Oktoberfest's Inventory Payback?

Oktoberfest hangover? Germany makes quite poor in October, as industrial production falls 1.8% month-on-month unexpectedly. Let's get some bearish sense, as James Nixon at Societe Generale comments today:

Sharp declines in both capital goods (down 3.5% mom) and consumer goods (down 1.9% mom) were largely responsible for the fall and the suspicion has to be that, now the auto incentives have finished, the growth momentum is beginning to wane. October's decline is the first fall in three months and the largest fall since April. It is particularly dispiriting to see the growth momentum beginning to stall at a time when industrial production is still some 17% below its peak reached in February 2008 and down 12.4% yoy.

Nice recovering? For a broader insight the comment from BNP Paribas is here.

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

BNP Paribas EcoWeek Focus: Turmoil In The Baltic Countries

The full report available here, starting from page 7. The summary is dire, though:

Until 2007, the Baltic countries went through a fast growth, at the expense of inflationary tensions, current account deficits and widening external debts which, even before the global crisis, have appeared as unsustainable. In Latvia, the joint rescue package from the IMF, the EU and Nordic countries has allowed to stabilise the situation. However, the three countries are now facing a sharp recession. The sustainability of the pegs between the Baltic currencies and the euro is regularly in doubt, in particular in the case of Latvia. Yet, devaluations would put at risk the solvability of households and corporates, which have deeply resorted to euro-denominated loans. Against this backdrop, deflation and fiscal tightening are required in order to manage the needed adjustment of the Baltic economies, which destroys prospects for any economic stimulus tool.

... which destroys prospects for any economic stimulus tool. Hmmm. Not so sure.

However, deflation + devaluation would be a nightmare!

Global Intermarket Perspectives Today: Wrath, Greed, Sloth, Pride, Lust, Envy, And Gluttony

Jan Bylov, chief analyst at Nordea Markets, who is a "rare specie" among analysts, as he is looking himself at all asset classes and uses inter-market approach in analyzing the markets. He writes in the summary today:

Stocks – Wrath, greed, sloth, pride, lust, envy, and gluttony

Undoubtedly, many people feel that a certain group of capitalism’s entrepreneurs have committed the seven Cardinal Sins of man, and many believe that we will pay the price for years to come. Whatever one believes about mans’ sins we do appreciate that we know little about the future, but fortunately we do know the cardinal proponents of a healthy stock market: 1) valuations, 2) liquidity and 3) growth. Generally, valuations do not appear stretched, liquidity remains amble and growth moving in the right direction. Also, the shadow of the old “Goldilocks” remains evident as: bond yields are low and ranging, the US dollar remains weak suggesting still amble global liquidity, commodity prices not soaring, leading stock indices confined within consistent post March uptrends and major central banks erring on the side of dovishness. Therefore, the major risk parameters appear to centre on a general change of perceptions regarding the monetary policies of leading central banks and the direction of the US dollar. Consequently, we remain structurally bullish, and an unusual large setback remains necessary to signal a real worry.

Bonds – Dovish central bank talk under siege

The hoarding of US short duration bonds appears to have come to a halt during last week as suggested by the strong rise in 2-year yields commencing from the December -08 record low… coinciding with Friday’s strong US job report. Also, money market futures in US have taken a hit causing markets to again price in a 50% change of a hike in the Fed funds rate at the late April 2010 meeting. With “inflation” and “deflation” believers in an open fight of opinions the ongoing dovish central bank talk appears under sudden siege – not least due to the risk of squeeze among holders of the enormous amount of bonds (unprecedented size suggested by US mutual funds flow data). Now, we believe that bonds still receive a tailwind from the primarily dovish statements from Fed, Bank of England, ECB and the IMF… centred on the timing of “exits” should err on the side of further supporting demand and financial repair. Consequently, we maintain that the yield direction will continue to oscillate/range between the popularity of two transient investment themes: 1) “supply fear and political discipline” and 2) “hesitating central bankers”. The overall market action still backs theme #2.

Commodities – Gold has stabilised

Last week’s $100 fall in the gold price – occurring on unusual large volume – suggests that the gold price will commence a ranging period above the psychological $1000 level. Profit-taking among speculative traders is also evident in oil. Elsewhere, industrial metals continue to show overall strength supported by investors embracing “Goldilocks”. With the traded $-index still not signalling a reversal (>77.74) underlying commodity strength is favoured.

Currencies – The crowded USD trade

Everyone knows that shorting USD is a crowded idea (positions > 2 stdv. from historic mean) and therefore they have been paying up for USD call options since late October. This risk awareness of a rising USD argues being cautious calling an imminent USD reversal – not least with little confirmation of a changed Fed policy and that the market action in EUR/USD and the traded USD index provides too little damage to the 2009 global USD downtrend (major stops <> 77.74). Consequently, we hold on to our May -09 carry basket strategy of long BRL, TRY, RUB funded by CHF and CAD… with a protective stop (profit) now close to spot.

Below you can see "commodity reflation" via DJ UBS Commodity Index in USD, JPY, EUR. Click on chart to enlarge, courtesy of Nordea Markets.

Golden dead-lock?

Global Consumption Blues

Economists at Credit Agricole provide us with their insights into conventional economic heavyweight - the US household consumption. The conclusion is rather straight forward:

In conclusion, the main question is whether the crisis has changed the mindset of US consumers in particular and of the United States in general: will they henceforth be more inclined to live within their means? And if so, what does that imply for US growth? A considerable number of macro-economic determinants point to an affirmative answer and hence, probably, to slower growth. But there is no guarantee of that, given the Americans’ unchanging ability to press on regardless.

On the other hand, Michael Pettis discusses, in the unconventional way, the hope for Chinese consumption. There are couple of paragraphs I would like to point out:

At roughly $1.2 trillion in 2008, total Chinese private consumption is only a little more than that of France (around $1.0 trillion) and still less than that of Germany (about $1.3 trillion, not to mention the UK’s $1.4 trillion and Japan’s $3.2 trillion). This fact alone should cause us to be extremely skeptical of feverish claims about the role Chinese consumers can play in making up for any contraction in US consumption – which at roughly $9.4 trillion last year is nearly eight times the size of China’s – without even taking into account that Europe and Japan are likely to exacerbate, rather than help absorb, the contraction in US net demand.

This should be the flower:

Crises seem to drive the household consumption rate down, even though bull markets don’t seem to drive it back up. Is that because crises cause households to worry about risk (although if that were true they wouldn’t go permanently down, would they)? Or is it because the government responds to crises by increasing the amount of misallocated investment, the consequence of which is to reduce future consumption? Government consumption, by the way, has stayed pretty steady, at around 15% of GDP, during that period.

With longer term perspective:

Look at it over the longer term. Just to return consumption to 40% of GDP over the next five years (and even that level is widely considered to be way too low, and probably unprecedented in the world excluding recent Chinese history), 8% average annual growth rates in GDP would require a tad under 11% annual growth in consumption. Similarly, 7% average annual GDP growth rates would require that consumption grow annually over the next five years by nearly 10%. To bring Chinese consumption in 20 years up to 50% of GDP, which is the low end for other high saving Asian countries, and far lower than any other large economy in Asia (and remember that large economies are less able to rely on exports to fuel growth than small countries), 7% annual GDP growth would require average annual consumption growth of just under 9% for twenty years.

To sum up, in order to compensate 1% decrease in nominal consumption in developed world (US, EU and Japan) combined, the nominal consumption in China should grow at ca. 20% rate ...

Exsqueeeezed Retailer And Will It Last?

No doubt, the event of the day was monthly release of US NFP (non-farm payrolls). Wow, recovery, game-changer ... on the Wall Street. Academia sounds less inspired, though, for whatever reason.

There were couple of issues that are raising my eyebrows, however. Non-manufacturing ISM, Conference Board, ADP, etc. indicated a different picture. Let it be ... Calculated Risk draws my attention to retail:

Retailers are hiring seasonal workers at slightly above the pace of last year ...

And BLS commented the details this way:

Within retail trade, department stores added 8,000 jobs over the month.

Of course, 8,000 jobs is not that much ... but they were stocking stuff and staff, but sales, as I noted yesterday, so far lagging the expectations. Risk of exsqueeezed profits? We will see it later, and retailers should pray for better December mood ...

Chunk of positives comes from:

Employment in professional and business services rose by 86,000 in November. Temporary help services accounted for the majority of the increase, adding 52,000 jobs. Since July, temporary help services employment has risen by 117,000.

Temporary help ... I really do not know why, but my thinking is zooming in and around housing? There are, of course, a lot of "bargain hunting" around where professional and business services are necessary ...

Oooops, and here is the skeptic's take!

ECRI's US WLI edges higher, from quant perspective ... so, as Goldman Sachs noted this week, it is time to turn from "Hope" to "Growth". However, the guys at ECRI ask this morning: "... But Will It Last?" Why such questions?

We have quite serious action today in:
US 10 Year Treasury Note Yield
US Dollar Index
Gold

Dow Jones Transportation Average leads with break-out to the upside, while S&P500 struggles ... Next week may be key for direction?

Sui Generis

In memoriam ...



Nice picture, sourced here.

Trolls Singing Ethnic Han Now

The orgy in risk markets continues, interrupted only by small setbacks (how much of US GDP was generated by services?) for a nanosecond (including the NYSE closing slide), as China is the true story (usually I do not link to Evans-Pritchard)... But Citigroup confirmed that Emperor appears to be concerned about the bubble in the apparel outlet this morning:

Hu Xiaolian, a People's Bank of China vice-governor, said that investors should be watching for a possible bubble, when asked whether China could boost the amount of gold in its international reserves. According to Hu, China must keep in mind the long-term effects when considering what to use as reserves, China must watch out for bubbles forming on certain assets, and be careful in those areas.

Just to continue on bullish note, the US economists cannot get off the retail steroids ... and asset reflators forgot to inflate the capacity of natural gas storage in the US. Interestingly, also other commodities with problematic storage and trade characteristics are relatively weak, e.g., look at uranium prices, despite the peak "propaganda" circulating.

Giant dry bulk trolls gathered in London recently and, according to Nordea Markets notes today (my emphasis), started to sing ethnic Han:

Dry Ships – Chairman and CEO George Economou

The market has continuously underestimated Chinese demand. Financing of vessels is a problem as USD 250bn is required for the total shipping order book. Dryships aims for 100% charter coverage until 2011 and increased spot exposure after that.

Golden Ocean – CEO Herman Billung

The company believes that Chinese steel production could be up 15% next year, implying 770 million tonnes of iron ore imports. The forward curve is in backwardation owing to the large order book. The company is moderately optimistic and believes there to be more upside potential in rates than downside. Chinese demand may surprise on the upside once again.

Paragon Shipping – Chairman and CEO Michael Bodoroglou

The company is fairly bullish on the demand side but has some concerns about the order book. However, the lack of newbuilding financing may save the industry.

All the companies believe that the Baltic Dry Index will be lower at this point next year.

The paragraph on Paragon Shipping, although very short, tells the Chinese economic story of lotto ... enjoy the struggle.

Sacred Vedic Cows And Golden Emperor

While the Gaming Cheeks and Emperor Without Clothes are enjoying the Goldilocks, the pigs get slaughtered, according to Dow Jones Newswires:

NEW YORK (Dow Jones)--MF Global Ltd. (MF) pulled its planned $250 million offering of 10-year bonds on Tuesday, almost a week after the derivatives brokerage announced the deal with preliminary price guidance at a suggested yield between 9.75% and 10%.

Company spokeswoman Tiffany Galvin declined to give a specific reason for the move. "In keeping with our commitment to sound capital principles," she said in a statement, "we remain focused on optimizing our capital structure through those avenues which best position this company for long-term success."

MF Global, which trades in global cash and derivatives markets, is rated Baa2 by Moody's Investors Service and BBB by Standard & Poor's, both investment-grade level. Investors have recently snapped up lesser-rated debt -- even CCC-rated bonds -- in their quest for high-yielding securities.

This should be something interesting for investment grade credit as equity bulls are unstoppable and government bond yields are so low. However, according to Caja Madrid Bolsa, the Spanish member of European Securities Network, the Financial Stability Board has identified 24 banks and 6 insurance companies as "too big to let them fail". Caja Madrid Bolsa listed the "sacred Vedic cows":

1. BBVA
2. Santander
3. Goldman Sachs
4. JPMorgna Chase
5. Morgan Stanley
6. Bank of America Merrill Lynch
7. Citigroup
8. Royal Bank of Canada
9. HSBC
10. Barclays
11. Royal Bank of Scotland
12. Standard Chartered
13. UBS
14. Credit Suisse
15. Societe Generale
16. BNP Paribas
17. Mizuho
18. Sumitomo Mitsui
19. Nomura
20. Mitsubishi UFJ
21. UniCredit
22. Banca Intesa
23. Deutsche Bank
24. ING

While it is not very clear to what extent the "sacred Vedic cows" are a factor of respective sovereign risks, but, as I have noted recently here and here, the risks of mirage and banking Enrons have to be considered ...

Don't fight the trend and do not ignore the risks!

Inglourious Bear-terds

Albert Edwards, the top ranked strategist at Societe Generale, delivers his bearish non-consensus outlook today:

We have just had the worst decade's performance for equity investors on record. Relative to government bonds, equities have been an even bigger disaster. Surely after such a terrible decade for equity investors things can only get better?

On a ten year view, equities may indeed prove to be a good investment. On a 1-2 year view, however, we still see much pain to come. After what we have been though so far, where the bulls' optimism has been crushed in 2001/2 and in 2007/8 surely there must be a heavy weight of self-doubt yoked onto the shoulders of the bulls – but apparently not!

The lesson from Japan is that while de-leveraging plays itself out, the global economy will remain extremely vulnerable. The Great Moderation is dead. It was built on a super-cycle of private sector debt. We know from Japan, we now return to what was before, i.e. highly volatile and unpredictable cycles. Recession will quickly follow recovery.

US equity valuations did not reach revulsion levels in March this year. After some 15 years of gross overvaluation do we really believe that this valuation bear market that has been in place since 2000 will finish with equities looking cheap for only three months? Long term-valuation measures suggest equities will fall substantially below March lows.

Government bonds are now an extremely poor investment. On a 10-year view, the insolvency of government finances will surely end in substantially higher inflation. Yet on a 1-2 year view, we believe the key threat remains deflation. Markets will react aggressively to this as the cycle stalls in 2010. Expect sub-2% bond yields to accompany new lows on the equity market next year. Thinking the unthinkable has paid off over the last decade and should continue to do so.

Click on chart of Multi-Asset Portfolio performances, courtesy of Societe Generale.Interestingly, his colleagues in cross-asset strategy research at the same Societe Generale, suggest the consensus-like asset allocation for the next year. Click on table, courtesy of Societe Generale.


Clash of opinions ... or in-house trade in everything?

BNP Paribas On Global Liquidity Floods

Look for your life rafts, as BNP Paribas notes in its Global Outlook yesterday:

Narrow money in the developed world is also growing again, thanks mainly to the US, where the central bank has expanded bank reserves by a further USD 200bn to compensate for a winding down of the Treasury Supplementary Financing Facility.

In advanced economies, there is still no sign of an acceleration in broad money…
Although narrow liquidity in the advanced economies jumped some time ago, there is still little sign of that translating into a pick-up in the growth of broad money. Our broad liquidity aggregate across the G7 is growing by less than 5% y/y (Chart 2), its slowest rate of growth since August 1995. As a result, the money multiplier across the advanced economies remains moribund with no sign of a recovery.

There has been a particularly significant deceleration in broad money growth in the
eurozone, which was the disproportionate driver of broad liquidity across the developed world before the crisis. M3 growth there has slowed by nearly 11 percentage points since the start of 2008 to 2% y/y in September – its joint-slowest
rate on record.

Much has been made of the surge in broad liquidity in China. Incorporating it into our
measure lifts the rate of broad money growth considerably, but there is still a significant deceleration in the aggregate measure (Chart 2).

…or credit growth
On the asset side of the balance sheet, the counterpart to a slowdown in the growth of broad money has been a sharp deceleration in the growth of credit to the private sector.

In contrast, the downward trend in total credit growth is much more modest, reflecting increased lending to governments and highlighting the risk of government borrowing crowding out private sector borrowing.

Click on charts, courtesy of BNP Paribas.
Reflation floods and dopamine ... organic lift in risk asset prices! Smoking ...