Tuesday, June 30, 2009

SocGen: Public Finances - The Impossible Equation

The economists at Societe Generale have an "eye-opening" commentary on public finances today:
As public deficits are surging to unknown territories, the average debt ratio of the advanced G-20 countries is expected to jump by 20 points of GDP between 2007 and 2009 according to the latest IMF forecasts, and by nearly 40 points by 2014. This huge deterioration in public finances comes precisely at the moment when governments were supposed to make special efforts in order to face the fiscal consequences of an ageing population. Starting from now, the ageing population is expected to add 3% to 4% of GDP, or even 9% of GDP in the case of Spain, to public deficits in the next 30 to 40 years.
... One first goal could be to stabilise these debt ratios. This can be achieved easily if the difference between the rate of growth of the economy and the interest rate is positive, which was the case in the 70s when inflation was strong (see graphs below).
Click on chart to enlarge, courtesy of Societe Generale.

Said differently, the debt ratio stabilises if the economy manages to create enough revenues to compensate for the cost of the accumulated debt. But, without higher inflation, this is unlikely to be the case anytime soon as 1) interest rates have been abnormally low, and 2) GDP growth had been boosted by these abnormally low rates. The other solution would be to make painful efforts, i.e. the primary balance (which excludes interest payments) would have to be more and more positive. Otherwise, the debt ratio could very quickly reach the 100% threshold. Another goal could be to bring the debt ratio back to a level which allows room for manoeuvre in budgetary policy. The IMF has done some calculations to see what would imply a come back of debt ratios to 60% of GDP. Results are scary. They show that most of the countries, excluding Germany (1.8%) and Japan (14.3%!), would need to make an effort of 3% to 5% of GDP during the next 15 years to achieve this result. This looks simply out of reach, especially if every country pursues the same target at the same moment. Thus, back to the 70s?
As even maintaining near zero growth in US consumer spending requires immense fiscal stimulus these days, and any cyclical recovery depends on them, there is only one question:


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 – The clash of opinions

From a general fear of systemic failure, global depression and unlimited downside risk opinion has slowly transformed towards hope (and stock prices with it) that the worst has already been seen. Recently, however, it appears that opinions have begun clashing whether prices and valuations have run ahead of the macro reality as most data improvements are due to base effects. With market action revealing mostly range trading – as opposed to outright deterioration – the vote for the next big stock market move is probably still out there, and we should rather view markets in a position where odds have moved back into balance. Lets keep our eyes wide open and less biased about what surely must happen next from current price levels. Consequently, a summer chill and a recovery peak still lack real confirmation e.g. via major stock market indices clearly breaking below the May reaction lows (S&P 500 @ 878, MSCI World @ 910 & DAX @ 4653).

Bonds – Exit plans several chess moves too early

So when should the so called “exit plans” begin influencing the price discovery beyond the short-term? With the last twelve months’ experiences in mind - and the rollercoaster psychological swings in particular – market operators are likely to remain unusual sensitive to the ever oscillating moves in market opinions. In this respect, we find it interesting that the recent exit-plan-scare began fading right when yields were approaching historic important levels of overhead trading (bond demand) and that officials began voicing not repeating the Japanese monetary policy mistake of the ’90ies. Now, this latest apparent change of market focus supports our general belief that central banks won’t commence removing the accommodation before clear and real macro improvements are evident i.e. when the economic business cycle has joined the post March financial business cycle recovery; execution of exit plans are several chess moves too early! Consequently, our long held guesstimate of overall range trading in long bond yields is slowly improving its odds with the transient investment themes probably swinging between: 1) “supply fear and exit plans” and 2) “global output gap and central bank responses to protect a fragile global macro economy”. The latter appears to be gaining momentum!

Commodities – Metals hold up well

Although oil and industrial metals already have approached price levels questioning additional recovery potential there remains no real market action confirming important recovery peaks. Rather, odds just appear to be moving back into balance… and we still need oil and copper to experience falls exceeding previous post March setbacks (15%-16%) to confirm a recovery peak in the economic growth sensitive commodity sector.

Currencies – Eyes wide open

It is a challenge to be unbiased and an everlasting goal of keeping our eyes wide open. Currently, it appears that opinions are clashing whether or not the global recovery in asset & debt markets have run ahead of the macro reality. We would argue that odds are “just” moving back into balance rather than having provided real market action confirmation that a new and more hostile period is ahead of us. So far, there is no safe heaven USD buying and our carry basket (long RUB, BRL, TRY vs. short CHF, CAD) is performing. Currently, the worst which might be said is that currency bets appear very concentrated on cyclical sensitive currencies when judged by the CoT report of speculative currency traders (primarily hedge funds) – not least in AUD.

Consider as a probability!

Rogoff: Latvia Should Devalue ...

According to Bloomberg:
Rogoff Says Latvia Should Devalue Its Currency, Direkt Reports

June 29 (Bloomberg) -- Latvia should devalue the lats to avoid a worsening of its economic crisis, said Kenneth Rogoff, a Harvard University professor and former chief economist at the International Monetary Fund, in an interview with Direkt.

The IMF made the wrong decision when it allowed Latvia to keep its currency peg, Rogoff said in Visby, Sweden today, according to the Swedish news agency. While a quick devaluation would be best for Latvia, Rogoff doesn’t believe it will happen for a long time because the IMF and Europe will provide the Baltic nation with loans, Direkt reported.

In a normal situation, Latvia would already have devalued the lats and defaulted on its debt, Rogoff said, according to the news agency. World leaders have decided no countries should be allowed to fail and Latvia is benefiting from that, he said.

If Latvia devalued, there is a risk that the turbulence would spread to other countries, which is why the IMF is supporting Latvia, Rogoff said.

Interestingly, what is going on behind the scenes at IMF, if former economists like Rogoff, Johnson, Roubini are leaning towards devaluation? The game rather appears to be about winning the time? For what? Just imagine like 1/3 of private borrowers going bankrupt ... how do you handle it?

Monday, June 29, 2009

Saut: We Remain Cautious, But Not Bearish

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:
We have now experienced two consecutive down weeks in the SPX, the first such occurrence since the March “lows.” Worryingly, both weeks contained a 90% Downside Day, which is why we remain cautious, but not bearish. Indeed, according to Bespoke Investment Group, July has historically been a strong month for equities, with an average gain of 1.17%, and a 70% positive monthly track record over the last 20 years. However, late last week the Russell Rebalance (Russell Investment Group rebalanced its 25 U.S. indices) created some “noise” that is unlikely to abate until quarter’s end. And speaking of noise, this morning we find out that even Greenpeace is against the Cap and Trade Bill as things remain curiouser and curiouser . . .

Consider as a probability!

Friday, June 26, 2009

ECRI: WLI Growth Turns Positive

" ... end to the (US) recession is at hand":

June 26, 2009 (Reuters) - NEW YORK, A gauge of future U.S. economic growth rose, and its yearly growth rate turned positive, raising hopes that the end of the recession
is in sight, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to a 37-week high of 117.6 for the week ending June 19, from a downwardly revised 117.0 the previous week.

The index's annualized growth rate spiked to a 97-week high of 2.1 percent from minus 0.6 percent a week ago.

It was ECRI's highest yearly growth reading since the week ended August 10, 2007,
when it stood at 3.4 percent.

"Following a 28-week upturn, WLI growth has broken into positive territory for the first time in over 22 months -- an affirmation that an end to the recession is at hand," said Lakshman Achuthan, managing director at ECRI.

The weekly index rose in the latest week because of stronger housing activity and investor confidence, Achuthan said.

And some charts, courtesy of ECRI.

Is the worst over?
Well, one may guess, by reading - how the people earn money and spend it? The commentary on Personal Income in US in May by Societe Generale at your disposal:
Personal Income was the surprise component- but the impressive jump was due to government payments stemming form the Economic Recovery Act of 2009. The surprise there was more the concentration of payments in one month. The social
payments were made in May and appear to be fully recorded in the month. Wage and salary income were down slightly while other sources of income posted modest gains.

You look at real spending chart below, courtesy of Societe Generale, and inquiring minds would ask where the money goes?
Savings. Why not spending?

Citigroup: Emerging Markets Barely In The Foothills Of A Potential Bubble

Citigroup Global Markets published "Global Equity Strategist" on Wednesday, 24 June. The first page summary is rather short:
  • Safe Haven Selling — The rise in risk appetite has been matched by large selling of traditional safe havens. Assets in US Money Market funds are down 6% from peak levels.
  • Welcome Back — After 10 months of outflows, Global Developed Market funds are seeing inflows again. Emerging Markets inflows have been even stronger this year, returning more than half of last year’s outflows.
  • Bubble Talk — Emerging Markets fund inflows have come back earlier and stronger than previous recoveries. Talk of a bubble is beginning to gain momentum. But performance, valuation and equitisation suggest an Emerging Market bubble is premature.
  • The Next Mania — Elements are potentially in place for a bubble in Emerging Markets. The most important is easy money. Real policy rates are negative. Money supply growth has rarely been stronger. We would buy Emerging Markets on dips and prefer CEEMEA and Em Asia.
However, the emerging markets equities are "barely in the foothills of a potential bubble":
Does performance signal a bubble in Emerging Market Equities? Emerging Markets are up 50% from their lows but this is just a fraction of the gains we have seen in a previous bubbles. In the 1980s Japanese equities rose nearly 10 times before the bubble burst in the early 1990s. Global Telecom, Media and Technology stock prices rose 7 times in their bubble. Chinese equities were up nearly 7 times from 2003-07, while Indian equities increased 9 times in their bubble.
Click on chart to enlarge, courtesy of Citigroup.

The rally in Emerging Markets has so far been in-line with previous bubbles at the same stage. However, it is still far too early to call the current move in Emerging Markets a bubble, either in duration or magnitude (Figure 12), in our view. For Emerging Markets to enter bubble territory we would have to see them double then double again.
So, just buy on dips?

I read sources, e.g., Societe Generale, Citigroup, today that June new lending will reach up to 1.2 trillion RMB (CNY, Chinese Yuans) in China. BNP Paribas mentions 1 trillion RMB in June, and concludes:
... total new lending in H1 2009 would amount to RMB 6.84 trn ...
Just to give some perspective, the USDCNY exchange rate is at circa 6.8335, meaning that 6.84 trillion RMB/CNY are 1 trillion USD. Chinese nominal GDP in current USD is ca. 5 trillion USD. So, they are blowing new credit only ca. 15-20% of nominal GDP in 6 months?

The 1 trillion USD lending growth on China would correspond to more than 2.5 (actually closer to 2.8 trillion) trillion USD lending growth in US. All the noise about irresponsible money printing in the US?

Thursday, June 25, 2009

Levy-Yeyati: Latvia's Three Exit Strategies ...

Eduardo Levy-Yeyati, Director and Head of Emerging Markets Strategy at Barclays Capital, had a rather good post "Is Latvia the new Argentina?" at voxeu.org.

Latvians, if sticking to internal deflation story, should focus very much on REER (real effective exchange rate), and the graph by Levy-Yayati shows that the things are actually getting worse ...

... and he proposes three exit strategies:

As the defence of the peg becomes increasingly untenable, the focus is shifting to a few alternative avenues to avert a disorderly currency collapse.

Judging from past experience, even if backed by an augmented EU-IMF program, a devaluation would overshoot the ex ante real exchange rate misalignment (which, based on the recent evolution of the Latvia’s REER, would place the needed correction already at a sizable 50%) fuelled by the run to dollarise savings before the new, higher exchange rate materialises. Argentina is a case in point – after the discrete 40% devaluation of January 2002 succumbed within a month to reserve drainage and parallel market pressures, the exchange rate overshot from 1 to 4 before coming down to 3 by end-2002.
However, given the current depth of the crisis and the fact that the inevitable debt write-downs that would benefit Latvian debtors at the expense of Scandinavian banks could boost the post-crisis rebound, devaluation may ultimately deliver the faster road to economic recovery.
But, in the particular case of Latvia, a good old devaluation would reset the clock for euro adoption and, given it potential implications for other ERM II countries, may draw little EU support. While this option remains the exit of last resort, it is unlikely to be the route chosen in the first place.

The Argentine analogy is, again, illuminating. Faced with concerns about its peg’s sustainability after Brazil abandoned its crawling peg in 1999, an Argentine mission to Washington to secure the endorsement of the US to de jure dollarisation – and the lender of last resort services of the Fed – was given a sympathetic but discouraging message – even if Argentina presented an attractive payoff for such a contingent liability (which it did not), a treaty would open the door for other financially dollarised countries to request similar treatment and would never pass Congress.
By contrast, Latvia’s early euro adoption would only test the EU commitment to euro convergence – a key driver of the Eastern European leveraging story. However, politics are more complicated. In Europe, there are many countries currently warming up to adopt the euro that could see Latvia’s case as a useful shortcut to avoid improbable but still possible currency stress down the road. Moreover, Latvia’s main regional exposure is vis-à-vis Scandinavian banks; the fact that euro adoption would grant Swedish banks a euro lender of last resort (the ECB) should certainly make euro countries uneasy.
Ultimately, while euroisation seems to be the solution favoured by the IMF, it would only make sense provided that the Euro zone approves, an unlikely event.

A strategy halfway between euroisation and floating – a contained devaluation that preserves Latvia’s ERM II status – falls short by most accounts, but it is nonetheless the most likely to broker a compromise between all relevant players (the Lats, the EU, the IMF, Sweden). The natural way to implement this would be a negotiated one-off 15%-30% realignment of the central parity preserving the ECB commitment to intervene at the bounds, and the time table for euro adoption, accompanied by the widening of the current +-1% band to the ERM standard +-15%. True, it’s hard to find successful contained devaluations under a currency run in recent economic history. But there are more things at stake in the Latvian peg – even a devalued one – than just a nominal anchor, which makes this strategy, if not a sure cure, at least a viable therapy.
Crucially, the plan requires a “Uruguay 2002”-type solution to the banking problem – limiting or suspending emergency assistance to foreign branches, thereby eliminating about 60% of the foreign exchange bank liabilities (a scenario that the Riksbank is regarding as increasingly likely). As for domestic banks, full deposit insurance plus explicit government support should counter the deposit run and keep dollarisation within the banks. Should the run continue, banks would be nationalised, reprogramming deposits to reduce the pressure on the Lat and restructuring non-deposit liabilities. The other critical aspect of this strategy is, or course, IMF-EU-EBRD money (as in EBRD’s recent involvement in large local bank Parex) to defend the new band ceiling (since the inadequately adjusted exchange rate will likely be under stress), thus providing assurance that Latvia will not be the next Argentina.
Such a scheme should receive support from all quarters. The EU minimises contagion (despite some predictable near-term ripples), the IMF avoids another embarrassing collapse and ensures that some of the foreign exchange pressure is transferred elsewhere, and Latvia stays the ERM course and shares the losses with Sweden – a fitting epilogue to a crisis that was in part rooted in reckless lending by foreign banks.
For all the obvious similarities with Argentina 2001, Latvia presents a more complex case that is poised to become the acid test of euro commitment.
While there are many who are drawing more and more parallels with Argentina, here are some arguments, among others, that I am copying (slightly adjusted for better reading) from a confidential source, against those parallels:
  • While Argentina's peg was clearly a boondoggle from the start (if you look at the fact that Argentina pegging to the dollar was silly since much of its trade was with countries outside the U.S. and since it had different business cycles than the U.S., which meant importing U.S. monetary policy was just plain dumb). In Latvia's case, the majority of its trade is with the Eurozone...
and here I add the ERM2 requirements on top of that argument, well, Latvia got it too tight ...
  • Argentina was fiscally profligate…Latvia, however, has not been. In many ways, it was a victim of EUphoria, receiving massive capital inflows as its EU entry buoyed positive sentiment toward the country and its neighbors. These massive inflows fueled bubbles, which have now spectacularly burst. What under other circumstances might have resulted in a mild bust has potentially turned into a regional financial crisis given the global context – that is, that we are in the midst of a severe global financial crisis.
  • Not being in the midst of a global crisis with slumping growth around the world, the argument that a devaluation would improve competitiveness was more clear-cut in Argentina.
  • Latvia had a clear exit strategy – joining the euro, something Argentina did not have.
Well, joining the euro is not a panacea... as one may conclude by looking at, e. g., Spain, Ireland ...

Friday, June 19, 2009

Long And Relieved: Citi Strikes Me Again ...

I read the summary of Equity Strategy by Citi' s Tobias Levkovich today (North America Investment Daily edition), and it resembles the Merrill's Global Fund Manager Survey, I noted yesterday, in some way...
However, I would like to point out two paragraphs of that summary (my emphasis):

Fund performance shows a bullish bias emerging. A study of Bloomberg data shows that the vast majority of funds have outperformed the S&P 500 in the past month through June 17), the past three months and year-to-date, arguing that 2008’s portfolio manager performance anxiety has diminished markedly. Actively-managed US equity funds have generated returns averaging about 7% through May, versus roughly 3% for the S&P 500 over the same time frame and the differential is at its widest since 1983, according to Morningstar data.

Sentiment surveys display rebounding enthusiasm but not ebullience. Most sentiment work illustrates that the fear that gripped the investment community three months ago has dissipated in almost dramatic fashion. However, it is also fair to say that the mood has not turned truly bullish either as economic worries still abound. Nonetheless, we believe that the market catalyst of depressed investor
sentiment lifting is missing for further gains.

A 45% swing in the relative stock/Treasuries trade demonstrates a 1933-like bounce. Assuming that stock and bond prices end the year at current levels, the relative performance swing would be nearly as sharp as the one experienced in 1933 following the 1932 swoon of stock prices. While we foresee more modest gains from current levels, the bulk of the move may already have occurred and investors need to lower their expectations.

Anecdotal evidence supports a more buoyant Wall Street. In several instances of late, the very same investors who perceived our bullishness several months ago as bordering on lunacy now consider our market outlook (S&P 500 at 1,000 by year-end) to be too conservative. To some degree, we have been surprised by the speed of this turn of events but the equity market’s powerful move since early March most likely explains this shift.

Sidelined cash may not chase returns but markets can gr1ind higher. While it is popular to argue that all of the cash on the sidelines may need to make its way into equities, we suspect that two equity market collapses in the past nine years may keep investors a bit more on the side of caution, especially as their equity exposure is not as severely underweight as was the case in the early 1980s. Nonetheless, further improvement on the economy should support additional equity market appreciation this year, especially for names in the Diversified Financials, Insurance, Capital Goods, Tech and Energy areas with some select opportunities in the Materials area.

" ... display rebounding enthusiasm but not ebullience ... In several instances of late, the very same investors who perceived our bullishness several months ago as bordering on lunacy now consider our market outlook (S&P 500 at 1,000 by year-end) to be too conservative. To some degree, we have been surprised by the speed of this turn of events but the equity market’s powerful move since early March most likely explains this shift."

So, You decide! "Maximum pain and frustration rule" now requires a move higher, and not only that ...

S&P500 Technicals by SocGen

I wrote on Wednesday, that I have not decided ... and I have not until today. The upward move has deteriorated considerably, but it may be a short-term consolidation, as there is no really bearish signal yet.
Market is about fairly priced, and the upcoming positive hard US economic data are priced in ... Probably, a bit too optimistic, but only two weeks till the end of quarter I cannot find myself selling equities... yet.
I am wondering, but the Techncians at SocGen are painting my script ... well, they are better than me!
Click to enlarge, courtesy of Societe Generale.

UPDATED: Citi: Because So Few People Remain Unemployed For The Full 26 Weeks

I was reading the commentary on U.S. weekly jobless data by Citigroup (Global Markets) economists last night. Quite interesting arguments, indeed (my emphasis):
Weekly jobless claims rose mildly for the week of June 13th, but the four-week average continued to decline gradually. Continuing claims for the week of the 6th fell by 148 thousand, which was the largest one-week decline since 2001. Some market participants have claimed that this drop was caused by people's benefits expiring. While we would agree that some workers are falling off the rolls, this effect is far too small to account for the latest drop in continuing claims because so few people remain unemployed for the full 26 weeks. Swings in beneficiary rolls are mainly driven by the balance between the influx of new claimants and the outflow of people who find jobs. This difference can be quite volatile so it is unwise to make too much of a single week change. If continuing claims continue to fall, we would take it as a sign that the labor market was improving.
So, you know now! Excellent explanation? Why continuing claims decreased?

Well, obviously I have to bring more clarifications ... Citi' s argument in itself (my emphasis in bold) is a non-sense without hard data ....

David Rosenberg, the chief economist and strategist at Gluskin Sheff, brought "the big picture" to the stage much better today:
All of a sudden, we have an army of economists now looking at the continuing claims data as confirmation that the green shoots are turning green again and that the pace of firing is subsiding. That may well be the case, but it is also the case that seasonal adjustment around the Memorial Holiday was at play, or the prospect that the massive 2.6 million people getting extended or emergency benefits may be rolling off. Either way, let’s not lose the big picture, here; claims have now been north of 600k for 20 weeks in a row, which is without precedent.

Thursday, June 18, 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 May. Key conclusions from the new June survey:
Bond yield back-up causing no macro panic
The June FMS shows no signs that investors are spooked by the recent rise in US bond yields and oil prices. The investor mood is pro-growth and fears of a growth "double-dip" or an imminent crash in U.S. Treasuries and the US$ are currently absent. On the contrary, the consensus is overweight assets that usually benefit from rising bond yields such as commodities and Emerging Markets.

Optimism is back in fashion
Global growth expectations continue to surge (+78%, a 6-year high); a net 7% of investors believe global recession is likely in the next year versus 70% just two months ago. Investor expectations have shifted decisively from recession to recovery: one-third of our panel believe corporate profit growth will exceed 10% in the next 12 months; cash balances fell to 4.2% (in-line with historical average); hedge fund net exposure surged from 25% to 35%.

Asset allocators finally back overweight equities
Expectations shifted from deflation to inflation in June: a net 19% of investors see higher inflation in 12 mths time versus -1% last month. Asset allocators reduced bond exposure (to -15% from -3% in May) and finally moved overweight equities (+9% from -6% in May). But optimism remains measured. Back in March the FMS showed extreme pessimism making us very constructive on equities. June levels of optimism on equities or risk cannot yet be described as dangerously high.

All bulls in the China shop
Global positioning remains pro-China. The survey shows the biggest OW of commodities as an asset class in the past 3 years. A net 49% of fund managers want to be OW Emerging Markets, versus just 8% who wish to be long European equities. Investors are OW technology, energy & materials, as the link to Chinese growth supersedes traditional notions of early cyclicals such as consumer discretionary. And investors are U/W every single defensive sector (pharma, staples, telecoms & utilities) for the first time since Nov 2003; a point at which the S&P had seen a similar 30% rally and presaged a further 10% run into year end.

There will be dips...buy them
Markets and optimism may have rebounded so quickly that both need to pause for breath. But "buy the dip" is the equity message coming from the survey with Q2 reporting season set to be the next major hurdle for re-setting expectations. The contrarian trades are as follows: directional bulls would buy consumer discretionary, industrials, Europe and Japan. Directional bears would go short the relative euphoria on Emerging Markets, energy and materials. Note that panellist's feedback on oil price valuations implies the consensus thinks $65/b is fair value.
Question #17 from Macro Man's "20 questions" asks: "... written in Pamplona?"

Wednesday, June 17, 2009

Another Day, Another Quote

HT Alea, I liked the two last paragraphs of "Market Analysis" very much :
In the late 1980's, the psychologist Paul Andreassen conducted a simple experiment on MIT business students. (Those poor students at MIT's Sloan School of Management are very popular research subjects. As one scientist joked to me, "They're like the fruit fly of behavioral economics".) First, Andreassen let the students select a portfolio of stock investments. Then he divided the students into two groups. The first group could only see the changes in the prices of their stocks. They had no idea why the share prices rose or fell, and had to make their trading decisions based on an extremely limited amount of data. In contrast, the second group was given access to a steady stream of financial information. They could watch financial news on television, read The Wall Street Journal and consult experts for the latest analysis of market trends.
So which group did better? To Andreassen's surprise, the group with less information ended up earning more than twice as much money as the well-informed group. Being exposed to extra news was distracting, and the "high-information" students quickly became fixated on the latest rumors and insider gossip. (Herbert Simon said it best: "A wealth of information creates a poverty of attention.") As a result, these students engaged in far more buying and selling than the "low-information" group. They were convinced that all their knowledge allowed them to anticipate the market. But they were wrong.

See you?

BTW, we have moved to the downside from the June range, I mentioned last Friday. However, I have not decided yet ...

O'Rourke: Baltic Trilemmas

Kevin O'Rourke has a following take on the Latvian situation this morning at The Irish Economy:

If there is one thing we have learned about international currency markets in the past couple of decades, it is that fixed exchange rates and internationally mobile capital don’t sit well together. A European response to this general lesson has been to go for full monetary integration — EMU — rather than stick with unstable intermediate arrangements such as the EMS.
There are logical consequences for how we deal with Latvia. If the country’s EU partners don’t want it to devalue, they should offer it immediate EMU membership. If they don’t do this, then we can probably leave aside the normative point that Latvia ought in its own interests devalue, since as a positive matter it will almost certainly be forced to be. As this article points out, a forced devaluation would have repercussions far beyond Latvia. It would be nice to avert a crisis before the fact rather than after it, for once.

Who makes the decision?

Tuesday, June 16, 2009

Quote Of The Day

By Andy Xie, a former economist at Morgan Stanley, at caijing.com.cn: "Andy Xie: Tight Spot for Fed, Blind Spot for Investors". I saw this quote also at Barry Ritholtz yesterday...

While rational expectation is returning to part of the investment community, most investors are still trapped by institutional weakness, which makes them behave irrationally. The Greenspan era has nurtured a vast financial sector. All the people in this business need something to do. Since they invest other people's money, they are biased toward bullish sentiment. Otherwise, if they say it's all bad, their investors will take back the money, and they will lose their jobs. Governments know that, and create noise to give them excuses to be bullish.
This institutional weakness has been a catastrophe for people who trust investment professionals. In the past two decades, equity investors have done worse than those who held U.S. market bonds, and who lost big in Japan and emerging markets in general. It is astonishing that a value-destroying industry has lasted so long. The greater irony is that salaries in this industry have been two to three times above what's paid in other sector. The key to its survival is volatility. As markets collapse and surge, possibilities for getting rich quickly are created. Unfortunately, most people don't get out when markets are high, as they are now. They only take a ride.

and this too:
The world is setting up for a big crash, again. Since the last bubble burst, governments around the world have not been focusing on reforms. They are trying to pump a new bubble to solve existing problems. Before inflation appears, this strategy works. As inflation expectation rises, its effectiveness is threatened. When inflation appears in 2010, another crash will come.
If you are a speculator and confident you can get out before it crashes, this is your market. If you think this market is for real, you are making a mistake and should get out as soon as possible. If you lost money during your last three market entries, stay away from this one – as far as you can.
Strong opinion.

Monday, June 15, 2009

Saut: Bears Have Been Wrong Since The March Lows ...

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:
On our desk resides a book by Ned Davis, Being Right or Making Money. Since we are often wrong (like being too cautious for the past two months), but usually wrong quickly to avoid big losses, we opt for making money. To that point, the bears have been wrong since the March lows often citing all the old mantras that took us to those lows. To us, the current markets feel more like 2003, when the S&P 500 rallied from its March lows of roughly 800 into its June highs of around 1000. From there, stocks chopped/flopped around, without giving back much ground, until early September when they again rallied to break out above those June highs on another upside leg that tacked on an additional 150 points (to 1150). While history doesn’t repeat itself, it often rhymes! If so, a Dow Theory “buy signal” will be rendered if the D-J Industrial Average and the D-J Transportation Average can better their respective January 6, 2009, closing highs of 9015.10 and 3717.26. If that happens, it would be termed a new bull market according to our interpretation of Dow Theory. Whether that occurs, or not, we think the emerging/frontier markets have already embarked on new bull markets. As for the recent mantra that “Buy and hold investing is dead,” while we questioned this “ride it out” mantra in late 2007, we think the current consensus “dissing it” has it wrong. Emphatically, one of the secrets to Warren Buffet’s long-term investment results is embedded in the tax code (i.e. – long-term capital gains); and, we continue to invest accordingly.

Consider as a probability!

Friday, June 12, 2009

"Breakneck" China Growth Fails To Excite Bulls ...Again

Societe Generale says these are "BREAKNECK" growth figures in China today. Latest reports on China miracle by Danske Bank available here, here and here. Continental Europe is still weak with hard economic data, but the Michigan Consumer Confidence data in the US were rather interesting today, the excerpt from Dow Jones report below:
NEW YORK (Dow Jones)--Consumer confidence levels ticked slightly higher in the middle of June, a report said Friday. The Reuters/University of Michigan preliminary consumer sentiment survey moved to a reading of 69.0, from 68.7 in May. It had been expected to move to 69.8. Consumer confidence surveys have been on the mend of late as signs the recession is ending have mounted. Households have also been cheered by gains in stock markets. In the report's other findings, the current conditions index hit 74.5, from 67.7 in May, while the expectations index was 65.4, versus 69.4 the prior month. On the prices front, the one year inflation expectation was 3.1%, from 2.8%, while the five year expectation was also 3.1%, from 2.9% in May.

Interesting that current conditions were much better than expected, but expectations component tanked far below estimates. Well, but these survey data have been drifting ...

Well, the US stock market got its usual last hour buying, but the gain was only 0.14% for the S&P500 index and the Nasdaq "family" closed even in the red slightly. So the the very short term technical picture from yesterday (see the chart from yesterday below) is still very much in force. Just the one question - which way there will be a decisive break of those blue lines?

A bit longer "technical picture" by Societe Generale below. Chart courtesy of Societe Generale, click to enlarge!

Well, the ECRI WLI points ever higher, so the fundamentals would suggest the recovery quite soon in the US. ECRI reported today:

In recent weeks, the group has forecast that the U.S. recession will end sometime during this summer, as its yearly economic growth reading rebounds from late-2008 lows.

The index's annualized growth rate spiked to a one and a half year high of minus 4.7 percent from the prior week's rate of minus 7.1 percent.

It was ECRI's highest yearly growth reading since the week ended December 7, 2007, when it stood at minus 3.9 percent.

"With WLI growth rising to its best reading in a year and a half -- namely, since the recession began -- economic recovery prospects are brightening rapidly," said Lakshman Achuthan, managing director at ECRI.

So, what is my take?
China is blowing something, US may see a growth very soon, but short and anemic? I am most worried about continental Europe and Japan. There are some pundits pointing to a strong cyclical correlation. Well, in my view:
  • equities have priced in the near term economic recovery and are priced slightly above fair value, especially in the U.S.
  • there is a huge gap between the expectations and reality, so we risk the miss on the expectations side
  • technically the picture looks rather shaky,
  • but we are approaching the end of month and the quarter very soon
  • we have to see what is stronger - the end of quarter greed, or the rather fragile fundamentals and technicals
  • if we move higher into the end of quarter, I would be seeking the "emergency exit" for cyclical exposure by the end of month ... quite strong correction should be expected?
Consider as a probability!

Thursday, June 11, 2009

UPDATED: In Bullish Mood Expecting "Back-To-Normal" US Retail Sales Trend

It' s ALL about bond yields ... as yields rise, so equities give up, and vice verse ... fascinating!

After a rather successful 30-year US Treasuries auction (profit-orientated central banks took almost 50%), equity markets (S&P500) were trying to break out to the UPSIDE the range (blue lines) since the beginning of June, see chart below, courtesy of StockCharts.com, here you can follow up-to-date ...

... but we failed to break the upside! Well, a minimum of a break below 920 for S&P500 would suggest a still healthy bearish notion.

Let's start with European equity market reaction, the German DAX index reversed the initial dip and closed near daily highs. Chart courtesy of Reuters.

Let' s move on with US retail sales data, here is the comment by BNP Paribas, and here by Danske Bank.

Steven Wieting at Citigroup, Global Markets, had a following commentary:

Retail sales in May rose 0.5%, with sales ex-autos also up 0.5%. The declines of April were revised up a bit, with sales overall and ex-autos down 0.2%. The level of sales in May was thus slightly higher than consensus expectations.

Gasoline prices rose above seasonal norms for the first time this year in May, with retail gasoline station receipts up 3.6% (seasonally adjusted). Ex-gasoline sales, total retail sales in the U.S. were up 0.2% in May (see figure 1). The data should reinforce forecasts that the CPI for May will rise 0.3% or 0.4%, with real retail sales up only slightly in the month.

In May, the components of retail sales that are excluded from core measures, gasoline, autos and building materials, saw gains. Auto dealer receipts rose 0.5% for the first increase since January. Sales at building materials, garden and supply
dealers rose 1.3% for the first increase (seasonally adjusted) since June 2008. So-called core retail sales, meanwhile, were flat following a 0.1% decline in April (though revised up slightly).

Core retail sales in May were 1.7% annualized below the first quarter average. Folding in services expenditures, price developments and a very slight rise in unit auto sales, real consumer spending appears on track to fall about 1% in 2Q 2009 following a 1.6% rise in 1Q 2009. Consumer spending has essentially idled this year. But domestic production (off 19% annualized in the first quarter) and imports have been crushed. Production and trade measures can rebound some to prevent inventories from falling, much less make them rise.

See the chart, courtesy of Citigroup, my adjustments with focus on " green shoots" story:
Societe Generale with Stephen Gallagher got to the point, confusing my brain, in the headline writing "Consumers regain momentum", but the chart title sounds like "Momentum fades after a Q1 bounce" ... well, the chart source was Global Insight, according to the note. So, the comment:
Consumer spending regains some momentum in May. Along upward revisions to earlier months, the May Retail Sales report implies flat consumer spending in Q2 after a 1.5% annualized gain in Q1. Returning momentum as suggested here implies a return to a 2.0%-2.5% pace in Q3. (or 1.2% average YTD).
Gas prices boosted Retail revenues in May, but pose a threat to consumer purchasing power. Gas prices continued to move higher in June. Current prices may not be a problem, but an ongoing rise would harm spending.
Well, you decide! My take can be seen in the Citi's chart ...

UPDATE 20:30 Latvian time: it' s not about any economic data today, it is about bond yields ...

UPDATE 15:55 Latvian time: Here is the original release ... the headline looks more or less in-line with consensus expectations, but equities expected more? Well, we had weekly jobless claims released at the same time, but also not as bad ...


This is, what, according to DBS, I should expect from the US Retail Sales data today (I like the chart very much):

The retail sales report (May) is on tap today. Markets expect a grudging 0.5% (MoM, sa) rise in headline sales, barely enough to offset last month’s decline of 0.4%. “Risks” are to the upside, though, given the 7% rise in unit auto sales reported 7 days ago. The latter really ought to push headline retail sales growth to 1.5% or more. Beneath the autos (and building materials) lies the so-called “control group” within retail sales, used to help calculate the consumption figures reported in the GDP accounts. This series continues to grind north since hitting bottom in Dec08. It’s far from a "V-shaped” recovery but growing it is and, in so doing, is performing the task always assigned to consumption at the bottom of a cycle: to drag the rest of the economy, kicking and screaming perhaps, out of recession after it has fallen into one for some other reason (typically an investment bust, in this case, housing). Given its crucial role in the recovery process, investors need to keep their eye on consumption more than any other series. It’s final demand that matters and there’s nothing more final than consumption.
Last month BNP Paribas reported this ...

Is there "back-to-normal"?

Roubini "Attacks" Latvia's FX Peg In At Least Two Ways

Nouriel Roubini, the professor of economics at New York University's Stern School of Business and chairman of RGE Monitor went two ways with Latvian devaluation message yesterday.

First, the analyst team of RGE Monitor came out with "Is Eastern Europe on the Brink of an Asia-Style Crisis?", without registering you can read it also here at naked capitalism.

Then, later on, Nouriel himself published his opinion "Latvia's currency crisis is a rerun of Argentina's" via Financial Times, and also at the RGE Monitor. Here I post some key excerpts:

Nonetheless, devaluation seems un­avoidable and the IMF programme – which ruled it out – is thus inherently flawed. The IMF or the European Union could increase financial support for Latvia but, as in Argentina, this would be throwing good money after bad. International resources are better used to mitigate the collateral damage of depreciation.

An introduction of the euro immediately after devaluation could help prevent the exchange rate from overshooting, although it would require the eurozone to admit a country that does not yet satisfy the formal criteria for membership. Euroisation after depreciation is a more credible strategy for Latvia than dollarisation would have been for Argentina, as Latvia was on its way to membership and its business cycle is highly correlated with that of the EU. Euroisation without depreciation will not work, as a real depreciation is necessary to restore competitiveness. Of course, any depreciation – with or without euroisation – will make many foreign currency debts unsustainable and will require a forced debt restructuring, as in the case of Argentina.

To minimise the risk of contagion, the best strategy may be: depreciate the currency, euroise after depreciation, restructure private foreign currency liabilities without a formal “default”, and augment the IMF plan to limit the financial fallout. It is a risky strategy but – as in Buenos Aires nine years ago – when plan A does not work it is time to move to plan B sooner rather than later. Delaying plan B would only cause a bigger blowout when the unavoidable currency crisis eventually occurs. It is to be hoped the lessons of Argentina in 2001 have been learnt.

Latvia’s authorities are trying desperately to prevent depreciation by intervening in the foreign exchange market. While the very thin interbank market slows down the rate at which domestic and foreign financial institutions can short the Latvian currency and put pressure on the central bank reserves, the country is bleeding forex reserves at an alarming rate. Only a miracle or some draconian and credible fiscal adjustment (that does not exacerbate the recession) could restore the peg’s credibility and lead to a growth recovery.

At this point, a currency and financial crisis is pretty much unavoidable; the issue is how to minimise the domestic and international costs of the needed change in the policy regime. As the experience with Argentina suggests, procrastinating will make the unavoidable crash – and the regional contagion – even more ­dramatic and costly.

Don't cry for me ...

Latvia: Danske Becoming Concerned ...

Well, I thought they have been concerned for years ...

Danske Bank writes in its EMEA Daily today:
This week has brought numerous comments from both the Latvian government and the EU on the Latvian crisis. Yesterday, comments from EU Commissioner Almunia and Latvian Prime Minister Dombrovskis (again) indicated that Latvia will get the next instalment on its IMF/EU loan. However, there are several reasons why we are becoming concerned that things might not be as simple as both Dombrovskis’ and Almunia’s comments might indicate. The main reason for our concerns is the deafening silence of the key player in all this – the IMF. The IMF could simply state that money would be forthcoming if the Latvian parliament on Friday passes the revised 2009 budget, but they have so far said nothing. And if the payment of the next instalment on the EU/IMF loan is a done deal, why did Dombrovskis state yesterday that the Latvian government was working on a "bridging loan" as an alternative to the EU/IMF loan?
SEB had an Instant Insight post yesterday with details on the forthcoming actions:

The road to parliaments vote on Latvian budget.

-The Latvian government, the President of Latvia and social partners agreed on amendments to the 2009 budget expenditures cut by LVL 500 M
-It has been agreed upon with the Latvian Employers Confederation, the Chamber of Commerce and Industry, the Latvian Confederation of Free Trade Unions and the Latvian Association of Local and Regional Governments.
-The expenditure has to be cut by 1.5 billion lats by 2011 or by 500 million lats per year, starting in 2009.
-LVL 500M must be saved in remaining 6 months of 2009.
-Exact details will be revealed on Thursday.
-The goal for the severe spending cuts in 2009-2011 is a 3% fiscal deficit in 2011 and euro introduction in 2012/13.
-The goal would be reached by hiking taxes and lowering wages and social benefits/pensions.
-Continuing of structural reforms based on functional audit, the IMF/EU/WB recommendations.

What will happen this year?
-Additional cuts for ministries, agencies for investments, purchases, etc.
-Salaries in public sectors down by 30-40% from the level of 2008 (-120 m LVL economy on salaries in the public administration).
-Cut of pensions by 5-15%
-Cut of non-taxable minimum income by half (from LVL 90 to 45 ) and minimal wage by 22% (from LVL 180 to 140 ).
-Maintenance of co-financing for implementation of the EU funds.
-Increase of excise tax for beer.

In 2010
-Introduction of progressive personal income tax (details unclear, but max could be 30%)
-Introduction of new property tax (property, living property, land). Possible taxation of all inhabitants.
-Introduction of tax on capital gains
-Income tax for individual enterprises up from 15% to 23%.
-Another possible hike of excise tax (all items in that group).

In 2011
-VAT from 21% to 23%
-Social tax from 34% to 37%

What's next
-Details in all positions regarding to those cuts by LVL 500M will be presented in extraordinary Government's session on Thursday, June 11
-2nd reading in Parliament the next day
-Continuing of the 2nd reading, voting on Wednesday, June 17
-All coalition parties plus opposition's First party will vote for.
-Money tranche of EUR 1.2B will be delivered in coming 2-3 weeks
Bridging loan? I thought Almunia is ready to discuss the size of gifts ...

Wednesday, June 10, 2009

EU To Support Lat "At Any Price" ...

According to Reuters, the headlines and key excerpts:

* Latvian prime minister expects next loan tranche soon
* PM says lat currency's euro peg to stay
* EU to support lat "at any price," calls for budget cuts
* Sweden taps ECB for funds to shield Baltic-exposed banks


Almunia (EU Economic and Monetary Affairs Commissioner) said continued spending cuts, which will only increase the pain of the crisis for ordinary Latvians, were needed to ensure pay-outs from the emergency package backed by Brussels and the International Monetary Fund.

"The end of the lat (currency peg) would create, if it happens, very serious difficulty and we want to avoid, at any price, this situation," he told news conference.

So, at a stage, where Latvians finally give up to commit themselves to repay loans, there will be gifts? I would be giving up immediately ... whatever the reason!

Chart Of The Day: German Industrial Output Vs Ifo Expectations

I do not bother about interpretation this time around, but the gap between "real hard" industrial production data and Ifo expectations is striking! Chart courtesy of BNP Paribas, Daily Economic Spotlight, 10 June 2009, click to enlarge.

Interestingly, how the gap will be closed?