Singaporean Anecdotes

I have been musing here on the Chinese growth miracle recently. The topic is much more deeper than just looking at the surface.

On top of the Nomura's findings of Chinese domestic fund manager survey, I got the email from Singapore over night:

Well, you know, its getting crazy here in S'pore. I mean the property market.
People are queuing overnight at new condo launches. Hundreds of people. There
is a palpable fear of being left behind in this new asset price upcycle. And this fear
is stretching across all the major Asian cities it seems. In HK, people are queuing
hours to collect IPO forms too. A recent listing (chinese cement supplier) was
oversubscribed nearly 800x.

To add fuel to the fire, there's been speculation that China will divert its excess liquidity
to the rest of Asia. Like via the QDII programme, the scheme that allows domestic
investors to invest abroad. This programme was suspended back in early '08 when the
Chinese stockmarket started to take a dive.

As every dip in markets is still viewed as an opportunity to buy, at least the verdict on confidence in Asian markets should be clear ...

French Credit Musings

Suki Mann, the credit strategist at Societe Generale, wrote in a daily wrap-up yesterday:

The iBoxx cash index has tightened by 52bp this month to B+232bp, helping credit return over 2% in July alone, with subordinated bank debt leading the charge in terms of performance. The stock market jitters earlier this week have passed, the Main index’s flirtation with 100bp was just that and the month will end with the same gusto that has helped credit become the asset class of choice in 2009. There’s been no summer sell-off in stocks - those who sold in May will regret the move; the earnings season is surprising to the upside though year-on-year comparisons remain atrocious, and the macro-economic numbers are much more mixed now than they have been for a while. Whether or not it’s jumping the ahead of the non-trivial potential for an economic double-dip, the equity/credit rally still has room to go. There’s now a lack of supply too, with this week looking to be the first week of zero issuance this year in the euro-denominated IG corporate world which had previously averaged some €7bn per week this year. So the cash credit world remains illiquid, squeezed, frustrated and going tighter through August – albeit at a slower pace now, as market participants exit for their summer vacation. We think the interest will pick up steam through the last week of August and we anticipate a fairly active primary market from September to year-end. The supply dynamic won’t be as strong as in the first 7 months, with almost €200bn issued, but if interest and inflows remain good, credit will continue to offer the requisite performance.

Click on chart to enlarge, courtesy of Nordea Markets.
Credit Strategists at BNP Paribas are flying lower, and focus on exuberance in their "Credit Driver" today:

Risk assets continue to rally strongly, aided and abetted by central bank liquidity, but a bit of exuberance is starting to creep into investor mentality, which raises a few cautionary flags.

The US consumer after enjoying the sugar rush in the spring, provided by government support to household incomes is starting to lose confidence in the recovery story due to rising unemployment, wage deflation, expected rise in taxes from healthcare reform and cap and trade legislation, lack of credit availability, rising energy costs and deteriorating state balances and services.

This week, the Conference Board confidence index dropped back down from 49.3 to 46.6. The deterioration in the labour index (jobs plentiful - jobs hard to find) was
particularly worrisome, exceeding the level printed in March and the worst level in 17 years, indicating that the unemployment rate is likely to rise sharply again. This
should be no surprise as local governments at all levels are cutting back on employment, wages and hours of employment.
......

Credit has also begun to price in a very bullish outlook for the next twelve to eighteen months, with BBB spreads over bunds now reflecting growth of 1% (Chart 3). This is overly bullish in our view and investors should brace for disappointments and volatility over the medium term.

The bottom line is that we are now starting to see a big disconnect between fundamentals and valuations and the over reliance on technicals may come back to haunt investors.

The central bankers have managed to create another minibubble and it would be wise to burst it here, or at a minimum, let some air out.

BNP Paribas has been pointing to the expectations and reality gaps earlier. Watch out!

Krugman's Saltwater Economics

Paul Krugman made it clear yesterday, 1979-82 made him convinced saltwater economist.

Still, many people continue to use the 70s to denounce all things liberal or activist.

What’s odd, though, is how little talk there is about the way the 70s ended — which I viewed at the time, and still do, as a huge vindication of Keynesianism.

Here’s what happened: the Fed decided to squeeze inflation out of the system through a monetary contraction. If you believed in Lucas-type rational expectations, this should have caused a rise in unemployment only to the extent that people didn’t realize what the Fed was doing; once the policy shift was clear, inflation should have subsided and the economy should have returned to the natural rate. If you believed in real business cycle theory, the Fed’s policies should have had no real effect at all.

What actually happened was a terrible, three-year slump, which eased only when the Fed relented.

It was 79-82 that made me a convinced saltwater economist. And nothing that has happened since — certainly not the current crisis — has dented that conviction.

Reading ... Grantham

US equities face challenges... Not conclusive yet, but topping? I am defensively tilted and passive ...

Objective and rational Jeremy Grantham of GMO is a always a must read ... sorry for delayed linkin' ...

Last Bears Giving Up?

David Rosenberg, the former chief economist of Merrill Lynch, now at Gluskin Sheff, has a following take in the early missive today:

But there is no doubt that after the sharpest downturn in housing, production and employment since the 1930s, that the laws of gravity themselves prevent the economy from any further deterioration. Nothing is going to zero, and there is always the chance that housing sales edge back up towards their demographic levels, auto sales recover to their replacement demand levels (plus GM getting back into the leasing game), and inventories get rebuilt in line with spending levels. The government has its hands in 40% of the economy and when public sector officials can influence how banks can value their assets, how mortgage servicers should be doing their business, who shall fail in the financial industry and who shall not; and when we have a central bank that is not just the lender but the market of last resort, even for RVs, and a government willing to run up its deficit to levels that would have made FDR blush, then perhaps we can end up seeing a recovery occur sooner than we had thought.

The data have been mixed overall, but certainly have been beating expectations for the most part. The question really is, as was the case in Japan, whether there is a fundamental change in the trend or whether we are seeing noise around a secular downtrend. In any event, the recovery we are seeing is the result by and large of a myriad of government patchwork, and while it may well be the case that some areas are stabilizing (industrial output, housing) or even improving (export-related activity — helped in part by the global effects of China’s latest bubble), so long as credit continues to contract, any recovery is going to be fraught with deflation pressure and double-dip recession risks along the way. While most pundits are bullish on the economic outlook, and it does indeed look like 3Q GDP is going to print positive, there is still very little visibility as far as 2010 is concerned.

Although he is, most likely, not giving up his bearish stance yet, the description of the state of affairs in the first paragraph strikes the eye.

Exotics From Nomura: Domestic China Investors Survey

Nomura published a strategy report on China today with, in my view, rather exotic findings of survey of China domestic fund managers. Here are the excerpts:

Over a two-day seminar, we asked China investors to fill in, anonymously, a questionnaire on the macro issues of the day. Our 13 questions covered a range of asset classes and financial markets. We have collated the results of more than 50% of
survey replies and present our findings inside. Investors remain very bullish on China-A shares and don't foresee much change in the monetary policy in the short term. In terms of sectors, they remain bullish on banks, insurance, and property and bearish on airlines. They see China curbing loan growth as the main risk for 2010F.

and some key bullet points:

• Investors remain extremely bearish on the US dollar...
• …with no-one expecting any change in the US interest rates
• The US will still remain the reserve currency
• Domestic investors regarded their own market (A-share market) as offering the best returns, with Japan and India being the least favoured
• Consensus is very bullish on Chinese growth
• There are few expectations of rate hikes this year
• Investors see no change to the HK peg…
• ...nor in the price of gold
• Investors expect double-digit gains on the Hang Seng until year end
• …and the same for the A-share market..
• …the same for the property market
• Banks, insurance and property are the most favoured sectors while airlines is the least favoured
• The biggest risk is China curbing loan growth

And here is an alternative view on Chinese property, and consequently financial sector ...

In the meanwhile many equity markets around the globe are testing new highs this year.

Merrill Lynch(ed) On US Dollar Scenarios & Short Interest In Equities

Foreign Exchange strategists at Banc of America Securities - Merrill Lynch (BAS-ML) had outlined some interesting scenarios for the US dollar. The excerpt from the FX Fix report today also includes the comment on resurgence of risk taking in the last 24 hours (my emphasis):

The motivation for the recent deterioration in the performance of underlying risk asset markets and the ensuing USD bounce from its early June lows appears to be concern over the prospect of an early end to the liquidity fuelled boom in China. Unsurprisingly those markets and currencies most popular as China plays – oil, AUD etc – have corrected the most. While the China market was unable to stage a bounce overnight, it nevertheless appears that the mooted policy moves are minor. The PBoC has simply stated that it will use market tools to control lending growth and affirmed a “moderately loose” monetary policy. This seems a far cry from the sort of policy tightening that would mark an exit from “middle-way” and a genuine near-term threat to the risk asset rally.

From a top-down perspective we believe there are two environments in which the USD can rally. One is that the economic data relapse as we reach the mid-peak of the W and spark a major correction in risky assets (left of middle-way). The second (right of middle-way) is that the strength of the recovery is such that fear of policy tightening saps the performance of risk assets as greater differentiation between excess liquidity and genuine growth plays emerges. In this environment – essentially what we are forecasting for 2010 - the USD is also supported, in G3 at least, by a favourable shift in interest rate differentials. An economic relapse may still follow. In the right of middle-way world there is also a high risk that sharp rises in the automatic stabilisers – oil and long-term yields - spark a relapse. We have already has a mini version of this. In early June the USD actually started to rally amid rising yields – i.e. we had moved right of middle-way. What happened next, however, was that risk assets started to correct on fears that higher oil and yields would derail the recovery. This pulled us back into middle-way and saw the USD recovery fail despite weakness in risk assets, sparking talk of a “correlation break”. Context is more important than correlation. ...

It looks like people simply love the momentum trade ...

However, the colleagues at the Technical Research of BAS-ML published a report on short interest in equity markets yesterday, with a following key message:

ASI readings remain elevated- a contrarian positive
Adjusted short interest (ASI) for the S&P 1500 rose in early July by 1.4%, with ASI increasing across all market caps. The increases were most evident in the mega caps and small caps, where ASI rose by 2.2% and 5.4% respectively ..., led by Energy, Materials and Consumer Staples. Overall ASI still remains elevated, especially within the mega caps space and among Financials ... High short levels can provide a floor on equity prices, and current readings may still be viewed as a contrarian positive for the market. Additionally, ASIR or days-cover-ratio (a measure of potential buying pressure) also continued to rise in early July on persistently weak trading volume; levels are now back near the historical average ... Short interest is reported semi-monthly with current data from 01July09 to 15July09. Our data is adjusted for the estimated effects of convertible arbitrage.
ASI rises across sectors in early July led by Energy
Aggregate ASI in the S&P 1500 rose modestly by 1.4% in early July, led by increases in Energy (8.7%), Materials (4.4%) and Consumer Staples (4.3%). ASI in Financials also rose overall in early July by 3% after falling in June by -5.4% (reflecting the unwinding of the preferred arbitrage trade in the large Diversified Financials). ASI in the sector still remains very elevated and accounts for 26% of all shorts in the S&P 1500. The large level of shorts in Financials is a contrarian positive for the sector.

Well, let it be! However, the chart of "adjusted short-interest ratio" may be sending signals that contradict the findings of analysts. Click on chart to enlarge, courtesy of BAS-ML.

Citi On US Same Store Sales In July

Markets took a minor hit after Consumer Confidence dipped in the US again, according to Conference Board yesterday. Comments by BNP Paribas and Nomura.

Citigroup published a note on their take-aways on US same store sales (SSS) in July yesterday. Here are some excerpts:

Our Take — We expect July SSS to be on-plan for the retailers under our coverage. Cool weather in the beginning of July likely hurt sales of summer clearance merchandise, but continued cool weather near month-end and early Back-to-
School promotions may have spurred sales late in July. Tax holiday shifts and lower YOY tax refund payments likely proved to be modest headwinds in July. However, we believe retailers are optimistic for Back-to-School as comparisons ease in 3Q09 and the economic environment has shown signs of stabilization.

CIRA SSS Forecasts for July — The Citi Investment Research & Analysis (CIRA) SSS Index forecasts July SSS to decrease (-4.7)% vs. +2.5% last year and (-4.4)% in June 2009. We forecast general merchandise store SSS of (-5.9)%, department store SSS of (-10.5)%, and drugstore SSS of +3.0%.

............................

July Weather Unfavorable — Overall, national temperatures in July were (-2.2)ºF colder than last year, and precipitation was (-4.0)% lower than last year. The first two weeks of July were the coldest in 12 years, a negative for sales of summer clearance merchandise. However, early Back-to-School sales likely received a boost from cool temperatures near month-end.

Tax Holiday Shifts a Negative for July SSS — Ten states will be shifting their 2009 tax holidays out of July and into August this year. More specifically, there will be four tax holiday days in July TY, vs. 33 days LY. The loss of 29 days YOY in July is expected to negatively impact SSS for the dept. stores the most while the clubs, discounters, and drugstores may experience a somewhat smaller negative impact.

Retailers Cycle LY's Tax Rebate Checks — Retailers continue to cycle strong sales from the tax rebate checks, as federal income tax payments to individuals in July totaled $4.5B through July 23rd, down (73.3)% from $16.7B last year.

Areas of Focus on Retail Sales Day — On Retail Sales Day, we will be listening for: 1) signs of a stabilizing consumer; 2) impact of tax holiday shifts; 3) early read on Back-to-School sales trends, and 4) inventory levels for Back-to-School.

Bullish?

Zooming In The Earnings Momentum of Deutsche Bank

I have posted a bit on earnings momentum recently, that is assumed to be driving the market. Deutsche Bank is the second best stock among DJ EuroStoxx50 constituents year-to-date with a gain of almost 87% as of close yesterday.

Bloomberg reports today:

July 28 (Bloomberg) -- Deutsche Bank AG, Germany’s biggest bank, said second-quarter profit rose 68 percent as increased revenue from trading bonds and stocks offset a surge in loan- loss provisions.

and

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

Well, it is assumed they posted a second straight quarterly profit ... "net income for the quarter was EUR 1.1 billion".

Let's look at the earnings release. It is quite difficult to read the report till you get to the page 56, where the "optical illusion of profits" is disclosed. The difference between "Carrying value" and "Fair value" is almost EUR 6 billion, just 17% of reported "Total Equity". Click to enlarge!

Stunning earnings momentum! Well, the 2nd quarter was better indeed, as no new reclassifications were made ... in fact, it is more about the solvency than earnings momentum.

Sorry, I Am NOT Buying Equities Right Now

I open another research report, from Morgan Stanley this time "Strong Earnings Momentum to Drive Further Upside for Metals & Mining", with an appealing summary. Click to enlarge, courtesy of Morgan Stanley.

That comes on top of the latest Global Strategy Weekly by Nomura, which is simply telling that "Good Q2 suggests good H2 too".

But I am not buying equities right now. Just riding the existing longs. Current technical conditions suggest this is not the best time to buy - there should be better opportunities in the future, if any ...


The fundamentals for US consumption are shadowed by debt and employment concerns, there are deflationary signs in China too. But Chinese Communist Party may be preparing for a blow...

Bylov: Global Intermarket Perspectives

This week Jan Bylov has following summary:

Stocks – Earnings disbelief!

Earnings are at the centre of focus and while results are better than expected (on a net basis) Large Traders in US stock futures are concentrated short as of last Tuesday. This appears to illustrate that the more active investors (hedge funds) hold a disbelief in a continued recovery in earnings (and the economy) in spite of the constructive market message from an increasing number of global stock indices breaking into new recovery highs lead by emerging markets and technology. Again we draw your attention to the historical fact that there is little relation between a recovery in companies’ profits and real GDP during the first year out of a recession! Consequently, we maintain that market evidence still advocates that “risk” appears to be on the upside rather than on the downside… contrary to what was commonly assumed at the end of June. Plunges below the early July reaction lows are necessary to cancel prospects of more gains ahead of us!

Bonds – Why should I have long duration?

To many market pundits’ surprise the global recovery continues – not least influenced by strong company earnings. Now, with a lot of evidence in support that we have passed the bottom of the global financial business cycle, a continued recovery in stocks, commodities and cyclical currencies and a continued hefty bond supply why should I hold long bonds/duration? This appears the thought of investors and yields are again rising towards the highs in June when officials stepped in to assure investors about their hesitance when to start executing “exit plans”. Within the short-term a further challenge of the June yield highs appears likely as asset allocators continue to direct funds towards more cyclical risk markets. However, this should not blind us to the fact that real bonds yields are soaring with inflation so benign and central bankers having informed us (in June) that they will not commit the Japanese mistake of the -90ies. Undoubtedly, this will lure long term institutional bond investors when benchmark yields approach the June highs. Therefore, we maintain that the yield direction within overall ranges will be guided by the two transient investment themes: 1) “supply fear and economic recovery” and 2) “real yields and central bank responses to protect a fragile global macro economy”.

Commodities – Short squeeze in copper

Speculators have been stubbornly short positioned in copper during the 2009 recovery, but interestingly an exit from short futures positions appear to have commenced. Therefore, with emerging markets still showing strength and industrial metals outperforming precious metals we believe that caution remains warranted about any calls for important recovery peaks in global commodities.

Currencies – A weak USD perception is spreading

Prospects of soaring health care expenditure and higher minimum wages are only encouraging US funds being allocated abroad and more foreign investors hedging their USD exposure. Clearly, the major investment themes among currencies centre on: 1) “the US dollar collapse theory”… currently only weakly tempered by 2) “US business cycle well ahead of Europe and the euro challenged by its first real recession”. Now, the US dollar market action and continued evidence of a global recovery still suggest to us that more USD weakness is ahead; this not least seen versus a soaring SEK (major technical top formation evident in EUR/SEK). Finally, we hold on to our carry basket (BRL, RUB, TRY vs. CHF, CAD).

Indeed, also UBS Investment Research published a note on European Earnings Momentum last week

Earnings momentum continued to be negative in July, but only just. We are close to seeing now as many upgrades as downgrades. The three-month average improved for a third consecutive month and is now at its highest level since June 2008. For one-and-a-half years we have been more bearish on the European earnings outlook than the bottom-up consensus numbers. Back in September 2008 when Lehmans failed and the US economy was already in recession (the ISM manufacturing survey was at 43.4 in September, with anything below 50 signalling a contraction), consensus was forecasting flat earnings growth in 2008 and a 13% rebound in 2009. Since then, consensus expectations for the level of 2009 earnings has halved with many sectors falling by much more. We believe we are getting close to downgrades ending with consensus currently estimating earnings to fall 22% this year. From a top-down perspective, we forecast a 25% fall in 2009 and 15% growth in 2010. We believe the market will look to the current earnings season for direction, as we believe we are moving back to an environment where performance and earnings momentum re-connects. Chart 1 highlights the historical correlation between the sectors’ earnings momentum and performance. At the recent market low and in 2003, the correlation turned negative (i.e. buy the downgrades and sell the upgrades), but now we are returning to a more normalised environment with the three-month correlation currently at 0.11 ... , having been 0.00 last month.

Here is also the excerpt from sector overview (my emphasis):

This month we extend our sector breakdown to 30 sectors by splitting materials and
food/beverages/tobacco into their components. General retail, banks (both retail and investment banks) and beverages have seen net upgrades relative to the market, and have outperformed, as correlation returns to positive territory. Telecoms, media and tech hardware have been among the worst performing sectors, and seen net downgrades relative to the market.

If I look at the components of DJ EuroStoxx 50 index, then the year-to-date (YTD) performance is led by names like Deutsche Bank (+87% YTD) , BNP Paribas (+72% YTD), Banco Santander (+45% YTD), UniCredit (+31% YTD), among others, versus the index itself just 6.7% YTD.

One reads, for example, the research note by BNP Paribas on German banks, and should be wondering about "optical illusions in banking figures".

S&P500 In Technical Breakout

Today, S&P500 equity index broke above the resistance level of 955 area it touched almost 2 months ago. The 1010-1015 level is the target now. Before we move into next target area the market should consolidate, probably down to 960 area.

However, there are fundamentals that will make some pain in the future:

1. The impossible fiscal equation should be solved, and taxes will be raised
2. The final consumer demand should still re-emerge
3. Corporates are beating earnings estimates just because of even sharper cost cuts, among others quite brutally on the employment side... This has been a good policy for an individual company or industry/sector in the past. However, but not in the case, if the entire market is doing just that. The effects will be the same like the global competitive devaluations.

But who thinks long-term?

Chinese Growth Inflationists

I already posted on the "shocking Chinese growth opinion" by UOB Kay Hian yesterday, as the consensus opinion runs rather along the lines at Danske.

However, I read a commentary by Citigroup today:

Shenzhen cuts minimum wage benchmark the first time in 10 years — The municipal government's Labour and Social Security Department announced high, medium and average wage benchmarks, compiled from polling salaries across 20 industries. The three were cut by 8.5%, 3.9% and 3.8% to Rmb23,700, Rmb2,460 and Rmb2,750 a month respectively. Shenzhen offers the highest minimum wage in the nation.

Who is cutting minimum wages, if the growth story is so compelling? Wage cuts are generally a sign of what? I am struggling to see much positives for Chinese domestic consumer demand going forward.

Asset inflation and general (consumer) price level ... ?

Danske: Latvia Cannot Ignore The IMF

Danske Bank has made a conclusion today:

• The European Commission published a Supplemental Memorandum of Understanding between the Latvian government and the EU.
• The MoU shows that half of the instalment of the EU loan to Latvia is earmarked for the financial sector. This leaves less money to cover the gap in the central government budget.
• Therefore, the Latvian government might not be able to meet its funding needs forthe rest of the year unless the country gets the next instalment of its IMF loan.

The full report here!
I am looking at the last bullet point in the conclusions, and keeping in mind the masochists ...

Citi Surveying The Investment Landscape

Complementary to the posting of key conclusions by Merrill Lynch(ed), here is the summary of survey findings by Citigroup (U.S. focused survey), published last Friday:

July survey responses show growing investor optimism. In the latest survey responses from institutional clients, we can discern more confidence building amongst investors. Specifically, an overwhelming 92% of those polled believe the market bottom already has been experienced, with more than 85% expecting the S&P 500 to close above 900 by year-end 2009 and more than 70% forecast a close above 1,000 by year-end 2010. Yet, we wonder about their conviction given our Panic/Euphoria Model’s readings.

Tech remains the sector favorite while Utilities remain the least liked. While there is growing interest in Energy, Materials and Industrials, investors strongly favor the IT and Financials sectors. Moreover, traditionally defensive sectors including Health Care, Consumer Staples and Utilities are expected to underperform in both 2009 and 2010, consistent with a more bullish stance. Historically, such data was used as a contrarian signal, but recent survey results have been a good indicator of direct performance relationships, not indirect ones.

The poll respondents are looking to allocate more cash to equities. A full 60% claim to be willing to allocate more money to equities by year-end 2009 even as only about 28% say they are overweight bonds vs. more than 60% being overweight stocks. With average cash levels as a percent of assets under management reaching 16% (vs. a median of 6%), there appears to be ample firepower for fund managers to increase
their equity market exposure, with many favoring emerging markets over US stocks.

Clients expect S&P 500 EPS to decline by more than 9% in 2009 but rebound 10%+ in 2010. Institutional investors expect 2009 earnings to drop year over year by an average 9.3% (and a median 12.0%) and then bounce back in 2010 by 13% (and a median of 15%). Thus, buy-siders appear to be less negative than the sell-side consensus of a 15% drop this year and less confident than the sell side forecast for a better than 20% recovery next year. However, the buy side is more optimistic than Citi’s earnings forecasts for both years.

Investors also weigh in on Fed policy, unemployment, style winners and likely legislation. While portfolio managers expect the Fed to begin lifting short-term rates around mid-year 2010, unemployment could rise to 10%-11% in the eyes of many investors, with value expected to outperform in 2009 and growth to outperform in 2010. Interestingly, clients envision passage of some Health Care legislation this year but are less convinced that the Climate Change bill will be signed into law, which seems consistent with what our DC sources were suggesting six weeks ago during a visit to Capitol Hill.

This sentence feels somewhat uncomfortable to me: "However, the buy side is more optimistic than Citi’s earnings forecasts..."

Masochist Latvians

Masochist Latvians believe they keep their own local habits as a secret?
Full commentary by Danske Bank here.

Merrill Lynch(ed): Global Fund Manager Survey

Bank of "Amerillwide" (or Countrywide Lynched America) published their monthly Global Fund Manager Survey last week. "The picture" looked like this in June. Key conclusions from the new June survey:

Growth up+ risk down+ defensives in = another opportunity
The July FMS shows how a modest correction in equity markets together with a larger one in commodity prices punctured investor confidence and prompted a hasty retreat back toward defensive sectors. This nervous response came despite growing conviction that we are through the worst of the economic problems and still rock-solid faith in the GEM story. It does suggest that any surprise in Q2 results could see markets being squeezed upward into H2.

Past-the-worst conviction rises; inflation scare eases
Investors are convinced that global growth will improve (+79% vs. 78% in June) and that this will lift corporate margins & profits (a net 51% see improvement over the next 12 months). However, a downtick in risk appetite saw a very skittish retreat back into defensive areas. That is, apart from GEM assets, which remain famously popular; and this despite China optimism coming off the boil, only to be replaced by Indonesia - now the most O/W GEM. Meanwhile, inflation fears eased as commodity & oil prices tumbled (a net 14% now see higher inflation, down from 19%) and this stabilised views on how quickly interest rate are likely to rise.

Asset allocators skittish as risk appetite falters
Asset allocators are in wait-and-see mode as overweights in cash (+9%) and equity (+7%) were trimmed, with bond U/W easing to -13% from -15%. Risk appetite fell, with our composite indicator standing at 36 from 38. Average cash balances saw a very sharp jump to 4.7% (vs. 4.2%), with only 12% of investors now reporting higher-than-normal risk-taking in portfolios. Hedge funds are more active, with leverage rising to 1.2, but net long exposure fell to 23% (from 35%).

Equities good value, but it’s GEM vs. the Rest of the World
Equities are viewed as undervalued by a net 8% of investors, while a net 30% say bonds are expensive (up from 22% in June). But it’s not about value: a net 8% of respondents view GEM as overvalued and yet it is still seen as the only game in town, with nearly half of all investors saying it is the region they want to O/W on a 12-month view (vs. -30% for Eurozone, the lowest reading ever).

Retreat to defensives provides chance to re-load
Having fleetingly been U/W all big 4 defensive sectors last month, investors turned on a sixpence in July with telecom, pharma and staples all recovering strongly, at the expense of materials, energy and industrials. The degree of optimism on EM vs. Eurozone looks dangerously extreme and, more broadly, the retreat to the defensive positioning of February, in our view, provides another opportunity to reload on cyclical over defensives trades on the expectation of confirmation of real economic growth emerging across all regions from Q3.

Nice equity performance. Sharp drop in headline compensated by even sharper cut in costs... At some stage one may realize that it was cutting off the hands of my very own customer?

UOB KayHian Offers Shocking Opinion On Chinese Growth ...

I am back, and UOB analysts, that I deemed to be the "almost members" of Chinese Communist Party offer "shocking opinion" on the Chinese growth story:

For the longer term, we believe the government needs to grow the economy by a more healthy way rather than based on the current mode, which relies too much on investment. If there is no recovery in consumption and exports, the fast expansion in investment could cause excess capacity to worsen and would therefore be unsustainable. Also, based on contributions by consumption and investment to GDP growth in 1H09, we can see that the investment boom has little effect on consumption as it was mainly government-driven. The government can boost both investment and consumption by deregulating private investment, allowing investment in sectors such as financial, telecoms, railway and aviation, which are
monopolised by state-owned firms. By this way, social capital can be raised and personal income be lifted, at the same time. The government has indicated that in the next stage, its priority is to focus more on stimulating domestic demand. Thus, it is studying measures to deregulate private investment.

Who cares about the long term?

On Hiatus

Nothing wrong, just taking breather ... except weird top stories!

Nobody should even assume to see any "rational expectation" here... but market may bring some "weird" ...

Compilation Of Jobless US Green Shoots

Before we dive into jobs data, ECRI proudly presented today that Weekly Leading Index Growth Rises Further, with corresponding charts and data here.

Bureau of Labor Statistics of the U.S. Department of Labor reported today:

Nonfarm payroll employment continued to decline in June (-467,000), and the unemployment rate was little changed at 9.5 percent...

Chart below courtesy of Citigroup Global Markets, click to enlarge.

The economists at BNP Paribas responded with a commentary here.

The compilation of opinions on jobs data by The New York Times Economix, and by WSJ Real Time Economics.

Unemployment is deemed to be lagging indicator, ECRI WLI is, as the name suggests, deemed to be leading. The nerves of risky asset traders did not hold today, equities and oil decided to be offered at discounts ...
Why markets are focusing on lagging indicator?