Words from the (investment) wise for the week that was (June 8

“Words from the Wise” this week comes to you in a shortened format as “day-job” responsibilities precludes me from doing a comprehensive commentary. However, a full dose of excerpts from interesting news items and quotes from market commentators is provided.

Signs of stability characterized trading on financial markets during the past week. As investors placed their bets on a global economic recovery, equities, base metals and crude oil made further headway, with long-term government bond yields remaining at elevated levels, but declining somewhat after a successful US 30-year bond auction and pro-US Treasury comments from Japan’s minister of finance.

Notwithstanding buyers returning to US long-term bonds, the greenback retreated on concerns of the huge issuance of government bonds, whereas commodity-linked and other high-yield currencies improved strongly.

The British pound also advanced as the UK’s National Institute for Economics and Social Research said the recession had passed through its trough in March. Also, the Organization for Economic Co-operation and Development (OECD) reported on Monday (via the Financial Times) that most of the world’s big economies were close to emerging from recession and that data pointed to a possible recovery by the end of the year. “Twenty-two out of the 30 OECD countries saw a rise in forward-looking measures of activity,” said the report.

The week’s performance of the major asset classes is summarized by the chart below. Not shown, platinum (-2.1%) and silver (-2.9%) cooled off in tandem with gold bullion (-1.6%). As the precious metals consolidate, gold bull Richard Russell (Dow Theory Letters) said in frustration: “Gold, gold, you’re making me old.”

The surge in oil prices to an eight-month high of more than $72 a barrel (in the case of West Texas Intermediate Crude), raised concerns as this is equivalent to a two-percentage-point drag on real GDP growth, according to David Rosenberg (Gluskin Sheff & Associates). In order to provide guidance on the direction of crude oil, Adam Hewison of INO.com has prepared another of his popular technical analyses, arguing that the long-term trend is bullish, but that a short-term pullback appears likely. Click here to access the short presentation.

The MSCI World Index (+1.2%) and the MSCI Emerging Markets Index (+0.4%) last week again added to the rally’s gains to take the year-to-date returns to +8.1% and a massive +39.4% respectively. Both these indices have only had one down-week since the advance commenced in early March.

Although trading was relatively flat, the major US indices (with the exception of the Russell 2000 Index) nevertheless gained for a fourth consecutive week - and for the twelfth week out of the past 14 - as seen from the movements of the indices: S&P 500 Index (+0.7%, YTD +4.8%), Dow Jones Industrial Index (+0.4%, YTD +0.3%), Nasdaq Composite Index (+0.5%, YTD +17.9%) and Russell 2000 Index (-0.7%, YTD +5.5%).

The Dow on Friday became the last of the major indices to break into positive territory for the year to date, albeit by a meager 0.3%.

As far as non-US markets are concerned, returns ranged from top performers Namibia (+8.5%), Vietnam (+6.5%), Mauritius (+5.4%), Palestine (+4.5%) and Thailand (+4.0%), to Ghana (-8.7%), Serbia (-5.2%), Sudan (-4.8%), Taiwan (-4.4%) and Bahrain (-2.4%), which experienced headwinds.

Among the major markets, the Japanese Nikkei 225 Average jumped by 3.8% to breach the 10,000 level for the first time since October on the back of recent data releases, indicating that the pace of Japan’s recession was moderating. (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 leaders for the week included MSCI Thailand (THD) (+6.2%), iShares MSCI Sweden (EWD) (+6.0%) and PowerShares DB Base Metal (DBB) (+5.6%), with notable laggards being Market Vectors Gold Miners (GDX) (-9.2%), iShares Silver Trust (SLV) (-6.4%) and iShares Taiwan (EWT) (-5.8%).

Other news is that Chrysler completed its deal with Fiat, the US Treasury Department announced that ten banks would repay TARP funds, and the Obama administration is dropping its plan to cap salaries at firms receiving bailout funds and has backed away from a large-scale reduction in the number of agencies overseeing financial markets.

Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “banks”, “markets” and “financial” featured prominently. “Bonds”, “yields” and “value” have soared in prominence as pundits debate whether government bonds and stock markets have seen secular turning points. “Recovery” also moved up the ranks as an increasing number of reports showed the global recession was abating.

Back to the stock markets: an analysis of the moving averages of the major US indices shows all the indices (with the exception of the Dow Jones Transport Index) above their 50- and 200-day moving averages and May 8 highs. The S&P 500, Nasdaq and Russell 2000 have also surpassed their early January peaks.

According to Bloomberg, the S&P 500 Index has not posted a daily rise or fall of 1% or more since June 4, the longest stretch in 14 months. Since September 15, 2008, when Lehman Brothers filed the largest ever US bankruptcy, 131 out of the 188 trading days have had moves of 1% or more.

The S&P 500 seems to be mapping out a trading range between 925 and 950 as shown in the chart below. Time will tell the direction of the eventual break out of the trendless market, but stock markets would appear to be getting somewhat exhausted, as indicated in last Sunday’s “Words from the Wise“.

The last words regarding stock markets go to David Fuller (Fullermoney) who said: “I am certainly not moving away from my view that this is a bull, since much of what we have seen since last October and everything since March has been consistent with a new bull market. However, extreme rallies to break the previous downtrends are often prone to lengthy pullbacks and ranging, because they discount improving or less bad news very quickly.

“Where the corrections occur, they are likely to be sharper in high-flying emerging markets but delay the next upward move on Wall Street for longer, because it is underperforming and is a much bigger market.”

Economy
“Global business confidence in early June improved to its best reading since last October. Sentiment remains consistent with a global recession, but the recession is quickly moderating. Expectations regarding the outlook for year’s end are also much improved,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. The Survey highlighted that US and Canadian confidence had notably improved in recent weeks, with businesses saying that sales conditions were stabilizing.

Nobel Prize-winning economist Paul Krugman commented that the US economy would probably emerge from the recession by September. “I would not be surprised if the official end of the US recession ends up being, in retrospect, dated sometime this summer. Things seem to be getting worse more slowly. There’s some reason to think that we’re stabilizing,” Krugman said at the London School of Economics (via Bloomberg).

According to Bloomberg, Richmond Fed Bank President Jeffrey Lacker said on Wednesday the Federal Reserve had to avoid the risks of “waiting too long or moving too slowly” to tighten monetary policy once an economic recovery begins. “The challenge for us on the Federal Open Market Committee will be to shrink our balance sheet and tighten policy soon enough when the recovery emerges to prevent rising inflation. The danger will be that we will not shrink our balance sheet enough when the recovery emerges.”

US interest rate futures rose to price in a tightening in the interest rate by the Federal Reserve by the end of this year. However, Andrew Balls, PIMCO’s managing director in London, believes this to be premature and wrote in a report (via Bloomberg) that signs of recovery in economies around the globe pointed to a slower pace of decline rather than recovery. “Rate hikes will be some time in coming.”

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Jun 9	10:00 AM	Wholesale Inventories	Apr	-1.4%	-1.0%	-1.2%	-1.8%
Jun 10	8:30 AM	Trade Balance	Apr	-$29.2B	-$29.5B	-$29.0B	-$28.5B
Jun 10	10:30 AM	Crude Inventories	06/05	-4.38M	NA	NA	+2.87M
Jun 10	2:00 PM	Treasury Budget	May	-$189.7B	NA	-$181.0B	-$165.9B
Jun 10	2:00 PM	Fed’s Beige Book	-	-	-	-	-
Jun 11	8:30 AM	Retail Sales	May	0.5%	0.3%	0.5%	-0.2%
Jun 11	8:30 AM	Retail Sales ex-auto	May	0.5%	0.0%	0.2%	-0.2%
Jun 11	8:30 AM	Initial Claims	06/06	601K	610K	615K	625K
Jun 11	10:00 AM	Business Inventories	Apr	-1.1%	-0.8%	-1.0%	-1.3%
Jun 12	8:30 AM	Export Prices ex-agriculture	May	0.3%	NA	NA	0.2%
Jun 12	8:30 AM	Import Prices ex-oil	May	0.2%	NA	NA	-0.2%
Jun 12	9:55 AM	Michigan Sentiment-preliminary	Jun	69.0	70.5	69.5	68.7

In addition to an interest rate announcement by the Bank of Japan (Tuesday, June 6), the US economic highlights for the week include the following:

Tuesday, June 16
Building Permits, Housing Starts, PPI, Capacity Utilization and Industrial Production

Thursday, June 18
Initial Jobless Claims, Leading Economic Indicators, and the Philadelphia Fed Survey

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

Will Rogers offered the following advice: “Buy stocks that go up, and if they don’t go up, don’t buy them.” (Hat tip: Vitaliy Katsenelson.) It sounds simple enough! Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will help Investment Postcards readers to have some advance warning of the most likely winners and losers.

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Click here for some more thought-provoking news items and quotes from market commentators.

* Dr Prieur du Plessis is chairman of Plexus Asset Management and writes the Investment Postcards from Cape Town blog (www.investmentpostcards.com)