Signs of the Economic Apocalypse, 6-11-07

From Signs of the Times:

Gold closed at 650.30 dollars an ounce Friday, down 4.1% from $676.90 at the close of the previous Friday. The dollar closed at 0.7478 euros Friday, up 0.6% from 0.7435 at the previous week’s close. That put the euro at 1.3373 dollars compared to 1.3449 the Friday before. Gold in euros would be 486.28 euros an ounce, down 3.5% from 503.31 for the week. Oil closed at 64.76 dollars a barrel Friday, down 0.5% from $65.08 at the close of the week before. Oil in euros would be 48.43 euros a barrel, up less than 0.1% from 48.39 for the week. The gold/oil ratio closed at 10.04 Friday, down 3.6% from 10.40 at the close of the previous Friday. In U.S. stocks, the Dow closed at 13,424.39 Friday, down 1.8% from 13,668.11 at the close of the week before. The NASDAQ closed at 2,573.54 Friday, down 1.6% from 2,613.92 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 5.11% Friday, up 16 basis points from 4.95 for the week (and up 25 basis over the past two weeks).



Big moves in the markets last week. The Dow lost a lot of ground through Thursday, but regained some on Friday to close down less than 2% for the week. But gold dropped 4% and the ten-year T-note rose to 5.11%. Something seems to be up but what is it? It seems that second quarter growth in the U.S. will be higher than the sluggish first quarter. That could lead to higher U.S. interest rates, as could the quiet moves away from U.S. Treasury paper by other countries’ central banks. Which could lead to lower gold prices (higher interest rates make currencies more valuable). But the strength of the swings are worrisome.

European stocks, which had been doing very well lately, were rocked by a “three-alarm” sell recommendation by Morgan Stanley:

Morgan Stanley's 3-Alarm Sell Signal
The firm issues a "full house" warning on European equities, fueling big declines in stock markets Wednesday

Will Andrews

June 6, 2007, 2:40PM EST

There have been a number of bearish analyst calls on stocks amid the recent global stock rally, but it took a three-alarm warning from Morgan Stanley on European equities to catch investors' attention. The note, which was released June 4 but didn't seem to attract the market's attention until June 6, helped spark a big sell-off during the European session and also contributed to big declines on Wall Street, with the Dow Jones industrial average down over 150 points at one point. The Nasdaq and S&P 500 indexes were both off about 1% in afternoon trading.

Indeed, major European indexes, buffeted by interest rate worries after the European Central Bank raised its benchmark interest rate by a quarter point to 4% on June 6, took a big hit. London's FTSE 100 index fell 1.7%, as did the CAC-40 index in Paris. The Dax index in Frankfurt suffered the worst damage on the day, falling 2.4%.

What caused all the fuss? In the note from the firm's chief European equity strategist Teun Draaisma and other Morgan Stanley staff analysts, the company issued a "Full House" sell signal on European equities. "[W]e now have a tactical sell signal as rates are rising and hitting critical levels." The firm pointed to signals from three indicators: A fundamentals indicator, which tripped because of higher bond yields and higher new orders from manufacturers in the U.S, and existing sell signals on its valuation and risk indicators.

"Such a full house sell signal across these three indicators is rare, and has occurred only five times since 1980", the firm said. Equities have always been down in the next six months following such signals, according to Morgan Stanley, on average by 15%, with previous occasions including September, 1987, and April, 2002. "We now have the choice – jump on the strong momentum, or play the odds that our models give us," the firm said in the report. "We prefer to be on the right side of those odds."

Morgan Stanley strategists concurred with some recent thinking on the market: "Yes, we agree that the economy is fine, large caps are cheap and M&A is buoyant." But Morgan Stanley argues that at this stage of bull markets, larger corrections become more frequent, caused by little changes in the macroeconomic environment.

The strategists hedged a bit, noting that cautious investor sentiment can negate a valuation sell signal. "One explanation why our models haven't worked yet in the last few weeks is sentiment: arguably the wall of worry is still being climbed." The firm said its indicators are suggesting an equity market correction, and it is expecting one. "We remain neutral equities, overweight cash, underweight bonds, and continue to have a preference for large caps."

While Morgan Stanley's call on European stocks took a dramatic turn, its view on U.S. equities remains unchanged. In a June 4 note, chief U.S. strategist Henry McVey said there had been no change to the company's U.S. asset allocation. "Despite the additional upside we are forecasting, we do not believe that now is the time to pile into equities." For the U.S., Morgan Stanley continues to have an equal weight rating on stocks, at 65% of its recommended portfolio, while it is overweight cash (10%), and underweight bonds (25%).

Chris Burba, a technical market strategist for Standard & Poor's, says the MS note was a contributing factor to Wall Street's June 6 sell-off. While there may have been some initial confusion as to whether Morgan Stanley was making its call for Europe exclusively or for other markets, Burba notes that "even if it's just for Europe it's still worrisome for U.S. investors." Burba points to other factors weighing on U.S. stocks, including a recent uptick in interest rates and worries about Federal Reserve rate hikes later this year. (S&P, like BusinessWeek.com, is a unit of The McGraw-Hill Cos.

European media were a bit late to the party, but they jumped in head first Wednesday as the "Full House" note circulated more widely. "Morgan Stanley has advised clients to slash exposure to the stock market after its three key warning indicators began flashing a 'Full House' sell signal for the first time since the dotcom bust" wrote London's Daily Telegraph on June 6.

A Morgan Stanley spokesman confirmed to BusinessWeek that the sell signal was targeted at European equities. Some of the confusion in other markets may have resulted from early media reports about the release of the note, which "blew things out of proportion," said the Europe-based spokesman, who declined to be identified because of firm policy.

With global equity investors nervous after recent big gains – and more worried about rising inflation and interest rates – a big bearish call from anywhere can spark a rush to the exits.

In the U.S. stocks rose Friday after a week-long selloff. According to some analysts, the selloff and the rise on Friday were both related to the drop in bonds (meaning higher yields or interest rates). Higher interest rates can mean lower corporate profits. So dropping stock prices. Or, higher interest rates indicate a strong economy, and higher profits, so stock prices go up:

Stocks still have room to extend rally

Herbert Lash

Fri Jun 8, 7:09 PM ET

NEW YORK (Reuters) - Stocks could move higher next week after a bond market rout led investors to wonder if the threat of inflation was on the horizon or if the economy was actually stronger than expected, and good for stocks.

Major stock market gauges recovered on Friday after a bond sell-off pushed the benchmark 10-year U.S. Treasury note's yield up to 5.25 percent -- matching the fed funds rate target at one point -- from levels below 5 percent a week ago. That jump in government bond yields rattled investors who, skittish about a bull market that has lasted longer than most, worry that rising capital costs will cut corporate profits.

Around midday on Friday, stocks began rallying as the 10-year note's yield retreated to around 5.11 percent.

Friday's recovery after a three-day slide is a good indication of where the market is headed as investors realized they overreacted to a spike in market interest rates, said David Joy, market strategist at RiverSource Investments.

"Interest rates are where they should be, and we haven't had any inflation. This a little adjustment to a new level of rates, a level that the stock market doesn't have a problem with," Joy said.

The blue-chip Dow Jones industrial average climbed 157.66 points, or 1.19 percent, to end Friday's session at 13,424.39. The broad Standard & Poor's 500 index gained 16.95 points, or 1.14 percent, to finish at 1,507.67. The Nasdaq Composite Index advanced 32.16 points, or 1.27 percent, to close at 2,573.54.

Falling oil prices on Friday also helped the major U.S. stock indexes rebound. U.S. crude oil for July slid $2.17 to settle at $64.76 a barrel on the New York Mercantile Exchange. For the week, NYMEX July crude fell 32 cents.

For the week, though, the effects of the pullback were visible, with the Dow average ending down 1.78 percent, the S&P 500 falling 1.87 percent and the Nasdaq losing 1.54 percent.

For the year so far, however, the Dow is still up 7.71 percent, while the S&P 500 is up 6.30 percent and the Nasdaq is up 6.55 percent.

With memories of the dot-com bust still fresh, many investors are cautious and trying to identify an inflection point, Joy said. But stronger growth, absent inflationary pressures, is good for stocks, he said.

"The bond market has realized rates should be a little higher, given how strong the economy is," he said.

In other news, the media took notice of a troubling recent trend. The super-rich buying massive tracks of land in South America. Why are they doing this? To secure fresh water sources? To have a place to sit out the next ice age? To set up their own kingdoms in a post-war or post apocalyptic world? The following article that drew attention to the phenomenon raises many questions and answers few. It also highlights the sinister undertones of the world conservation movement:

American buys slices of South America

Shane Romig

Jun 9, 7:25 PM ET

LOS ESTEROS DEL IBERA, Argentina - Associated Press

The American multimillionaire who founded the North Face and Esprit clothing lines says he is trying to save the planet by buying bits of it. First Douglas Tompkins purchased a huge swath of southern Chile, and now he's hoping to save the northeast wetlands of neighboring Argentina.

He has snapped up more than half a million acres of the Esteros del Ibera, a vast Argentine marshland teeming with wildlife.

Tompkins, 64, is a hero to some for his environmental stewardship. Others resent his land purchases as a foreign challenge to their national patrimony.

In an interview with The Associated Press, Tompkins said industrialized agriculture is chewing up big chunks of Argentina's fragile marshland and savanna, and that essential topsoil is disappearing as a result.

"Everywhere I look here in Argentina I see massive abuse of the soil ... just like what happened in the U.S. 20 or 30 years ago," he said.

Tompkins hopes to do in Argentina what he did in Chile — create broad stretches of land protected from agribusiness or industrial development, and one day turn them over to the government as nature reserves.

Wealthy foreigners have bought an estimated 4.5 million acres in Argentina and Chile in the past 15 years for private Patagonian playgrounds. Sylvester Stallone, Ted Turner and Italian fashion designer Luciano Benetton all have large holdings set amid pristine mountains and lakes.

So, too, has the Bush family in Paraguay. Why did they not mention this?

Tompkins was among the early ones, buying a 35-mile-wide strip of Chile from a Pacific coastal bay to the country's Andean mountain border with Argentina. He said his purchases were intended specifically to protect the environment.

Argentine officials took notice and eagerly courted Tompkins' philanthropy, flying him to several areas of ecological significance in the late 1990s — when the government was strapped for cash because of the economic crisis.

"The land conservation budget was burning a hole in our pocket," Tompkins said.
He bought a 120,000-acre ranch in 1998 and has increased his Argentine holdings to nearly 600,000 acres since then. He now owns well over 1 million acres in Chile and Argentina, a combined area about the size of Rhode Island.

The financial details of the transactions were not disclosed because they were private deals between Tompkins and landowners. There was no major opposition to the deals initially because Tompkins bought the land parcels gradually, keeping a low profile.

Critics now weave many conspiracy theories, accusing Tompkins of seeking control of one of South America's biggest fresh water reserves, and worrying that he might never cede the lands to the state.

"These lands should not belong to an individual, much less a foreigner," said Luis D'Elia, who argues the American could gain "control of resources that are going to be scarce in the future, like water."

Tompkins' Argentine holdings sit atop the huge Guarani Aquifer, which extends north into Paraguay.

Last year, D'Elia, then a minister in Argentina's left-leaning cabinet, accused Tompkins of blocking access to public roads and cut through some locked gates to the land trust's property.

"He blundered in cutting the provincial road, the only access for the people living in the area," D'Elia argued.

This month lawmakers in Corrientes province, where the wetlands are located, modified the local constitution to block foreigners from buying land considered a strategic resource. The law appeared to target any new attempts by Tompkins to increase his holdings.

Tompkins responded in an e-mailed statement from his publicist that such changes would be unconstitutional and likely trigger legal challenges.

Jose Luis Niella, a Catholic priest and social activist, said many poor people no longer have access to lands where ancestors lived freely for generations. "It's not fair for him to be concerned only with protecting the environment," Niella said.

In Chile, independent Sen. Antonio Horvath said the Chilean government must have final say on land usage, complaining that Tompkins' purchases were "effectively splitting the country in two."

Opposition lawmakers in both countries have sought unsuccessfully to expropriate Tompkins' purchases or put limits on extremely large landholdings.

The Argentine wetlands remain wild for now, with marsh deer feeding on tall grasses, families of capybaras splashing through the muddy water and caymans sunning themselves on the banks of small islands. An ostrich-like nandu tries to peck its way in through a screen door at one of the eco-tourism lodges opened for visitors in three renovated ranch houses.

Tompkins' Conservation Land Trust recently released its first anteater into the wild and wants to reintroduce otters and even jaguars.

Tompkins shrugs off the protests.

"If you had to go to bed every night thinking about every accusation that would come up the next day, you'd be consumed," he said. "Some of that stuff is laughable. ... You've just got to live with that and focus on the things you're doing."

Tompkins insists he'll eventually return the land to both governments to be preserved as nature reserves or parks, but will hold onto it for now "as a very good example of what private conservation can do."

Finally, more evidence that former Federal Reserve Board chairman, Alan Greenspan, deliberately encouraged the housing bubble just like he did the dot com stock bubble. We have known for a long time that he encouraged borrowers to take risky variable rate, low initial payment mortgages. He did this publicly at the time. Now we find out that he blocked any Fed oversight of shady lenders:

Greenspan nixed idea of subprime crackdown: paper

Sat Jun 9, 6:03 PM ET

CHICAGO (Reuters) - Alan Greenspan, when chairman of the Federal Reserve, brushed off an idea to boost scrutiny of subprime mortgage lenders, a former Fed governor told the Wall Street Journal.

In an interview published on Saturday, Edward Gramlich, who was a Fed governor from 1997 to 2005, said he proposed to Greenspan in or around 2000 that the Fed start sending examiners into the offices of consumer-finance lenders that were units of Fed-regulated banks.

"He was opposed to it, so I didn't really pursue it," said Gramlich, who said he raised the idea with Greenspan personally rather than going to the full board of governors.

Gramlich is now a senior fellow at the Urban Institute, a nonpartisan Washington-based research group.

Greenspan, who retired from the Fed in early 2006, told the Journal he did not recall a specific discussion on subprime lenders but would have been opposed to a crackdown.

"For us to go in and audit how they act on their mortgage applications would have been a huge effort, and it's not clear to me we would have found anything that would have been worthwhile," Greenspan said.

Subprime loans, typically made to borrowers with poor credit histories, have hurt the U.S. mortgage market in recent months as higher interest rates led to rising defaults and delinquencies.

Under new Chairman Ben Bernanke the Fed has started reviewing its oversight of holding-company units.