A light at the end of the tunnel
…or an oncoming train?

by Anthony Cherniawski, The Practical Investor, LLC | April 24, 2009

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The deep recession in manufacturing worsened in March, as demand for U.S.-made durable goods fell 0.8%, the seventh decline in the past eight months, the Commerce Department estimated Friday.

New orders declined in almost every industrial sector, although a key gauge of capital spending by businesses rose 1.5%, the second straight increase following a severe decline in January.
New orders in the first quarter were down 27.1% compared with the first three months of 2008.
The 0.8% decline in new orders was less than the 2% decline expected by economists surveyed by MarketWatch. But February's data were revised lower to show a 2.1% gain, rather than the 3.5% increase reported a month ago. With the revision, the level of orders in March was weaker than expected.

The media is still trying to put a positive spin on this report, suggesting that the rate of decline may be slowing down.  However, revisions of prior months’ estimates are show lower figures than first reported.  You be the judge. 

Those who don’t know their history are doomed to repeat it (Santayana).

House Speaker Nancy Pelosi says she will push for the deepest congressional inquiry into Wall Street’s abuses since the 1930s, using Ferdinand Pecora’s investigation as a model. This resulted in the Pecora Commission’s 1934 report.

Some of the abusive practices Pecora chronicled are similar to the machinations at the heart of the Treasury Department’s plan to revive the nation’s hobbled financial-services industry. To see how, let’s look at a 1920s-era scheme called a pool, which in those days was a common device for manipulating prices on the New York Stock Exchange. (See article)

Is this a new bull market…or just a bear market rally?

 -- (Mark Hulbert, (MarketWatch) writes, “That's the big debate currently, of course -- with a lot apparently riding on the right answer. But what if it doesn't make that much of a difference?
I ask because new bull markets often retest the lows of the bear markets that preceded them. That means that, even if a new bull market is now underway, it is not necessarily essential that you immediately increase your equity exposure.”
Treasury bonds may be ready for a reversal.

 -- Treasury yields rose after the Commerce Department said orders of products expected to last several years declined 0.8% in March. Analysts surveyed by MarketWatch had predicted a 2% slide. The report also revised lower February's big increase in orders. Still, durable-goods orders have been positive over the past two months, far better than the double-digit declines in previous months.

 Gold is noticed as a diversifier against currency risk.

China has nearly doubled its gold reserves in the last five years as it diversified its enormous foreign exchange reserves away from US dollar assets, the head of the country’s secretive foreign exchange administration said in a rare disclosure on Friday.

The country now holds 1,054 tons of gold, up from the 600 tons it last disclosed in 2003, according to Hu Xiaolian, head of the State Administration of Foreign Exchange (Safe), which manages the country’s $1,954bn in foreign exchange reserves.

Japanese investors suffering from indigestion.
(Bloomberg) -- The Nikkei, which has soared by almost a quarter from its more than 26-year low on March 10, retreated 2.2 percent on the week, while the Topix lost 1.8 percent. Both gauges had their biggest weekly drops since the five days ending March 6, as earnings reports diminished optimism that government stimulus efforts and share purchases can sustain market growth.  To put it succinctly, it went too far too fast. 
Chinese stocks declining with increased volatility.
-- The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, fell 15.36, or 0.6 percent today, to 2,448.60 at the close after changing direction at least 10 times. The measure declined 2.2 percent this week, its first retreat in six weeks.  China’s economy is still growing by 7-8% but that is not sufficient enough to justify the 34% rise in the Shanghai Index this year.

 

The strength of the dollar is dependent on of Asia’s goodwill.
-- Asia is the last bastion of the strong dollar policy. US policymakers still repeat the mantra of a strong currency. But it is Asia’s central bankers that have backed up their words with action, accumulating thousands of billions’ worth of US Treasuries. A real shift by central banks away from the dollar would have big implications for financial markets beyond exchange rates. The US Treasury market – half of which is owned by foreign investors – would crash if central banks began to desert it. The ensuing rise in long-term yields would sharply increase the costs of financing in America’s mortgage and corporate bond markets.

Subsidies for mortgage investors?

  The U.S. Treasury Department is considering giving banks and investors billions of dollars in fresh incentives to modify troubled mortgages and save homeowners from foreclosure, sources familiar with official deliberations said. Under one scenario, investors in second liens would receive a cash payment if they agree to ease the terms of troubled loans and accept a smaller return on their mortgage investment, the sources said.

Summer driving season is here.
Energy Information Administration Weekly Report suggests that, “The national average price for regular gasoline continued to move higher, increasing almost a penny to $2.06 per gallon. That price was $1.45 less than the price a year ago. On the East Coast, the price rose 1.4 cents to $2.04 per gallon. The average price in the Midwest was essentially unchanged at $2.01 per gallon.”

Natural gas prices remain low.
The Energy Information Agency’s Natural Gas Weekly Update reports, “(Natural gas) spot prices fell in most market locations with a few exceptions. On average, prices fell by 12 cents in the Lower 48 States. Prices closed yesterday below $4 per MMBtu in all market locations except one, after trading below $4 per MMBtu the entire week in most locations. Four regions closed the week with average prices below $3 per MMBtu. The only exceptions to the downward price trend occurred in the Midcontinent.”

Can we be confident in our financial institutions?”

Wall Street financial institutions have suffered a gross loss of investor confidence in this crisis and have seen their share values ravaged as a result. Hence, there is a concerted and vigorous effort underway on their part to bolster that collapsed confidence, with the aim of driving the value of their shares back up.

Remember, these big institutions all participated in one way or another in the grossly deceptive schemes and practices that created and artificially inflated fundamentally risky investment assets, grossly overstated their creditworthiness, and sold them on to unsuspecting investors - the massive swindle that brought us into this crisis in the first place, a crisis that emerged right on Wall Street itself.

Hence, it is nothing for such firms and their accounting and credit rating accomplices to engage once again in spin, deceptively cooking the numbers to make their position look much better than it really is, so as to attract investors and drive up share prices. Sovereign wealth funds around the globe, having suffered huge losses on their investments in US banks, can be described by the adage "once bitten, twice shy". Many have decided to largely divest themselves of their holdings in US financial shares. Why? They no longer trust the banks to disclose their true financial position fully, accurately and honestly. The savvy investor will keep such facts very close in mind.

Copyright © 2009 Anthony Cherniawski
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Anthony Cherniawski | President and CIO, The Practical Investor, LLC. 
State Registered Investment Advisor | Mason, MI USA | Email | Website

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