If you have never been there, it is hard to do this country justice with simple prose – is special and it deserves to be seen that way. I am visiting the country soon, but on the southern province, which has been exudes an energy all its own since 1979. In short, China remains one of the very best profit opportunities of our lifetime.
A few months ago, China entered 22 year contract with Iraq that could worth up to US$3bn and the oil produced from the Ahdab field will help Iraq, a nation where electricity is in short supply, fuel a planned power plant that would be one of the largest in the country. For China, the deal offers a lucrative foothold in one of the most oil-rich countries in the world. In a bigger set of assumptions, this is part of the grand plan of China as a sign of a changing world.
Well now its time for Round 2 of this strategy to unfold. Russia and China recently signed a multi-billion dollar, intergovernmental agreement to construct an oil line from Russia that will supply oil directly to China – worth trillions of dollars with a 20 year oil contract to pump Russian oil and in return, China has agreed to provide a total $25bn in loans to Russian oil companies Transneft and OAO Rosneft Oil Co.
The terms of contacts are fascinating – it gives China roughly 15mn metric tons of crude per year from 2011 to 2030, flowing through the 1,030-km pipeline from the Skovorodino refinery in Eastern Russia to Mohe County in China’s Heilongjiang province. It is a branch of the even bigger 4,700-km East-Siberia-Pacific Ocean Pipeline that is currently under construction.
My sense this oil supply deal is just part of a much bigger strategic drama that is played out here, which the Western world have totally missed.
For China, the oil pipeline will greatly reduce the risks of its oil imports – the majority of which come through the Straits of Malacca and to Russia, it gives it a stable and reliable oil market in the East. Interestingly, China’s nuclear subs were just on parade for the first time ever as part of the 60th Anniversary of the founding of the PLA’s Navy in Qingdao, Shandong province.
If we read between the lines, comments made by leaders of both sides point to a desire to have an even tighter China-Russia relationship in the years to come and this will really lock the United States out of the game and will also wrest an increasing amount of energy-pricing control from OPEC cartel. The status-quo in the global oil game had changed and China is not afraid to do business with rogue nations like Iran, Sudan and Myanmar and has even gotten chummy with Venezuela and Russia.
Wednesday, April 29, 2009
Tuesday, April 28, 2009
Oil Price Bull
Since mid-February, oil has staged an impressive rally, soaring 42% in little more than a month to above $50 a barrel. There are people that asking me if prices will retreat further amid sluggish demand.
Here is my reply:-
There is no question that downside risk remains. On April 13, the Paris-based International Energy Agency (IEA) lowered its demand forecast by 1mn barrels a day and now expects the world will use about 83.4mn barrels per day in 2009. That would be 2.4mn barrels a day or 2.8%^ less than last year. So far, dwindling demand has failed to contain oil prices.
Having said that I take comfort for the fact that OPEC has made substantial progress in reducing the amount of oil on the market. It has issued three production cuts totaling 4.2mn barrels per day or nearly 12% of its capacity since September 2008. While this has yet to bring back oil prices to desired level of $60-$70 a barrel, the cartel abstained from making any further reductions at its latest meeting in March and even voiced optimism that crude would reach $60 a barrel by the end of the year. OPEC’s discipline has proven many critics wrong, despite foot-draging from Iran and Venezuela. OPEC has gotten about 80% compliance of the 4.2mn bpd production cut. Historically, the cartel only gets about 60% compliance on such cuts.
Also the fact that the US dollar has been made vulnerable by the US Fed Reserve’s aggressive policy of quantitative easing. From July 2007 to July 2008, the dollar plunged 16% against the euro and as the dollar became less valuable the cost of commodities around the world skyrocketed. The Fed’s cut in benchmark rate to a range of 0-0.25% and the $300bn purchase of longer term Treasury securities and $750bn of MBS, along with a corresponding rise in equities, this has been the driving force behind oil’s recent rally.
Last but not least, low oil prices and tight credit have reduced global energy investment, putting future supply at risk. Tighter lending conditions and a trough in oil prices have badly crimped investment and jeopardized future supplies. More expensive energy projects such as oil sands have been put on hold and the number of drilling rigs at marginal shallow-water fields around the world has been scaled back to a three-year low. Oil drilling activity dropped 43% in the 12-months through March, with year-on-year oil exploration in the United States alone down 38%.
Here is my reply:-
There is no question that downside risk remains. On April 13, the Paris-based International Energy Agency (IEA) lowered its demand forecast by 1mn barrels a day and now expects the world will use about 83.4mn barrels per day in 2009. That would be 2.4mn barrels a day or 2.8%^ less than last year. So far, dwindling demand has failed to contain oil prices.
Having said that I take comfort for the fact that OPEC has made substantial progress in reducing the amount of oil on the market. It has issued three production cuts totaling 4.2mn barrels per day or nearly 12% of its capacity since September 2008. While this has yet to bring back oil prices to desired level of $60-$70 a barrel, the cartel abstained from making any further reductions at its latest meeting in March and even voiced optimism that crude would reach $60 a barrel by the end of the year. OPEC’s discipline has proven many critics wrong, despite foot-draging from Iran and Venezuela. OPEC has gotten about 80% compliance of the 4.2mn bpd production cut. Historically, the cartel only gets about 60% compliance on such cuts.
Also the fact that the US dollar has been made vulnerable by the US Fed Reserve’s aggressive policy of quantitative easing. From July 2007 to July 2008, the dollar plunged 16% against the euro and as the dollar became less valuable the cost of commodities around the world skyrocketed. The Fed’s cut in benchmark rate to a range of 0-0.25% and the $300bn purchase of longer term Treasury securities and $750bn of MBS, along with a corresponding rise in equities, this has been the driving force behind oil’s recent rally.
Last but not least, low oil prices and tight credit have reduced global energy investment, putting future supply at risk. Tighter lending conditions and a trough in oil prices have badly crimped investment and jeopardized future supplies. More expensive energy projects such as oil sands have been put on hold and the number of drilling rigs at marginal shallow-water fields around the world has been scaled back to a three-year low. Oil drilling activity dropped 43% in the 12-months through March, with year-on-year oil exploration in the United States alone down 38%.
Monday, April 27, 2009
US Dollar Bears
Let me reiterate my view that the dollar will weaken further and I would not be surprised to see the euro to breach 1.45 level. The aggressive quantitative easing in the US with the Fed’s balance sheet potentially doubling in size will be the key argument to support my arguments. Also is the fact that the return of risk appetite is positive for Euro now, as indicated by the tight correlation between the S&P 500 and Euro. The Yen weakened during the BoJ quantitative easing period in Mar 2001 to Mar 2006 even with a current account surplus of more than 3% of GDP.
Having said that, I am doubtful that the dollar will lose its reserve currency status. Clearly, this is an issue after China’s central bank Governor Zhou Xiaochuan called for the creation of a new non-sovereign official reserve currency. The IMF’s Special Drawing Right (SDR) could be a potential candidate to replace the dollar, but the lack of investible assets denominated in SDR makes this currency not as competitive against the USD and the Euro.
Private sector risk aversion and the tightening of lending conditions will, at times, overwhelm the Fed’s efforts. What’s more, the current situation shares eerie similarities with Latin America’s petrodollar crisis in the 1980s, which then get us to years of hyperinflation and sharp volatility.
Industrial commodities, which are having an inverse relation to US dollar, are bouncing off their bottoms and headed higher. Simply put, the Fed has cranked up the printing presses and the CRB index has pushed above overhead resistance and its 50-day moving average.
For the first time in history, US banks have suffered large, ominous losses and according to the fourth quarter report just released by the Comptroller of the Currency (OCC), commercial banks lost a record $3.4 billion in interest rate derivatives or more than seven times their worst previous quarterly loss in that category. Considering their far larger volume, any threat to interest rate derivatives could be far more serious than anything we have seen so far. Meanwhile, time bombs continue to explode in the credit default swaps as well, delivering another massive loss of nearly $9billion.
For now, the dollar stays under appreciation pressure from continued global de-leveraging and a global bid for scarce dollars to fund USD denominated assets. Having said that, I think it will be several months yet before the tide on the USD turning.
Having said that, I am doubtful that the dollar will lose its reserve currency status. Clearly, this is an issue after China’s central bank Governor Zhou Xiaochuan called for the creation of a new non-sovereign official reserve currency. The IMF’s Special Drawing Right (SDR) could be a potential candidate to replace the dollar, but the lack of investible assets denominated in SDR makes this currency not as competitive against the USD and the Euro.
Private sector risk aversion and the tightening of lending conditions will, at times, overwhelm the Fed’s efforts. What’s more, the current situation shares eerie similarities with Latin America’s petrodollar crisis in the 1980s, which then get us to years of hyperinflation and sharp volatility.
Industrial commodities, which are having an inverse relation to US dollar, are bouncing off their bottoms and headed higher. Simply put, the Fed has cranked up the printing presses and the CRB index has pushed above overhead resistance and its 50-day moving average.
For the first time in history, US banks have suffered large, ominous losses and according to the fourth quarter report just released by the Comptroller of the Currency (OCC), commercial banks lost a record $3.4 billion in interest rate derivatives or more than seven times their worst previous quarterly loss in that category. Considering their far larger volume, any threat to interest rate derivatives could be far more serious than anything we have seen so far. Meanwhile, time bombs continue to explode in the credit default swaps as well, delivering another massive loss of nearly $9billion.
For now, the dollar stays under appreciation pressure from continued global de-leveraging and a global bid for scarce dollars to fund USD denominated assets. Having said that, I think it will be several months yet before the tide on the USD turning.
Wednesday, April 22, 2009
Another Round of Drugged Economy in China?
There are greater signs of economy recovery in March from the depths of Q42008, but some observers are arguing that the Chinese policy stimulus could turn out to be insufficient and further stimulus may be needed. They argued that the drugged economy – via easy money, loose fiscal policy and easy credit will lead to further over-capacity, rising non-performing loans, falling profits or rising losses.
I think exports on one hand to remain weak in the coming months, but it may get stabilize and become less of a drag on growth as expectations, trade finance and de-stocking are showing sign of normalization globally.
I was told by some friends with investment in China that the economic stimulus is already translating into a rebound in investor confidence – an increase in orders and production in some metal products and rise in infrastructure-related investment. The power of this combination in driving investment-led growth should never be underestimated.
The next 4-5 months would be a critical period if the stimulus program works in China. It is usually will take at least 4-5 months between policy announcements and actual construction leading to increased final orders. Going by this count, the Q2 2009 is a period to watch for.
The $585 billion Chinese stimulus plan is already creating an estimated 100mn tons of steel with $220 billion to be invested in infrastructure such as railways, roads and airports, and $150 billion used for post-earthquake reconstruction in Sichuan. Currently, Chinese steel inventories are estimated at less than one-third of what is required.
China is going on a global shopping spree that capitalizes on global weaknesses and generally low energy prices. Major integrated oil companies are cutting back spending in the face of lower oil prices. Copper stockpiles in warehouses monitored by the LME dropped to their lowest levels since February 2 as Chinese imports of refined copper topped 300,000 tons for the first time in March. At least 75,000 tons of that copper is going to the government’s State Reserve Bureau stockpiling agency. China plans to stockpile aluminum, copper, zinc and lead for its metals reserves over the next 3 years.
Plus, China’s nearly $2 trillion in reserves is the largest stockpile on the planet and maintain over 34% reserves in proportion to its GDP compared to less than 5% in the case of the United States. And that means that China stands to be the most important long-term investment opportunity for years to come. The sky is the limit!
I think exports on one hand to remain weak in the coming months, but it may get stabilize and become less of a drag on growth as expectations, trade finance and de-stocking are showing sign of normalization globally.
I was told by some friends with investment in China that the economic stimulus is already translating into a rebound in investor confidence – an increase in orders and production in some metal products and rise in infrastructure-related investment. The power of this combination in driving investment-led growth should never be underestimated.
The next 4-5 months would be a critical period if the stimulus program works in China. It is usually will take at least 4-5 months between policy announcements and actual construction leading to increased final orders. Going by this count, the Q2 2009 is a period to watch for.
The $585 billion Chinese stimulus plan is already creating an estimated 100mn tons of steel with $220 billion to be invested in infrastructure such as railways, roads and airports, and $150 billion used for post-earthquake reconstruction in Sichuan. Currently, Chinese steel inventories are estimated at less than one-third of what is required.
China is going on a global shopping spree that capitalizes on global weaknesses and generally low energy prices. Major integrated oil companies are cutting back spending in the face of lower oil prices. Copper stockpiles in warehouses monitored by the LME dropped to their lowest levels since February 2 as Chinese imports of refined copper topped 300,000 tons for the first time in March. At least 75,000 tons of that copper is going to the government’s State Reserve Bureau stockpiling agency. China plans to stockpile aluminum, copper, zinc and lead for its metals reserves over the next 3 years.
Plus, China’s nearly $2 trillion in reserves is the largest stockpile on the planet and maintain over 34% reserves in proportion to its GDP compared to less than 5% in the case of the United States. And that means that China stands to be the most important long-term investment opportunity for years to come. The sky is the limit!
Tuesday, April 21, 2009
US Banking Results Commentary II
Confidence on banking sector was already reflected in the 30% stock rally in the run up to the Q1 earnings season. The authorities say all of the 14 largest banks have earned a ‘passing’ grade in their just-completed ‘stress-test’. But just six months ago, the authorities swore that without a massive injection of taxpayer funds, those same banks would suffer a fatal meltdown.
Was the bad-debt disease magically cured? Did the economy miraculously turn around? Strike up the band, let the good times roll, banks are making money again (or not losing quite as much)?
A look below the surface reveals some caveats to this positive picture. Banks are benefiting from close to zero borrowing costs and fewer competitors with a massive transfer of wealth from savers to borrowers given a dozen different government bailouts and subsidy programs for the financial system. The recent mark-to-market accounting changes by FASB helps to inflate the value of many assets, hence in my view, this accounting trick helps to minimize reported losses and maximize reported earnings. It is no surprise if someone told me that banks are not properly making provision for massive future loan losses. Not long ago, Fed Chairman Bernanke declared that the total losses from the debt crisis would not exceed $100bn and also at the same time, the IMF estimated the losses would be $1 trillion with only a small percentage written-off. Now, the IMF’s latest estimate: $4 trillion in losses, with only one-third of those written-off so far.
Many of these banks were the main recipients of AIG bailout funds in previous months e.g. Goldman Sachs ($12.9bn), Merrill Lynch ($6.8bn), Bank of America ($5.2bn), Citigroup ($2.3bn), and Wachovia ($1.5bn), according to New York Times data. These firms, however, dismiss this factor as immaterial for 1Q earnings.
On the real economy side, credit growth has continued to slow down at a fast pace in the US as well as in Europe. Moody’s predicts the charge-off rate index will peak at about 10.5% in the first half of 2010, assuming a coincident unemployment rate peak at 10% respectively.
Was the bad-debt disease magically cured? Did the economy miraculously turn around? Strike up the band, let the good times roll, banks are making money again (or not losing quite as much)?
A look below the surface reveals some caveats to this positive picture. Banks are benefiting from close to zero borrowing costs and fewer competitors with a massive transfer of wealth from savers to borrowers given a dozen different government bailouts and subsidy programs for the financial system. The recent mark-to-market accounting changes by FASB helps to inflate the value of many assets, hence in my view, this accounting trick helps to minimize reported losses and maximize reported earnings. It is no surprise if someone told me that banks are not properly making provision for massive future loan losses. Not long ago, Fed Chairman Bernanke declared that the total losses from the debt crisis would not exceed $100bn and also at the same time, the IMF estimated the losses would be $1 trillion with only a small percentage written-off. Now, the IMF’s latest estimate: $4 trillion in losses, with only one-third of those written-off so far.
Many of these banks were the main recipients of AIG bailout funds in previous months e.g. Goldman Sachs ($12.9bn), Merrill Lynch ($6.8bn), Bank of America ($5.2bn), Citigroup ($2.3bn), and Wachovia ($1.5bn), according to New York Times data. These firms, however, dismiss this factor as immaterial for 1Q earnings.
On the real economy side, credit growth has continued to slow down at a fast pace in the US as well as in Europe. Moody’s predicts the charge-off rate index will peak at about 10.5% in the first half of 2010, assuming a coincident unemployment rate peak at 10% respectively.
Monday, April 20, 2009
Beginning of a Bull or Breather for the Bear?
S&P 500 hit 12-year low on March 9 – since then the index gained close 25% - the best rally since 1933. Question – is this the beginning of a bull market or just a breather for the bear?
One thing, we should be very clear that the 1933 rally came after a record-breaking decline. Real GDP fell 25% during the Great Depression and Dow fell by almost 90%. In 1949, the Dow was selling at P/E of just 7 times. And this time around, the S&P 500 fell 58% from its 2007 peak to its March 9 bottom.
So, the happy days are not here again, at least not yet.
In this market, the Dow was above 7,000 – within 50% of its 14,164 peak – continually from May 1997 until February 2009 and the current rally has been based on signs that the US banking system is not about to expire – a development that worry me hell a lot. With short-term rates well below long term rates, banks’ on-going lending business is currently exceptionally profitable and the economy may actually be beginning a lengthy ‘bottoming-out’ process.
With imbalances in size of expansive monetary policy and record peacetime deficits – deficits that are more than double the previous peacetime record, there can no assurance that a recessionary bottom will be followed by recovery, quite the opposite, I think.
The high stock prices of 1996-2008 have gone. Take the 1949 P/E multiple of 7, and apply it to a recovering earnings level of say $60 on the S&P 500, and you get an S&P of 420 – an equivalent to a Dow of around 4,500 level. We can expect an eventual low well below the 6,547 the Dow reached last month, and any rally to be temporary.
Don’t get sugarcoated and the unmistakable reality is that, despite any government guarantees, there is no question that downside risk remains. The perplexing divergence between growing investor optimism and the fundamentally abysmal economic situation will continue to build and this tells me a top of this wave of risky assets is near, if not already here, and a sharp reversal will follow.
One thing, we should be very clear that the 1933 rally came after a record-breaking decline. Real GDP fell 25% during the Great Depression and Dow fell by almost 90%. In 1949, the Dow was selling at P/E of just 7 times. And this time around, the S&P 500 fell 58% from its 2007 peak to its March 9 bottom.
So, the happy days are not here again, at least not yet.
In this market, the Dow was above 7,000 – within 50% of its 14,164 peak – continually from May 1997 until February 2009 and the current rally has been based on signs that the US banking system is not about to expire – a development that worry me hell a lot. With short-term rates well below long term rates, banks’ on-going lending business is currently exceptionally profitable and the economy may actually be beginning a lengthy ‘bottoming-out’ process.
With imbalances in size of expansive monetary policy and record peacetime deficits – deficits that are more than double the previous peacetime record, there can no assurance that a recessionary bottom will be followed by recovery, quite the opposite, I think.
The high stock prices of 1996-2008 have gone. Take the 1949 P/E multiple of 7, and apply it to a recovering earnings level of say $60 on the S&P 500, and you get an S&P of 420 – an equivalent to a Dow of around 4,500 level. We can expect an eventual low well below the 6,547 the Dow reached last month, and any rally to be temporary.
Don’t get sugarcoated and the unmistakable reality is that, despite any government guarantees, there is no question that downside risk remains. The perplexing divergence between growing investor optimism and the fundamentally abysmal economic situation will continue to build and this tells me a top of this wave of risky assets is near, if not already here, and a sharp reversal will follow.
Sunday, April 19, 2009
US Banking Results Commentary
US banks’ quarterly results came in with an upside surprise. Goldman Sachs are positioning for TARP payback with another round of aggressive legacy asset write-down. Wells Fargo bank reported a ‘record’ profit with earnings of 55 cents a share after paying preferred stock dividends of US$372mn on its US$25bn of preference share from TARP and latest JPMorgan reported 1Q EPS of $0.40, driven by solid investment banking revenues partially offset by higher credit costs.
Hmm, I wonder if this is true or an extreme exaggeration of the truth, especially after the FASB reverts to mark-to-myth accounting, receive billions of taxpayer money including financial assistance acquiring Wachovia and then turn out to not need it, right? In an another word, we are robbed! So which is it?
But as long as half truths pop the indices, nobody is going to complain. People only want the truth when the market is going south, not when it is climbing, right? It is maddening, whether it is perception or reality and bad news is simply shelved for a later date. I am just interested to know what will cause the Street to stop ignoring lies and bad news.
Nouriel Roubini said that last September’s spree of bank takeovers deepened the crisis because it made the already-too-big banks even bigger. He may well be right, more interesting is what this tells us about the future of US banking industry.
Nor did the trouble stop with the banks. Two of the US Big Three automakers – General Motors and Chrysler LLC moved closer to bankruptcy as the government rejected the American carmakers’ plan for reorganizing. But then, funny thing happened with each banks to-date announcing promising results, surprising investors and igniting a late-quarter stock market rally.
Hmm, I wonder if this is true or an extreme exaggeration of the truth, especially after the FASB reverts to mark-to-myth accounting, receive billions of taxpayer money including financial assistance acquiring Wachovia and then turn out to not need it, right? In an another word, we are robbed! So which is it?
But as long as half truths pop the indices, nobody is going to complain. People only want the truth when the market is going south, not when it is climbing, right? It is maddening, whether it is perception or reality and bad news is simply shelved for a later date. I am just interested to know what will cause the Street to stop ignoring lies and bad news.
Nouriel Roubini said that last September’s spree of bank takeovers deepened the crisis because it made the already-too-big banks even bigger. He may well be right, more interesting is what this tells us about the future of US banking industry.
Nor did the trouble stop with the banks. Two of the US Big Three automakers – General Motors and Chrysler LLC moved closer to bankruptcy as the government rejected the American carmakers’ plan for reorganizing. But then, funny thing happened with each banks to-date announcing promising results, surprising investors and igniting a late-quarter stock market rally.
Thai Rak Thai IV
As promised, I file this report from Bangkok. I flew there on courtesy of a senior member of Thai service. Though press reports claimed situations were under control, the scars remain very visible. Emergency laws remain in place, and from where I stayed, and areas that I visited, the activities were visible soft. Bangkokians are fearful about their safety while army practically patrolling in every aspect of their life.
I was stopped and questioned twice, once outside my unit at Langsuan and another at Nonthaburi. My southern Thai dialect had certainly attracted undesired attentions. Luckily, I was accompanied by a senior member of Thai service.
I had a breakfast with Sondhi’s son Jittanart Limthongkul and he told me that the shooting incidence was merely a warning and said there is a new form of war by a group who want to create a new government consisting of the police and army in neutral gear and basically they are not friendly to either ‘red’ or ‘yellow’ teams. When I related my ‘detention’ to him at Nonthaburi, he confirmed that I was witnessing the work of this ‘third’ team, which is putting up military barrier on the outer ring to prevent Thaksin Shinawatra from returning while blocking Premier Abhisit with an inner ring.
In fact, he claimed that incident at the Interior Ministry last week when Premier Abhisit Vejjajiva came under attack had been planned "to kill the prime minister -- and put the blame on the red-shirts”.
Local media, depending which magazines or newspaper that I read, have become more pronounced, their coverage more partisan, and their opinion-makers seemingly more sure of themselves even as things get less certain.
I also talked to couple of local, including some staff at factory and basically they were at loss on who to trust at this stage. They can’t make up for the paucity of trustworthy periodicals and professional broadcasters. Not only that, some websites on Thai news are blocked and until time of this filing, they remained un-accessible.
I was told that Mr. Abhisit and his backers still seem reluctant to recognize the red shirts’ grievances. My sense this is a mistake and we can expect more chaos in the streets.
Abhisit relied on the security forces brought into the capital from upcountry such as Nakhon Rachasima, Kanchanaburi or Lop Buri with helps from veterans and some retired generals. Army Commander in Chief Gen Anupong Paochinda and police were sidelined.
Now the government had revoked Thaksin's Thai passport, we are now can expect Thaksin to run secret campaigns against the Democrat-led government, which can become too hot for Thailand to digest in all intent and purpose.
I was stopped and questioned twice, once outside my unit at Langsuan and another at Nonthaburi. My southern Thai dialect had certainly attracted undesired attentions. Luckily, I was accompanied by a senior member of Thai service.
I had a breakfast with Sondhi’s son Jittanart Limthongkul and he told me that the shooting incidence was merely a warning and said there is a new form of war by a group who want to create a new government consisting of the police and army in neutral gear and basically they are not friendly to either ‘red’ or ‘yellow’ teams. When I related my ‘detention’ to him at Nonthaburi, he confirmed that I was witnessing the work of this ‘third’ team, which is putting up military barrier on the outer ring to prevent Thaksin Shinawatra from returning while blocking Premier Abhisit with an inner ring.
In fact, he claimed that incident at the Interior Ministry last week when Premier Abhisit Vejjajiva came under attack had been planned "to kill the prime minister -- and put the blame on the red-shirts”.
Local media, depending which magazines or newspaper that I read, have become more pronounced, their coverage more partisan, and their opinion-makers seemingly more sure of themselves even as things get less certain.
I also talked to couple of local, including some staff at factory and basically they were at loss on who to trust at this stage. They can’t make up for the paucity of trustworthy periodicals and professional broadcasters. Not only that, some websites on Thai news are blocked and until time of this filing, they remained un-accessible.
I was told that Mr. Abhisit and his backers still seem reluctant to recognize the red shirts’ grievances. My sense this is a mistake and we can expect more chaos in the streets.
Abhisit relied on the security forces brought into the capital from upcountry such as Nakhon Rachasima, Kanchanaburi or Lop Buri with helps from veterans and some retired generals. Army Commander in Chief Gen Anupong Paochinda and police were sidelined.
Now the government had revoked Thaksin's Thai passport, we are now can expect Thaksin to run secret campaigns against the Democrat-led government, which can become too hot for Thailand to digest in all intent and purpose.
Friday, April 17, 2009
Will China’s Magic Work?
The Chinese authorities have responded to the crisis by easing monetary policy with 5 times cut in the benchmark interest rate and 4 times reduction in the reserve requirement. I do entertain the possibility of further drop in policy rate and easing of the required reserve.
So far, the money supply and credit growth appear to suggest that it works well with M2 growing at 19.7% in the first two months this year compared to 15.9% in Q4 and total loans by financial institutions were up 24.2% in February. Companies are reportedly borrowing from banks in order to earn the spread between rates on term deposits, which are set by the PBOC and those on bankers’ acceptances, while banks like to see their commission revenues rise and to report strong loan growth.
While China’s expansion will have only moderate positive effects on world exports, I am already seeing some boost to Japanese, Taiwanese and Korean exports. Commodity producing countries stand to benefit more meaningfully from China’s stimulus policy with a pick up in imports of iron, coal and oil demand.
Having said that, after the Chinese New Year holiday in February, no less than 20 million migrant workers had lost their jobs. Wage growth in the export sector is likely to contract sharply.
With greater fiscal spending, it leads me to have optimistic outlook on China’s bond market. Out of the 4 trillion stimulus package, the central government will pay 1.18 trillion and just closed NPC projected a budget deficit of 950 billion, almost all of which will be financed by new government bond issuance. Local government debt issuance was introduced recently. The total amount will be limited to 200 billion with maturity of three years. Thus far, the risk of default is low because of the role of Ministry of Finance plays and the way local tax revenue is handled between the central and the local government.
Recent comments by top Chinese officials also suggest that they are becoming increasingly uncomfortable with the accumulation of foreign assets, notably US Treasuries and agencies that results from balance of payments surplus and the targeting of the reminbi exchange rate.
All this suggests that China wants to assert its growing economic weight in global affairs, albeit with characteristic prudence and gradualism.
So far, the money supply and credit growth appear to suggest that it works well with M2 growing at 19.7% in the first two months this year compared to 15.9% in Q4 and total loans by financial institutions were up 24.2% in February. Companies are reportedly borrowing from banks in order to earn the spread between rates on term deposits, which are set by the PBOC and those on bankers’ acceptances, while banks like to see their commission revenues rise and to report strong loan growth.
While China’s expansion will have only moderate positive effects on world exports, I am already seeing some boost to Japanese, Taiwanese and Korean exports. Commodity producing countries stand to benefit more meaningfully from China’s stimulus policy with a pick up in imports of iron, coal and oil demand.
Having said that, after the Chinese New Year holiday in February, no less than 20 million migrant workers had lost their jobs. Wage growth in the export sector is likely to contract sharply.
With greater fiscal spending, it leads me to have optimistic outlook on China’s bond market. Out of the 4 trillion stimulus package, the central government will pay 1.18 trillion and just closed NPC projected a budget deficit of 950 billion, almost all of which will be financed by new government bond issuance. Local government debt issuance was introduced recently. The total amount will be limited to 200 billion with maturity of three years. Thus far, the risk of default is low because of the role of Ministry of Finance plays and the way local tax revenue is handled between the central and the local government.
Recent comments by top Chinese officials also suggest that they are becoming increasingly uncomfortable with the accumulation of foreign assets, notably US Treasuries and agencies that results from balance of payments surplus and the targeting of the reminbi exchange rate.
All this suggests that China wants to assert its growing economic weight in global affairs, albeit with characteristic prudence and gradualism.
Wednesday, April 15, 2009
Mark-to-Market Game
I am not an accounting student and it really took me a while to understand this as the Financial Accounting Standards Board (FASB) caved on the mark-to-market accounting front.
The key problem isn’t that there is no market for these bad securities, but it is the prices that are artificially low. The issue is that the industry doesn’t want to acknowledge that today’s prices are the real prices. Sellers refused to admit to reality, hoping against hope that they won’t have to sell at the true market prices. I truly believe there are buyers like vulture funds, hedge funds, private equity investors etc are eagerly to scoop up these crappy papers ..but at the right price.
Lobbyists argue that because many of these assets are still spinning off principal and interest payments, they should be carry them at full value or close to it – not supposedly distressed ‘false’ market prices, but look at the performance of the asset markets underlying the toxic paper – they are getting worse. FHA loans delinquency rates are rising, Fannie Mae and Freddic Mac 90+ day late payment rates are surging. All this tells us that while some of these securities may be spinning off income now, the likelihood they will continue to do so in future is going down. They certainly don’t prove the real value of these securities should be much higher.
Also, the delinquency rate on $700bn in securitized commercial real estate loans has more than doubled in just the past six months. So what does that say about the value of CMBS – Commercial Mortgage Backed Securities?
Investors take a different view that more flexibility with the rules would let big banks hide the real value of their toxic assets cosmetically and increase their capital levels. I am afraid that this change will result in fewer impairments being recognized and I don’t think that it will help the investor confidence in the balance sheet.
I find it rather interesting that the responsibility of this game is still very much on the FASB rather than having the regulators to take this on.
The key problem isn’t that there is no market for these bad securities, but it is the prices that are artificially low. The issue is that the industry doesn’t want to acknowledge that today’s prices are the real prices. Sellers refused to admit to reality, hoping against hope that they won’t have to sell at the true market prices. I truly believe there are buyers like vulture funds, hedge funds, private equity investors etc are eagerly to scoop up these crappy papers ..but at the right price.
Lobbyists argue that because many of these assets are still spinning off principal and interest payments, they should be carry them at full value or close to it – not supposedly distressed ‘false’ market prices, but look at the performance of the asset markets underlying the toxic paper – they are getting worse. FHA loans delinquency rates are rising, Fannie Mae and Freddic Mac 90+ day late payment rates are surging. All this tells us that while some of these securities may be spinning off income now, the likelihood they will continue to do so in future is going down. They certainly don’t prove the real value of these securities should be much higher.
Also, the delinquency rate on $700bn in securitized commercial real estate loans has more than doubled in just the past six months. So what does that say about the value of CMBS – Commercial Mortgage Backed Securities?
Investors take a different view that more flexibility with the rules would let big banks hide the real value of their toxic assets cosmetically and increase their capital levels. I am afraid that this change will result in fewer impairments being recognized and I don’t think that it will help the investor confidence in the balance sheet.
I find it rather interesting that the responsibility of this game is still very much on the FASB rather than having the regulators to take this on.
Tuesday, April 14, 2009
Bear Will Return
It is a trap. Even after the 1929 Crash, we had rally just like this one – up 30% the first time, 48% the second time, and more. Each time, this is a great selling opportunities and sure enough, after each temporary bounce, the market plunged far further.
Right now, unemployment is getting worse far more rapidly than at the end of a recession. Bankruptcies are still soaring. Credit is still scarce. The IMF, World Bank, and the OECD are predicting even sharper plunge.
Still, we could see stocks rally through the end of this month or even longer. But the bear is out there, my friend. The US government has allocated at least $356bn bailing out the banks alone. Most of that has been thrown down a rat hole. And it is getting worse and the IMF announced that toxic debts could reach $4 trillion, up from an estimate of $2.2 trillion that it made in January.
Note that the deleveraging of the US credit bubble has already begun and it is not pretty. Consumer wealth is evaporating like water in the desert. Credit cards are imploding and nervous bankers would eliminate at least $2 trillion of available credit on credit cards by end of this year. The effect of those cutbacks on already anxious consumers is bound to be enormous.
When Japan slid into its economic ‘lost decade’, the rest of the world kept chugging along, which was the factor in pulling Japan out of its rut. Today, the World Bank says global economic growth will slow this year by far more than previously estimated, thus sending the global economy into its first contraction – for the first time since World War II.
All in all, market is bearish until proven otherwise. We have seen big upward swings in this bear market only to see them crush later on. For the S&P 500, analysts are expecting earnings will decline 37% from a year ago with all 10 groups in the index to show a year-on-year contraction in profits – something that hasn’t happened in the 10 years Thomson Financial has been tracking this data.
Fundamentals are still terrible, and they have not improved enough to justify this rally. What’s more, the market is overbought, but it can get a lot more overbought and overextended as we saw in the market ‘recovery’ of 2004-2006 when the US equity indices were managed up to new highs.
This is a trading rally!. Don’t get married to positions and try to ride the market’s swings up and down.
Right now, unemployment is getting worse far more rapidly than at the end of a recession. Bankruptcies are still soaring. Credit is still scarce. The IMF, World Bank, and the OECD are predicting even sharper plunge.
Still, we could see stocks rally through the end of this month or even longer. But the bear is out there, my friend. The US government has allocated at least $356bn bailing out the banks alone. Most of that has been thrown down a rat hole. And it is getting worse and the IMF announced that toxic debts could reach $4 trillion, up from an estimate of $2.2 trillion that it made in January.
Note that the deleveraging of the US credit bubble has already begun and it is not pretty. Consumer wealth is evaporating like water in the desert. Credit cards are imploding and nervous bankers would eliminate at least $2 trillion of available credit on credit cards by end of this year. The effect of those cutbacks on already anxious consumers is bound to be enormous.
When Japan slid into its economic ‘lost decade’, the rest of the world kept chugging along, which was the factor in pulling Japan out of its rut. Today, the World Bank says global economic growth will slow this year by far more than previously estimated, thus sending the global economy into its first contraction – for the first time since World War II.
All in all, market is bearish until proven otherwise. We have seen big upward swings in this bear market only to see them crush later on. For the S&P 500, analysts are expecting earnings will decline 37% from a year ago with all 10 groups in the index to show a year-on-year contraction in profits – something that hasn’t happened in the 10 years Thomson Financial has been tracking this data.
Fundamentals are still terrible, and they have not improved enough to justify this rally. What’s more, the market is overbought, but it can get a lot more overbought and overextended as we saw in the market ‘recovery’ of 2004-2006 when the US equity indices were managed up to new highs.
This is a trading rally!. Don’t get married to positions and try to ride the market’s swings up and down.
Monday, April 13, 2009
Thai Rak Thai III
The Nation reported that two killed in clashes between rioters and angry residents. The angry residents chased protesters away and some even clashed with them, threatening to shoot the rioters. A clash between red-shirt rioters and a group of residents in Bangkok's Nang Lerng area last night left two people dead and nine others injured, with two sustaining serious wounds. As many as 74 of those sent to hospital sustained injuries early yesterday when the troops cracked down on a rioting mob near the Din Daeng intersection.
It is a sign of deep divisions in Thai society, which will take a long time to heal as the power-play has flip-flopped from side to side. At the centre of the rift is Thaksin, the ousted prime minister and charismatic billionaire that to a great extent, represents a voice of impoverished north and northeast and at the other end is the powerful central elite from the palace, military, bureaucracy and middle-class, in a colour-coded battle between the ‘Red Shirts’ and the later the ‘Yellow Shirts’.
All this takes place in the name to defense democracy and both sides are now driven to a corner, where everything is at stake and neither party can afford to lose that spill-over into ordinary life and economy. Australia, Russia and Hong Kong have joined governments around the world in advising their citizens to avoid or reconsider travelling to Bangkok. The Philippines, Malaysia and South Korea on Monday also told travellers to stay away from Bangkok or exercise extreme caution.
Unity at the very core of Thai society is a stake, including the survival of monarchy. Foreign diplomats in Bangkok feared political turmoil might escalate to a civil war, which would inevitably invite another coup.
It is widely believed that the 1932 coup was the first coup in Thailand. It wasn’t; the first coup was in 1912, when a group of junior officers, fired by the Chinese revolution a year earlier, tried to seize power. They failed. The 24 June 1932 coup, however, succeeded and brought an end to absolute monarchy in Thailand. The 1932 coup ended 150 years of absolute monarchy under the Chakri dynasty and irreversibly changed the face of Thai politics. Within a year in June 1933, another coup forced a change of government. This trend of coups was to persist for the next seven decades.
I will report life from Bangkok this weekend!
It is a sign of deep divisions in Thai society, which will take a long time to heal as the power-play has flip-flopped from side to side. At the centre of the rift is Thaksin, the ousted prime minister and charismatic billionaire that to a great extent, represents a voice of impoverished north and northeast and at the other end is the powerful central elite from the palace, military, bureaucracy and middle-class, in a colour-coded battle between the ‘Red Shirts’ and the later the ‘Yellow Shirts’.
All this takes place in the name to defense democracy and both sides are now driven to a corner, where everything is at stake and neither party can afford to lose that spill-over into ordinary life and economy. Australia, Russia and Hong Kong have joined governments around the world in advising their citizens to avoid or reconsider travelling to Bangkok. The Philippines, Malaysia and South Korea on Monday also told travellers to stay away from Bangkok or exercise extreme caution.
Unity at the very core of Thai society is a stake, including the survival of monarchy. Foreign diplomats in Bangkok feared political turmoil might escalate to a civil war, which would inevitably invite another coup.
It is widely believed that the 1932 coup was the first coup in Thailand. It wasn’t; the first coup was in 1912, when a group of junior officers, fired by the Chinese revolution a year earlier, tried to seize power. They failed. The 24 June 1932 coup, however, succeeded and brought an end to absolute monarchy in Thailand. The 1932 coup ended 150 years of absolute monarchy under the Chakri dynasty and irreversibly changed the face of Thai politics. Within a year in June 1933, another coup forced a change of government. This trend of coups was to persist for the next seven decades.
I will report life from Bangkok this weekend!
Sunday, April 12, 2009
Thai Rak Thai II
I continued to maintain an active communication with my brother in Thailand. I am deadly worried as I really know how bad the situation could turn out to be when military and police are less than committed. Four days period asked by PM Abhisit, perhaps, are too short a period for normalcy to return when I was told that there are at least 50,000 more people are coming down to Bangkok this week.
I was told that hundreds of soldiers advanced against the crowd at a major road junction close to the landmark Victory Monument, also at Din Daeng intersection – the first serious clash after weeks of mass protests. Live rounds were fired.
There have been 18 coups since World War 2 and closer to my memory were (i) 1976 when the army unleashed the paramilitaries, and used the resultant orgy of violence, in which hundreds of students were tortured and killed, to suspend the constitution and resume power and ones (ii) the Bloody May of which Suchinda brought military units personally loyal to him into the city and tried to suppress the demonstrations by force, leading to a massacre in the heart of the city in which hundreds died. The Navy mutinied in protest, and the country seemed on the verge of civil war.
In my view, the current saga in Thailand is a continuation of episode in September 2006 when the then prime minister Thaksin in New York for a meeting of the United Nations General Assembly, Army Commander-in-Chief Lieutenant General Sonthi Boonyaratglin launched a successful coup 'd'etat. The political crisis will continue as I would not be surprise if one could not see peaceful resolution until the King Bhumibol intervened like the conclusion of bloody May’s episode when the King summoned Suchinda and Chamlong to a televised audience, resulted in Suchinda's resignation.
Lets face it, there’s not much love in Thailand for Prime Minister Abhisit or his government at the moment. All the innuendo and political debate aside the new government is in a very precarious position. The government while wanting to show that it is willing to hear the peoples concerns has also shown it’s weakness in doing so. The longer this goes on the chances that the violence between these two groups will escalate again is a given.
No matter what is the outcome, I will defend my family. At time of writing, I have made necessary contacts and arrangements to get my brother out of this predicament. Monetary losses are secondary, and it remains a challenge to mobilize all possible resources in times of uncertainty. Airports across the country, key roads leading out of Bangkok will be closely monitored and best case scenario is moving south with minimal entourage. God bless Thai!
I was told that hundreds of soldiers advanced against the crowd at a major road junction close to the landmark Victory Monument, also at Din Daeng intersection – the first serious clash after weeks of mass protests. Live rounds were fired.
There have been 18 coups since World War 2 and closer to my memory were (i) 1976 when the army unleashed the paramilitaries, and used the resultant orgy of violence, in which hundreds of students were tortured and killed, to suspend the constitution and resume power and ones (ii) the Bloody May of which Suchinda brought military units personally loyal to him into the city and tried to suppress the demonstrations by force, leading to a massacre in the heart of the city in which hundreds died. The Navy mutinied in protest, and the country seemed on the verge of civil war.
In my view, the current saga in Thailand is a continuation of episode in September 2006 when the then prime minister Thaksin in New York for a meeting of the United Nations General Assembly, Army Commander-in-Chief Lieutenant General Sonthi Boonyaratglin launched a successful coup 'd'etat. The political crisis will continue as I would not be surprise if one could not see peaceful resolution until the King Bhumibol intervened like the conclusion of bloody May’s episode when the King summoned Suchinda and Chamlong to a televised audience, resulted in Suchinda's resignation.
Lets face it, there’s not much love in Thailand for Prime Minister Abhisit or his government at the moment. All the innuendo and political debate aside the new government is in a very precarious position. The government while wanting to show that it is willing to hear the peoples concerns has also shown it’s weakness in doing so. The longer this goes on the chances that the violence between these two groups will escalate again is a given.
No matter what is the outcome, I will defend my family. At time of writing, I have made necessary contacts and arrangements to get my brother out of this predicament. Monetary losses are secondary, and it remains a challenge to mobilize all possible resources in times of uncertainty. Airports across the country, key roads leading out of Bangkok will be closely monitored and best case scenario is moving south with minimal entourage. God bless Thai!
Thai Rak Thai!
It means Thai loves Thai. I met another Thai last week and one thing that we really agreed is that the rule of law has weakened, a culture of street protest has taken hold and social divisions have deepened. It is really sad, but I am optimistic about Thai’s medium to long term outlook, given the strong entrepreneurial spirit in it.
I have seen how the economy rebounded faster than its SEA peers in the 1997/98 crisis and its couple political spirals in the 1990s.
Let me make it clear that I am not a big fan of Democrats and I doubt its policy of national reconciliation based on generous social programmes and amnesty for Thaksin associates banned from politics will work, until and unless it makes peace with Thaksin himself, but it could be too big a risk for Abhisit Vejjajiva to take. Also, it could trigger some kind of reactions from anti-Thaksin People’s Alliance for Democracy (PAD).
Social spending by the Democrats may be seen to be auspicious to campaign for the hearts and minds of the rural poor in the Northeast – the heartland of Thakin’s support base may work to some extent, but it will be a serious violation for one of the key reasons why military coup taken place then. It is not the direct spending that provoke but rather the consequence of the spending and it would not be surprise if members of the Bangkok elite to be part of the reasons as well.
The regional divide between North and South and the struggle between the poor-and-rich will further complicate the matter. In the North, and Northeast, Thaksin’s associated People Power Party (PPP) won 50% and 56% of the votes compared to Democrats while in the Central and South, Democrats took 47% and 80% of the votes. If that geographical extremities are not addressed by the current government, it will aggravates regional tensions further as the social spending program intensifies. Bangkokians are in general perceived northern politicians as being corrupt.
Political risks remain significant and likely to remain above peer levels for the foreseeable future.
I have seen how the economy rebounded faster than its SEA peers in the 1997/98 crisis and its couple political spirals in the 1990s.
Let me make it clear that I am not a big fan of Democrats and I doubt its policy of national reconciliation based on generous social programmes and amnesty for Thaksin associates banned from politics will work, until and unless it makes peace with Thaksin himself, but it could be too big a risk for Abhisit Vejjajiva to take. Also, it could trigger some kind of reactions from anti-Thaksin People’s Alliance for Democracy (PAD).
Social spending by the Democrats may be seen to be auspicious to campaign for the hearts and minds of the rural poor in the Northeast – the heartland of Thakin’s support base may work to some extent, but it will be a serious violation for one of the key reasons why military coup taken place then. It is not the direct spending that provoke but rather the consequence of the spending and it would not be surprise if members of the Bangkok elite to be part of the reasons as well.
The regional divide between North and South and the struggle between the poor-and-rich will further complicate the matter. In the North, and Northeast, Thaksin’s associated People Power Party (PPP) won 50% and 56% of the votes compared to Democrats while in the Central and South, Democrats took 47% and 80% of the votes. If that geographical extremities are not addressed by the current government, it will aggravates regional tensions further as the social spending program intensifies. Bangkokians are in general perceived northern politicians as being corrupt.
Political risks remain significant and likely to remain above peer levels for the foreseeable future.
Thursday, April 9, 2009
Choppy Trades
I expect the yields to be choppy. On one hand, the Fed has clearly determined to keep private sector borrowing costs low though a combination of quantitative easing and on the other hand, US dollar hoarding is bidding up the rates. If the rates are inching up, I do entertain the possibility of the Fed to increase the size and the pace of the Treasury purchase program beyond the initially announced $300bn over the course of six months.
That, I believe will put a temporary ‘cap’ on how high the Fed will allow yields to rise, but it will raise the upward pressure on implied volatility. Falling employment is gathering momentum in the US and Europe, now at 8.5% compared to 4.8% in the US and 7.2% in the Eurozone a year ago.
Over the past week, we had seen continued sell off on rates, but now the equity markets have done in consolidating the recovery and going forward, we will be able to make clearer assessment of what I call ‘second derivative’ of economic data. It would an interesting weeks to look forward to as most US banks will report in the second half of the month and the US Treasury should release the results of the ‘stress test’ on the banking system. The equity market has taken heart form the recent change in accounting rules and it would be good if some of the investment banks to post relatively good set of results, or if the announcement to exit TARP made. Let us keep the fingers cross.
It remains a big question if Fed will respond to 10y yields rising above 3% and that will lead us to the issue of credibility that could come back to haunt the Fed once the excitement about the start of a sharp economic recovery fades. The potential rise in implied volatility argues for a good delta hedging position, rather than buy-and-hold options. Volatility looks on the expensive side because yields are likely to be highly volatile not within the range. In response to this scenario, I like trades that have underlying in the 5-7 year maturity sector of the curve with relatively shorter expiry options, especially if the Fed’s Treasury purchase program slows or nears the end.
The situation could be far severe across the Atlantic. The ECB disappointed once again, easing its official refi rate by just 25bps. It is a missed opportunity to get ahead of the curve as it is continuing to buy time as it approaches the end of the traditional monetary policy easing cycle. I begin to see similar widening has already taken place in long dated BOR-OIS spreads with the sport three month differentials rising above 8bps last few days. Given this scenario, I disregard long-end euro rates to be attractive and any further rally in riskier assets would have positive effect on bond yields.
That, I believe will put a temporary ‘cap’ on how high the Fed will allow yields to rise, but it will raise the upward pressure on implied volatility. Falling employment is gathering momentum in the US and Europe, now at 8.5% compared to 4.8% in the US and 7.2% in the Eurozone a year ago.
Over the past week, we had seen continued sell off on rates, but now the equity markets have done in consolidating the recovery and going forward, we will be able to make clearer assessment of what I call ‘second derivative’ of economic data. It would an interesting weeks to look forward to as most US banks will report in the second half of the month and the US Treasury should release the results of the ‘stress test’ on the banking system. The equity market has taken heart form the recent change in accounting rules and it would be good if some of the investment banks to post relatively good set of results, or if the announcement to exit TARP made. Let us keep the fingers cross.
It remains a big question if Fed will respond to 10y yields rising above 3% and that will lead us to the issue of credibility that could come back to haunt the Fed once the excitement about the start of a sharp economic recovery fades. The potential rise in implied volatility argues for a good delta hedging position, rather than buy-and-hold options. Volatility looks on the expensive side because yields are likely to be highly volatile not within the range. In response to this scenario, I like trades that have underlying in the 5-7 year maturity sector of the curve with relatively shorter expiry options, especially if the Fed’s Treasury purchase program slows or nears the end.
The situation could be far severe across the Atlantic. The ECB disappointed once again, easing its official refi rate by just 25bps. It is a missed opportunity to get ahead of the curve as it is continuing to buy time as it approaches the end of the traditional monetary policy easing cycle. I begin to see similar widening has already taken place in long dated BOR-OIS spreads with the sport three month differentials rising above 8bps last few days. Given this scenario, I disregard long-end euro rates to be attractive and any further rally in riskier assets would have positive effect on bond yields.
Wednesday, April 8, 2009
FX Update
I am still US dollar bear and the pressure gets intensify as the Fed hiking up its claim on quantitative easing. Global markets have not taking a significant change compared to ones that was reviewed last year.
My top concern for this update is EUR. There are several reasons still to sell EUR. The hairline crack in the foundation stone widens with a core story as German growth evaporates with the collapse in world trades. I still think there will be flows of bad news about financial sector in Europe, relatively speaking, than there is in the US and UK. I believe large parts of central and eastern Europe are on the cusp of synchronized currency crisis as the output gap widens very rapidly, hence that arguably that policy in the Europe has to stay that much looser for that much longer rises. This could play out partly as reserve managers, notably in Asia come to distrust the EUR foundations as a global reserve currency.
Do not be drawn into thinking that the pound somehow gets ‘rewarded’ for the pro-activity of the UK’s monetary printing policy approach. Also, still helping the greenback is a persistent global ‘bid; for it, partly as capital flows and stays home.
The yen has weakened sharply. However, risk of renewed yen downtrend look exaggerated as the international taxation reform of Japan starting April, which promotes larger repatriation of overseas profit by Japanese corporate potentially will limits yen’s downside. Unless widening losses on stocks leads to the large scale divestment overseas, the impact on the currency should be limited.
On commodity currencies, CAD, AUD & NZD have been underperformed with a loss of 3.3%, 2.2% and 4.0% in a race to zero for interest rate globally. Gone are the days where, at least for the AUD and NZD yield will be rewarded but there is a strong cyclical between emerging economies and overall commodity price baskets.
My base case for USD/CNY remains unchanged and it has continued to trade relatively steadily at 6.84 during the past month. I expect the PBOC will draw down FX reserves in defense of the currency, but a sharp drop in FX reserves is unlikely, though cannot be ruled out.
The Ringgit has finally decoupled from the CNY and is starting to buckle under pressure from slowing growth and falling commodity prices. The balance of payments position remains under stress on the back of heavy portfolio liquidation and resident capital outflows despite solid current account surpluses of 15% of GDP.
For this review, my key highlight is Korean won – the cheapest of all currencies I monitor. On a PPP basis, Won is 16% cheaper against the USD. Large under-ownership of Korea and abnormally high loan/deposit ratio for Asia (131% in Korea), it will benefit from a fall in credit spreads.
My top concern for this update is EUR. There are several reasons still to sell EUR. The hairline crack in the foundation stone widens with a core story as German growth evaporates with the collapse in world trades. I still think there will be flows of bad news about financial sector in Europe, relatively speaking, than there is in the US and UK. I believe large parts of central and eastern Europe are on the cusp of synchronized currency crisis as the output gap widens very rapidly, hence that arguably that policy in the Europe has to stay that much looser for that much longer rises. This could play out partly as reserve managers, notably in Asia come to distrust the EUR foundations as a global reserve currency.
Do not be drawn into thinking that the pound somehow gets ‘rewarded’ for the pro-activity of the UK’s monetary printing policy approach. Also, still helping the greenback is a persistent global ‘bid; for it, partly as capital flows and stays home.
The yen has weakened sharply. However, risk of renewed yen downtrend look exaggerated as the international taxation reform of Japan starting April, which promotes larger repatriation of overseas profit by Japanese corporate potentially will limits yen’s downside. Unless widening losses on stocks leads to the large scale divestment overseas, the impact on the currency should be limited.
On commodity currencies, CAD, AUD & NZD have been underperformed with a loss of 3.3%, 2.2% and 4.0% in a race to zero for interest rate globally. Gone are the days where, at least for the AUD and NZD yield will be rewarded but there is a strong cyclical between emerging economies and overall commodity price baskets.
My base case for USD/CNY remains unchanged and it has continued to trade relatively steadily at 6.84 during the past month. I expect the PBOC will draw down FX reserves in defense of the currency, but a sharp drop in FX reserves is unlikely, though cannot be ruled out.
The Ringgit has finally decoupled from the CNY and is starting to buckle under pressure from slowing growth and falling commodity prices. The balance of payments position remains under stress on the back of heavy portfolio liquidation and resident capital outflows despite solid current account surpluses of 15% of GDP.
For this review, my key highlight is Korean won – the cheapest of all currencies I monitor. On a PPP basis, Won is 16% cheaper against the USD. Large under-ownership of Korea and abnormally high loan/deposit ratio for Asia (131% in Korea), it will benefit from a fall in credit spreads.
Tuesday, April 7, 2009
The Dam is Cracking
A rally in the global equity market has gained traction over the past month, but it really a big question to ask on what it takes to hold. Globally, some US$50 trillion in net worth has vanished, but Dow wrapped up its best four-week run since 1933 last week after the economy showed signs of improvement and world leaders at the Group 20 meeting in London pledged more than US$1 trillion to ending the first global recession since World War II.
Question – are we seeing a full-fledged bull market or temporary bear market rally?
Bear in mind, sentiment can change on a dime as the market continues to experience more volatility than they have at any time in recent memory. Much of the US financial sector is still teetering on the brink of insolvency. The housing market remains in free fall and the economy is on track for its longest recession since the Great Depression.
Friday’s employment report from the Labour Department was bad again with large job losses, even government jobs. In fact, the New York Times recently reported on this disturbing trend that prior months’ data were revised down again. The department keeps concluding that its initial estimates were too optimistic. On average, from August 2008 through January 2009, the first estimate was too optimistic by 112,000 jobs. Without a February revision, the unemployment rate reached a new high of 8.5%, notching the 15th consecutive months of job losses.
Many of the real time indicators that I follow, such as corporate bond spreads, credit availability, jobless claims etc are telling me that any rally we experience in the stock market is likely to be only temporary. Consumer spending – the heart and soul of the US economy – is plunging at an unprecedented rate of nearly 9% annually – the largest decline ever recorded. In another word, there could be many false starts and this seems to be the closest definition that one could find for a bear market rally.
On the other hand, there is a mountain of cash sitting at the sidelines right now. A total of US$3.6 trillion in retail and institutional money market accounts – that is an all time record high. We don’t need to actually see good news, we just need news that is no worse than before. So, if the news flow gets ‘less bad’ the rally can be guided against its long term fundamentals and that doesn’t mean the market has reached the bottom.
This week, investors will get a glimpse of the first batch of first quarter earnings reports. Aluminum producer Alcoa Inc will be the first Dow Jones industrial to kick off the first quarter earnings session. Investors are eager to see some sector specific results as well, especially banking and retail industries.
Question – are we seeing a full-fledged bull market or temporary bear market rally?
Bear in mind, sentiment can change on a dime as the market continues to experience more volatility than they have at any time in recent memory. Much of the US financial sector is still teetering on the brink of insolvency. The housing market remains in free fall and the economy is on track for its longest recession since the Great Depression.
Friday’s employment report from the Labour Department was bad again with large job losses, even government jobs. In fact, the New York Times recently reported on this disturbing trend that prior months’ data were revised down again. The department keeps concluding that its initial estimates were too optimistic. On average, from August 2008 through January 2009, the first estimate was too optimistic by 112,000 jobs. Without a February revision, the unemployment rate reached a new high of 8.5%, notching the 15th consecutive months of job losses.
Many of the real time indicators that I follow, such as corporate bond spreads, credit availability, jobless claims etc are telling me that any rally we experience in the stock market is likely to be only temporary. Consumer spending – the heart and soul of the US economy – is plunging at an unprecedented rate of nearly 9% annually – the largest decline ever recorded. In another word, there could be many false starts and this seems to be the closest definition that one could find for a bear market rally.
On the other hand, there is a mountain of cash sitting at the sidelines right now. A total of US$3.6 trillion in retail and institutional money market accounts – that is an all time record high. We don’t need to actually see good news, we just need news that is no worse than before. So, if the news flow gets ‘less bad’ the rally can be guided against its long term fundamentals and that doesn’t mean the market has reached the bottom.
This week, investors will get a glimpse of the first batch of first quarter earnings reports. Aluminum producer Alcoa Inc will be the first Dow Jones industrial to kick off the first quarter earnings session. Investors are eager to see some sector specific results as well, especially banking and retail industries.
Monday, April 6, 2009
Friends in China
I met couple of old friends, who have been spending more than a decade in China last Sunday. I learned that there is a huge divergence between the economic performance of the coastal and inland regions and based on the anecdotal evidence, the inland provinces are faring much better than coastal provinces. Coastal regions, which accounted for around 60% of sales, have dropped to current 45%, according to a friend that worked for Qingling Motors.
I heard comments about residential property demand, as second-tier cities look more promising with government offering monetary subsidies to home buyers rather than building economically affordable housing for them. An absolute increase in supply will be largest in cities such as Shanghai, Guangzhou, Beijing and Tianjin. I was told there is some investment opportunity in tier 2 cities like Chongqing. In January this year, this province sold 5,000 units per week and in February 2009, a new record was created at 7,000 units per week. The city will see some 8 million people moving to the city centre from the Three Gorges Dam area while the average home price was RMB3,400/unit and family income was RM4,000.
Key reason for the optimism is the infrastructure investment with central government’s emphasis on people’s livelihood rather than traditional infrastructure. Today, China is in the middle and late stage of industrialization and its urbanization is accelerating. The rich provinces like Beijing, Shanghai, Zhejiang, Guangdong, Jiangsu that have the resources to invest heavily all recorded investment growth lower than the national average in 2008 and now the strongest growth has been seen in inland provinces. Infrastructure and industrial facilities of these provinces are well built – room for large scale investment is very small. In contrast, the inland provinces are just in the early stage of industrialization and urbanization – therefore there is more room to build.
I heard comments about residential property demand, as second-tier cities look more promising with government offering monetary subsidies to home buyers rather than building economically affordable housing for them. An absolute increase in supply will be largest in cities such as Shanghai, Guangzhou, Beijing and Tianjin. I was told there is some investment opportunity in tier 2 cities like Chongqing. In January this year, this province sold 5,000 units per week and in February 2009, a new record was created at 7,000 units per week. The city will see some 8 million people moving to the city centre from the Three Gorges Dam area while the average home price was RMB3,400/unit and family income was RM4,000.
Key reason for the optimism is the infrastructure investment with central government’s emphasis on people’s livelihood rather than traditional infrastructure. Today, China is in the middle and late stage of industrialization and its urbanization is accelerating. The rich provinces like Beijing, Shanghai, Zhejiang, Guangdong, Jiangsu that have the resources to invest heavily all recorded investment growth lower than the national average in 2008 and now the strongest growth has been seen in inland provinces. Infrastructure and industrial facilities of these provinces are well built – room for large scale investment is very small. In contrast, the inland provinces are just in the early stage of industrialization and urbanization – therefore there is more room to build.
Sunday, April 5, 2009
Dollar Liquidity Tight
High cost of swapping local currency into US dollar is well reflected in basis swaps. Since the crisis started, it becomes difficult to raise dollars directly in cash markets and institutions with dollar needs have to turn to alternative dollar funding markets like the cross-currency basis swap market.
In this instance, institutions are forced to move from borrowing directly in the uncollateralized dollar cash market to the local currency’s uncollateralized cash market and then convert the proceeds into a dollar obligation through a foreign currency basis swap. This essentially translates into marked dislocations as reflected in the spread between the actual interest rate received on the leg of the swap and actual libor.
This indicates that the credit crunch is not yet over and it makes it expensive for foreign dollar-based issuers to tap non-dollar bond markets. If the situation persists, it would nto be surprised to see further unwinding of foreign holdings of local currency bonds and in combination with wider sovereign credit spreads, it makes dollar bonds issued by Asian governments to become more attractive relative to their local currency counterparts.
Volatility between on-shore and off-shore markets is expected to rise dramatically and that will lead to co-dependence of volatility regimes. Ongoing financial market volatility,
falling interest rates and concerns over the safety of bank deposits following the collapse of Northern Rock and Bear Stearns has focused institutional investors’ attention on their cash investments. Foreign order cancellations could also aggravate the situation as it could mean a need for foreign currency to settle the hedges.
It also presents an arbitrage opportunity for investors. Moreover, as a result of the credit crunch, it is extremely difficult for borrowers to issue corporate bonds offshore. Hedge funds, meanwhile, have stepped in to do Asian/dollar forward trades with Asian companies that are looking to hedge.
And, from another perspective, we have learned from different policy reactions to the currency speculation during the crisis, the subsequent high level of FX volatility has set the pace for the capital market liberalization.
In this instance, institutions are forced to move from borrowing directly in the uncollateralized dollar cash market to the local currency’s uncollateralized cash market and then convert the proceeds into a dollar obligation through a foreign currency basis swap. This essentially translates into marked dislocations as reflected in the spread between the actual interest rate received on the leg of the swap and actual libor.
This indicates that the credit crunch is not yet over and it makes it expensive for foreign dollar-based issuers to tap non-dollar bond markets. If the situation persists, it would nto be surprised to see further unwinding of foreign holdings of local currency bonds and in combination with wider sovereign credit spreads, it makes dollar bonds issued by Asian governments to become more attractive relative to their local currency counterparts.
Volatility between on-shore and off-shore markets is expected to rise dramatically and that will lead to co-dependence of volatility regimes. Ongoing financial market volatility,
falling interest rates and concerns over the safety of bank deposits following the collapse of Northern Rock and Bear Stearns has focused institutional investors’ attention on their cash investments. Foreign order cancellations could also aggravate the situation as it could mean a need for foreign currency to settle the hedges.
It also presents an arbitrage opportunity for investors. Moreover, as a result of the credit crunch, it is extremely difficult for borrowers to issue corporate bonds offshore. Hedge funds, meanwhile, have stepped in to do Asian/dollar forward trades with Asian companies that are looking to hedge.
And, from another perspective, we have learned from different policy reactions to the currency speculation during the crisis, the subsequent high level of FX volatility has set the pace for the capital market liberalization.
Thursday, April 2, 2009
Call for a CELEBRATION with Beers!
This piece is a cut and paste from an email sent by a friend.
It's fairly common knowledge that beer has a relaxing effect on the body and can reduce stress, but there are a myriad of other health benefits of this potent potable that are not as apparent at your local happy hour. There has never been better reason to enjoy a cold one.
Beer is good for your heart.
A Dutch study conducted by TNO Nutrition and Food Research found that a known reference for predicting future cardiovascular disease, blood C-reactive protein (CRP), declined by 35% after three weeks of regular beer consumption compared with levels after three weeks of drinking non-alcoholic beer. The same study found that levels of HDL or "good" cholesterol rose by 11% during the same period. Beer also contains vitamin B6, which prevents the build-up of an amino acid called homocysteine that has been linked to heart disease.
Beer will reduce the chance of stroke.
One drink a day for women or up to two drinks a day for men will reduce your chances of strokes, heart and vascular disease. Strokes are the third-leading cause of death in the U.S. and the leading cause of serious, long-term disabilities. It is said that light to moderate drinkers will decrease their chances of suffering a stroke by 20 percent.
You should give your grandma a beer.
Don't load her up a beer bong yet or take her to "kill a keg" night at your local pub, but in moderation, beer has been proven to have positive effects on elderly people. It helps promote blood vessel dilation, sleep and urination.
Beer is good for breasts.
Research by scientists at the Universidade do Porto in Portugal found that polyphenols in wine and beer appeared to decrease breast cancer cells significantly. Numerous other experiments have shown that certain polyphenols, mainly flavonoids, can protect against heart disease and have anticancer, antiviral and antiallergic properties. The Portuguese study concluded that xanthohumol, which is found in beer, was the most potent polyphenol over breast cancer cell growth; it showed its effect more rapidly and at a lower concentration than the others.
Beer could save the Three Blind Mice.
John Trevithick, Ph.D., and Maurice Hirst, Ph.D., of the University of Western Ontario, conducted a study that suggests beer reduced the incidence of cataracts in mice (but increased their propensity to "go wild" and get tattoos they'll regret later in life -- my own inference). If the same cataract protection occurs in humans, it would be especially beneficial to people with diabetes.
"Beer is proof that God loves us and wants us to be happy."
It's fairly common knowledge that beer has a relaxing effect on the body and can reduce stress, but there are a myriad of other health benefits of this potent potable that are not as apparent at your local happy hour. There has never been better reason to enjoy a cold one.
Beer is good for your heart.
A Dutch study conducted by TNO Nutrition and Food Research found that a known reference for predicting future cardiovascular disease, blood C-reactive protein (CRP), declined by 35% after three weeks of regular beer consumption compared with levels after three weeks of drinking non-alcoholic beer. The same study found that levels of HDL or "good" cholesterol rose by 11% during the same period. Beer also contains vitamin B6, which prevents the build-up of an amino acid called homocysteine that has been linked to heart disease.
Beer will reduce the chance of stroke.
One drink a day for women or up to two drinks a day for men will reduce your chances of strokes, heart and vascular disease. Strokes are the third-leading cause of death in the U.S. and the leading cause of serious, long-term disabilities. It is said that light to moderate drinkers will decrease their chances of suffering a stroke by 20 percent.
You should give your grandma a beer.
Don't load her up a beer bong yet or take her to "kill a keg" night at your local pub, but in moderation, beer has been proven to have positive effects on elderly people. It helps promote blood vessel dilation, sleep and urination.
Beer is good for breasts.
Research by scientists at the Universidade do Porto in Portugal found that polyphenols in wine and beer appeared to decrease breast cancer cells significantly. Numerous other experiments have shown that certain polyphenols, mainly flavonoids, can protect against heart disease and have anticancer, antiviral and antiallergic properties. The Portuguese study concluded that xanthohumol, which is found in beer, was the most potent polyphenol over breast cancer cell growth; it showed its effect more rapidly and at a lower concentration than the others.
Beer could save the Three Blind Mice.
John Trevithick, Ph.D., and Maurice Hirst, Ph.D., of the University of Western Ontario, conducted a study that suggests beer reduced the incidence of cataracts in mice (but increased their propensity to "go wild" and get tattoos they'll regret later in life -- my own inference). If the same cataract protection occurs in humans, it would be especially beneficial to people with diabetes.
"Beer is proof that God loves us and wants us to be happy."
Wednesday, April 1, 2009
Fed in ‘All In’
The Fed said it will ramp up its purchases of Fannie Mae and Freddie Mac Mortgage Backed Securities (MBS) from $500 billion to a whopping $1.25 trillion in the coming months. The Fed is also going to double its purchases of Fannie Mae, Freddie Mac, and Federal Home Loan Bank bonds to $200 billion from $100 billion.
And for the icing on the cake ... the Fed will buy as much as $300 billion in longer-term U.S. Treasury securities. It's going to focus on Treasuries with maturities between two and ten years, and make purchases two or three times a week.
In short, printing money out of thin air at the central bank, only to turn around and buy debt securities issued by your Treasury, is the kind of practice you typically see in emerging market regimes.
Indeed, the Fed's actions sparked the biggest one-day plunge in the U.S. dollar in several years. Gold also surged, a vote of no confidence in central bankers' willingness to preserve our purchasing power. The yield on the 10-year Treasury Note, which had been flirting with the 3 percent level, plunged roughly 50 basis points in the blink of an eye. The last weekly survey from the Mortgage Bankers Association pegged the average 30-year mortgage rate at 4.89%. Consider that the lowest annual average mortgage rate seen in the 20th and 21st centuries was 4.7 percent, set right after World War II. In other words, this is just about the cheapest that mortgage money has ever been.
The Obama administration is going on the offensive in an attempt to rebuild confidence in its ability to lead the country out of its seemingly depending financial morass.
But don’t be too optimistic with the recent runs. The last time the economy was this bad - during the Depression - the Dow sank to 36 and gold rose to $36 - a 1-to-1 ratio. In 1980, after the huge stock downturn of the ' 70s, the Dow and gold met at 850. Today the Dow is rapidly falling, down 50% from its peak of 14,164 set in October 2007. Gold is soaring once again, retesting historic highs. If they meet somewhere in the middle, that point could very well be 5,000, according to legendary bear market analyst and millionaire investor Peter Schiff (the man who accurately called the last 4 major market corrections) . Indeed, he sees the 1-to-1 ratio returning again, and soon.
And for the icing on the cake ... the Fed will buy as much as $300 billion in longer-term U.S. Treasury securities. It's going to focus on Treasuries with maturities between two and ten years, and make purchases two or three times a week.
In short, printing money out of thin air at the central bank, only to turn around and buy debt securities issued by your Treasury, is the kind of practice you typically see in emerging market regimes.
Indeed, the Fed's actions sparked the biggest one-day plunge in the U.S. dollar in several years. Gold also surged, a vote of no confidence in central bankers' willingness to preserve our purchasing power. The yield on the 10-year Treasury Note, which had been flirting with the 3 percent level, plunged roughly 50 basis points in the blink of an eye. The last weekly survey from the Mortgage Bankers Association pegged the average 30-year mortgage rate at 4.89%. Consider that the lowest annual average mortgage rate seen in the 20th and 21st centuries was 4.7 percent, set right after World War II. In other words, this is just about the cheapest that mortgage money has ever been.
The Obama administration is going on the offensive in an attempt to rebuild confidence in its ability to lead the country out of its seemingly depending financial morass.
But don’t be too optimistic with the recent runs. The last time the economy was this bad - during the Depression - the Dow sank to 36 and gold rose to $36 - a 1-to-1 ratio. In 1980, after the huge stock downturn of the ' 70s, the Dow and gold met at 850. Today the Dow is rapidly falling, down 50% from its peak of 14,164 set in October 2007. Gold is soaring once again, retesting historic highs. If they meet somewhere in the middle, that point could very well be 5,000, according to legendary bear market analyst and millionaire investor Peter Schiff (the man who accurately called the last 4 major market corrections) . Indeed, he sees the 1-to-1 ratio returning again, and soon.
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