prospects.
Fiscal stimulus has not endangered the sustainability of China's public finances. Indeed, the OECD expects net government debt to be "very low" when stimulus is withdrawn in 2011.
Whereas the government can afford to keep spending at higher levels, credit growth will need to be reined in to avert a new crop of bad loans, the report said.
INDIA
The OECD had been forecasting GDP growth for India of 5.9 percent in 2009 and 7.2 percent in 2010.
With inflation re-emerging, due to various supply factors, policymakers will need to ensure a timely withdrawal of stimulus.
"Given the magnitude of the easing and the speed at which inflation has bounced back, monetary policy will need to be tightened fairly soon," the report said.
Reining in the budget deficit will be tough because of its size and the permanent nature of recent increases in spending.
Higher financing costs, exacerbated by heavy government borrowing, will be a drag on investment and keep economic growth just below pre-crisis rates.
RUSSIA
The OECD had previously forecast a contraction of 6.8 percent for Russia in 2009 and growth of 3.7 percent in 2010.
"Although recovery is in prospect, the large output gap and subdued inflation suggest that policy stimulus should not be removed too hastily," the OECD said.
By contrast, discriminatory trade measures to protect domestic industries during the crisis are counter-productive and should be unwound as quickly as possible.
"Also, the high concentration of assets and deposits in a few state-owned banks was a natural consequence of the crisis, but is not healthy for the long-run development of the banking system."
The OECD said consumer and investor confidence is still fragile and closely tied to the oil price, which holds the key to the direction of capital flows, credit growth and asset prices.
BRAZIL
In its previous forecasts, the OECD projected that Brazil's GDP would shrink 0.8 percent this year and grow 4.0 percent in 2010.
"A judiciously planned withdrawal of policy stimulus would be advisable from early 2010, if the recovery is well in hand, as expected," the report said.
The inflation outlook is benign, but a gradual tightening of monetary policy might be in order from mid-2010 to prevent price pressures arising from rapidly diminishing slack in the economy.
Brazil's debt dynamics are sustainable, even though the ratio of public debt to GDP has been trending higher, the OECD added.
Wednesday, November 18, 2009
Baltic Dry Index - BDI (BALDRY)
The Baltic Dry Index is a daily average of prices to ship raw materials. It represents the cost paid by an end customer to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. The index is quoted every working day at 1300 London time. The Baltic Exchange is similar to the New York Merc in that it is a medium for buyers and sellers of contracts and forward agreements (futures) for delivery of dry bulk cargo. The Baltic is owned and operated by the member buyers and sellers. The exchange maintains prices on several routes for different cargoes and then publishes its own index, the BDI, as a summary of the entire dry bulk shipping market. This index can be used as an overall economic indicator as it shows where end prices are heading for items that use the raw materials that are shipped in dry bulk.
The BDI is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it.
Economic Implications
This index is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. This could also be gleaned from looking at commodity prices, but there are substitution effects and futures contracts that make it difficult to interpret the impact of commodity price fluctuations. Additionally, nearly all commodities are seeing severe increases in prices in 2008 regardless of supply situations as investors seek to hedge their inflation exposure with hard assets.
Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it. [5] The BDI will show how much a company or country is willing to pay to import raw materials immediately. For example, if a Chinese company has contracted out coal prices for the next year from Rio Tinto (RTP), then the spot price of coal increasing after a mine accident will not impact that established contract. However, when this company is willing to pay more per ton to ship the coal than to actually purchase it, an investor can see that price growth is accelerating.
Price Increases Passed To Businesses/Consumers
As the BDI increases, so effectively does the cost of raw materials. This cost associated with procuring the materials must be passed along the value chain by producers and refiners. In the end, consumers will see higher dry bulk rates in the higher prices they pay for goods derived from these raw materials. For example, when Folgers pays an extra $10/ton to import coffee beans, they will pass along this increased procurement cost to consumers to maintain margins.
Additionally, imported goods may often carry a BDI factor in the prices. An example of this would be the average Chinese imported good. As China transformed from coal exporter to importer, they began buying coal from nations such as Russia, Brazil, and Australia. The coal from the latter two must be shipped using dry bulk carriers. As the rates for the BDI went up in 07, so did the cost of coal to China. Since coal is used for 70-80% of China's energy generation, [6] overhead costs for factories increased with the price of coal. As the overhead costs increase, so must the price of the end good to maintain the margin of profit. As this end price increased, an American paid more for a t-shirt or toy at Wal-Mart.
Key Trends and Forces
* Commodity Demand - This is determined mainly by industrial production and energy demand. If commodity demand is strong, BDI rates will increase regardless of spot rates for those commodities. Companies that have contracted out spot rates will show increased demand through paying more for shipping of the materials. As more coal and steel are being demanded by China, so will the rates for dry bulk shipping increase.
* Fleet Supply - This is determined by the number of available ships, their capacity, and the utilization rates. Additionally, the average age of the fleets will determine where they are in the life cycle. The average ship lasts 25 years. If the average is closer to that number, supply will be decreasing in the short term. Also, supply is greatly determined by delivery of new vessels. Currently, there is significant back logged demand for new vessels. No new orders are being taken for delivery before late 2009. With this backed up supply, BDI prices soared in 2007. With rates for the largest dry bulkers fetching nearly 10x that of a comparable VLCC Oil Tanker, many companies converted tankers into dry bulk carriers.[7] As conversions and ships contracted to be built at the beginning of the price run up in 2006 come on line, the upward pricing pressure of a fleet in which 41% of its ships are over 20 years old will be held at bay.[8]
* Seasonal Pressures - Weather has a major impact on both demand and logistics. For demand, cold weather may increase the demand for coal and other energy creating raw materials. For logistics, cold weather may cause ice to block ports and low rivers to prevent travel. Both of these cause increases in the BDI. Conversely, a mild winter or early ice breakup in cold water parts will cause decreases in the BDI.
* Bunker Prices - Bunker fuel is a type of fuel oil a ship uses for propulsion. Bunker fuel accounts for between a quarter and a third of vessel operating costs. Higher crude oil prices also mean higher bunker fuel prices which will be reflected in higher BDI prices. So, just as higher oil prices will put a damper on Airline company margins, they will squeeze margins for dry bulk operators. High bunker fuel prices in 2008 caused many companies to instruct their crews to decrease ship speeds to conserve fuel, thereby increasing shipping times- which causes the BDI to rise. A new (2008) trend in the shipping industry is the recent development of a "skysail," a ship propulsion augmentation system consisting of a paraglider-type airfoil and an electronic deployment and control mechanism that uses wind to help propel ships and thereby save bunker fuel costs[9].
* Choke Points Nearly half of the world's oil passes through a few narrow shipping lanes. This includes the straights of Hormuz and Malacca, the Bosporus and the Suez and Panama canals. These geographic choke points cause natural caps in the number of ships that can pass through each day, month or year and therefore also limits the bulk tonnage capacity of certain shipping routes. If anything disrupts the flow of ships through the choke points, the BDI will increase. The narrow (52 mile wide) Bering Strait (also called the "Bering Gate" in the shipping industry) may soon become the world's newest strategic "choke point" for shipping [10].
* Market Sentiment - Because of the time lag in forecasting demand for raw materials, market opinion can greatly affect the freight exchange. [11] The recent halving of the index's value can be attributed to many companies forecasting lower global growth and cutting their production/demand targets.
* Port Congestion -This acts as another great buffer against supply increases lowering index prices. The actual infrastructure of these ports prevents more ships entering the market. The ports simply cannot handle more traffic. Until major changes occur at these vital terminals, there will be upward pressure on dry bulk prices. Shipping industry analysts [2] are actually developing an index to standardize and make available this incredibly vital data.
* Labor Relations - Nothing is loaded or unloaded from ships without labor. Labor relations at various ports around the world directly affects the BDI. For example, in the U.S. both the ILA (International Longshoreman's Association) and the ILWU (International Longshoreman's and Warehouse Union) exert enormous control over the labor at ports. Labor relations issues include: intentional work slowdowns, company lockouts, strikes and political boycotts. Labor unions have expressed their political power and influence in the past by boycotting products from apartheid South Africa, protesting the war in Iraq and even the Soviet Invasion of Afghanistan[13]. Labor relations impacts on the Baltic Dry Index should not be underestimated by the sophisticated investor.
* Piracy - Although piracy has been a constant factor affecting shipping for thousands of years, 2008 saw some significant piracy events including the capture and ransom of the MV Sirius Star, a Saudi owned oil supertanker seized by pirates off the coast of Somalia. Pirates are also holding crews hostage for significant ransoms as in the case of the MV Faina, a Ukrainian arms shipping vessel. Interpol and other global law enforcement agencies are investigating the connections of various organized crime groups that may be bankrolling and organizing pirate groups including those based in Somalia. Various nations including the U.S., Canada, France, U.K., Russia, Ukraine and China are now deploying warships to patrol the coast of Somalia. These factors put additional upward pressure on the BDI[14].
* New Arctic Shipping Routes - Shipping from Europe to China by means of the arctic offers a route distance savings of approximately 4000 miles, which is a large percentage of the non-arctic total route distance. Of course, the historical search for the Europe-China route was the reason for the discovery of the "New World" (America). With oil prices (Bunker Fuel) at 1st Q 2009 lows, arctic shipping may or may not be economical. But during mid-2008 oil prices, a 4000 mile route saving offered significant fuel and time savings. Discussion among scientists attending the March 2009 "Copenhagen Conference" suggests that the predictions by the 2007 UN- IPCC Report on Climate Change regarding the likely clearing of arctic sea ice has underestimated the rate of clearing and by 2013 arctic shipping may become feasible. Although the shipping industry remains highly secretive, the potentially significant economic advantages have caused many international shipping companies to begin analyzing and planning for potential new arctic routes. Shipping industry intelligence indicates that China is interested in potential deep-water ports in Iceland. Arctic routes do not currently affect the BDI but may in the near future[15].
The BDI is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it.
Economic Implications
This index is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. This could also be gleaned from looking at commodity prices, but there are substitution effects and futures contracts that make it difficult to interpret the impact of commodity price fluctuations. Additionally, nearly all commodities are seeing severe increases in prices in 2008 regardless of supply situations as investors seek to hedge their inflation exposure with hard assets.
Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it. [5] The BDI will show how much a company or country is willing to pay to import raw materials immediately. For example, if a Chinese company has contracted out coal prices for the next year from Rio Tinto (RTP), then the spot price of coal increasing after a mine accident will not impact that established contract. However, when this company is willing to pay more per ton to ship the coal than to actually purchase it, an investor can see that price growth is accelerating.
Price Increases Passed To Businesses/Consumers
As the BDI increases, so effectively does the cost of raw materials. This cost associated with procuring the materials must be passed along the value chain by producers and refiners. In the end, consumers will see higher dry bulk rates in the higher prices they pay for goods derived from these raw materials. For example, when Folgers pays an extra $10/ton to import coffee beans, they will pass along this increased procurement cost to consumers to maintain margins.
Additionally, imported goods may often carry a BDI factor in the prices. An example of this would be the average Chinese imported good. As China transformed from coal exporter to importer, they began buying coal from nations such as Russia, Brazil, and Australia. The coal from the latter two must be shipped using dry bulk carriers. As the rates for the BDI went up in 07, so did the cost of coal to China. Since coal is used for 70-80% of China's energy generation, [6] overhead costs for factories increased with the price of coal. As the overhead costs increase, so must the price of the end good to maintain the margin of profit. As this end price increased, an American paid more for a t-shirt or toy at Wal-Mart.
Key Trends and Forces
* Commodity Demand - This is determined mainly by industrial production and energy demand. If commodity demand is strong, BDI rates will increase regardless of spot rates for those commodities. Companies that have contracted out spot rates will show increased demand through paying more for shipping of the materials. As more coal and steel are being demanded by China, so will the rates for dry bulk shipping increase.
* Fleet Supply - This is determined by the number of available ships, their capacity, and the utilization rates. Additionally, the average age of the fleets will determine where they are in the life cycle. The average ship lasts 25 years. If the average is closer to that number, supply will be decreasing in the short term. Also, supply is greatly determined by delivery of new vessels. Currently, there is significant back logged demand for new vessels. No new orders are being taken for delivery before late 2009. With this backed up supply, BDI prices soared in 2007. With rates for the largest dry bulkers fetching nearly 10x that of a comparable VLCC Oil Tanker, many companies converted tankers into dry bulk carriers.[7] As conversions and ships contracted to be built at the beginning of the price run up in 2006 come on line, the upward pricing pressure of a fleet in which 41% of its ships are over 20 years old will be held at bay.[8]
* Seasonal Pressures - Weather has a major impact on both demand and logistics. For demand, cold weather may increase the demand for coal and other energy creating raw materials. For logistics, cold weather may cause ice to block ports and low rivers to prevent travel. Both of these cause increases in the BDI. Conversely, a mild winter or early ice breakup in cold water parts will cause decreases in the BDI.
* Bunker Prices - Bunker fuel is a type of fuel oil a ship uses for propulsion. Bunker fuel accounts for between a quarter and a third of vessel operating costs. Higher crude oil prices also mean higher bunker fuel prices which will be reflected in higher BDI prices. So, just as higher oil prices will put a damper on Airline company margins, they will squeeze margins for dry bulk operators. High bunker fuel prices in 2008 caused many companies to instruct their crews to decrease ship speeds to conserve fuel, thereby increasing shipping times- which causes the BDI to rise. A new (2008) trend in the shipping industry is the recent development of a "skysail," a ship propulsion augmentation system consisting of a paraglider-type airfoil and an electronic deployment and control mechanism that uses wind to help propel ships and thereby save bunker fuel costs[9].
* Choke Points Nearly half of the world's oil passes through a few narrow shipping lanes. This includes the straights of Hormuz and Malacca, the Bosporus and the Suez and Panama canals. These geographic choke points cause natural caps in the number of ships that can pass through each day, month or year and therefore also limits the bulk tonnage capacity of certain shipping routes. If anything disrupts the flow of ships through the choke points, the BDI will increase. The narrow (52 mile wide) Bering Strait (also called the "Bering Gate" in the shipping industry) may soon become the world's newest strategic "choke point" for shipping [10].
* Market Sentiment - Because of the time lag in forecasting demand for raw materials, market opinion can greatly affect the freight exchange. [11] The recent halving of the index's value can be attributed to many companies forecasting lower global growth and cutting their production/demand targets.
* Port Congestion -This acts as another great buffer against supply increases lowering index prices. The actual infrastructure of these ports prevents more ships entering the market. The ports simply cannot handle more traffic. Until major changes occur at these vital terminals, there will be upward pressure on dry bulk prices. Shipping industry analysts [2] are actually developing an index to standardize and make available this incredibly vital data.
* Labor Relations - Nothing is loaded or unloaded from ships without labor. Labor relations at various ports around the world directly affects the BDI. For example, in the U.S. both the ILA (International Longshoreman's Association) and the ILWU (International Longshoreman's and Warehouse Union) exert enormous control over the labor at ports. Labor relations issues include: intentional work slowdowns, company lockouts, strikes and political boycotts. Labor unions have expressed their political power and influence in the past by boycotting products from apartheid South Africa, protesting the war in Iraq and even the Soviet Invasion of Afghanistan[13]. Labor relations impacts on the Baltic Dry Index should not be underestimated by the sophisticated investor.
* Piracy - Although piracy has been a constant factor affecting shipping for thousands of years, 2008 saw some significant piracy events including the capture and ransom of the MV Sirius Star, a Saudi owned oil supertanker seized by pirates off the coast of Somalia. Pirates are also holding crews hostage for significant ransoms as in the case of the MV Faina, a Ukrainian arms shipping vessel. Interpol and other global law enforcement agencies are investigating the connections of various organized crime groups that may be bankrolling and organizing pirate groups including those based in Somalia. Various nations including the U.S., Canada, France, U.K., Russia, Ukraine and China are now deploying warships to patrol the coast of Somalia. These factors put additional upward pressure on the BDI[14].
* New Arctic Shipping Routes - Shipping from Europe to China by means of the arctic offers a route distance savings of approximately 4000 miles, which is a large percentage of the non-arctic total route distance. Of course, the historical search for the Europe-China route was the reason for the discovery of the "New World" (America). With oil prices (Bunker Fuel) at 1st Q 2009 lows, arctic shipping may or may not be economical. But during mid-2008 oil prices, a 4000 mile route saving offered significant fuel and time savings. Discussion among scientists attending the March 2009 "Copenhagen Conference" suggests that the predictions by the 2007 UN- IPCC Report on Climate Change regarding the likely clearing of arctic sea ice has underestimated the rate of clearing and by 2013 arctic shipping may become feasible. Although the shipping industry remains highly secretive, the potentially significant economic advantages have caused many international shipping companies to begin analyzing and planning for potential new arctic routes. Shipping industry intelligence indicates that China is interested in potential deep-water ports in Iceland. Arctic routes do not currently affect the BDI but may in the near future[15].
Baltic Dry Index at 2009 high and what it means
LONDON (Commodity Online): The Baltic Dry Idex (BDI), the global benchmark for freight costs for dry bulk commodities has a hit a 2009 high of 4381 points as bids rose for the Capesize vessels that transport iron ore and coal to China. Analysts have described BDI as the purest leading indicators of economic activity as it measures the demand to move raw materials and precursurs to production, as well as the supply of ships available to move this cargo.
The Financial Times quoting Peter Norfolk of SSY Consultancy and Research said that at the start of 2009, 170 Capesize vessels were on order for delivery this year but new ship availability amounts to only 35 vessels at present due to congestion and scrappages and the fact that some greenfiled shipyards have either not been built or have not delivered on schedule.
The Baltic Dry Index is a daily average of prices to ship raw materials. It represents the cost paid by an end customer to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. The index is quoted every working day at 1300 London time. The Baltic Exchange is similar to the New York Merc in that it is a medium for buyers and sellers of contracts and forward agreements (futures) for delivery of dry bulk cargo. The Baltic is owned and operated by the member buyers and sellers. The exchange maintains prices on several routes for different cargoes and then publishes its own index, the BDI, as a summary of the entire dry bulk shipping market. This index can be used as an overall economic indicator as it shows where end prices are heading for items that use the raw materials that are shipped in dry bulk.
BDI measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it. [1]
The index is maintained by the Baltic Exchange. The cargoes being moved are raw material commodities such as coal, steel, cement, and iron ore. The prices of underlying contracts are determined by the buyers and sellers, and then the exchange takes 20 different routes throughout the world for various materials and averages them into one index. The index does not concern itself with finished goods or container ships, only raw materials and dry bulk specific ships are factored into the calculation.[2] It also factors in all four sizes of oceangoing dry bulk transport vessels.
The Baltic Dry Index, had its ups and downs this year as in August first week it fell 17.2% from 3,350 to 2772 on falling coal and iron ore imports by China. At that time China's steel mills were locked in negotiations with foreign miners over import of iron ore and there fore, BDI fell to one of the lowest levels.
The Financial Times quoting Peter Norfolk of SSY Consultancy and Research said that at the start of 2009, 170 Capesize vessels were on order for delivery this year but new ship availability amounts to only 35 vessels at present due to congestion and scrappages and the fact that some greenfiled shipyards have either not been built or have not delivered on schedule.
The Baltic Dry Index is a daily average of prices to ship raw materials. It represents the cost paid by an end customer to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. The index is quoted every working day at 1300 London time. The Baltic Exchange is similar to the New York Merc in that it is a medium for buyers and sellers of contracts and forward agreements (futures) for delivery of dry bulk cargo. The Baltic is owned and operated by the member buyers and sellers. The exchange maintains prices on several routes for different cargoes and then publishes its own index, the BDI, as a summary of the entire dry bulk shipping market. This index can be used as an overall economic indicator as it shows where end prices are heading for items that use the raw materials that are shipped in dry bulk.
BDI measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players. The trading is limited only to the member companies, and the only relevant parties securing contracts are those who have actual cargo to move and those who have the ships to move it. [1]
The index is maintained by the Baltic Exchange. The cargoes being moved are raw material commodities such as coal, steel, cement, and iron ore. The prices of underlying contracts are determined by the buyers and sellers, and then the exchange takes 20 different routes throughout the world for various materials and averages them into one index. The index does not concern itself with finished goods or container ships, only raw materials and dry bulk specific ships are factored into the calculation.[2] It also factors in all four sizes of oceangoing dry bulk transport vessels.
The Baltic Dry Index, had its ups and downs this year as in August first week it fell 17.2% from 3,350 to 2772 on falling coal and iron ore imports by China. At that time China's steel mills were locked in negotiations with foreign miners over import of iron ore and there fore, BDI fell to one of the lowest levels.
US urges China to strengthen renminbi
President Barack Obama on Tuesday urged China to strengthen its currency as tensions over exchange rates and trade broke through a carefully orchestrated show of co-operation between Washington and Beijing.
Mr Obama made his comments after a three-hour meeting on Tuesday in Beijing with President Hu Jintao, during which both leaders pledged to work together on a long list of pressing international issues.
However, the US president also joined in the growing chorus of international voices calling on China to allow the renminbi to appreciate.
“I was pleased to note the Chinese commitment made in past statements to move toward a more market-oriented exchange rate over time,” he said at a joint appearance with Mr Hu in the Great Hall of the People. Such a move would “make an essential contribution to the global rebalancing effort”.
The reference to “past” statements could imply that China did not make any new commitments on Tuesday. Mr Hu did not mention the currency issue in his own statement, although he did call on both governments to refrain from protectionism, a veiled criticism of recent US trade measures on Chinese steel pipes and tyres.
“I stressed to President Obama that under the current circumstances our two countries need to oppose all kinds of trade protectionism even more strongly,” he said.
Coming at a time when Chinese prestige is growing and the US is facing enormous difficulties, Mr Obama’s trip has symbolised the advent of a more multi-polar world where US leadership has to co-exist with several rising powers, most notably China.
Although the public appearance on Tuesday had been billed as a press conference, the two leaders did not take any questions from the media and made only prepared statements, adding to the impression that Mr Obama’s visit has been one of the most tightly scripted in recent years and frustrating his hopes to speak more directly to the Chinese people.
In their comments and in a nine-page joint statement, the two governments spelled out a programme for ever-growing co-operation including stronger ties between their militaries, joint research initiatives on climate change and clean energy and even “a dialogue on human space flight”.
On Iran, where the US has been pushing China to take a harder line against Tehran, Mr Obama spoke with stronger language.
“We agreed that the Islamic Republic of Iran must provide assurances to the international community that its nuclear programme is peaceful and transparent,” he said. “Iran has an opportunity to present and demonstrate its peaceful intentions but if it fails to take this opportunity, there will be consequences.” Mr Hu said it was important to try to resolve the issue through negotiations.
China’s currency has been effectively pegged to the US dollar since the middle of last year and in recent weeks a number of international officials and governments have complained at the advantage this gives Chinese exporters, given the current weakness of the dollar.
Dominique Strauss-Kahn, managing director of the International Monetary Fund, called again on Monday at a conference in Beijing for a stronger renminbi “the sooner the better”.
He Yafei, one of China’s vice foreign ministers, defended China’s exchange rate policy. “In the process of tackling the financial crisis, keeping the RMB stable not only was a contribution to fighting the crisis but also helped stabilise global financial markets,” he said.
In recent days, several senior Chinese officials have criticised the US Federal Reserve, arguing that loose monetary policy in the US was creating bubbles in asset prices and endangering the global recovery. Yu Yongding, a researcher at one of China’s leading government think-tanks and a former member of the central bank monetary committee, said on Tuesday that Europe and China “should play together and put pressure on the US to change its monetary policy”. China and much of the world was being held “hostage” by US monetary policy, he said.
Mr Obama made his comments after a three-hour meeting on Tuesday in Beijing with President Hu Jintao, during which both leaders pledged to work together on a long list of pressing international issues.
However, the US president also joined in the growing chorus of international voices calling on China to allow the renminbi to appreciate.
“I was pleased to note the Chinese commitment made in past statements to move toward a more market-oriented exchange rate over time,” he said at a joint appearance with Mr Hu in the Great Hall of the People. Such a move would “make an essential contribution to the global rebalancing effort”.
The reference to “past” statements could imply that China did not make any new commitments on Tuesday. Mr Hu did not mention the currency issue in his own statement, although he did call on both governments to refrain from protectionism, a veiled criticism of recent US trade measures on Chinese steel pipes and tyres.
“I stressed to President Obama that under the current circumstances our two countries need to oppose all kinds of trade protectionism even more strongly,” he said.
Coming at a time when Chinese prestige is growing and the US is facing enormous difficulties, Mr Obama’s trip has symbolised the advent of a more multi-polar world where US leadership has to co-exist with several rising powers, most notably China.
Although the public appearance on Tuesday had been billed as a press conference, the two leaders did not take any questions from the media and made only prepared statements, adding to the impression that Mr Obama’s visit has been one of the most tightly scripted in recent years and frustrating his hopes to speak more directly to the Chinese people.
In their comments and in a nine-page joint statement, the two governments spelled out a programme for ever-growing co-operation including stronger ties between their militaries, joint research initiatives on climate change and clean energy and even “a dialogue on human space flight”.
On Iran, where the US has been pushing China to take a harder line against Tehran, Mr Obama spoke with stronger language.
“We agreed that the Islamic Republic of Iran must provide assurances to the international community that its nuclear programme is peaceful and transparent,” he said. “Iran has an opportunity to present and demonstrate its peaceful intentions but if it fails to take this opportunity, there will be consequences.” Mr Hu said it was important to try to resolve the issue through negotiations.
China’s currency has been effectively pegged to the US dollar since the middle of last year and in recent weeks a number of international officials and governments have complained at the advantage this gives Chinese exporters, given the current weakness of the dollar.
Dominique Strauss-Kahn, managing director of the International Monetary Fund, called again on Monday at a conference in Beijing for a stronger renminbi “the sooner the better”.
He Yafei, one of China’s vice foreign ministers, defended China’s exchange rate policy. “In the process of tackling the financial crisis, keeping the RMB stable not only was a contribution to fighting the crisis but also helped stabilise global financial markets,” he said.
In recent days, several senior Chinese officials have criticised the US Federal Reserve, arguing that loose monetary policy in the US was creating bubbles in asset prices and endangering the global recovery. Yu Yongding, a researcher at one of China’s leading government think-tanks and a former member of the central bank monetary committee, said on Tuesday that Europe and China “should play together and put pressure on the US to change its monetary policy”. China and much of the world was being held “hostage” by US monetary policy, he said.
Short View: Dollar carry trade
Just hours before US president Barack Obama arrived in China, the country’s chief banking regulator said the US was fuelling “speculative investments” and endangering global recovery through loose monetary policy.
Hours after the president landed, Ben Bernanke, US Federal Reserve chairman, said he did not think new asset price bubbles were forming in the US. Who is right? Near-zero interest rates in dollars are one reason for the rush for higher-yielding assets, from US and European stocks to emerging market equities to corporate bonds and commodities. Indeed, creating demand for risky assets is part of the point.
What is not clear is how dangerous it is. A so-called “carry trade” of borrowing in dollars in low rates to invest in higher-yielding assets could be reversed as soon as US interest rates rise or the currency shifts. If there is a rush for the exits, some investors fear a knock-on collapse in prices of assets.
Though some investors are likely to be borrowing in dollars, it may not be that widespread. “Money and credit have been quite weak, suggesting that asset price movements have not been fuelled by increased leverage that would leave financial intermediaries vulnerable to a reversal of recent gains,” said Donald Kohn, Fed vice-chairman, this week. In the US, as well as in Europe, bank lending continues to fall. The amount lent against securities in the repurchase, or repo, markets is also well below the peaks of 2008.
The problem with measures of leverage in the financial system is they ignore market psychology. If nothing else was reinforced by last year’s market gyrations, it is panic travels fast. Aggregate positions also may not reveal build-ups in particular trades, which present particular exit dangers. Leverage is down, but a lack of leverage in markets does not mean there will be a lack of volatility.
Hours after the president landed, Ben Bernanke, US Federal Reserve chairman, said he did not think new asset price bubbles were forming in the US. Who is right? Near-zero interest rates in dollars are one reason for the rush for higher-yielding assets, from US and European stocks to emerging market equities to corporate bonds and commodities. Indeed, creating demand for risky assets is part of the point.
What is not clear is how dangerous it is. A so-called “carry trade” of borrowing in dollars in low rates to invest in higher-yielding assets could be reversed as soon as US interest rates rise or the currency shifts. If there is a rush for the exits, some investors fear a knock-on collapse in prices of assets.
Though some investors are likely to be borrowing in dollars, it may not be that widespread. “Money and credit have been quite weak, suggesting that asset price movements have not been fuelled by increased leverage that would leave financial intermediaries vulnerable to a reversal of recent gains,” said Donald Kohn, Fed vice-chairman, this week. In the US, as well as in Europe, bank lending continues to fall. The amount lent against securities in the repurchase, or repo, markets is also well below the peaks of 2008.
The problem with measures of leverage in the financial system is they ignore market psychology. If nothing else was reinforced by last year’s market gyrations, it is panic travels fast. Aggregate positions also may not reveal build-ups in particular trades, which present particular exit dangers. Leverage is down, but a lack of leverage in markets does not mean there will be a lack of volatility.
Mother of all carry trades faces an inevitable bust
Since March there has been a massive rally in all sorts of risky assets – equities, oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply , while government bond yields have gently increased but stayed low and stable.
This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, asset prices should be moving gradually higher.
But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.
So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.
Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.
People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.
Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight – witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage-backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets – the VAR again looks low.
So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.
While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.
The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.
But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.
Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.
This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.
This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anaemic as I have argued, asset prices should be moving gradually higher.
But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.
So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.
Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.
People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.
Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight – witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage-backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets – the VAR again looks low.
So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.
While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.
The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.
But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.
Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever – its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.
This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.
Be Prepared for the Worst
The large-scale government intervention in the economy is going to end badly.
Any number of pundits claim that we have now passed the worst of the recession. Green shoots of recovery are supposedly popping up all around the country, and the economy is expected to resume growing soon at an annual rate of 3% to 4%. Many of these are the same people who insisted that the economy would continue growing last year, even while it was clear that we were already in the beginning stages of a recession.
A false recovery is under way. I am reminded of the outlook in 1930, when the experts were certain that the worst of the Depression was over and that recovery was just around the corner. The economy and stock market seemed to be recovering, and there was optimism that the recession, like many of those before it, would be over in a year or less. Instead, the interventionist policies of Hoover and Roosevelt caused the Depression to worsen, and the Dow Jones industrial average did not recover to 1929 levels until 1954. I fear that our stimulus and bailout programs have already done too much to prevent the economy from recovering in a natural manner and will result in yet another asset bubble.
Anytime the central bank intervenes to pump trillions of dollars into the financial system, a bubble is created that must eventually deflate. We have seen the results of Alan Greenspan's excessively low interest rates: the housing bubble, the explosion of subprime loans and the subsequent collapse of the bubble, which took down numerous financial institutions. Rather than allow the market to correct itself and clear away the worst excesses of the boom period, the Federal Reserve and the U.S. Treasury colluded to put taxpayers on the hook for trillions of dollars. Those banks and financial institutions that took on the largest risks and performed worst were rewarded with billions in taxpayer dollars, allowing them to survive and compete with their better-managed peers.
This is nothing less than the creation of another bubble. By attempting to cushion the economy from the worst shocks of the housing bubble's collapse, the Federal Reserve has ensured that the ultimate correction of its flawed economic policies will be more severe than it otherwise would have been. Even with the massive interventions, unemployment is near 10% and likely to increase, foreigners are cutting back on purchases of Treasury debt and the Federal Reserve's balance sheet remains bloated at an unprecedented $2 trillion. Can anyone realistically argue that a few small upticks in a handful of economic indicators are a sign that the recession is over?
What is more likely happening is a repeat of the Great Depression. We might have up to a year or so of an economy growing just slightly above stagnation, followed by a drop in growth worse than anything we have seen in the past two years. As the housing market fails to return to any sense of normalcy, commercial real estate begins to collapse and manufacturers produce goods that cannot be purchased by debt-strapped consumers, the economy will falter. That will go on until we come to our senses and end this wasteful government spending.
Government intervention cannot lead to economic growth. Where does the money come from for Tarp (Treasury's program to buy bad bank paper), the stimulus handouts and the cash for clunkers? It can come only from taxpayers, from sales of Treasury debt or through the printing of new money. Paying for these programs out of tax revenues is pure redistribution; it takes money out of one person's pocket and gives it to someone else without creating any new wealth. Besides, tax revenues have fallen drastically as unemployment has risen, yet government spending continues to increase. As for Treasury debt, the Chinese and other foreign investors are more and more reluctant to buy it, denominated as it is in depreciating dollars.
The only remaining option is to have the Fed create new money out of thin air. This is inflation. Higher prices lead to a devalued dollar and a lower standard of living for Americans. The Fed has already overseen a 95% loss in the dollar's purchasing power since 1913. If we do not stop this profligate spending soon, we risk hyperinflation and seeing a 95% devaluation every year.
Any number of pundits claim that we have now passed the worst of the recession. Green shoots of recovery are supposedly popping up all around the country, and the economy is expected to resume growing soon at an annual rate of 3% to 4%. Many of these are the same people who insisted that the economy would continue growing last year, even while it was clear that we were already in the beginning stages of a recession.
A false recovery is under way. I am reminded of the outlook in 1930, when the experts were certain that the worst of the Depression was over and that recovery was just around the corner. The economy and stock market seemed to be recovering, and there was optimism that the recession, like many of those before it, would be over in a year or less. Instead, the interventionist policies of Hoover and Roosevelt caused the Depression to worsen, and the Dow Jones industrial average did not recover to 1929 levels until 1954. I fear that our stimulus and bailout programs have already done too much to prevent the economy from recovering in a natural manner and will result in yet another asset bubble.
Anytime the central bank intervenes to pump trillions of dollars into the financial system, a bubble is created that must eventually deflate. We have seen the results of Alan Greenspan's excessively low interest rates: the housing bubble, the explosion of subprime loans and the subsequent collapse of the bubble, which took down numerous financial institutions. Rather than allow the market to correct itself and clear away the worst excesses of the boom period, the Federal Reserve and the U.S. Treasury colluded to put taxpayers on the hook for trillions of dollars. Those banks and financial institutions that took on the largest risks and performed worst were rewarded with billions in taxpayer dollars, allowing them to survive and compete with their better-managed peers.
This is nothing less than the creation of another bubble. By attempting to cushion the economy from the worst shocks of the housing bubble's collapse, the Federal Reserve has ensured that the ultimate correction of its flawed economic policies will be more severe than it otherwise would have been. Even with the massive interventions, unemployment is near 10% and likely to increase, foreigners are cutting back on purchases of Treasury debt and the Federal Reserve's balance sheet remains bloated at an unprecedented $2 trillion. Can anyone realistically argue that a few small upticks in a handful of economic indicators are a sign that the recession is over?
What is more likely happening is a repeat of the Great Depression. We might have up to a year or so of an economy growing just slightly above stagnation, followed by a drop in growth worse than anything we have seen in the past two years. As the housing market fails to return to any sense of normalcy, commercial real estate begins to collapse and manufacturers produce goods that cannot be purchased by debt-strapped consumers, the economy will falter. That will go on until we come to our senses and end this wasteful government spending.
Government intervention cannot lead to economic growth. Where does the money come from for Tarp (Treasury's program to buy bad bank paper), the stimulus handouts and the cash for clunkers? It can come only from taxpayers, from sales of Treasury debt or through the printing of new money. Paying for these programs out of tax revenues is pure redistribution; it takes money out of one person's pocket and gives it to someone else without creating any new wealth. Besides, tax revenues have fallen drastically as unemployment has risen, yet government spending continues to increase. As for Treasury debt, the Chinese and other foreign investors are more and more reluctant to buy it, denominated as it is in depreciating dollars.
The only remaining option is to have the Fed create new money out of thin air. This is inflation. Higher prices lead to a devalued dollar and a lower standard of living for Americans. The Fed has already overseen a 95% loss in the dollar's purchasing power since 1913. If we do not stop this profligate spending soon, we risk hyperinflation and seeing a 95% devaluation every year.
Tuesday, November 17, 2009
Berkshire buys Nestle, Exxon; ups Wal-Mart stake
NEW YORK, Nov 16 (Reuters) - Billionaire Warren Buffett's Berkshire Hathaway Inc on Monday revealed new investments in Nestle AG and Exxon Mobil Corp and that it has nearly doubled its investment in Wal-Mart Stores Inc.
In a U.S. Securities and Exchange Commission filing reporting U.S.-listed equity holdings as of Sept. 30, Berkshire said it held 3.4 million American depositary receipts of Nestle, the world's largest foodmaker, worth $144.7 million.
It also reported owning 1.28 million shares of Exxon Mobil, the world's largest oil company, valued at $87.6 million.
Berkshire also boosted its stake in Wal-Mart, the world's largest retailer, 90 percent from three months earlier, to 37.8 million shares worth $1.86 billion from 19.9 million shares.
While the companies are all household names, their shares have lagged the broader U.S. stock market since the market bottomed in March. Buffett favors undervalued stocks, and regularly buys even when economic conditions are weak.
'The general market has rocketed higher, but it may be that these businesses haven't participated as well,' said Justin Fuller, an analyst at Midway Capital Research & Management in Chicago and author of the Buffettologist.com blog.
Berkshire also reported new investments of $96.3 million in trash hauler Republic Services Inc, and $1.35 million in insurer Travelers Cos.
Omaha, Nebraska-based Berkshire did not immediately return a request for comment.
Buffett, the world's second-richest person, does not publicly discuss what he is buying and selling, or ordinarily explain purchases and sales revealed in quarterly SEC filings.
Monday's SEC filing includes investments made by Berkshire subsidiaries, including a portfolio at the car insurer Geico Corp overseen by Lou Simpson. Buffett has said investors should not assume all the reported investment decisions are his.
A separate SEC filing revealed that Berkshire had begun amassing its Exxon stake by the second quarter. The SEC occasionally lets Buffett delay disclosing investment activity so investors cannot copy him while he is buying and selling.
Soros Asset Management, overseen by billionaire George Soros, in a separate SEC filing revealed a stake in Berkshire itself and increased stakes in many blue-chip companies.
WHITHER KRAFT
Fuller said the Nestle stake appears surprising given Berkshire's reported $3.63 billion stake in Kraft Foods Inc , which last week launched a hostile bid for Britain's Cadbury Plc.
Yet he said Nestle could help Berkshire 'diversify away from Kraft. It is the classic Berkshire-type business in that it is easy to understand, and which has many good brands that people like to buy.'
He also said the added Wal-Mart stake 'makes more sense at a time consumers are more price-conscious,' while the Exxon stake could be 'indicative of Berkshire's large bet in energy. If you believe as Buffett does that more inflation is on the horizon, then it makes sense.'
Berkshire this month agreed to buy the 77.4 percent of railroad operator Burlington Northern Santa Fe Corp it did not already own for $26.4 billion.
While Berkshire on Sept 30 still owned shares of railroad operators Norfolk Southern Corp and Union Pacific Corp , Buffett has said he has sold these.
The value of Berkshire's disclosed portfolio of U.S.-listed equities grew 16 percent from the second quarter to $56.55 billion from $48.95 billion. Berkshire bought a net $1.45 billion of equities in the quarter.
Berkshire also reported increased stakes in Wells Fargo & Co and lowered stakes in oil company ConocoPhillips , credit rater Moody's Corp, NRG Energy Inc , SunTrust Banks Inc and health insurer WellPoint Inc.
It also reported no stake in Eaton Corp, after holding 2 million shares of the manufacturer of hydraulics and electrical control systems three months earlier.
Buffett has transformed Berkshire since 1965 into a roughly $160 billion conglomerate with close to 80 companies selling such things as candy, car insurance, ice cream and underwear.
In Monday trading, Berkshire Class A shares closed up $945 at $103,000, and its Class B shares rose $20.50 to $3,431.50.
In a U.S. Securities and Exchange Commission filing reporting U.S.-listed equity holdings as of Sept. 30, Berkshire said it held 3.4 million American depositary receipts of Nestle, the world's largest foodmaker, worth $144.7 million.
It also reported owning 1.28 million shares of Exxon Mobil, the world's largest oil company, valued at $87.6 million.
Berkshire also boosted its stake in Wal-Mart, the world's largest retailer, 90 percent from three months earlier, to 37.8 million shares worth $1.86 billion from 19.9 million shares.
While the companies are all household names, their shares have lagged the broader U.S. stock market since the market bottomed in March. Buffett favors undervalued stocks, and regularly buys even when economic conditions are weak.
'The general market has rocketed higher, but it may be that these businesses haven't participated as well,' said Justin Fuller, an analyst at Midway Capital Research & Management in Chicago and author of the Buffettologist.com blog.
Berkshire also reported new investments of $96.3 million in trash hauler Republic Services Inc, and $1.35 million in insurer Travelers Cos.
Omaha, Nebraska-based Berkshire did not immediately return a request for comment.
Buffett, the world's second-richest person, does not publicly discuss what he is buying and selling, or ordinarily explain purchases and sales revealed in quarterly SEC filings.
Monday's SEC filing includes investments made by Berkshire subsidiaries, including a portfolio at the car insurer Geico Corp overseen by Lou Simpson. Buffett has said investors should not assume all the reported investment decisions are his.
A separate SEC filing revealed that Berkshire had begun amassing its Exxon stake by the second quarter. The SEC occasionally lets Buffett delay disclosing investment activity so investors cannot copy him while he is buying and selling.
Soros Asset Management, overseen by billionaire George Soros, in a separate SEC filing revealed a stake in Berkshire itself and increased stakes in many blue-chip companies.
WHITHER KRAFT
Fuller said the Nestle stake appears surprising given Berkshire's reported $3.63 billion stake in Kraft Foods Inc , which last week launched a hostile bid for Britain's Cadbury Plc.
Yet he said Nestle could help Berkshire 'diversify away from Kraft. It is the classic Berkshire-type business in that it is easy to understand, and which has many good brands that people like to buy.'
He also said the added Wal-Mart stake 'makes more sense at a time consumers are more price-conscious,' while the Exxon stake could be 'indicative of Berkshire's large bet in energy. If you believe as Buffett does that more inflation is on the horizon, then it makes sense.'
Berkshire this month agreed to buy the 77.4 percent of railroad operator Burlington Northern Santa Fe Corp it did not already own for $26.4 billion.
While Berkshire on Sept 30 still owned shares of railroad operators Norfolk Southern Corp and Union Pacific Corp , Buffett has said he has sold these.
The value of Berkshire's disclosed portfolio of U.S.-listed equities grew 16 percent from the second quarter to $56.55 billion from $48.95 billion. Berkshire bought a net $1.45 billion of equities in the quarter.
Berkshire also reported increased stakes in Wells Fargo & Co and lowered stakes in oil company ConocoPhillips , credit rater Moody's Corp, NRG Energy Inc , SunTrust Banks Inc and health insurer WellPoint Inc.
It also reported no stake in Eaton Corp, after holding 2 million shares of the manufacturer of hydraulics and electrical control systems three months earlier.
Buffett has transformed Berkshire since 1965 into a roughly $160 billion conglomerate with close to 80 companies selling such things as candy, car insurance, ice cream and underwear.
In Monday trading, Berkshire Class A shares closed up $945 at $103,000, and its Class B shares rose $20.50 to $3,431.50.
U.S. Dollar Has A Long Way To Fall
China's right, the U.S. government wants to inflate its way out of debt.
Gold is soaring Monday, trading at $1131 per ounce. President Obama is in China, calling for a new relationship. New relationship, indeed! On the surface of this visit everyone is smiling. Immediately below surface the dollar is falling--again.
There is tremendous global finger-pointing today. Liu Mingkang, head of China’s CBRC, said that the combination of a weak dollar and low U.S. interest rates has spawned: "A huge carry trade” that was having a “massive impact on global asset prices … [It] is boosting speculative investment in stock and property markets and will pose new, real and insurmountable risks to the global recovery and particularly to the recovery in emerging markets."
Mr. Liu implied that the U.S. was purposely inflating away its massive debt. On the other hand IMF head Dominique Strauss-Kahn suggested that China must float her currency to ease the pain of her Asian neighbors and the European Union countries.
There are no "best" alternatives. Raising interest rates in the U.S. would be extremely painful and would derail the recovery. The U.S. needs at least 5% growth in GDP to support its huge and increasing debt load. Raising U.S. rates to defend the dollar is political nonstarter.
Last Tuesday China said, somewhat begrudgingly, that it would allow the yuan to appreciate. China now pegs the yuan to the U.S. dollar. This announcement was likely in response to pressure from China’s Asian neighbors (Thou Shalt Not Beggar Thy Neighbor). The Euro Union leaders have also felt the pain of a jointly weaker dollar and yuan. Time will tell how serious China is about the floating the yuan. Today once again the dollar is weaker--across the board--except for the yuan, where the peg has been maintained.
Wednesday the press was full of "dollar strength" rhetoric. Treasury Secretary Geithner said the U.S. needs a strong currency. "I believe deeply that it’s very important to the United States, to the economic health of the United States, that we maintain a strong dollar … Because of the important role the dollar plays in the international financial system, we bear a special responsibility for trying to make sure that we are implementing policies in the United States that will sustain confidence."
How many times have we heard this statement from Washington? There is a growing global fear that the U.S. greenback is beginning a longer and inexorable slide and that the reserve position of the U.S. currency will come under pressure. There is no replacement for that dollar reserve role today, and there may not be for a long time.
Fred Bergsten recently wrote in Foreign Affairs (Nov.-Dec. 2009) that it is clearly "in the best interest of the U.S." to move away from its sole role as keeper of the reserve currency. Running large external deficits in a reserve-currency country continually ignites bubbles. Rising deficits combined with a reserve currency causes inflows and lower rates. Professors Kenneth Rogoff and Niall Ferguson (Harvard) suggested on Bloomberg (Oct. 29) that the fiscal imbalances in the world are now greater than ever. U.S. fiscal policy and the existence of the reserve-currency status of the U.S. dollar are igniting the next round of bubbles. There may be very good reason why China tied its currency to the dollar and encouraged its citizens to buy gold and silver. Professor Ferguson foresees a sharp 10% selloff in the U.S. dollar from this level (75.04) and then a long, gradual decline. He also sees an imminent "tipping point" because of the evolving fiscal situation.
The U.S. needs inflation more than any country in the world. Bergsten recently said that given current relentless spending plans in Washington by 2030 the CBO projects the net debt will rise to $50 trillion and servicing that debt will require $2.5 trillion each year. At some point this service is unsustainable. The dollar will fall, long rates must rise to attract new capital, and inflation will reassert itself.
Why does the Fed want inflation? It is very simple: If you carry a lot of debt, inflation is your friend. The dollar will not be. We like the currencies of the commodity countries. Once again we quote Professor Ferguson, who says we are on the cusp of a 500-year event. He believes that China will be the engine that eventually emerges. "China is in the early phase of a massive buying spree to get the commodities she needs. … Load up on copper, load up on anything the Chinese want … the safest one-way trade you can make."
We think that the long-term dynamics of a falling dollar combined with the Chinese commodity-buying spree are good reasons to buy hard assets, not only gold and silver. Mining shares in the Canadian markets are good places to start. The loonie--definitely headed back to par-- and beyond. Please act accordingly.
Where do gold and silver prices head from here? As you can see, gold has continued its tremendous breakout since Sept. 1. It has risen from $958 to $1130 this AM (17.9%). Silver during this period has performed about as well. Copper is above the $3.03 per pound range this a.m. The real question: Is this a dollar carry trade bubble or is this the result of the world seeking protection from fiat currencies in hard assets and perhaps the nascent beginnings of a move toward a new currency standard? Are we slouching to Bethlehem to be reborn?
We think the hard assets need a rest here. But why fight the trend--it is indeed your friend here. Until there is some clarity on the U.S. fiscal policy and the Chinese peg to the dollar the imbalances will continue to build in the global financial system.
In the meantime we think Goldcorp ( GG - news - people ) is significantly undervalued. We like the up and coming gold stocks such as Goldcorp, Ventana Gold, Galway Resources and Antioquiain Colombia's prolific gold districts. On the silver front Quaterra Resources ( QMM - news - people ) announced last week that it is now infill drilling its silver discovery at Nieves in Mexico. We think this could double Quaterra’s silver resources from its current level of 17 million ounces. We own shares of Goldcorp and Quaterra Resources.
Gold is soaring Monday, trading at $1131 per ounce. President Obama is in China, calling for a new relationship. New relationship, indeed! On the surface of this visit everyone is smiling. Immediately below surface the dollar is falling--again.
There is tremendous global finger-pointing today. Liu Mingkang, head of China’s CBRC, said that the combination of a weak dollar and low U.S. interest rates has spawned: "A huge carry trade” that was having a “massive impact on global asset prices … [It] is boosting speculative investment in stock and property markets and will pose new, real and insurmountable risks to the global recovery and particularly to the recovery in emerging markets."
Mr. Liu implied that the U.S. was purposely inflating away its massive debt. On the other hand IMF head Dominique Strauss-Kahn suggested that China must float her currency to ease the pain of her Asian neighbors and the European Union countries.
There are no "best" alternatives. Raising interest rates in the U.S. would be extremely painful and would derail the recovery. The U.S. needs at least 5% growth in GDP to support its huge and increasing debt load. Raising U.S. rates to defend the dollar is political nonstarter.
Last Tuesday China said, somewhat begrudgingly, that it would allow the yuan to appreciate. China now pegs the yuan to the U.S. dollar. This announcement was likely in response to pressure from China’s Asian neighbors (Thou Shalt Not Beggar Thy Neighbor). The Euro Union leaders have also felt the pain of a jointly weaker dollar and yuan. Time will tell how serious China is about the floating the yuan. Today once again the dollar is weaker--across the board--except for the yuan, where the peg has been maintained.
Wednesday the press was full of "dollar strength" rhetoric. Treasury Secretary Geithner said the U.S. needs a strong currency. "I believe deeply that it’s very important to the United States, to the economic health of the United States, that we maintain a strong dollar … Because of the important role the dollar plays in the international financial system, we bear a special responsibility for trying to make sure that we are implementing policies in the United States that will sustain confidence."
How many times have we heard this statement from Washington? There is a growing global fear that the U.S. greenback is beginning a longer and inexorable slide and that the reserve position of the U.S. currency will come under pressure. There is no replacement for that dollar reserve role today, and there may not be for a long time.
Fred Bergsten recently wrote in Foreign Affairs (Nov.-Dec. 2009) that it is clearly "in the best interest of the U.S." to move away from its sole role as keeper of the reserve currency. Running large external deficits in a reserve-currency country continually ignites bubbles. Rising deficits combined with a reserve currency causes inflows and lower rates. Professors Kenneth Rogoff and Niall Ferguson (Harvard) suggested on Bloomberg (Oct. 29) that the fiscal imbalances in the world are now greater than ever. U.S. fiscal policy and the existence of the reserve-currency status of the U.S. dollar are igniting the next round of bubbles. There may be very good reason why China tied its currency to the dollar and encouraged its citizens to buy gold and silver. Professor Ferguson foresees a sharp 10% selloff in the U.S. dollar from this level (75.04) and then a long, gradual decline. He also sees an imminent "tipping point" because of the evolving fiscal situation.
The U.S. needs inflation more than any country in the world. Bergsten recently said that given current relentless spending plans in Washington by 2030 the CBO projects the net debt will rise to $50 trillion and servicing that debt will require $2.5 trillion each year. At some point this service is unsustainable. The dollar will fall, long rates must rise to attract new capital, and inflation will reassert itself.
Why does the Fed want inflation? It is very simple: If you carry a lot of debt, inflation is your friend. The dollar will not be. We like the currencies of the commodity countries. Once again we quote Professor Ferguson, who says we are on the cusp of a 500-year event. He believes that China will be the engine that eventually emerges. "China is in the early phase of a massive buying spree to get the commodities she needs. … Load up on copper, load up on anything the Chinese want … the safest one-way trade you can make."
We think that the long-term dynamics of a falling dollar combined with the Chinese commodity-buying spree are good reasons to buy hard assets, not only gold and silver. Mining shares in the Canadian markets are good places to start. The loonie--definitely headed back to par-- and beyond. Please act accordingly.
Where do gold and silver prices head from here? As you can see, gold has continued its tremendous breakout since Sept. 1. It has risen from $958 to $1130 this AM (17.9%). Silver during this period has performed about as well. Copper is above the $3.03 per pound range this a.m. The real question: Is this a dollar carry trade bubble or is this the result of the world seeking protection from fiat currencies in hard assets and perhaps the nascent beginnings of a move toward a new currency standard? Are we slouching to Bethlehem to be reborn?
We think the hard assets need a rest here. But why fight the trend--it is indeed your friend here. Until there is some clarity on the U.S. fiscal policy and the Chinese peg to the dollar the imbalances will continue to build in the global financial system.
In the meantime we think Goldcorp ( GG - news - people ) is significantly undervalued. We like the up and coming gold stocks such as Goldcorp, Ventana Gold, Galway Resources and Antioquiain Colombia's prolific gold districts. On the silver front Quaterra Resources ( QMM - news - people ) announced last week that it is now infill drilling its silver discovery at Nieves in Mexico. We think this could double Quaterra’s silver resources from its current level of 17 million ounces. We own shares of Goldcorp and Quaterra Resources.
Singapore Export Decline Eases Amid Gradual Recovery
Nov. 17 (Bloomberg) -- Singapore’s exports failed to recover as strongly as expected in October, giving policy makers a reason to be wary about exiting stimulus measures too soon.
Non-oil domestic exports dropped 6.1 percent from a year earlier, after a revised 7.3 percent contraction in September, the trade promotion agency said in a statement today. The median forecast of 10 economists surveyed by Bloomberg News was for a 0.2 percent gain.
The improvement in exports “has been gradual so far,” Brian Jackson, a senior strategist for emerging markets at the Royal Bank of Canada in Hong Kong, said in an e-mail. “This suggests that Singapore authorities will be cautious about the outlook for recovery and will want to keep a lid on currency appreciation against the dollar.”
The central bank said last month it will maintain a zero appreciation stance in its currency policy, after opting for a de-facto devaluation of the Singapore dollar in April to help reverse a collapse in exports. The global recovery “remains fragile” and growth in the coming quarters may be uneven, Asia- Pacific Economic Cooperation ministers said last week.
Singapore’s benchmark stock index fell 0.4 percent as at 2:19 p.m. today. The island’s currency was little changed at 1.3858 against the U.S. dollar.
Not All ‘Rosy’
“It is beginning to look as though not everything in Singapore’s garden is rosy right now,” Robert Prior-Wandesforde, a Singapore-based senior economist at HSBC Holdings Plc., said in an e-mail. “It’s most likely to prove a pause for breath after what has been an extremely rapid period of growth but clearly the situation needs watching closely.”
Singapore’s stock index has surged 57 percent this year as a global economic recovery increases sales at companies including Chartered Semiconductor Manufacturing Ltd. Improving exports are needed to sustain Asia’s emergence from the world recession after the region’s governments pumped more than $950 billion into their economies and cut interest rates to revive growth.
Japan’s economy expanded at the fastest pace in more than two years in the third quarter, led by a rebound in domestic demand, a report showed yesterday. The annual 4.8 percent increase in gross domestic product was the second straight advance after the nation’s deepest postwar recession.
Growth Forecast
Singapore’s government has raised its 2009 economic forecast twice this year after cutting corporate taxes and unveiling record spending to revive growth. The island’s $182 billion economy grew 0.8 percent in the third quarter from a year earlier, the first expansion in more than a year, according to an advanced estimate last month.
The country may report a smaller 0.5 percent increase in third-quarter GDP from a year earlier when it releases final estimates on Nov. 19, according to the median forecast of eight economists surveyed by Bloomberg News.
“Our base case scenario of a gradual global demand recovery and benign inflation environment remains intact,” said Alvin Liew, an economist at Standard Chartered Plc in Singapore.
Singapore’s non-oil exports fell a seasonally adjusted 12.6 percent last month from September, when they rose a revised 2.9 percent, today’s report showed.
Electronics shipments dropped 13.8 percent in October from a year earlier to S$4.85 billion ($3.5 billion), easing from a 14.4 percent decline in September. Non-electronics shipments, which include petrochemicals and pharmaceuticals, fell 0.5 percent in October after declining a revised 2.5 percent in September. Pharmaceutical shipments gained 24.8 percent.
The performance of Singapore’s pharmaceutical industry is volatile as production swings by companies such as Sanofi- Aventis SA can cause industrial output to fluctuate from month to month. Drug companies sometimes shut plants for cleaning before making different products.
Non-oil domestic exports dropped 6.1 percent from a year earlier, after a revised 7.3 percent contraction in September, the trade promotion agency said in a statement today. The median forecast of 10 economists surveyed by Bloomberg News was for a 0.2 percent gain.
The improvement in exports “has been gradual so far,” Brian Jackson, a senior strategist for emerging markets at the Royal Bank of Canada in Hong Kong, said in an e-mail. “This suggests that Singapore authorities will be cautious about the outlook for recovery and will want to keep a lid on currency appreciation against the dollar.”
The central bank said last month it will maintain a zero appreciation stance in its currency policy, after opting for a de-facto devaluation of the Singapore dollar in April to help reverse a collapse in exports. The global recovery “remains fragile” and growth in the coming quarters may be uneven, Asia- Pacific Economic Cooperation ministers said last week.
Singapore’s benchmark stock index fell 0.4 percent as at 2:19 p.m. today. The island’s currency was little changed at 1.3858 against the U.S. dollar.
Not All ‘Rosy’
“It is beginning to look as though not everything in Singapore’s garden is rosy right now,” Robert Prior-Wandesforde, a Singapore-based senior economist at HSBC Holdings Plc., said in an e-mail. “It’s most likely to prove a pause for breath after what has been an extremely rapid period of growth but clearly the situation needs watching closely.”
Singapore’s stock index has surged 57 percent this year as a global economic recovery increases sales at companies including Chartered Semiconductor Manufacturing Ltd. Improving exports are needed to sustain Asia’s emergence from the world recession after the region’s governments pumped more than $950 billion into their economies and cut interest rates to revive growth.
Japan’s economy expanded at the fastest pace in more than two years in the third quarter, led by a rebound in domestic demand, a report showed yesterday. The annual 4.8 percent increase in gross domestic product was the second straight advance after the nation’s deepest postwar recession.
Growth Forecast
Singapore’s government has raised its 2009 economic forecast twice this year after cutting corporate taxes and unveiling record spending to revive growth. The island’s $182 billion economy grew 0.8 percent in the third quarter from a year earlier, the first expansion in more than a year, according to an advanced estimate last month.
The country may report a smaller 0.5 percent increase in third-quarter GDP from a year earlier when it releases final estimates on Nov. 19, according to the median forecast of eight economists surveyed by Bloomberg News.
“Our base case scenario of a gradual global demand recovery and benign inflation environment remains intact,” said Alvin Liew, an economist at Standard Chartered Plc in Singapore.
Singapore’s non-oil exports fell a seasonally adjusted 12.6 percent last month from September, when they rose a revised 2.9 percent, today’s report showed.
Electronics shipments dropped 13.8 percent in October from a year earlier to S$4.85 billion ($3.5 billion), easing from a 14.4 percent decline in September. Non-electronics shipments, which include petrochemicals and pharmaceuticals, fell 0.5 percent in October after declining a revised 2.5 percent in September. Pharmaceutical shipments gained 24.8 percent.
The performance of Singapore’s pharmaceutical industry is volatile as production swings by companies such as Sanofi- Aventis SA can cause industrial output to fluctuate from month to month. Drug companies sometimes shut plants for cleaning before making different products.
U.S. Economy: Sales Rebound From Year’s Biggest Drop
Nov. 16 (Bloomberg) -- Retail sales in the U.S. rebounded more than forecast as demand for autos climbed, and a regional gauge of manufacturing showed expansion for a fourth month, easing concern the recovery will cool after government incentives end.
Purchases increased 1.4 percent in October after a 2.3 percent drop in September that was larger than the previously estimated, Commerce Department figures showed today in Washington. The Federal Reserve Bank of New York’s general economic index, where positive readings signal growth, fell to 23.5 this month from a five-year high of 34.6 in October.
Stocks added to a global rally after the reports signaled rising demand at retailers from discount chain TJX Cos. to luxury store Saks Inc. may foreshadow a better holiday shopping season, while General Motors Co. said demand is holding up this month. Fed Chairman Ben S. Bernanke today said “headwinds” of reduced credit and a weak labor market will probably restrain the recovery.
“Consumers are looking relatively resilient,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York, who projected sales would increase 1.3 percent. “They are spending a little more freely, which bodes well for the holiday season. Given the backdrop of the labor market, this is actually as good as one can hope for.”
Stocks Rise
Benchmark stock indexes reached 13-month highs, led by energy producers as crude oil prices climbed. The Standard & Poor’s 500 Index rose 1.5 percent to close at 1,109.3. Shares of retailers including Nordstrom Inc. and Saks rallied.
“Significant economic challenges remain,” Bernanke said in a speech to the Economic Club of New York. “The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible.”
A Commerce Department report today also showed inventories at U.S. businesses fell in September to the lowest level in almost four years, signaling orders will rise in coming months as spending picks up.
The 0.4 percent decrease in stockpiles was smaller than anticipated and brought the value of goods on hand down to $1.3 trillion, the fewest since November 2005. Sales decreased 0.3 percent, reflecting a slump in demand for autos that was reversed last month.
Forecast, Revision
Retail sales were projected to rise 0.9 percent after an originally reported 1.5 percent decline in September, according to the median estimate of 66 economists in a Bloomberg News survey. Forecasts ranged from gains of 0.4 percent to 1.8 percent.
Excluding autos, sales increased 0.2 percent, less than anticipated, after a 0.4 percent gain in September.
Sales at automobile dealerships and parts stores jumped 7.4 percent in October after a 14 percent plunge the prior month that was larger than previously estimated.
Auto demand is stabilizing after plunging to a three- decade low earlier this year. GM and Ford Motor Co. last month had their first combined sales gain in three years, helping the industry rebound from a plunge in September. Overall sales climbed to a 10.5 million annual rate from 9.2 million.
Fritz Henderson, GM’s chief executive officer, said in a Bloomberg Television interview today that November’s sales pace will be about the same as last month’s.
Broad-Based Gains
Car dealers aren’t the only retailers to see improvement. Sales climbed at clothing, department and health and personal care stores, along with Internet retailers and restaurants, today’s report showed. Furniture, electronic and building supply stores all showed declines, signaling the rebound in housing will be slow to develop.
Sales at stores open at least a year climbed last month from a year earlier at Framingham, Massachusetts-based TJX, owner of T.J. Maxx and Marshalls stores that sell designer goods at discounted prices. Luxury chains Saks and Nordstrom also showed gains, helping the retail industry report its biggest same-store sales increase since July 2008.
Wal-Mart Stores Inc., the world’s largest retailer, raised its annual profit forecast while predicting U.S. sales may be little changed this quarter. Bentonville, Arkansas-based Walmart plans to cut prices weekly, and offer discounts on items such as flat-panel televisions to win holiday shoppers.
“While the economy remains challenging for our customers and therefore for Walmart sales, I continue to be encouraged by both our traffic and market-share gains,” Chief Executive Officer Mike Duke said on a pre-recorded conference call last week.
Exports, Inventories
Exports that have increased five straight months, a weaker dollar and lean inventories have combined to keep factories busy. Economic growth will be stronger over coming quarters than previously anticipated reflecting the pickup in manufacturing, according to a Bloomberg survey of economists taken Nov. 2 to Nov. 9.
Consumer spending will be slower to rebound as unemployment exceeds 10 percent through the first half of 2010, economists surveyed projected.
Payrolls fell by 190,000 in October and the jobless rate jumped to 10.2 percent, topping 10 percent for the first time since 1983. Concern about jobs and incomes pushed consumer sentiment down to a three-month low in November, according to a report from Reuters/University of Michigan last week.
Purchases increased 1.4 percent in October after a 2.3 percent drop in September that was larger than the previously estimated, Commerce Department figures showed today in Washington. The Federal Reserve Bank of New York’s general economic index, where positive readings signal growth, fell to 23.5 this month from a five-year high of 34.6 in October.
Stocks added to a global rally after the reports signaled rising demand at retailers from discount chain TJX Cos. to luxury store Saks Inc. may foreshadow a better holiday shopping season, while General Motors Co. said demand is holding up this month. Fed Chairman Ben S. Bernanke today said “headwinds” of reduced credit and a weak labor market will probably restrain the recovery.
“Consumers are looking relatively resilient,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York, who projected sales would increase 1.3 percent. “They are spending a little more freely, which bodes well for the holiday season. Given the backdrop of the labor market, this is actually as good as one can hope for.”
Stocks Rise
Benchmark stock indexes reached 13-month highs, led by energy producers as crude oil prices climbed. The Standard & Poor’s 500 Index rose 1.5 percent to close at 1,109.3. Shares of retailers including Nordstrom Inc. and Saks rallied.
“Significant economic challenges remain,” Bernanke said in a speech to the Economic Club of New York. “The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible.”
A Commerce Department report today also showed inventories at U.S. businesses fell in September to the lowest level in almost four years, signaling orders will rise in coming months as spending picks up.
The 0.4 percent decrease in stockpiles was smaller than anticipated and brought the value of goods on hand down to $1.3 trillion, the fewest since November 2005. Sales decreased 0.3 percent, reflecting a slump in demand for autos that was reversed last month.
Forecast, Revision
Retail sales were projected to rise 0.9 percent after an originally reported 1.5 percent decline in September, according to the median estimate of 66 economists in a Bloomberg News survey. Forecasts ranged from gains of 0.4 percent to 1.8 percent.
Excluding autos, sales increased 0.2 percent, less than anticipated, after a 0.4 percent gain in September.
Sales at automobile dealerships and parts stores jumped 7.4 percent in October after a 14 percent plunge the prior month that was larger than previously estimated.
Auto demand is stabilizing after plunging to a three- decade low earlier this year. GM and Ford Motor Co. last month had their first combined sales gain in three years, helping the industry rebound from a plunge in September. Overall sales climbed to a 10.5 million annual rate from 9.2 million.
Fritz Henderson, GM’s chief executive officer, said in a Bloomberg Television interview today that November’s sales pace will be about the same as last month’s.
Broad-Based Gains
Car dealers aren’t the only retailers to see improvement. Sales climbed at clothing, department and health and personal care stores, along with Internet retailers and restaurants, today’s report showed. Furniture, electronic and building supply stores all showed declines, signaling the rebound in housing will be slow to develop.
Sales at stores open at least a year climbed last month from a year earlier at Framingham, Massachusetts-based TJX, owner of T.J. Maxx and Marshalls stores that sell designer goods at discounted prices. Luxury chains Saks and Nordstrom also showed gains, helping the retail industry report its biggest same-store sales increase since July 2008.
Wal-Mart Stores Inc., the world’s largest retailer, raised its annual profit forecast while predicting U.S. sales may be little changed this quarter. Bentonville, Arkansas-based Walmart plans to cut prices weekly, and offer discounts on items such as flat-panel televisions to win holiday shoppers.
“While the economy remains challenging for our customers and therefore for Walmart sales, I continue to be encouraged by both our traffic and market-share gains,” Chief Executive Officer Mike Duke said on a pre-recorded conference call last week.
Exports, Inventories
Exports that have increased five straight months, a weaker dollar and lean inventories have combined to keep factories busy. Economic growth will be stronger over coming quarters than previously anticipated reflecting the pickup in manufacturing, according to a Bloomberg survey of economists taken Nov. 2 to Nov. 9.
Consumer spending will be slower to rebound as unemployment exceeds 10 percent through the first half of 2010, economists surveyed projected.
Payrolls fell by 190,000 in October and the jobless rate jumped to 10.2 percent, topping 10 percent for the first time since 1983. Concern about jobs and incomes pushed consumer sentiment down to a three-month low in November, according to a report from Reuters/University of Michigan last week.
Monday, November 16, 2009
Economic Conditions Snapshot, November 2009
McKinsey Global Survey results: Executives' optimism about the economy continues to climb, but they're a little less sure about their own companies' prospects.
For the first time in a year, a majority of respondents--51%--say economic conditions in their countries are better now than they were in September 2008, according to a survey in the field during the last week of October, a volatile week for stock markets.A larger share of executives also expects the good news to continue, with 47% expecting GDP growth to return to pre-September 2008 levels in 2010 or 2011, compared with 40% six weeks ago. Although the global news is good, there are marked regional differences; executives in the developed countries of Asia are generally the most optimistic and those in Europe are the least.
However, a majority of executives around the world share the prevailing skepticism about consumers: When asked to name the biggest threat to future economic growth and to the growth of their own companies, more cite low consumer demand than anything else. Ineffective government regulation is the next biggest economic concern, respondents indicate, followed by losing business to low-cost competitors.
Looking ahead, respondents' views on company profits and workforce size haven't changed meaningfully in the past six weeks. Pluralities still expect increased profits in 2009 and no change in their workforces through the first quarter of 2010. Here, too, however, there are notable regional differences.
Where Economic Optimism Is Highest
Although 51% of all respondents say economic conditions are better than they were last September, only 19% say an upturn has begun. This figure rises to a remarkable 33%, however, among respondents in Asia's developed countries. And about a quarter of those--more than in any other developed region--also say the best way to describe the global economy through the end of the first quarter of 2010 is "regenerated global momentum."
Respondents identify several potential stumbling blocks to economic growth, most often low consumer demand. Other potential barriers to growth vary by whether respondents expect their nations' GDPs to increase or decrease. In countries where executives expect an increase in GDP, more are also worried about currency values and inflation; in countries where executives expect a decrease, they are notably more concerned about ineffective regulation.
For the first time in a year, a majority of respondents--51%--say economic conditions in their countries are better now than they were in September 2008, according to a survey in the field during the last week of October, a volatile week for stock markets.A larger share of executives also expects the good news to continue, with 47% expecting GDP growth to return to pre-September 2008 levels in 2010 or 2011, compared with 40% six weeks ago. Although the global news is good, there are marked regional differences; executives in the developed countries of Asia are generally the most optimistic and those in Europe are the least.
However, a majority of executives around the world share the prevailing skepticism about consumers: When asked to name the biggest threat to future economic growth and to the growth of their own companies, more cite low consumer demand than anything else. Ineffective government regulation is the next biggest economic concern, respondents indicate, followed by losing business to low-cost competitors.
Looking ahead, respondents' views on company profits and workforce size haven't changed meaningfully in the past six weeks. Pluralities still expect increased profits in 2009 and no change in their workforces through the first quarter of 2010. Here, too, however, there are notable regional differences.
Where Economic Optimism Is Highest
Although 51% of all respondents say economic conditions are better than they were last September, only 19% say an upturn has begun. This figure rises to a remarkable 33%, however, among respondents in Asia's developed countries. And about a quarter of those--more than in any other developed region--also say the best way to describe the global economy through the end of the first quarter of 2010 is "regenerated global momentum."
Respondents identify several potential stumbling blocks to economic growth, most often low consumer demand. Other potential barriers to growth vary by whether respondents expect their nations' GDPs to increase or decrease. In countries where executives expect an increase in GDP, more are also worried about currency values and inflation; in countries where executives expect a decrease, they are notably more concerned about ineffective regulation.
Friday, November 13, 2009
Warren Buffett: The financial panic is over
NEW YORK (Reuters) - Warren Buffett, perhaps the world's most admired investor, said on Thursday the financial panic that gripped the globe last year is a thing of the past, even as the U.S. economy's struggles persist.
"The financial panic is behind us," the world's second-richest person said at Columbia University's business school. "Our economy was sputtering, still is sputtering some."
Buffett, 79, nevertheless said there is greater opportunity for investments inside the United States than outside, noting that the U.S. economy is far larger than any other.
He appeared at Columbia with Microsoft Corp founder Bill Gates, the world's richest person and a Buffett friend and bridge partner.
Last month, preliminary government data showed the U.S. economy expanded in the third quarter, the first three-month period of growth since the second quarter of 2008.
Nonetheless, the U.S. unemployment rate last month reached 10.2 percent, the first double-digit reading in 26 years.
Buffett last week made a big bet on the U.S. economy when his Berkshire Hathaway Inc agreed to pay about $26.4 billion for the 77 percent of railroad company Burlington Northern Santa Fe Corp that it did not already own.
"There will be more people in this country, 10, 20, 30 years from now," Buffett said. "They'll be moving more and more goods back and forth to each other and the most environmentally friendly and cost-efficient way of doing that is railroads."
Buffett said rail transport uses one-third less fuel and pollutes the air less than trucks, and that one train can supplant about 280 trucks.
Gates, who is also a Berkshire director, said other sectors might also boost the economy over the long term, including information technology, energy and medicine.
Separately, Buffett advised the U.S. government not to coddle companies that need bailouts to survive or preserve capital.
"More sticks are called for," he said.
Buffett gave Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Timothy Geithner "high marks" for how they managed the financial crisis.
The billionaire has praised Bernanke in the past, while mocking Geithner's stress tests for banks.
Thursday, November 12, 2009
Purchasing Managers Index
The Purchasing Managers Index (PMI) is an indicator for economic activity. Roughly speaking it reflects the percentage of purchasing managers in a certain economic sector that reported better business conditions than in the previous month.
A PMI index over 50 indicates that the economy is expanding while anything below 50 means that the economy is contracting.
Composition of the PMI
The original PMI is issued since 1948 by the Institute for Supply Management in Tempe, AZ. The data for the index are collected through a survey among 400 purchasing managers in the manufacturing sector on five different fields, namely, production level, new orders from customers, speed of supplier deliveries, inventories and employment level. Respondents can report either better, same or worse conditions than previous months.
For all these fields the percentage of respondents that reported better conditions than the previous months is calculated. The five percentages are multiplied by a weighing factor (the factors adding to 1) and are added.
Currently, PMI’s for other economic sectors and other geographical zones are issued by different organizations.
Uses of the PMI
The PMI report is an extremely important indicator for the financial markets as it is considered the best indicator of factory production. The index is popular for detecting inflationary pressure as well as manufacturing economic activity, both of which investors pay close attention to. The PMI is not as strong as the CPI in detecting inflation, but because the data is released one day after the month it is very timely.
Should the PMI report an unexpected change, it is usually followed by a quick reaction in stocks. One especially key area of the report is growth in new orders, which predicts manufacturing activity in future months.
Strengths
Extremely timely, the PMI is released one working day after the month to which it refers.
The PMI is often used to help predict the Producer Price Index which is released later in the month.
By many it is considered to be the best snapshot of the factory sector. It is a very worth while thing to do and is a big benefit in the long run.
Weaknesses
The survey gives three possible responses - fast, same, slower. Therefore results are not that specific.
The index leaves out employment costs, which are a large portion of manufacturing costs.
A PMI index over 50 indicates that the economy is expanding while anything below 50 means that the economy is contracting.
Composition of the PMI
The original PMI is issued since 1948 by the Institute for Supply Management in Tempe, AZ. The data for the index are collected through a survey among 400 purchasing managers in the manufacturing sector on five different fields, namely, production level, new orders from customers, speed of supplier deliveries, inventories and employment level. Respondents can report either better, same or worse conditions than previous months.
For all these fields the percentage of respondents that reported better conditions than the previous months is calculated. The five percentages are multiplied by a weighing factor (the factors adding to 1) and are added.
Currently, PMI’s for other economic sectors and other geographical zones are issued by different organizations.
Uses of the PMI
The PMI report is an extremely important indicator for the financial markets as it is considered the best indicator of factory production. The index is popular for detecting inflationary pressure as well as manufacturing economic activity, both of which investors pay close attention to. The PMI is not as strong as the CPI in detecting inflation, but because the data is released one day after the month it is very timely.
Should the PMI report an unexpected change, it is usually followed by a quick reaction in stocks. One especially key area of the report is growth in new orders, which predicts manufacturing activity in future months.
Strengths
Extremely timely, the PMI is released one working day after the month to which it refers.
The PMI is often used to help predict the Producer Price Index which is released later in the month.
By many it is considered to be the best snapshot of the factory sector. It is a very worth while thing to do and is a big benefit in the long run.
Weaknesses
The survey gives three possible responses - fast, same, slower. Therefore results are not that specific.
The index leaves out employment costs, which are a large portion of manufacturing costs.
Strong industry data adds to stimulus debate
NEW DELHI (Reuters) - India's industrial output grew a faster-than-expected 9.1 percent in September from a year earlier, helped by stimulus measures and adding to the debate over when the government should pull back from its aggressive policies to drive growth.
The increase in industrial output topped expectations in a Reuters poll, and August's annual growth was revised up to 11 percent from 10.4 percent, data showed on Thursday.
"It's extremely strong. Month-on-month it has grown about 17 percent annualised after seasonal adjustments. If this pick-up is not because of consumption then it won't sustain," said Ramya Suryanarayanan, economist at DBS in Singapore.
"The rise is mainly on account of pent-up demand," she said, expecting the rate of industrial output growth would moderate in October and November.
Yields on the 10-year bond rose 2 basis points following the data release.
Consumer durable goods output surged by an annual 22.2 percent as stimulus measures, festivals and wage back-pay to government staff boosted demand.
Manufacturing production in Asia's third-largest economy rose 9.3 percent in September from a year earlier, while mining output was up 8.6 percent and power generation rose 7.9 percent.
"It is much above expectations, even if you adjust for the positives ahead of Diwali in October. It is reiterating the fact that the policy environment continues to support industrial growth," Jyotinder Kaur, economist at HDFC Bank in new Delhi.
"I think the RBI will hike the repo and reverse repo rates at the January policy, but banks are not likely to immediately follow by raising lending rates. That will maintain sweet spot for industrial growth," Kaur said.
India's industrial output growth, which expanded for the ninth consecutive month, still lagged neighbouring China's 13.9 percent growth in September.
On Wednesday, China reported October factory output growth surged to a 19-month high of 16.1 percent, a sign the world's third-largest economy had put the worst of the global downturn behind it.
The October purchasing managers' index for India showed the pace of manufacturing activity picked up as domestic demand and factory orders rose.
BAD MONSOON
Faster output at factories, mines and utilities has helped offset a decline in farm output after the weakest monsoon in nearly four decades and then floods in parts of the country hurt crops and pushed up food prices.
Price pressures in recent months have strengthened the view the central bank could start tightening from early next year.
Economists think the first policy shift could be an increase in the cash reserve ratio for banks in the December quarter.
On Sunday, Prime Minister Manmohan Singh said the economy could still grow by 6.5 percent in 2009/10 (April-March), compared with 6.7 percent last year and 9 percent or more in each of the previous three years.
Officials have said the country still had to wait before unwinding stimulus efforts as the economy was not operating at full capacity, and said the inflationary impact of India's stimulus measures was likely to be minimal.
Last month, Reserve Bank of India kept its key lending rate unchanged after cutting it by 425 basis points between October and April as the global downturn hit the economy harder than expected. It also slashed banks' reserve requirements and pumped liquidity into markets.
Indirect tax collections drop 13% to Rs 25,495 cr in Oct
NEW DELHI: Excise and service tax collections continued to decline despite signs of a pick up in manufacturing and a general revival in the economic
activity, bringing into question the strength of the economic recovery underway and weakening the case for any immediate withdrawal of the fiscal stimulus. The contraction in customs duty was, however, not surprising with imports still falling at over 30% rates in recent months.
Total indirect tax collections, including excise duty, customs and service tax, dropped 12.95% to Rs 25,495 crore in October 2009 over corresponding month last year. However, October collections look better when stacked against September 2009 mop-up, suggesting some improvement.
The month-on-month contraction in excise collection is particularly surprising given the strong evidence of pick-up in manufacturing, which had grown a strong 10.4% in August 2009, the latest month for which data is available. The manufacturing looks to be still doing well. October had witnessed strong cement despatches and automobile sales have touched highest ever in any month.
“It may be too early to draw any conclusion on the trend,” a finance ministry official said. The government had indeed cut factory levies to shield the country from the global financial crisis. That could be one explanation for the week excise collections. The financial services sector, one of the largest contributor to the service tax, has also shown some recovery. Another official in the ministry, however, said a detailed analysis was yet to be carried out.
But the overall contraction in service tax collections does not square with the official 6.5% estimate of national income or GDP growth in the economy. Services have an over 55% share in the GDP, measured at current price.
The government’s total indirect tax collections for April-October 2009 are only 47% of the total budgeted collection from customs, excise and service tax levy for 2009-10. The lower than budgeted collection will put further pressure on government finances.
“We can’t continue to have fiscal deficit in the order of 6.8% of gross domestic product,” Mr. Rangarajan said. “We need to cut it by at least 1%-1.5% next (fiscal) year.”But any premature withdrawal of the stimulus runs the risk of affecting the economic recovery.
activity, bringing into question the strength of the economic recovery underway and weakening the case for any immediate withdrawal of the fiscal stimulus. The contraction in customs duty was, however, not surprising with imports still falling at over 30% rates in recent months.
Total indirect tax collections, including excise duty, customs and service tax, dropped 12.95% to Rs 25,495 crore in October 2009 over corresponding month last year. However, October collections look better when stacked against September 2009 mop-up, suggesting some improvement.
The month-on-month contraction in excise collection is particularly surprising given the strong evidence of pick-up in manufacturing, which had grown a strong 10.4% in August 2009, the latest month for which data is available. The manufacturing looks to be still doing well. October had witnessed strong cement despatches and automobile sales have touched highest ever in any month.
“It may be too early to draw any conclusion on the trend,” a finance ministry official said. The government had indeed cut factory levies to shield the country from the global financial crisis. That could be one explanation for the week excise collections. The financial services sector, one of the largest contributor to the service tax, has also shown some recovery. Another official in the ministry, however, said a detailed analysis was yet to be carried out.
But the overall contraction in service tax collections does not square with the official 6.5% estimate of national income or GDP growth in the economy. Services have an over 55% share in the GDP, measured at current price.
The government’s total indirect tax collections for April-October 2009 are only 47% of the total budgeted collection from customs, excise and service tax levy for 2009-10. The lower than budgeted collection will put further pressure on government finances.
“We can’t continue to have fiscal deficit in the order of 6.8% of gross domestic product,” Mr. Rangarajan said. “We need to cut it by at least 1%-1.5% next (fiscal) year.”But any premature withdrawal of the stimulus runs the risk of affecting the economic recovery.
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