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!