Tuesday, April 21, 2009

Safety in Norway’s krone

The Norwegian krone might become the new Swiss franc as investors seek a haven from the turmoil engulfing the global economy, argues Axel Merk of Merk Investments.

“The world’s a mess and in our eyes policymakers are inadvertently doing their best to worsen a bad situation,” he says. “We are in a period where a depression, if not a long and drawn-out recession, is a very realistic probability. Where can investors hide?”

Mr Merk believes that recent actions by the Swiss National Bank have diluted the franc’s status as a haven currency.

“Investors put their money in Switzerland because of its safe haven appeal,” he says. “Now, the SNB intervenes in the currency markets to erode trust in the franc. The SNB is also more vulnerable as it engages in unconventional policies, from swap lines for eastern Europe to the issuance of US dollar-denominated Swiss Treasury bills.”

Mr Merk believes that Norway may replace Switzerland as the place to take refuge in Europe.

“Norway is a surplus country - an enviable position to be in should we face an extended depression - and it can afford to get through this crisis.

“The krone is not particularly ‘sexy’; if the markets recover, risk-friendly money may move towards other currencies again.

“However, in our assessment, the Norwegian krone may be the most appropriate depression trade.”

http://www.ft.com/cms/s/0/ca170f16-1239-11de-b816-0000779fd2ac.html?nclick_check=1

Monday, April 20, 2009

Dow plunges 290

as investors worry about banks.

Investors are back to worrying about banks. Long-present unease about soured loans bubbled over on Monday after Bank of America Corp. said it set aside $13.4 billion to cover lending losses even as it posted earnings that beat expectations. Other big banks have also increased loss provisions in the past two weeks.

Financial stocks suffered some of the day's worst declines and major market indicators tumbled more than 3 percent, including the Dow Jones industrial average, which fell 290 points.

Bank of America plunged 24.3 percent and Citigroup fell 19 percent as investors became worried that cleaning up bad loans from banks' balance sheets may have farther to go than many had anticipated.

Joe Saluzzi, co-head of equity trading at Themis Trading LLC, said traders are now viewing bank earnings with more skepticism and believe that the better-than-expected profit reports may be disguising problems.

"They're looking at bank numbers and are saying they are not that great," Saluzzi said.

Even without growing anxiety about financial stocks, traders had been looking for some pullback after the Dow jumped 24 percent from 12-year lows in early March.

The renewed worries about banks' debt problems were aggravated by news reports that their lending remains tight and that the government may swap its debt in banks for ownership stakes as its $700 billion bailout fund runs down.

Because of the central role lending plays in keeping businesses of all kinds going, investors have been hunting for signs of a recovery in banks before they get more optimistic about the broader economy.

The market has been encouraged by early indications that a government drive for lower interest rates has been helping banks step up lending, but investors are still sensitive to any signs of trouble.

Now they're on high alert about what the government will say in two weeks when it reports results of in-depth examinations to see which banks might need more help to stay afloat if the economy gets even worse.

Energy and materials companies also fell along with the prices of key commodities they rely on such as crude oil.

The market declines were broad and deep, outweighing what would otherwise be positive news about a step-up in deal activity. After a deal with IBM Corp. didn't work out, troubled technology company Sun Microsystems found a buyer in Oracle, a leading maker of business software, while PepsiCo Inc. said it would bid $6 billion to buy its two biggest bottlers.

According to preliminary calculations, the Dow fell 289.60, or 3.6 percent, to 7,841.73.

Broader stock indicators also lost ground. The Standard & Poor's 500 index fell 37.20, or 4.3 percent, to 832.40, and the Nasdaq composite index fell 64.86, or 3.9 percent, to 1,608.21.

About 10 stocks fell for every one that rose on the New York Stock Exchange, where volume came to 1.8 billion shares.

Concerns about the sustainability of bank earnings weighed on financial stocks. Citigroup Inc. lost 19.5 percent, JPMorgan Chase & Co. fell 10.7 percent and American Express Co. fell 13 percent.

Jeffrey Frankel, president of Stuart Frankel & Co. in New York, said the retreat in financial stocks is welcome after their massive gains from early March — he said too sharp a rise could endanger a long-term advance. Many bank stocks have doubled in only weeks.

"These banks have had a tremendous run," Frankel said. "Now you're hearing the bearish camp speak up a little bit."

Investors are also cautious about financials after The New York Times reported that the government might be forced to find ways to stretch the $700 billion allocated for the government's bank rescue fund by converting the government's loans into common stock. Such a move would give the government a controlling stake in banks and hurt existing shareholders by reducing the value of their shares.

Separately, The Wall Street Journal reported that banks receiving government bailout money are having a hard time making loans.

Wall Street was more upbeat about the Oracle deal, which carries a 42 percent premium to Sun's Friday closing stock price of $6.69. Sun jumped 36.8 percent, while Oracle slipped 1.3 percent.

Beverage and snack maker PepsiCo offered to acquire Pepsi Bottling Group and PepsiAmericas in a move to cut costs. Pepsi lost 4.4 percent, while Pepsi Bottling jumped 22 percent and PepsiAmericas surged 26 percent.

In earnings news, drug maker Eli Lilly & Co.'s first-quarter earnings rose 24 percent on higher sales of the antidepressant Cymbalta and as costs for Humalog, a form of insulin Lilly makes, remained flat. Shares slipped 2.3 percent.

Light, sweet crude fell $4.45 to $45.88 a barrel on the New York Mercantile Exchange.

Occidental Petroleum Corp. lost 6.3 percent, while Dow Chemical Co. fell 9.1 percent.

In other market moves, the Russell 2000 index of smaller companies fell 26.88, or 5.6 percent, to 452.49.

Bond prices rose. The yield on the 10-year Treasury note fell to 2.85 percent from 2.95 percent late Friday. The yield on the three-month T-bill was unchanged at 0.13 percent.

The dollar was mostly higher against other major currencies. Gold prices rose.

http://news.yahoo.com/s/ap/20090420/ap_on_bi_st_ma_re/wall_street

Saturday, April 11, 2009

Gold standard debate roars on

A few months ago, Terry Smith, head of Tullett Prebon, the interdealer broker, chaired a panel at the World Economic Forum meeting in Davos which was asked to produce one concrete recommendation to fix the global financial crisis.

The top pick? Not anything on toxic assets or fiscal spending. Instead, this gaggle of leading financiers called for a new reserve currency, akin to an old-style gold standard.

“Two-thirds of the world’s assets are denominated in a fiat currency issued by a country whose authorities are taking policy actions which seem inevitably to lead to its debasement,” explains Mr Smith, noting that “it seems . . . the Chinese have now concluded that this is not acceptable”.

Just a bit of pie-in-the-sky posturing of the sort that often occurs in high-altitude Davos? Perhaps. But Mr Smith is hardly a do-gooding, state-loving dreamer; on the contrary, Tullett Prebon is about as ruthlessly free-market as they come.

Moreover, these musings about a gold standard are currently cropping up in all manner of unlikely places. One savvy European property developer (who aggressively sold most of his holdings in early 2007) recently told me that he is now moving a growing proportion of his assets from government bonds into gold, even at today’s elevated prices.

“The logical conclusion of where we will end up eventually is with some type of gold standard,” he explains, arguing that future inflation will almost inevitably cause a future collapse in government bonds.

Half a world away in the Middle East, some sovereign wealth funds now say that they are stocking up enthusiastically on food and gold, due to similar reasoning.

Meanwhile, in New York a (still) formidable American hedge fund recently circulated private research that echoes the reasoning of Mr Smith. Most notably, this hedge fund points out that since the world abandoned the gold standard on August 15, 1971 credit creation has spiralled completely out of control.

But this four-decade long experiment with fiat currency is not just something of a historical aberration, it argues – but potentially very fragile too. After all, the only thing that ever underpins a fiat currency is a belief that governments are credible. In the past 18 months that belief has been tested to its limits. In coming years it could be shattered, particularly if the current wave of extraordinary policy measures unleashes a wild bout of inflation.

Hence the chatter about a gold standard. Indeed, as the debate bubbles up, some financiers are now even emailing each other an extraordinary little essay that Alan Greenspan himself wrote in support of a gold standard back in the 1960s, called “Gold and Economic Freedom”*.

In the years since he penned this essay, Greenspan has partly backed away from those ideas (and he blatantly ignored their implications when he was at the Fed.) But now they look prescient.

“Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets . . . [but] in the absence of the gold standard . . . there is no safe store of value,” Greenspan wrote back then, pointing out that without a gold standard in place, there is little to prevent governments indulging in wild credit creation. “Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.”

Of course, for the moment all this muttering about gold is simply wild speculation. Even if western leaders suddenly were to decide they wished to turn back the clock, the logistics of embracing a new gold standard would be mind-boggling. UBS, for example, calculates that the US reserve of gold are so small, relative to its monetary base, that a price above $6,000 an ounce would be needed to reintroduce a gold standard. To implement that standard in Japan, China and the US, the price would be more than $9,000. Moreover, right now few western governments have any motive to even entertain the debate, given that inflation may soon seem the least bad way to tackle the current overhang of debt.

But what this debate does show is just how much cognitive dissonance – and utter uncertainty – continues to stalk the markets. It might seem almost unthinkable to propose a return to a gold standard, in other words. However, the key point is that the last 18 months have already produced a stream of once unimaginable events.

Given that, shell-shocked investors are increasingly reluctant to rule anything out, as they stare at such uncharted waters. So while I would not bet today on a gold standard returning any time soon, I would also not bet that the debate dies away. Nor would I bet that the gold price crashes too far from its current rate of $900, while so much fear continues to stalk the world.

Financial Times

Thursday, April 9, 2009

Gold falls as investors turn to stock market rally

Commodity prices ended mixed Thursday as a stock market rally cut into demand for safe-haven investments like gold.

Gold prices fell $2.60 to settle at $883.30 an ounce on the New York Mercantile Exchange. Meanwhile, the dollar rose against other major currencies. Gold can fall when the dollar rises because investors use the metal as a hedge against inflation, which can be caused by a weak dollar.

The gyrations came in a shortened week and as stocks bounded higher. Markets are closed for Good Friday.

Stocks jumped Thursday after banking giant Wells Fargo & Co. surprised investors with the prediction it would earn $3 billion for the first quarter because of a strong increase in its lending business. Major stock market indexes rose more than 3 percent Thursday.

A sharp rise in stocks has weighed on demand for gold in recent weeks. Prices have fallen since early March when Wall Street began a rally that lifted major stock market indicators more than 20 percent in less than a month from 12-year lows.

Other metals were mixed Thursday. May silver fell 1 cent to $12.33 an ounce, while May copper futures rose 7.25 cents to $2.071 a pound.

http://www.google.com/hostednews/ap/article/ALeqM5jND4r3B-VBZu2Ogg2_yzjYnPIP8gD97F6NQO1