Global Markets in Review: Stocks Still in Rally Mode, For Now

“Words from the Wise” this week comes to you in a shortened format as I do not have access to my normal research resources while on the road in Europe. Although very little commentary is provided, a full dose of excerpts from interesting news items and quotes from market commentators is included.

While the Dow Jones Industrial Index and other benchmark indices reached 52-week highs last week and pleased Wall Street, the cartoonists reminded us that worrisome economic issues remained in Main Street …

Source: Jeff Parker, Comics.com, November 11, 2009.

The past week’s performance of the major asset classes is summarized by the chart below - a mixed bag, so to speak, with government bonds, equities, corporate bonds and gold closing the week in positive territory.

Click to enlarge:

Source: StockCharts.com

A summary of the movements of major global stock markets for the past week and various other measurement periods is given in the table below. With the exception of only a few indices - notably the Japanese Nikkei Dow that recorded a third consecutive down week - most global stock markets made headway last week, adding to the gains for the month.

Click here or on the table below for a larger image.

Top performers among stock markets this week were Romania (+8.1%), Russia (+6.1%), Jamaica (+6.1%), Hungary (+5.2%) and Israel (+5.2%). At the bottom end of the performance rankings countries included Latvia (‑5.1%), Cyprus (-4.4%), Greece (-4.2%), Serbia (-4.0%) and Kuwait (‑3.8%).

Of the 99 stock markets I keep on my radar screen, 66% recorded gains (last week 52%), 31% (43%) showed losses and 3% (5%) remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

John Nyaradi (Wall Street Sector Selector) reports that, as far as exchange-traded funds (ETFs) are concerned, the winners for the week included PowerShares Global Coal (PKOL) (+7.6%), iShares Cohen & Steers Realty Majors (ICF) (+7.4%), Vanguard REIT (VNQ) (+6.4%) and Market Vectors Russia (RSX) (+6.4%).

At the bottom end of the performance rankings, ETFs included United States Natural Gas (UNG) (-4.9%), ProShares Short Emerging Markets (EUM) (-3.7%), ProShares Short QQQ (PSQ) (-3.4%), SPDR Russell/Nomura Small Cap Japan (JSC) (-3.0%) and WisdomTree Japan Small Cap (DFJ) (-2.5%).

Still on the topic of ETFs, Clusterstock reported that investors have been pouring $108 billion into ETFs during the year to date, with $24 billion coming in during the last three months:

Yet while investors have been pouring money into commodity, fixed income and global equity ETFs, one very important category has remained a complete pariah - U.S. stocks. Despite the stock market rally …, money has continued to flow out of U.S. equity ETFs. Thus while some might be able to argue that the crowd has jumped into commodities, fixed income and global equities, it’s pretty hard to say that investors are in love with stocks again …

said Clusterstock. (Click to enlarge)

Source: Clusterstock - Business Insider, November 11, 2009.

Referring to the surge in the gold price, the quote du jour this week comes from Richard Russell, 85-year-old author of the Dow Theory Letters. He said:

America’s Fed Chairman, Ben Bernanke, is convinced he knows the secret of avoiding hard times. The Fed can halt deflation and turn the picture into asset inflation. All it takes, thinks Bernanke, is zero interest rates and the creation of trillions of new dollars - and they will come, and they will spend. This is the path the Bernanke Fed has chosen. So far, it has not worked - they are not coming, and they are not spending. The Fed’s strategy has not even succeeded in bringing down unemployment. Bernanke’s solution - more of the same: ‘Whatever it takes, and as long as it takes.’

Thus we have a strange and ironic situation. We have world deflation, and a Fed Chairman who believes he can manipulate the primary trend. Bernanke’s strategy is leading to a weakening dollar. The more dollars that are created, the weaker the dollar. As the dollar’s very status comes into question, wise and seasoned investors move to protect their wealth. They move to the time-honored ’safe haven’: the one unit of wealth that cannot be destroyed in that it is not a liability of any government. And, of course, I’m talking about the one unit of wealth that is never questioned - gold.

So it’s the gold bull market that I trust and believe in. I think and I ponder - what can halt the gold bull market? The only thing that can halt the gold bull market is a complete reversal by the politicians and the Fed, and that would allow the U.S. to sink into a state of deflation and depression. Unthinkable.

Next, a quick textual analysis of my week’s reading - mostly done on airplanes and between meetings in Europe. This is a way of visualizing word frequencies at a glance. Although “bank” still features prominently, the key words have started taking on a more normal pattern compared to the crisis-related words that have dominated the tag cloud for many months. Unsurprisingly, “gold” is gaining in prominence.

Click to enlarge:

The major moving-average levels for the benchmark U.S. indices, the BRIC countries and South Africa (where I am based in Cape Town) are given in the table below. With the exception of the Russell 2000 Index, most of the indices are trading above their 50-day moving averages, with all the indices also above their respective 200-day moving averages. The 50-day lines are also above the 200-day lines in all instances.

The October lows are also given in the table. A break below these levels would indicate a reversal of the uptrend since March, i.e. reversing the progression of higher-reaction lows.

Click here or on the table below for a larger image.

Still on charting, Adam Hewison (INO.com) sounded a cautious note on the outlook for the Dow Jones Industrial Index and S&P 500 Index as explained in one of his popular technical analysis presentations. Click here to access the presentation.

The announcement of Wal-Mart’s (WMT) results marked the end of the Q3 earnings season. Research outfit Bespoke provided the following summary of the Q3 earnings results as well as Q4 estimates:

The estimates for the year-over-year change in Q3 earnings at the start of earnings season were -23.2% for the S&P 500. Currently, the actual number sits at -17.2%. As shown below, the Financial sector has seen its earnings grow by 358.8% in Q3 ‘09 versus Q3 ‘08! Given how bad things were last year, it’s not surprising to see a reading this high, but it is a sign that things have gotten much better. Health Care, Utilities and Consumer Staples (all non-cyclical) are the only other sectors that have seen year-over-year earnings growth this quarter. Energy has seen the biggest decline in earnings at -62.9%, followed by Materials (-43.4%), Industrials (-37.3%), and Consumer Discretionary (-29.3%).

The Financial sector is currently expected to see growth of 133.8% in Q4 ‘09 versus Q4 ‘08. This high estimate in the Financial sector helps put estimates for the entire S&P 500 at +65.2% in the fourth quarter. Ex-Financials, the S&P 500 is expected to see Q4 earnings actually decline by 7.6%. Technology is expected to see growth of 21.5% in Q4, while estimates for the Materials sector are currently at 97.5%.

Source: Bespoke, November 11, 2009.

From across the pond, David Fuller (Fullermoney) said:

Veteran subscribers will recall a remark often used on this site [Fullermoney]: Bull markets do not die of old age - to which I will add warnings by Roubiniesque economists. Instead, they are assassinated - usually by central banks. So how many rate bullets does it take to fell a bull? You may not be surprised to hear that there is no precise answer, because it depends mainly on sentiment and liquidity. We know when central banks start to reduce liquidity, or at least increase its price, but we do not know precisely when that will affect sentiment adversely.

Note the still widening spread between U.S. 10-year yields over 2-year yields, otherwise known as the yield curve, on this historical. It is still rising, indicating to me that quantitative easing continues. The time to start thinking about closing long portfolios in anticipation of the next bear market, I suggest, will be when the yield curve next inverts by moving below zero. However, the lead was so early last time (early 2006) that some of us became complacent about it.

Click to enlarge:

Source: Fullermoney.com

Economy
The Recession Status Map below, courtesy of Dismal Scientist Economy.com, aggregates growth statistics from around the world and allows one to see at a glance which economies are in recession, at risk or beginning to recover. Click on the map to link to the interactive version.

Source: Dismal Scientist

Global business confidence has remained largely unchanged during the past two months through mid-October. Sentiment is consistent with a very tentative and fragile global economic recovery,

according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com.

Businesses … are more upbeat about the outlook into next year … and their broad assessment of current business conditions. South Americans are the most positive, and North Americans generally the most negative.

Click to enlarge:

Source: Moody’s Economy.com

As far as hard data are concerned, the Eurozone emerged from recession in the third quarter, but the speed of the recovery fell short of expectations - and the growth rate of 0.9% achieved by the U.S..

Eurozone gross domestic product expanded by 0.4% compared with the previous three months, after having previously contracted for five consecutive quarters, according to official figures on Friday. Powering the rebound were Germany and Italy, which saw GDP rising by 0.7% and 0.6% respectively,

reported the Financial Times.

A snapshot of the week’s U.S. economic reports is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)

November 13
• Widening of trade deficit reflects oil imports and improving economic conditions
• Michigan Consumer Sentiment Index - households remained gloomy in November

November 12
• Noteworthy news from labor market - total continuing claims are trending down

November 10
• Yellen on budget deficit and inflation
• Inflation expectations - an update

November 9
• October Senior Loan Officer Opinion Survey - improved picture of lending conditions, but demand for loans was weak

Meanwhile, James Bullard, the president of the Federal Reserve Bank of St Louis, has told the Financial Times that uncertainty over the outlook for inflation

“is as high as it has ever been since 1980″. "I think there’s still some risk of deflation, but I do think the deflation risk is fading as the economy recovers,” he said. In the medium term, “you have inflation that will be possibly substantially above target over a horizon of two to four years, and that, I think, is because of the combination of very large fiscal deficits in the U.S. with very easy monetary policy.”

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Nov 12	08:30 AM	Initial Claims	11/07	502K	525K	510K	514K
Nov 12	08:30 AM	Continuing Claims	10/31	5631K	5700K	5700K	5770K
Nov 12	11:00 AM	Crude Inventories	11/06	1.76M	NA	NA	-3.94M
Nov 12	02:00 PM	Treasury Budget	Oct	-$176.4B	-$150.0B	-$165.0B	-$155.5B
Nov 13	08:30 AM	Export Prices ex agriculture	Oct	0.3%	NA	NA	0.1%
Nov 13	08:30 AM	Import Prices ex oil	Oct	0.4%	NA	NA	0.5%
Nov 13	08:30 AM	Trade Balance	Sep	-$36.5	-$30.0B	-$31.8B	-$30.8B
Nov 13	09:55 AM	Michigan Sentiment	Nov	66.0	70.5	71.0	70.6

Source: Yahoo Finance, November 13, 2009.

Click the links below for the following economic reports:

• Wells Fargo Securities: Weekly Economic & Financial Commentary
• Wells Fargo Securities: Monthly Economic Outlook (November 2009)
• Wells Fargo Securities: Global Chartbook (November 2009)

In addition to a speech by Fed Chairman Ben Bernanke to the Economic Club of New York, U.S. economic data reports for the week include the following:

Monday, November 16
• Retail sales
• Empire manufacturing
• Business inventories

Tuesday, November 17
• PPI
• TIC flows
• Capacity utilization
• Industrial production

Wednesday, November 18
• Housing starts
• Building permits
• CPI

Thursday, November 19
• Initial jobless claims
• Leading indicators
• Philadelphia Fed

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global financial markets performed during the past week.

Click to enlarge:

Source: Wall Street Journal Online, November 13, 2009.

Amateurs measure potential while professionals measure risk,

said hedge fund legend Steve Cohen, founder of SAC Capital Advisors (hat tip: The Kirk Report). Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist readers of Investment Postcards to properly assess the risk associated with specific investments.

That’s the way it looks from Geneva (from where I will be making my way back to Cape Town later today).

Comments

[Peter Cooper]

Markets are looking for a new direction but it is unlikely to be up! See:
arabianmoney.net/2009/.../

2009 Nov 15 08:07 AM

[adan]

i think the thing about an artificially propped up market, that bothers me more than the chances one would take with a naturally evolving market, is relying and trusting one's monies on the arbitrary whims of someone we can't see, who won't guarantee their "management" of stock prices, or, share "their" risk / reward with the rest of us -

when the stock market becomes a slightly more fluxy equivalent of a U.S. savings bond, then an up market like we have today might be worth pretending to risk in ;-)

2009 Nov 15 11:37 AM

[Dr Jan]

Today the local rag had another of the trillion or so tea-bagger op-eds shrieking that the world is coming to an end because there has always been, is now, and always will be a direct 1 to 1 correlation between federal budget deficits and run-away hyperinflation. Glad to see the markets, in their collective wisdom, agree with me that there is no risk of inflation any time soon.

When no one is willing to buy anything because he either has no job or fears he soon will have no job, prices cannot go up, so inflation is not possible.

2009 Nov 15 04:46 PM

[Brad Ferris]

This rally has been remarkable, but with unemployment so high (and still rising) I think the earnings will be the continuing force driving markets higher. If earnings don't grow at a rate that the market feels is either sustainable or indicative for a true recovery then we could see a substantial pull back of 10-15% over the next few months.

2009 Nov 15 10:30 PM

[Options Trading]

i have been a bull since the beginning of the year and am going to stay that way.

2009 Nov 15 11:38 PM

[DavidC]

Increased earnings have (mainly) been the result of cutting back and laying people off. The stock market rally, latterly, has been the result of the dollar index falling - look at the charts and the stock market indices are direct inverses of the dollar index. That's the only thing holding this market up where it is. The stock markets in no way reflect the fundamentals of the economy.

2009 Nov 16 07:17 AM