Goldman Sachs’ Cohen: New bull market has begun

U.S. stocks have entered a new bull market, and the S&P 500 index could rise as much as 10 percent from current levels by the end of this year, Goldman Sachs strategist Abby Joseph Cohen said on CNBC on Thursday.

Goldman Sachs sees the benchmark Standard & Poor’s 500 index in a range of 1,050-1,100 toward year-end, said Cohen, the firm’s senior investment strategist and president of its Global Markets Institute.

That range, she said, “is where we should be toward the end of this year. “We do think the new bull market has begun,” Cohen said. “It may prove it began in March of this year.” Stocks have recovered sharply since hitting 12-year lows in early March, with the S&P 500 index now up 47 percent since trading as low as 666.79 points in March. In early afternoon trade on Thursday, the S&P was off 0.53 percent at 997.44 points.

Cohen also said she expects the labor market to improve, but in “an erratic way. “It appears job losses are slowing, and there is some job creation going on,” she said. But “we have many more months of difficult labor situation ahead, even if the recession, using GDP or industrial production, is almost over.” The U.S. labor market has remained weak even as other parts of the economy have improved, with the unemployment rate at just under 10 percent.

Friday’s July employment report from the Labor Department is forecast to show the jobless rate at 9.6 percent, its highest since June 1983, and 320,000 monthly job losses, according to a Reuters survey.

Cohen said sectors tied to economic improvement are likely to be the best stock picks for right now, including energy, technology and financial companies. “Many of us have lost track of the fact that most of these (financial) stocks do follow economic growth, so when the GDP is doing well, financial services tend to do well,” she said.

Goldman Sachs on Wednesday raised its gross domestic product forecast for this year’s second half to an annualized rate of 3 percent, from a prior outlook of 1 percent, citing an expected increase in production by companies. “Many companies trying to be very cautious over last year really squeezed inventories down to levels that are unsustainable,”

Cohen said on CNBC. “Even without any notable improvement in current demand, companies just need to have more stuff in the back room to get their business done.”

Dow Sends Buy Signal That’s Worked Since 1921

The Dow Jones Industrial Average is sending a buy signal that has foreshadowed gains of 18 percent during the past nine decades.

 

The 30-stock gauge climbed to more than 10 percent above its mean level from the previous 200 days, rebounding from 34 percent below the so-called 200-day moving average in November, according to data compiled by Bloomberg. Eighteen of the last 21 times the Dow rallied from at least 10 percent below the 200-day level to 10 percent above, it posted gains during the next 12 months, Bloomberg data since 1921 show.

The CHART OF THE DAY tracks the difference between the Dow’s last price and its 200-day average since 1989. The lower panel displays the measure’s price, along with the buy signals it sent near the start of rallies in 1991, 1999 and 2003.

“This rally, while it will have its fits and starts, is the beginning of a new trend, not just a bounce,” said Michael Williams, managing director of New York-based Genesis Asset Management, which oversees about $2 billion. “It is a significant opportunity.”

The Dow posted an average advance of 18 percent during the 12-month period following buy signals since 1921, Bloomberg data show. In the six-month period, there were 17 advances for an average gain of 8.2 percent. In three months, it climbed 18 times, averaging an increase of 5.7 percent.

Returns by the Dow Jones Industrial Average 12, 6 and 3 months after the buy signal.

Buy Signal            12 Months         6 Months      3 Months
June 11, 2003          13.36%             8.98%         3.01%
Jan 8, 1999            19.49%            15.38%         5.75%
March 5, 1991           9.05%             1.21%         1.11%
Jan  27, 1989          10.18%            13.46%         4.14%
Sept. 3, 1982          31.38%            23.02%        11.67%
July 18, 1980           3.78%             5.34%         3.48%
Aug. 9, 1978           -3.74%            -7.76%        -9.83%
March 7, 1975          26.43%             8.63%         9.11%
Dec. 7, 1970            4.73%            12.75%         9.69%
May 8, 1967             1.02%            -6.60%         1.41%
Jan. 25, 1963          15.20%             1.18%         5.68%
July 24, 1958          33.51%            19.91%         8.53%
Dec. 13, 1949          16.26%            15.04%         3.15%
Nov. 6, 1942           16.66%            18.21%         8.29%
Sept. 11, 1939        -16.61%            -4.49%        -5.20%
July 6, 1938           -3.05%            10.95%         7.49%
Feb. 18, 1935          43.10%            19.09%         8.06%
Apr. 19, 1933          54.47%            23.53%        51.63%
Aug. 29, 1932          37.72%           -31.68%       -21.87%
Aug. 18, 1924          35.82%            14.36%         5.46%
Dec. 12, 1921          21.89%            12.53%         8.12%

Average                17.65%             8.24%         5.66%

New Zealand Leaves Key Rate Unchanged a Second Month

New Zealand’s central bank kept its benchmark interest rate unchanged for a second month and said it may cut borrowing costs further as a rising currency threatens a recovery from the worst recession in three decades.

“The forecast recovery is based on a further easing in financial conditions,” Reserve Bank Governor Alan Bollard said in a statement in Wellington today after leaving the official cash rate at 2.5 percent. “If this easing does not occur, the recovery could be put at risk. In these circumstances we would reassess policy settings.”

New Zealand’s dollar fell the most in three weeks after Bollard said rates may fall further and won’t rise until late next year。The central bank cut borrowing costs by 5.75 percentage points between July 2008 and April to buoy an economy that began contracting in the first quarter of last year.

“We continue to expect the dollar to be strong over the next year, which does reinforce the prospect of the Reserve Bank having to cut the cash rate further,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. He expects quarter-point cuts in September and October.

New Zealand’s dollar tumbled to 65.01 U.S. cents at 10 a.m. in Wellington from 65.74 cents immediately before the statement. The two-year swap rate, a fixed payment made to receive floating rates, fell to 3.94 percent from 4.07 yesterday.

More to Come

“We expect to see a patchy recovery get under way toward the end of the year, but it will be some time before growth returns to healthy levels,” Bollard said. The cash rate “could still move modestly lower over the coming quarters.”

Bollard said inflation is expected to remain comfortably within the 1 percent-to-3 percent range he targets.

Wholesale interest rates and the currency are higher than the central bank assumed, which “is not helping the sustainability of future growth and brings with it additional risks,” he said.

Finance Minister Bill English said this month the currency was “higher than fundamentals warrant” and may hamper his desire for the nation’s recovery to be based around exports and investment rather than consumption led by borrowing.

Exports fell 5.4 percent in the second quarter from the previous three months, the government reported this week.

“We need to see the Reserve Bank indicate a commitment to lowering the currency,” John Walley, chief executive of the New Zealand Manufacturers & Exporters Association, said this week in an e-mailed statement. He wanted Bollard to cut the cash rate.

Export Threat

Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, yesterday reiterated that its payment to New Zealand farmers will be 12 percent lower this year because of falling prices and the currency.

The payment would have been revised lower were it not for “encouraging signs” in some international dairy markets, the Auckland-based company said.

Bollard reiterated he “expects to keep the cash rate at or below the current level through until the latter part of 2010.” By contrast, traders expected 86 basis points of increase within a year, according to a Credit Suisse index. A basis point is 0.01 percentage point.

All 10 economists surveyed last week by Bloomberg News forecast today’s move. All expected the rate will also be unchanged at the next review on Sept. 10.

New Zealand’s economy is probably in its seventh quarter of recession, according to the central bank’s June 11 forecasts. Today’s statement contains no new forecasts.

“Overall economic growth is evolving broadly in line with our forecasts in June” Bollard said. “The outlook remains highly uncertain.”

Housing Market

New Zealand’s exports are heavily weighted to soft commodities such as butter, cheese and wool and haven’t benefited from recent gains in hard commodity prices, he said.

The housing market may lead a recovery after second-quarter home prices rose for the first time since late 2007. There were 40 percent more property sales in June than a year earlier, the Real Estate Institute said on July 9.

Consumers are less pessimistic and business confidence is recovering, recent polls show.

The proportion of consumers who expect the economy will deteriorate over the next year fell to 41 percent in early July, the lowest level since March last year, according to a survey of 1,039 people by Melbourne-based Roy Morgan Research.

Business confidence rose to a 10-month high in July, ANZ National Bank Ltd. said yesterday, citing a survey of 402 companies. Firms were less pessimistic about profits and fewer expected to fire workers over the next year.

The jobless rate rose to a five-year high of 5 percent in the first quarter and may increase to 7.2 percent by mid-2010, the central bank forecast last month.

Winstone Pulp International Ltd. this week said it would close a North Island saw mill and fire 65 workers. Earlier this month, New Zealand Post, the state-owned postal service said it had cut 380 jobs since the start of the year.

Pimco’s Gross Favors ‘Strong’ Company Bonds, Stocks

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said investors should favor debt and stocks of “strong” companies, and assets in emerging markets with improving economic growth.

Investors in riskier assets will get “haircuts” because U.S. economic growth will be closer to 3 percent than the range of 5 percent to 7 percent for the past 15 years, Gross said. The U.S. economy will begin to recover in the second half of 2009, he wrote in his August investment outlook on Pimco’s Web site.

U.S. corporate bonds are outperforming Treasuries in 2009, the first time in three years, as signs of improvement in the economy led investors to seek higher-yielding assets. Franklin Templeton Investments, a mutual fund company that oversees $450 billion, and JPMorgan Chase & Co., the second-largest U.S. bank, are also recommending company bonds.

“There is no investment potion for this new environment other than steady income-producing bond and equity investments in companies with strong balance sheets and high dividend yields,” Gross wrote. “A journey to 3 percent nominal GDP means default/haircuts for assets on the upper end of the risk spectrum, as well as extremely low yielding returns for government and government-guaranteed assets at the bottom end.”

Gross also favors emerging markets where growth prospects are “tilted upward,” according to the report.

‘Tangible Earnings’

“Stock prices will ultimately depend on tangible earnings growth in the form of increased dividends, not green shoots hope,” Gross wrote. High-risk bonds, commercial real estate and lower-quality municipal bonds “may suffer,” the report said.

Federal Reserve Chairman Ben S. Bernanke used the term “green shoots” in an interview aired March 15 on CBS Corp.’s “60 Minutes” to describe signs of improvement in the economy.

U.S. corporate bonds rated A to AAA by Standard & Poor’s returned 7.3 percent this year, according to indexes compiled by Merrill Lynch & Co. The U.S. Treasury Master Index handed investors a 4.9 percent loss, according to Merrill. MSCI’s World Index of stocks has returned 13 percent so far in 2009.

The Templeton Global Bond Fund is avoiding debt issued by the U.S., the U.K., and Germany and has sold Japanese yen it purchased last year, said John Beck, the company’s co-director of international bonds.

‘Bullish View’

Templeton is favoring U.S. bank debt and municipal bonds, Beck, who is based in London, told reporters on July 27 during a trip to Singapore. The company, which is in San Mateo, California, is also investing in a mix of local-currency and dollar-denominated securities in emerging markets, he said.

JPMorgan has a “bullish view” on high-grade corporate bonds, it said in a report July 24.

“Money continues to be allocated to the high-grade bond asset class,” said the report by JPMorgan analysts including Eric Beinstein, co-head of U.S. credit strategy, in New York.

For the week ended July 22, high-grade bond funds drew $1.4 billion, above the 13-week average of $1 billion, the report said.

The Federal Reserve said yesterday that most of its 12 regional banks detected a slower pace of economic decline in June and July, further signs the worst U.S. downturn in at least five decades is closer to an end.

U.S. Contraction

The financial crisis, which started with the collapse of the U.S. property market in 2007, has triggered $1.52 trillion of writedowns and credit losses at banks and other institutions and sent the global economy into its first recession since World War II.

The U.S. economy shrank 1.5 percent in the second quarter according to the median forecast in a Bloomberg News survey of economists before the Commerce Department reports the figure tomorrow. The first-quarter contraction was 5.5 percent.

Gross’ $161 billion Total Return Fund returned 10.9 percent in the past year, beating 96 percent of its peers, according to data compiled by Bloomberg. Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE.

Oil “Well Overpriced” and Will Keep Falling; Gasoline to Follow, Energy Trader Says

After rallying nearly 50% this year, crude prices hit a major speed bump this week as the dollar has firmed up and inventories have risen.
Oil prices were “well overpriced” in the $70s and will continue to weaken in the weeks and months ahead, says James Cordier, President of Liberty Trading Group and co-author of The Complete Guide to Option Selling.

Rather than increased demand, the recent rally was based mainly on speculative demand driven by government stimulus packages, Cordier says. Most notably, a flood of liquidity in China found its way into commodities and China’s economy now “looks like a bubble,” he says, joining a growing chorus.

More evidence the rally was not demand driven emerged Wednesday, when the Energy Department said inventories surged by 5.15 million barrels in the week ended July 24, the biggest weekly increase since April and vs. forecasts for a decline if 1.5 million barrels, according to Bloomberg.

In reaction, crude futures were recently down more than 5%, on track for their biggest decline in three months.

Cordier, who made a well-timed call on a coming oil rally here in February, now expects crude to fall $10 to $15 from recent levels. In anticipation of that drop, Liberty is making a bearish trade — “selling calls with both hands,” Cordier says.

If and when that happens, he also predicts prices at the pump will fall 10 to 15 cents from current levels, which would be welcomed news for cash-strapped Americans.

Viacom Posts Lower Profit; Advertising Hurts

Viacom reported a steep fall in quarterly earnings, hit by poor advertising revenue and a dropoff in sales of its “Rock Band” video game.

The owner of MTV Networks and Paramount film studios reported second quarter profit of $277 million, or 46 cents a share, down from $406 million, or 64 cents a share, in the same period a year ago.

Excluding 3 cents a share in severance charges, adjusted earnings per share were 49 cents, which was slightly ahead of average analyst estimates of 48 cents, according to Reuters Estimates.

Revenue declined 14 percent to $3.3 billion, the company said, and short of analyst estimates calling for revenue of $3.49 billion in the quarter. Revenue was hit from several sides.

The prolonged slump in advertising spending continued to undercut Viacom’s earnings, as did lower sales of the video game “Rock Band” and DVDs.

While Viacom [VIA 24.49 -0.66 (-2.62%) ] is not as dependent on advertising as some other media companies — such as corporate sibling CBS Corp [CBS 7.65 -0.34 (-4.26%) ] — the company still gets about 30 percent of annual revenue from ads.

As a result, its results have been hampered by the prolonged downturn in ad spending, with sectors like automotive cutting way back on their marketing budgets over the past year.

Viacom Chief Executive Officer Philippe Dauman predicted several months ago that advertising was finally stabilizing, and noted on Tuesday that U.S. advertising revenue had actually increased from the first to the second quarters of this year.

Meanwhile, Viacom’s Paramount Pictures pulled out two big hits during the quarter — “Star Trek and “Transformers: Revenge of the Fallen.”

Still, the combination of the two films could not surpass the results of “Iron Man” and “Indiana Jones and the Kingdom of the Crystal Skull” in the same period a year earlier, so Viacom’s theatrical revenue dropped 27 percent.

Home entertainment revenues also declined, dropping 29 percent and underscoring the industry’s broader struggles with a depressed DVD

5-Year Auction Generates Weak Response; Treasurys Fall

Treasurys fell after an auction of 5-year government debt saw another tepid response, with investors getting a yield of 2.689 percent on a swell of $39 billion in supply.

The results come a day after a similarly weak auction of 2-year notes showing a reticence for government debt as a record supply of $115 billion comes on line this week.

The bid gathered a bid-to-call ratio of 1.92 against the recent normal of 2.20.

The Federal Reserve will be buying longer-dated Treasurys on the open market Wednesday as part of its $300-billion, six-month program intended to free up lending and reduce longer-term interest rates such as those on mortgages.

Later Wednesday the Fed—the U.S. central bank—will release its Beige Book of anecdotal information on current economic conditions.

 

Durable Goods Orders Drop 2.5%, Most in Five Months

New orders for long-lasting U.S. manufactured goods fell more sharply than expected in June, notching their biggest decline in five months as demand for communications and transportation equipment slumped, a government report showed on Wednesday.

The Commerce Department said on Wednesday durable goods orders fell 2.5 percent in June, the largest drop since January, after rising by a revised 1.3 percent in May. This was worse than market expectations for a 0.6 percent decline.

Orders, which had advanced for two straight months, were pulled lower by steep declines in demand for transportation and communications equipment.

U.S. stocks index futures deepened losses on the report, while Treasury debt prices held gains and U.S. dollar extended gains versus euro.

“Durable goods doesn’t look positive … it’s no turning point in terms of momentum, and markets have reacted neither positively or negatively,” said Sebastien Galy, senior currency strategist at BNP Paribas in New York.

But there were bright spots in the mixed report. New orders excluding transportation rose 1.1 percent in June, the biggest rise since February, after climbing by 0.8 percent in May. Excluding defense, orders slipped 0.7 percent in June, after two months of straight gains.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, rose 1.4 percent in June after increasing 4.3 percent the previous month.

“The manufacturing sector benefits when we see non-defense ex-aircraft orders increase,” said Gary Thayer, senior economist at Wells Fargo Advisors in St. Louis. “This is potentially a sign that the worst of the weakness in business spending is behind us and we could see modest improvement in capital spending in the second half of the year.”

SIVR: new silver ETF…Silver Safer Than Gold, Natural Gas: Commodity Exec

The silver market is outpacing gold this year, and for those looking to buy into the metal, there’s now a new method.

ETF Securities, the largest provider of commodity-based exchange-traded funds (ETFs) in Europe, recently created a new ETF for silver.

“It’s the first step in building a platform for commodities,” said Graham Tuckwell, founder and chairman of ETF Securities.

Those buying into the ETF, which operates under the ticker SIVR [SIVR 13.31 -0.44 (-3.2%)], aren’t buying into futures. Rather, they are purchasing an actual piece of metal that is stored in a vault and stamped with a serial number.

Deutsche Bank Second-Quarter Profit Rises on Trading

Deutsche Bank AG, Germany’s biggest bank, said second-quarter profit rose 68 percent as increased revenue from trading bonds and stocks offset a surge in loan- loss provisions.

Net income rose to 1.09 billion euros ($1.55 billion), or 1.64 euros a share, from 649 million euros, or 1.27 euros, a year earlier, the Frankfurt-based bank said in a statement today. Earnings exceeded the 944 million-euro median estimate of 13 analysts surveyed by Bloomberg.

Chief Executive Officer Josef Ackermann said the banking industry and financial markets stabilized in the quarter, propelling a fourfold gain in income from debt sales and an improvement in equity trading. The economic slump led to a larger increase in loan losses than analysts estimated.

“Deutsche Bank fared pretty well compared to competitors because of its well-positioned investment bank,” said Katharina Eberle, an analyst at Bankhaus Lampe in Dusseldorf, Germany, who has a “hold” rating on the stock. “But loan-loss provisions were very disappointing because of the worsening economic situation and higher defaults.”

Deutsche Bank rose about 87 percent in Frankfurt trading this year, making it the sixth-biggest gainer on the Bloomberg index of 63 European financial companies.

Debt and Equity

The investment bank, run by Anshu Jain and Michael Cohrs, posted pretax profit of 828 million euros after a loss a year earlier. Analysts estimated earnings of 1.08 billion euros.

The company’s global markets business, run by Jain, had debt trading income of 2.6 billion euros on credit, interest- rate and currency sales, below analysts’ estimates. Equity trading generated 903 million euros in revenue, the most in six quarters and more than analysts predicted.

Credit Suisse Group AG of Zurich and New York-based Goldman Sachs Group Inc. and JPMorgan Chase & Co. also generated higher trading income in the past quarter.

“The bond business is definitely a revenue driver at the moment, and we’ve seen that banks are earning a lot from that,” said Daniel Hupfer, who helps manage about $42 billion, including Deutsche Bank shares, at M.M. Warburg in Hamburg.

The asset and wealth management business reported a pretax loss of 85 million euros, a bigger deficit than analysts estimated, compared with a year-earlier profit. Earnings at the consumer bank fell 83 percent to 55 million euros.

Progress in Economy

The bank posted a second straight quarterly profit after reporting its first annual loss in more than 50 years in 2008 amid the worst financial crisis since the Great Depression. In the second quarter, sales of corporate debt in Europe rose 12 percent from a year earlier to 329 billion euros, data compiled by Bloomberg show.

“The outlook for the remainder of 2009 is strongly influenced by progress in the global economy,” Ackermann, 61, said in the statement. “In an uncertain environment, Deutsche Bank is well prepared,” and can take “full advantage of opportunities, as and when business conditions improve,” he said.

The bank incurred 1.4 billion euros in charges, including provisions for credit losses, legal costs related to the failed buyout of Huntsman Corp. and severance payments. Total loan-loss provisions at the bank rose to 1 billion euros from 135 million euros in the year-earlier period, almost matching the amount set aside for possible defaults in all of 2008.

Capital Ratio Rises

Earnings were boosted by 377 million euros in pretax profit at the corporate investments unit, including gains from derivatives related to the acquisition ofDeutsche Postbank AG shares and stake sales in companies such as Daimler AG and Linde AG. The bank paid 242 million euros in income taxes, down from 633 million euros in the first quarter, helped by tax-exempt asset disposals.

Ackermann had his contract extended by three years to 2013 in April after guiding Deutsche Bank through the financial crisis without taking government aid. He boosted the bank’s tier 1 capital ratio, a measure of solvency closely watched by regulators, to 11 percent in the second quarter. He lowered the bank’s leverage ratio — total assets divided by shareholder equity, using U.S. accounting principles for derivatives — to 24 times by the end of June from 38 times a year earlier.

Non-interest expenses rose 21 percent to 5.6 billion euros in the quarter, boosted by a 17 percent jump in compensation and benefits to 3.14 billion euros as the company set aside more money for bonuses.

Earnings at the asset and wealth management business, headed by Kevin Parker and Pierre de Weck, suffered from declining asset values, client withdrawals at the asset management unit and charges related to a property fund. Earnings at the retail bank were hurt by rising loan provisions and severance charges tied to job cuts. Pretax profit from global transaction banking fell 36 percent to 181 million euros.

Ackermann has built up those so-called stable businesses to decrease the company’s reliance on investment banking. The investment bank, known as corporate banking and securities, generated 59 percent of total revenue in the quarter.