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Key News

  • Five months after the collapse of Lehman Brothers Holdings, risk-averse investors across the world are still flocking to the safe-haven instruments, and in the process shunning riskier debt, a signal of the continued woes plaguing the economy and financial markets. A slew of government-bond auctions this week, which totaled $94 billion in sales, underscored the point. At an auction of two-year notes Tuesday, bids for the securities outnumbered the amount being offered by a ratio of more than 2.5 to 1 even though they yielded just 0.96%. The sales were followed up with robust demand at auctions of five-year and seven-year notes Wednesday and Thursday. (WSJ)

  • Quick Summary of Eastern Europe from The Economist:

Source: The Economist

Key Reports Due:
8:30 a.m. 4Q Preliminary GDP: Previous: -3.8%.
9:45 a.m. Jan Chicago PMI: Previous: 33.3.
10:00 a.m. End-Feb Reuters/U Mich Sentiment Index: Previous: 61.2.

Quotable [our emphasis]

The cold statistics have hardly been encouraging for the traditional view. On a total return basis, the Ibbotson data show that the S&P 500 has underperformed long-term Treasury bonds for the last five-year, 10-year, and 25-year periods, and by substantial amounts.

These data are not to be taken lightly.

If the long-run expected return on bonds in the future were higher than the expected return on equities, the capitalist system would grind to a halt, because the reward system would be completely out of whack with the risks involved. After all, from the end of 1949 to the end of 2000, the S&P 500 provided a total annual return of 13.1 per cent, while long Treasuries could grind out only 5.8 per cent a year.

But does this history really tell us anything about what lies ahead? Neither the awesome historical track record of equities nor the theoretical case is a promise of a realised equity risk premium. John Maynard Keynes, in an immortal observation about the future, expressed the matter in simple but obvious terms: “We simply do not know.”

Relying on the long run for investment decisions is essentially relying on trend lines. But how certain can we be that trends are destiny? Trends bend. Trends break. Today, in fact, we have no idea where any trend lines might begin or end, or even whether any trend lines still exist.

As Lord Keynes in one of his best known (and wisest) observations, reminded us: “The long run is a misleading guide to current affairs. Economists set themselves too easy, too useless a task if in the tempestuous seasons they only tell us that when the storm is past the ocean will be flat.” To Lord Keynes, the tempestuous seas are the norm. We cannot escape the short run.

There is an even deeper reason to reject the long run as a guide to future investment policy. The long-run results we can discern in the data of stock market history are not a random set of numbers: each event was the result of a preceding event rather than an independent observation. This is a statement of the highest importance. Any starting conditions we select in the historical data cannot replicate the starting conditions at any other moment because the preceding events in the two cases are never identical. There is no predestined rate of return. There is only an expected return that may not be realised.

                              Peter Bernstein, The flight of the long run (FT 2-26-09)

FX Trading – This is fresh! China to grow at 8%!
China bulls don’t worry, be happy, because China is going to be the sole winner in this race to the bottom–don’t you know. 

Feb. 27 (Bloomberg) — China said its 8 percent growth target for this year is within reach even as the worst financial crisis since the Great Depression hammers economies worldwide.

Liu Tienan, vice chairman of the National Development and Reform Commission, restated the goal at a briefing in Beijing today and said China has “the conditions” and “the confidence” to meet it.

And if you believe that one, we have all kinds of things here we’d like you go bid on…this from yesterday’s The Lex Column published by the Financial Times:

Asian exports
Published: February 25 2009 09:14 | Last updated: February 25 2009 19:03
The sight of half-laden container ships plying the seas is another clue that this is no ordinary recession. Japanese exports almost halved in January. A geographic breakdown of Wednesday’s 46 per cent year-on-year drop in exports shows the buyers’ strike is global. Japanese exports to the US fell 53 per cent and to the European Union and Asia by 47 per cent. This follows an 18 per cent drop in China, 33 per cent in South Korea and 44 per cent in Taiwan.
Statistics are skewed by the Chinese lunar new year holidays. But lead indicators suggest there is worse to come. Throughput at China’s once bustling ports is thinning. After growing at an annual 20-30 per cent from 2004, volumes have now returned to 2006 levels. Chinese import processing, which leads exports by a month or two, plunged 50 per cent, year on year, in January, according to Citigroup.

…and we noticed this also from the Financial Times this yesterday in a story about Hong Kong’s deepening recession [our emphasis]:

Hong Kong warns of deeper recession
By Tom Mitchell in Hong Kong
Published: February 26 2009 02:00 | Last updated: February 26 2009 02:00
Hong Kong’s recession will worsen this year after gross domestic product fell 2.5 per cent in the fourth quarter, the territory’s financial secretary has warned, as the global financial crisis continues.
…According to Mr Tsang, exports – primarily "reexports" of China-made goods flowing through Hong Kong’s port – grew an anaemic 2 per cent in real terms last year. The territory’s entrepreneurs are the largest investors in southern China’s manufacturing sector. Exports from neighbouring Guangdong province, which accounts for one-third of China’s total, fell 23.6 per cent in January to US$24.2bn (€19bn, £17bn).

We know there are believers in China still out there.  In fact, we continue to see global strategists tell us it’s time to buy Chinese stocks because they are “cheap.”  We keep asking: Cheap compared to what?  I guess cheap if China does grow 8% and we have this totally wrong.  But if we are right and growth is close to zero or negative, we think social unrest will make it to the front pages of even fawning financial news pubs.  And if we are right about that, then the word cheap may start to make a lot more sense to us.

China ETF vs. Australian $ – US$ Daily …

Seems the Aussie didn’t follow through on the good China news today…in lock-step they go …

Have a great weekend!