Putting the spice back into investing.

Christmas hiatus

Friday, December 19, 2003
I'd like to thank all my readers for their visits over the past couple of months. I was really overwhelmed by the amount of interest this blog was able to generate in the short time it has existed. I will be on vacation from today until January 5th so blogging will be light at best 'till then - I probably won't be in the mood to post at all.

I wish all readers a fantastic holiday season and a great start into a healthy and successfull 2004.
12:14 PM :: Karsten :: permalink ::

Call me a prophet

Tuesday, December 16, 2003
Yesterday saw me finishing a post with "Everyone's been seling the dollar because they haven't caught Osama!". What do I see on Reuters today? Analysts See Bigger Stock Rally - If Bin Laden Found. Here my other secret predictions:

Analysts see rally if Loch Ness Monster found.
Stocks will rise if it becomes known that aliens are investing in Oracle.
Elvis rings the NYSE opening bell - stocks rise!

Curry in the news

Here. Did you think it was about me? :-)

Data Watch

Industrial production is picking up steam as restocking contributes to a higher number. Manufacturing surveys have been leading us to expect a positive number. Capacity utilization is rising but still way below anything which might be deemed inflationary. Output of construction supplies has been on the rise for five months now - not an astounding fact if you look at the data on Housing Starts.

Speaking of which: residential construction has been a pillar of economic strength this year. Keep in mind that every house built employs workers that can't be offshored to China or India. That is why good housing numbers also mean stable employment in the housing sector.

Disinflation is still the name of the game with the CPI down 0.2%.

All this data just reinforces my view that the Fed can afford to keep rates low for a very long time (into 2005). There is still a large amount of slack in the economy which can easily absorb even high growth rates. Wage pressure is absent (because jobs are absent as well) and will only appear if and when the labor market looks much tighter than it does today. Restocking should continue and serve as a catalyst for industrial output into the first two quarters. What happens then is anyone's guess - you'll know by now that I'm call this recovery a mini-cycle until I see signs of normal demand - i.e. no spending of tax rebates and mortgage refinancings. My mantra is: jobs, jobs, jobs.

In related news: the current account deficit shrank to around 135 billion in the third quarter. The greenback couldn't profit from this news and is still hanging around 1.23 vs. the euro.

Good News from the Empire State

Monday, December 15, 2003
The Federal Reserve Bank of New York's Empire State Manufacturing Survey index was down but there was good news in the details. Employment (and employment intentions) and future capital spending were up. These are things that like to see with regard to a firming up of the recovery.

Quote(s) of the day

Prize goes to Tomoko Fujii, economic and market analyst at Nikko Citigroup, who said:

"When you think about it, the capture does not really mean that terrorism will completely disappear, or erase the U.S. deficit"

Oh no. Really? Next thing he'll she'll tell me the earth isn't really flat (Thanks Jakub).

Another pearl of oriental wisdom comes from Tohru Sasaki, chief forex strategist at JP Morgan Chase:

"Saddam's capture alone isn't going to change the state of the dollar right now, because in contrast, it's not like dollars were being sold because he had not been arrested (until now)"

Of course not. Everyone's been seling the dollar because they haven't caught Osama!

Morning Update

The Nikkei is up around 3.2% on the back of the Saddam news. Should bode well for a higher opening in Europe. German politicians agreed on a diluted version of the government's plans to speed up reforms overnight as well. This will lead to individual tax rates falling and brings further micro-reforms to the labor market.

Saddam rally?

Sunday, December 14, 2003
Most commentators I've seen or heard today seem to think that the bagging of Saddam will lead to equities popping up right out of the open tomorrow. The reason being that the arrest reduces chances of more terrorist type attacks. Well, maybe (although I do agree with eminent members of the blogosphere who think that this might lead to a flurry of new bombings in retribution). Any sudden rise in prices will lead to one thing for certain - performance panic. Just imagine that you manage 3rd party assets and were too "dumb" to see that equities were the place to invest! You better think of something before the 31st... Drowning your sorrow in eggnog might help - buying high beta stocks with high index weights could work even better.

An Early Christmas Present

Looks like coalition forces bagged Saddam. Hope this is true.

Three C's for 2004

Saturday, December 13, 2003
Ah yes, the holiday season is here. Chestnuts roasting on an open fire, sleigh rides through the fields and pundits of all flavors and colors ruminating about what 2004 will bring us in their various areas of expertise. That's enough of a reason for me to offer you my opinions about what subjects I think will be important next year. It just so happens that I could easily think of around 20 things to write about - as I'm suffering from a cold and not really in a mood to overly engage my brain, I present you with the three (four if you count my cold) C's for the day:

The big question is "what will the dollar do next year?". If you've been following this blog you'll know that I'm somewhat puzzled about policy makers in Japan and Europe with regard to their stance to their currencies appreciaton. This is especially true in the Eurozone. Exports outside the common currency area account for a massive chunk of Eurozone GDP (around 20%). This could lead to the ECB finally lowering rates and/or intervening outright.

China has been one of the engines of economic growth in 2003. The question to ask is "How long will this continue?". I freely admit that China puzzles me. I've seen clients rush into to China on the basis of pure momentum and news reports which suggest that the China offers near-boundless returns. I've also seen some of these people lose their shirts. I see two basic with regard to China: one is the decrepit banking system and the other is the very simple fact that foreign investor's enthusiasm might just start to fade going forward. The danger is that a braking China will leave skid-marks all over the world economy (think late 90's Asian crisis).

Consumer Demand
I keep going on about the current recovery being a kind of mini-cycle which will burn itself out by the middle of 2004. Tax incentives and cheap credit have delivered windfalls to consumers which they then have gone on to spend. There is no telling if all this spending will go on past Q2 2004 when most effects will have phased themselves out. The stagnant labor market has not yet convinced me that all the stimulus has yet managed to kick start a sustainable recovery. If you look at Europe you'll see that consumer demand is still extremely sluggish and labor market reforms - which would lead to higher GDP growth - are some ways off.

The King of Bonds on Investing in a Reflationary Scenario

Friday, December 12, 2003
Bill Gross finishes the year with an extremly readable Investment Outlook. A little excerpt follows:
Not that inflation’s spectre will immediately haunt us. There’s too much spare capacity and unemployment to produce much beyond the standard 2-3% forecast in the next year or so. But markets anticipate, often incorrectly, yet still they anticipate. $800 gold in 1981 and NASDAQ 5,000 three years ago are graphic examples of investors extending trends into the hereafter. This current reflationary reversal, however, remains in its infancy – in fact there are justifiable reasons to doubt its longevity – globalization, productivity, and such. If it climbs in future years, it will climb that wall of worry that stocks are often accustomed to.

Fed Semantics

Wednesday, December 10, 2003
The FOMC said this:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 1 percent.

The Committee continues to believe that an accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing important ongoing support to economic activity. The evidence accumulated over the intermeeting period confirms that output is expanding briskly, and the labor market appears to be improving modestly. Increases in core consumer prices are muted and expected to remain low.

The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. However, with inflation quite low and resource use slack, the Committee believes that policy accommodation can be maintained for a considerable period.

I've highlighted changes vs. last month's statement. I interpret the statement to mean that we've moved from an easing bias to a neutral bias. Last month the statement said "The Committee judges that, on balance, the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future." This fear of deflation seems to have evaporated. There is no reason to raise rates as "resource use [is] slack". This is obvious - capacity utilization is still pretty low and the state of the labor market does not induce fear of wage driven inflation. Two factors in the current scenario (high productivity, high growth) almost form a neutral with regard to jobs creation. In my view growth has to outpace productivity gains for job creation to ensue.

The 64,000 USD question is: how long is the cited "considerable period"? My guess ist that we won't be seeing any large inflationary pressure going into 2004. So, no rate moves until (at least) Q4 2004.
12:58 PM :: Karsten :: permalink ::

New Blog

Tuesday, December 09, 2003
A new investing/market blog is born! Be sure to visit Charles Rotblut's Stock Market Commentary for "analysis and commentary on stocks, investing, the equity markets, and the U.S. economy by Charles Rotblut. Charles is a Chartered Financial Analyst and the Director of Financial Content for INVESTools, Inc."

I've added Charles to my blogroll and am pretty sure that we can look forward to lots of interesting commentary from him.

Back to blogging...

Monday, December 08, 2003
Well not really - there's nothing much going on today. Trading pretty lackluster and the dollar is still under pressure. There was a nice comment by Barclay's Steve Englander (via Bloomberg):

``If the market could find another currency to buy besides the euro it would gladly do it, because of concerns about the sustainability of European growth, particularly with a strong euro,'' Barclays' Englander said. Investors are reluctant to buy the yen because of the prospect the Japanese central bank will sell the currency, Englander said.

My sentiments exactly. With the central bank's finger poised above the "sell" button Yen trades are getting somewhat dangerous. So the euro is the escape valve currency of last resort - although there is really no fundamental reason to buy! Maybe I should start looking at the swissie?

My call: way off

Friday, December 05, 2003
From Reuters:

U.S. payrolls edge up 57,000 in November

WASHINGTON, Dec 5 (Reuters) - American employers hired far fewer workers than expected in November, the government said on Friday in a report that still showed the fourth straight month of job growth and a drop in the unemployment rate.

The number of workers on U.S. payrolls outside the farm sector in November edged up by 57,000, the Labor Department said, from an upwardly revised climb of 137,000 the previous month.

The November gain was far lower than forecasts for a bumper increase of 150,000. Analysts had ratcheted up their forecasts after recent data showed the economic recovery gaining strength.

The department said grocery store strikes, mainly affecting California, had added up to 20,000 jobs to October's gain and deducted up to 30,800 workers from November's number. In an encouraging sign for the health of the labor market,
the unemployment rate edged down to 5.9 percent, the lowest level since March, from 6.0 in October. A large portion of the job gains came in the services sector while struggling factories cut jobs for the 40th month in a row.

My call: Payrolls

+140k (10k below consensus).
BTW - no blogging this weekend. See you all on Monday!
11:41 AM :: Karsten :: permalink ::

Gold on a Stairway to Heaven?

Thursday, December 04, 2003
There's a lady who's sure all that glitters is gold
And she's buying a stairway to heaven
And when she gets there she knows if the stores are closed
With a word she can get what she came for

Following the tradition of the CurryBlog sing-along leads us to the fabulous Page/Plant classic "Stairway to Heaven" today. A little fiddling with the lyrics gives us:

There's an investor who's sure all that glitters is gold
And he's bidding it right up to heaven
And when it gets there he knows if currencies are hosed
With the gold he can get what he came for

Gold has been the success story of the past couple of months. The question is only why? Gold is no longer the foundation of the international monetary system, it offers no interest and inflation is subdued. So why buy the stuff? I'd like to offer two more or less simple explanations:

1) We're looking at a pure speculative bubble
2) There is another reason

I won't go into 1) in any detail because we all should know what a bubble is. 2) is much more interesting. In this post I talked about the fact that gold could remain the "last man standing" if central banks all try to devalue their currencies vs. the US dollar - this is the still the essence of my argument.

The US economy is looking very robust - a result of massive monetary and fiscal stimulus over the past couple of years. In the words of Dr. Ed:

My main investment recommendation since late last year has been to bet on the presidential election cycle. I recently observed that we are experiencing not just a classic rerun of this cycle, but the textbook version. The Bush administration is doing everything that is legally possible to win a second term for the President. They've cut taxes for just about everyone. The President hasn't vetoed a single spending program passed by Congress. He is about to significantly expand government spending on healthcare with a new drug prescription benefit program for senior citizens. He has slapped tariffs on steel imports. Recently, he did the same on selected textile imports from China. The President has even sought to please anti-Castro Cuban voters in Florida by tightening the ban on travel to Cuba.

The problem with all this stimulus is that it can only go so far. Interest rates won't fall past zero and the government can't keep paying people to go shopping. But there is one lever left to pull: the dollar. Continuing dollar weakness would help turn the current mini-cycle into a sustained recovery. The pressure on China to revalue the yuan is just one example of trying to talk the dollar down - a marked departure from the strong dollar rhetoric of the past.

The fly in the ointment is the simple fact that most other countries desperately need a strong - or at least stable - dollar to combat deflationary tendencies (i.e. Japan) and to secure adequate prices for exports. Asian countries have been very actively intervening in the foreign exchange markets to keep the dollar from falling into a pit vs. their currencies. Just look at the level of foreign purchases of Treasuries, Agencies and Corporates over the past 12 Months! Something had to give - and it did.

A quick look at the relative performance of the euro and yen vs. the greenback shows that both made large gains against the dollar (with the euro rising more). September and October saw the Japanese reducing their pace of US bond purchases - something which led then Yen to leave its stable, intervention induced, trading range. The euro just got squeezed upwards - interest rate differentials and growth prospects do not explain the rise vs. the dollar.

Now imagine the ECB entering the arena of competetive devaluation. The bank could just start printing money to buy USD. This could lead to two positive effects - the dollar could recover some ground and a measure of inflation could be introduced into the European economies. The only problem could be the fact that pure monetary stimulus might not help the economy (see Japan!) and that other central banks might start to intervene vs. the ECB thus mopping up any excess liquidity. This could then start another round of USD buying by the ECB and so on and so forth. Voila! Competitive devaluation!

In this kind of situation gold could remain the "last man standing". The low interest rate environment reduces the opportunity costs of holding gold which could act as further positive impetus. If you follow through with this scenario you'll have two parallel worlds - one consists of central banks managing paper money with the aim of reflating their espective economies; the other consists of investors frantically buying into the only remaing stable store of value. This could - in an extreme case - force the world back onto a de facto gold standard. This would then lead to the gold price blowing through the roof as central banks seek to increase their "gold cover ratio".

Do I think this scenario is possible? Sure. Is it likely? I don't think so. But it could just be that the possibility of continuing competitive devaluation has been a contributing factor to the rise in the gold price that we've seen lately. I do know for sure that very many clients (= investors) think in this fashion and have bought the yellow stuff.

If you're interested in further information on the subject of gold prices be sure to head over to Michael Kantor's Gold and Silver blog for timely market updates.

Data watch

Wednesday, December 03, 2003
Productivity is way up. Consensus was looking for a number around 9% - we got a 9.4.

This is an impressive number which bodes well for profits in the short term. We had unit labor costs declining and saw almost no increase in hours worked. I'd love to see some strong payroll data on Friday because efficiency gains will not sustain this economy in the long term. CNN/Money had the following comment:

In the longer term, strong productivity growth will help boost standards of living, although in the short run it may prove a hurdle to strong hiring.

The positive part is that we're pretty quickly approaching the point where the level of GDP growth is so high that companies will have to hire - efficiency can't be scaled up endlessly. Lets just hope that we get a very strong positive effect in the labor market quickly enough to turn this mini-cycle into a sustained recovery by the middle of 2004.

Update / No Update

Tuesday, December 02, 2003
My 11.00 appointment lasted all day. No time at all to write something. Come back tomorrow! But seeing that you're here I can't just send you away like this. Here is a little gem from Cliff Asness of AQR Capital Management (via CNN/Money):

But just as wiser doesn't necessarily mean wise, bears argue that cheaper doesn't necessarily mean cheap. Cliff Asness, managing principal at the hedge fund AQR Capital Management, recently sent a series of haiku to his investors, one of which complained:

Best they can argue
Not as high as ninety nine
Faint praise is damning

To figure out valuations, Asness looks at how the S&P trades relative to average annual earnings, adjusted for inflation, over the past 10 years. On that basis, the S&P's P/E is around 26. That's lower than its March 1999 level of 42, but it's also well above the historical average of 14 to 15.

Asness believes that stocks have historically been a bargain -- a P/E of 20 or so, the way he looks at it, seems about right to him now. But he also thinks that P/Es are going to have to dip down to historic levels for a real bull market to start. For that to happen, the S&P would have to drop by 40 percent. Or earnings would have to accelerate a great deal. Or a little of both.
Tune in tomorrow for more negativity (great Haiku!)!


Monday, December 01, 2003
The ISM is even stronger than I thought - 62.8% vs. the 58% that were expected. And I thought I was being optimistic by looking for something around 61%! The increase in the employment subindex is especially heartening. If payrolls keep looking good, we might even get something which looks like a sustainable recovery.

Having a bad monday?

Try this to get into the holiday spirit.
10:09 AM :: Karsten :: permalink ::

Morning roundup

I was a little off the mark with last week's call that the US administration would dump the steel tariffs during the past week. The Washington Post - and others - tell us, that

"The Bush administration has decided to repeal most of its 20-month-old tariffs on imported steel to head off a trade war that would have included foreign retaliation against products exported from politically crucial states, administration and industry sources said yesterday."

This should be USD positive - especially if we get a strong ISM and good payrolls. But don't get your hopes up - a rebounding dollar will probably just lead to people selling into the recovery.

The ISM will come out today - I'm calling it higher (61?) on the back of the very good looking Chicago PMI out last week. Today sees DaimlerChrysler Chairman Shrempp in court over the "was it a merger or a takeover?" issue. My call: they'll settle out of court.