Tuesday, May 31, 2011

Paper Money - One Of China's Historic Innovations

I was reading a special report by Mizuho Securities Asia today, written by Alexandra Harney and titled "Can China Innovate?". I think for many investors, also those deep in the Austrian school, it will be a refreshing reminder, among other things, that "paper money" was introduced by China, at least so is it accounted for...

Click on picture to enlarge, courtesy of Mizuho, my annotation.

Monday, May 30, 2011

Chinese Imports Already Show Signs Of A Slowdown

I am entertaining myself with the chart below that comes from economists at Barclays Capital. We have had musings about the importance of Chinese growth story, also as a leading indicator for the global manufacturing cycle. Obviously, Chinese imports play here some role.

Click on chart to enlarge, courtesy of Barclays Capital.

The economists at Barclays Capital wrote on Friday:

... there are already signs of a slowdown in Chinese imports from the US and Europe.

Thursday, May 26, 2011

BNP Paribas: US Bank Credit Has Underperformed Europe's

Indeed, interesting, brought to you by credit strategists at BNP Paribas today, my emphasis in bold and underlined:

It is interesting to note that while European bank paper (Senior and LT2) has widened on the back of sovereign concerns, US bank paper (Senior and LT2) has widened more over the last month due to housing double-dip, legal issues and relatively weaker economic environment. This US bank underperformance stresses two key points, namely that the GIP sovereign crisis is increasingly being seen as idiosyncratic and manageable while the US economic slowdown if sustained is likely to become a bigger issue in June.

Click on charts to enlarge, courtesy of BNP Paribas.

Well, let's see!

Wednesday, May 25, 2011

Profit Margins Again

It just happens, as a follow-up on the post from yesterday, also the economists at BCA Research made their conclusions on the corporate profit margins yesterday. So, here some excerpts to consider:

Ultimately, the health of the corporate sector depends on the financial health of its customers. Thus, the divergence between rising profits and weak growth in real consumer incomes will have to change. Historically, the growth in real profits has been correlated closely with that of real consumer spending, and the wide gap in the current cycle represents a major aberration.

I have discussed the real consumer spending and especially the incomes that should drive that spending here earlier. So, here are the mains points about margins, according to BCA Research:

To conclude, the corporate sector has been enjoying a very favorable set of circumstances that will not persist. This does not mean that profit margins are about to plunge. Companies will remain intensely focused on cost control and boosting efficiency, and the weak dollar will continue to provide support to overseas earnings. However, it is hard to see margins moving higher from current levels in the coming year.

Margins and thus profits will face a severe challenge during the next recession. The ability to repeat this cycle’s aggressive cost cutting will be minimal, and pricing power will be under pressure. If we are going to have a mean reversion of margins, then that is when it will occur. A severe margin squeeze does not seem likely while the economy is still expanding.

All in all, not bad? Just imagine how much money has been thrown at non-existing problems. Save that challenge for next recession, while at least couple of bears were growling also today ...

Tuesday, May 24, 2011

Margins & Profit Shares At New All-Time Highs

Right, this is about our expectations, apparently. Gerard Minack at Morgan Stanley writes today:

The only way equities look cheap on a through-the-cycle earnings basis is if earnings are heading higher and stay higher (through the cycle). It so happens that the sell-side consensus expects this. It is forecasting 30% EPS growth over the next two years for developed world equities. This implies margins and profit shares at significant new all-time highs.

Click on chart to enlarge, courtesy of Morgan Stanley.

Well, at the end he made the conclusion as follows:

But the bigger-picture point is that equities have priced in a higher structural range for earnings. Equities may be cheap if earnings move into a new, even higher range. Otherwise, they appear expensive or very expensive.
Unusually bearish for sell-side consensus?

Thursday, May 19, 2011

Still Some Adjustments In Labor Legacy Costs To Expect

Charts below are self-explanatory, while housing is non-productive and legacy cost of domestic labor. I marked some countries that I believe deserve attention.

Click on charts to enlarge, courtesy of Goldman Sachs, my annotations in red and yellow.

More than couple of those "marked" countries are enjoying record high housing prices in nominal, real and relative terms now.

Wednesday, May 18, 2011

Japanese Candlestick Masters

Once again, it is time to look at latest masterpieces by Japanese candlestick masters. Recent track record is not that bad ...

Click on chart to enlarge, courtesy of Nomura.

Heh, they "do not expect US equities to embark on a renewed uptrend before summer" ...

Tuesday, May 17, 2011

European Debt Sinners

While Europeans are not the only sinners, the majority of brains with money are focused on EU sovereign debt issues. Economists at Erste Bank delivered excellent reminders today - who is who in this game?

Click on charts to enlarge, courtesy of Erste Bank.

Merrill's Fund Managers Are Fading Or Risking

We saw Reluctant Equity Bulls last month, this month key messages from BofA Merrill Lynch Global Fund Manager Survey are as follows:

The potential summer surprises

The May FMS sees investors questioning global growth (in a re-run of summer 2010) but enjoying ample liquidity that keeps risk appetite high. A stand-off has ensued with little change in allocation across asset classes but some switching within asset classes, typified by defensive rotation within equities. The summer surprises are either growth to the upside or liquidity disappointing as QE2 ends.

Growth expectations are falling
Only a net 10% of investors expect stronger global economic growth in the next 12m, down from 58% in Feb. This is easing inflation concerns, albeit marginally, with a net 61% seeing higher inflation down from 75% in March.
Risk appetite resilient
Three-quarters of the panel expect no Fed rate rise before 2012 and so risk appetite remains firm. Hedge funds are risk-on with 1.53x gearing the highest since Nov-07. Cash balances rose to 3.9% up from 3.7%, but remain low. Our risk appetite indicator eased to 43 but is well above the average of 40.

EU debt the tail risk but watch China
Growth fears see EU debt issues again ranking as the main investment risk. A slightly lower EU growth outlook (49 vs. 52) is being offset by US resilience and a rebound in Japan sentiment (74 vs. 42). A bigger concern is the deeper decline in China optimism with a net 28% seeing weaker growth compared to 15% in March.

Asset allocation: very modest change
Asset allocation saw modest rotation into bonds (48% UW from 58%) funded by lower commodities (12% OW vs. 24%) and equities (41% OW vs. 50%). GEM regains its position of most preferred region (29% OW vs. 22%) replacing US (26% OW). Consensus is UW Europe (-1%) and Japan (-17%). USD sentiment (48% undervalued) is one of the highest readings since 2002.

Sector rotation: defensive rotation
Sharp falls in energy (to 19% OW from 40%) and materials (2% UW from 17% OW) accompanied a sharp defensive rotation into staples (8% OW from 6% UW), pharma and telecoms. Banks are once again the most unpopular sector (26% UW down from 15%) with technology by far the most popular (35% OW).

How to trade the risk scenarios
If the summer sees stronger-than-expected growth: long banks, short pharma; long commodities, short bonds. If the summer sees weaker liquidity: long bonds, short equities; long US$, short EM.

Click on chart to enlarge, courtesy of BofA Merrill Lynch.
While there is still room for "feel good" short-term rally, it is more likely to see weaker liquidity over summer ...

Monday, May 16, 2011

Importance Of "Difficult To Measure" China's Growth

After the Blogger's black-out on Friday, I am back with old issues. There was a post back last November featuring the economists at Societe Generale on China driving the global manufacturing cycle. Now last Friday, but this time at Nomura, macro strategists have been trying to gauge the importance of China's growth:

While difficult to measure, we would argue China's growth has been one of a few core drivers of financial trends since the start of its recovery in early 2009. Figures 1 & 2 look at the performance of equities and currencies since the start of 2002. Each chart divides the world between those markets fundamentally linked to China and those not. These universes are then weighted by the size of imports to China as a percent of GDP. While it is difficult to gauge from these charts how important China's growth has been in driving the extent of the market recovery, its importance in driving relative trends should be pretty clear. In equity markets, countries fundamentally linked to China have outperformed other markets by nearly two-thirds over the course of the recovery. During the previous seven years, the performance between the two groups was practically indistinguishable. We have seen a similar trend in currencies. Since the beginning of the recovery, real effective exchange rates of countries linked to China have outperformed those of other countries substantially – although, unlike the equity performance, the FX outperformance of China-linked countries has simply gone some way in closing a valuation gap.

Click on charts to enlarge, courtesy of Nomura.

Well, at the end of day it is difficult to measure ...

Thursday, May 12, 2011

So Much About Inflation

Tiny bit about inflation from monthly Macro Strategy Views by Standard Chartered today:

Yet there is no room for complacency, given that the current round of inflation is driven by massive monetary easing and by extraordinarily high commodity prices due to a mix of supply and demand factors. No single monetary, fiscal or exchange policy tool is sufficient to arrest the situation. Given initial signs that inflation is peaking, it is critical that EM policy makers are not seen as wavering in their determination to fight inflation, and are viewed as having sufficient flexibility to reduce the risk of a hard landing. While we expect most EM central banks to continue tightening in the coming months, some – such as Brazil and China – could be close to the end of their current hiking cycles.

Click on charts to enlarge, courtesy of Standard Chartered.

Do you hear the sweet and enchanting music of "...sufficient flexibility to reduce the risk of a hard landing" and "could be close to the end of their current hiking cycles"?

There are those seductresses, Greek bird-women ... well, but not because of inflation.

Wednesday, May 11, 2011

Grantham Gets Serious, While We Look At Bubbles In Terms Of Bubbles?

The legendary Jeremy Grantham moves on today and says it is Time To Be Serious ...

However, as I have been serious for a while, I decided to look at industrial metals in terms of gold, that was brought to me by good folks Citigroup Global markets today.

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

Bubbles in terms of bubbles? Or, all we saw so far was just an adjustment in USD value? Well, we are indeed constrained by resources and capital in the real world, that are not reserves of fractional reserve banking.

Spanish Insolvencies

You thought that situation in Spain is stabilising? Well, the analysts at German Commerzbank write today:

According to provisional data of the national statistical office, the number of insolvencies in Spain reached a new high in the first quarter. The recovery of autumn 2010 was therefore short-lived. The property sector’s share of bankruptcies remains strikingly high: Property developers or construction companies accounted for nearly a third of all business failures. This persistent concentration shows that the consolidation of the Spanish real estate market is still not over. At the same time, house prices continued their downward trend: At the end of March the house price index had fallen by a further 4.6% yoy. Pressure on asset quality in the credit portfolios of Spanish financial institutions therefore appears likely to continue for the time being.

Click on charts to enlarge, courtesy of Commerzbank.

Right, all is contained and under control, as always ....

Tuesday, May 10, 2011

Alternate View On Financial Repression

I was reading Is Financial Repression the Answer? via Mark Thoma today. This paragraph sits in my sick mind:

Ms Reinhart and Ms Sbrancia argue the world has forgotten that the widespread system of financial repression “played an instrumental role in reducing or ‘liquidating’ the massive stocks of debt accumulated during World War II”. ...

Well, I just thought - what are real negative rates we have seen so often recently, and are "enjoying" right now? Probably the negative real interest rates is the true, but not obvious, financial repression managed by central banks in order to collect the "Greenspan's brownies" for splendid growth story, but leads to unsustainable credit/debt accumulation and Minsky moments? Debt destruction in this context would not be repression, but liberation ...

Alternate Seasonality At Citi

This should be an interesting approach. The small and mid cap strategists at Citi went so far to write yesterday:

This “Topics” note provides a historical look at summer seasonal trading patterns, but with an alternate set of data where we remove recessionary periods, including the “tech bubble” time period, as well as the outlier circumstance that contained the ’87 “crash”. We acknowledge that this approach entails a large element of subjectivity but, nevertheless, provides an interesting, and alternative, set of observations. Figure 1 shows the seasonal trading pattern for the Russell 2000 with all periods since index inception in 1979 included. Figure 2 provides the “alternate” look.

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

And it continues just like this:

The takeaway of this analysis is two fold. First, there is clear evidence of small cap seasonality during the summer months, when viewed back to Russell 2000 inception circa 1979. Second, when the ’81-’82, ’90-91 and ’08-’09 recessionary periods, along with the ’98-’02 “tech bubble” phase are removed from the seasonal analysis, a much more benign summer seasonal trading picture emerges.

We acknowledge the inherent difficulties in defining “mid cycle” from a traditional statistical perspective. While removing “recessionary” periods, as well as the tech bubble phase, increases risk of data manipulation, we argue that this is, nevertheless, as relevant as traditional historical analysis, where average calculations can be overly influenced by outlier periods.

So, we acknowledge, but we will do much more to talk up? Hey, but this is normal market practice, just assume, e.g., money market indices in Europe ...

Monday, May 09, 2011

Real Interest Rates And Credit Growth In Asia

The last days are traded in the sign of Greek-out, but for the sake of change we travel to Asia today.

This is a nice depiction of real growth drivers in Asia too. You simply arrange the God's Work with negative real rates, and credits simply fly, as economists at Deutsche Bank are writing:

Declining, and often negative, real interest rates against a backdrop of strong growth provide strong support for credit growth, which is rising in most Asian economies.

Click on chart to enlarge, courtesy of Deutsche Bank.

While I am not so sure that "strong growth provide strong support for credit growth", I would rather think the other way round. However, this seems to be more important now:

China is a key exception. Despite negative real interest rates, credit growth has slowed for most of the last 18 months after the surge in lending in support of the government’s stimulus program in early 2009. Interest rates do not play an important role in allocating or managing credit growth in China.

And once again, if you doubt the first paragraph, can you trust the second quote?

Thursday, May 05, 2011

Beauty Of 5 Standard Deviations In This Real World

Felix Salmon has the de-coding story today:

In a normally-distributed world, 5-standard-deviation moves never happen. In this world, however, such moves can happen even when there’s no news at all. (Reuters, for what it’s worth, blames “concerns about economic growth and monetary tightening”, which is code for “we have no idea why this is happening, or whether there even is a reason”.)

Click on chart of "first month Brent Crude Oil futures" to enlarge, courtesy of Reuters.

Wednesday, May 04, 2011

Victory Of Monetarism At Citi

Tobias Levkovich, the US equity strategist at Citigroup, posted the "chart of the month" yesterday, and the monetarism obviously leads the investment idea there:

Credit conditions remain critical for business investment and economic activity. The latest senior loan officers survey released by the Federal Reserve Board shows further easing in loan standards during 2Q11 (including those for small business and consumers) which has been a powerful nine-month lead indicator for investments in human, physical and working capital. As credit conditions improve, it is highly likely that business trends and GDP should remain constructive for the balance of 2011, reducing the probability of economic weakness developing. However, actual commercial & industrial loan activity lags the survey by 18 months and investors need to understand the differences in timing.

And the market concerns should be misguided:

Concerns about QE2 ending, higher energy prices and some moderation in ISM new orders miss the durability point. While the investment community may get distracted by the end of the Fed’s $600 billion in bond purchases this June, not to mention plausible softening in ISM new order figures from current elevated levels, the costs of corporate capital is far more crucial for determining capital spending programs as the return of investment capital is weighted against its cost. Indeed, worries with respect to higher gasoline prices undermining consumption should be offset by more jobs as a result of the eased lending standards. Thus, as the credit environment progresses more favorably, so should the decision making to generate returns.

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

Bears should be disappointed? Well, if not Loan Demand, Not Credit, Is The Problem ... and some price issues ...

Tuesday, May 03, 2011

Nomura: US Factory Orders Rose Because Of Higher Gasoline Prices

While media focuses on headlines of factory orders, the real picture may be a bit different to Keynesian dream that either neglects or intentionally sees compression of corporate margins.

However, the economists at Nomura explain today:

US factory orders rose 3.0% m-o-m in March exceeding market expectations of a 2.0% increase. Although the solid growth in orders partly reflected healthy growth in the manufacturing sector, price effects of higher input costs to some extent drove up the US dollar value of orders for US manufactured goods. Orders for nondurable goods jumped 3.1% in the month, part of which was led by a 7.8% m-o-m increase in orders for petroleum and coal products. The solid gain in overall orders should be viewed with caution because of price effects, as orders for goods excluding petroleum and coal products rose by only 1.7% m-o-m compared with the 3.0% increase in orders for overall products.

Well, probably Fed will discover someday the difference between nominal and real growth, which one is to drive the employment ...

Monday, May 02, 2011

US Nominal Vs Real Spending

I am not going to make long speech or writing about the sustainability of US spending, but it is the driving force of "growth" again. Just one question to Mr. Bernanke who is about to embrace new real-time tests of Philips Curve. Is nominal or real growth more likely to lead to employment gains?

Click on chart to enlarge, courtesy of BNP Paribas.