By Ambrose Evans-Prichard
Too many steel mills have been built, too many plants making cars, computer chips or solar panels, too many ships, too many houses. They have outstripped the spending power of those supposed to buy the products. This is more or less what happened in the 1920s when electrification and Ford’s assembly line methods lifted output faster than wages. It is a key reason why the Slump proved so intractable, though debt then was far lower than today.
Thankfully, leaders in the US and Europe have this time prevented an implosion of the money supply and domino bank failures. But they have not resolved the elemental causes of our (misnamed) Credit Crisis; nor can they.
Excess plant will hang over us like an oppressive fog until cleared by liquidation, or incomes slowly catch up, or both. Until this occurs, we risk lurching from one false dawn to another, endlessly disappointed.
Justin Lin, the World Bank’s chief economist, warned last month that half-empty factories risk setting off a “deflationary spiral”. We are moving into a phase where the “real economy crisis” bites deeper – meaning mass lay-offs and drastic falls in investment as firms retrench. “Unless we deal with excess capacity, it will wreak havoc on all countries,” he said.
Mr Lin said capacity use had fallen to 72pc in Germany, 69pc in the US, 65pc in Japan, and near 50pc in some poorer countries. These are post-War lows. Fresh data from the Federal Reserve is actually worse. Capacity use in US manufacturing fell to 65.4pc in July.
My discovery as a journalist is that deflation is a taboo subject. Those who came of age in the 1970s mostly refuse to accept that such an outcome is remotely possible, and that includes a few regional Fed governors and the German-led core of the European Central Bank.
As a matter of strict fact, two- thirds of the global economy is already in “deflation-lite”. US prices fell 2.1pc in July year-on-year, the steepest drop since 1950. Import prices are down 7.3pc, even after stripping out energy. At almost every stage over the last year, in almost every country (except Britain), deflationary forces have proved stronger than expected.
Elsewhere, the CPI figures are: Ireland (-5.9), Thailand (-4.4), Taiwan (-2.3), Japan (-1.8), China (-1.8), Belgium (-1.7), Spain (-1.4), Malaysia (-1.4), Switzerland (-1.2), France (-0.7), Germany (-0.6), Canada (-0.3).
Even countries such as France and Germany eking out slight recoveries are seeing a contraction in “nominal” GDP. This is new outside Japan, and matters for debt dynamics. Ireland’s nominal GDP is shrinking 13pc annually: debt stays still.
Global prices will rebound later this year as commodity costs feed through – though that may not last once China pricks its credit bubble after the 60th anniversary of the revolution in October. My fear – hopefully wrong – is that we are being boiled slowly like frogs, complacent until it is too late to jump out of the deflation pot.
The sugar rush of fiscal stimulus in the West will subside within a few months. Those “cash-for-clunkers” schemes that have lifted France and Germany out of recession – just – change nothing. They draw forward spending, leading to a cliff-edge fall later. (This is not a criticism. Governments did the right thing given the emergency). The thaw in trade finance has led to a V-shaped rebound in East Asia as pent up exports are shipped. But again, nothing fundamental has changed. Deficit countries in the Anglo-Sphere, Club Med, and East Europe are all on diets. People talk too much about “liquidity” – a slippery term – and not enough about concrete demand.
Professor James Livingston at Rutgers University says we have been blinded by Milton Friedman, who convinced our economic elites and above all Fed chair Ben Bernanke that the Depression was a “credit event” that could have been avoided by a monetary blast (helicopters/QE). Under that schema, we should be safely clear of trouble before long this time.
Mr Livingston’s “Left-Keynesian” view is that a widening gap between rich and poor in the 1920s incubated the Slump. The profit share of GDP grew: the wage share fell – just as now, in today’s case because globalisation lets business exploit “labour arbitrage” by playing off Western workers against the Asian wages. The rich do not spend (much), they accumulate capital. Hence the investment bubble of the 1920s, even as consumption stagnated.
I reserve judgment on this thesis, which amounts to an indictment of our economic model. But whether we like it or not, Left or Right, we may have to pay more attention to such thinking if Bernanke’s credit fix fails to do the job. Back to socialism anybody?
I’ve been writing for months that commercial real estate is the next to drop, hitting the financial sector.
When 600K-700K jobs are being lost each month, available office space soars because of office closings and I think it’s just a matter of time before the commercial real estate sector blows up.
Plus, because the consumer makes up ~70% of the U.S. economy and consumers aren’t spending (consumers who don’t have a job don’t have any money and the ones who do have jobs are afraid of losing them), stores in shopping malls are closing faster than you can say “Hey, what happened to Kmart?”
I expect the financial sector to open lower tomorrow morning possibly providing more great trading opportunities throughout the day.
U.S. stock futures indicated a second day of strong gains Thursday with bulls cautiously optimistic that the bear market, economic and financial crisis have bottomed.
S&P futures gained 15.1 points to 824 and Nasdaq 100 futures rose 23 points to 1,276. Dow industrial futures rose 133 points.
U.S. stocks surged yesterday, with the Dow Jones Industrial Average closing more than 150 points higher as investors chose to focus on the bright side of manufacturing data and auto-sales reports and ignored a worrisome labor-market survey. The broader Standard & Poor's 500 index rose 13.21 and the Nasdaq Composite rose 23.01 points.
Those who are bullish on stocks see signs that the bear market has reached a low, supported by the fact that a measure of pending-home sales ticked up in February, and the manufacturing survey showed improvement in March from February.
"We have more and more evidence that the economy is heading for some stabilization and we see some leading indicators that show that the bottom could be near," said Gerhard Schwarz, head of global equity strategy at UniCredit Markets & Investment Banking.
Simon Denham, managing director of Capital Spreads, said if the Dow can break above 7,920 or even better, 8,000 "confidence would take a real shot in the arm." But he said traders should "keep their running shoes close as any disappointment over the G20 communiqué may spill over into a sharp move lower."
From the G20 meeting, fully underway in London, leaders are moving toward an agreement to "at least double" the International Monetary Fund's emergency resources to $500 billion, Stephen Timms, financial secretary to the British Treasury, told reporters. The fund currently has $250 billion in lending capacity, which has been heavily tapped by more than a dozen bailout loans to struggling nations.
The U.K. spokesman also said leaders are likely to impose sanctions against countries that don't comply with a crackdown on bank secrecy rules.
Economic data on tap for Thursday includes jobless claims and February factory orders, while bigger data looms Friday, including with non-farm payrolls for March.
Meanwhile, the Financial Accounting Standards Board, known as FASB is scheduled to vote Thursday on giving auditors more flexibility in valuing illiquid mortgage assets that may have a long-term value and strong cash flow. In other words, they are not distressed assets, but they cannot be sold in the markets today.
The European Central Bank meanwhile, cut key rates by a quarter point to 1.25%, a fresh record loss, but a smaller-than-expected cut that stunned markets. European stocks reined in some gains after the decision, but still sporting impressive gains, while the euro jumped against the dollar.
In London, the FTSE 100 was back above the 4,000 perch, up 2.4%, while the pan-European Dow Jones Stoxx 600 index rose 2.8%. Beaten down banks like HSBC Holdings and oil producers were making up the bulk of gainers.
Asia stocks rallied overnight. The Hang Seng soared 7.2% and the Nikkei 225 rose 4.4%.
Economic data on tap for Thursday includes jobless claims and February factory orders, while bigger data looms Friday, including with nonfarm payrolls for March.
You'd think the CDN$ and other currencies would be soaring against the US$, but in recent months it's been the US$ that's been crushing the major world currencies.
After all, the U.S. Treasury is working the printing presses 24/7, printing as much money as it can to support all the trillion dollar bailouts.
Granted, the US$ has come down in recent weeks but it's too early to say that a downtrend is firmly in place.
So, if this stock market rally is really just a bear-market rally (which I think it is), the CDN$ should fall along with the U.S. benchmark.
This should also apply to the Australian dollar and South African Rand whose economies, like Canada, are commodity driven.
The greenback has always been a safe haven but many of the world's governments are worried about the U.S.'s ability to pay back its liabilities.
Just ask the Chinese.
On March 13, the Chinese government demanded that the United States "guarantee the safety" of the U.S. bonds held by China which amount to around $1 trillion.
The demand was made at the National People's Congress in Beijing by Chinese Premier Wen Jiabao, at a time when relations between the two superpowers aren't exactly at their rosiest.
"We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets," Wen said. "To be honest, I am definitely a little worried."
Looks like Wen is having a hard time sleeping these days (I’ve heard even watching his favorite Johnny Carson reruns aren’t helping).
Historically, the Japanese have held more Treasury bonds than any other country till being surpassed by the Chinese last year.
Basically, I think it's really a lot of political talk for nothing, as usual.
If China stops buying U.S. debt (or worse, starts selling) it'll cost the U.S. government more to borrow, causing interest and mortgage rates to soar in the U.S.
Conversely, Americans will stop buying Chinese goods, sending the already shaky Chinese economy for even more of a loop.
According to JING SHI, China (CNN), in just the past months about 70,000 factories nationwide have closed.
Beijing official Chen Xiwen estimates about 20 million migrant workers have lost jobs. Tens of thousands of villages in the countryside depend on migrant workers' income.
So basically it's bla, bla, bla.....
But this should make Chinese Premier Wen Jiabao and all of you feel better.
"There is no safer investment in the world than in the United States," White House spokesman Robert Gibbs said.
That certainly reassures me, doesn't it you...pass the soya sauce please…..
I think so, for three reasons.
There’s not much news coming out this week regarding the economy or corporate earnings. But the news that might come out on Thursday may make the market soar, big-time (Reason 3).
First off, everyone will naturally be watching the financial sector. The financials and many of the retailers have gotten smacked so bad that even the most pessimistic traders are looking to come in.
Plus, as I predicted last week the jobs numbers were going to be horrible and they were. But the markets didn’t have a bad reaction to it.
The once largest bank in the world is now trading at a buck (C). Can’t go much lower, can it? The risk/reward for a huge number of stocks out there is definitely to the upside.
Remember, bear-market rallies are vicious to the upside.
I compare it to Boxing Day at Walmart with anxious shoppers waiting to pick up everything and anything on sale. All the shoppers are herded outside like sheep with their noses pressed against the door waiting for the store to open. Once that door opens and the first few come in, the rest of the sheep will follow.
Many market analysts wrongly called the bottom last Oct./Nov. as stocks continued to tank. Now, this could again be the case but I’m seeing the same type of base-forming that happened between Oct./02 and Mar./03, which was the last bear market.
As then as now, there’s a lower number of stocks hit new lows and that’s an important indicator.
Second, there’s the all-important “contrarian perspective”, which basically means do the opposite of what the rest of the sheep are doing.
As of last Wednesday, 70.3% of investors were bearish according to the AAII (American Association of Individual Investors). That’s the highest number the association has ever had since the index came about in 1987.
According to the AAII, over the last two months the index has been between 39 and 55 but last week soared to 70.3%.
Keeping with those numbers, for the week ending Mar.4 there was $29.9 billion pulled out of stocks and another $18 billion the week before (according to Trim Tabs).
Looks like the sheep are all following each other off a cliff.
The third reason is a meeting that’s scheduled for Mar.12 by a House financial services subcommittee on the rules on mark-to-market accounting. Many billions of write-downs have been taken by banks because of this rule.
What mark-to-market accounting does is it requires assets to be valued at current market prices. Some banks say it forces them to mark down assets to artificially low prices in the current financial crisis, even when banks intend to hold the assets past the current reporting.
If the government relaxes or makes some changes to the rules for a year or two some financial stocks might go through the roof. A quick double for some isn’t out of the question.
While this isn’t a recommendation to buy any of these (always talk to your broker), here’s some ETFs (Exchange Traded Funds) on the U.S. markets that should do well in a bear-market rally:
Russell 1000 Energy
Russell 1000 Financial Services
MSCI EAFE Index
MSCI Emerging Markets Index
Russell 1000 Technology Index
Russell Midcap Index
And on the TSX:
S&P/TSX 60 IndexTM
S&P 500® Index
Canadian Equity Sector
S&P/TSX Capped Financials IndexTM
S&P/TSX Capped Energy IndexTM
S&P/TSX Global Gold IndexTM
S&P/TSX Global Mining IndexTM
MSCI® Emerging Markets Index
In Tuesday trading, shares of Bow Valley Energy (TSX: T.BVX) shot up 66% to 49 cents as the oil and gas producer/explorer said it has entered into an arrangement agreement for Dana Petroleum to acquire Bow Valley for 50 cents per share in cash, valuing the transaction at $240 million, including the assumption of net debt, liabilities and other obligations.
As well, Superior Mining International (TSX: V.SUI) shares surged 75% to 10.5 cents after the junior explorer reported that it has received assay results from an exploration drilling program at its Mangalisa property in South Africa, which included 0.45 metres of 45.8 g/t gold and 3.79 kg/t uranium.
Wednesday’s market action saw shares of Condor Resources (TSX: V.CN) shares climb 30% to 13 cents after the micro cap explorer reported results of a recent unsolicited drill hole on its wholly-owned Austral porphyry copper project in Chile. Copper values in the hole were anomalous, with numerous individual one metre core samples returning values of 1% to 1.1% copper and gold values ranging from negligible to 0.248 grams per tonne (g/t) gold. A cumulative 56 meters of core assayed more than 0.5% copper equivalent.
Also, shares of Yale Resources (TSX: V.YLL) soared 44% to 6.5 cents as the junior miner announced that it has signed a letter of agreement to purchase a 100% interest in the Urique gold/silver project in Mexico -- a total of sixteen concessions covering 29,100 hectares -- from its partner, EXMIN Resources Inc. Yale has agreed to pay US$250,000 and issue one million shares issued to EXMIN in two tranches.
On Thursday, Golden Chalice Resources (TSX: V.GCR) shares jumped 40% to 14 cents after the micro cap miner reported the latest results from the 2008 infill drill program that focused on the Langmuir Nickel Discovery on its wholly-owned Langmuir Property, southeast of Timmins, Ontario, which included 2.75% nickel over a drilled width of 24.4 meters.
In addition, shares of American Creek Resources (TSX: V.AMK) skyrocketed 140% to 12 cents as the junior explorer said the Preliminary Economic Assessment released January 8, 2009, by Seabridge Gold (TSX: T.SEA) indicates that Seabridge proposes to construct a 21.5 km underground tunnel to transport ore by conveyor from its KSM deposit to a mill and tailings pond to be constructed northeast of American Creek's Treaty Creek Project located in British Columbia. American Creek reports that approximately 13 km of the proposed tunnel extends through the heart of its property, intersecting multiple mineralized zones.
And, in Friday trading, Blue Note Mining (TSX: T.BN) reported that its wholly-owned subsidiary, Blue Note Caribou Mines, has obtained an order from the New Brunswick Court of Queen's Bench for creditor protection pursuant to the provisions of the Companies' Creditors Arrangement Act. Blue Note stock plunged 50% to a penny a share.
Finally, Phase Separation Solutions, a wholly-owned subsidiary of West Mountain Capital (TSX: V.WMT), said it now has commitments for PCB soil treatment services that exceed 75% of its treatment capacity for 2009 at its facility in Wolseley, Saskatchewan. West Mountain shares added 88% to 7.5 cents.
None of the above are stock recommendations, only illustrations of activity from the past week.
Roger Biduk; Stockhouse Stock movers for the week of February 9, 2009
On Monday, Frontera Copper (T.FCC) shares climbed 15% to 78 cents after Invecture Group, S.A. de C.V. said it is raising its formal take-over bid for the common shares of Frontera to 75 cents a share from 59 cents.
As well, shares of Northstar Healthcare (T.NHC) soared 52% to $1 as the owner and/or manager of ambulatory surgery centers in the United States reported that its Board of Directors has initiated a process to identify and evaluate strategic alternatives available to maximize shareholder value. Donald Kramer, M.D., founder and director of Northstar, has indicated that he is considering making an offer to purchase all of the outstanding common shares of the company.
In Tuesday trading, Indicator Minerals (V.IME) shares jumped 29% to nine cents after the micro cap explorer reported diamond results from a sample of the first kimberlite discovered on the Nanuq North Project in Nunavut. A total of 206 diamonds were recovered from a 152.75kg sample of the NQN-001 kimberlite. The largest stone measured 0.98mm x 0.72mm x 0.70mm. The majority of the diamonds described are characterized as white/colorless with no inclusions.
Also, shares of TUSK Energy (T.TSK) skyrocketed 142% to $2.08 as the oil and gas producer/explorer announced that Polar Star Canadian Oil and Gas, a venture indirectly owned by the Teachers Insurance and Annuity Association of America, will acquire all of the issued and outstanding common shares of TUSK for cash consideration of $2.15 per TUSK share. The aggregate value of the transaction is about $257 million.
Wednesday’s market action saw shares of Colossus Minerals (T.CSI) power 49% higher to $2.38 after the miner reported results for the first systematic assaying of drill core for the complete platinum group element suite from the Serra Pelada Project in Brazil, which included 7.88 metres of 406.4 grams per tonne (g/t) gold, 98.4 g/t platinum, 115.7 g/t palladium, 2.74 g/t rhodium, 1.52 g/t iridium, 0.19 g/t ruthenium, and 0.03 g/t osmium.
In addition, shares of Rubicon Minerals (T.RMX) shot up 13% to $1.73 as the gold miner announced new results from ongoing drilling at its 100%-controlled Phoenix Gold Project in the Red Lake gold district of Ontario, which included 173.7 g/t gold over 2.5 metres.
On Thursday, SLAM Exploration (V.SXL) shares surged 25% to 2.5 cents after the micro cap miner said it has received a draft 43-101 Technical Report and resource estimate for its wholly-owned Nash Creek Project in New Brunswick. Using a 2% Zinc Equivalent cut-off and after mill recoveries are factored in, it is estimated that the Nash Creek deposit contains an indicated resource of 7,807,900 tonnes grading 2.72% zinc, 0.55% lead, and 18.26 grams per tonne (g/t) silver, plus an inferred resource of 1,211,700 tonnes grading 2.66% zinc, 0.52% lead, and 18.00 g/t silver.
As well, shares of PharmaGap (V.GAP) added 57% at 22 cents as the biotech firm reported that its lead drug compound PhG-alpha-1 has been accepted for testing at the National Cancer Institute, an institute of the National Institutes of Health. The National Cancer Institute's mandate is to conduct and foster cancer research in the United States.
And, in Friday trading,Canadian Gold Hunter (T.CGH) shares climbed 20% to 30 cents after the micro cap explorer reported that it will acquire all of the issued and outstanding shares of Suramina Resources (T.SAX) on the basis of 0.7541 shares of Canadian Gold Hunter for each one Suramina share. Canadian Gold Hunter claims Suramina brings to the transaction a large, diversified copper/gold exploration portfolio in South America, including the Josemaria copper/gold porphyry project with a 43-101 inferred resource of 460 million tonnes grading 0.39% copper and 0.30 grams per tonne (g/t) gold at a 0.3% TCu cut-off, containing 3.9 billion pounds of copper and 4.4 million ounces of gold.
Finally, shares of EnerGulf Resources (V.ENG) jumped 13% to 43 cents as the oil and gas explorer said it has signed a joint operating agreement with COHYDRO, the Democratic Republic of Congo’s national oil and gas company, setting out the terms of which EnerGulf, as operator, is to manage the exploration activities on its Lotshi Block.
Stockhouse Canadian Small and Micro-cap Stock Report for Wednesday, February 11, 2009
TORONTO (SHfn) - Precious and rare earth metals assays generated some investor interest Wednesday, while Red Lake results shone.
Colossus Minerals (T.CSI) shares powered 49% higher to $2.38 on Wednesday after the miner reported results for the first systematic assaying of drill core for the complete platinum group element suite from the Serra Pelada Project in Brazil, which included 7.88 metres of 406.4 grams per tonne (g/t) gold, 98.4 g/t platinum, 115.7 g/t palladium, 2.74 g/t rhodium, 1.52 g/t iridium, 0.19 g/t ruthenium, and 0.03 g/t osmium.
As well, shares of Rubicon Minerals (T.RMX) shot up 13% to $1.73 as the gold miner announced new results from ongoing drilling at its 100%-controlled Phoenix Gold Project in the Red Lake gold district of Ontario, which included 173.7 g/t gold over 2.5 metres.
Mart Resources (V.MMT), meanwhile, said it has received an unsolicited expression of interest from a third party with respect to a proposal for a corporate purchase transaction. Mart stock popped 50% to nine cents.
Shares of StrataGold (TSX: T.SGV, Stock Forum) climbed 25% to five cents after the micro cap explorer announced that Victoria Gold (TSX: V.VIT, Stock Forum) has agreed to offer StrataGold shareholders 0.1249 of a Victoria common share for each StrataGold common share held, as part of a friendly takeover agreement.
And, Pacific Rubiales Energy (TSX: T.PRE, Stock Forum) Wednesday reported that it has received a Statement of Reserve Data for the Rubiales-Piriri and Quifa Blocks in Columbia. In the Rubiales-Piriri Blocks, the company's gross total proved reserve is 114.3 million barrels (MMbbl) of heavy oil for December 2008. This represents an increase of 82.3% of the proved reserve of 62.7 MMbbl of heavy oil for December 2007. Its shares surged 12% to $3.11.
|Top Canadian Small/Micro-cap Advancers (as of 4 PM Eastern)|
|Cadan Resources (TSX: V.CNF, Stock Forum)||+ 125%|
|Sprylogics International (TSX: V.SPY, Stock Forum)||+ 100%|
|Calibre Mining (TSX: V.CXB, Stock Forum)||+ 86%|
|CMQ Resources (TSX: V.NV, Stock Forum)||+ 77%|
|Australian Solomons Gold (TSX: T.SGA, Stock Forum)||+ 70%|
|Top Canadian Small/Micro-cap Decliners|
|Mount Dakota Energy (TSX: V.MMO, Stock Forum)||- 56%|
|Golden Arch Resources (TSX: V.GAI, Stock Forum)||- 50%|
|Geologix Explorations (TSX: V.GIX, Stock Forum)||- 38%|
|SLAM Exploration (TSX: V.SXL, Stock Forum)||- 33%|
|Royal Roads (TSX: V.RRO, Stock Forum)||- 33%|
Roger Biduk writes:
First, a definition for those who aren’t familiar with ETFs.
Simply put, Exchange Traded Funds (ETFs) allow an investor to buy an entire portfolio of stocks through a single security that tracks and matches the returns of a stock market index.
They’re like mutual funds but better. You can buy ETFs that mirror any stock market index in the world or any industry sector. You can buy them to mirror the upside (going long) or downside (going short).
Unlike mutual funds, they trade like stocks on the major North American Markets and are very liquid.
The two I looked at are leveraged and positioned to profit from the decline in the financial sector:
· The Financial Bear 3X (FAZ) seeks to replicate, net of expenses, 300% of the inverse daily performance of the Russell 1000 Financial Services Index .
This ETF is +145% since Jan. 5.
· UltraShort Financials ProShares (SKF) seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the Dow Jones U.S. Financials index.
This ETF is +88% since Jan. 5.
Many that thought oil was terribly overpriced last summer and was a bubble waiting to burst. They could have bought a Canadian ETF (HOD) that would profit as the price of oil declines.
The Horizons BetaPro NYMEX® Crude Oil Bear+ ETF (HOD) seeks daily investment results equal to 200% of the inverse daily performance, of the NYMEX® light sweet crude oil futures contract for the next delivery month. For example, if the price of oil drops 10%, the ETF will rise 20%.
Well, on July 3/08 the price of oil peaked ~US$147 and HOD closed at $6.77. On Dec. 24/08 the price of oil bottomed and HOD hit $62.72, an incredible gain of 826% in less than five months...!!!
As you may know, Nortel filed yesterday for bankrupcy protection. The shares should be worthless but at one point today on the TSX they traded up 43% on huge volume of over 82 million shares.
But I think much of the volume is from short sellers buying the stock and closing their position. They profited from selling Nortel at a higher price and buying it when it declined.
At one point it was trading around $125CDN. A short-seller could have sold the stock at $125 and bought it today for $.12 to close out the position. That means the profit on one share would be over $124. There's lots of money to be made in a down market or when there's an opportunity to capitalize on a stock that's on its way down.