31st January 2012: The Tale Of Two Cities: New York Property Dynamics Versus Shanghai Property Dynamics

Quote of the Day:

We will continue to strictly implement and gradually improve policies aimed to discourage house-buying for speculation or investment purposes

 

Chinese Premier Wen Jiabao.

 

Macro Overview

US Property Is Beginning To Draw Investors

• New York apartment yields are booming. In fact, if you’re a New York realtor, not all is bad – especially in the buy-to-let market. The economy may be a little wobbly but the fluctuations in real estate activity in many of America’s iconic cities seem to dance to a different beat.
• Most people do not have billions of dollars of hard capital, locked up for months or even years. But for those that do, the American property market is beginning to look attractive in places.
• I emphasize the word “beginning” because this asset class is certainly not for the faint-hearted – especially as we appear to be entering another global slowdown and the bad news still keeps pouring in.
• That said, there may be some attractive opportunities in this market in specific pockets and (for those not able to do localized research) in companies or funds with the expertise and resources to deploy towards property investments. The Bloomberg article highlights how some Private Equity Funds are circling real estate ventures in the US. Whether we see the bottom for US house prices nationwide in 2012 or not, another down-leg in economic activity and a pretty firm promise from the Fed to keep mortgage rates low and from the Government  to reduce inventory will surely tempt some savvy investors.

 

China Property Is Beginning To Draw Attention

• China is deliberately cooling its property market, which is a good thing for the economy as a whole. But what is good for the Chinese economy is not necessarily good for property investors or property developers – both of whom seem to target high end residential and commercial properties.
• It should be unsurprising to most that the Communist Party do not care too much if high-end property investors and over-extended property billionaires do take a hit on their inflated real estate portfolios. I’m going to keep this brief and just link you to a little excerpt from the Shanghai Daily yesterday.
• If you’re an investor that cares about keeping an “international perspective” you’d probably do well to follow developments in Chinese policy toward property prices – just today CNBC quoted Chinese Premier Wen Jiabao as saying:

We will continue to strictly implement and gradually improve policies aimed to discourage house-buying for speculation or investment purposes

Market Overview

Japanese Companies Feel The Pinch

• Japanese companies are some of the most competitive in the World, but not even they can withstand the Dollar/Yen with a 7-handle. If you remember, dear reader, at the end of last year, the Ministry of Finance vowed to defend the Dollar/Yen from falling. They ramped the exchange rate up to nearly 80 Yen to the Dollar. At the time I, could not hide my cynicism:

Today I just want to focus on one thing. The Yen. Remember the MoF effectively smashed the Yen right the way back to 78 vowing to defend the level and slash any trader that dares to cross it. It looks like today the market had other ideas. As I wrote last month:

“Japanese Yen intervention is Chart of the Day. Trying to change the market is much like trying to change the weather… you can try … it may even appear to succeed for a long period of time. But a free market could just as easily turn around and take your head off on a whim – just ask the Bank of England.”

• Where is the Dollar/Yen today? A lowly 76.30 … a flea’s whisker away from the all time low of 75.35. RememberJapan’s fastest growing market,China, is pegged to the Dollar and so is falling almost in lockstep. Today companies like Honda, Fujitsu and Toshiba projected pretty dismal outlooks on account of the stronger Yen.
• Chart of the Day is Dollar/Yen.

 

Bye Bye January

• All things considered, a pretty good start to the year for risk assets, despite the softening at the end. Also most sovereign credits tightened nicely with bond auctions around the World going well -Portugal being the biggest concern on the horizon).
• I still cannot quite get my head around why the market rallied like it did when it did – I expected the rally to start early December and for the rally to be hard and fast – that’s when the big news came out of Europe.
• I’ve also included a chart of RadioShack (not a great day for that stock).

 

Chart of the Day

JPY/USD (Source: Bloomberg)

RadioShambles (Source: Bloomberg)

 

 

Events

Macro Events:

Update:

• Canada GDP -0.1% vs expected +0.2% … that’s a disappointment
• US Consumer Confidence (for what its worth) came out below expectations
• Taiwanese GDP worse than expected

 

Alerts:

• Eurozone CPI
• South Korea CPI

 

Corporate Events:

Results:

• Fiat [FI IM], Hershey [HSY], Nomura Holdings [8604 JT], Roche [ROG VX],

Dividends:

• Pfizer [PFE],

 

Reading, Links:

Nothing Significant

30th January 2012: Sell The Summit – EU Leaders Disappoint … Again

Quote of the Day:

… if you just look at the 312 million [people] in the US with the 16.4 trillion [dollars of federal debt], that’s 52,409 dollars per man, woman and child.

 

Rick Santelli – CNBC Reporter

Check the Rick Santelli clip out here.

Macro Overview

Sell The Summit

• Another EU Summit disappoints. Soon summit meetings will be hard-coded as “Sell Commands” in programmed trading models. I mean I cannot remember a summit which did not disappoint – market rallies seem to occur between political events in Europe …funny that. Merkel poured cold water over the hopefuls who thought that we’d see something decisive come out of the core today.
• On top of it all Germany is calling for debt caps to be enforced. As if policing this in a single state monetary environment isn’t enough, imagine trying to keep debt caps for 17 very different cultures all subject to varying influence over centralized policies out of Brussels.
• I’m sorry, Germany, but it is simply too early to start talking about universal hard limits on debt. Merkel is a shrewd and talented politician, there is no question she is using Germany’s position of strength to take a hard line in negotiations to secure an optimal political EU structure her country. It is hard to see Merkel not getting what she wants… but she may want to be careful what she wishes for. Nobody benefits from a disharmonized and disenchanted Europe and I feel as though the Germans may begin to sound a little too authoritative for the comfort of many “lesser” nations in Europe. If Germany wishes to mold the new EU into a stoic, strictly regulated centralized authority they should be aware of how this could be perceived. It could come across a little authoritarian for some tastes and, dare I say it, perhaps a little too close to totalitarian for some more liberal cultures.

 

Debt Ceiling Debates

• As if to satirize Germany’s debt ceiling debate, the US (a country with its own currency and its own monetary and fiscal control) remains politically gridlocked regarding economic issues over fiscal (and monetary) discipline. As we approach the next election in November this will only crescendo. Indeed, many think that the gridlock in Washingtonis here to stay – it’s the consequence of a generational shift in attitude towards government in general – a cultural change which is here to stay for quite some time.
• The political debt ceiling debate may have cooled a little since the summer of 2011, but the economic debate will last for an entire generation – indeed it has only just begun. When we talk about numbers with so many zero’s “Trillions” for Europe and the US, “Quadrillions” (did you ever think it would be necessary to use that word?) for Japan, it’s hard for people to conceptualize the relative magnitude of America’s debt mountain. For those with a cheeky sense of humour I include a funny little film to put it into context, you gotta watch this (warning: this clip contains some extreme satire)…

Market Overview

The Old Market Trends Are Back

• Let’s focus on a few off the beat moves: US and European yield curves are flattening, Gold is rising and the Dollar is falling. This all points to business-as-usual from the Fed. Prepare for more money printing, only this time it may simultaneously come from both sides of the Atlantic. I can hardly wait!
• But this may be a little more awkward for the Fed, I cannot help noticing that even the PCE core inflation measure (inflation without all the inflationary bits) has just hit a 3 year high and rising. That shouldn’t stop them though, they’ll think of something.
• I also want to include in my Chart of the Day, what ZeroHedge think may be the one of the most worrying charts of the year. Youth unemployment in Europe… there is a rather unsavory correlation between youth unemployment and social unrest – just ask any Tottenham resident.

 

Chart of the Day

Youth Unemployment In Europe (Source: ZeroHedge)

Events

Macro Events:

Update:

• Spanish GDP in line but not good (-0.3%)

Alerts:

• Canada GDP
• Japan Industrial Production
• South Korea Industrial Production
• Taiwan GDP

 

Corporate Events:

Results:

• Amazon [AMZN], Baidu [BIDU], Banco Santander [SANB4 BZ], B Sky B [BSY LN], Eli Lilly [LLY], Enel [ENEL IM], Exxon Mobil [XOM], Fujitsu [6702 JT], Honda [7267 JT], Komatsu [6301 JT], Pfizer [PFE], Sands China [1928 HK], Toshiba [6502 JT], UPS [UPS],

Dividends:

• Nothing Significant

 

Reading, Links:

Nothing Significant

29th January 2012: Economic Growth In the UK Poised For Capitulation – Small Businesses On The Breadline

Quote of the Day:

And what most people don’t understand is the bulk of business in this country is small business.

 

Alphonso Jackson

Macro Overview

Small Businesses In The UK On The Breadline

• This week my brother-in-law asked me about an investment in a company which allowed savers to invest directly in tranches of business loans: “peer-to-peer lending companies”. The average yield was over 8% and the number of defaults was very small. I’t an interesting concept: anyone can become a diversified lender to fledgling UK businesses.
• As this Telegraph article shows, many companies have rushed in to fill the niche left by traditional community banking in the wake of the biggest recession in a generation.
• This is what I love about living in a dynamic economy like Britain’s. There are always entrepreneurs looking to take advantage of market dislocations. But I gave my brother-in-law a note of caution; Britain is entering a recession, along with the rest of Europe and tail-risk potential is building in every economy – this changes the prospects for all investments.
• During the stimulus-led bounce of 2010 and early 2011 new businesses had a comforting tail-wind. But poor economic numbers out of the US and a Eurosclerosis over the summer of 2011 soon changed that. When we lend to companies we assume credit risk. One has to always look at credit risk with a top-down overlay: how would this company stand up in a recession? As I look to start up a business myself, this is something I have a great personal interest in.
• In my ground-work for the economic outlook for small businesses I came across the usual cautious tone in the mainstream press (e.g. see this article in the FT, last week). But then I came across this amazing statistic in the Yorkshire post – it’s so alarming I’m actually going to quote it.

Firms resort to credit cards to pay bills

Published on Saturday 28 January 2012 06:00

RECORD numbers of cash-strapped businesses are resorting to their company or personal credit cards in order to pay their tax bills, according to figures obtained from HM Revenue and Customs.

As recently as 2005/2006 just 6,083 credit card payments, totalling £2.2m, were made to the Inland Revenue to meet PAYE, corporation and personal tax bills.

However, for the financial year ending March 31, 2010, this figure had escalated to 184,587 credit card transactions, totalling £485.92m.

This represents a 220-fold increase in the amount being paid on the ‘never-never’ – and lifts the lid on the true extent of the financial crisis facing struggling businesses. The figures were obtained under the Freedom of Information Act on behalf of the Debt Recovery team at Harrogate-based Ashworth Law.

• Can you believe that? Just re-read it if you dare. A 22000% increase in the amount of tax bills being paid off on credit cards in the last 6 years! If small-to-medium sized enterprises are supposed to lead this economy out of the doldrums I think our economy is in deeper trouble than we think!

Sovereign Bond Auctions

• So far European auctions have gone really well. The focus is on two peripherals now really. Greece and the swap negotiations and Portugal whose 5-year CDS spread is only 200bps (that’s not much when your CDS trades at 1400bps) away from whereGreece’s was last August. And we all know what happened to Greek CDS after August of 2011.
• Chart of the Day is Portuguese 5 Year CDS Spreads.

Important Week For Global Macro Data

• We had US GDP out last week, which was obviously very important but, from an “international perspective” this week will be equally important. There is so much data coming out.South Korea and the US disappointed a little with their GDP numbers, but we have many more big numbers out this week including: Canadian and Spanish GDP and US ISM numbers later in the week.
• Then there is the small issue of the EU summit on Monday. Yes… I know, another one. I honestly think we may soon reach the point where we should just report when EU leaders are not in summit meetings. Clearly, the Greeks are not the only ones feeling the pressure. There are calls for Germany, now that is has got what it wanted (Treaty Change, ECB and Fiscal punishment of peripherals) to now contribute something of its own towards the fiscal union – see this Reuters report.
• I’m of the same opinion really. It is true that German tax-payers may be indirectly contributing via inflationary policies by the ECB but I think this hyperinflation hand was deliberately over-played by a shrewd Merkel. Really they should front up some hard cash to the EFSF as part of my suggested three-pronged attack on Eurosclerosis.
• Earnings are sort-of in-line with analyst estimates but forecasts coming from executives seem to be a little erratic. Signs to me that the business outlook is very unclear – not a great sign for capex and business growth. To add to this it appears that much of the growth over the last few months has been inventory stockpiling. As ZeroHedge report, it would seem that 1.9% of the 2.8% growth in Q4 2011 was just inventory stockpiling. Just like the tax statistic in the first section – these are signs that there will be an inflection point in the coming growth trajectory for the economy. Let’s hope it’s a hiccup and not a heart-attack.

Market Overview

Market Discrimination

• Interesting market movement in both equities and CDS. It seems that macro data has been less influential in price discovery, generally speaking. We see a big divergence in Portuguese CDS vs the rest of Europe. It’s the same with single-name stocks. On the same day we saw the market push Microsoft to a new high, it also hammered Google for poor results. The market is very discriminatory once again – perhaps it’s time to go back to bottom-up?

 

Chart of the Day

Daily Auction Calendar - 29th Jan 2012

 

 

Portugal 5 Year CDS (Source: Bloomberg)

Events

Macro Events:

Update:

• US GDP slipped on a banana skin and had to be revised down to 2.8% from initial 3.0% estimate

 

Alerts:

• EU SUMMIT MEETING
• Germany CPI
• South Korea Industrial Production
• Spain GDP
• US PCE Core

 

Corporate Events:

Results:

• Cathay Financial [2882 TT], FujiFilm [4901 JT], Philips [PHIA NA], NanYa Plastics [1303 TT],

Dividends:

• AON [AON]

 

Reading, Links:

Nothing Significant

26th January 2012: Bye Bye “Merkozy” Hello “Merkeron” – Hit Sarkozy Fire An Economic Bazooka Or Hurl A Political Boomerang?

Quote of the Day:

Austerity, as painful as it seems (and as much as the Europeans and the Americans say that “we don’t want austerity” under any measure) worked for Asia – and who are we to say that it won’t work for us?

Stephen Roach – Morgan Stanley Asia CEO

Macro Overview

Will Merkel Offer Cameron An Olive-Branch?

• What’s this? A Bloomberg report indicates that Merkel seems to be taking a step back from their joint stance with France to shun Britain out of the EU treaty debate – specifically on the rift over the Financial Transactions Tax. I was quite scathing about Cameron’s diplomatic approach to those negotiations… but I’ll be the first to admit – hey perhaps I was wrong?
• One thing for sure Sarkozy will be feeling a little abashed by this move by Merkel. Now there is talk of a Sourthern Periphery, a “soft core” and a “hard core” of which France is no longer a part of. Indeed the Sungard macro research team (below) imply that France will likely be an integral part of the next Eurozone crisis.
• Zut alors, Nicolas. Disintegration of your European policy, one of the pillars of the election campaign is not what you need at this moment in time. Sacrebleu!

Roachie Goes Austrian In Switzerland

• Good little Bloomberg interview with one of my favourite economists, Stephen Roach. But this is the first time I’ve heard him sounding so pro-austerity but you cannot get any clearer than this. Notice he also agrees that China will not have a hard-landing inChina. I’m inclined to agree,China just has too many stimulus alternatives to mitigate a down-turn even ifEurope plunges into recession.

Financial Software Company Providing Macro Research

• Well it’s an interesting ploy and I have to admit it makes sense for Sungard to show-off the capabilities of their multi-factor modeling systems by actually broadcasting the results. Hey, at least you know it’s independent and mathematically relatively unbiased. You can listen to the outcomes from their stress-tests here.  Makes for an interesting read, in fact – for example, if we see a segregation of Europe (PIIGS separate from core) then the factor correlations point to a 25% drop in Emerging Markets.

Market Overview

Equity Risk Back On

• Bernanke reassured investors that equities will find a fan in the Fed who will fan the inflationary fire as long as the adjustment process proceeded. Fantastic!
• AAPL came out and simply blew the lid off analyst estimates too… iphone 5? What iphone 5? Add in the falling sovereign spreads in Europe and it seems risk appetite is definitely back.
• One thing I will say… Volatility is beginning to look quite attractive again. VIX could easily go to 15 but I don’t think you can go wrong with beginning to nibble at single-name volatility trades with the VIX at 18. We have not entered a low-volatility paradigm, over the long term, we are still in a vol-spike minefield… possibly for the next 24 months. See Chart of the Day – VIX

Chart of the Day

VIX (Source: Bloomberg)

 

Events

Macro Events:

Update:

• Nothing Significant

Alerts:

• Japan Inflation
• South Korean GDP

 

Corporate Events:

Results:

• Canon [7751 JT], Chevron [CVX], Ford [F], Honeywell [HON], NipponSteel [5401 JT], NTT Docomo [9437 JT], Procter & Gamble [PG]

Dividends:

• Ford [F], Morgan Stanley [MS],Texas Instruments [TXN],

 

Reading, Links:

Nothing Significant

23rd January 2012: The New Emerging Gold Standard

Quote of the Day:

The gold standard has one tremendous virtue: the quantity of the money supply, under the gold standard, is independent of the policies of governments and political parties. This is its advantage. It is a form of protection against spendthrift governments.

Ludwig von Mises

Macro Overview

The Old Gold Standard – Learning From The Romans

• The first thing I’d like to point you towards is this article in Reuters. Let me quote the first two sentences from the article:

India has reportedly agreed to pay Tehran in gold for the oil it buys, in a move aimed at protecting Delhi from US-sanctions targeting countries who trade with Iran. China, another buyer of Iranian oil, may follow Delhi’s lead.

The report, by the Israeli-based news website DEBKAfile, states that Iran and India are negotiating backup alternatives with China and Russia, should the US and EU find a way to block the gold payment mechanism.

• All too often conversations about Gold standards escalate quickly into political arguments about Nixon, Bretton Woods and the long term history of Gold currency standards. Modern Monetary Theorists and Gold bugs face off against each other, implying: either you have a gold standard or you do not.
• But the reality is not so simple. If that is the case, why do fiat currency governments still hoard massive banks of gold? Surely, there must be some sort of weight to this collateral. In fact, even during the so-called gold standard era of the mid 20^th century, only part of the currency base was ever covered by gold. We’d have to go back to Roman times to find currencies which were 100% backed by gold (because they physically were pieces of gold!)
• While I understand the concern of many gold-bugs: fiat debasement is truly a massive economic phenomenon (if not a worrying concern) of our era. The Bretton-Woods style gold-standard is not necessarily a panacea. History rarely repeats, but it often rhymes.
• There are those who point to how the Roman Empirewas built on a Gold standard and a Gold Currency (The Denarius). The Empire’s downfall coincided nicely with the debasement of the Denarius from a gold standard. But what is often missed is the fact that, once the reputation of the currency was lost, attempts made to re-standardize to gold completely failed the economy. As I wrote in my piece: The Perils of Currency Debasement: Learning From The Romans.

The Denarius was a gold and silver coin which was introduced a couple of centuries before Christ and was the roman currency and the empire’s equivalent of a global reserve currency. However, in the centuries after Christ, starting around the second century AD, it was systematically debased to pay for roman fiscal mismanagement and the unsustainable obligations of a far-reaching superpower. In fact one can pin-point the beginning of the decline of The Roman Empire to the decade starting, coincidentally, with the commencement of the debasement of the Denarius. Romans simply kept shaving precious metals out of the coin and replacing the incorruptible silver and gold with a more “faith-based” system of ubiquitous scrap metal + “golden promises” toward a “strong Denarius policy” (heard that one before?). Saving a very brief flirtation by Diocletian to bring back a heavier gold and silver standard, this practice continued until it tarnished the luster of loyalty; The Roman Empire had no faith, no purchasing power, no wealth and, eventually, no purpose.

As I alluded to, people often look at gold currency in the wrong context; just because the roman system, and successful monetary systems thereafter, were based off a Gold Standard does not mean that this should necessarily be the currency-base of choice in a modern world. Currency debasement may be more of a symptom of a failing faith-based economy than a cause. Indeed, an interesting observation is that the debasement of the currency not only marked the peak of The Roman Empire, but also that, once momentum against the roman currency was entrenched, attempts by Diocletian to revert back to a gold standard were a complete failure – if anything further fueling the inflationary fire.

The New Gold Standard

• As I alluded to in one of my comments (quoting Jim O’Neill of Goldman Sachs); Economies like India, China, Russia and Brazil are set to contribute much more to global economic growth over the next ten years than the whole of Europe and America put together. In fact China could achieve this all by itself.
• During this period we are likely to see the two largest economies (Europe and the US) print the heck out of their respective fiat currencies in a sort of competitive debasement race. This is especially true with Super Mario at the helm of the ECB – who appears to be much more accommodative to creatively accommodative monetary policies – see LTRO comment. This in turn motivates the US to keep pace with its own currency debasing  policies (currency rates are just a relative value game, after all). This currency rate helps the central banker to import just the right amount of inflation where its own reflationary tools have little traction (ZIRP/zero bound of interest rates).
• This is why it is extremely interesting to see the emerging growth superpowers looking to diversify away from traditional fiat settlement currencies. As wrote in a group email today:

I think the “gold standard” is often considered a black and white issue, whereas the reality is normally something a little more opaque. Perhaps we are already moving towards a sort of gold standard – not in the Bretton Woods sense but in the sense that governments will look to gold as an exchange mechanism/collateral for large deals?

Interesting the intimacy of dialogue between Italy and China last year when it was reported that China may be stepping in to help Italy with debt purchases. Given the respect and hunger the Chinese have for gold and the fact that Italy has the largest Gold-to-GDP ratio of any large economy, it would not surprise me if this came up in conversation

Gold to GDP Ratios

.

• The Italy/China discussions were highlighted in my comment a while ago: The Marco Polo Connection. Today we hear, not only Ron Paul but front-runner Newt Gingrich making some pretty assertive comments on the concept of getting “back to hard money”.
• But it may be worth considering the emergence of a new gold standard of the 21^st century. One where economic juggernauts vie for superior gold reserves as a measure of their fiscal prowess and fundamental proof of their creditworthiness in a World where the true value of fiat currencies is hard to predict or quantify. After all… history rarely repeats, but it often rhymes.

Market Overview

Global Slowdown and Mild Weather Weigh Heavily On Hard Commodities

• Hardly surprising that hard commodities and fossil fuels are down given the outlook for global growth and the relatively mild weather we’ve had acrossEurope. But there is another side to this argument as described above: the debasement of the denominators. Perhaps it is time to start looking at commodities like Coal and Nat Gas to buy. Chart of the Day shows Central Appalachian Coal Futures… through all the good news out in the past month or so the price is still down over 20% from where it was just 6 months ago.

Chart of the Day

Central Appalachian Coal Futures (Source: Bloomberg)

 

Events

Macro Events:

Update:

• Nothing Significant

Alerts:

• Australia Inflation
• Germany IFO Business Survey
• Singapore Inflation
• US FOMC

 

Corporate Events:

Results:

• Boeing [BA], Citrix Systems [CTXS], ConocoPhilips [COP], Motorola [MSI],

Dividends:

• Nothing Significant

Reading, Links:

Nothing Significant

23rd January 2012: The Art Of Torture – Punishing The Greeks

Quote of the Day:

They want to punish Greece, they want to show to other governments that this is not the road to take…

Christian Schulz – Berenberg Chief Economist

 

Macro Overview

Greece The Fly In The Ointment

• What’s up with the Greek-Creditor situation? I mean don’t they know the importance of this negotiation? Greece is effectively the only fly left in the ointment for the EU recovery.
• Well part of the reason why things are so tense in Athens right now, it is important. As Schulz said (Quote of the Day) this is a benchmark for other PIIGS (especially Portugal) to study. In actual fact, it’s a benchmark to the entire Eurozone. The message is loud and clear: if you stray beyond your official fiscal guidelines we (the European “Core”) will do everything in our power to ensure that you (the European periphery) are punished.
• Firstly, you will be punished by a stoic Central Bank, which will strictly follow a mandate considerate of the Eurozone in aggregate not by showing mercy to any ailing (even failing) government within the Eurozone – see my comment Structural Gamesmanship: Monetary and Fiscal Dominance. The ECB does this via an intentionally Germanic design – with a slightly different mandate it ensures what we call “Monetary Dominance”. This is why the ECB has resisted accommodative policy for so long. This is why the independence of the ECB is of critical importance.
• Secondly, you will be punished by the political elite of core members who will resist all temptation to apportion any of their own revenues (taxpayers money) or reputation directly to your aid.
• Thirdly, there will (soon) be structural punitive measures baked into the Treaties of Europe… That’s what Merkel and Sarkozy are currently negotiating with the rest of Europe! Check this sentence out in a recent Bloomberg article:

…ministers, will require a centralized “correction mechanism” to be triggered “automatically” in cases of “significant” deviations from a target structural deficit of 0.5 percent of gross domestic product…

• Of course it’ll be interesting to see the exact detail of this “correction mechanism”. It’ll be interesting to see just who if affects, it’ll be interesting to see what happens when Germany or France stray beyond their own guidelines… some Euro-skeptics of course remember when Germany and France broke their own treaty arrangements on the Stability and Growth Pact. Suddenly the rules didn’t apply any more. But that’s another story for another time…
• The reality is the Greek-Creditor situation is a very important deal for the precedent it sets. The Eurozone needs to send a real message that if any sovereign plays with fiscal fire it will indeed get burned. But it needs to do this without tipping Europetowards disintegration. The pressure, I think, is on Greece to step up to creditor demands.

Market Overview

Bank Risk Is Back On

• The most prudent sovereign state had its first round of elections over the weekend and the Finnish public voted for a pro-Euro candidate. That may have set the tone in Europe.
• It may not look like much but the mix of performance was very encouraging. As soon as the morning session got underway the Euro broke the 1.30 level without even too much fuss. Then the banks started to rally, in particular, it was the dead cats that were bouncing: Commerzbank, Unicredit and Soc Gen all recording massive gains in the region of +10%.
• Chart of the Day is a graph of Commerzbank shares since the beginning of the year – take a look in particular at the volume.

 

Chart of the Day

Commerzbank (Source: Bloomberg)

 

 

Events

Macro Events:

Update:

• Nothing Significant

Alerts:

• Nothing Significant

 

Corporate Events:

Results:

• Apple [AAPL], Coach [COH], Du Pont [DD], Johnson & Johnson [JNJ], MacDonald’s [MCD], Nidec [6594 JT], Siemens [SIE GR], Stryker [SYK], Verizon [VZ], Yahoo [YHOO]

Dividends:

• Nothing Significant

 

Reading, Links:

Nothing Significant

22nd January 2012: Changing China – Enter The Dragon

Quote of the Day:

A goal is not always meant to be reached, it often serves simply as something to aim at.

Bruce Lee

 

Macro Overview

Enter The Dragon

• Kung Hei Fat Choi or Happy New Year to all our Chinese friends!
• An apt quote from Bruce Lee as we enter the Year of the Dragon. This is a year of change for China, a new plan, a new leadership but not a new philosophy. China continues to set extremely ambitious goals for itself and yet, despite the skeptics of the past decade, seems able, not just to achieve them, but to exceed them.
• The next 10 years will be no different in this respect. But the goals will change; a breakneck growth-rate is no longer the panacea for China. As Jim O’Neill  points out, if China grows at a “mere” 7.5% pa it will likely contribute more to the global economy than Europe and America put together over the next 10 years. If Westerners want an exhibit of “change they can believe in”, they’d do well to look East.
• China will morph into a model which focuses on internal demand and high-employment industries (tertiary industry). This will lessen the dependence on Western consumption and also, crucially, raise wages.
• To do this without creating volatility, pockets of social unrest and rising tail-risk is impossible. To do this without risking mass food inflation spikes, social revolt and plunging the economy off a cliff (hard landing) is difficult, but not impossible – and my money is on China’s new leadership navigating the minefield of the next decade as deftly as the old leadership did the last decade.
• That said, there is a BIG difference between being optimistic about China’s medium and long term economic prospects and positioning yourself as “risk on” in a China-centric/Asian investment portfolio. It will be vitally important that investors understand the difference between the two in the Year of the Dragon.

Market Overview

Microsoft Gives Google A Whoopin’

• Microsoft executives must be allowing themselves a wry grin this weekend. Microsoft, once the largest company in the World, has played second fiddle to Google for much of the last 7 or 8 years. But on Friday, despite the slightly unpredictable economic outlook Microsoft beat earnings, whereas the young pretender missed earnings for the first time. Still young enough to feel the back of Mr Market’s hand.
• MSFT shares rose 5.65%, whereas GOOG dropped 8.38%… what’s that $20bil, $25bil difference within a day? Nice little bump for MSFT shareholders… and they get a dividend too!

 

Auction Calendar

• Chart of the Day – see auction calendar. Another big week for Italy.

 

Chart of the Day

Bond Auctions - Daily Chart (click to enlarge)

Bond Auctions - Weekly Chart (click to enlarge)

 

Events

Macro Events:

Update:

• Taiwanese Industrial Production disappoints (-8.15%)
• HK Inflation persistently high at  +5.7%

 

Alerts:

• Hong Kong CPI
• TaiwanIndustrial Production

 

Corporate Events:

Results:

• Halliburton [HAL],Texas Instruments [TXN]

Dividends:

• Lowe’s [LOW], Thyssenkrupp [TKA GR]

 

Reading, Links:

Nothing Significant

19th January 2012: Greek Funding – Mind The Gap

Quote of the Day:

It is going to happen. Greece is insolvent so it will default

Edward Parker – Managing Director for Fitch’s Sovereign and Supranational Group (EMEA)

 

Macro Overview

Greek Stand-off

• Greece is still weighing heavily on investors minds and it’s looking more and more like PSI (Private Sector Involvement) is stalling at the final hurdle.  There’s a bond-swap deal in the works but the key variables are the respective interest payments. Of course, that’s the part they cannot agree on.
• Greek Finance Minister Venizelos said that there appears to be a financing gap (“they”, the private investors, want more interest than we want to give them) and this gap will need to be plugged by the official sector (that means other Eurozone nations). But here is the thing, nobody wants to budge. The Greek government does not want to budge on what it will be willing to pay out and the private sector will not budge on what it will accept in return for the massive haircut… to add more problems, the official sector will not budge on filling in the Greek-PSI gap.
• Aye aye aye… it’s a farce isn’t it? The lengths Europeans will go to to avoid saying the “D-word” … but we’ll call a spade a spade, just like Fitch’s Mr Parker: Greece has defaulted – it defaulted 18 months ago. The rest is just very expensive ISDA semantics.
• We’re in a bit of pickle as things stand and the world will be watching… nobody more so than Portugal (see Chart of the Day) for Portuguese CDS.

 

Market Overview

Strange Market

• I’m still a little perplexed by the market. In my view it should have been rallying much harder, much earlier than it is doing and, if anything I was expecting by now to be entertaining conversations of how the market was overbought with the S&P approaching 1400. Instead the market has been steady and slow, volatility has suddenly dropped. Today, for example, the jobs numbers out of the US were really good but the market was moving lethargically. I guess mild earnings outlook and the Greek/Portugal situation still weighing on investors.

Chart of the Day

Portugal 1 Yr CDS (Source: Bloomberg)

 

Events

Macro Events:

Update:

• US Inflation – in line
• US Jobs – good numbers, initial jobless claims at 352k (lowest since pre-Lehman)

Alerts:

• Hong Kong CPI
• Taiwan Industrial Production

 

Corporate Events:

Results:

• General Electric [GE], Schlumberger [SLB], SK Innovation [096770 KS],

Dividends:

• Colgate-Palmolive [CL]

 

Reading, Links:

Nothing Significant

18th January 2012: The Most Important Thing In The World… Is China

Quote of the Day:

I’m very optimistic on China, the key challenge for China here is the structural rebalancing that was outlined 9 months ago with the passage of the 12^th  5 year plan – to move from and investment and export-led economy to a consumer-led economy. I think the Chinese are very serious about engineering the shift and I think you’ll be pleasantly surprised to the progress they make in building out a consumer-led growth model. So I’m of the view that we can look for positive surprises from China not negative surprises.

Stephen Roach – Morgan Stanley non-executive chairman

China creates the equivalent of another new Greek economy every 4 months, so you could write off Greece completely and within 4 months China has created another one…

Jim O’Neill – Chairman of Goldman Sachs Asset Management

Macro Overview

Will China-Bashing Continue?

• Yes – is the quick answer. There are too many easy political points to be won by bashing China, in both Europe and the US. That’s the sad state of affairs. Paul Krugman is one of the main antagonists in this respect, so too is Jim Chanos – legendary hedge fund manager. Although, from a macro perspective, the Krugmans of this World are more concerning, as they argue from a political pulpit (Chanos, let’s face it, just wants to make money). As far as I’m aware, neither man has spent any appreciable time in China.
• But China has been the scapegoat for many-a-politician in the West. A real shame when our problems have been almost entirely our own making. That’s what I’ve been trying to show in the past two comments here and here. As developed countries we enjoy many privileges (don’t talk to Asia about Greece and the “fairness” of IMF bailouts!). Whether China chooses to partly control its own economy via the spigot of a currency fixated to the USD is largely China’s own business – they cannot do it forever, we all know that. Of course, it’s fine to brand China a currency manipulator, provided you brand Bernanke one too. I’ve written so much about this you can find it on my blogs here, here, here, here, here, here and here.
• The grim reality is that one of the real threats to the three-legged stool which has supported the global economy for the last 3 decades (see comment: The Original Debt-Pimp) is protectionism. Protectionism towards China will do very little to help Western Economies – production would just move to other low-cost manufacturing bases (Vietnam, Indonesia) anyway.
• If you’re worried about losing manufacturing jobs to Asia and South America you’re about 40 years too late, very little to be gained by trying to ratchet back protectionism against a world where half the population work for less than $2.50 a day. Sure America could become the biggest apparel manufacturer in the World… provided you don’t mind paying $500 for a pair of sneakers.
• I hate to put a pessimistic tone on things, but with big presidential elections coming up in the midst of another global slowdown in the West, I think we can expect protectionism to be high on the political agenda never-the-less.

Comments From The China Bulls

• But not every foreigner misunderstands China. The two most prominent characters at the two most famous investment banks: Stephen Roach of Morgan Stanley and Jim O’Neill of Goldman Sachs, have been the biggest roaring bulls on the Chinese economy for many years now. They show no signs of abating either. Stephen Roach said on Bloomberg recently that he thought China was in a much better place than India specifically with China’s success in bringing down inflation.
• But today I’d like to focus on some choice words from Jim O’Neill on China. Worth watching the video, here.
• A few choice excerpts on China:

If I was a hard landing guy I wouldn’t be feeling too excited this morning

 

I’m assuming this decade China grows by 7.5%, with inflation 3-4 [percent], translated into Dollars, if they do that (7.5)… if they do that, China will contribute (in Dollar terms) more than the US and Europe put together… so it’s the most important thing in the World – is what I’m trying to say.

 

The thing that generally impresses me is the Chinese policy-makers themselves – they don’t shy away from acknowledging that many of these things are issues and they try to deal with them. The big one is the property issue. I think something that many people in the West, particularly in the US, misunderstand about this. It’s not like the UK or, particularly, the US bubble bursting. Chinese property prices have turned because the Chinese authorities have deliberately stopped them going up. I don’t know anywhere in the West… that should have been what the Fed did in ’05 may be ’06 may be even flirted with it before that.

• So there we have it, we’ve come full circle this week. The difference between the vision of Chinese and Anglo-Saxon policy-makers in a nutshell.

Market Overview

Something is missing

• Is it just me or is there something uneasy about this equity market. Firstly, all the significant news onEuropecame out last month. It actually ended on a relatively positive note. I mentioned that theEuropeneeded a three-pronged attack on the crisis. Short, Medium and Long Term objectives. These were: ECB participation, reformation of the EFSF and Treaty Change. Almost every one of these was achieved by December – so why didn’t the market rally then? Why wait until January? And now that it is trading up why is it so tentative – why are equities not charging? Why is the Euro not at 1.40 again? As far as I’m aware it’s only really been good news so far this year.
• In fact Chart of the Day is (wait for it) an encouraging PIIGS CDS Chart – 5 year CDS on Ireland… note UK banks are highly geared to Irish debt.
• Earnings and a European recession are the things which must be holding the market back but, honestly, what do we know now that we did not know 3 weeks ago? Something is missing… and I can’t quite put my finger on it. But if earnings come even in-line I don’t see much holding back this equity market from quite a sharp rally into Spring.
• Big numbers out tomorrow: American Express, Bank of America, Google, Intel, IMB, Microsoft, Morgan Stanley

Chart of the Day

Ireland 5 yr CDS (Source: Bloomberg)

Events

Macro Events:

Update:

• Nothing Significant

Alerts:

• US Inflation (CPI)

 

Corporate Events:

Results:

• American Express [AXP], Bank of America [BAC], Blackrock [BLK], Capital One [COF], Google [GOOG], Hang Lung Properties [101 HK], Intel [INTC], IBM [IBM], Microsoft [MSFT], Morgan Stanley [MS]

Dividends:

• CVS [CVS]

Reading, Links:

Nothing Significant

17th January 2012: Celebrity Central Banking – The Committee To Pimp Your Wealth

Quote of the Day:

Federal Reserve (Fed) policy appears all too dependent on Fed Chair Bernanke rather than what central banking should be about: the preservation of purchasing power. We hear the latest whim on what trick might work to boost the economy, disguised in the name of transparency.

What the Fed and the SNB have in common is that they are both run by celebrities.

Axel Merk

 

Macro Overview

The Committee To Pimp Your Wealth

• Yesterday I wrote a rather scathing article on Greenspan the Original Debt-Pimp of Western society. With a generation of easy credit, extended courtesy of an easy monetary policy, was it any wonder that the popularity of Keynesianism and Modern Monetary Theory reached new heights? Debt no longer mattered; it could be permeated on to the sovereign balance sheet and magically printed out of existence without any cost. For so many years it made sense to run expansionary policies as it was facilitated by a once-in-a-lifetime global economic backdrop. Importantly, it was a financial condition of no single party’s creation – as I explained in yesterday’s three tectonic macro factors of our era. Our mind repels the blatantly obvious as being too simplistic, but a large part of the economic propulsion was just fueled simply by fortuitous circumstance not by deliberate engineered construction by mastermind think-tanks.
• Never-the-less, as Axel Merk pointed out in a great piece (Perils of Celebrity Banking), this love for modern monetary policies inevitably led to an obsessive adoration for central bankers. The gallant Greenspan slew “the Beast of Black Monday” with the first of what would be many in a long line of sharp asset-price-sensitive monetary expansion initiatives (which the media later dubbed “The Greenspan Put”). No sooner had he done so, the “celebrity central banker” was born. Not a wonkish, grey-faced committee or collective with a mundane mandate, but the standard-bearers of the economy macro and micro, the wealth protector of the individual.
• Appearing on national TV and the cover of Time Magazine as “The Committee To Save The World” the message rang loud and clear. No longer was one’s 401k subject to the natural, at times destructive, forces of the market such as economic cyclicality and market volatility. Here, in Easy Al, modern America had the guardian angel of middle class savings, a wealth protector for the masses, an insurance policy on asset prices. With this media coverage came great influence, with the influence came great power and with this power came great political interest… … and the rest, as they say, is history dear reader.
• Human psychology is funny, I played a cruel trick on my 3 year old daughter: hiding a remote I managed to convince her that I could change the TV channel with a banana. We are hard-wired to observe patterns and intuitively impute association, even when it is irrational. So it is perhaps unsurprising that decisions of policy makers during the boom decades after the late eighties were perceived as Godly masterstrokes. No matter what the Feds and Politicians fumbled and mumbled out (sometimes even talking down the economy – see Greenspan’s irrational exuberance speech), the economy went from strength to strength, asset prices went higher and higher. Media stories portrayed these relatively irrelevant “banana remote” gestures as intellectual, even courageous, acts of heroic stewardship by a select few economic Maestros – intellectual elitists, moral giants among ignorant men and women like you and I, dear reader.
• We cannot blame the media, it feeds us only what we wish to consume. At the time there was little appetite for the bland hypothesis that the magical growth dynamic would have persisted irrespective of their ineffective tinkering, or even lack thereof. Of course, if you even dared to suggest that their so-called exemplary influence succeeded only in deftly transforming a booming economy with strong fundamentals into the mother of all financial crises you would have been torn apart as a pessimistic kill-joy and your pathetic skinny carcass dragged around Wall Street for the “Smart Money” investors to ridicule and jeer at.
• But we know the real story, dear reader, we know that everything happens for a reason and a purpose.

 

Market Overview

Good Bond Auctions (Still) Buoy The Market

• Once again, the bond markets are leading sentiment. But the equity market break out is quite conservative. We need to either break the back of the shorts and trigger a sharp short covering rally. I don’t feel it yet, but they’re squealing a little… trust me, they’re squealing.
• One reason not to be quite so cheerful is the Portuguese situation.Portugal is looking like it is becoming the next Greece… and Greece looks like it’s becoming the next … well… Enron. See Chart of the Day for Portuguese CDS levels.
• That said, the Chinese growth numbers were better than even the bulls like Jim O’Neill were expecting – more from him another time!
• The other reason is earnings, I think if we see a good trend in earnings data then we are off to the races. So far it’s a little ambiguous – if anything disappointing (see Citi earnings missed forecasts)… so it’s a mixed environment. I cannot help feeling that the market needs to digest things a little and latch onto a definitive theme. That theme may well be earnings – Goldman, EBay and a few others reporting tomorrow – given Citi’s clanger it may be wise to keep an eye on GS numbers!

 

Chart of the Day

Portugal 2 Yr CDS (Source: Bloomberg)

 

Events

Macro Events:

Update:

• Chinese Growth Numbers were good!

Alerts:

• Japan Industrial Production
• New Zealand CPI

 

Corporate Events:

Results:

• ASML [ASML NA], Bank of NY Mellon [BK], EBAY [EBAY], Goldman Sachs [GS], Charles Schwab [SCHW], State Street [STT], US Bancorp [USB]

 

Dividends:

• Caterpillar [CAT], General Dynamics [GD], Procter and Gamble [PG],

 

Reading, Links:

Nothing Significant