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March Rallies Bring April...
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Economic & Market Update: March 30, 2009 “March Rallies Bring April…”The Fortigent Investment Research Team
Last Week’s Highlights: Existing Home Sales: 4.72m – distressed sales helping but prices still dropping Q4 GDP: -6.3% – negative contributors offset by government spending Personal Spending: 0.2% – savings rate remains elevated Consumer Sentiment: 57.3 – sentiment seen stabilizing for the time being Stocks: 816 – equities up 20% from market bottom at close Thursday Bonds: 2.8% – Fed fighting a losing battle Oil: $52 – strength in dollar hurts attractiveness of commodities Dollar/Euro: $1.33 – traders seek relative safety in the dollar
Economics This Week:
Date Item Est. Comment 3/31 Home Price Index: -18.5% Prices punching through 2003 levels 4/1 Construction Spending: -2.0% Nonresidential spending hits a wall 4/3 Nonfarm Payrolls: -640K Rate of losses hitting a trough 4/3 Unemployment Rate: 8.5% Still moving vertically upwards
Watch Out For April Showers It was another powerful week for the equity markets following the unveiling of the Treasury’s Private Public Investment Program on Monday. The Treasury, in concert with private investment companies, will create a series of funds to purchase anywhere from $500 billion to $1 trillion of toxic assets (mostly mortgage-backed securities) in an effort to extricate them from the balance sheets of financial institutions. To enlist support from the private sector, the government will offer substantial subsidies (see: “leverage”) while also agreeing to take a majority of any potential losses.
When you tack on last week’s +6% move, the S&P 500 index is now up over 22% from the intra-day low hit on March 6th. A 20% rally is one indicator of a bull market, but whether this is the case in the current environment is anyone’s guess. It is usually difficult to distinguish between a new bull market and a short-term bear market rally until after the fact, and this time is no different.
The credit markets, on the other hand, do not appear to be sharing the same level of optimism that we see in equities.
Switching gears to the economy, several releases came out last week that pointed to possible easing of the economic freefall. While the numbers are by no means reverting to pre-crisis levels, they do signal a slow down in the rate of deterioration. In other words, things may not be getting significantly better but they seem to be getting less bad.
Included in those figures are consumer sentiment, durable goods, and personal spending, all of which came in at or above expectations. In addition, existing home sales witnessed a slight jump month-over-month due to a number of distressed properties being snapped up. At this point, it’s not important where the sale is coming from as long as banks are able to offload the properties from their balance sheets.
Source: Wall Street Journal
Bond Investors Start Acting Uncooperative Over in England, the UK government ran into some trouble when its auction of £1.75 billion in 40-year notes failed to attract a sufficient number of investors. This marks only the 4th auction failure in the last 23 years and the first for England since 2002. Ultimately, it wound up being a bit of a head fake by investors as it seems that a confluence of events led to the failure. The primary reason most investors chose not to participate is that, as part of its quantitative easing program, the Bank of England is only anticipated to buy back bonds with maturities in the 5 to 25 year range, leaving this 40-year issuance outside that window. Concern abated the following day when the government successfully auctioned off £1.1 billion in 13-year inflation-linked notes that were heavily oversubscribed. If auction failures turn into a regular occurrence then we might have cause for concern.
Bond markets here in the US endured some equally erratic behavior, with the yield on one-month Treasury bills dipping into negative territory for the first time since the beginning of December. Pundits expressed concern that this is indicative of another flight to safety but, given the run-up in equity markets, this is unlikely. What is likely happening is a need to do some “window-dressing” by banks and other financial institutions in advance of the quarter end “closing of the financial books”. The impending fiscal year end in Japan is adding further downward pressure on short-term Treasury yields.
The Tables Have Turned The Chinese are making things interesting on the global currency front. In advance of the G20 meeting this week, officials in China made it known that they would like to move away from the US dollar as the global currency of choice. Echoing concerns expressed by the Russians earlier in the year, the Chinese are concerned that the dollar is in for a long and ugly unwind as the numerous liquidity backstops put into place by the government begin to take hold and lead to a potentially massive depreciation of the dollar. Ironically, the Chinese have been the recipient of harsh criticism directed at their economic policies in past years but, this time around, the “developed” global financial powers have little room for condemnation.
Source: Wachovia
The Chinese have plausible cause for concern as evidenced by the chart above. Of the more than $6 trillion in outstanding currency reserves, the Chinese control about $2 trillion, with most of that denominated in US dollars.
The Chinese call for a global currency may not be so improbable considering that the IMF already backs a synthetic currency called the “Special Drawing Rights” which is linked to a basket of currencies including the dollar, euro, yen and the British pound. SDRs never really took off after their creation in the 1960s because they are not readily exchangeable for any major goods, services, or assets. If the Chinese have their way, that may be about to change.
Without a doubt, challenges exist to creating a global currency – for starters, it would still need “backing” by some joint entity or country. In the end, this may merely be posturing by Chinese officials who are seeking a greater role in the day-to-day operations of the IMF.
A New Era in Hostage Negotiations In what we found to be the most unusual negotiation tactic of the week, French employees of the American manufacturing company 3M decided to take their boss hostage for 48 hours to demand better severance packages for employees being laid off. Surprisingly (or maybe not), this is the second occurrence of a boss in France being held hostage in the past 30 days following the detainment of a Sony executive earlier in the month. With tongue firmly planted in cheek, we note that here in the US we don’t settled for half-handed tactics like taking executives hostage – we simply fire them (see: Rick Wagoner).
While this story is amusing on the surface, it’s a strong reminder of the underlying tension being brought about by the worldwide recession. Accelerations in job losses are contributing to social unrest in countries as far-reaching as England, Tajikistan, and Malaysia. On an anecdotal basis, the home and automobile of the former head of the Royal Bank of Scotland were vandalized after it was made public that he would resign but still receive a pension of $1.2 million per annum.
Source: The Economist Intelligence Unit
Adding credence to the notion that the working class is unhappy, the Economist released its Political Instability Index last week and as one would expect, political unrest increased sharply since the index was last released in 2007. The U.S. is now at a higher risk of unrest than previous notables such as Rwanda, Kazakhstan, and Libya. Several factors have made this crisis especially difficult – the depth of the crisis, an underlying anxiety that things may be worse than we are being told and, finally, the contagion factor that has seen this crisis spread from the US to every small corner of the globe.
This year’s G20 meeting may be the most important in history as we now realize that the future trajectory of this crisis lies entirely in the hands of the central bankers and finance ministers of the world. If they are able to stem the tide and slow this crisis down we can all breathe a collective sigh of relief. However, if the world economy deteriorates from here, we could be in for an unpleasant ride.
About Fortigent: Fortigent, LLC delivers a fully integrated and customizable business-to-business outsourced wealth management solution to banks, trust companies, and independent advisory firms. Services include an "open architecture" investment platform with particular expertise in alternative investments, a flexible unified managed account program, and consolidated wealth reporting. Fortigent's web-based portal interface allows access to proposal and rebalancing tools, client portfolio reporting and accounting, as well as industry articles, research papers, and other practice management and business development resources.
The information provided is general in nature and is not intended to be, and should not be construed as, investment, legal or tax advice. Fortigent makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based upon information that Fortigent considers reliable, is not guaranteed as to accuracy or completeness.
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