Thursday, August 25, 2011

Solution to Deficit: Global Fiscal Adjustment

Goldman Sachs Global ECS Research stresses that large fiscal adjustments are required around the world, particularly in the advanced economies. The IMF projects an average primary deficit (excluding interest) of 5.3% of GDP in the advanced economies in 2011...

GS Global Econ Paper Aug19 2011

Reflection Series: Jonathan Ive, Apple's senior vice-president of industrial design

Other than Steve Jobs himself, no single figure has defined Apple’s resurgence since 1997 more than Jonathan Ive, the company’s senior vice-president of industrial design.
He's a designer who taps into the wells of unmet consumer need that fuel Apple's ongoing growth. With the exception of Steve himself, he's tuned to the zeitgeist that determines winners more than anyone else at Apple. Moreover, he's able to articulate that vision with consistent grace and precise execution. He's got a track record of hitting home runs. If you want to keep the innovation leadership that makes Apple, well, Apple, then you've got to have the driver's seat firmly bolted to the flow of trend, meaning, and consequence. That's the domain of Design, and Jonathan Ive is your Designer.
Jony Ive is a brilliant designer. That doesn’t mean he would be a great CEO — he certainly doesn’t have the sales flair that defines an Apple product introduction. Still, an interesting and provocative reminder of the need to figure out what comes after Steve.

Wednesday, August 24, 2011

Hedge funds have opened the biggest short position on the S&P500 since December 2008

Hedge funds held a net short position of 71,980 short contracts at August 16, according to a monthly report on global asset allocation from Societe Generale, which looks at positions reported to the Commodity Futures Trading Commission. This is the biggest figure seen since December 2008, three months after the collapse of Lehman Brothers, when hedge funds held a net short position of 85,984 short positions.

Chart of the Day: The big short

Alain Bokobza, head of global asset allocation at Societe Generale, and one of the authors of the report, told Financial News: “Active market participants have switched to a massive net short. They have reacted very strongly to the recent economic and political newsflow. It’s a very important figure. It indicates just how pessimistic hedge funds are.”

Bokobza said that there’s a correlation between hedge funds opening the net short position and the S&P500 falling. "They have been partly initiating the fall by opening the net short.”

The S&P500 was trading at 1,192.76 on August 16 and fell to a low of about 1,121.45 on Tuesday.

According to CFTC data, the number of net short contracts hit a high of 127,474 in early September 2007, at the peak of the sub-prime housing crisis. Hedge funds currently account for 14% of total open interest on the S&P500, according to the CFTC.

US markets are poised to digest several events later this week. The Kansas City Federal Reserve’s survey - a regional manufacturing report - will be released tomorrow; a second reading on second-quarter GDP is scheduled for release on Friday; also on Friday, Federal Reserve Chairman Ben Bernanke will speak on the direction of the US economy at an annual conference in Jackson Hol, hosted by the Kansas City Fed; and the final reading of the Reuters/University of Michigan Consumer Sentiment Index is due.

Bokobza said that hedge fund reaction to this newsflow may have an impact on the S&P500. He said: “At some point they will have to take profits and cover their shorts. Technically this will be a bullish indication for equities."

Hedge funds continue to hold a long position in gold, according to the Societe Generale report.

(Financial News, August 24, 2011)

Factory activity plummeted in August

New data suggests that the US will soon enter recession, if it has not done so already. The figures for the East Coast region shows that factory activity plummeted in August to a level never seen before without the economy being in recession.

Philadelphia nightmare

Philadelphia leads the way

The index from the Federal Reserve Bank of Philadelphia shows manufacturing output in the Mid-Atlantic region of the US East Coast stood at minus 30.7 in August compared with a gain of 3.2 in July.

The survey was conducted during August 8-16.

The data shows that this month's key purchasing data index from the National Institute for Supply Management could sink as low as 42 from the current figure of 50.9. The close relationship between the two data points is illustrated by the attached graphic. Economists had expected a 1.5 rise in the Philadelphia reading for August.

Any figure of below 50 for the ISM index, due to be released at the beginning of September, indicates the economy is contracting.

That, in turn, would be likely to push down equities. Deutsche Bank strategists said. “Using our often-used relationship between the change in the S&P500 and the ISM this would point to a year on year fall of 22% in US equities. On September 1 last year the S&P 500 was at around 1080 and 22% below this would take us to around 860.”

Things may not get that bad. Deutsche points out that the index hit a low last July and August. A fairer 2010 starting point to calculate a drop could be the beginning of year. This would imply a less frightening drop in the S&P500 to 1000.

Other analysts say the fall in the US equities over the last fortnight has already partly discounted the arrival of recession.

Economists at Germany's Berenberg Bank said current reactions to bad news, or expected bad news, are overdone: "It is the nature of panics and manias that they drive asset prices away from fundamental valuations. For a while, such exaggerations reinforce themselves as investors are inclined to pay more attention to facts, events or mere rumours that seem to justify their current concerns than to longer-run fundamentals.

The Wall Street Journal quotes Eric Green, head of rates research at TD Securities, as expecting a less severe fall in the ISM to between 46 and 47. He said: “We were looking for more weakness on the ISM but nothing like this.”

(Financial News, August 19, 2011)

Tipping Point

Bill Gross, who runs the world's biggest bond mutual fund at Pacific Investment Management Co., talks about the U.S. debt ceiling compromise passed by Congress and signed into law by President Obama, the outlook for U.S. tax policy and the state of the economy. Gross, speaking with Carol Massar on Bloomberg Television's "Street Smart," also discusses Federal Reserve policy and Pimco's investment strategy in the current climate.

The U.S. economy is “one giant soft patch”

The U.S. economy is “one giant soft patch” on the verge of a recession, economist David Rosenberg of Gluskin Sheff & Associates Inc. in Toronto, said today.
In a radio interview with Tom Keene on “Bloomberg Surveillance,” Rosenberg said the economy is in a “classic pre-recession pattern” and that “we are on the precipice of the economy contracting between now and the winter.”
Rosenberg called consumer spending, which accounts for about 70 percent of the economy, “the weakest link” and said that “housing is clearly not coming up off the bottom.”
“Capital spending is still positive but not enough to offset the other contractionary forces in the economy,” Rosenberg said.
The economy has slowed from last year. Gross domestic product expanded at a 1.3 percent annual rate in the second quarter after a 0.4 percent pace in the first three months of this year, according to Commerce Department statistics.
The economy expanded at a 3.1 percent pace on average in 2010.
The unemployment rate has been at or above 9 percent since April, according to the Labor Department statistics.
In an interview on Aug. 5, Rosenberg put the odds of a recession at 99 percent. “When you’re running the economy so close to zero, you’re like one little shock away from heading into a recession,” he said.

(Bloomberg, August 22, 2011)