Friday, May 29, 2009

Last Minute Window Dressers Wake UP

Last Minute Window Dressers Wake UP Up UP Up ..

I forgot it is the last trading day of the month. Why I do not observe something similar in, e.g., bond or FX markets?

BTW, bond investors decided to provide extensive subsidies to other asset classes in the green shoots race today ...

Click to enlarge, courtesy of Yahoo!

SocGen's Technical View On S&P500

Click to enlarge, courtesy of Societe Generale!

ECRI' s WLI Growth Climbs Higher vs Dean Baker

As usually, the weekend update of ECRI' s WLI (my emphasis):

Reuters, May 29, 2009
A gauge of future U.S. economic growth rose for the sixth straight week, sending its yearly growth rate to its highest levels since last summer, a research group said on

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index ticked up to a 30-week high of 111.9 for the week ending May 22 from 111.0 the prior week, which was revised lower from 111.1.

The index's annualized growth rate surged to a 43-week high of negative 9.3 percent from last week's rate of negative 11.5 percent.

It was ECRI's highest yearly growth reading since the week ended July 25, 2008, when it stood at negative 8.1 percent, indicating that the growth rate should march into positive territory as the summer progresses.

"With WLI growth climbing by 20 percentage points in 26 weeks, the economic growth outlook is getting steadily brighter," said Lakshman Achuthan, managing director at ECRI.

The research group's far-seeing Long Leading Index is already in positive territory, so "it would be normal for WLI growth to follow suit in the coming months," Achuthan added.

The weekly index pushed higher due to stronger stock prices and lower jobless claims data, Achuthan said.

I posted the latest chart update on Monday for better visual perspective ... and the LLI is not turning down according to ECRI ...

As a qualitative disagreement to the "all green" and the other side of the trade I propose the views by Dean Baker, who was somewhat disppointed by "media spin" today?:

NPR Says Investors Are Out to Lunch
It told listeners on the headline news on Morning Edition that stock prices rose yesterday due to a fall in new unemployment claims, a surge in durable goods orders, and an increase in new home sales. If these reports were really the basis of investors' optimism, then we should all be very scared since it would mean investors are really clueless.

New unemployment claims were reported at 623,000 for last week. This is down by 13,000 from the 636,000 reported for the prior week, but it is down by only 8,000 from the number that had been reported before yesterday's upward revision. It is also a number consistent with a very rapid pace of job loss. New claims were running at the rate of less than 600,000 a week in November, December, and January, when the economy was losing more than 600,000 jobs a month. (Note, the weekly claims refer to the number of people who filed for unemployment insurance in that week. The monthly job loss refers to the net change in employment [new hires minus job losers] over the course of a month.)

As noted in an earlier post, there was no surge in durable goods orders. There had been a downward revision to the March data that was equal to or larger than the extent to which the April numbers exceeded expectation. New orders for capital goods, the investment component of this measure, fell sharply in April.

Finally, new homes sales reported for April were up by 1,000 from the level reported for March, but this 4,000 below the level previously reported for March. The April sales level is the second lowest on record.

In sum, none of these reports are especially good. In each case, they could have been worse, but none provide any evidence of growth, nor even much evidence that the rate of decline is slowing. Whatever modest improvement they show from the weak reports in prior weeks/months is well within the margin of error for these reports.

As a more general proposition. No one knows what was in the mind of the millions of investors whose actions moved the market yesterday. Media outlets should attribute the claim of what was in their minds to a specific source rather than pronouncing it as a matter of fact, as NPR did this morning.

Difficult to make judgement?

Thursday, May 28, 2009

Shaky Baltic Currencies ...

My baseline scenario assumes that the real circus in Latvia starts after 6th of June, after municipal and EU parliament elections, but the devaluation debate is heating up already now, and therefore some link-fest today:
Danske Bank Warns On The Baltics @ Latvia Economy Watch
Devaluation Imminent in the Baltics? @ Latvia Economy Watch
Event risk in the Baltics is critically high @ Credit Writedowns

But who knows?

Wednesday, May 27, 2009

German Dax knackt 5000er-Marke

The on-line version of major German daily newspaper "Bild" runs a story: "Dax knackt 5000er-Marke"
TOPMELDUNG 1: Dax knackt 5000er-Marke: Der Dax hat im frühen Geschäft mithilfe guter US-Vorgaben die 5000-Punkte-Marke übersprungen. Der Leitindex legte 0,5 Prozent auf 5010 Zähler zu. Händler sahen bei der 5000-Punkte-Marke einen psychologisch wie charttechnisch wichtigen Widerstand. Der Index hat in diesem Jahr dieses Niveau zwar schon einige Mal kurz übersprungen, aber nur zweimal darüber schließen können. Um die 5000 Punkte nachhaltig zu überwinden, brauche der Markt neue Impulse, sagten Händler.
Contrarian indicator? Watch Russell 2000!

Tuesday, May 26, 2009

SocGen: (US) Consumers Say Worst May Be Over

Well, BNP Paribas titled the story "US: Less pessimistic consumer in May - Conference Board index up to 54.9", with following bullet points:

    • The consumer confidence index calculated by the Conference Board improved to 54.9 in May from 40.8 in April. In the past three months, the Conference Board index has recovered from its historic low. Yet, its current level remains weak.
    • The present situation index edged up to 28.9 from 25.5. The expectations index improved much more significantly, to 72.3 from 51.0.
It is fascinating how the same story is interpreted by another French bank Societe Generale, titling the story: "Consumers say worst may be over". Click on chart to enlarge, courtesy of Societe Generale.

Societe Generale comment:
Consumer confidence is up sharply from the February lows and indicates a view from the consumer that the worst is over. The Expectations Index is at its highest since December 2007, or when the current recession started.
Consumer spending data has been mixed in March and April but the underlying message in the consumer confidence readings is of greater stability. We expect spending to resume at a moderate pace in Q3 when GDP is expected to again turn positive.
Wow, and risky assets like bullish expectations ... Unfortunately, not always expectations turn into reality!

Monday, May 25, 2009

Bylov: Weekly Inter-Markets Trading View

Jan Bylov, chief analyst at Nordea Markets, is a "rare specie" among analysts, as he is looking himself at all asset classes and uses inter-market approach in analyzing the markets. He writes in the summary today:

Stocks – LatAm and Asia lead the way forward

With the Short Interest in cash stocks little changed during the recovery it appears that market pundits remain divided into two groups of perception: 1) “this is just a suckers’ rally within a structural bear market” (the fear demagogues) or 2) “having faced unlimited downside risk in March the significant recovery illustrates that markets still respond to traditional economic stimulus”. Now, whatever one believes lots of indices have approached conventional “overbought” technical levels causing concern as risk/reward considerations are moving back towards balance. Still, we remain optimistic based on the concept that we already have faced “unlimited downside risk” (OECD in March) and that it consequently will take a new black swan accident to cause global equity markets to extend the bear market lows of 2009! Further, we find it extremely interestingly that emerging LatAm and Asia found the low already back in October/November 2008 and have led the way higher ever since. We are on the road back from hell!

Bonds – Environment deteriorating at the long end

Arguments against holding long government bonds appear to be building in the minds of global asset allocators whom are influenced by: 1) performance by global asset and debt markets providing evidence that the bottom of the financial business cycle has been passed, 2) the enormous bond issuance to finance the unprecedented rescue packages, 3) already historic low interest rates and 4) rating agencies in a process of lowering the outlook of sovereign debt. Definitely, we also subscribe to the evidence working against owing long government bonds, but any case has two sides to consider. Most importantly, central banks are unlikely to allow a crash in bonds with the global macro economy still fragile – not least to support the housing market. And we should neither forget that the Japanese bond market with negligible yields outperformed longer than any asset allocator had ever imagined. As a consequence, we maintain that long bonds hold unattractive risk/reward ratios, and that any buy strategy must be considered of short-term nature. Currently, market action in Bunds and Treasuries remain bearish!

Commodities – Precious metals still in favour

Agriculture and energy prices are edging higher while industrial metals continue to show evidence of losing buy momentum. Still, the overall recovery in commodities has importantly NOT been driven by speculative interest (re. CFTC report) which is considered an important and constructive piece of evidence as financial markets already have experienced “unlimited downside risk” advocating that the financial business cycle has passed its bottom. Future challenges still appear evident, however, with precious metals performing well (a battle with fiat currencies?).

Currencies – Hedging fiat currency risks

The general recovery in minor and emerging currencies are clearly losing momentum and judged by the positioning among futures traders currency bets are being concentrated against USD and GBP; meanwhile buying of precious metals (physical as well as stocks) continue unabated. Now, with ratings agencies in a process of lowering the outlook for sovereign debt this raises an important question whether market operators are hedging the inherent risks of fiat (paper) currencies currently centred on USD and GBP? Undoubtedly, “old USD collapse” theories are moving back into fashion, and with market action clearly against USD, and the financial business cycle having passed its bottom, a weaker USD holds the upper hand.

Consider as a probability!

ECRI WLI Chart Update

I promised to update the ECRI WLI charts on Friday, now it is at your disposal ...

Click to enlarge!

"With WLI growth rising steadily to a 35-week high, it is increasingly obvious that the 'green shoots' will blossom this summer," said Lakshman Achuthan, managing director at ECRI.

Friday, May 22, 2009

Another Quote Of The Day

This time around the journalists (Rita Nazareth) at are masters of the universe ...
I made a PrintScreen and framed the story in red, as the underlying story and the headline is a bit different than the headline would suggest.
Click on picture to enlarge ...

Here is what writes in the headlines ...

I have no comment ... other than a question: " What happens to Sears profits if government fails to fund itself in capital markets?". Well, and what is Sears Holdings Corp. profit compared to $160+ billion the U.S. govt intends to raise next week?

ECRI: WLI Growth At 35-Week High

Those, who do not believe in green shoots, should listen to ECRI (my emphasis):

Reuters, May 22, 2009 (Reuters) - A measure of U.S. future economic growth inched higher in the latest week, while its yearly growth rate continued to climb toward positive territory, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index edged up to a 29-week high of 111.1 for the week ending May 15 from 111.0 the prior week.

The index's annualized growth rate reached a 35-week high of minus 11.5 percent from last week's rate of minus 13.6 percent.

It was the highest yearly growth reading since the week ended September 12, when it stood at minus 11.4 percent."With WLI growth rising steadily to a 35-week high, it is increasingly obvious that the 'green shoots' will blossom this summer," said Lakshman Achuthan, managing director at ECRI.

The group's index rose because of lower interest rates and higher commodity prices, and was partly offset by weaker housing activity, Achuthan said.

Well, their methodology failed, or, more precisely said, the forecast was interrupted, during Great Depression. But who believes we face something similar to ...? Not necessarily the U.S. is the weakest link these days? As long as the U.S. is able to raise money for their banks, whatever way, one should be worried about other geographic locations ...

I should put a chart here for a better visualization ...

UPDATED: Someone is suggesting to me that "their methodology did not fail". Well, their current "marketing" of " imminent recovery" may fail ... it is, probably, a fairer representation of my current view.

Thursday, May 21, 2009

Quote Of The Day

I read at "Mish" today:
Nonetheless, I would like to pass on a saying of my friend Clyde Harrison at Brookshire Raw Materials ...
"Fiat currencies don't float. They sink at varying rates".
At Wikipedia: "Fiat money" ...

Energy Musings

Crude oil (West Texas Intermediate) is up some 50% in the last 3 months, click on chart to enlarge, courtesy of, and you can follow that up-to-date here.

Mike Fitzpatrick at MF Global Energy wrote yesterday:
With each passing day we are beginning to feel more and more like the Emperor in his new clothes, but we must continue to warn that danger lurks. Since the turn of the year market lows about the only positive that we can agree on is that economic contraction seems to have slowed, but there has yet to be any discernable sign of solid economic growth. Previous recoveries may have gained strength very quickly, usually from US consumers penchant for profligate spending, and the availability of easy credit. These elements are missing this time around. Savings rates have soared as consumers snapped their wallets shut. While it is probably a good thing that credit is utilized more responsibly, putting consumers on a mostly cash diet means that demand will return very slowly.
Today he writes:
The solidity of the current rally's strength must be called intro question after yesterday's late sell-off in RBOB, the particular star performer, of late. The seasonal increase in gasoline production has not materialized to the degree of prior years because of historically poor margins. As product moves along the distribution chain towards pumps, refiners' stockpiles will be the first to register; so yesterday's large draw is hardly a surprise.
In view of the fact that current gains in oil prices far surpass the 12% advance last year when prices were closing in on $100, certainly points out that this rally is an expression of hope, rather than a reflection of reality.
BNP Paribas commented the US energy statistics of yesterday as follows:
Product stocks: stronger draws in gasoline but an in line increase in distillates: Another week and another very depressing reading on US product demand which, on an average four-week basis, fell 7.5% against last year. US gasoline stocks draw more than expected as refinery deliveries jump, outpacing a recovery in imports on the week. Conventional gasoline stocks fell 2.8 mb while blending components were down 2 mb. The increase in deliveries (a proxy for demand) does not hide a 1.2% contraction on the year and needs to be set within the seasonal context. It can be seen as part increased deliveries to gas stations ahead of the Memorial day weekend and the start of the summer driving season (for logistical reasons), part exports of the remainder of winter grade material (no longer suitable for commercial distribution) and also higher blending as refinery crude runs are cut back. In the end, retail sales of gasoline were down 2.3% m/m in April, building on the 3.2% m/m fall in March while prices at the pump creep progressively higher – the average price nationwide for a gallon of gasoline is $2.3 (about $1.50 lower than last year but up from average of $1.96 during April). Distillates stocks rise 0.7 mb with builds in heating oil but mostly diesel. The US business inventory to sales ratio is still high given the magnitude of the recession, suggesting more cutbacks in industrial output – this would imply weaker demand for freight and as a result, sustained weakness for diesel demand. US distillate demand is still down by double digits against last year (-12%).
Click for larger charts with US energy demand indications, courtesy of BNP Paribas.
FT Alphaville provides some more insights into efficient markets ... The coming oil-equity disconnect ... and "bullish case for gasoline". Strong action based on anticipation ...

Wednesday, May 20, 2009

Merrill Lynch(ed): Global Fund Manager Survey

Bank of "Amerillwide" (or Countrywide Lynched America) is out with Global Fund Manager Survey today. "The picture" looked like this in April. Key conclusions from the new May survey:
The bulls are back
Investors are now positioned for global economic recovery according to the May FMS. The unrelenting gloom of a mere three months ago has been replaced by fairly typical early-cyclical sentiment, with the only hint of potential irrational-exuberance in Emerging Markets. Real economic data now needs to satisfy consensus expectations but the May FMS does not say “Sell in May”.

Surging optimism on macro outlook and corporate profits

Optimism on global economic growth surged with a net 57% of panellists expecting a stronger economy- the highest reading since early-2004. And for the first time since March 2005, investors expect corporate profits to improve in the next 12 months, with over a quarter of respondents forecasting EPS growth to exceed 10%.

All regions seeing optimism (even Europe. . .)

Global growth optimism remains founded on China with two-thirds of investors expecting strength. However, even the final recessionary holdout has turned pro-growth with a net 35% of fund managers expecting Europe’s economy to improve, compared to a negative 26% last month.

Rising risk appetite but asset allocators hedge bets

The BAS-ML Risk & Liquidity composite jumped to the highest level since Nov 2007, with investors cutting cash balances to 4.3% (from 4.9% last month and a recent peak of 5.5%). However, asset allocators are still hedging their bets: they remain U/W equities (-6%) and have only marginally lowered cash O/W (+21% from +24%). A brief 9-month sojourn into bonds ended with allocators cutting to a net 3% U/W. They stay U/W Europe & Japan, but a record net 40% of investors see GEM as the region to O/W for the next 12 mths.

Defensives hacked back

Investors’ top 3 global sectors are now technology, energy and materials as May saw a rout in defensive sectors: pharma fell to -2% from +21%, staples -1% from +9%, and utilities -19% from -15% (now the most U/W global sector). The stubborn bank U/W was further reduced to its lowest level since June 2007.

What happens next?

Markets in H1 were all about extreme positioning & policy. With positioning now more balanced, markets in H2 will be driven by the economy & earnings. The FMS says the market grinds higher via asset allocation moves and pressure from the ongoing U/W in global banks. The grind lower risks revolve around weaker Chinese/EM data. Contrarian trades to mull over are long Europe/Japan, short
EM/China; long pharma/utilities, short technology/materials.
Last month I pointed out China and banks. Banks are obviously the game of faith in the government criminality. Many of them are de facto insolvent, in my view, but the operating earnings potential is good, and governments, on behalf of tax-payers, have promised "no repeat of Lehman". So, they will be walking around like zombies and sucking the blood of economy. Instead of re-capitalizing them, they are allowed to earn they way out (by sucking) ...

It is time to turn to China (last time I opined here, and before that here) latest link-fest now:
Those are the articles I read this morning, no selection at all ... but may be biased anyway. China is a black-box for me, and some economists are talking of China being very similar to Japan in late 1980ties... Bearish bias? Technically not yet ...

Tuesday, May 19, 2009

Back To Consumption Growth ...

The previous posts have been rather "technical" in nature, as I would describe the equity markets recently ... It is probably a time to re-visit the fundamentals?

Indeed, there is a big difference between the investing and trading, as Brett Steenbarger noted in his blog yesterday:
Mixing the mindset of trader and investor is hazardous to your wealth. As an investor, I can tell you that I remain very conservatively positioned with my retirement assets.

All of that, however, is irrelevant to what I think about the stock market *today*.


Trading is about exploiting supply and demand during short-term intervals; it is not investing.
Last week the economists at San Francisco Fed (HT Mark Thoma) published a FRBSF Economic Letter: U.S. Household Deleveraging and Future Consumption Growth. I excerpt here the conclusion:
More than 20 years ago, economist Hyman Minsky (1986) proposed a "financial instability hypothesis." He argued that prosperous times can often induce borrowers to accumulate debt beyond their ability to repay out of current income, thus leading to financial crises and severe economic contractions.
Until recently, U.S. households were accumulating debt at a rapid pace, allowing consumption to grow faster than income. An environment of easy credit facilitated this process, fueled further by rising prices of stocks and housing, which provided collateral for even more borrowing. The value of that collateral has since dropped dramatically, leaving many households in a precarious financial position, particularly in light of economic uncertainty that threatens their jobs.
Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the deleveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates. Alternatively, if accomplished through some form of default on existing debt, such as real estate short sales, foreclosures, or bankruptcy, deleveraging could involve significant costs for consumers, including tax liabilities on forgiven debt, legal fees, and lower credit scores. Moreover, this form of deleveraging would simply shift the problem onto banks that hold these loans as assets on their balance sheets. Either way, the process of household deleveraging will not be painless.
This is simply a reminder of my fundamental concern for fast (V-shaped) recovery, and keep in mind that U.S. is just some 30% of global consumption. As Paul Kedrosky noted yesterday, the "Green Shoots" look really amazing in U.S. retail. The latest report on U.S. retail sales by BNP Paribas is available here.

The latest data from Fed on U.S. consumer credit suggest heavy deleveraging going on. David Rosenberg, the ex-economist of BofA/Merrill Lynch(ed), noted in one of his latest reports:

Consumer credit contracted a record $11.2 billion in March (a 5.2% annual rate and down a total of $32 billion since last September. Revolving credit posted a large decline -- after sliding at a 12.1% annual rate (-$9.7 billion) in February, it fell another 6.8% SAAR (or -$5.4 billion) in March. This was the sixth consecutive monthly decline in revolving credit, and the YoY trend in credit card use is running at -1.2% -- a huge swing from the +7.7% trend a year ago and the first move into negative terrain ever People are cutting up their credit cards and extending the life of their durable consumer goods -- after all, the average household owns a record $37,000 of "stuff".
The fact that non-revolving credit is down $5.4 billion for the month in the face of the huge improvement in auto loan terms is a story in its own right. What is tough to square is the huge gap between the seasonally adjusted and non adjusted data - for example, credit card outstandings were down $17 billion for the month and $60 billion year-to-date unadjusted versus the 'smoothed' $5 bln and $16 bln drawdown respectively.

Click on chart to enlarge, courtesy of Bank of America/Merrill Lynch.

There are, of course, many other issues to climb the "wall of worry".

Many pundits are talking about "stabilization" in the U.S. housing markets, but there are many other housing bubbles around the world. The activity is one side of the coin, but for the financial world the housing prices may be more important than activity (that is probably indeed at very depressed levels already) ...

Societe Generale acknowledges today:
Foreclosures are the wildcard in timing the pace of inventory liquidation. Over the past year, foreclosures added about 200K housing units to the excess housing stock. The pace slowed somewhat in Q4 as banks put temporary moratoria on foreclosures in anticipation of the new government-subsidized foreclosure mitigation programs. These moratoria have been gradually lifted this year, and while many loans are being modified, foreclosures are likely to go up. We assume that about 250K units will be added to supply due to foreclosures in 2009. Even if we allow for further rise in foreclosures, the economy should be able to clear out the excess inventory stock within the next 12-18 months. With that, the bottom for home prices looks to be in sight.
Click on chart to enlarge, courtesy of Societe Generale.

What kind of glasses are they wearing? Or looking through a telescope?
But we are getting the latest U.S. housing data (starts and permits) right now, and reports:
WASHINGTON -- Home construction unexpectedly fell during April, brought down by a large decline in apartment groundbreakings that offset a modest gain in single-family housing starts.

Wall Street expected an increase in April construction. Economists surveyed by Dow Jones Newswires forecast a 2.0% increase to an annual rate of 520,000.
Year over year, housing starts were 54.2% below the pace of construction in April 2008.
Despite the encouraging increase in single-family starts, the big overall drop was somewhat disappointing, given signs elsewhere of stabilization in the housing sector. New-home sales, for instance, are up from a January low. Builder confidence in the housing market is growing. The National Association of Home Builders' latest Housing Market Index rose to 16 in May, from 14 in April and nine in March.
Tuesday's report on housing showed building permits in April decreased 3.3% to a 494,000 annual rate. Economists had expected permits to climb by 2.7% to a rate of 530,000. March permits fell 7.1% to 511,000.
Rotten shoots? Or a pause (of what)?

Saut: Keep Your Eyes On The Russell 2000...

Jeff Saut, the respectful strategist at Raymond James has posted his weekly missive, see the latest version here. Last time on this blog Jeff suggested this.
His call for this week (but read the full story) in very short:
I am leaving for Europe this coming Friday to see institutional accounts and do some seminars. Consequently, while I will continue to do verbal comments for the balance of this week, there will be no Monday letter for the next two weeks. Hopefully, I will have some insights from my travels upon returning. Nevertheless, last week felt like a trend change to me with the S&P 500 (equal weighted) losing more than 8%, the Russell 2000 surrendering some 7%, and the D-J Transports shedding nearly 9%. Moreover, Thursday was a 90% Downside Day. As the Lowry’s service notes, “A likely key factor in determining the extent of a market pullback in the weeks ahead would be the occurrence of additional 90% Down Days. Thus far, in the rally since mid March, 90% Down Days have been isolated events, quickly followed by a renewed uptrend. However, a series of 90% Down Days could indicate the sort of sustained, heavy selling consistent with a deeper and more sustained market set back.” And, as the always insightful Helene Meisler writes, “Keep your eyes on the Russell 2000 since it is the only index that has rallied back to the underside (or just about) of its broken channel line. A failure here would confirm my view that we’re in the midst of a correction.”
Click on chart to enlarge, courtesy of Raymond James.

Watch out Russell 2000 at!

Monday, May 18, 2009

Bylov: Weekly Inter-Markets Trading View

Jan Bylov, chief analyst at Nordea Markets, is a "rare specie" among analysts, as he is looking himself at all asset classes and uses inter-market approach in analyzing the markets. He writes in the summary today:

Stocks – Profit taking mode spreading

Bellwether western stock markets have recovered to the January highs and thereby removing 1/3 of the overall bear market losses! Now, it appears that market pundits are split into two groups of perception: 1) “this is just a suckers’ rally within a structural bear market” or 2) “having faced unlimited downside risk in March the significant recovery illustrates that markets still respond to traditional economic stimulus”. Therefore, with indices having recovered to conventional “overbought” technical levels and consensus sentiment well into buy readings profit taking is spreading to most regions and sectors. Looking further ahead we remain optimistic based on the concept that as we already have faced “unlimited downside risk” it will take a new black swan accident to cause global equity markets to extend the bear market lows of 2009! Consequently, we are currently facing a congesting of the first move from “unlimited downside risk” towards below potential growth expectations… to be followed by higher stock market levels ultimately.

Bonds – Asset allocators gaining importance

With central banks already implementing unconventional market operations (quantitative easing) in a continued effort to improve credit access (also beyond the normal credit creation through the banking system) and interest rates flirting with “nothing” what shall it take to invigorate enough investor interest to force long government bond yields back to the historic low levels of recent months? More printing of new money? Statement of low interest rate policies for the next many quarters/years? Intensified central bank buying? Or will it increasingly be related to the oscillating decisions by global asset allocators whom primarily will decide based on their perceptions of either a global economic recovery or global economic recession. With evidence that the financial business cycle has bottomed we believe that decisions by asset allocators are becoming increasingly important, but also that long bonds hold unattractive risk/reward relations beyond trading opportunities. Whatever one may believe, two dominating investment themes continue to exist: 1) global recession and dovish central banks i.e. bullish bonds and 2) the fear from enormous bond issuances i.e. bearish bonds.

Commodities – Recovery stabilising

In sympathy with other asset classes the recovery process which actually began back in February appears to be losing buy momentum – gold aside. Interestingly, the recovery has NOT been driven by speculative interest as data reveals that Large Traders in futures generally have stayed neutral or short – aside from a still hefty long position in gold. We find this evidence encouraging on a wider scale with financial markets already having looked into the abyss of “unlimited downside risk” in March and other evidence that the financial business cycle has seen its bottom.

Currencies – Is USD weakness a global signal of better times?

Futures traders are significantly concentrating their bets against USD and the recent change away from diversified reflation bets raises the question whether this move is a global constructive signal? Historically, a stable/weak USD works as a tailwind to the global financial and economic system and combining this experience with the fact that the we have already faced abyss of “unlimited downside risk” in early March we believe that the reported ongoing allocation away from USD is yet another piece of evidence of markets returning slowly towards better times. Further, this development increases the odds that the extreme currency valuations seen in Feb./March marks important reversal points!

Consider as a probability!

Friday, May 15, 2009

SocGen Quants On Stability In US 10 Year Inflation Break-Evens

Quantitative Strategy team of Societe Generale had interesting observations yesterday:
Stability in US 10Y inflation break-evens signals overshoot in equities and curves
- Our model fair value for inflation break-evens is related to the global market factor and to the inflation factor, which includes a strong exposure to yield curves.

- The combination of the past few months’ bull market and of the recent steepening of yield curves has therefore led to a rise in our short-term fair values for inflation break-evens. Meanwhile, market values remained unchanged or even decreased.

- Fair values would correct towards zero inflation if the recent bullish trend inverted, bringing stocks back to the nadir of the recent V-shape. The
correction could also come from a flattening of yield curves.

Click on chart to enlarge, courtesy of Societe Generale.
Yeaa, look at equities via 10 year inflation linkers ...

Thursday, May 14, 2009

BNP Paribas On US Inventory Dreaming ...

I was looking at the chart prepared by the economists of BNP Paribas today...
Stunning feeling just thinking about the "green shoot screamers" of "extraordinary inventory adjustment" so far ...

Just to add the economic context, here is what the economists at BNP Paribas write:

The need to reduce inventories much further is very apparent from the lofty level of the present business inventory sales ratio. This ratio, which spans manufacturers, wholesalers and retailers, presently stands at 1.44% marginally down from a cycle peak of 1.46%. In the last cycle the I/S ratio plunged to 1.35% in the subsequent 2 years.

Business inventories are expected to plunge in the last two months of this quarter when major automobile manufacturers and all of their suppliers suspend new vehicle production for two months. While this period will include the normal 2 week retooling shutdown in July the present decision lasting for 9 weeks will affect all suppliers such as chip makers, tire, glass, leather, plastic, aluminium, steel, axel and wheel makers, paint suppliers and all those other industries too numerous to account for. Auto inventories account for 14% of the stock pile of unsold business inventories and approximately 70% of these inventories are held at the retail level.

Wednesday, May 13, 2009

Credit Suisse: Becoming More Defensive

The Global Equity Strategy team of Credit Suisse suggests today:
We reduce the size of our overweight in our favoured three cyclical sectors—autos, steel and technology—and raise food producers to overweight from benchmark. We reduce weightings in cyclicals because:
  • Valuation
  • Magnitude of performance
  • W not V recovery
  • Bond yields close to peak
  • Positioning & Technicals: European fund managers have close-to-record overweight and cyclicals are 2 standard deviations overbought
We raise food producers to overweight
Click on chart to enlarge, courtesy of Credit Suisse.

Hmmm, and their S&P500 year-end target remains 920 ... not really much to gain.

Tuesday, May 12, 2009

Hugh: Non-performing Loans In Latvia

Indeed, who cares about the devaluation?

Edward Hugh has a good reminder today!

How much worse would it be? A friend of mine told today:
Who cares - is it 18%, or 15%?

SocGen: Decline In EPS Momentum ...

The quant equity strategy team at Societe Generale is out with a note today, and warns:
If history holds (and we see no reason for it not to) it will be interesting to see how equities cope with the expected down leg in EPS momentum. This is especially the case given that on a six-month view equities are now in positive territory and the sharp improvement seen in the US upgrades/downgrades ratio seen during the last couple of months. The strong outperformance of some lower quality cyclical stocks could also be called in question.

At the same time James Montier, the prominent strategist at Societe General, has listed seven habits of highly defective managers in a separate note:
1. They see themselves and their companies as dominating their environments, not simply responding to developments in those environments.
2. They identify so completely with the company that there is no clear boundary between their personal interests and corporate interests.
3. They seem to have all the answers, often dazzling people with the speed and decisiveness with which they can deal with challenging issues.
4. They make sure that everyone is 100 percent behind them, ruthlessly eliminating anyone who might undermine their efforts.
5. They are consummate company spokespeople, often devoting the largest portion of their efforts to managing and developing the company's image.
6. They treat intimidating and difficult obstacles as temporary impediments to be removed or overcome.
7. They never hesitate to return to the strategies and tactics that made them and their companies successful in the first place.
So watch out where the weakness resides!

Saut: The Ambergris Factor

Jeff Saut, the respectful strategist at Raymond James has posted his weekly missive, see the latest version here. Last time on this blog Jeff suggested this.
His call for this week (but read the full story) in very short:
Well it’s a record, at least according to our notes of more than 40 years, as the current “buying stampede” has eclipsed the previous record stampede of 41 sessions. Indeed, today is session 45 in the upside skein without so much as anything more than a one- to three-session pause/correction since the stampede began on March 9th; and, we were bullish at that time. The straight up rally has lifted the senior index (DJIA/8574.65) some 33%, and to within 4.5% of its 200-day moving average (DMA) at 8575, which should act as overhead resistance. Clearly, the markets are currently overbought with 91% of the S&P 500 components above their respective 50-DMAs, while 44% are above their 200-DMAs for the highest 200-DMA overbought reading since August 2008 (we were cautious). Moreover, as the astute Dines Letter observes, “April has been a month with a pivotal reversal of the March trend 67% of the time since 1963; and, at least a semi-important TOP has been reached in virtually every April or May since then.” Consequently, while we don’t think the old stock market “saw” of “sell in May and go away” is going to play in 2009, we do believe the trick from here is to harvest trading profits and hedge some of your investment positions for a downside correction. That said, we are buyers of select thematic investment positions, preferably ones with a dividend yield, on weakness.
Consider as a probability!

Hempton: The (Latvian) Hooker No Longer Cost Too Much ...

As Claus of Alpha.Sources noted today:
one of those "must reads" ...
John Hempton has a "makes sense" post on Latvia and Baltics today:

The hookers no longer cost too much: geopolitics and the price of prostitutes in the Baltic States

go and read it!

Monday, May 11, 2009

Danske: The Worst Case Scenario Is The Reality ... As GDP Collapses 18% y/y

Ooouch! This sounds painful!

The Danske Bank noted today:
This afternoon we saw really shocking GDP numbers for Latvia for Q1. GDP dropped by 18% y/y – much more than consensus forecast and our expectation of a drop of 16.8% y/y – and a very significant deterioration from Q4 08, in which GDP dropped by 10% y/y.
The details for GDP have not been published yet, but it is almost clear that the drop in GDP is broad based – with both domestic and external demand.
We already expected that the Latvian economy might decline by 15% y/y in 2009, but today’s GDP numbers mean that we would have to adjust our GDP forecast in a significantly more negative direction and it is now likely that GDP will drop by more than 20% as an average for 2009.
The very weak GDP numbers are also a clear indication that the Latvian government budget situation will have further deteriorated. It looks like the IMF agreed fiscal deficit target of around 7% of GDP will be very difficult to achieve. We believe that uncertainties with regard to the budget situation have increased significantly.
Nordea bank commented:

Latvian Q1 GDP contracted by 18% compared to a year ago (Consensus -16.2%, Nordea -13.5%). The clearly steeper than expected fall confirmed the view that the economy has gone on an even steeper downhill from Q4, when the economy already shrank by -10.4%.
The weakness in the Latvian economy is broad-based. The decline in both the manufacturing and the service sectors continued in Q1. The export sector is slow, due to dampened world demand, the situation of companies is strained, as demand is weak and the financing situation is tough. Furthermore, the situation of the consumers in Latvia is difficult, as unemployment has shot up and wage growth has slowed.
The year 2009 is likely to be difficult in Latvia, and the government faces the challenge of keeping the budget deficit within a limit accepted by the IMF in order to receive the rest of the emergency loan. At the moment the government is working towards a deficit of 7% of GDP, more than the 5% initially agreed upon with the IMF. According to the Prime Minister the discussions whether the IMF will allow a larger deficit are still going on. Keeping the deficit within 5% of GDP is turning out to be increasingly difficult as the economy has contracted further.
We foresee the economy contracting by 12% in 2009, with the recession easing towards the end of the year. In 2010 we expect a decline of 3%, as the world economy starts to recover.

But the "green shoots" were observable also in Latvia, as exports climbed more than 10% in March on month, but still more than 20% down on year ...

Friday, May 08, 2009

US Bank Stress Tests

Conservative market observers say the test was not so stressful.
Dean Baker seems to be one of them, see his post "Background on the Stress Tests: Anyone Got an Extra $120 Billion?", and offers insight into his thinking:

Most news outlets seem anxious to join the Treasury's PR campaign in pronouncing the banks essentially healthy based on the stress test results. There is of course enormous uncertainty around the course of the economy over the next few years, and the results of these stress tests may well prove to be an accurate assessment of the banks' health, but there are some reasons for believing that the stress tests are likely to prove too lenient.
1) Fraud in mortgage issuance -- we know that many of the loans issued in this period involved fraud, more often on the lenders' side than the borrowers. In these cases, for example where the mortgage application grossly overstates the buyers income or the appraisal hugely overstates the market price of the house, default rates will be far higher than would be expected even in bad economic times. Also, recovery rates will be far lower if the original appraisal price was inflated.
2) Unemployment -- in their negative scenario, the stress tests assumed a year-round average unemployment rate of 8.9 percent for the 2009 and 10.3 percent for 2010. The economy is on track to have a much higher unemployment rate, as it is likely to hit 9.0 percent in April. My best guess for a year-round average would be 9.4 percent for 2009 and probably around 10.5 percent for 2010. (These numbers assume no second stimulus, but of course Congress will not sit back and just let the unemployment rate go through the roof.)
3) House prices -- the negative scenario assumes that house prices, as measured by the Case-Shiller 10-City index fall 22.0 percent in 2009. Prices in this index have been falling at a 24 percent annual rate in recent months. Given the massive inventory of unsold homes, It is reasonable to expect that this rate of price decline could continue at least through 2009.
What difference would harsher assumptions make? The projected loss rate on first mortgages increases by 45 percent between the baseline scenario and the negative scenarios in the stress tests. The baseline scenario assumes an 8.4 percent unemployment rate for 2009 and 8.8 percent for 2010 (some serious stimulus here), compared to the 8.9 and 10.3 rates in the negative scenario. The rate of house price decline in the baseline scenario was 14 percent in 2009 and 4 percent in 2010, compared to 22 percent and 7 percent in the negative scenario.
So, if my somewhat more negative numbers prove accurate let's assume that it increases losses by about 20 percent. That comes to an additional $120 billion in losses. That would mean that instead of having to raise $75 billion, these banks would have to raise $195 billion. That's a qualitatively different picture.
So, are the stress tests worthless? They did provide a much clearer picture of the position of individual banks than we had previously. It is worth noting that this is a 180 degree shift from the original course pursued by Treasury Secretary Henry Paulson last fall. Paulson tried to conceal the situation of individual banks, putting a cloud over all of them. Treasury also should be credited for disclosing many of the specifics of the stress tests so it is possible to do a quick (or more in depth) analysis of its assumptions and explore the implications of alternative assumptions.
Still, it is hard not to conclude that these stress tests and certainly the PR campaign around them, were intended to paint as positive a picture as possible of the banks' financial condition. If this picture proves to be wrong, then it means that we will have unnecessarily delayed the clean-up of the financial system. It will also be bad political news for the administration (Geithner and Summers will presumably be joining the ranks of the unemployed).
Of course, the big second stimulus package that Congress will pass this summer, will save both the banks and the administration.

Calculated Risk and BNP Paribas credit strategists have similar views ...

Some time ago I wrote that bank equity is an option (like here re Citigroup), and the credit strategists at BNP Paribas have an interesting comment in their "Credit Driver" today:
The fading risk of a forced nationalisation (or indeed receivership or wind-down) in the foreseeable future is definitely good news for both banks’ shareholders and bondholders. While some equity dilution looks inevitable, and more may be needed going forward, that seems to be a better prospect for shareholders compared to being wiped out. If one looks at equity as a call option on the assets of the banks, even an out-of-the-money one becomes more valuable if its expiry date is pushed back. Therefore, a rally in bank equities was indeed warranted; the question is whether it has gone too far.
BTW, back in March I noted for reference the Barbie's Ken promising to repay TARP money, now he is obliged to raise the most common equity, according to stress test ...

John Hempton at Bronte Capital argues: Why American banks will not wind up looking like Japanese banks - Part 1, obviously with more arguments to follow. In the meanwhile Doug Kaas writes that financials are done, and priced for perfection ...

BTW, I expressed some critics in relation to Buffett PR and WFC (Wells Fargo) on Monday, WFC was first to announce capital increase last night ... Indeed, style-drifting.

SocGen: Taiwan's Green Shoot Down?

Wake-up call? There may be more yellow straws in the inventory story ... Watch out!
Click to enlarge, courtesy of Societe Generale.

Thursday, May 07, 2009

Is China Transforming Itself In Financial Ponzi?

I read a post at naked capitalism "China Power Generation Falls, Suggesting Talk of Recovery is Premature":
According to the State Grid’s latest statistics, April’s national power generation totaled 274.763 billion kwh, a fall of 3.55%, year on year, and a decline of over 3% from the previous month.
The Ministry of Industry and Information Technology says that in the first three months of this year, China’s power consumption totaled 780.990 kwh, down 4.02%, year on year, and power consumption in March alone totaled 283.389 kwh, down 2.01%....
However, at the same time the credit is growing like mushrooms, more info at WSJ China Journal "Where Is China’s Surge In Bank Credit Going?":
One of the most talked about recent numbers in China’s economy -– the 4.6 trillion yuan (nearly $675 billion) in new bank loans extended in the first quarter –- is also one of the most confusing. It’s clear that a lot of lending has been pushed into the economy, but so far it’s not been that clear where exactly the money is going.
The central bank’s breakdown of new medium- and long-term borrowing, the kind most likely to be used to pay for investment, shows that 50.1% went to infrastructure in the first quarter. That clearly reflects how banks are being pressed to give priority to government stimulus projects. But such lending has its own risks. “Recent bank lending has been concentrated in government projects which, while helping drive rapid investment, also requires evaluation of local governments’ ability to repay the debts,” the central bank said.
Outside of stimulus projects, demand for credit is not as strong. Only 7.9% of new medium- and long-term lending went to manufacturing, and 11.2% to real estate development.
On the one hand, the figures could allay worries that the surge in bank lending is financing an increase in excess manufacturing capacity in China. On the other, it shows that many Chinese businesses are still having a tough time.

Contracting power consumption would suggest contracting industrial production, unless moved to energy efficient technologies, due to lower demand? How do they build that infrastructure, e.g., I would expect that concrete production requires quite a lot of power?

Well, is this country going to create GDP growth with excessive credit growth and fancy financial services?

SEB: Macroeconomic Review Of Latvia

SEB has published the April issue of "Macroeconomic Review of Latvia". It is definitely worth reading the full report, but here I list the headlines:
  • Government agrees to cut the budget expenditure by 40% compared with 2008 which still means budget deficit of at least 7% of GDP.
  • In February there was a surplus of 0.7 million lats in the Current Payment Account of the Balance of Payments.
  • Tax revenues as at 19 April 2009 amounted to 565 million lats or 12.8% below the target.
  • Moodyʹs has downgraded the government ratings for Latvia for liabilities in foreign and local currency from Baa1 to Baa3.
  • In 2008 the annual budget deficit was 4% of GDP. The main precondition for introduction of the euro will depend on the government’s ability to straighten out the budgetary expnditure according to Maastricht criteria.
  • The transit industry feels little influence of recession and shows only a slight drop in the first quarter.
  • The rocketing provisions for doubtful loans turned the bank‘s profit in the 1st quarter into loss
At least the current payment account posted a surplus ...