Tuesday, February 1, 2011

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How the US Government Manipulates Inflation Data

Courtesy of Phil of Phil's Stock World

The Government told us that the PCE core price index for December was 0% - no inflation at all.
I found that to be incredible - as in not credible at all and then Tusked asked me how long the Bern ank could keep justifying his rampant money printing with fake government data, to which I responded: "I had many derogatory things to say about that but I was literally so sickened by that BS that I couldn’t bring myself to comment on it so I just left it alone but it’s a very sad joke that our government can tell us that there was no inflation in December while the whole planet is falling apart, isn’t it?"
Fortunately, there was a helpful article in the WSJ by Brett Arends that pointed out that the way the government justifies their low inflation figures is through "substitution and harmonics," a topic expert Government BS detector, Barry Ritholtz had touched on as well.  As Barry says:
Harmonics asks the question: "How much of a product's price increase is a function of "inflation," and how much is quality improvement?" Thus, the entire late 1990's concept of Hedonics is premised upon a flawed assumption: that quality is static.  Hedonics is a variation of the old trick of comparing the present with the past, instead of the present. Measuring quality improvements is a distraction from the real measure of inflation: the purchasing power of a dollar.
 Hedonics opens the door to producing magical results: a lower inflation rate with generally rising prices, a higher growth rate although the economy may be weaker, and a higher productivity number, although productivity would have been declining without the Donica imputation. [..]
phil's stock world
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ISM, strong growth, rising inflation

By Peter Boockvar

The Jan ISM mfr’g index was 60.8, above expectations of 58, up from 58.5 in Dec and its the best since May ’04. New Orders rose almost 6 pts to 67.8 and Backlogs rose 11 pts to 58. Also positively, the Employment component rose almost 3 pts to 61.7, the best since 1973 (not a typo). Inventories at both the mfr’g level and customer rose and the Export component rose 4.5 pts. As mentioned yesterday, the data measures the direction of change, not degree but clearly reflects a continued improvement in mfr’g. The news though comes with the specter of growing inflation pressures as the Prices Paid component rose 9 pts to 81.5, the highest since July ’08. Of 18 industries surveyed, 14 reported growth. Bottom line, mfr’g continues to reflect strong growth but with rising input costs that will be eaten in part and passed on in part and the 30 yr bond yield is rising to the highest since Apr ’10 in response. [..]

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90/90 Down Days Followed by Rally, Then…

By Barry Ritholtz

Yesterday, I reviewed the major indices, explaining why we are expecting a 5-8% correction at a minimum, and possibly an 8-12% whack over the next few months.
Whenever markets experience the intense selling of 90/90 days — those trading sessions when 90 percent of the volume is to the downside, and 9 out of 10 stocks close lower — it often marks a turning point in a bull run. The psychology is shifting, as institutions are changing postures from accumulation to distribution.
Of course, Mr. Market being devilishly sly, that cautious discussion was immediately met with futures screaming higher. But the bounce is not unexpected, and as we have seen in the past, strong downside flushes are often met with a short term pop.
Why? But Based on the work of Paul Desmond of Lowry’s (the oldest technical research firm in the US), we typically see a rally that lasts 2 – 7 days.
Think back to January 19th — a 90% downside day. As the chart below shows (first large red candle), that was followed by a short rally. And Friday’s 2% whoosh (second large red candle) is also likely to be followed by a short  term pop.
There is one small twist worth reporting: Friday was not technically a 90/90 downside day. According to Lowry’s, down volume represented only 89.5% of total Up/Down Volume on the NYSE. And even more tantalizingly, the NASDAQ’s Points Lost was 89.9% of Points Gained, while Down Volume was 89.7% of Up/Down Volume. That is about as close as you can come to a 90/90 day. To quote Terry Knudsen, one of their technicians, “it is probably not going too far out on a limb to suggest another rebound rally lasting several sessions is possible following Friday’s sell-off.” .. [..]

S&P500  Daily Candles, December/January

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Super Commodity System Trades Upgrade

Un breve aggiornamento sull'andamento dei trades in corso di Super Commodity. I trades sull'Euro Bund e sul Sugar sono stati stoppati oggi sui rispettivi valori di Stop Loss. Stanno invece andando bene i Long trade sul Copper e sull'eMini Nasdaq. Riassumendo, due piccole perdite su Bund e Sugar, un ottimo trade sul Copper, per il quale è già attivo da giorni il Trailing Stop, un buon inizio per il trade sull'eMini Nasdaq.

A brief update on the progress of the Super Commodity trades. On Euro Bund and Sugar were stopped today on the respective Stop Loss. Are instead going well the Long trade on Copper and eMini Nasdaq. So, two small loss on Sugar and Bund, a great trade on Copper, which is already active the Trailing Stop, a good start to trade on eMini Nasdaq.

Weaker Than Expected Chinese PMI

by Bespoke Investment Group

For all the talk of an overheating economy in China, today's release of the PMI manufacturing index came in weaker than expected for the second straight month.  Over the last two months, the index has declined from 55.2 down to 52.9 forming what is increasingly beginning to look like a downtrend in the indicator.  To be sure, it's still positive but based on this indicator at least, it appears that the Chinese government's efforts to slow down economic growth are having at least some effect.

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The Seat Belt Problem: A New Approach to Calculating Risk-Adjusted Returns

by Steven Abernathy

People don’t perceive that they are going to be the one in a crash,” laments Russ Rader, media director at the IIHS (Insurance Institute for Highway Safety). “They believe that they are in control when they’re behind the wheel. They don’t sense how high the risk actually is.” The IIHS, a Virginia-based, national nonprofit that has helped significantly increase seat belt usage in the last twenty years, has a simple objective: lessen the risk taken in everyday driving behavior. The risk-measurement approach it employs has the potential to revolutionize how the investment community evaluates manager performance.
In our industry any credible performance comparison is risk adjusted. It makes no sense to equate the returns of two funds that take different amounts of risk. The challenge has always been how to measure the risk taken by managers—mathematically speaking, what to stick in the denominator.
Formulas generally fall into one of two categories. Those in the first category, inculcated in CFP®/CFA® study courses as the definitive way of measuring risk, view the variance of past returns as the primary indicator of risk. The Sharpe ratio, Sortino ratio, information ratio, Treynor ratio, and the Morningstar risk rating all fall into this category. Canonized by great thinkers such as Harry M. Markowitz and William Sharpe, these approaches gave us a way to measure risk with precision and a toolbox for evaluating performance. Look at returns as a distribution, MPT (modern portfolio theory) told us, and you can apply measures like skew, kurtosis, standard deviation, correlation, beta, and alpha. The second school of evaluating performance—found in the Calmar, MAR, and Sterling ratios—suggests that the risk denominator should be a manager’s maximum historical drawdown. There is something elegant and candid about this approach: it says to managers, “No amount of positive performance will make up for that downturn.” Critics have jumped on both schools for their reliance on applying past correlations to future market events. Yet there is a larger, more fatal flaw in both of these schools that has yet to be adequately addressed: neither solves the “seat belt problem.” . [..]

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Pavlov’s Bulls

Jeremy Grantham

About 100 years ago, the Russian physiologist Ivan Pavlov noticed that when the feeding bell was rung, his dogs would salivate before they saw the actual food. They had been “conditioned.” And so it was with “The Great Stimulus” of 2008-09. The market’s players salivated long before they could see actual results. And the market roared up as it usually does. That was the main meal. But the tea-time bell for entering Year 3 of the Presidential Cycle was struck on October 1. Since 1964, “routine” Year 3 stimulus has helped drive the S&P up a remarkable 23% above any infl ation. And this time, the tea has been spiced with QE2. Moral hazard was seen to be alive and well, and the dogs were raring to go. The market came out of its starting gate like a greyhound, and has already surged 13% (by January 12), leaving the average Year 3 in easy reach (+9%). The speculative stocks, as usual, were even better, with the Russell 2000 leaping almost 19%. We have all been well-trained market dogs, salivating on cue and behaving exactly as we are expected to. So much for free will!

Recent Predictions …

From time to time, it is our practice to take a look at our predictive hits and misses in an important market phase. I’ll try to keep it brief: how did our prognostication skill stand up to Pavlov’s bulls? Well, to be blunt, brilliantly on general principle; we foretold its broad outline in my 1Q 2009 Letter and warned repeatedly of the probable strength of Year 3. But we were quite disappointing in detail.

The Good News …

For someone who has been mostly bearish for the last 20 years (of admittedly generally overpriced markets), I got this rally more or less right at the macro level. In my 1Q 2009 Letter, I wrote, “I am parting company with many of my bearish allies for a while … we could easily get a prodigious response to the greatest monetary and fiscal stimulus by far in U.S. history … we are likely to have a remarkable stock rally, far in excess of anything justified by either long-term or short-term economic fundamentals … [to] way beyond fair value [then 880] to the 1000-1100 level or so before the end of the year.” As a consequence, in traditional balanced accounts, we moved from an all-time low of 38% in global equities in October 2008 to 62% in March 2009. (If only that had been 72%, though, as, in hindsight, it probably should have been.) In the same Letter, I said of the economy, “The current stimulus is so extensive globally that surely it will kick up the economies of at least some of the larger countries, including the U.S. and China, by late this year …”
On one part of the fundamentals we were, in contrast, completely wrong. On the topic of potential problems, I wrote, “Not the least of these will be downward pressure on profit margins that for 20 years had benefited from rising asset prices sneaking through into margins.” Why I was so wrong, I cannot say, because I still don’t understand how the U.S. could have massive numbers of unused labor and industrial capacity yet still have peak profit margins. This has never happened before. In fact, before Greenspan, there was a powerful positive correlation between profit margins and capacity in the expected direction. It is one of the reasons that we in asset allocation strongly suspect the bedrock on which these fat profits rest. We still expect margins to regress to more normal levels.
On the topic of resource prices, my long-term view was, and still is, very positive. Not that I don’t expect occasional vicious setbacks – that is the nature of the beast. I wrote in my 2Q 2009 Letter, “We are simply running out of everything at a dangerous rate … We must prepare ourselves for waves of higher resource prices and periods of shortages unlike anything we have faced outside of wartime conditions.”
In homage to the Fed’s remarkable powers to move the market, I argued in successive quarters that the market’s “line of least resistance” was up – to the 1500 range on the S&P by October 2011. That outlook held if the market and economy could survive smaller possibilities of double-dips. On fundamentals, I still believe that the economies of the developed world will settle down to growth rates that are adequate, but lower than in the past, and that we are pecking our way through my “Seven Lean Years.” We face a triple threat in this regard: 1) the loss of wealth from housing, commercial real estate, and still, to some extent, the stock market, which stranded debt and resulted in a negative wealth effect; 2) the slowing growth rate of the working-age population; and 3) increasing commodity prices and periods of scarcity, to which weather extremes will contribute. To judge the accuracy of this forecast will take a while, but it is clear from the early phases that this is the worst-ever recovery from a major economic downturn, especially in terms of job creation.

And the Bad News …

We pointed out that quality stocks – the great franchise companies – were the cheapest stock group. Cheapness in any given year is often a frail reed to lean upon, and so it was in 2009 and again last year, resulting in about as bad a pasting for high quality as it has ever had. We have already confessed a few .. [..]

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Gold: Investment Demand In Flux

By Julian Murdoch

As gold prices skyrocketed last year, so too did investment demand, according to the World Gold Council's recent Gold Investment Digest.
Although gold has since pulled back from its record $1,400/oz level, gold prices were still substantially higher in 2010 than the previous year. Last year, the average price of gold rose 25.9 percent year-over-year to $1,224.52, up from $972.35 in 2009. Much of that was driven by investment in ETFs and physical gold, as U.S. unemployment and lingering fears of further economic difficulties in Europe continued to support gold as a safe haven.

ETFs: Surprises In GLD, India
Gold ETF Holdings
(Click to enlarge)

ETF holdings monitored by the World Gold Council continued to grow in 2010, though not as quickly as we saw in 2009 — 361 tonnes vs. 617 tonnes. Still, by year-end, ETFs held a whopping 2,167.4 tonnes of metal.
GLD saw the year's largest gains, with 147.1 tonnes added to the fund during 2010 to reach a total of 1,280.7 tonnes. But it's interesting to note that since the report's publication, GLD's holdings have dropped by more than 55 tonnes — its lowest levels since last May.
This is a case where optimism can hurt. As Ong Yi Ling, investment analyst with Phillip Futures in Singapore, noted to TradeArabia, "The ETF is decreasing due to the optimism in the US economy. If we see concerns on unemployment coming back to haunt us, then perhaps we could see the ETF holding start to increase again." ... [..]

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Here is how and when Gold will begin its bubble

by Jordan Roy-Byrne, CMT

The bull market in Gold is in its 12th year (globally it began in 1999) but has yet to exhibit any “bubble-like” conditions. In fact, we still see many people referring to this bull market as “the Gold trade,” as if its an aberration that needs to be reversed or corrected. That aside, we know that Gold is under-owned as an asset class. The very well respected BCA Research estimates that globally only 1% is allocated to Gold and that fits with some of the charts that I’ve shown in the past.

Institutional accumulation began in 2009 (e.g. Paulson, Einhorn) and we know that phase lasts at least a few years before a bull market gives birth to a bubble.

Part of the problem for Gold has been the solid performance of other asset classes through most of the Gold bull market. Stocks performed very well from 2003 to 2007 and from 2009-2010. Commodities performed well from 2001-2002 and in the first half of 2008. If stocks are doing well or if commodities such as oil and agriculture are performing well, it detracts from Gold. Gold performs its absolute best when the other asset classes underperform or don’t perform too well.

Let me explain the conditions and setup that will facilitate the birth of a bubble and Gold going mainstream.

First, stocks are going to peak in Q2 of this year and enter a mild cyclical bear market. The chart below details the previous three secular bear markets and the template that each follows. After the mid-point crash (i.e 1907, 1938, 1974 and 2008) the market rallied significantly over the next one to two years. After that rally stocks went into a mild cyclical bear market for several years.

Those periods were associated with rising commodity prices, rising interest rates and rising inflation. Sounds like history could repeat again.

In the next year there is a good chance that we’ll see stocks and bonds in a bear market, simultaneously for the first time since the late 1970s. It is at that point that hard assets will emerge and mainstream managers will no longer be able to ignore that barbarous relic. This could begin as early as Q2 of this year or as late as 2012. It is hard to say but we think it begins somewhere in the middle.

Here is why the backdrop will ultimately support Gold and not stocks or bonds.

Economic growth is simply too low and too meager to put any dent into debt to GDP ratios. The economy is recovering but the debt load is growing larger. Two trillion dollars was added to the national debt in FY 2010. The CBO just came out and projected a deficit of $1.5 Trillion in FY 2011. This is why monetization will not only continue but it will be more frequent and in larger amounts.

We already see the effects. Inflation is rising and interest rates may be in a new cyclical uptrend. These are the factors and not deflationary conditions, which will cause the next mild bear market and mild recession. We say mild because the private sector was in recession for three years of the last decade. The survivors are better able to handle any current difficulties. In fact, the credit markets and the global economy have improved. After a recession like 2007-2009, there tends to be a slow but arduous period of recovery for the private sector. ... [..]

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Will Commodity Prices Pass Through to the Core?.

Surging commodity prices have economists debating whether the gains will kick off an inflation surge, create new obstacles for the modest U.S. recovery or generate a noxious combination of both.
For now, many forecasters remain confident the U.S. will be able to withstand a storm that’s bedeviling other economies. They believe the nation will continue forward with its modestly paced recovery, with inflation rising only gradually. This sentiment is shared by Federal Reserve policymakers who are pressing forward with their aggressive campaign of bond buying, as they try to goose inflation a bit higher and bring down unemployment.
And yet, there’s plenty of reason to worry. A recent research piece from Credit Suisse said “the common global concern of the moment is commodity price inflation.”
Rising food, energy and raw material costs are problematic on several fronts. They can feed into core inflation and drive up underlying price trends. Commodity-based gains can also create drag on growth, because for many companies and firms, the cost of things like energy is unavoidable. Money spent there is money that can’t be spent on other things, so the higher the cost of something like oil gets — futures prices for Brent crude oil cracked $100 a barrel Monday — the less spending power remains available for things like car purchases or home electronics, and so on.
A number of recent U.S. manufacturing reports show factory operators have been getting jammed by higher costs for a while. And it goes beyond factory operators. Monday morning’s release of the closely watched Institute for Supply Management-Chicago, which polls manufacturers and service sector firms, showed rising overall activity joined the broadest increase in what firms paid for raw materials since July 2008.
Surging oil prices are particularly worrisome. University of California San Diego economist James Hamilton observed on his blog “every recession (with one exception) was preceded by an increase in oil prices, and every oil market disruption (with one exception) was followed by an economic recession.” .. [..]

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Weak Breadth for Staples

by Bespoke Investment Group

Below we take a look at breadth as measured by the percentage of stocks trading above their 50-day moving averages in the S&P 500 and its ten sectors.  Breadth helps investors see how much the stocks that make up various indices or sectors are participating in rallies or declines.  It is generally thought that the better the underlying breadth, the healthier the rally, and vice versa.
We have noted numerous times during the most recent run-up to new highs for the S&P 500 that underlying breadth has been weak.  As shown in the first chart below, the percentage of stocks in the S&P 500 trading above their 50-day moving averages made a lower high during the most recent rally.  Two prior rallies over the last year saw much better breadth readings.  As it stands now, 69% of stocks in the S&P 500 are trading above their 50-days, and the reading is really starting to look like it's rolling over.

Below are breadth readings for the ten S&P 500 sectors.  At the moment there is quite a bit of difference between the sectors with the best and worst breadth readings.  At 98%, the Energy sector has far and away the highest percentage of stocks trading above their 50-days, and it is really helping the overall market stay afloat.  Somewhat surprisingly, the Financial sector has the second highest breadth reading at the moment at 88%.  The Industrial sector ranks third best at 81%. .. [..]

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Investing in China

By John Kuhns

LIME ROCK, Conn. (MarketWatch) — I have been investing in China for two decades. I haven’t changed my investment philosophy much, and don’t see any reason to do so in 2011.
I have always invested in China based on my belief that it is an economy a century behind ours in terms of where the PRC is now compared to what it will become. So by looking back at what worked for investors in the United States between the World Wars, I believe I can peer into a time capsule to see what will work for investors today in China. 

Stateside, the best investments in the first half of the 20th century were in companies led by excellent managements producing goods for a burgeoning middle class at a fair price; investments in things such as information technology (like Smith Corona, who once offered the fanciest typewriter) were peripheral, and doomed to underperform. Therefore, when investing in China today, I focus on the same basic sectors that created so much value in the U.S. last century: energy and infrastructure; agricultural commodities and food products; and natural resources, to name a few.
Before I comment on two appealing investment themes in the energy sector in China today, two notes of caution:
First, for investors looking at offerings of Chinese companies traded on the mainland or Hong Kong exchanges, steer clear of “SOEs.” An SOE is a state-owned enterprise. Many of China’s largest and most prominent companies are SOEs. These organizations, many of which would be included in any “Fortune 100” in China, are entities of the state that often get their power from special rights granted for political reasons. Unlike international companies, SOEs get most of their funds from the central government and therefore do not see public shareholders as the party to whom they owe their ultimate allegiance.
Second, for investors investing in Chinese companies that have listed their shares on exchanges like the NYSE and the Nasdaq in the U.S., carefully review the transparency of the companies. Do they have a Big Four auditor? Do they have an internationally recognized law firm?) Does their chief financial officer have acceptable credentials (a CPA, CFA or at least an MBA), or were they hired mainly because they speak passable English?
Any investment I make in China in 2011, the year of the rabbit, must certainly be made with one eye on the country’s 12th Five-Year Plan; Feb. 3 brings the lunar spring festival in China, with the plan unveiled soon afterwards.... [..]
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by Cullen Roche

Oliver Wyman Group has released a very interesting piece about the potential for a future financial crisis (thanks to the FT).  They make the case that the next great financial crisis will occur around 2015 and will be the result of a massive bubble in commodity markets that results in widespread economic collapse and sovereign defaults.
I’ve described in recent reports how the financialization of the USA is helping to drive commodity prices higher (see here for more) and generate economic instability.   This, combined with the other two major structural imbalances in the global economy (China’s flawed economic policy and the inherently flawed single currency system in Europe) are creating an environment that is ripe for disequilibrium and turmoil.  The potential for bubbles is not only likely, but now appears like a near certainty.
Wyman describes how the bubble will form in commodities and ultimately collapse:
“Based on favorable demographic trends and continued liberalization, the growth story for emerging markets was accepted by almost everyone. However, much of the economic activity in these markets was buoyed by cheap money being pumped into the system by Western central banks. Commodities prices had acted as a sponge to soak up the excess global money supply, and commodities-rich emerging economies such as Brazil and Russia were the main beneficiaries.
High commodities prices created strong incentives for these emerging economies to launch expensive development projects to dig more commodities out of the ground, creating a massive oversupply of  commodities relative to the demand coming from the real economy. In the same way that over-valued property prices in the US had allowed people to go on debt-fueled spending sprees, the governments of  commodities-rich economies started spending beyond their means.  They fell into the familiar trap of borrowing from foreign investors to finance huge development projects justified by unrealistic valuations. Western banks built up large and concentrated loan exposures in these new and exciting growth markets.
The banking M&A market was turned on its head. Banks pursuing high growth strategies, particularly those focussed on lending to the booming commodities-rich economies, started to attract high market valuations and shareholder praise. In the second half of 2012 some of these banks made successful bids for some of the leading European players that had been cut down to a digestible size by the new anti-“too big to fail” regulations. The market was, once again, rewarding the riskiest strategies. Stakeholders and commentators began pressing risk-averse banks to mimic their bolder rivals.
The narrative driving the global commodities bubble assumed a continuation of the increasing demand from China, which had become the largest commodities importer in the world. Any rumors of a slowing Chinese economy sent tremors through global markets. Much now depended on continued demand growth in China and continued appreciation of commodities prices.”
The bubble bursts
Western central banks pumping cheap money into the financial system was seen by many as having the dual purposes of kick-starting Western economies and pressing China to appreciate its currency. Strict capital controls initially enabled the Chinese authorities to resist pressure on their currency. Yet the dramatic rises in commodities prices resulting from loose Western monetary policies eventually caused rampant inflation in China. China was forced to raise interest rates and appreciate its currency to bring inflation under control. The Western central banks had been granted their wish of an appreciating Chinese currency but with the unwanted side effect of a slowing Chinese economy and the reduction in global demand that came with it.
Once the Chinese economy began to slow, investors quickly realized that the demand for commodities was unsustainable. Combined with the massive oversupply that had built up during the boom, this led to a collapse of commodities prices. Having borrowed to finance expensive development projects, the commodities-rich countries in Latin America and Africa and some of the world’s leading mining companies were suddenly the focus of a new debt crisis. In the same way that the sub-prime crisis led to a plethora of half-completed real estate development projects in the US, Ireland and Spain, the commodities crisis of 2013 left many expensive commodity exploration projects unfinished.
Western banks and insurers did not escape the consequences of the commodities crisis. Some, such as the Spanish banks, had built up direct exposure by financing Latin American development projects. Others, such as US insurers, had amassed indirect exposures through investments in infrastructure funds and bank debt. Inflation pressure in the US and UK during the commodities boom had forced the Bank of England and Fed to push through a series of interest rate hikes that forced many Western debtors that had been holding on since the subprime crisis, to finally to default on their debts. With growth in both developed and emerging markets suppressed, the world once again fell into recession.”
Of course, this scenario is already largely playing out in real-time.  We are seeing investors drive up the prices of commodities as the global economy recovers and speculators look for the next big boom.  Wyman elaborates:
“However, it is already apparent that increasing commodities prices are also creating inflationary pressure in China, which is exacerbated by China holding its currency artificially low by effectively pegging it to the  US dollar. This makes commodities look like an attractive hedge against inflation for Chinese investors. The loose monetary policy in developed markets is similarly making commodities look attractive for Western investors. This “commodities rush” is demonstrated in the right-hand chart below, which shows the asset allocations of European and Asian investors. A recent investor survey by Barclays also found that 76% of investors predicted an even bigger inflow into commodities in 2011.” ... [..]

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by Cullen Roche

The Fed’s PR campaign on QE2 is on full blast.  This time the SF Fed is again defending the program.  Unfortunately, their argument lacks any real facts as it is entirely based around the idea that QE reduces the cost of credit.  The real evidence shows that QE is not having nearly the impact that Fed officials expected.  Someone should probably inform these economists that mortgage rates, corporate debt and the general cost of credit is higher than it was before the program was initiated.  Not surprisingly, the impact has been a continued decline in home prices, collapsing refinancings, a continued decline in total borrowing and higher corporate debt costs.
In fact, the only net positive is the stock market’s appreciation and they have not been shy about taking credit for it.  Unfortunately, there is no evidence that QE is the actual cause of the stock market rally and there is certainly no evidence that its impacts are due to anything other than the Bernanke Put – a psychological safety net underneath the market that fuels speculation and causes disequilibrium as fundamentals stray from reality.   If the market were to decline substantially in the next few years I have little doubt that the Fed will not be publishing research papers that take credit for it.
Not surprisingly, they make no mention of the fact that total borrowing and home prices have continued to decline despite their “significant” impact on credit markets.  Despite this PR campaign there is almost zero substantiated evidence that QE is having a positive impact on the economy.  Nonetheless, the arguments are always interesting: ... [..]

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U.S. stocks rise; Dow has best January since 1997

By Laura Mandaro

SAN FRANCISCO (MarketWatch) - U.S. stocks closed higher Monday, helped by a jump in energy stocks on the back of earnings from heavyweight Exxon Mobil Corp. (XOM 80.69, +0.01, +0.01%) and deals in that sector, and as some of the worries about contagion from Egyptian protests abated. The Dow Jones Industrial Average. (DJIA 11,892, +68.23, +0.58%) ended up 68.23 points, or 0.6%, to 11,891.93 and gained 2.7% for the month, its best January since 1997. Alcoa, Inc. (AA 16.57, +0.44, +2.73%) and Exxon (XOM 80.69, +0.01, +0.01%) shares led session gainers; both rose more than 2%. The S&P 500 (SPX 1,286, +9.78, +0.77%) added 9.78 points, or 0.8%, to 1,286.12, led by a 2.6% gain in energy stocks. It rose 2.3% for the month. The Nasdaq Composite (COMP 2,700, +13.19, +0.49%) added 13.19 points, or 0.5%, to 2,700.08 and gained 1.8% for the month. [..]

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