Stocks rebounded but one still need to be mindful about the situation in North Korea, which relationships between two Koreas seemingly to be deteriorating with latest North Korea expelling eight South Korean government workers and threatening to close its borders to its neighbor to the south completely. Also, persistent concerns about the debt situation in Europe and the potential of it to evolve into a global problem have already wiped out about 6 trillion USD of value in global equities.
On top of that money supply had stopped increasing. Liquidity is drying up and a few short weeks ago, mutual fund cash levels reached a record low of 3.4% , according to Jason Geopfert, president of SentimentTrader.com. The old record of 3.5% was set in the summer of 2007 at the very end of a cyclical bull market off the 2003 lows. Back then, it took fund managers 41/2 years to get fully invested.
The chart pattern is clear to me. Valuation is still very high and monetary indicators are clearly negative for stocks. Longer-term sentiment indicators have not changed for the better – patterns that look like potential topping formations. If prices break below the lower boundary, the huge rally off the March 2009 low is over and the bear market is back.
Right now, the arguments for an eventual rather than an immediate.
Wednesday, May 26, 2010
Tuesday, May 25, 2010
In East and In West
Tensions mount in Korea and investors see caution flags in Spain as it bails out struggling savings banks. Overnight equity marts throughout Asia and Europe slumped.
North Korea has reportedly put its military on alert, either it is a bluff or not, it will weigh heavily on investor sentiment all the way. South Korean currency KRW has dipped to new 14-month lows against the greenback, adding to the 11.3% decline it has been forced to endure this month alone. It is perched to record its second-worse performing month since the Asian banking debacle shredded markets in the late 1990s. Relations between the two Koreas are at their worst for decades. The North says it has abrogated its non-aggression agreement with the South, trade links have been cut, shipping lanes closed, and the armed forces of both sides are on alert.
The latest move by the US isn’t helping either to lower the tension with its jets deployment in the peninsula. The arrival of the top-of-the line aircraft at Kadena air force base comes after U.S. President Barack Obama reassured Prime Minister Taro Aso in a telephone conversation this week of Washington's commitment to the defence of its Asian ally. And on the other hand, China, being the North Korea's most important ally, biggest trading partner, and main source of food, arms, and fuel, is not fully convinced by Seoul’s arguments. The communist North denies sinking the Cheonan, one of the South's worst military losses since the Korean War.
On the other end of this planet, Spain’s central bank has decided to bail out regional savings bank CajaSur with $621.75 million. The savings banks’ ownership models make it difficult to raise money as they are controlled by local politicians and cannot easily sell shares. CajaSur, formerly run by the Catholic Church, lost $748 million last year and there are 45 savings banks in Spain and investors have yet another reason to pull out of Europe and head for United States.
As risk aversion looks to be in full swing, commodities, coupled with equities and high yielding currencies have taken it on the chin. Oil prices have fallen in tandem with the slumping stock markets and sits south of $68/bbl.
North Korea has reportedly put its military on alert, either it is a bluff or not, it will weigh heavily on investor sentiment all the way. South Korean currency KRW has dipped to new 14-month lows against the greenback, adding to the 11.3% decline it has been forced to endure this month alone. It is perched to record its second-worse performing month since the Asian banking debacle shredded markets in the late 1990s. Relations between the two Koreas are at their worst for decades. The North says it has abrogated its non-aggression agreement with the South, trade links have been cut, shipping lanes closed, and the armed forces of both sides are on alert.
The latest move by the US isn’t helping either to lower the tension with its jets deployment in the peninsula. The arrival of the top-of-the line aircraft at Kadena air force base comes after U.S. President Barack Obama reassured Prime Minister Taro Aso in a telephone conversation this week of Washington's commitment to the defence of its Asian ally. And on the other hand, China, being the North Korea's most important ally, biggest trading partner, and main source of food, arms, and fuel, is not fully convinced by Seoul’s arguments. The communist North denies sinking the Cheonan, one of the South's worst military losses since the Korean War.
On the other end of this planet, Spain’s central bank has decided to bail out regional savings bank CajaSur with $621.75 million. The savings banks’ ownership models make it difficult to raise money as they are controlled by local politicians and cannot easily sell shares. CajaSur, formerly run by the Catholic Church, lost $748 million last year and there are 45 savings banks in Spain and investors have yet another reason to pull out of Europe and head for United States.
As risk aversion looks to be in full swing, commodities, coupled with equities and high yielding currencies have taken it on the chin. Oil prices have fallen in tandem with the slumping stock markets and sits south of $68/bbl.
Wednesday, May 19, 2010
The Fate of EUR
From Greece to France and latest German … the story line remains EUR bear. The common currency tumbled to its lowest point in over four years on the news that the German government temporarily banned naked short-selling. Instead of solving the problems, it created wilder volatility and more speculations with measures included bans on naked short-selling and naked credit default swaps of the Euro area government bonds, as well as a ban on the naked short-selling of shares from ten major German banks and insurers.
Let me clarify, there is one critical difference between conventional short-sell and naked short-sell – in the practice of a conventional short trade, the party executing the short trade secures or borrows the underlying assets if is shorting from a third party, whereas in the naked short, this is not done.
With investors shedding risk and seeking out the safe haven assets, pretty much all major currencies have retreated against the Greenback and the JPY. Oil will be at its lowest level and it is going to be interesting to observe the gap between the GBP and EUR to widen further. The coming US-China Strategic and Economic Dialogue that will commence in Beijing on May 24, will be less an event to talk about RMB revaluation. Still, the agenda this year bears similarities to the 2009 edition with trade and savings imbalances to dominate the economic talks followed by reviving ‘Six-Party Talks’ with North Korea among other. The RMB at this point will remains pegged to USD, though concerns about the EUR have boosted the Chinese currency’s valuation on a trade-weighted basis in any case, which could forestall a move or limit its degree.
Our markets will continue to be under selling pressure with the support level at 1,280 and lesser attention will be paid to current reporting season. For one strange reason or another, the usual dictum ‘ Sell in May, Go Away’ seems quite applicable in this case. Perhaps, just another coincidence, I guess. Of course, the run-up to the Jun-Jul 2010 FIFA World Cup finals in South Africa is not helping either.
Let me clarify, there is one critical difference between conventional short-sell and naked short-sell – in the practice of a conventional short trade, the party executing the short trade secures or borrows the underlying assets if is shorting from a third party, whereas in the naked short, this is not done.
With investors shedding risk and seeking out the safe haven assets, pretty much all major currencies have retreated against the Greenback and the JPY. Oil will be at its lowest level and it is going to be interesting to observe the gap between the GBP and EUR to widen further. The coming US-China Strategic and Economic Dialogue that will commence in Beijing on May 24, will be less an event to talk about RMB revaluation. Still, the agenda this year bears similarities to the 2009 edition with trade and savings imbalances to dominate the economic talks followed by reviving ‘Six-Party Talks’ with North Korea among other. The RMB at this point will remains pegged to USD, though concerns about the EUR have boosted the Chinese currency’s valuation on a trade-weighted basis in any case, which could forestall a move or limit its degree.
Our markets will continue to be under selling pressure with the support level at 1,280 and lesser attention will be paid to current reporting season. For one strange reason or another, the usual dictum ‘ Sell in May, Go Away’ seems quite applicable in this case. Perhaps, just another coincidence, I guess. Of course, the run-up to the Jun-Jul 2010 FIFA World Cup finals in South Africa is not helping either.
Tuesday, May 18, 2010
Investing in Commodity
It is not as simple as you think and I see kind of air turbulence for commodity in next couple of months. Things do look a little bit too perky for my taste in the short term.
There has been rapid demand for commodities from financial investors to the point that commodities have become a mainstream asset class. According to Barclay Capital, total commodity linked asset under management 36% last year to US$257 billion, with ETF program growing even faster. Only a few years ago, commodity-linked ETFs were a rare phenomenon and it has grown to become the product of choice for many commodity investors. Commodities now are becoming more financial rather than real assets. Over the past 15 years, financial futures have grown from 2 times the size of physical markets to almost 12 times the size.
As commodity markets are tiny compared to the size of financial markets, prices are easily distorted. In this respect, China – the largest nation on earth, is intimately linked to the growth story of commodities and there is no doubt at present, a desire of the Chinese authority to cool down things a notch or two. Deutsche Bank now expects growth in Chinese infrastructure spending to be slashed from 120% last year to just 4-10% this year. Industrial metals such as lead, zinc, copper and nickel are particularly sensitive to such investments.
It is also a fact that China stockpiled commodities en-masse last year and Royal Bank of Scotland has found a ferocious appetite for industrial metals from Chinese buyers throughout 2009. By stock piling commodities on a large scale, China is effectively placing their excess dollars in hard assets rather than buying the more dubious paper assets – US treasuries. It is also helped to lower large trade surpluses - a point of contention that will set RMB to appreciation path.
One should also beware of contango effects i.e. when the future is priced higher than the spot price and the roll yield is negative. Most commodities are in contango more often than not, effectively costing investors the spread between the nearby future and the more distant future every time the position is rolled. The danger is that for passive investors to be taken out by professional and active traders every time they need to roll their positions.
There has been rapid demand for commodities from financial investors to the point that commodities have become a mainstream asset class. According to Barclay Capital, total commodity linked asset under management 36% last year to US$257 billion, with ETF program growing even faster. Only a few years ago, commodity-linked ETFs were a rare phenomenon and it has grown to become the product of choice for many commodity investors. Commodities now are becoming more financial rather than real assets. Over the past 15 years, financial futures have grown from 2 times the size of physical markets to almost 12 times the size.
As commodity markets are tiny compared to the size of financial markets, prices are easily distorted. In this respect, China – the largest nation on earth, is intimately linked to the growth story of commodities and there is no doubt at present, a desire of the Chinese authority to cool down things a notch or two. Deutsche Bank now expects growth in Chinese infrastructure spending to be slashed from 120% last year to just 4-10% this year. Industrial metals such as lead, zinc, copper and nickel are particularly sensitive to such investments.
It is also a fact that China stockpiled commodities en-masse last year and Royal Bank of Scotland has found a ferocious appetite for industrial metals from Chinese buyers throughout 2009. By stock piling commodities on a large scale, China is effectively placing their excess dollars in hard assets rather than buying the more dubious paper assets – US treasuries. It is also helped to lower large trade surpluses - a point of contention that will set RMB to appreciation path.
One should also beware of contango effects i.e. when the future is priced higher than the spot price and the roll yield is negative. Most commodities are in contango more often than not, effectively costing investors the spread between the nearby future and the more distant future every time the position is rolled. The danger is that for passive investors to be taken out by professional and active traders every time they need to roll their positions.
Wednesday, May 12, 2010
UK – Will the New Government Helps?
We know for sure now the British general election produced a truly knife-edge results. With 326 of 650 members of parliament needed for a majority, the conservatives have 306, labour has 258 and the liberal democrats 57 and minor parties 28.
Question is that how this coalition government to change the façade of the UK economy and possibly lead to better days ahead. Out from the shadows comes the wrongly derided ghost of such coalition – the 1931 First National Government. The last such coalition took place in a time of equivalent financial crisis – the autumn of 1931. Then, as now – a Labour government (then a minority government) had increased public spending and run up deficits. Remember – we are talking about a period that was only two years removed from Wall Street’s Great Crash and one in which the global Great Depression was deepening.
The National Government was formed to solve the financial crisis. It acquired a mixed posthumous reputation and in its form, it lasted only a year as Home Secretary Samuel resigned over the issue of modest Imperial Preference tariffs in 1932. It then became a largely Conservative government, although it retained several ‘Liberal National’ cabinet ministers, including Sir John Simon.
However, its economy policy was remarkably successful. It took British off the Gold Standard, devaluing pound by about 20%. It cut public spending sharply, reducing public sector pay by 10% and ended the British policy of unilateral free trade, introducing modest tariffs with exemptions for the British Empire. As a result of that, Britian enjoyed the highest five-year GDP growth in its history – lasting until 1937. New industries such as automobiles, chemicals and aircrafts – energized the economy, as did such new inventions as radar, nylon and the intellectual underpinnings of the jet engine, the computer and atomic power.
The National government was able to take unpopular decisions because of its broad popular support – 67.2% of the voters had supported it in 193e1 and it was re-elected in 1935 with 53.3% of the vote.
This would be the principal advantage of a Conservative-Liberal Democrat coalition today, which would have 59.1% of the vote and would also have a House of Commons majority of 76 seats.
Question is that how this coalition government to change the façade of the UK economy and possibly lead to better days ahead. Out from the shadows comes the wrongly derided ghost of such coalition – the 1931 First National Government. The last such coalition took place in a time of equivalent financial crisis – the autumn of 1931. Then, as now – a Labour government (then a minority government) had increased public spending and run up deficits. Remember – we are talking about a period that was only two years removed from Wall Street’s Great Crash and one in which the global Great Depression was deepening.
The National Government was formed to solve the financial crisis. It acquired a mixed posthumous reputation and in its form, it lasted only a year as Home Secretary Samuel resigned over the issue of modest Imperial Preference tariffs in 1932. It then became a largely Conservative government, although it retained several ‘Liberal National’ cabinet ministers, including Sir John Simon.
However, its economy policy was remarkably successful. It took British off the Gold Standard, devaluing pound by about 20%. It cut public spending sharply, reducing public sector pay by 10% and ended the British policy of unilateral free trade, introducing modest tariffs with exemptions for the British Empire. As a result of that, Britian enjoyed the highest five-year GDP growth in its history – lasting until 1937. New industries such as automobiles, chemicals and aircrafts – energized the economy, as did such new inventions as radar, nylon and the intellectual underpinnings of the jet engine, the computer and atomic power.
The National government was able to take unpopular decisions because of its broad popular support – 67.2% of the voters had supported it in 193e1 and it was re-elected in 1935 with 53.3% of the vote.
This would be the principal advantage of a Conservative-Liberal Democrat coalition today, which would have 59.1% of the vote and would also have a House of Commons majority of 76 seats.
Methane Ice
For the second time of my useful life, geology is becoming part of me. The latest news to-date is that the 100-ton dome, which is designed to funnel leaking oil from the Gulf, is lowered into sea to cap oil leak this Friday. It is expected to be operational next Monday, when a large part of the oil would then be funneled up to a containment vessel on the surface for storage and processing. The BP is racing to contain an estimated 200,000 gallons of crude spewing into the sea daily, threatening the ecologically fragile Gulf Coast wetlands and shorelines.
Well, it is not my intention to dwell more than being told. What interesting to my finding is the possible cause to what went wrong in the Gulf. What possibly happened was that the drilling hit the area of unusual ice-like crystals called methane hydrates, hence the catastrophic oil spills.
We know for sure in the last 10 or 15 years, the industry will avoid methane hydrates, which a well known geological hazard and they are dangerous. But the rush to produce more oil for domestic consumption has forced companies like BP to take bigger risks by drilling in deep waters that are a breeding ground for hydrates. More worrying it’s the recent approval by President Barack Obama to drill in the Arctic Ocean, which could expose a fragile and remote environment to additional risks from catastrophic oil spills.
Methane hydrates only exist in cold water – just above or below freezing and at the undersea pressures found in deep water off the continental shelf. This slushy of sea mixture and methane gas makes drilling more complicated and makes the seafloor unstable. If hydrates are warmed by oil moving through pipes, they can turn into methane gas (known as ‘kick’ to drillers) that can shoot back up the drilling pipe and ignite the rig – a possible cause of the blast aboard the Deepwater Horizon rig on April 20.
In 2003, Unocal abandoned plans to drill in the deep water off Indonesia for the same reason. China has delayed plans for offshore oil development after finding large hydrate fields. The location of methane hydrate fields are well mapped but decisions are always commercial – a tug between risk and reward. As at now, the industry’s drilling and spill clean-up technology hasn’t caught up with the economic imperative to produce more oil.
Well, it is not my intention to dwell more than being told. What interesting to my finding is the possible cause to what went wrong in the Gulf. What possibly happened was that the drilling hit the area of unusual ice-like crystals called methane hydrates, hence the catastrophic oil spills.
We know for sure in the last 10 or 15 years, the industry will avoid methane hydrates, which a well known geological hazard and they are dangerous. But the rush to produce more oil for domestic consumption has forced companies like BP to take bigger risks by drilling in deep waters that are a breeding ground for hydrates. More worrying it’s the recent approval by President Barack Obama to drill in the Arctic Ocean, which could expose a fragile and remote environment to additional risks from catastrophic oil spills.
Methane hydrates only exist in cold water – just above or below freezing and at the undersea pressures found in deep water off the continental shelf. This slushy of sea mixture and methane gas makes drilling more complicated and makes the seafloor unstable. If hydrates are warmed by oil moving through pipes, they can turn into methane gas (known as ‘kick’ to drillers) that can shoot back up the drilling pipe and ignite the rig – a possible cause of the blast aboard the Deepwater Horizon rig on April 20.
In 2003, Unocal abandoned plans to drill in the deep water off Indonesia for the same reason. China has delayed plans for offshore oil development after finding large hydrate fields. The location of methane hydrate fields are well mapped but decisions are always commercial – a tug between risk and reward. As at now, the industry’s drilling and spill clean-up technology hasn’t caught up with the economic imperative to produce more oil.
Sunday, May 9, 2010
Euro in deliberate devaluation
Over last five months, euro has fallen 17% against the US dollar. It is clear that euro is in devaluation mode. Now, I think it is a covert policy decision by the European Central Bank (ECB) to use currency devaluation as a tool for the European monetary union to survive.
Of course, if that is the direction, then, it puts countries like Portugal, Spain, Italy, Greece and Ireland at a competitive disadvantage when trying to salvage themselves from debt burdens and feeble economic activity. It is also highly likely that the ECB to aggressively and openly buy up the government debt of the weak economies to keep them breathing.
Germany is the biggest and most robust country in the euro zone and for this plan to succeed, it has to be drag Germany headlong into it. Of course, they have already done so by agreeing to provide bailout funds to Greece. Germany has a lot to lose if other euro countries end up in shambles. Firstly, Germany is on the hook for $668 billion in PIIGS sovereign debt, and not to mention the fresh $30 billion they have agreed to give Greece. Secondly, if these countries continue their downward spiral, Germany’s intra-Europe exports of about 10% of total exports promise to dwindle with it.
Europe, the IMF and the ECB are demonstrating this week that it is ready to go all out to keep monetary union intact. They announced a massive multi-year bailout for Greece and perhaps to the extent of accepting Greece junk bonds for collateral, which may jeopardize the credibility and independence of the central bank.
In latest ECB press conference, its president Jean-Claude Trichet adamantly said that a Greek default is ‘out of question’ and a biggie…he ignored all questions about the value of euro, despite its slippery slide.
Of course, if that is the direction, then, it puts countries like Portugal, Spain, Italy, Greece and Ireland at a competitive disadvantage when trying to salvage themselves from debt burdens and feeble economic activity. It is also highly likely that the ECB to aggressively and openly buy up the government debt of the weak economies to keep them breathing.
Germany is the biggest and most robust country in the euro zone and for this plan to succeed, it has to be drag Germany headlong into it. Of course, they have already done so by agreeing to provide bailout funds to Greece. Germany has a lot to lose if other euro countries end up in shambles. Firstly, Germany is on the hook for $668 billion in PIIGS sovereign debt, and not to mention the fresh $30 billion they have agreed to give Greece. Secondly, if these countries continue their downward spiral, Germany’s intra-Europe exports of about 10% of total exports promise to dwindle with it.
Europe, the IMF and the ECB are demonstrating this week that it is ready to go all out to keep monetary union intact. They announced a massive multi-year bailout for Greece and perhaps to the extent of accepting Greece junk bonds for collateral, which may jeopardize the credibility and independence of the central bank.
In latest ECB press conference, its president Jean-Claude Trichet adamantly said that a Greek default is ‘out of question’ and a biggie…he ignored all questions about the value of euro, despite its slippery slide.
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