Click here to view as PDF. “Could or would a state default? Not really―Illinois is probably in the worst shape, and there are states that I would avoid but basically the states are not going to default in Pimco’s opinion.” -Bond guru Bill Gross POINTS TO PONDER By David Hay, Chief Investment Officer 1. The view that commodity prices are in a perpetual bull market continues to be heavily reliant on Chinese demand. Oil is a prime example of this, but China is aggressively attempting to lower the energy intensity of its economy. Over the last five years, China’s energy consumption growth rate has declined noticeably. 2. China’s push to forcefully ramp up its nuclear power production has received considerable press. India’s efforts, by contrast, have attracted much less attention despite its intent to spend $100 billion as it strives to raise nuclear-generating capacity from 4 gigawatts (enough to power four midsize cities) to 40 gigawatts by 2020. Read More

Click to view as PDF. “Indeed, the euro must still be one of the greatest shorts out there—what sort of credibility can the currency possibly have when the Irish banks managed to pass those European stress tests last summer?” – DAVID ROSENBERG, prominent economic strategist POINTS TO… Read More

Click here to view as PDF. “Pessimism is so often wrong because people assume a world where there is no change or innovation. They simply extrapolate from what is going on today, failing to recognize the new developments and insights that might alter current trends.” -Bill Gates POINTS TO PONDER 1. Year-end supply pressures and credit fears continue to hit the tax-free bond market, driving yields on some gilt-edged issues with intermediate maturities up to 5%. Predictably, retail investors, who own roughly 70% of all municipal debt, are fleeing at a rate not seen since the outstanding buying opportunity seen in 2008. 2. Canada’s residential real estate market has fully recovered partially due to an influx of wealthy Asian buyers. Its “Business Immigration Program,” requiring an upfront investment of $400,000, is cited as one reason the average home price in Vancouver, BC, is nearly $1 million. Read More

Click here to view as PDF. “The US as a net debtor is one of the oldest canards.” -GaveKal Research’s Charles Gave POINTS TO PONDER 1. Due to both a negative reaction to the Fed’s second round of quantitative easing (QE II) and this week’s surprisingly pro-growth tax proposals by President Obama, yields on the 10-year Treasury note surged by precisely 100 basis points (1%) from early October to a peak of 3.33% on Wednesday. Municipal bond yields have also jumped, pummeling prices. 2. In another boost to investing against the herd, leading mutual fund evaluator Morningstar has found that the least popular fund categories have outperformed the most in-favor by nearly 5% per year over the past decade. Currently, blue-chip US stocks are held in lowest esteem while emerging markets and commodities are fund-investor favorites. 3. One persuasive bit of evidence undercutting the popular notion that Americans over-consume and under-save is that for the last 50 years discretionary consumer spending has actually declined somewhat. Higher medical expenditures are a growing portion of total outlays, much of which is reimbursed by the government. Read More

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Click here to view as PDF. "There are no atheists in foxholes or ideologues in financial crises." -Fed Chairman BEN BERNANKE Points to Ponder 1. The primary measure of stock market volatility, the VIX, recently hit 80, the highest level ever recorded. Even readings of 40 are considered extreme; thus, the current number is truly incredible. 2. The stock market collapse has been so intense that, according to the Wall Street Journal, 10% of all listed companies are trading below their cash holdings. This is comparable to what occurred during the Great Depression. Additionally, nearly 40% of all stocks tracked by Standard & Poor’s are trading at 8 times earnings or less. 3. Investment-grade corporate bonds have also been caught up in the selling frenzy, with some leading bond mutual funds having lost 25% or more year-to-date. Yield differentials (spreads) versus treasuries on junk bonds recently hit an unprecedented 15% and nearly 6% on high grade debt. This means their absolute yields reached 19% and 10%, respectively. 4. In one faint ray of hope for the credit markets, the prices of AAA-rated sub-prime collateralized debt obligations (CDOs) have risen from around 50 cents on the dollar to close to 60 cents. This may indicate that the government’s mortgage stabilization fund (TARP) might already be helping, even before it actually starts buying. 5. Retail gasoline prices have fallen from $4.11 in July to $3.03 recently (and are likely headed even lower). According to Merrill Lynch, each one cent decline in pump prices represents $1.3 billion in relief to consumers, amounting to roughly $140 billion overall. Read More

Sometimes warnings do more harm than good. Back during the rock and roll phase of the late, great tech boom, various observers, including your humble EVA-author, repeatedly warned of a judgment day. Yet the NASDAQ just kept rolling. The innumerable premature warnings only seemed to embolden those entranced by tech’s seemingly endless ascent. Read More