Friday, April 30, 2010

Ready To Pay Liquidity Premium?

Today was unusual in the context of recent months, so we should ask ourselves about liquidity premium. Click on chart to enlarge, courtesy of Barclays.

SOXX broke the neck today, but still standing on own legs ...

Thursday, April 29, 2010

Directors Of European Business Services Cannot Get That Recovery?

The equity analysts of European business services at Nomura have got the chart with following bullet points, my emphasis:
- Net buyers: YTD there has been no real director buying. USG has bucked the trend with US$24m of net purchases.
- Net sellers: Despite ample evidence of improving economies, our sector has seen broad-based and significant directors’ net sales. Adecco’s Jacobs family is now a just below 20% shareholder, but retains large structured product exposure.
Click on chart to enlarge, courtesy of Nomura.

The comrades across the pond cannot get it either?

Wednesday, April 28, 2010

Sweet Spot Of Fed Funds To Stay Exceptionally Low For Extended Period

While FOMC press release cheers bulls with the sweet spot and Goldilocks expectations, let's look at the latest message by the super-bull on the Street. Although guys at Bespoke Investment Group ranked Binky Chadha of Deutsche Bank only second after UBS riders yesterday, Binky did not give up and went on to upgrade his year-end S&P500 target to 1375, just ahead of UBS riders.

This is how Binky and team summarized their view yesterday, among other things:

Limited forward upgrades on beats suggest upgrades/surprises to come

Forward estimates moved up on the Q1 beats, but only modestly. The bottom-up consensus is thus treating a major proportion of the beat as temporary. While this may be reasonable on the face of it, this is exactly what happened in the prior four quarters with each subsequent reporting season then delivering a sizable upside surprise. We expect positive earnings momentum to thus continue.

Prudent on margins but we see the risks as being to the upside

S&P 500 operating EPS margins have risen significantly from their lows following the collapse of sales in the aftermath of Lehman. First, corporates aggressively cut costs. Then, beginning in H2 2009, top-line growth kicked in, providing operating leverage. Ex-Financials margins thus have some, but limited, upside to their last cyclical peak (50 bps from 8.25% to 8.75%). Our forecasts maintain the last cyclical peak in margins as a ceiling. But various cyclical drivers suggest significant further upside:

(i) cautious hiring in the face of top-line growth should see solid productivity gains; (ii) high unemployment should restrain wage costs; (iii) low but rising capacity utilization will provide operating leverage; (iv) these factors should be offset only partly by rising raw material costs. The biggest upside risk to margins in our view though comes from looking across cycles: cyclical peaks in margins have been successively higher as corporates make some of their cost savings over the cycle permanent. A linear extrapolation across past cyclical peaks implies significantly more upside for Ex-Financials margins in this cycle (150 bps from 8.25% to 9.75%).

Conservative on top line but we see the risks as also being to the upside

The decline in top line in the Great Recession has been the steepest in at least 30 years, with sales falling 25% from their peak and 15% below historical trend levels. Our forecast for top line uses as a proxy DB's forecast for US nominal GDP growth (5½% through 2011); we see growth of foreign sales in local currencies as continuing to decelerate; and the dollar as rising modestly.

On net this implies average top line growth of about 6% at an annual rate through 2011. This would leave sales significantly below trend and well below their previous peak levels by the end of 2011. Like the prospects for margins, we believe that the risks for a recovery in the top line are also tilted to the upside relative to our forecasts for several reasons:

(i) the traditional top line macro multiplier associated with a turn in the labor market is just beginning (jobs and income growth leads spending which feeds back to more corporate hiring and spending); (ii) the pace of consumer durables spending to date suggests plenty of pent up demand from the crisis; (iii) corporate capex guidance has continued to be positive.

This is a nice exhibit on momentum in Krugman's sales pitch of US banking system. Click on chart, courtesy of Deutsche Bank.
Only thing that bears should be afraid is upside risk? Simple linear extrapolation is sophisticated tool ... Indeed, What Do Earnings Tell Us? James Bianco was voicing yesterday, among other things:

... we believe the percentage of companies that beat expectations is a meaningless statistic. The game is designed for this to happen, even when earnings are collapsing.

This is also a great reading on earnings expectations, not to lose a balance ...

Tuesday, April 27, 2010

Quant Confusion

US equity quantitative strategists at Barclays Capital wrote yester-night:

As the market continues to rally onwards, traditional methods for investing continue to struggle to add value. Quality investing continues to underperform as a strategy, as companies with lower quality of management, more leveraged balance sheets and less repeatable earnings continue to outperform their counterparts. Additionally, companies with weaker future earnings estimates and worse analyst recommendations are also outperforming. Valuation appears to be largely irrelevant to investors. This trend in place since March 2009 has yet to show any signs of breaking.
Does the following sound amazing?:

Where is the model failing? Well, to put it succinctly: everywhere. Our Quality theme – the strategy of buying high Quality stocks and selling low Quality stocks – is down 45 bps for the month. Our Sentiment theme – the strategy of buying stocks with strong investor dynamics and selling those with poor investment dynamics – is down 125 basis points for month. And our Valuation theme – the strategy of buying cheap stocks and selling expensive stocks – is basically flat, down a mild 15 bps for the month.
Click on chart to enlarge, courtesy of Barclays Capital.

Well, they had false signals last year too. But how is the statistical arbitrage doing now?

Poor Standards Junked Greece, Introduces dos Santos Of Portugal

As per Reuters reporting today:

ATHENS/BERLIN, April 27 (Reuters) - Rating agency Standard and Poor's slashed Greek debt to junk status on Tuesday and also downgraded Portugal, as investors worried political pressures could block a multi-billion euro bailout of Greece.

Markets in Europe and the United States tumbled in reaction to signs that the Greek debt crisis was spreading to other highly indebted states on the periphery of the euro zone.
S&P cut its rating of Greek government debt by a full three notches to BB-plus, the first level of speculative status. The outlook is negative, meaning the agency could downgrade Greece again.
For Portugal, S&P cut its rating by two notches to A-minus, saying Portuguese finances were structurally weak and the economy uncompetitive. Lisbon needs to do more than it currently plans to stabilise its finances, S&P said.

Certain spreads of benchmark bonds in Eurozone are blowing out versus Germany, click on chart to enlarge, 10 year spreads of Greece, Ireland, Portugal and Spain versus Germany.

Here you can read more In the event of Greek default ... Introducing Fernando Teixeira dos Santos, Portugal’s Finmin.

Interestingly, but Trim Deficit or Economy Will Be Hurt by Ben Bernanke came via the newswires actually before the poor standards action hit the Europe. Did he read also this on drug prescriptions?

Citi's Buiter Prescribes Anti-Ponzi-ness Drugs

Willem Buiter, the chief economist of Citigroup, has a long note on Sovereign Debt Problems in Advanced Industrial Countries, and summarizes his view as follows:
- Most advanced industrial countries in worst ever peacetime fiscal shape
- Sovereign default can become the least bad solution for a country
- Sovereign default risk outside Greece low but non-negligible
- Most countries will eventually choose a ‘fiscal pain’ solution
- Debt restructuring, possibly with haircuts, likely to be part of the ‘fiscal pain’ package
- Inflationary solution to public debt burden highly unlikely in Europe, unlikely in US
- Euro Area needs mutual fiscal insurance mechanism to survive and prosper
- Restoring fiscal balance will be a drag on growth for years to come for advanced industrial countries
Click on chart to enlarge, courtesy of Citigroup Global Markets.
As for Ponzi scheme in the US, the prescription is straight forward:
For the US, with a structural primary deficit in 2009 of 7.3 percent of GDP, the arithmetic of solvency indicates the need for at least 7.3 percent of GDP worth of permanent fiscal tightening (not counting the long-term fiscal tightening required to accommodate future age-related public spending ambitions).
As to inflating away the real burden of debt:
The qualification ‘if the inflation was unexpected’ is important. The numerical decomposition of the change in the public debt-to-GDP ratio into its three components (and the growth-inflation interaction term) does not provide enough information to answer the counterfactual question: would a higher rate of inflation have lowered the public debt-to-GDP ratio more or faster? Only an unanticipated increase in the inflation rate reduces the real burden of servicing the debt over its entire lifetime. An anticipated increase in the rate of inflation raises both the nominal coupon payments and the nominal discount rates proportionally, leaving their real present discounted value unchanged.

Monday, April 26, 2010

Does Krugman Make A Sales Pitch Of US Banking System?

Equities of US Financials are among the TOP 3 best performing sectors so far this year, but Nobelist Paul Krugman had a reason to attack this sector last Friday. Although I suspect the political drive here, Paul Krugman wrote:

That, I’d argue, is what the financial industry has been doing for a long time: borrowing by issuing supposedly safe assets, investing the proceeds in assets that don’t really yield more, but seem to.

...What has happened instead was that the very growth of the financial sector led to an upward trend in asset prices that masked the real risks — the way the housing bubble masked the true risks of subprime lending is a key example, but not unique. Sooner or later, however, the bubble would run out of room to expand, and the whole thing would collapse.

If this sounds Ponzi-ish, it should. Bob Shiller pointed out way back in his book “Irrational Exuberance” that a bubble is, in effect, a natural Ponzi scheme, which doesn’t actually require a deliberate act of fraud yet has the same effect.

Err, the first quoted paragraph rather smells fraud-ish, but you know - Gods work ? :) Profits are that make people, also on the Hill, to dance.

Here is another version of profit story, courtesy of Societe Generale. As classic economic book teaches about recessions, the development of oligopoly profit margins catches the eye. Another text-book case? Click on chart to enlarge.

Financial profit margins, that at the end of the day are zero-sum game for economy as a whole, are rising, and so are the corporate profits. So, a bigger share of national income is allocated to bankers, corporate sector and shareholders. It seems that labor compensation as a share of national income in US is about to be decreasing? Err, forget that household de-leveraging? They do not need to save in Ponzi scheme ... as Russell Napier was writing:
When it comes to economics, youth and inexperience, key drivers of consumption, are often more rewarding than the age and guile that brings conservatism and savings.
Can the U.S. grow so fast to compensate the pace of this decrease in labor share? Or, will it be a permanent state of bailouts?

Well, forget it! How one could ever be saving in a financial Ponzi scheme? :)

Friday, April 23, 2010

Playing The Fire With Jeremy Grantham This Weekend

Always recommended reading of latest thoughts by Jeremy Grantham. One quote to spice it up:
...We all know that there is plenty that could go wrong. Some combinations would be enough to break the market but still leave the economy limping along. This would be far better than having the market rise through the fall of next year by, say, another 30% to40%, along with risk trades similarly flourishing and then all breaking. The possibilities of this happening seem nerve-wrackingly high. The developed world’s financial and economic structure, already none too impressive, would simply buckle at the knees.

Euro Not Reacting To Recent Widening In Greek Bonds?

This chart comes from Nomura today, and should be seen in conjunction with the previous post.

Click on chart to enlarge, courtesy of Nomura.

Euro Is A Political Project?

This "quote of the day" comes from GaveKal today, whereby I like to emphasize the parallels with Japan:
...In Japan you only ever had three pools of power (MoF, BoJ and LDP) that needed to coordinate to draw an effective response to the crisis. However, in Europe, any agreement is the result of pain-staking compromise of far more players, which takes months, if not years, to push through. With that in mind, the long-standing consensus opinion that "because the Euro is a political project, a political solution will be found" may soon be proved to be unduly optimistic...

Let's see ...

Thursday, April 22, 2010

Neck-breaking Bulls Of "The China 5" And Eurozone

Almost everyone is talking about the strong bull market in equities and broad based economic recovery? Well, the other day I was running through the Eurozone stock screens, and noticed that Eurozone benchmarks like EuroStoxx and EuroStoxx 50 have barely moved in the last 6 months. Click on chart to enlarge.

Well, assuming where the epicenter of current sovereign debt crisis is, one may say it is no wonder. Then, I decided to look at roaring China and "The China 5". China itself, and its neighbouring financial centre of Hong Kong are actually down from late October 2009. The rest of "The China 5" also have not done very much ... Click on chart to enlarge.

However, there are bull markets around. Bull market gurus would suggest that this is bullish consolidation before the next leg up. Like the Fisher Investments suggest:
...Aside from a few minor setbacks, it has continued its surge from the bottom. We expect more stories will surface, and a few of those will cause the bull to buck. Short and sharp, corrections are to be expected, but not dodged. Young bull markets eat such fire and brimstone for breakfast.
Indeed, is it very likely that Goldman's Big Swinging Dicks have already spoiled the exhausting equity party?

Wednesday, April 21, 2010

China Pulls The Top 5 Import Horses

The economists at Societe Generale have nicknamed the capital exporters of Asia (Japan, South Korea and Taiwan) and world's bulk commodity exporters (Brazil and Australia) "The China 5". Today they write:
"The China 5" remains one of key thematic calls for 2010 and at this time we alert readers that China is reasserting its influence on these 5 lucky economies, not fading it.

Click on chart to enlarge, courtesy of Societe Generale.

Tough Love With Bonds

Somebody is loving the US mutual funds that invest in bonds, but is that indicative for prices? As you can see, the US equities can rise without positive flows via US mutual funds.

Click on chart to enlarge, courtesy of Nomura.

Cannot stop wondering about those assholes mentioning the "stockpiles of cash on side-lines" ...

Tuesday, April 20, 2010

Shanghai Copper Pipeline

While the rest of world enjoys the sovereign risk, Gods of Wall Street, volcano ashes etc. ... I made a step back and looked at Shanghai copper pipeline ... with Shanghai stocks here and copper here.

The break of 50 day moving average is a BUY call for Gods on Wall Street for the stocks ...

Standard Chartered in its Commodity Outlook writes today:
Meanwhile, China’s unwrought copper and copper product imports also rose 22%y/y to a record 456.2kt in March, implying around 365kt of refined copper imports.We believe that domestic copper inventory levels, which are still rising at Shanghai Futures Exchange warehouses (Chart 2), and potentially huge unreported stocks held by trading firms and consumers (possibly 0.5-1.0mt), are not a cause for concern, given demand forecasts. As we expect China’s refined copper consumption to rise by 16% y/y to 6.85mt in 2010, the highest level in history,these inventories are likely to be easily absorbed by mid-Q3, even on the highest estimate of undisclosed stocks. Following our recent visits to consumers along the business chain – from semi producers, cable and wire makers to home appliance manufacturers – incoming orders have significantly increased m/m. Capacity utilisation has improved notably, particularly in the home appliance sector.

Click on charts to enlarge, courtesy of Standard Chartered.

So, you know that expectations are not only on Wall Street ...

Monday, April 19, 2010

Curve Ball Of A Volcano

Jim Reid, the strategist at Deutsche Bank, writes today:
If you can ignore Sovereign and regulatory risk then these really are the best of times. This week will likely show the extremes of these push/pull factors as strong earnings and data will be likely be offset by renewed financial regulatory concern and the EU Sovereign crisis perhaps coming closer to a head. In addition to all this there is now the added curve ball of a volcano, the impact of which is surely starting to become a macro event, especially if further eruptions follow.
Who cares about further eruptions?

Well, for the historic background, The Journal Of Nutrition on its website writes:
... On the one hand, harvests were low in many parts of Europe. From 1813 through 1815 harvests were generally lower than expected in many countries, largely because of a strong El Niño "warm event" which caused droughts in some regions and floods in others... However, 1816 was truly calamitous for most of the continent—a year "without summer" in most high latitude temperate zones as a result of volcanic dust blanketing high altitudes after a major volcanic eruption in 1815 in Indonesia ...
Then you travel to the website of Icelandic Met Office, and look at Q&A on the eruption in Eyjafjallajökull:

How long will the eruption last?
The eruption continues. It is not possible to predict the duration of the eruption. Previous known eruptions from this volcano were in the years 1612, believed to have lasted only three days, and 1821-3, when it erupted on and off for over a

What kind of an eruption is it?
The eruption is an explosive eruption beneath a glacier. The ash is fluorine rich, of intermediate content and the particles are very fine.

Is the ash dangerous?
Yes, the fluorine is dangerous to livestock. The quantity is approximately 25-35 mg/kg according to chemical analysis carried out by the Institute of Earth Sciences, University of Iceland. The fine ash can also effect human health, for example the respiratory system.

Put it all together, and using the words of Jim Reid, one should:
Expect analysts to start to come out with pieces on the impact of this increasingly disruptive eruption.
Yes, and it spreads, as Volcanic Ash Drifts Toward North America ...

Friday, April 16, 2010

No Changes? More Risk ...

Without comment ... front page GS parade.


Goldman's Big Swinging Dicks Lost Orientation?

I prefer to focus on things like WLI Growth Eases to 36-Week Low, however, this Friday ...

Securities and Exchange Commission of the U.S. decided to go against the Gods of Wall Street, whereby the Commission (SEC) alleges against the Goldman, Sachs & Co.

Hmmm, it looks like the SEC has the case where Goldman lost its orientation?

Picture courtesy of

Here are diverse links in random order to paint the picture:

Goldman’s Abacus lies
Goldman Defends Against SEC Charges
SEC Sues Goldman for Fraud
Blast from the Goldman Testimony Past: CDOs and Bad Brakes
Vampire squid alert: Goldman is clearly being singled out
Goldman Sachs Presents “The Producers” (Abacus 2007)
Goldman on Trial
Goldman Default Risk
Paulson: We Didn’t Pick RMBS in Goldman Abacus Trades
$1 Billion Turns Into $14.5 Billion

and the link to FT Alphaville Linkfest SEC/Goldman linkfest

I am not so sure, but it smells Crumbling resistance to financial reform

Well, Felix is parsing the new Goldman statement, and FT Alphaville says: ‘Goldman Sachs is disappointed…

I have been wrong often, and may be again, but it does not feel to me me we have done the bull run yet. Rather a prelude? Markets need a pause ... but for long? I would not chase the bid on Monday, if we move decisively below the today's lows.

Thursday, April 15, 2010

Reading Hoisington On Contradictory Fiscal Policy, Ricardo, Keynes And Friedman

As always, Hoisington delivers sharp insights into contemporary economic affairs, and contrary to prevailing mood sounds quite deflationary.

Also top ranked strategist Albert Edwards at Societe Generale was calling today for cyclical deflation, before accepting structural inflation take-off.

Ufff, get it right ....

Icelandic Volcano May Have An Impact On Agriculture?

As Reuters reports today:
(Reuters) - A huge cloud of ash from a volcano in Iceland turned the skies of northern Europe into a no-fly zone on Thursday ...

I went on volcano watch, thinking of impact on agriculture in Northern hemisphere, if this is going to continue for longer period ...

Picture taken April 14, 2010. Credit: REUTERS/Icelandic Coast Guard/Arni Saeberg/Handout

Citi's Fiscal Risk Index

Really nice chart, click on chart to enlarge, courtesy of Citigroup Global Markets.

Wednesday, April 14, 2010

Natixis Understands Stock Markets' Optimism, But Fears ...

Natixis has a short concluding note with excellent charts today:

The rise in stock markets in OECD countries has been strong in the first quarter of 2009. The markets are driven by:
− the industrial recovery, which, besides, largely results from the Chinese recovery;
− the end of capital flows to emerging countries, as this capital is being invested in OECD countries;
− the end of the adjustment of employment in the United States via the improvement in household confidence and the fall in risk aversion;
− the highly expansionary economic policies still in place;
− the improvement in company results.

However, the stock markets in OECD countries are in our opinion not valuing any of the risks:
− persistently sluggish growth in domestic demand in OECD countries;
− risk of a levy on incomes due to the rise in commodity prices (metals);
− lower global liquidity if emerging countries no longer have to accumulate official reserves to stabilise the dollar;
− restrictive fiscal policies in OECD countries or, on the other hand, rise in long-term interest rates.

These charts of metal consumption are quite interesting in regard to "China effect", click on charts to enlarge, courtesy of Natixis.

While some countries believe the "China effect" are their leading indicators, there is some food of thought for admirers of steep yield curves too. Meanwhile the Fed finally sees that "Overall economic activity increased somewhat ..." But the brave declaration of "The Consumer Is Back" may still need some proof of sustainability.

All in all, Big Six are Transporting broad based economic recovery in an exhausting manner, a sweet time for Bull Market Gurus.

After all, it looks like guys are indeed running out of cash, as broad based recovery is leaving defensive sectors in the red for the day, despite S&P500 staging a nice 1+% advance.

Tuesday, April 13, 2010

Merrill Sees Goldilocks Running Out Of Cash?

As an add-on to the Citi's survey I mentioned yesterday, Bank of America Merrill Lynch is out with monthly Global Fund Manager Survey today, and the conclusions are as follows:

The Full Goldilocks

The April FMS shows investor expectations are for robust growth (just 11% think growth slows), big profits and contained inflation…the full Goldilocks. In a super sign for structural bulls, investor belief in “above-trend” growth leaped. But short-term markets now vulnerable to growth disappointment and/or a jump in rates (consensus predicts 4.15% year-end for 10-year US Treasury yield).

No More Deleveraging Please

For the first time since December 2007 investors rank higher dividends and capital spending as higher priorities than balance sheet deleveraging, a sign the balance sheet recession has ended and a view consistent with equities outperforming corporate bonds.

No Cash = Correction Signal

Cash balances dropped to 3.5%. In 4 out of the past 5 occasions cash fell to 3.5% or below, equities corrected 7.1% in the following 4 weeks. As in January, asset allocators are once again very overweight equities (+52%), underweight bonds (-48%) and, in a rare admission, underweight cash too (-4%).

Banks Ain’t So Bad After All

The big underweight of global banks narrowed dramatically to -10%. April saw a pro-cyclical shift to materials (18%) and industrials (27%, highest since May '06) and away from utilities (-35%, lowest since May '06). Tech is still the big favourite.

Europe a No-Go Zone but the Yen Better Decline

Eurozone and UK remain no-go regions for asset allocators. More investors expect the yen to weaken than at any time since March 2002. So no surprise the Japan equity OW (+12%) reached its highest level since July 2007. Investors are overweight the US and Emerging Markets.

Pain Trades

Treasuries outperform Equities; Eurozone outperforms; Yen appreciates; defensives outperform cyclicals.

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

Of course, there are fund managers that have alternative views, but note bears are in short supply these days, like John Hussman notes this week:
In short, my impression is that investors are deluding themselves about the solvency of the banking system. People learned in the 1930's that when you don't require the reported value of assets to have a clear and tangible link to the value that the assets would have in liquidation, bad things happen. Yet this is what regulatory and accounting rules are allowing for the banking system at present. While I do believe that bank depositors are safe to the extent of FDIC guarantees, my impression is that the banking system is still quietly insolvent.

Add this bullish sentiment in options markets, and wait not long till the roof of your house crashes? Guys, please send those Priests of Goldilocks some real stuff, otherwise the dopamine may be not sufficient to maintain the placebo effect of self-fulfilling prophecy, errr, expectations! Or prepare yourself ... :)

Monday, April 12, 2010

Growing Optimism And Focus On Operating Expenses And Input Costs

Tobias Levkovich, the US equity strategist at Citigroup Global Markets, wrote on Friday:
Investors now expect further stock index appreciation. Almost 70% of the 100 respondents (comprised of hedge, mutual and pension fund professionals) now see the S&P 500 closing out 2010 between 1,150 and 1,300, with the weighted average outcome coming to 1,234, which is above our 1,175 expectation. Moreover, there is a slight majority (51%) who think that the market is more vulnerable to a 10%-20% rally versus a 10%-20% pullback from current levels. Most important, average cash levels have dropped to more than 6% of portfolio assets from 11% in January and 16% last July, yet greater than 60% of respondents plan to allocate more money into equities this year.
On the political side also some interesting expectations:
More than 90% of those polled foresee tax increases in 2011 yet only 45% expected the Republicans to win control of the House of Representatives in November’s midterm elections. More than half thought that the US budget deficit would not become an issue for equity markets in 2H10 despite government policy missteps being the most highlighted risk to equities. Additionally, almost 70% of respondents expected growing trade friction between the US and China.
Steven Wieting, the US economist at Citigroup Global Markets, writes this morning:

The now routine beats of analysts’ earnings estimates should continue in the 1Q period again, with our sitting S&P 500 estimate 6.4% ahead of bottom-up Street estimates. Positive surprises in several activity measures since our February estimate suggest upside risk. Management outlooks should be more optimistic.

While estimates have been rising into results, for most non-financial firms, they still show an EPS decline from 4Q 2009 that is roughly twice the seasonal norm.

The sharp, “snapback rate” of profits should slow soon. But profits should continue to grow rapidly relative to labor income, even as the latter begins to improve. Strong revenue growth and rising labor costs are a better combination for cyclical profit gains than weak revenue growth and falling labor costs.

Click on chart to enlarge, courtesy of Citigroup Global Markets.

So, we did touch the issue of rising labour costs couple of weeks ago. However, the US Equity strategists led by Barry Knapp at Baclays Capital, went much deeper with their analysis, and sound not too optimistic on Friday:
In conjunction with ... analyst earnings estimate revisions and their negative divergence from stock prices (net revisions are falling, while share prices are rising), we believe 1Q10 earnings season is unlikely to drive share prices higher. Also, margin expansion is unlikely to continue, due to increasing labor and commodity costs, and (while revenues could beat expectations) forward guidance is likely to be cautious as most companies, like the Fed staff and FOMC members, do not yet share our optimistic outlook for a typical cyclical recovery of the economy and the labor market.
Click on charts to enlarge, courtesy of Barclays Capital.

Interestingly, according to guys at Bespoke Investment Group on March 26, Barclays had a bit more bullish target for S&P500 than Citigroup (well, I checked and these targets are valid as I write), but now the language at Barclays is less bullish than Citigroup?

Further on, NBER had it difficult today to announce the end of US recession ...

Friday, April 09, 2010

Late Nite Note On Averages And Extremes

Banking analysts at Societe Generale wrote last night, my emphasis in the last sentence:

The myth of the “average” LTV. We believe the average LTV is a largely useless measure when estimating potential losses. A simple example shows that, despite a low average LTV, banks can still lose money. It is not the average that determines losses but the extremes.
Then, Kenneth Rogoff had an article at Financial Times yesterday, where he wrote:

In China today, the real problem is that no one seems to have very good data on how debt is distributed, much less an understanding of the web of implicit and explicit guarantees underlying it. But this is hardly a problem unique to China. Even as published official government debt soars, huge off-balance-sheet guarantees and borrowings remain hidden for political expedience around the world.

So, focus on extremes, and forget averages ...

Thursday, April 08, 2010

Are Asian Equities Cheap?

This comes from latest "Asia Maxima" by CLSA Asia-Pacific Markets, click to enlarge.

Well, but Christopher Wood argues for the valuation premium:

The reason to expect a growing valuation premium both relative to history and relative to developed stock markets in both America and Europe is simply that such a valuation differential makes increasing fundamental sense. This is because of the continuing resilience shown by Asia’s largest economies, such as China, India and Indonesia. CLSA’s economics team is forecasting real GDP growth of 10%, 8.8% and 7% respectively for these three economies in 2010. It also remains self-evident that Asia is not vulnerable to the same systemic risks that are so in evidence in America and other leveraged economies in Europe. This reflects the Asian region’s continuing lack of leverage, be it at the government, corporate or consumer levels. Thus, the net debt-to-equity ratio of CLSA’s Asia ex-Japan universe is only 20%.
But he also insists:

Clearly, the Western world’s policy ‘solution’ to the credit crisis was in the main only to add public-sector debt on top of private-sector debt. This was done not only by massive formal government borrowing but also by an increasingly promiscuous use of government guarantees, most particularly guarantees of bonds issued by banks. This means, as long argued here, that the next systemic crisis will most likely be a crisis of public-sector debt when investors lose confidence in Western government guarantees.

Based On Corporate Feedback The Outlook For Orders Remains Cloudy At Best?

Economists at Standard Chartered look at global economy today, and note:
Leading indicators and commodity prices are pointing to a sturdy recovery, but based on corporate feedback, the outlook for orders remains cloudy at best

Hmmm... While looking at Asian exports, the tone does not get much more optimistic:
Despite these positive indicators, there are still concerns on the horizon. As noted above, the recovery in US and European demand is still at a nascent stage. An expected slowdown in the recovery in the West in H2-2010 means that Western buyers are still taking a conservative approach to orders, buying for the near term and avoiding committing to orders beyond two to three months ahead. China’s commodity import boom may also fizzle in the months ahead due to high inventory and the return of domestic supply as local mines reopen after the winter. Prospects of stronger Asian exchange rates pose another challenge to Asian exporters. Regardless of China-US tensions over the USD-CNY exchange rate, Asian currencies are expected to appreciate on the back of capital inflows, and this could slow the recovery in Asian exports. Many South East Asian exporters face intense competition from China, both in Western and Asian markets. This is especially true of Thailand and Malaysia, whose manufacturing industries have considerable overlap with China’s. This competition is likely to put even more pressure on exporters in Asia ex-China during the recovery phase.

Click on charts to enlarge, courtesy of Standard Chartered.

As to exchange rate fallacy, and clear US policy, the Nobelist international trade economist Paul Krugman had to do an explaining still yesterday. Obviously, the US has exclusive rights for currency debasement, BUT still the European competition from front-runners like Latvia, Greece may be fierce ...

Just to end up on more optimistic note, but though not for Western folks in particular, as economists at Standard Chartered are musing today:

Currently, the West – particularly the US and the UK – still has the institutions and infrastructure to foster creative success. The US and the UK currently dominate the world’s top universities. However, that is changing, with China in particular catching up in engineering and other technical disciplines. On patents, Japan and the US still lead, but China is catching up rapidly. The challenge for the US and UK will be to continue to – or, in the case of the UK (judging from the patent statistics), start to – leverage research and intellectual prowess into creative products or services. It is still unclear, however, whether some Western governments ‘get it’. The current UK government is cutting spending on vital infrastructure and attacking the elite education that most often produces the creative successes, while skewing taxes against success. Canada, on the other hand, is cutting taxes while channelling more towards its most successful universities. China’s educational expenditure continues to rise as a proportion of a rapidly growing GDP.

Click on charts to enlarge, courtesy of Standard Chartered.

Yea, Chinese really "appreciate" things like patents, copyrights etc., but Austrian economists have their thoughts too ...

Global Crude Oil Consumption

Thanks to analysts at Raymond James, click on chart to enlarge.

Note the "strength" in OECD?

Wednesday, April 07, 2010

Some Facts & Thoughts On US Household Deleveraging

The economists at Societe Generale are addressing some of my recent questions. Click on charts to enlarge, courtesy of Societe Generale.

Depending on economic religion, one should consider what the rise in interest rates mean for economy.
It is not like consumer is giving up its spending habits completely, just the weakest are dropping off the wagon of lust.

Well, but the final thoughts by economists at Societe Generale are opening my wide shut eyes:
While the savings rate is still below long-term equilibrium and will eventually have to rise toward 7%, there are many ways of getting there: lower consumption, higher income, lower effective tax rates or lower interest payments. In a best-case scenario, we will get there via income growth, which would allow consumption to grow modestly at the same time (with income being subsidized by exports). This scenario is implicitly embedded in the current consensus thinking, and fully supported by current policy efforts.

Global Car Production In Pictures

Nordea Markets have a couple of simply nice charts on global car industry, while focusing on Swedish automotive industry, with few bullet points:
• Emerging markets now account for nearly half of global car production (measured in units produced, not sales value) and should be a strong growth driver in 2010E, more than compensating for the “hangover” from expired scrapping incentives in Europe.
• Reduced under-absorption of fixed costs, as scrapping incentives during 2009 reduced inventories for OEMs. Inventories are still below normal levels and we expect further rebuilding during H1 2010E, which, combined with higher demand for new cars, should lead to much improved capacity utilisation in 2010E.
• Heavy cost cutting ... at an early stage should yield strong positive operating leverage from a quicker and stronger than expected recovery for car production this year.
• A positive mix boost to EBIT from an uptick in demand from premium and large cars, for which sales were hurt in 2009 by scrapping incentives favouring smaller and more fuel-efficient cars.

Click on charts to enlarge, courtesy of Nordea Markets.

So, all in all worst is over?

Tuesday, April 06, 2010

Sweet Spot Recovery Of Industrial Production In Developed Economies?

Industrial production in Japan is indeed staging a nice V-shaped recovery so far, but they have adapted to Chinese religion. There is also a question of sustainability, but should be a short term worry? US and EU show a less impressive come-back, but equity markets will lead ... and there is not much of industrial production anyway?

Click on chart to enlarge, courtesy of Nomura.

Thursday, April 01, 2010

About The Time To Buy Self Sustaining Recovery?

After a brief set-back in China's PMI, we are surging again ... Eurozone sees strong increase in manufacturing PMI despite all PIIGS concerns, the US personal consumption is moving up! No wonder that J.P.Morgan suggests (H/T The Pragmatic Capitalist) that

"the global economy is making an important transition to self sustaining growth".

Self sustaining growth? This is what I have been missing since September 2009. Unfortunately to me, the cyclical cheer is clouded by structural gloom from the perspective of long term investing. Crowd Sentiment at extreme optimism (H/T Trader's Narrative) and other things I have learned in the past years keep me cautious near term ... and bearish longer term?

The 2nd quarter still looks OK to me, with an estimated adoration of equities still in cards, but the 2H 2010 makes me worry ... Climbing the wall of worry? Here is more of micro level in oil, and do not forget Merton ...

Click on chart to enlarge, courtesy of, annotations with my guesstimates.

Click on chart to enlarge, courtesy of Woody Dorsey, Behavioural Trading: Methods for Measuring Investor Confidence, Expectations, and Market Trends.

Is the long term picture telling me we are about the "Hope" that is followed by "Recognition"? But do not look at corporate profits, the problem is elsewhere ...
For the upcoming Easter entertainment of 1st April I suggest to read Lloyd Blankfein: Time Man Of The Year at The Baseline Scenario.