'the bear market is starting': marc faber

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    'The Bear Market Is Starting': Marc Faber

    The bear market is on its way back, economist and contrarian investor Marc Faber, the editor and publisher of The Gloom Boom & Doom Report told CNBC Tuesday.

    "The bear market is starting. When you compare equities to bonds and cash I don't think equities are very positive," Faber said in an interview.

    The S&P 500 [.SPX 1286.94 --- UNCH (0) ] has risen steadily since hitting its lowest point of the previous decade in March 2009.

    Markets have been more turbulent in recent months as debt crises in both the US and the euro zone threatened to damage growth there.

    "The Treasury market is telling you that the economy is in recession," said Faber. "So if the bond market is telling you that the economies of the Western world are weakening, but at the same time the stock market is still relatively high, I think the stock market is vulnerable."

    He added his voice to those criticizing politicians in the US and elsewhere over the current problems.

    "The politicians are all useless individuals. Nobody is reducing the problems in the US or Europe, just putting on a band aid and postponing the problems endlessly," he said.

    "Some analysts think that there's a chance economic data will surprise on the upside but I think, if anything, it will be on the downside," Faber added.

    He believes that some companies will start to disappoint in the second half of this year.

    China Bigger Risk

    Second-quarter results so far have been a mixed bag, with major European banks such as BNP Paribas and Barclays announcing disappointing results on Tuesday, while earlier in the week Motorola and engineering giant EADS performed better than expected.

    The most recent plan for US debt, which the Senate will vote on Tuesday afternoon, involves more than $1 trillion of spending cuts and a hard-won raising of the debt ceiling.

    Faber argues that China disappointing "is a much bigger risk for the global economy than the US because the US is no longer a major commodities buyer".

    He believes that the impact of a decline in Chinese growth on the oil price could be critical for major commodities producers like Canada, Australia and the Middle East.

    "If commodity prices are falling, then commodity producers will buy fewer goods from China," he pointed out. "This is something that the world central bankers can't deal with."

    Food price inflation is more of a problem in emerging markets than in the developed world as food is typically a much bigger part of annual spend in poorer countries, Faber pointed out, arguing that this could lead to worse than expected growth in China.

    Faber, who describes himself as "ultra-bearish", said that he thinks that precious metals are the best place to be at the moment.

    Despite worries about major euro zone economies including Italy, he is relatively bullish on the survival of the euro.

    "What surprises me more is actually the strength of the euro and that it has not collapsed yet," he said

    He believes that peripheral economies which drag down the euro will eventually be "chucked out" of the single currency.

    "I would have chucked out Greece three years ago, straight away, and it would have been much cheaper," Faber said.

    Gold's [XAU= 1633.39 15.29 (+0.94%) ] position as a safe haven will continue to keep prices close to their recent historical highs, Faber believes. He said that he would buy gold if it falls below $150 per ounce again.


    Debt Deal Done, Focus Turns Back to Fed on Economy:

    Even as Congress escapes from its brush with default, political divisions have all but immobilized the levers of fiscal policy, raising pressure on the Federal Reserve to address the nation�s economic lethargy.

    Failing to raise the U.S. debt ceiling could lead to an economic catastrophe. But even if the Senate on Tuesday joins the House in agreeing to let the government borrow more money, there is mounting evidence that the political turmoil has made a bad economic situation worse.

    Manufacturing activity declined in July, a trade group reported Monday. Unemployment is climbing. So is inflation. And the high pitch of partisan rancor in Congress makes it difficult for either party to advance their incompatible economic agendas.

    The deal to raise the debt ceiling would reduce federal spending this year by billions of dollars, exacerbating a broader downturn in federal aid as the stimulus peters out. A payroll tax cut and extended benefits for the unemployed are scheduled to expire at the end of the year.

    Ben S. Bernanke, the chairman of the Federal Reserve, said in the spring that it was time to see whether the economy could stand on its own. Last month he said the Fed would consider new steps if conditions deteriorated significantly. As the Fed�s policy-making committee prepares to meet Aug. 9, the drums are beating louder.

    �I don�t think they can do anything until we see how much was lost and how much we can recoup,� said Diane Swonk, chief economist at Mesirow Financial. �But if we have persistent weakness, and stagnant employment growth through the third quarter, I just don�t see how they can�t step back into the game.�

    The Fed already is engaged in a vast and unprecedented effort to bolster economic growth. It has held short-term interest rates near zero for almost three years, and amassed more than $2 trillion in Treasuries and mortgage bonds to hold down long-term rates. But since the end of June, when it completed its most recent round of asset purchases, the Fed has chosen to stand pat.

    Its available options now are modest steps including replacing its promise to maintain low rates �for an extended period� with a more specific commitment, like a six-month minimum. More aggressive steps could include tilting the composition of its investment portfolio toward longer-term Treasury securities, to increase the downward pressure on long-term rates. The most drastic step, which analysts also consider least likely, would be a decision to increase the size of its portfolio.

    For the moment, and for as long as possible, the central bank would like to do nothing. There is broad agreement that the unprecedented size of the Fed�s portfolio has complicated its ability to control the pace of inflation, and that additional purchases would exacerbate the difficulty.

    Mr. Bernanke has said that growth must weaken and price increases abate. A vocal minority of Fed officials has gone further, arguing the central bank has reached the limit of its powers.

    �It seems unlikely that the forces limiting the pace at which U.S. growth is recovering are amenable to monetary policy,� Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, said in a speech last week. �Additional monetary stimulus at this juncture seems likely to raise inflation to undesirably high levels and do little to spur real growth.�

    The Fed is even less eager to renew its interventions into financial markets. The central bank has hovered on the edge of the debt ceiling debate like a homeowner riding out a hurricane, hoping for limited damage to the lethargic economy.

    �I want to eliminate any expectation that the Fed through any mechanism could offset the impact of a default on the government debt,� Mr. Bernanke told Congress in July.

    Even if the Congress meets President Obama�s Tuesday deadline for a debt ceiling deal, the ratings agency Standard & Poor�s has warned that it may downgrade long-term Treasury bonds, altering a basic premise of many financial transactions and unleashing smaller but still significant disruptions.

    �If a huge amount of harm is being done to the markets and the economy, they will have to consider carefully whether there�s anything they can do to help,� said Donald L. Kohn, who stepped down last June after serving four years as vice-chair of the Fed�s board of governors. �The point of that would be to help the markets get through a chaotic period.�

    During a previous debt ceiling standoff, which ran from the fall of 1995 through the spring of 1996, the Fed considered offering loans to banks that did not receive expected payments from the government, and honoring defaulted Treasurys as collateral, according to Alan Blinder, who served as vice chairman of the board of governors at the time.

    �We had extensive discussions with the principal clearing banks in New York which then were Chase and Bank of New York,� said Mr. Blinder, now a Princeton economics professor. �What we on the board were most worried about was preserving the remnants of the Treasury market because of its central role in providing liquidity to the whole system.�

    The Fed also could buy dollars in the event of a downgrade. Uncertainty already is driving investors to other currencies, and a sharper decline could undermine the dollar�s role as an international reserve currency�a status that has significant benefits for the American economy.

    Such a step would be taken at the behest of Treasury, because the administration sets currency policy.

    But there are strong reasons to doubt the government would try such an intervention. A weaker dollar could bolster growth by making American exports more attractive. In particular, it could improve the balance of trade with China�while intervening to prop up the dollar would undermine the credibility of American efforts to convince China to stop manipulating its currency.

    Perhaps most important, intervening in exchange markets may not prevent the dollar�s fall. �If the dollar were just weak because people had lost confidence in the U.S. government, I don�t see why buying dollars is going to restore confidence,� said Mr. Kohn, now a senior fellow at the Brookings Institution. �The cure for that isn�t intervention. The cure is the government acting like adults."


    US Futures to Open Lower Despite Debt Deal:

    US stock market futures pointed to a lower open on Wall Street on Tuesday despite legislation being passed by the US House of Representatives late on Monday to raise the US government�s borrowing limit beyond $14.3 trillion until 2013 and cut public spending by $2.1 trillion over the next decade.

    The US Senate is due to vote on the bill at noon New York time with lawmakers expected to pass the bill. However, concerns persist that the deal will still not prevent America from losing its triple-A credit rating.

    Weak manufacturing data out of the US on Monday and more concern over the European debt crisis helped to kill off the relief rally early as investors focused on fundamental concerns about the growth prospects for the US economy.

    Meanwhile, companies due to report results include Pfizer [PFE 19.01 -0.239 (-1.24%) ], CBS[CBS 27.28 -0.09 (-0.33%) ] Duke Energy [DUK 18.70 0.10 (+0.54%) ], Marathon Oil[MRO 30.64 -0.33 (-1.07%) ], Molson Coors Brewing [TAP 44.63 -0.42 (-0.93%) ]and Tenet Healthcare [THC 5.44 -0.12 (-2.16%) ].

    On the economic data front US personal income and spending data for June are expected at 08:30am in New York alongside core inflation data also due at the same time. Auto makers are also due to report sales for July.

    Analysts� expectations on briefing.com signaled personal spending rising by 0.1 percent and inflation increasing by 0.2 percent.

    In Europe, the spreads for Spanish and Italian credit default swaps rose to a new record on Tuesday and reports said that officials from the Italian government, Bank of Italy and market authorities are to meet to discuss the market turbulence.

    European stocks opened lower as several banks posted significant losses and job cuts. On Monday HSBC [HSBA-LN 617.70 10.20 (+1.68%) ] announced that it would be cutting up to 30,000 jobs worldwide, while on Tuesday morning Barclays bank [BARC-LN 226.60 9.60 (+4.42%) ] announced 3,000 job losses as it reported pre-tax profits of 2.6 billion pounds ($4.3 billion) down 33 percent from a year ago.

    French bank BNP Paribas [BNP-FR 43.25 -0.425 (-0.97%) ] also unveiled a $768.3 million writedown linked to its exposure to Greek debt as it announced second-quarter net profit rose by 1.1 percent to 2.128 billion euros ($3.017 billion), falling short of a Reuters analysts� forecast of 2.234 billion euros.


    European Shares Hit 10-Month Low as US Data Fuels Growth Fears:

    European shares fell for a third straight session to hit a 10-month low on Tuesday as bleak U.S. manufacturing data raised concerns about the health of the global economy, while charts pointed to further weakness for major equity indexes

    Shares in personal and household goods companies [.SXQP 420.19 -5.83 (-1.37%) ], down 1.6 percent, were among the top decliners, led by a 62-percent slump in Danish jewelry maker Pandora after the company cut its full-year outlook owing to rising costs and a sharp fall in revenue.

    The FTSEurofirst 300 [.FTEU3 1058.09 -9.88 (-0.93%) ] index of top European shares was down 1 percent at 1,057.39 points after falling as low as 1,056.81, the lowest since October 2010. The index, which has fallen in 6 of 7 sessions, is down more than 5 percent so far this year.

    Italy's FTSE MIB [.FTMIB 17469.57 -250.87 (-1.42%) ] index fell 1.8 percent to its lowest in more than 27 months on worries that Italy could leapfrog Spain to become the next most likely victim of the euro zone crisis.

    Analysts said the euro zone's blue chip Euro STOXX 50 [.STOXX50E 2578.27 -15.07 (-0.58%) ] index was heading towards a major low of around 2,448 points reached in May last year. On Tuesday, it was down 1 percent at 2,567.15 after hitting 11-month lows.

    "It looks like investors have just forgotten about the debt ceiling deal in Washington and instead are focusing on the economic data, which was clearly weaker than anticipated," said Bill McNamara, analyst at Charles Stanley.

    "The uptrend is clearly over. The Euro STOXX 50 looks relatively oversold, but in extreme cases, the 14-day relative strength index (RSI) for this index has a habit of dropping back to about 20. That could easily happen again."

    The RSI for the index was last at 32. A level of 30 and below is considered as oversold and 70 and above is considered as overbought.

    Analysts saw near-term support for the index at around 2,557, its 38.2-percent retracement of a rally that began in March 2009, and said that investors will stay jittery following sluggish global manufacturing data on Monday and on concerns about a possible downgrade of the U.S. credit rating.

    Washington looked to have averted a debt default after the House of Representatives approved a deal to raise the government's borrowing limit, but investors stayed concerned the United States could still lose its triple-A credit rating.

    "The macroeconomic figures that we saw have certainly given investors serious considerations to question the speed of global economic recovery," said Keith Bowman, equity analyst at Hargreaves Lansdown.

    "In the background, we have got the rating agencies' potential comments on the U.S. credit rating."

    Euro Zone Debt Condition

    Five-year credit default swaps on Spanish and Italian debt rose on worries that the latest bailout for Greece does not go far enough to ringfence the region's bigger economies from contagion.

    Officials from the Italian economy ministry, the Bank of Italy and market authorities are to meet on Tuesday to discuss the market turbulence which has sent Italian bond yields to record levels, a source with knowledge of the meeting said.

    The Thomson Reuters Peripheral Eurozone Banks index [.TRXFLDPIPUBANK 59.20 -0.98 (-1.62%) ] fell 1.4 percent on writedowns and capital hike fears for banks. European banking index [.SX7P 169.00 -0.57 (-0.34%) ] was down 0.5 percent, while Italian banks UniCredit and Intesa Sanpaolo fell 2.5 percent and 3.4 percent respectively.

    BNP Paribas regained some ground after early steep falls to be down 0.1 percent. The bank fell short of profit expectations for the second quarter, hit by its Greek exposure and sluggish growth in its retail and investment banking units.

    Miners also lost ground on worries about global demand for raw materials. The sector index [.SXPP 534.71 -11.72 (-2.14%) ] was down 1.9 percent.

    Among individual movers, Wacker Chemie fell 9.7 percent after the world's No.2 maker of polysilicon's second-quarter results disappointed as rising raw material costs hit earnings.


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