thefrugalplain

Danske: Disease That Takes Time To Cure

2011-08-24T16:12:00.000-04:00

I am back, but I cannot promise the posting will be regular going forward.

My "focus list" consisting of Spanish and Italian bonds, and JPY worked well, however all of those instruments have experienced interventions by central banks and cannot be considered as leading indicators anymore.

The liquidity crisis usually resolves with a victim, and while none of fundamental macro problems have been solved, the liquidity will just postpone the resolution.

However, for the greedy people we all are, I would be still cautious beyond the obvious speculative action. Danske Bank had a good reminder yesterday, see the picture below, but you decide whether the witch-hunt has ended.

Click on picture to enlarge, courtesy of Danske Bank Markets.

Moody's Does Not Like Portugal

2011-07-05T16:29:00.001-04:00

As the European government debt crisis just seemed to turn the corner, Moody's junked the Portugal today...

Credit Agricole: Sisyphus Cannot Simply Kick The Can Down The Road

2011-07-04T05:43:00.000-04:00

Posting will be very light, or even absent in July. For the longer reading the latest macro prospects by Credit Agricole are at your disposal here.

Second Anniversary Of Impossible Equation

2011-06-30T11:15:00.000-04:00

With the second round of "Greek bail-outs" already passed the "feel good" kicking of the can down the road goes on. However, I return to history that has second anniversary today, when I singled out the report by Societe Generale and posted on this blog SocGen: Public Finances - The Impossible Equation two years ago. The first anniversary I remembered with Anniversary Of Impossible Equation. But how far have we got today?

As Keynes noted:

"In the long run we are all dead."

Anyway?

Liquidity Glut And Low Interest Rates

2011-06-29T16:55:00.000-04:00

I have been writing about liquidity glut and low interest rates, and their impact on real economy some time ago. Gerard Minack, the strategist at Morgan Stanley, brings up this issue today and makes it very clear, again:

Exhibit 1 shows the contribution to the 12 month return on US equities from the change in the prospective PE ratio (the PE based on consensus earning forecasts). The amplitude is significant: the swing in the PE often contributed plus or minus 20-30 percentage points to the annual equity return. Importantly, the biggest influence on the PE ratio was interest rates. Falling rates led to a rising PE, and vice versa. (The line in the chart is the 12 month change in the 10 year Treasury yield – but it is inverted: so the line goes up as yields go down.)

Click on chart to enlarge, courtesy of Morgan Stanley.

Well, the times may be changing, as Gerard Minack continues:
This was the basis for the ‘don’t fight the Fed’ mantra. In a credit super cycle – when investors are willing to increase borrowing as rates fall – lower rates are good for risk assets.

A post-bubble environment is different. As I’ve discussed before, macro cycles tend to be weaker and more fragile. As importantly, investors do not respond to lower rates in the same way as they did through the credit super-cycle.

On a days like today it feels like bubble never ended? Some evidence of global stabilisation?

China's Local Government Financing

2011-06-28T16:01:00.000-04:00

On a day when markets seek for a Greek relief rally, as the Greek default may appear like mission impossible and the real challenge for Greeks now to get into such mess, I am looking at "perceived hope" of growth in China, while the financing of that growth becomes more riskier. The economists at Societe Generale are offering their views on China's local government financing issues today. I skip here the consensus optimism, but look at potential problems, as per economists at Societe Generale:

...China’s local government debt problem is scary in different ways. A simple calculation based on the information available in the report suggests that the total debt load increased 36 times in nominal terms and fivefold relative to GDP between 1997 and 2010! More than 80% of the money has gone to finance hard infrastructure. Economically speaking, an increasingly bigger share of total capital has been allocated to the public sector, and the marginal return of each borrowed yuan has been on a steady decline. In the last three years, total liabilities of local governments nearly doubled in size and ballooned from 17% to 27% of GDP. The health of China’s public debt and investments is deteriorating at its fastest pace ever.

Click on charts to enlarge, courtesy of Societe Generale.

Now, if one assumes that investments are "hard infrastructure" and often (about one quarter) of "debt is promised with land sales revenues", the maturity profile may provide some challenges as loans are maturing.

But then again, quoting the economists at Societe Generale:

... we can say China is different as there is no clear trigger of a sudden emergence of bad debt. Both debtors and creditors belong to the government, more or less.

Italian Job

2011-06-27T16:43:00.000-04:00

Nothing really new here for Italian long-term story, but simply worth adding to my "Focus List" consisting of Spanish Government bonds and JPY so far. Just because we are testing key technical levels here, and the overall story gets more compelling with Italian banks running hot media headlines.

Click on chart to enlarge, courtesy of Reuters.

Summer to be interesting with the peripheral yield games in spotlight?

80 JPY In Focus Too

2011-06-23T08:46:00.002-04:00

Another "inflection point" on my screens is the mark of 80 Japanese yens (JPY) per 1 US dollar. This is rather important for Japan in watching the Chinese slowdown.

"... Preliminary China June PMI Falls to 11-Month Low", as per WSJ.com today:

The preliminary HSBC PMI declined from a final reading of 51.6 in May, while the manufacturing output sub-index fell to an 11-month low of 50 from the previous month's 50.9, HSBC Holdings PLC said Thursday.

Of course, the soft landing in China is consensus view, but the tight liquidity situation may bring some "fat tails". However, the 80 JPY mark will show where the market goes ...

Click on chart to enlarge, courtesy of Reuters.

Spanish Government Bonds In Focus

2011-06-22T16:50:00.001-04:00

As the interest rate strategists at Commerzbank write today, despite hope for better sentiment in the weeks ahead:

At the same time, the risks of a re-widening in spreads from lower levels later this year have increased. Should politicians fail to come up with a coherent plan to ring-fence Greece in the case of default, highly adverse consequences like a bank run in Greece or Spanish yields moving to unsustainable levels cannot be ruled out.

Click on chart to enlarge, courtesy of Commerzbank.

Interestingly, but 10-year Spanish government bonds appear to be testing unchartered waters with a potential upside breakout from technical perspective, while still below the point of no return at 6%, as per Commerzbank. At the same time 5-year Spanish bonds still appear somewhat friendly...

However, this is one area to keep an eye on.

Nomura: How Much Of A US Slowdown Is In The Price?

2011-06-21T10:19:00.002-04:00

Interesting observations by strategists at Nomura today:

While June ISM risks are skewed to the downside, growth-related assets seem to be underestimating the possibility of a disappointing outcome. Figure 1 compares the ISM index with the year-on-year changes in our common measure of US market-implied growth, which we define as the first component of a PCA on a group of US growth-related assets. It is apparent that after months of relative pessimism the market is now trying to look through the recent data and view it as a transitory slowdown. As such, growth assets appear vulnerable to further disappointing data in June. Currently, on this simplistic measure the market implies an ISM of roughly 57.0 vs our economists forecast of 51.8 and the Philly Fed's dismal ISM-equivalent reading of 45.5.

While buying Treasuries and selling stocks would be the natural trade to position for a deeper-than-expected ISM dip, optimising this trade could be key given current valuations. Figure 2 looks at the relative mispricing of each asset with respect to the common US growth component. Clearly, while Treasuries would benefit from a disappointing growth outcome, yields already appear too low compared with the rest of the assets in our universe and arguably offer only a limited reward. Conversely, S&P Consumer services, oil and copper still appear too optimistic with respect to growth, despite their recent retrenchment, and thus offer an interesting trade for investors positioning for a longer and deeper "soft patch" than currently expected.

Click on charts to enlarge, courtesy of Nomura.

Well, markets seem to be focused on "technically oversold" conditions and Greek "victory" today...

Bonds Outperforming Equities

2011-06-20T16:25:00.000-04:00

Well, this was initiated couple of months ago. Mary Ann Bartels et al. at BofA Merrill Lynch paints the bigger picture of equities versus bonds, and note today:

From a mid February high, the stocks vs. bonds ratio has corrected and is testing the rising 200-day moving average.

There are not yet any firm bottoming signs for stocks relative to bonds. This suggests that stocks should continue to underperform bonds in coming days/weeks.

Click on chart to enlarge, courtesy of BofA Merrill Lynch.

Should we assume we move towards the bottom of the channel?

Chinese "Quantitative Easing" In One Chart

2011-06-17T17:06:00.001-04:00

From the economists at Morgan Stanley, the Chinese growth miracle explained in one chart. Though, not the full story.

Click on chart to enlarge, courtesy of Morgan Stanley.

Add the fiscal "orgy" to this...

Jump In Correlations In European Credit Markets

2011-06-16T16:23:00.001-04:00

The message from credit strategists at BNP Paribas today:

A confluence of events has increased volatility which could turn systemic in nature. With correlations bunching up once again and trending towards 1.0, the message from the markets is loud and clear that systemic risk is rising and liquidity is poor, which is being reflected in higher volatility and risk premia.

Click on chart to enlarge, courtesy of BNP Paribas.

If this is not enough, one should consider - what has made US markets "so weak" recently?

Click on chart to enlarge, courtesy of BNP Paribas.

Well, ECRI tells us not to blame Japan for slowdown ...

DBS Sees "Summer Lull A Window Of Opportunities" For Asia Equities

2011-06-16T03:00:00.001-04:00

DBS came out with latest Asset Allocation report today, as for Asian equities the view is more than clear:

• The short-term ebbs and flows we are currently experiencing are nothing but a proverbial 'tempest in a tea cup'. Financial instability in Europe and an economic soft patch in the US heighten risks, but not enough to derail the ongoing global recovery

• Volatility and mixed data signals are the norm at this stage of the cycle. We find comfort in attractive valuations, supported by realistic earnings growth expectations. Asian equities as an asset class are cheap relative to cash and inflation

• Asian markets probably bottomed at the end of March and should end the year comfortably higher than current levels. The passing of QE2 is unlikely to be a big event. The associated risks are rising bond yields and capital outflow in the early part of 3Q. We believe the stage is set for a 2H rally after the removal of this overhang.

• We are maintaining our Overweight recommendation in Taiwan, Malaysia and Indonesia whilst Thailand is downgraded to Underweight. China, Hong Kong and India are still Underweight. Korea is upgraded to Neutral.

So, the window of opportunity may close soon, or be the wall to hit soon in full speed.

Stunning difference, that is very obvious in the picture below, creates views like this:

Asian demand is the main determinant of its own fate

Click on chart to enlarge, courtesy of DBS.

Well, there are views that the "main determinant of its own fate" may face serious problems of rebalancing ...

Just In Case You Thought QE2 Is Already Priced In

2011-06-14T15:57:00.000-04:00

The strategists at Societe Generale think that QE2 is NOT priced in yet, and paint a picture of what lies ahead.

Click on charts to enlarge, courtesy of Societe Generale.

Indeed, it may be far from "worst is over" until capitulation sets in ...

No Capitulation For Merrill's Fund Managers

2011-06-14T15:46:00.000-04:00

They were about Fading Or Risking last month, this month key messages from BofA Merrill Lynch Global Fund Manager Survey are as follows:

No capitulation... no QE3

In the June FMS investors raised cash, reduced risk asset exposure and rotated to defensive sectors. But investor panic is not yet visible. The recent drop in global growth expectations stabilized and despite sharply lower inflation readings, two-thirds of investors predict no QE3.

Growth expectation stabilise
Growth and profit expectations stabilised after recent sharp falls. Inflation expectations fell to 38% from 69% two months ago. But the macro backdrop is not seen as weak enough to warrant more stimulus: three out of four panellists think a recession unlikely and only 13% expect a new round of QE in H2.

Risk is off
The percentage of investors OW cash rose to 21%, the highest since July-09. Actual cash balances rose from 3.9% to 4.2% but this did not trigger a buy signal from our trading rule. Hedge funds cut gearing levels sharply to 1.27x from 1.53x while 43% of investors believe EU sovereign debt funding is the biggest "tail risk". Overall our risk & liquidity index fell to 38, below its long term average of 40.

Gold overvaluation highest since 2009
Equity allocations fell, benefiting bonds and cash, but positioning overall stands in the middle of historic ranges. Note that the gold price is seen as more overvalued than at anytime since Dec-09 while commodity allocations again fell.

Japan remains most unloved market

Despite China growth expectations dropping to the lowest reading since Jan-09, EM remains the most preferred region for equities, pipping the US. Regional allocations show a big drop in exposure to Eurozone and UK equities but Japan remains the most unloved equity region.

Bank underweight most negative since March 2009
Contrarians note that the weighting in global banks fell to its lowest since March 2009. Consumer discretionary saw the largest monthly drop in exposure with the only positive sector moves coming from defensives. Tech remains the most popular sector followed by pharma and energy.

Contrarian trades...
Despite no contrarian "buy" signal for risk being triggered, the contrarian trades within the June FMS are: long banks, short gold; long Japanese banks, short US tech; long Eurozone, short EM; long US dollar, short Japanese yen.

Click on chart to enlarge, courtesy of BofA Merrill Lynch.

I have no intention to be contrarian this month ...

Barclays On US Deflation Risks

2011-06-13T15:35:00.000-04:00

While the equity investors like the industrialists of Weimar Republic are awaiting for the first hints of QE3 by Fed, I was a bit surprised that the risk of deflation appears like a distant probability. Here the latest take by economists at Barclays Capital:

The increase in inflation and inflation expectations has also coincided with a reduction in deflation risk. Figure 3 shows the probability of cumulative inflation over a one-year horizon using information from both TIPS and CPI options data. The figure shows that the probability of deflation over the one-year ahead horizon in August of last year was 36%. When 5y5y breakeven inflation reached its recent high in April of this year, the probability had fallen to about 3%. Currently, it stands at about 7%. In addition, Figure 4 shows that the market remains more willing to pay for protection against upside inflation risks than protection against excessive deflation risk. The figure plots the difference in premiums paid on +200bp out-of-the-money inflation caps and -200bp out-of-the-money inflation floors for different horizons. Because an inflation cap pays off when cumulative inflation exceeds the threshold specified in the contract, a positive reading is an indication that the caps are more expensive than the floors; in other words, the market sees the distribution of expected inflation as skewed in the direction of upside inflation risk. The trends from CPI options markets suggest that skew has been moving in the direction of willingness to pay for protection against upside inflation risk, whereas for much of last year, participants were willing to pay more for protection against deflation.

Altogether, we see the trends in inflation markets as consistent with Chairman Bernanke’s comments in his April press conference that the balance of risks between seeking additional progress on its dual mandate relative to further balance sheet expansion was “less attractive” than it was a year earlier. We therefore see the Fed as inclined to remain patient. If incoming data confirm the Fed’s view that the economy is turning up in the second half of the year, the FOMC will likely continue on its path towards normalizing the policy stance. However, if the recovery fails to regain momentum, the balance of risks may shift back in favor of further Fed action.

Click on charts to enlarge, courtesy of Barclays Capital.

Well, just in case ... "if the recovery fails to regain momentum". Why it should?

On Hiatus This Week

2011-06-06T16:19:00.001-04:00

The bulls(hitters) have it difficult to defend the technical support levels around 1295 for S&P500 today.

Click on chart to enlarge, courtesy of StockCharts.com (click on link for up-to-date version).

Sometimes bulls like cheaper prices, like March lows, for example ...

Corporate Profits & Margins At Record High Vs Real Wages

2011-06-03T17:44:00.001-04:00

Well, let's put them both in confrontation - record high corporate profits and margins versus real wages. Then, this is the part of Keynes I believe in, while otherwise the problems have been created because we have departed from, sort of, "Austrian" school:

Business doesn’t invest and hire because they feel good, they invest and hire because they think someone will buy what they are making and selling.

There is a substantial downside for riches, as Keynes speak "Austrian". Debt destruction will lead to savings destruction, that will in turn require more savings and less consumption.

More Than 1000 Words Can Tell

2011-06-03T17:05:00.000-04:00

The Blogosphere went on to look at US real wage growth today, e.g., comparing it to Great Depression, but has been my focus for a while already. Well, a nice picture from the team of Chris Wood at CLSA Asia-Pacific Markets yesterday.

Click on chart to enlarge, courtesy of CLSA Asia-Pacific Markets.

We need more stimulus, to drive trend consumption that was driven by debt bubble ...

Chart Of The Day

2011-06-02T16:29:00.000-04:00

While media still wonders around economic surprises, and I did it very clear a month ago, we move on to chart of the day, this time from credit strategists at BNP Paribas. No comment, brrrrr.

Click on chart to enlarge, courtesy of BNP Paribas.

Chinese Holes

2011-06-01T16:33:00.000-04:00

While the markets digest the bearish PMIs/ISM reports, with the weakness attributed to Japanese earthquake, I am looking elsewhere today. Actually, my mind is in China, again.

Today I list some of the "Holes in the bull argument" written by property analysts at Credit Suisse on Monday:

■ Credit Suisse proprietary surveys on banks, construction companies and unlisted developers showed no light at the end of the tunnel. Banks’ lending has become much more pragmatic, and the well-accepted perception of favouritism on SOEs may not be correct; many developers are delaying payments to construction companies, and taking private loans with interests beyond 20%—sector cash flow may get much worse soon.

■ ‘Rising salary’ may not solve China's housing affordability issue. Income growth targets and the proposed new income tax reform focus on low income class—the target customers for private housing may actually be worse off as a result.

■ The industry consolidation argument has neglected the impact to book value. Major listed developers only represent a fraction of China’s property market. The potential exodus of small developers could be overwhelming, and lowered land prices may force listed developers to adjust book value.

Click on chart to enlarge, courtesy of Credit Suisse.

By the way, China takes on its massive muni mess with a $463bn bailout, to start with ...

Paper Money - One Of China's Historic Innovations

2011-05-31T16:03:00.000-04:00

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.

Chinese Imports Already Show Signs Of A Slowdown

2011-05-30T15:35:00.000-04:00

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.

BNP Paribas: US Bank Credit Has Underperformed Europe's

2011-05-26T16:37:00.001-04:00

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!

Profit Margins Again

2011-05-25T16:34:00.000-04:00

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 ...

Margins & Profit Shares At New All-Time Highs

2011-05-24T14:47:00.000-04:00

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?

What Is Chartalism?

2011-05-23T15:46:00.000-04:00

While my Korean beauty has broken the neck, and overseas princes cannot get up on their legs (above 50 day moving average) too, my addiction to charts brought me to reading "The Revival of Chartalism" at Acting Man ... nothing to do with charts.

Still Some Adjustments In Labor Legacy Costs To Expect

2011-05-19T16:27:00.000-04:00

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.

Japanese Candlestick Masters

2011-05-18T09:49:00.002-04:00

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" ...

European Debt Sinners

2011-05-17T16:29:00.001-04:00

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

2011-05-17T13:08:00.001-04:00

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 ...

Importance Of "Difficult To Measure" China's Growth

2011-05-16T15:30:00.002-04:00

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 ...

So Much About Inflation

2011-05-12T10:03:00.000-04:00

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.

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

2011-05-11T16:05:00.001-04:00

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

2011-05-11T09:57:00.000-04:00

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 ....

Alternate View On Financial Repression

2011-05-10T16:05:00.002-04:00

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

2011-05-10T15:51:00.000-04:00

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 ...

Real Interest Rates And Credit Growth In Asia

2011-05-09T14:52:00.000-04:00

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?

Listening To Valuable Voice Of Jean-Marie Eveillard

2011-05-06T16:31:00.000-04:00

Look for the MP3 link via King World News.

Beauty Of 5 Standard Deviations In This Real World

2011-05-05T16:43:00.000-04:00

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.

Victory Of Monetarism At Citi

2011-05-04T16:39:00.000-04:00

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 ...

Nomura: US Factory Orders Rose Because Of Higher Gasoline Prices

2011-05-03T16:52:00.000-04:00

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 ...

US Nominal Vs Real Spending

2011-05-02T15:33:00.000-04:00

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.

Beijing To Battle Stubbornly High Inflation?

2011-04-29T19:16:00.000-04:00

I do not do this often, but this took me to the edge today. Media is failing every day in trying to explain the markets, however, today the headlines of Yuan Breaks Past 6.50/Dollar, Further Gains Seen and alike bring me laughing down on the floor, in particular assertions like this:

Beijing will continue to let the currency strengthen quickly to battle stubbornly high inflation.

Focus on US dollar is so misleading, if one considers to look at, e.g., NEER. Click on chart to enlarge, courtesy of Standard Chartered.

The success should be obvious?

Surprised By Bullish Action In Bonds?

2011-04-28T15:05:00.002-04:00

This "Chart of the week" from macro team at Nomura explains the bullish action (lower yields for longer term bonds) in US.

Click on charts to enlarge, courtesy of Nomura.

If that is not a sufficient evidence, one may look at the latest updates on global cooling by Simon Ward.

Well, Citigroup Economic Surprise Index provides an alternative view too.

"Fight Of The Century: Keynes Vs. Hayek Round Two"

2011-04-28T14:44:00.001-04:00

Excellent continuation ...

MSCI USA Standard Core Index Year-To-Date In EUR

2011-04-28T11:06:00.000-04:00

Just like back in November of last year, took a look at bullish US stocks in terms of EUR year-to-date via MSCI.

Click on chart to enlarge, courtesy of MSCI.

Ben Decided To Run Real-Time Tests On Philips Curve

2011-04-27T16:33:00.000-04:00

Obvious hype was the Ben's Press event today, while FOMC statement was taken neutral, for example, by Swedish SEB. Interestingly, Ben appears to be running a real-time test of Philips Curve, while Fed's staff raises inflation expectations and downgrades the real growth outlook ...

Reading Wake-Up Call By Jeremy Grantham

2011-04-26T15:34:00.000-04:00

The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we will run out of everything and crash. We must substitute qualitative growth for quantitative growth.

Finding statements alike interesting? Go and read the entire message here.

Fed's "Masochism"? Well, Sadism

2011-04-21T16:17:00.001-04:00

These charts from economists at BNP Paribas tell the bitter story. Click on charts to enlarge, courtesy of BNP Paribas.

Enjoy the long Easter holiday!

Korean Beauty

2011-04-20T15:36:00.000-04:00

Presented without comment, available live at StockCharts.com.

Click on chart to enlarge.

Cannot resist?

Which Asset Classes Will Outperform In 2011?

2011-04-19T15:42:00.001-04:00

While I have no clue which asset classes will outperform this year, but the latest results from Citi institutional investor survey are indeed intriguing, as Tobias Levkovich writes:

Our most recent fund managers’ poll, conducted this past week, and encompassing nearly 100 responses, shows meaningful changes from early January’s results. In particular, enthusiasm for the dollar has weakened significantly, as average cash holdings dipped and the desire to buy stocks has edged lower. Plus, more than 50% see a bigger chance of the markets sliding 20% than gaining 20%, a sharp reversal from the January 2011 view, when nearly 70% saw a large gain as being more likely.

While more than 50% see a bigger chance of markets falling 20%:

Overall, investors still like US stocks compared with other asset classes (see Figure), but commodities have gained some traction of late, as dollar weakness fears probably are contributing to the mix. Indeed, most investors now think that the dollar will weaken further as opposed to what proved to be inaccurate optimism for greenback strength in January. This may reflect the budget fears but also the expectation that the Fed will not be lifting short-term rates until 1H12.

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

Indeed, why not falling in love with US equities? Well, I still prefer to be contrarian ...

S&P Makes Indecent Reminder The US Has A Debt

2011-04-18T16:33:00.000-04:00

S&P shrugs off the fear of being black-listed at all US intelligence services and to gain the ranks in status of public enemy by cutting the outlook for US credit rating to be negative. Reuters points to federal budget deficit ... The total debt of US still sits at mind-blowing heights, while the public money is being spent on bailing out reckless risk takers, feeding the commodity inflation and other God's works.

Click on chart to enlarge, courtesy of Bank Degroof.

Well, risk assets took a minor beating today. Was it in fear of more pragmatic government spending?

Chinese Food Prices Show No Respite, While New Loans Up By 33%y/y

2011-04-15T16:19:00.001-04:00

Playing the game of sell-side establishment with close to peak in Chinese rate cycle propaganda? These guys are credit addicted and cannot stop the poisoning of the economy with new loans up by 33% year on year.

These are not the charts from CME pricing service, but there is little evidence of momentum slowing? Click on chart to enlarge, courtesy of Standard Chartered.

Bullish charts for food prices are not necessary bullish for other assets ...

Merrill's Fund Managers Are "Reluctant Equity Bulls"

2011-04-14T14:53:00.000-04:00

While the last month was "Wait & see", this month key messages from BofA Merrill Lynch Global Fund Manager Survey are as follows:

Equities: a reluctant default position

In the April FMS, global growth expectations fell for the second consecutive month while inflation expectations remain high. But with no imminent change in Fed policy anticipated and bonds looking more risky, investors feel compelled to stay in stocks. Equity allocations rose in April despite another sharp drop in profit expectations: a net 19% see higher profits in the next 12m, down from 32% last month and 51% in Feb.

Monetary policy: gone wild
A net 51% of investors regard monetary policy as too stimulative, the highest level since July 2004, and commodity price inflation is now regarded as the largest tail risk for financial markets. Just 6% of the panel think long-term interest rates will be lower in 12 months’ time. Liquidity expectations remain high, nonetheless, with Q1-2012 seen as the most likely date for the first Fed rate hike.

Equity risk-reward: poor
Cash balances fell to 3.7% from 4.1%. No sell-signal is triggered for equities but upside looks constrained. Risk-taking has increased: our Risk Appetite index is at 45 vs. a long-term avg of 40; levels of hedge fund gearing rose to 1.49 from 1.38.

Asset allocation: equities over bonds and cash
The equity risk premium for investors continues to fall (3.79% vs. 3.86%) and supports an increase in equity allocation (net 50% O/W from 45%). The big U/W in bonds (58%) continues and cash O/W was cut to 10% from 14%. A long position in commodities was extended, rising to 24% from 21% in March.

Regions: out of Japan, back into Emerging Markets
In a growth-constrained world, investors want profit visibility and this month sees a big rotation out of Japan (to an 18% U/W from an 8% O/W) back into Emerging Markets (to a net 22% O/W from neutral in March). The US remains the most favoured region at 30% O/W while the consensus is neutral on Europe.

Sectors: Energy now #1 sector; but defensive shift
Energy is now the most popular sector at a net 40% O/W displacing the under performing tech sector. But the sector mood is more defensive with rotation into utilities, pharma, staples & telecom, out of discretionary, industrials and materials. Financials remain stubbornly unpopular; the net global position falling to 15% UW.

Contrarian trades
Long bonds, short equities/commodities; long Japan equities, short EM; long Europe equities, short US; long consumer discretionary, short energy; long utilities, short tech/ industrials.

Let's ride the biggest "tail risk"? Click on chart to enlarge, courtesy of BofAML.

I prefer to be contrarian ...

Chart Of The Day

2011-04-13T09:49:00.000-04:00

Inflation fear mongering by economists at Societe Generale. Following the lines in the chart one should assume that 2012 should be key for US, as Chinese CPI leads the US core CPI ex services by 20 months ...

Click on chart to enlarge, courtesy of Societe Generale.

But should NOT the US core CPI ex services move south still some time before turning up, if one believes in this relationship?

Reading Hoisington's "No Help" From QE

2011-04-13T08:31:00.000-04:00

Right on top of my German musings yesterday, you get the US story in full from Hoisington. This sentence at the very beginning gives kind of lead into the subject:

If the objectives of Quantitative Easing 2 (QE2) were to: a) raise interest rates; b) slow economic growth; c) encourage speculation, and d) eviscerate the standard of living of the average American family, then it has been enormously successful.

So, it is worth considering to read the paper in full.

Looking For Savers Bailed Out By Governments?

2011-04-13T08:24:00.002-04:00

I was refering to "savers, often bailed out by governments" yesterday. If you are desperate for them, look no further than The Real Housewives of Wall Street at http://www.rollingstone.com/.

German Savings Rate & Spending On Must Haves By Income Class

2011-04-12T15:35:00.001-04:00

Everyone is so focused on inequality in the US, and for right reasons. However, German social welfare state has its headwinds due to rising commodity prices too. Nice charts from UniCredit, click on charts to enlarge.

These sentences by economists at UniCredit describe the essence of distribution problems for incomes and benefits from bailouts:

Apart from the psychological effects of perceived inflation on consumer climate, however, the surge in prices of daily essentials is in fact having a disproportionately negative impact on households’ propensity to buy. In general, consumers with lower household incomes exhibit the highest propensity to consume. That means that they use incrementally available funds more for consumption. Households with higher incomes, in contrast, save a rising percentage of the incremental income. This is reflected in the personal savings rates by household income classes calculated by the Federal Statistical Office as part of its sample survey of income and expenditure (see chart next page). And higher energy and food prices hit low income earners especially hard. The share of expenditures in total disposable income varies considerably according to the level of income. While the share for households with a monthly income of between EUR 5,000 and EUR 18,000 is "only" just shy of 13%, the number for the lowest income class is a very high 35.5%.

While the savers, often bailed out by governments, are fearing the destructive effects of negative real rates and pile into real assets, also raw commodities, the payers of these policies are lower income households.

Folks Simply Cannot Agree On International Political Economy?

2011-04-11T16:51:00.000-04:00

Lots of diverging paths at Bretton Woods Conference ... agreement seems to be still distant!

George Soros's talk.

The Big US Corporate Squeeze

2011-04-06T09:35:00.000-04:00

While the come-back of financial sector profits in US is more than impressive, especially assuming the "God's Work" they do on the yield curve, there has not been a lot of noise about non-financial profits lately.

The graphical depiction of US financial profits is so stunning that nothing else was left as to reproduce it from Ritholtz' s The Big Picture here again, click on picture to enlarge.

Well, but economists at BNP Paribas shared couple of words on US non-financial profits last week:

Profits at financial companies surged 15.6% q/q in Q4 2010 following a 10.4% increase in Q3, while profits at non-financial companies declined for the first time since the end of the recession, by 1.1% q/q. Rest-of-world profits dropped most in Q4, declining 2.5%.

In 2011, corporate profits may get squeezed on all sides.

Corporations have limited ability to pass higher input costs onto consumers given sluggish wage growth. In addition, continuing gradual increases in payrolls should curb productivity growth.

Click on charts to enlarge, courtesy of BNP Paribas.

Those bears getting boring?

Rate Hikes, Equity Pullbacks & Relative Sector Performance

2011-04-06T08:57:00.001-04:00

European equity strategists at Morgan Stanley remind us how the stocks behave anticipating rate hikes by Fed, at least in 2004 tightening episode. Click on charts to enlarge, courtesy of Morgan Stanley.

ECB prepared to hike rates tomorrow?

While the Portuguese left hand makes markets with right hand, Credit Agricole assures there is no reason to fear the End in periphery.

Look At Paintings By Japanese Candlestick Masters

2011-04-05T16:25:00.000-04:00

Last time they were spot on, let's see how good they will be this time around! Click on chart to enlarge, courtesy of Nomura.

So, expect a setback?

Focus On Some Risk Scenarios Written By BNP Paribas

2011-04-04T15:26:00.000-04:00

Economists at BNP Paribas presented their latest Global Outlook, entitled "Struggling with Inflation", today. Here is the excerpt from the risk scenarios:

Under our base case, to which we apportion a 60% probability, we assume that global growth remains robust at 4% or above over the coming years. We expect emerging markets to grow significantly faster than the advanced economies where growth is expected to be modest.

Global overheating (20% probability)

Policy conditions globally are accommodative. Financial and monetary conditions are looser than average in most economies and considerably looser than average in some cases. In emerging markets, particularly Asia and Latin America, conditions are looser than they should be – especially where economies are operating with the unemployment rate below the NAIRU. Hence, geopolitical events and adverse weather aside, it is not entirely surprising that commodity prices have been rising, with a resultant increase in headline inflation nearly everywhere.

Against this background, there is a risk that growth is much stronger than assumed in our central case. With PMI surveys in a number of developed economies close to 60, and little in the way of policy tightening being delivered, there is a risk of overheating. Such overheating could be fuelled by firms putting to work the stockpiles of cash that have built up due to uncertainty about future demand.

In this scenario, accelerating inflation is likely to become a greater concern. In most cases, the likely further narrowing in output gaps and lower unemployment rates would help to propel inflation higher. Moreover, the reduction of economic slack would facilitate a greater pass-through of commodity price increases into underlying inflation. A USD 10/bbl higher profile for oil prices relative to our base case would reinforce a higher path for headline inflation.

Increased inflation fears, combined with above-trend GDP growth rates, would bring forward policy normalisation. The ECB is already on the path towards tightening. This scenario would probably involve a steeper trajectory for the refi rate. Attention would also turn to the question of when the Fed and others begin to reverse asset purchases.

MENA tensions escalate (10% probability)

Social unrest in the MENA area has reinforced the upward trend in crude oil prices. There is a risk that the tensions spread to other countries in the region and threaten the supply of oil from bigger producers. In such a scenario, the price of crude oil could spike up to USD 180/bbl.

Such a spike in the oil price would probably result in stagflation. A typical rule of thumb suggests that it would cause the level of GDP to be 3.5% below the profile in the base forecast primarily as a result of a far greater squeeze on profit margins and households’ real incomes.

Similarly, headline inflation is likely to be around 2½pp higher than in our base case forecasts.

The response of monetary policy in this scenario would depend on the individual central banks. We assume that the Fed would leave interest rates on hold at current levels as the economy slips back into recession and there is a renewed increase in unemployment that outweighs concerns over inflation. Nonetheless, with inflation approaching 5% y/y, it is unlikely that the Fed would engage in additional quantitative easing.

Meanwhile, the ECB is likely to have already begun to raise the refi rate. We assume that, in the early stages, the ECB would probably tighten a little further in the face of the worsening inflation outlook. However, towards the end of the year, falls in GDP would probably bring the rate-hiking cycle to a halt.

Global slowdown (10% probability)

There are several possible catalysts for a scenario whereby growth surprises to the downside relative to our base case.

In particular, the surge in commodity prices and other costs is imposing an increased burden on households and businesses. In many cases, real household incomes are being squeezed as employment and wage inflation fall short of consumer price inflation. Similarly, producer output prices are rising far slower than input costs. That is squeezing profit margins, reducing the willingness to hire and to invest.

Although survey indicators are at, or close to, record highs, there is a danger that their ascent has been based on policy accommodation delivered over the last two years, which is coming to an end. In the absence of self-sustaining momentum, and given the continued overhang of restrictive credit conditions, it is possible that growth slips back below trend.

Events in Japan in recent weeks have highlighted the vulnerability of the global recovery to an adverse shock. The abrupt shift in sentiment and markets is an illustration of how quickly a downward shock can spread. A fall in sentiment indicators and equity markets in response to a shock is likely to hold back hiring and investment intentions as well as personal consumption.

A global slowdown would slow or even reverse the narrowing in output gaps in developed economies. In addition, a deterioration in global growth prospects would take some of the heat out of commodity prices. Both would mean a lower trajectory for headline and core inflation.

With regards to policy, a slowdown in the pace of growth to below that consistent with job creation means that the Fed would continue to fail to meet its dual mandate. In turn, that is likely to push back the timing of the first interest rate hike. It could even reignite speculation about QE3 if there are signs of disinflation.

The ECB is likely to have already started to raise the refi rate by the time a slowdown became apparent. However, as GDP ground to a virtual standstill, and upstream price indicators fell back, it is likely that the hiking cycle would come to an abrupt end.

So, quite risky with 10% probability for global slowdown?

Fed's Bird Cage

2011-04-01T17:32:00.000-04:00

There are millions of topics to post, but bulls are sticking their horns in my body... should act before they kill me. China was ugly today? No, dumb apes celebrated the killing ceremony.

Well, as Fed-speak increases the intensity of chirp, the friendly economists at Societe Generale have painted the guide to the bird cage. Click to enlarge, courtesy of Societe Generale.

Even Bears Sucked In Slowly

2011-03-30T16:56:00.000-04:00

Even smart investors are slowly, but slowly, giving up ... this should turn to become very exciting!
I don't care, took my Porsche to gas guzzling ride ...

SEB's View On Equities Is "Unclear"

2011-03-28T08:18:00.000-04:00

The painting artists at Swedish SEB have rolled out their latest Technical Week Ahead today, where their conclusion is pretty straight forward - unclear.

Click on charts to enlarge, courtesy of SEB.

Excavating Deep Routes Of Reflexivity & Fallibility

2011-03-25T18:24:00.001-04:00

Nothing else, but archeology of indecent thinking by Goerge Soros back in 1997?

Fed Goes Heavy On Transparency PR, But Don't Audit Us!

2011-03-24T16:36:00.000-04:00

As the MarketBeat reports, chairman Ben will be speaking more directly to the public in the coming months, via four-times-a-year press conferences, just to “further enhance the clarity and timeliness of the Federal Reserve’s monetary policy communication.”

The Federal Reserve could not possibly be more transparent. But don’t audit us!

Focus On Saudi And Shiite

2011-03-23T07:25:00.000-04:00

Christopher Wood at CLSA Asia-Pacific Markets scribed yesterday:
Still as the Western politicians responsible posture, most of them with a public relations agenda rather than a military agenda, GREED & fear would continue to advise investors to focus on Bahrain, the Shiite area of Saudi and also the Shiite area of Kuwait where again hundreds of thousands of Shiites live close to the oil producing area.

...
Unfortunately, the odds still favour further escalation, with such escalation being encouraged by both Iran and Iraq which now has a Shiite dominated regime. This issue is a much greater threat to the near term prospects of global financial markets than radiation levels in Japan or the sideshow in Libya. Meanwhile, if Saudi starts taking on its own Shiite population in a more violent fashion, what are the “Allies” going to do? Invade Saudi!
Indeed, oil feels like natural hedge?

From Deleveraging To Derating

2011-03-23T06:47:00.001-04:00

Gerard Minack at Morgan Stanley kinda goes deeper into the sovereign debt issue than Steven Wieting and is wrapping up today:

The most important change in borrowing in the US over the past three years was who has borrowed, not how much was borrowed. The credit super-cycle was largely a private sector activity, but the public sector has been the only borrower (in net terms) over the past two years (Exhibit 2). This swap was critical. The private sector has reduced its leverage (and increased its saving), but this has only been made possible by the unprecedented peacetime increase in leverage (and fall in saving) by the public sector. To focus in isolation on lower private sector leverage (and rising saving) as a sign of ‘healing’ misses the point that it’s only been possible due to the stretch in public sector finances.

Click on charts to enlarge, courtesy of Morgan Stanley.

While there are serious questions about real deleveraging by US households, however, the "sort of" conclusions at the end of Morgan Stanley's note sound like this:

Borrowing to buy pre-existing assets can affect the valuation of those assets. Most periods of sustained asset revaluation go hand-in-hand with sustained leverage increases (Exhibit 6). While sustained deleveraging does not imply sustained macro weakness, I think it will put downward pressure on asset valuations. I think most assets are now expensive relative to history. Deleveraging points to asset valuations falling.

I believe one should sort out what they are buying now - potential cash flows or real assets?

Lend More Money To Governments At Negative Real Rates

2011-03-23T06:18:00.000-04:00

Some snippets from Steven Wieting, US economist at Citigroup, written on Monday:
If deficit spending hasn’t immediately boosted hiring, where did the money go? To the extent that increased government spending has not immediately been matched by private labor income, it boosted corporate profits.

The personal savings rate has risen significantly – but with the aid of income transfer payments of largely borrowed money. If, as we expect, national savings in the U.S. rises in the years ahead as fiscal easing unwinds, we believe corporate profits will rise less than the economy expands.

Increased transfer payments during the severe recent downturn were 3X the size (relative to GDP) of average recessions of the past four decades. Tax cuts, credits and rebates added up to 2% of GDP intermittently in recent years.
So, lend more money to governments that can transfer it easily into pockets of corporate shareholders. But now, when QE is destroying the foundations of private credit markets, sleep well in wealth delusion.

China Landing Watch

2011-03-22T08:52:00.000-04:00

Macro strategists at Nomura are tracking the China landing today:
In recent months, China has been stepping up its efforts to slow the economy and curb inflationary pressures, with both M2 and industrial production growth slowing substantially. Looking ahead, a key question is whether Chinese policymakers can achieve a soft-landing-like scenario of trend growth and lower inflation. While on balance we are optimistic, we also admit it is too early to judge the success of China’s anti-inflation policies. With this in mind, commodity prices already look a little expensive relative to China’s growth, the case for further CNY appreciation is still compelling and it is too early to buy regional equities in our view.
Click on charts to enlarge, courtesy of Nomura.

Right, that China’s missing M2 ...

Uncertainty Shock

2011-03-21T09:43:00.000-04:00

This is another interesting view by US economists at Goldman Sachs:

Uncertainty can cause firms or individuals to postpone irreversible big-ticket purchases or investments. The option value of waiting to get a better read on the future goes up in uncertain times, leading to “wait and see” behavior that results in a short-term decline in economic activity. Once the coast is clear, activity typically rebounds (exhibit below right). The impact of “uncertainty shocks” can therefore look quite different than the impact from forces such as monetary tightening.

Our own tests, following in the spirit of recent academic research on the topic, find that “uncertainty shocks” have a fast-acting, negative impact on growth, but rarely lead to recession. As expected, the effect is clearest for “big ticket” purchases or investments. A large part of the impact on the economy appears to occur via subsequent changes in financial conditions, reaffirming the usefulness of a financial conditions framework for forecasting in uncertain times.

Click on chart to enlarge, courtesy of Goldman Sachs.

European Leading Indicators & Hard Facts

2011-03-21T09:30:00.000-04:00

Economists at Goldman Sachs look at their leading and coincident indicators:
Our survey-based GDP tracker now points to a +0.8% qoq expansion in early stages of Q1. Our leading indicators of IP is signalling a pick-up in industrial momentum.

Click on charts to enlarge, courtesy of Goldman Sachs.

And here are the hard facts of recovery as measured by industrial production.

Tohoku/Fukushima Comparable Disasters Impact On Equity Markets

2011-03-21T09:19:00.000-04:00

Excellent chart from equity strategists at Danske Markets Equities. Click on chart to enlarge, courtesy of Danske Markets Equities.

Very sharp reaction, but fully discounted?

BNP Paribas: Crisis And Sentiment

2011-03-17T16:07:00.000-04:00

The economists at BNP Paribas:
We have looked at the impact of some previous episodes of disasters and financial crises on sentiment to shed some light on the possible spill-over effects.
Click on charts to enlarge, courtesy of BNP Paribas.

Merrill's Global Fund Managers "Wait & see"

2011-03-16T18:54:00.000-04:00

While the world melts down with nuclear swan nests in Japan, key messages from BofA Merrill Lynch Global Fund Manager Survey are as follows:
Cash back

The March FMS shows a scaling back of investor optimism as high commodity prices sap confidence in corporate profitability and global growth. It feels like wait & see rather than risk aversion; cash is replenished but this could reverse with easing MENA geopolitics or if the ECB threat of higher rates proves over-played.

Inflation risk, but not in corporate margins
Global inflation expectations remain high at 75%. A net 31% see stronger global growth but down from 58% last month and broadly similar to the fall in profit expectations (32% from 51%); a net 24% see corporate profit margins falling compared to 10% expecting an increase back in Jan.

Gulf in rate expectations
A slight shortening in views on Fed rate hikes was trumped by wholesale buy-in toECB rate rhetoric with 72% now expecting a rate rise in Q2 (vs. 0% last month). In light of agreement being reached on an expanded EFSF, this may be premature.

Cash sell signal closed
The FMS Risk Appetite Index fell back to 41 (from 47) the lowest in six months. Hedge fund net exposure fell to 34% (from 39% in Feb) and cash increased to 4.1% up sharply from 3.5% last month. This closes the cash sell signal triggered last month since when global equities have fallen by c.3%.

Equities out, but bonds not in
Equities (45% O/W vs. 65%) and commodities (21% O/W vs. 28%) were cut in favour of cash (14% O/W from 9% U/W). However, bonds saw very little benefit with the U/W closing only modestly to 59% from 66% in Feb.

Regional conviction at lowest level in 10 years
EM exposure fell to 0% from 5% O/W. The US was cut to 23% O/W from 34%, with both EU and Japan at 8% O/W (note: the survey closed before news of the Japan earthquake). This puts regional conviction at the lowest level since Jul-01.

Pharma added, but staying pro-cyclical
Pharma had the biggest jump on the month (10% O/W from 4% U/W) but investors remain resolutely pro-cyclical with tech, energy, materials and industrials the top-4 preferred sectors.

The FMS contrarian trades
Long bonds: short cash, equity, commodities. Short tech; long utilities. Long regional dispersion.

Japanese Discover Their Own Black Swan's Nest That Apparently Is Nuclear

2011-03-15T16:24:00.000-04:00

Nuclear panic, click on chart to enlarge, courtesy of StockCharts.com (click here for up-to-date version).

Well, but Japan may solve its capacity problem (but not really the domestic demand issues), as meltdown macreconomics are in action.

Japan & China Money Supply

2011-03-14T16:53:00.000-04:00

It is not like I would ignore the tragedy in Japan, even more now with nuclear meltdown alert. While the printed stimulus will boost the recovery in short term, Japan remains the prime candidate for sovereign crisis too. No wonder that we have from US perspective.
Well, to judge the health of the region, it worth looking at China too. The economists at BNP Paribas are writing today:
February new loans at RMB 535.6bn, down 23.5% y/y due to credit tightening.
M2 registered growth of 15.7% y/y, lower than the government’s target of 16% y/y.
M1 growth rebounded to 14.5% y/y, less than market expectations.
Household deposit growth fell to 12.3% y/y, due to negative real deposit rates.

Credit growth and money supply weakened further due to record high RRR slowing credit creation, the restrictive property control also slow asset reflation and leveraging process; though real rates remain negative, however tight liquidity situation approaching PBOC target of 16% M2 and 10% drop of credit, this suggest economic slowdown in 2H and stabilization of inflation, asset prices.
Click on charts to enlarge, courtesy of BNP Paribas.

Does this matter when Japan is going to flood markets?

Chart Of The Week: DAX & M1 Money Growth

2011-03-11T10:47:00.000-05:00

As far back as end of December of last year here was the warning, but the equity strategists at Commerzbank have the chart for us today. Click on chart to enlarge, courtesy of Commerzbank.

Not perfect, but who cares about couple of months here or there ...

China Or European Periphery?

2011-03-10T16:38:00.000-05:00

I still think it is primarily China today, European periphery is still background noise ...

Ugly China Auto Sales In February

2011-03-09T15:43:00.000-05:00

From the equity analysts at UOB Kay Hian today:
Worse-than-expected wholesale sales in February. China automobile sales in Feb 11 came in lower than both our and consensus expectations with flat yoy wholesale sales of passenger vehicles (PV). The Chinese New Year (CNY) holiday is not an excuse for the poor sales. In Jan-Feb 11, PV sales only grew 9% yoy, vs consensus 10-15% for the full year.

Sedan and mini-bus underperformed. The sluggish sales were dragged down by sedan and mini-bus, which respectively saw a sales growth of - 2% yoy and -12% yoy in Feb 11 and 7% yoy and -5% yoy in Jan-Feb 11.

SUV and MPV remained robust. Due to a low base, sales of SUV and MPV grew 17% yoy and 46% yoy in Feb 11 and 23% yoy and 58% yoy in Jan-Feb 11 respectively, making them the best-performing segments among PVs.

Retail sales. According to China Passenger Vehicle Association, retail sales of automobiles fell both mom and yoy in Feb 11.
Click on charts to enlarge, courtesy of UOB Kay Hian.

Chinese New Year holiday is not an excuse?

If Oil Price Spikes Still Matter

2011-03-08T15:27:00.000-05:00

The European equity strategists at Morgan Stanley opine in a report yesterday that:
... the best performing sectors during, and after, such spikes have traditionally been Energy, Telecoms, Healthcare and Utilities while Consumer Discretionary performs worst in such periods.
Click on chart to enlarge, courtesy of Morgan Stanley.

Hot Holiday Destinations In CIS

2011-03-07T16:14:00.001-05:00

While CIS definitely is not MENA, but the sun of coming summer may make some brains suffering in oily heat. Excellent guide by economists at Commerzbank.

Click on chart to enlarge, courtesy of Commerzbank.

Relative Importance Of Oil

2011-03-04T15:31:00.000-05:00

Nice and informative charts by economists at Deutsche Bank. Click on charts to enlarge, courtesy of Deutsche Bank.

While it may look like oil is not even the half of sources for energy, but "near-perfect synchronization of prices" of three major sources is stunning.

Enjoy the Mid-East and tell yourself it is not your problem.

Who Cares About Brent Crude At 115 USD?

2011-03-03T16:32:00.000-05:00

From the monthly client survey at Nomura:
More than half of our clients (57%) think that oil prices need to rise to levels of $150 or higher in order to materially increase risks to global growth; only 7% think that current levels pose significant risks.

Click on chart to enlarge, courtesy of Nomura.

So, some $20-25 higher should goe easily?
Well, the survey was conducted last week or so, I suppose, when Brent was about $10 lower?

US Bonds Returned In Favour While PIMCO Asks Who Will Buy Treasuries

2011-03-02T15:37:00.001-05:00

The bond king Bill Gross asks today: Who will buy Treasuries when the Fed doesn’t? At the same time strategists at Societe Generale deliver charts with latest data on US bond mutual fund flows.

Click on charts to enlarge, courtesy of Societe Generale.

Well, it may be not enough ...

Don't Worry About Commodity Prices

2011-03-01T16:19:00.005-05:00

While the Ben Bernanke Plays Down Gas-Price Rise today, the economists at BNP Paribas believe that higher commodity prices reduce demand for services in the United States:

The latest personal spending report suggests that higher commodity prices represent a risk of creating a "taking from Peter to give to Paul" situation. In the absence of a robust pick up in wages consumers have to cut on services to pay for more expensive goods.

Click on chart to enlarge, courtesy of BNP Paribas.

Hmmm, discretionary spending ... BTW, who is that Ben Bernanke, the expert on subprime being contained?

Do Emerging Markets Love Oil?

2011-03-01T16:06:00.000-05:00

Equity strategists at Citigroup are looking at Global Emerging Markets (GEM) via the prism of Net Oil Balance as % GDP. The following charts should provide kind of hint who is more and less vulnerable to oil shocks.

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

Well, if not afraid of short-term correction?

Is Prechter Wrong?

2011-02-28T15:00:00.000-05:00

As I am cashing in to buy my Porsche tomorrow, is he wrong?

Fear Is Over ...

2011-02-25T16:06:00.000-05:00

... because oil settles higher, as per Dow Jones:

NEW YORK (Dow Jones)--Crude futures settled higher Friday, ending near $98 a barrel as oil markets remain focused on the violent unrest in Libya.

Light, sweet crude for April delivery settled up 60 cents at $97.88 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange settled 78 cents higher at $112.14 a barrel.

Enjoy!

Viking's Latest Paintings

2011-02-24T08:49:00.000-05:00

Weekly equity technical focus by Swedish SEB has a lot of red arrows, but ICE Brent Crude has it green ...

Oil Prices And Recessions

2011-02-24T07:31:00.000-05:00

If it has not been clear yet to the readers, the following chart by economists at Nomura should make it very obvious, why the stress?

Click on chart to enlarge, courtesy of Nomura.

Interestingly, these guys in video below have a straight forward opinion who is to blame.

Visit msnbc.com for breaking news, world news, and news about the economy

If China Is Indeed Leading?

2011-02-23T07:55:00.000-05:00

Already some time ago I noted that economists at Societe Generale believe that China drives the global manufacturing cycle now. If we look at China PMI now, the outlook would not be very encouraging, if the economists at Societe Generale are indeed right.

Click on chart to enlarge, courtesy of BNP Paribas.

Though, just not yet? The economists at BNP Paribas write today:
The US manufacturing sector continues to grow and outperform other sectors of the economy. February’s Richmond Fed manufacturing survey jumped to 25 from 18 in the month prior. Earlier this month the Philly Fed index surged to 35.9, the highest level since January of 2004, while the Empire manufacturing index improved to 15.4 following a 11.9 reading in the previous month. However, on an ISM-adjusted basis, all three indexes in February were slightly below the ISM index in January; supporting our forecast for a small decline in the Manufacturing ISM in February (see chart below).
Click on chart to enlarge, courtesy of BNP Paribas.

False Transport Confirmation?

2011-02-23T07:41:00.000-05:00

I noted bullish confirmation by DJ Trannies last Thursday, it seems to be FALSE bullishness by now.

Click on chart to enlarge, up-to-date version available at StockCharts.com.

S&P500 below 1311 would be vulnerable to serious correction? Above 1325 it would look bullish again?

Global Oil Bill As % Of Nominal GDP

2011-02-23T07:27:00.000-05:00

Excellent chart from economists at Societe Generale. Click on chart to enlarge, courtesy of Societe Generale.

If Libya Is Not Enough, Take A Look At Potential Dissents In Asia

2011-02-21T14:20:00.000-05:00

While Fed's POMO and QE2 are on holiday, Libya comes in spot today. If Libya is not enough, take a look at potential dissents in Asia with the helping tool by economists at Societe Generale.

Click on chart to enlarge, courtesy of Societe Generale. "EG" is supposed to be Egypt, "TN" - Tunisia, "VN" Vietnam, "CH" - China, and so on...

Though, it is worth saving poor bankers ...

Watch The Greenback

2011-02-18T16:20:00.000-05:00

... says Nomura today, and draws the chart of the week, based on the emerging markets fund flows.

Click on chart to enlarge, courtesy of Nomura.

It is not only currency that will be affected then.