Monday, December 28, 2009

Prolonged Good News?

I was reading an interview with Paul Krugman recently, and there were couple of sentences that reminded me that seems to be another version of the so-called "positive feedback loops":
... prolonged good news tends to silence the skeptics ...
This sentence also is key, especially in the context of what attempts were made during heights of the Internet bubble:
Those who rationalized the way things were going gained credibility until the day things fell apart.

No intentions at all? Only hope gets so visible reinforced by positive feedback loops ...

Happy New Year!

Wednesday, December 23, 2009

Socialistic Xmas Lust Of American Capitalists

Clowns have been hiding in the US Existing Home Sales, now they are coming to the stock market. Some media outlets even see prices brighten ... just keep in mind those socialist discounts, err, first-time home buyer tax credit. This is a classic text book recovery in everything? Yes, there is little value of existing home sales activity in terms of GDP growth, but new home sales do.

Interestingly, but the existing home sales frenzy goes on without much help of credit, so, most likely, the life time opportunity in housing leads to dis-savings ... So, we are basically moving back to old normal, which was not to sustain, but that was then ... Because the next step in bull's scenario is renewed borrowing?

As to life time opportunity in the US housing market, the chart by BNP Paribas reminds today, that we may have some time to run for the real value. Click on chart to enlarge, courtesy of BNP Paribas.

As BNP Paribas comments on shadow inventory:
In addition, headline numbers do not account for discouraged homeowners who have stopped advertising for their property as they wait for prospects to strengthen of for homes which have been put up for rent. In this respect, the vacancy rate for residential rental properties reached a new record high of 11.1% in Q3, suggesting important imbalances remain.
I am not sure for what reason, but the sense of lost life time opportunity reminds me of words by Dylan Grice, the global strategist at Societe Generale:
But a good story isn't an investment case. Anyone investing in the late 1990s into the story that the internet was going to change the world, for example, likely lost a fortune, even though the story was 100% correct. Value should always get in the way of a good story.
If there is any bear left, then Lombard Street Research was warning yesterday:
Mr Zhou Xiachuan, Governor of the People’s Bank of China, today signalled the end of the global market bounce that has been in progress since the end of last winter. The only major addition of liquidity in the world economy over the past year has been in China. That is about to be withdrawn. Risk assets look like an unwise place to be in early 2010 – especially commodity futures and the government bonds of countries with large deficits and/or debts.
Click on charts to enlarge, courtesy of Lombard Street Research.


Indeed, China's domestic markets managed to close in red yesterday, however, today there is little sign of liquidity fear left.

US personal income and spending data for November were worse than expected by consensus economist, with all consequences, but this should not be the reason for Xmas pessimism?

Merry Christmas!

Tuesday, December 22, 2009

Mother Of All Inventory Recoveries Already Peaking?

As I mentioned before, there is a fat chance that mother of all inventory recoveries is already peaking. Economists at Societe Generale are nailing it down today:
Based on the incoming data, it looks increasingly likely that much of this positive boost will be realized in Q4. This is good news and bad news. The good news is that the economy is likely to end the year on a very positive momentum. Whereas our initial forecasts pegged Q4 GDP at 3.6%, it now looks more likely that we will see growth well in excess of 4%. A 5%-handle is not out of the question. In this high-growth scenario, inventories would contribute as much as 3.5% in Q4 (or 0.875% not annualized). The bad news is that this would close about 80% of the current gap between production and demand, leaving less upside from inventories for 2010.

An interesting feature that emerges in the modeling
of inventory cycles is the asymmetry between production undershoots (currently -1.1%) and the positive contributions to growth that follow (forecast at +1.4%). This asymmetry captures the virtuous cycle that typically takes hold as the initial production gains boost employment and consumption, triggering the need for outright inventory gains. Our current forecasts assume very little inventory accumulation beyond the production catch-up. If employment gains materialize and consumption gains become more sustainable, the positive feedback mechanism could inject some new life into the US inventory cycle.

Globally, the inventory cycle is also moving along.
Asia has led the way, but industrialized economies did a lot of catching up through the course of 2009. Based on the inventory indices within PMI surveys, the US experienced the largest inventory drawdown during the crisis, and as such, may be experiencing the largest positive contributions from the inventory cycle. The UK is also closing the gap relatively quickly, while Europe still appears to have some “juice” left in its inventory cycle. This is good news, because the prospects for a successful transition to consumer-led growth are somewhat more limited in Europe.

So, enjoy the positive momentum into year-end, and
fasten your seatbelts for the transition to demand-led growth in 2010.
Click on charts to enlarge, courtesy of Societe Generale.

Markets are surely pricing in demand-led growth in 2010 and 2011. Without government support it is likely to fail soon, as private sector deleveraging is set to continue...

Click on chart to enlarge, courtesy of Morgan Stanley.

Interestingly ... when corporate sector will join the government efforts? As long as China continues to support its current economic model, it is not going to happen soon...

Was it Milton Friedman who said that income polarization reduces the velocity of money?

Monday, December 21, 2009

Watch Those Reflators, Monetizers And Debasers

Some of them have quite a lot of debt to roll-over next year!
Click on chart to enlarge, courtesy of Societe Generale.

Addicted To F-armageddon's Financial Heroin

Following the traditions of best drug dealership practice, Don Coxe shares (HT Zero Hedge) the experience of his father:
... he told me that he swiftly learned that the best - and frequently the only - reliable drug for the critically wounded was heroin. Soldiers who writhed in agony under other medications almost always responded to heroin.

The problem wasn't deciding whether to administer it: if morphine didn't work fast, you didn't waste time, you injected heroin.

The problem for the doctor came when the patient had begun to recover from surgery, and was receiving heroin. How quickly could the dosage be reduced and when it be terminated? Although few soldiers were freed of heroin without experiencing pain or distress, it was necessary to take the drug away as rapidly as possible. Otherwise they would become addicts and their lives would be ruined - for soldiering and everything else ...
Clowns are not following drug addicted with their lives ruined, so expect hangover after New Year's party?

P.S. It is fascinating to see, how the most important event for the German DAX today, is the US cash market opening ...

Friday, December 18, 2009

On Moral Hazard Trade This Week

Christopher Wood, the strategist at CLSA Asia-Pacific Markets, had an excellent closing paragraph in the latest Greed&Fear, I could not resist myself to quote it here, my emphasis:
This has been a good week for investors trading moral hazard. Abu Dhabi threw some money to Dubai’s highly indebted property developer Nakheel, while Japanese bank stocks rallied sharply on word that there would be an extended grace period for banks to meet proposed new tougher BIS regulation for Tier 1 capital. Still all these bailouts and frenetic forbearance are not bullish in the long run. Rather, like securitisation before, they should be seen as a cancer spreading through the system.
Buy the cancer?

Merrill's Fund Bulls Vs Citi's Japanese Candlestick Masters

Bank of America Merrill Lynch published its monthly Fund Manager Survey Global on Wednesday. The summary of key findings is as follows:
Investors optimistic for 2010 despite giving up on banks
Walls of worry seemingly litter the landscape but investors exit 2009 hopeful that the New Year brings economic recovery, strong EPS growth, moderately rising interest rates and positive returns for equities. This comes despite a global collapse in optimism on banks during December (a month where two of the largest ever bank capital raisings were successfully completed).

7.7% expected total return for global equities
Investors forecast a +7.7% total return for global equities in 2010 led by APR (+9.1%) and GEM (+9.0%) closely followed by Europe (+8.9%) and UK (+8.3%). The laggards are forecast to be US (+5.5%) and Japan (+7.0%).

Growth, but where is the rate cycle?

A net 80% of investors think the global economy will get stronger over the next 12 months (a current cycle high) but a majority (63%) see growth as likely to be below trend together with below trend inflation. This may explain an easing in expectations of rate rises, with 51% of fund managers seeing no Fed rate hike before Q4 next year at the earliest, compared to just 41% last month. Optimism on corporate profitability, meanwhile, is at the highest level since December 2003.

Risk appetite constrained

Near record macro optimism is held in check by moderate risk appetite. In December, cash balances rose to 4.0% from 3.7% and our Risk & Liquidity composite indicator was static at 44, marginally above its long term average. Hedge fund exposure did, however, tick up to 35% the highest level since May.

Equities, EM & Europe in; Bonds, UK and Japan out
Investors have high conviction in the attraction of equities over bonds (the latter falling to the lowest level of valuation support since April 2006). Optimism on China also remains rock solid leaving Emerging markets as by far the most overweight region followed by Europe. Meanwhile pessimism on the UK and Japan continues to increase.

US$ bulls, Yen bears, gold overvalued
A net 37% of panellists see US$ strengthening over the next 12 months (the third highest ever reading and compares to -5% a mere 4 months ago). Conversely a net 35% of investors see the Yen depreciating. The 72 point difference in $/¥ view is the highest level since Feb 2002. Meanwhile the recent surge in gold sees a net 39% of investors viewing the metal as overvalued; consistent with $ views.
Near record macro optimism? Click on chart to enlarge, courtesy of BofA Merrill Lynch.

Interestingly, the Japanese candlestick masters at Citi, who usually do not bother with macroeconomics, have a different view:
Global equities — We think global equities will be vulnerable to a shakeout in
2010, as the intermediate rally off the spring 2009 lows plays out. The global
correction could be drawn out through to mid-year or autumn, especially for US
equities, which have been playing the anchor role.
...

Interest rates — US and Japanese long-term yields may take different paths
through spring. The US 10-year T-note yield could rise to 4.25% or 4.69% through June or October. Conversely, we think the JGB yield will continue on its downtrend through March but then turn toward an uptrend.

Forex — While dollar weakness is an ongoing longer-term trend, 2010 will be a year in which the dollar could easily stage an intermediate rebound. We think the dollar could rebound to $1.38-$1.35 against the euro. Against the yen too, we see a possible rebound of ¥15 or ¥22 in the second half of the year following weakening to ¥82.30 or ¥80 in February–March.

Commodities — In commodities, 2010 could be a year of bottom firming. WTI crude futures could be pushed down close to the December 2008 low of $33.87. Gold, too, could be subject to a shakedown of $200–$300 in the second half of the year after rallying on to $1,300 or $1,410 in the first half.
For the US equities, the reasoning behind the expected headwinds:
After a rise uninterrupted by a meaningful correction, the DJIA stalled as it approached major resistance at 10,500. The brakes came on in November and the index immediately appeared to have peaked. We think further upside is unlikely for the reasons outlined below.

1. The time from the 2007 high of 14,164 (2007/10/9) to the 2009 low of 6,547 (3/9) was only 18 months, not long enough to constitute a reliable wave pattern from a time perspective (a declining wave normally lasts just under three years or longer before reversing).
2. In the first stage of the two-stage rebound, from March to June 2009, trading volume was relatively high. But the pattern during the second stage, from July onward, was unsustainable, with share prices continuing to rise amid declining trading volume. This is not characteristic of a strong rising wave.
3. It appears increasingly likely that US long-term bond yields have bottomed out, and there are signs that the downturn in the dollar depreciation, which has supported share prices since March, is reversing.

Considering the aforementioned factors, we believe the intermediate rally from
6,547 (3/9) will peak at 10,500 or 10,600 and give way to a correction early in 2010.
Click on chart to enlarge, courtesy of Citigroup Global Markets.

They see two possible scenarios for a correction in 2010:
Scenario 1): A relatively mild near-term correction of 1,480pts ending in February-March, followed by the formation of a second ceiling around June. This gives way to a larger second-stage correction of 2,480pts, ending with a bottom in September-October.

1,482pts: The magnitude of the rise from 7,552 (2008/11/20) to 9,034 (1/2)
2,487pts: The magnitude of the decline from 9,034 (1/2) to 6,547 (3/9)

Scenario 2): A large drop of 1830-2,840pts from March through June, bringing
an end to a correction from a price perspective. Bottoming firming until September-October gives way to a rebound.

1,828pts: The magnitude of the decline from 8,375 (1/28) to 6,547 (3/9)

In either case, we expect the correction to last until September-October, and if
a second bottom to 6,547 (3/9) is formed this could set the stage for another intermediate rebound in 2001 H1.

An alternate (risk) scenario is that of a 1,480pts correction through February-
March followed by an intermediate rebound to new highs that lasts to August or October. In this case we see potential upside to 10,980 in 2010. If the DJIA does not break above this level it would complete a major head-and-shoulders pattern starting from the 2000 high. This would be a warning signal for a potentially massive fall from autumn 2010.

10,983: Derived by adding to 6,547 (3/9) the magnitude of the decline from 11,722 (2000/1/14) to 7,286 (2002/10/9)

Key dates from a perspective of time cycle analysis are June, September- October, December, and February-March 2011. Important dates in 2010 H1 are January 4, 13, and 26; February 2 and 23; March 4 and 30; April 20; May 5 and 17; and June 18.
Click on chart to enlarge, courtesy of Citigroup Global Markets.

Near record macro optimism, but where is the rate cycle? Bond markets ready to go on strike?

Thursday, December 17, 2009

FOMC Over-Dose And China Surprises In 2010

It rather looks like FOMC over-dosed yesterday, by promising to withdraw liquidity a bit faster than expected? Citigroup messes the financial bed, although Basel was seen as a financial positive in Japan yesterday.

Well, do you know the digital era of financial markets? You make or break! It is, however, never too late to learn.

Now, let's race to the research factory gates of Morgan Stanley. The wise strategists have a message:

Whatever is in the share price cannot move the share price: In other words, any information that the stock market has good visibility on and / or strong consensus on does not move the stock market in the future. Equities move on expectations and it is always what moves the expectations, i.e., the surprises to the consensus view, or the developments in the uncertainty, that move the stock markets. While we have confidence in our difference from the consensus view, it is also important to highlight what could logically develop to surprise the consensus and even ourselves, to move the market beyond our current expectations. We start with a potential surprise for 2010:

The downside surprise – an inflation shock: Our base case is built on the assumption that inflation will remain moderate in 2010 (our economist expects 2.5% inflation in 2010). This is a very important assumption because if inflation
surprises, so will everything else (policy and growth). In fact, we think inflation is the most important macro call for 2010.


Click on chart to enlarge, courtesy of Morgan Stanley.

And the conclusions are straight forward:

1) A weak global economy is most favorable for China’s equity pricing, because it means low cost of capital and low inflation (our base case view).

2) Chinese equities will fall, even if growth shocks on the upside, if inflation becomes visible.

3) The extent of a peak in Chinese equities is largely dependant on global inflation and global growth in 2010 (changes to cost of capital and risk appetite), given that China’s domestic growth looks buoyant.

Food and energy "asset reflation" are the best recipe for "recovering" ... in bust!

Wednesday, December 16, 2009

Just Technicalities, As Markets Await The Dose Of Dopamine From FOMC

It does not matter what is the level or value, just direction matters. Markets appear in mood to pick the dose of dopamine, what makes them happy. And no wonder, as the traditional X-mas rally, that started already in March this year, should have legs ...

Those who are seeking long term value, probably should think of wise words by Gerald Loeb:
Profits can be made safely only when the opportunity is available and not just because they happen to be desired or needed. ...Willingness and ability to hold funds uninvested while awaiting real opportunities is a key to success in the battle for investment survival.
Leading indicators in the land of positive hard data surprises recently, somehow are taking the breather for the X-mas, but the area of negative hard data surprises somehow blows strong into 1st quarter of next year.

At the end of day, somebody is trying to push up the unpopular banking laggards ...

Only technical interpretation of charts may confuse the quant algorithms. Societe Generale takes the bull's suggestion for the S&P500 equity index with the "... close to breakout" title for the technical analysis section in its weekly "Equity Prism" today.
The pause that began end-October (in the form of a complex flat consolidation pattern) should now give way to a gradual improvement, leading to new annual peaks.
Click on chart to enlarge, courtesy of Societe Generale.


The first weekly close above 1,100 would be a positive signal, to be confirmed this time by daily closings above 1,111. As a reminder, the real signal of a breakout is still present, and would be confirmed by a move above 1,120/1,125 (closing) This key level (retracement of 50% of the downtrend over 2007-2009) has kept the index in check since mid-October. The anticipated breach of this level would bring confirm of a continuation of the uptrending wave that took shape in March 2009, with the next target at 1,200/1,225 (62% retracement and initial target - arithmetic - of the inverted head-and-shoulders reversal formation).

First resistance
level at +/-1,150.
Support 1,085/1,080 -1,060/1,055.

Resistances
1,120- 1,150 - 1,200/1,225
The Japanese candlestick masters at Nomura take the other side of trade for whatever reason. Click on chart to enlarge, courtesy of Nomura.

FOMC has the chance to release the final dose of dopamine for the bulls tonight, or over-dose...

Tuesday, December 15, 2009

US Dollar Dominatrix In Nordics

US Dollar Dominatrix hits the minds of Nordic equity strategists at Danske Markets today. USD dollar is seen as one of key factors for the next year:
We do not know what will happen to the USD in 2010. In a bull case, the US economy will recover as usual when leaving recession and as neither deflation nor a jobless recovery will force the Fed to keep its interest rates down the USD will strengthen alongside a gradually stronger US economy. In the bear case, the USD will weaken further due to extraordinary macroeconomic weakness following the credit crisis.

In our view, the direction for the USD has the potential to be the factor that determines the relative performance between sectors during 2010 as it has partially done in 2009. When it comes to our bull case for the USD, Nordic Energy and Industrials stand to be the prime beneficiaries while Nordic Consumer Discretionary is likely to underperform other cyclicals.

In our bear case, the opposite is obviously true for the aforementioned sectors. However, it is also obvious,
that segments of the Nordic market that have ignored the weak USD trend are likely to start to react. This could hit the defensives Health Care and Consumer Staples which currently rate as Overweight.

Overall, today’s financial risk management has delayed the effects of the weaker USD. In fact, according to our calculations, most of the effects of the weaker USD vs. local Nordic currencies during 2009 have still not been reported by companies and will be reflected in Q4 09 and Q1 10 reports.
Click on chart to enlarge, courtesy of Danske Markets Equities.


Who knows?

European Strategy And Economic Surprises For 2010 By Morgan Stanley

The European factory of research at the gates of Morgan Stanley have produced hefty report and published it yesterday. The strategy team, including Teun Draaisma, outlines the base case for 2010:
We are bullish on growth, and bearish on the consequences of some stimulus withdrawal. We think the ongoing rally will take MSCI Europe (latest 1,091) as high as 1,200, but we expect it to end 2010 at 1,030, 5% down for the year.
Of course, the strategists are challenging the consensus, and actually consider the 3 key surprises to be more probable than markets are currently pricing in:
First, the US dollar rebounds, leading to developed equities outperforming emerging.
Second, Pharma is a surprisingly
large outperformer as it cuts costs and benefits from emerging market exposure and corporate action.
Third, the
UK becomes the first of the G10 to have a major fiscal crisis as elections lead to a hung parliament.
The third surprise with the UK fiscal crisis fits well into the sharp v-shaped global recovery picture? Well, strategists go on with more details:
The poor state of government finances is one of the key risks we see in the medium term. Therefore, one tail risk and potential surprise is that a government bond and FX crisis materializes already in 2010. One candidate for such a scenario, although not our base case, is the UK, where the upcoming election could provide a catalyst, particularly if it results in a hung parliament. Such an outcome would likely lead to a coalition or minority government, where the ability to govern effectively would depend on the main party’s ability to forge a consensus view to drive through necessary change. In the run-up to the election, growing fears over a hung parliament would likely weigh on both currency and gilt yields as it would represent something of a leap into the unknown and (given that the last hung parliament in the UK was in 1974). It would also increase the probability that some of the rating agencies remove the UK’s AAA status.

Weak UK macro backdrop.
Severe weakness in GBP and gilts …
… but UK equities may benefit.
It does not stop there, as European economists are not shy to list their own views:
The consensus, and our base case for 2010, is a lacklustre, sub-par cyclical recovery, subdued consumer price inflation and a hesitant removal of policy stimulus in the second half of the year. With capacity utilisation still extremely low and unemployment set to rise until the second half of 2010, domestic demand dynamics – both consumer and investment spending – should remain muted.
And the surprises by economists are:
We see four potential surprises that could affect the macro outlook:
1. a late-cycle credit crunch;
2. a new
commodity price spike;
3. ample liquidity pushing bond
yields down; and
4. the re-emergence of country-specific
political risks in Europe.
Click on chart to enlarge, courtesy of Morgan Stanley.

Who said strategists and economists are optimists? What, if probabilities are even higher? They focus on UK, but what about Greece, Spain, Austria, Italy, Portugal, Ireland ...?

Monday, December 14, 2009

Waiting For Clowns To Join The Gaming Of Contained Bailouts

Asian risk markets started the week with losses, but rebounded sharply on singular event of Dubai, after Abu-Dhabi provided a sticking plaster to Nakheel's bond. Markets may indeed assume that the plaster is the right cure for headache? Despite the claims that Austrians should be held responsible for various financial crisis and even World Wars, the nationalization of Hypo Group Alpe Adria is a clear positive for financial markets? All those Greek musings, Spanish tango ...

Well, financial markets may have other issues in the focus. Nomura's Mr Macro sums up today:
Since the NFP report, the Citigroup Economic Surprise Index (CESIUSD) has ripped 55 points higher. Stocks are unchanged, IG is tighter by almost 8bp, Gold is down 7.6%, and EUR/USD is down 0.78%. One of the more interesting aspects is the breakdown of real yield and inflation expectation components. All the increase in yields since the NFP report is accounted for by real yields. Inflation expectations hardly budged. In the context of Fed rhetoric, that acknowledges better growth but insists this is not a trigger for rate hikes, this market response is a curious one. The Fed is inviting inflation, but inflation has not sent an RSVP. There are three possible interpretations:

1. Higher real yields and a steeper curve are affirmations of better growth prospects at a time when wide output gaps dampen down inflation expectations.
2. Markets do not trust the Fed to keep rates lower for longer. Following a period of stronger data, the Fed may conclude the economic expansion is sustainable and signal higher rates. Markets are building in risk premium against that outcome rather than discounting higher inflation expectations of a Fed perpetually behind the curve.
3. A more benign explanation is how higher real yields threaten commodity prices. Breakevens are tied to oil prices. If oil declines it is difficult for inflation expectations to increase.

Ironically, the bond market moves on Friday were just the opposite. All of the change in yields came on the back of the inflation component. At this juncture it is still too hard to be conclusive whether the biggest risk in 2010 is the Fed scare or an inflation scare. Stay tuned.
The Japanese candlestick charting technicians at Citigroup Global Markets conclude on Euro today:
Euro weakening — Buying back of dollars versus the euro appears to be intensifying, with US long-term interest rates rising and the euro having fallen below support at $1.463. On the other hand, the dollar/yen could not make a break above ¥90.78 (12/4) and has been pushed back down. The recent prevailing trend on the forex market has not been dollar strength but rather euro weakness, in our view. If we are right, this could be negative for the equity markets.
And add on on equities:
Impact on the equity market — The correlation between overseas equity markets and the euro/dollar rate and between the Nikkei 225 and the euro/yen rate has intensified since March. Even if the dollar stages something of a comeback against the yen, if the euro loses ground against the yen this would be negative, not positive, for Japanese equities.
It is no wonder that Citi strategist Tobias Levkovich was asking late Friday: "Why Might Someone Buy Stocks?" The quest for answer somehow missed the favourable economic backdrop, but focused instead on relative value gaming:
  • Equity allocation seems light and may need some adjustment.
  • Pension funds could boost their stock portfolios.
  • Extreme flows into bond funds argue for some shift.
  • Poor yields on cash may force some money into dividend yielding stocks.
  • Sidelined cash contentions are not that indicative of new buying.
However, Steven Wieting, the US economist at Citigroup, sees the route "from financial recovery to real recovery":
  • A solid gain in real output is evident in 4Q 2009 without the help of substantial one-off stimulus. Consumption, trade and (less favorably) inventories have all surprised to the upside in recent reports.
  • Employment data could show outright gains, if mild, before long.
  • Inflation expectations receded meaningfully in early December and consumers noted a highly favorable pricing backdrop in the latest Michigan survey.
Yea, the adoration of equities comes difficult this time, so expect a digital outcome ...

Jan Bylov of Nordea Markets is also trying to look past the US job market schizophrenia today:

Stocks – The US job report schizophrenia

Exposed by the US job report “economic surprises” from USA have rebounded strongly during December. Apparently, this is igniting a schizophrenia between the potential consequences: 1) Fed to tighten and remove liquidity sooner rather than later and 2) will stronger data but potentially less liquidity kill the stock market recovery? With the cardinal proponents of a healthy stock market centred on valuations, growth and liquidity investors’ concerns are understandable – not least with global bonds losing upside price momentum and US dollar recovering. Clearly, the US job report is raising questions about the assurances from Fed about low rates for an extended period and the continuation of “Goldilocks” (bond yields low and ranging, a weak US dollar suggesting amble global liquidity, commodity prices not soaring, leading stock indices recovering and major central banks erring on the side of dovishness). In a low-liquidity environment the parameters driving the post March recovery appear to be questioned by investors. Consequently, while we are structurally bullish it appears increasingly important to focus on tactics to protect the 2009 profits.

Bonds – US & UK taking a big hit

For different reasons long bonds in US and UK have taken a hit while continental European equivalents continue range trading near levels seen at the fear peak of “systemic breakdown” back in early 2009. Most likely, the sell-off in long US bonds and the halt of hoarding US short duration bonds are related to the sudden change and return back to more US economic strength surprises seen during December and in particular the strong US job report. It now appears that investors are questioning the consequences of the strong US job report – will more strong data follow and will it speed up the timetable of when Fed will begin tightening and removing liquidity? With an absence of new Fed rhetoric we believe that bonds still receive a tailwind from dovish statements from Fed, Bank of England, ECB and the IMF… centred on the timing of “exits” which should err on the side of further supporting demand and financial repair. Consequently, we maintain that the yield direction will continue to oscillate/range between the popularity of two transient investment themes: 1) “supply fear and political discipline” and 2) “hesitating central bankers”. The overall market action still backs theme #2.

Commodities – Gold and oil squeezed lower

The setback in gold and oil comes from a situation with very high speculative commitments – also evident in US dollar – suggesting that a further exit by speculative traders is at risk of pressuring prices further down for now. Elsewhere, industrial metals continue to show overall strength, and with the traded $-index still not signalling a reversal (>77.50) underlying commodity strength is favoured.

Currencies – Unwinding the crowded short USD trade

Lead by the US job report investors appear to be questioning the dovish statements by Fed and what the consequences of less liquidity might mean to the Goldilocks scenario! Nowhere is the question raised harder than among currency traders whom are faced with an enormous load of short USD positions. Technical USD resistance levels are under pressure everywhere (EUR 1.46 & USD index at 77.50) and “the line of least expectation” surely is up for USD. So far we consider the situation as a risk management issue, and our May -09 carry basket strategy of long BRL, TRY, RUB funded by CHF and CAD has a protective stop (profit) close to spot.

Nomura made a defensive rotation call in telecoms and utilities even for Asia last week ... It is a digital world today!

Friday, December 11, 2009

Swimming In The Summer Wine Of Bust

"Das wilde Leben" of swimming in the wine last night has its price. Societe Generale this morning writes about "No-nonsense picture of China's investment-led model", and the strong November data-set should assure every sceptic.

However, Dylan Grice, the global strategist at Societe Generale, was quoting Seth Klarman (look also at left top of this website) yesterday:
The best investors do not target return; they focus first on risk, and only then decide whether the projected return justifies taking each particular risk.
He is, of course, pointing to the credit printing presses in China, and the likely outcome of bust.

Well, Christopher Wood, the strategist at CLSA Asia-Pacific Markets writes today:
Still GREED & fear has long since learnt to view the mainland first and foremost through the prism of its political economy. And so long as China controls the main levers in the game, primarily through its closed capital account, GREED & fear takes the view that it is premature to conclude that China is about to succumb to the long discussed over investment bust.
And continues with:
As has been noted by CLSA China macro strategist Andy Rothman, the tendency to make alarmist predictions about China GDP at the end of last year has now been replaced in recent months by over exuberant forecasts. The likelihood is that China growth is likely to peak in the first quarter because of the base effect. Longer term, 8% annual growth seems a good target for both policy makers and investors to have in mind for the next five to ten years as China implements what can only be an incremental adjustment to a less investment led and more consumption led economy; though clearly if the export sector comes bouncing back like old times thanks to resurgent Western demand the growth can be higher than that though this would not be GREED & fear’s base case.

If this is the macro economic backdrop, the real issue for GREED & fear remains whether China is on the road to an asset bubble. This week’s visit has also confirmed that this risk remains real if not yet a reality. In this sense it still makes sense to remain overweight Chinese equities. Still the risks of an asset bubble later are real, most particularly if Western economies do not recover properly which means Western interest rates remain low and the Chinese government remains cautious about tightening too aggressively.
Nice chart of China monthly floor space started (housing starts rose by 194% YoY in November and are up 15.8% YoY year-to-date), click on chart to enlarge, courtesy of CLSA Asia-Pacific Markets.

State Council will take care.

The econtrarian Paul Kasriel gives your latest alternative to the US econsensus!

Thursday, December 10, 2009

China State Council Beyond That Recovery Trade?

Whatever happens in real economy, interpretation is of massive importance. It is enough for markets to recover only "due to mean reversion belief", even if there is no particular reason. Lack of selling pressure is enough for quant algorithms to start buying.

Well, let's move to China dream and look at what State Council has directed now. According to Citigroup Global Markets:
The State Council decided yesterday that it would remove certain stimulus policies to curb property speculation, while extending others that are aimed to promote consumption and ease pressures on small enterprises.

Still within the scope of gradual exit – These changes could help to limit property price increases, though unlikely to cause major correction, as credit and liquidity remain ample. Investors should feel relieved that harsher tightening measures have not yet emerged, while authorities are conducting policy to curb speculation and asset bubble. Some highlights below.

Reduce property speculation – Business operating taxes to be reinstated for transactions of property owned for less than 5 years. This is increased from the 2 year limit set at the end of 2008 to stimulate the property market, before which, the rule was also 5 years. The levy is 5.5% of total appraised value for properties owned less than 5 years and do not qualify for normal living space upgrading. This measure is well expected by markets, but could still markedly reduce sales volume of existing homes after taking effect next month and stabilize prices. Other property stimulus policies, such as interest rate discounts, are not affected by this decision.

Continue rural consumption stimulus – “Electronics go rural” program to
increase maximum prices of covered products, improve subsidy procedures, and allow local governments to include one additional product according to local demand. “Automobiles go rural” program extended to end of 2010 (January 2013 for motorcycles). Subsidies on farming capital equipment purchases would also continue, with some expansion.

Home electronics replacement program – would expand after the testing phase ends in May 2010. Promote energy efficient products, including expanding subsidies for autos and lighting equipment.

Partially remove tax cut for purchasing low emission passenger vehicles – For passenger vehicles with engines of 1.6 liters or below, the sales tax will be 7.5% through end of 2010, up from the 5% rate used in 2009 as a stimulus policy, but still below the original rate of 10%. The top subsidy for replacing old vehicles with qualified new more efficient vehicles is raised to a range of RMB5000-18000.

Ease social security payment pressures of enterprises – Allow deferred payment
of social security levies by struggling enterprises, reduce some rates, extend subsidies by one year for employers of job losers and freelancers. This is aimed to help small enterprises facing difficulties fulfilling social security contributions.
On the American soil Citi's view is a consensus:
Nonetheless, the interaction of improved financial conditions, reviving final demand and diminishing layoff activity may represent early signs that recovery is nearing a self-sustaining phase. Initial jobless claims are closing in on readings consistent with renewed growth in payrolls.

Barring financial setbacks or an unlikely further decline in inflation forecasts, policymakers’ appetite for extreme accommodation may wear thin as recovery proceeds. Continued growth, with improving unemployment and financial conditions that signal a continuation of these trends, would likely prompt initial moves to a slightly less accommodative stance later next year.
Weekly setbacks are not enough to derail from consensus view, and serves well for weaker USD and carry phantasms, despite all the doom and gloom from global periphery (that can be ignored?). Bank of America shows intrinsic strength, and Ken is killing me softly, as I was, obviously, wrong then ... but I am just not giving up and remain distant from bank equity orgy.

But wait, Larry Kantor, the head of research at Barclays Capital, writes in the foreword to their "Global Outlook" today:
All good things come to an end, and this unusually friendly environment for financial assets will too, probably in the first half of 2010. Ironically, the signal could well be a confirmation of above-trend economic growth in the US – the last shoe to drop in the global recovery story. We believe – contrary to the consensus – that the US economy has shifted to a 4-5% GDP range for this quarter and next, and that the labor market will generate job growth and establish a peak in the unemployment rate by the end of the first quarter. Such a development would likely generate concerns that the Fed will soon begin to remove its extraordinarily accommodative stance. History suggests that this would interrupt the steady rise in asset prices and produce a market correction. We look for the biggest impacts to be on money market rates (up), the dollar (up) and gold prices (down). That said, any sign of change in the enormously supportive environment is likely to trigger a broad-based correction (just as the lift to asset prices has been broad based), and the equity and credit markets will not be immune. But we do not see the onset of Fed tightening as triggering a bear market in either sector. Valuations are not extreme, and it will be a long time before Fed policy is even remotely restrictive.
Interestingly, but those who dig deeper themselves, cannot see "the mother of all inventory recoveries" just yet, despite nice headline yesterday ...

A bit scared souls may look at Danish genetic bulls turning defensive. Surprised?

Well, the melt up is still in cards (despite the break-down of crude oil?) and a look at almost 170 pages of Asian optimism will release a fair amount of dopamine, even to quant algorithms! GEMaRI may be of some help for those who ever thought about the meaning of the word like "risk"! Keep the eyes on key levels!

Wednesday, December 09, 2009

A Lot Of Bearish Noise That Still Needs Price Confirmation

In addition to the woes from yesterday, when the market's focus on credits of Dubai and Greece were joined with industrial production alerts from Germany, today Japan discloses its miss. But wait for that a second.

Still yesterday, BNP Paribas commented on European manufacturing:
Overall, despite the recent upward trend, output is still well below its levels prior to the crisis (Chart 3, see below). This is one of the reasons why we remain cautious on the recovery and believe the policy rates in most advanced economies will stay low for a longer time than what the market is currently pricing in.
Click on chart to enlarge, courtesy of BNP Paribas.

Today analysts at Societe Generale go further as they write the title of daily economics publication:
European growth may stall as fiscal stimulus wanes
and expand on it as follows:
One of the key themes of our recent ‘Global Outlook’ was the likelihood of a growing divergence in the growth in the US and the euro area. That was supposed to be a theme for 2010, but this week’s manufacturing data out of Germany suggest the divergence may be more immediate. Increasingly, it looks as if much of the earlier than expected recovery in the euro area was almost entirely down to the impact of fiscal stimulus. Car incentives, in particular, have been very effective at restarting manufacturing demand.
Click on chart to enlarge, courtesy of Societe Generale.

Well, I noted the trick of global manufacturing in September, but it was more than obvious in October. However, the US consumer is probably rolling over, as I already noted last Friday. Jamie Dimon, the CEO of JPMorgan Chase, was neither optimistic about the bank reserves, nor consumer credit too. I was curious also looking at the chart of JPMorgan's stock price. Technical deterioration continues, but rally is not over just yet ... however, it may get really nasty, also due to fundamental reasons, and not only due to loss of momentum.

Now, we are back to the Japanese story, as they revised the initial estimate of real GDP growth in 3rd quarter only more than 3 times lower. More than 3 times miss ... on investments and inventory. BNP Paribas has more details for you.

Well, but the reversal of fortune is not yet confirmed in my eyes. What I am waiting for? First of all, I am still ready for an exhaustive bull's leg higher in risk markets, but positioned with defensive tilt. On the defensive side, I wait for new reaction lows below November levels in:

EUR/USD currency exchange rate should move below 1.46
WTI Light Crude Oil below 72 USD
S&P500 moves below 1084
US 10 year Treasury Note yield below 3.20%

On the European side of the pond the conditions appear somewhat more fragile at the moment ... and some positives (Dow Jones Transports, Korea ... ) are visible elsewhere.

Tuesday, December 08, 2009

Oktoberfest's Inventory Payback?

Oktoberfest hangover? Germany makes quite poor in October, as industrial production falls 1.8% month-on-month unexpectedly. Let's get some bearish sense, as James Nixon at Societe Generale comments today:
Sharp declines in both capital goods (down 3.5% mom) and consumer goods (down 1.9% mom) were largely responsible for the fall and the suspicion has to be that, now the auto incentives have finished, the growth momentum is beginning to wane. October's decline is the first fall in three months and the largest fall since April. It is particularly dispiriting to see the growth momentum beginning to stall at a time when industrial production is still some 17% below its peak reached in February 2008 and down 12.4% yoy.
Nice recovering? For a broader insight the comment from BNP Paribas is here.

Add to this "Greek mythology" with downgrade to BBB+ by Fitch, mix it with Dubai's CuraƧao, stir it, and markets get offered with X-mas discounts today ...