I observe that the number of traders betting that oil prices will drop outnumbers the number of traders, who believe they will rise by the largest margin ever. Some believe prices will fall significantly lower in the near future – at least into the low of $60 a barrel range after soaring to $75 a barrel in August.
Supply has outrun demand this year, yet oil prices more than doubled from February to August and are up about 50% from where they started the year. Now, many traders are positioning themselves to profit from a pullback. The gap between prices of options betting on a decline in prices and those that would profit as a result of a rise in oil has widened to a record 10 percentage points, according to five years of data compiled by Bank of America Securities-Merrill Lynch.
Put options, which give right to sell oil in December below current prices have an implied volatility of 54.3% compared to 43.3% for options to call. Implied volatility generally increases when the market is bearish and decreases when the market in bullish. If puts are pricing higher than calls, we are looking at situation where the market is more averse to the downside and is looking for more compensation.
Perhaps the biggest reason the market is worried is that a generous supply of oil remains on the market, some of it piled up in offshore tankers. US stockpiles of crude are 14% higher than they were a year ago, according to the International Energy Agency (IEA). US gasoline supplies are 2.2% higher than they were in May at the start of peak summer driving season. The story is much the same where gasoil stockpiles – the European equivalent of heating oil reached a record 23 million barrels on September 10, according to PJK International BV, Bloomberg reported. The Centre for Global Energy Studies in a monthly report that it expects high crude stockpiles will continue to constraint the market.
Saudi Arabia’s oil minister, Ali al-Naimi weeks ago told reporters that the OPEC is more concerned with reinvigorating the global economy rather than oil prices. But according to Bloomberg estimates, the cartel’s production exceeded its quotas by 1.2 million barrels a day in August.
Wednesday, September 30, 2009
Tuesday, September 29, 2009
Fair But Fairer to Someone
For once, let us put anger and emotion to one side. The United States is home to four of the nine largest banks in the world – JP Morgan, Bank of America, Wells Fargo & Co and Citigroup Inc. It is also home to four of the six most handsomely rewarded bank CEOs. If America’s make-believe capitalists want to pay their CEOs exorbitant wages, that is their business.
On the other hand, China boasts three of the world’s biggest banks, yet the leader of those banks – Industrial and Commercial Bank of China (ICBC), China Construction Bank and Bank of China – are among the lowest paid of those surveyed by Reuters. The chairman and the president of each of the banks are paid roughly $230,000 per annum. Mr Jian Jianqing, chairman of Industrial and Commercial Bank of China made just $234,700 in 2008 and that was less than 2% of the $19.6 million awarded to Jamie Dimon, chief executive of the world’s fourth largest bank, JP Morgan Chase & Co. In fact, ICBC’s Jiang took a 10% pay cut in 2008, even as ICBC’s profit jumped 36% to US$16.23bil.
In the case of China, one needs to acknowledge the fact that some of the Chinese bank executives may be willing to accept the pay level of a top government official in the hope of moving into a powerful political position in the future
Kiwi Sir Ralph Norris, chief executive officer of the Commonwealth Bank of Australia, is one of the world’s highest paid bank CEOs. Sir Ralph's pay came in seventh in a Reuters survey of CEO pay levels at the world's 18 biggest banks by market value. Commonwealth Bank 's market capitalization, by contrast, was sixteenth out of 18.
HSBC Holdings, the world’s third largest bank by market capitalisation, paid CEO Michael Geoghegan US$2.8mil in 2008 – much more than his Chinese counterparts but far less than JPMorgan paid Dimon.
I am pretty sure that one of the consequences of the ongoing economic crisis is a harder look at the compensation given to company leaders. The multi-million dollar packages have long been criticized, but in times of economic growth many were content to reward success. Financial Times columnist Michael Skapinker commented that ill-feeling about high pay is widespread in both the U.S. and Europe. It turns out that in the United States nearly five thousand bankers and traders were paid more than $1 million in bonuses in 2008. According to a July 31 report by the New York Times this came at a time when profits at the biggest banks plummeted, and many of them accepted tens of billions of dollars of taxpayer money.
While the banking and finance sector might be holding on to past patterns of behavior there are, however, signs of change in other areas. Added to this was the admission by Goldman Sachs CEO Lloyd Blankfein, who said Wall Street compensation needs to be overhauled. In short, it’s easier to point to the problem of excessive executive salaries than it is to provide a solution.
On the other hand, China boasts three of the world’s biggest banks, yet the leader of those banks – Industrial and Commercial Bank of China (ICBC), China Construction Bank and Bank of China – are among the lowest paid of those surveyed by Reuters. The chairman and the president of each of the banks are paid roughly $230,000 per annum. Mr Jian Jianqing, chairman of Industrial and Commercial Bank of China made just $234,700 in 2008 and that was less than 2% of the $19.6 million awarded to Jamie Dimon, chief executive of the world’s fourth largest bank, JP Morgan Chase & Co. In fact, ICBC’s Jiang took a 10% pay cut in 2008, even as ICBC’s profit jumped 36% to US$16.23bil.
In the case of China, one needs to acknowledge the fact that some of the Chinese bank executives may be willing to accept the pay level of a top government official in the hope of moving into a powerful political position in the future
Kiwi Sir Ralph Norris, chief executive officer of the Commonwealth Bank of Australia, is one of the world’s highest paid bank CEOs. Sir Ralph's pay came in seventh in a Reuters survey of CEO pay levels at the world's 18 biggest banks by market value. Commonwealth Bank 's market capitalization, by contrast, was sixteenth out of 18.
HSBC Holdings, the world’s third largest bank by market capitalisation, paid CEO Michael Geoghegan US$2.8mil in 2008 – much more than his Chinese counterparts but far less than JPMorgan paid Dimon.
I am pretty sure that one of the consequences of the ongoing economic crisis is a harder look at the compensation given to company leaders. The multi-million dollar packages have long been criticized, but in times of economic growth many were content to reward success. Financial Times columnist Michael Skapinker commented that ill-feeling about high pay is widespread in both the U.S. and Europe. It turns out that in the United States nearly five thousand bankers and traders were paid more than $1 million in bonuses in 2008. According to a July 31 report by the New York Times this came at a time when profits at the biggest banks plummeted, and many of them accepted tens of billions of dollars of taxpayer money.
While the banking and finance sector might be holding on to past patterns of behavior there are, however, signs of change in other areas. Added to this was the admission by Goldman Sachs CEO Lloyd Blankfein, who said Wall Street compensation needs to be overhauled. In short, it’s easier to point to the problem of excessive executive salaries than it is to provide a solution.
Monday, September 28, 2009
Bernanke’s Mind
I have been following his works since my graduate days. In recent months, I re-read his pieces to have a better understanding of his main beliefs are. It is clear to me Bernanke has one, single overarching goal i.e to avoid the policy mistakes that he believes caused the Great Depression, and that will have significant impact on the US dollar.
Bernanke believes that overly tight monetary policy at the outset of the Great Depression was the key reason for the event. Despite the absence of any signs of inflation, through 1929, the Federal Reserve unjustifiably raised its discount rate from 4% to as high as 6% with the explicit aim of deliberately pricking the stock market bubble was a policy mistake. The decision to lower rate to 1.5% in October 1931 was too late and worse, the Fed doubling rates within the next four months to 3% by February 1932 was another tight monetary blunder. It kills off any possibility of a recovery.
If that being transposed into today’s environment, it highly probable that Fed will not raise rate until there are abundant signs of a rock solid economic recovery.
Bernanke also believes that nearly all policy blunders by Congress and the Fed during the Great Depression were driven by a single misguided goal i.e. to protect the dollar by defending its underlying gold reserves. That policy, according to Bernanke, had devastating unintended consequences. Other countries around the world were worried that they were going to lose reserves that fled to the US seeking the higher interest rates and to maintain the status quo, the began to raise their own interest rates competitively without regard to deteriorating economic fundamentals, hence self-fulfilling and self-perpetuating global depression. He argued that the sooner a country abandoned the gold standard during the Great Depression – and effectively devalued its currency – the faster the economic recovery.
Ergo, today, Bernanke’s plan is to do nothing to support the dollar. Quite to the contrary, he is intending to let the dollar fall as quickly as possible, no matter how low it goes and no matter what the long-term consequences may be.
Fed said it will stick to its plan to buy $1.45 trillion in mortgage-backed securities and ‘agency’ debt sold by the likes of Fannie Mae and Freddie Mac. The message is clear – Party On! Starting with Alan Greenspan two decades ago and continuing under Bernanke, the Fed has become a gigantic enabler of financial risk-taking.
Bernanke believes that overly tight monetary policy at the outset of the Great Depression was the key reason for the event. Despite the absence of any signs of inflation, through 1929, the Federal Reserve unjustifiably raised its discount rate from 4% to as high as 6% with the explicit aim of deliberately pricking the stock market bubble was a policy mistake. The decision to lower rate to 1.5% in October 1931 was too late and worse, the Fed doubling rates within the next four months to 3% by February 1932 was another tight monetary blunder. It kills off any possibility of a recovery.
If that being transposed into today’s environment, it highly probable that Fed will not raise rate until there are abundant signs of a rock solid economic recovery.
Bernanke also believes that nearly all policy blunders by Congress and the Fed during the Great Depression were driven by a single misguided goal i.e. to protect the dollar by defending its underlying gold reserves. That policy, according to Bernanke, had devastating unintended consequences. Other countries around the world were worried that they were going to lose reserves that fled to the US seeking the higher interest rates and to maintain the status quo, the began to raise their own interest rates competitively without regard to deteriorating economic fundamentals, hence self-fulfilling and self-perpetuating global depression. He argued that the sooner a country abandoned the gold standard during the Great Depression – and effectively devalued its currency – the faster the economic recovery.
Ergo, today, Bernanke’s plan is to do nothing to support the dollar. Quite to the contrary, he is intending to let the dollar fall as quickly as possible, no matter how low it goes and no matter what the long-term consequences may be.
Fed said it will stick to its plan to buy $1.45 trillion in mortgage-backed securities and ‘agency’ debt sold by the likes of Fannie Mae and Freddie Mac. The message is clear – Party On! Starting with Alan Greenspan two decades ago and continuing under Bernanke, the Fed has become a gigantic enabler of financial risk-taking.
Sunday, September 27, 2009
Dollar Apocalypse
The long battle between gold and the US dollar ended in a gold victory. The yellow metal broke out to the upside through a month-long downtrend. If we are really lucky, gold will come back to test support from its uptrend.
Anything that is priced in US dollars – hard assets of all stripes – has the potential to outperform in the months ahead. It could be time for you to start making some serious gains. Fundamental forces are lining up that will push the dollar lower and commodities – especially precious metals – much higher.
Like I always say we are heading for a currency crisis. It will be ugly and the US Treasury is running its printing presses at warp speed. In short, Washington is debasing the US dollar and it is adding debt to the burden of every American at frightening pace. According to the Peter G. Peterson Foundation, a deficit of US$1.8 trillion this year alone is adding a debt at a clip of $3.4 million a minute, $200 million an hour or $5 billion a day.
With Uncle Sam spending money like his wallet is on fire, China, Russia and the Middle East are getting steamed and they are ready to do something about it. They are ready to dump the dollar. It is already started in China and is diversifying into euros, yen and other currencies.
At the meeting in Yekaterinburg, Russia, the BRIC nations suggested shifting their currency holdings from the dollar into the IMF’s Special Drawing Rights (SDRs). The IMF recently announced that around $2 billion of SDRs recently transferred to Russia. But Russia is still behind China, which announced its intention to purchase up to $50 billion in SDRs from the IMF. India is going to purchase SDRs too. SDRs on their own can’t function as a global reserve currency, but combined with a basket of hard assets – gold, silver, copper and oil – they could be a big step in that direction.
After a lull this summer, investor demand is picking up again. Gold holdings in 10 monitored gold-backed exchange traded funds increased by 4.871 metric tonnes in the week from September 4 to September 11. The amount of gold in ETFs globally has surged to more than 66.7 million ounces. The World Gold Council reports that only about half of 1% of total worldwide funds under management are currently invested in gold and if that were to double to 1%, there would be insufficient gold in the vaults of central banks to accommodate the increase in demand.
Gold is not the only thing investors and funds are buying. Copper, zinc, cotton, oil and other hard assets are all becoming sought after investments.
Anything that is priced in US dollars – hard assets of all stripes – has the potential to outperform in the months ahead. It could be time for you to start making some serious gains. Fundamental forces are lining up that will push the dollar lower and commodities – especially precious metals – much higher.
Like I always say we are heading for a currency crisis. It will be ugly and the US Treasury is running its printing presses at warp speed. In short, Washington is debasing the US dollar and it is adding debt to the burden of every American at frightening pace. According to the Peter G. Peterson Foundation, a deficit of US$1.8 trillion this year alone is adding a debt at a clip of $3.4 million a minute, $200 million an hour or $5 billion a day.
With Uncle Sam spending money like his wallet is on fire, China, Russia and the Middle East are getting steamed and they are ready to do something about it. They are ready to dump the dollar. It is already started in China and is diversifying into euros, yen and other currencies.
At the meeting in Yekaterinburg, Russia, the BRIC nations suggested shifting their currency holdings from the dollar into the IMF’s Special Drawing Rights (SDRs). The IMF recently announced that around $2 billion of SDRs recently transferred to Russia. But Russia is still behind China, which announced its intention to purchase up to $50 billion in SDRs from the IMF. India is going to purchase SDRs too. SDRs on their own can’t function as a global reserve currency, but combined with a basket of hard assets – gold, silver, copper and oil – they could be a big step in that direction.
After a lull this summer, investor demand is picking up again. Gold holdings in 10 monitored gold-backed exchange traded funds increased by 4.871 metric tonnes in the week from September 4 to September 11. The amount of gold in ETFs globally has surged to more than 66.7 million ounces. The World Gold Council reports that only about half of 1% of total worldwide funds under management are currently invested in gold and if that were to double to 1%, there would be insufficient gold in the vaults of central banks to accommodate the increase in demand.
Gold is not the only thing investors and funds are buying. Copper, zinc, cotton, oil and other hard assets are all becoming sought after investments.
Thursday, September 24, 2009
Bubble, oh Bubble
I remember once the former Fed’s Alan Greenspan said it was impossible to tell a bubble while you were in it.
Review – the Standard & Poor’s index is up 58% from its March lows, gold has finally broken through the 1,000-an-ounce level and may go higher and bond yields have fallen substantially in spite of the huge US budget deficit. Is it too difficult to tell if we’re in a bubble?
What is really tough is trying to figure out how to invest while it is developing.
It is no wonder right now why I have been recommending investments in gold and other hard assets. When current Fed Chairman Ben Bernanke doubled the monetary base ina few weeks last fall, it was pretty obvious that the extra money would appear somewhere, either as zooming asset prices or as surging inflation. If gold is adjusted for inflation, it remains far below the inflation-adjusted equivalent of their 1980 peak, which would be around $2,300 per ounce today. Likewise, silver prices are even further below their 1980 peak, which would be around $130 per pounce or nearly 10 times the current level. The potential run-up is considerable.
Let us look at stocks. Let’s say the market of early 1995 – when the Dow Jones was at 4,000 – a reasonable base for estimating a fair value for the US stock market, then we inflation the Dow in line with nominal gross domestic product to keep it at fair value, which would bring us to a current day estimate of 7,800. To reach this fair-value level, Dow would have to drop 1,984 points or 20% - enough of a decline to qualify as an official bear market. But one thing to remember – 1995 wasn’t a bear market and economic and earnings prospects that year were really good. In another word, US stocks are overvalued. Even after the bearish trauma of last year, we remain in a stock market bubble.
Bubble investing is different from bull-market investing. There are not many ‘good’ values, so you have to be very careful. One should certainly keep much higher cash reserves than normal. Get ready to sell at the first signs that the Fed is beginning to take inflation seriously. You will know when this is because you will likely start hearing a lot of Fed ‘exit strategies’. Don’t be greedy – better to sell too early than too late.
Review – the Standard & Poor’s index is up 58% from its March lows, gold has finally broken through the 1,000-an-ounce level and may go higher and bond yields have fallen substantially in spite of the huge US budget deficit. Is it too difficult to tell if we’re in a bubble?
What is really tough is trying to figure out how to invest while it is developing.
It is no wonder right now why I have been recommending investments in gold and other hard assets. When current Fed Chairman Ben Bernanke doubled the monetary base ina few weeks last fall, it was pretty obvious that the extra money would appear somewhere, either as zooming asset prices or as surging inflation. If gold is adjusted for inflation, it remains far below the inflation-adjusted equivalent of their 1980 peak, which would be around $2,300 per ounce today. Likewise, silver prices are even further below their 1980 peak, which would be around $130 per pounce or nearly 10 times the current level. The potential run-up is considerable.
Let us look at stocks. Let’s say the market of early 1995 – when the Dow Jones was at 4,000 – a reasonable base for estimating a fair value for the US stock market, then we inflation the Dow in line with nominal gross domestic product to keep it at fair value, which would bring us to a current day estimate of 7,800. To reach this fair-value level, Dow would have to drop 1,984 points or 20% - enough of a decline to qualify as an official bear market. But one thing to remember – 1995 wasn’t a bear market and economic and earnings prospects that year were really good. In another word, US stocks are overvalued. Even after the bearish trauma of last year, we remain in a stock market bubble.
Bubble investing is different from bull-market investing. There are not many ‘good’ values, so you have to be very careful. One should certainly keep much higher cash reserves than normal. Get ready to sell at the first signs that the Fed is beginning to take inflation seriously. You will know when this is because you will likely start hearing a lot of Fed ‘exit strategies’. Don’t be greedy – better to sell too early than too late.
Wednesday, September 23, 2009
Guanxi – Path to Glory
I was in Shanghai over the weekend to visit my brother and some of my business associates. Among topic of discussions was ways to connect with China’s profit pathway – quanxi – which loosely defined as ‘connections’ – a position of trust that is very tough from an outsiders to obtain.
During the politically charged period in the late 1980s and early 1990s – when China believed it really needed friends – a small number of companies ignored the controversies, are now rewarded with hefty market shares, growing profits and a position of trust. Now, it is crystal clear why most Chinese seem to spend inordinate amounts of time and money establishing, cultivating and maintaining their quanxi networks – guarded for they can last a lifetime.
This is the fifth years of my business involvement in China and I can testify to the fact that properly constructed guanxi relationships will help investors to identify future trends, potential profit opportunities and even the players best positioned top pursue them. In that sense, it is a bit like the proverbial ‘old-boys network’. It is also no surprise to see many guys that lack of quanxi will want to cry ‘foul’ when it comes to this aspect of business dealing. Quanxi is completely legal and it has been that way for 5,000 years.
If anything, my experience in Asia over the last 20 years suggests that people without quanxi are the ones who should be worried. Question that many people ask me how do I go about developing my own quanxi and business opportunities as those who know me, I hardly travel at most two or three times a year to land of dragon at most. Let me share with readers my three key guides – consistency, patience and deliberateness.
Most of China’s fastest growing and most profitable companies right now are the ones transitioning from a purely state-owned status. It is no surprise that these companies would have best success quanxi in areas the government has deemed to be so important.
Here in China, trust matters and it takes time. When I first came to China, a senior Chinese executive bluntly told me that he wouldn’t even begin to trust me until after would have met at least three times. Even then, he said, trust would be superficial, at best. In his view, we must see each other over a period of time to get to know one another. Only then would our ‘truest character’ emerge and that would put in place the building blocks for a relationship built upon long term trust.
Last but not least, one needs to fully appreciate the fact that while China has made more economic progress in the last two decades that it did in the previous 2,000 years combined, one who succeed here will be those who tackle this process in a steady and measured manner.
All in all, it proves that old adage that says ‘it’s who you know that counts’ – especially in China.
During the politically charged period in the late 1980s and early 1990s – when China believed it really needed friends – a small number of companies ignored the controversies, are now rewarded with hefty market shares, growing profits and a position of trust. Now, it is crystal clear why most Chinese seem to spend inordinate amounts of time and money establishing, cultivating and maintaining their quanxi networks – guarded for they can last a lifetime.
This is the fifth years of my business involvement in China and I can testify to the fact that properly constructed guanxi relationships will help investors to identify future trends, potential profit opportunities and even the players best positioned top pursue them. In that sense, it is a bit like the proverbial ‘old-boys network’. It is also no surprise to see many guys that lack of quanxi will want to cry ‘foul’ when it comes to this aspect of business dealing. Quanxi is completely legal and it has been that way for 5,000 years.
If anything, my experience in Asia over the last 20 years suggests that people without quanxi are the ones who should be worried. Question that many people ask me how do I go about developing my own quanxi and business opportunities as those who know me, I hardly travel at most two or three times a year to land of dragon at most. Let me share with readers my three key guides – consistency, patience and deliberateness.
Most of China’s fastest growing and most profitable companies right now are the ones transitioning from a purely state-owned status. It is no surprise that these companies would have best success quanxi in areas the government has deemed to be so important.
Here in China, trust matters and it takes time. When I first came to China, a senior Chinese executive bluntly told me that he wouldn’t even begin to trust me until after would have met at least three times. Even then, he said, trust would be superficial, at best. In his view, we must see each other over a period of time to get to know one another. Only then would our ‘truest character’ emerge and that would put in place the building blocks for a relationship built upon long term trust.
Last but not least, one needs to fully appreciate the fact that while China has made more economic progress in the last two decades that it did in the previous 2,000 years combined, one who succeed here will be those who tackle this process in a steady and measured manner.
All in all, it proves that old adage that says ‘it’s who you know that counts’ – especially in China.
Tuesday, September 22, 2009
Solar Energy
When I was visiting southern part of China couple of months back, one of the key things that I picked up was the potential of solar energy. With heavy government backing, Chinese solar companies are quickly to becoming global leaders.
Since 2007, about 54 gigawatts – about 7% of the nation’s electricity-generating capacity – of coals and oil-fired power plants have been closed down as part of the effort to reduce carbon emissions. It plans to reduce energy consumption per unit of its GDP by 20% of 2005 levels by the end of next year.
According to some estimates by China Greentech Initiative and the American Chamber of Commerce, China’s market for green technology could reach $1 trillion annually, or about 15% of the country’s forecast 2013 GDP. China plans to install more than 500 megawatts of solar pilot projects in two to three years. It might not be a huge, but it sends a strong signal that China is serious about developing its domestic solar market.
In July, the central government said it would subsidize 50% of investment for solar projects as well as transmission and distribution systems that connect to grid networks. The subsidy rises to 70% for independent photovoltaic power generating systems in remote regions of the country that have no power supply.
One problem, however, is that businessmen are not just benefiting from the growing market of the mainland. Many are now building factories in the United States as it seeks to expand its presence in the US solar market – thanks to the generous subsidies it receives from Beijing.
Some call this as China’s dumping strategy and companies like Conergy and Solarworld – two German solar companies – have called on Western governments to protect the solar industry with import tariffs on Chinese products. But so far, there has been no action on the part of US and European governments.
Chinese government on the other hand, sets a requirement that 75% of the content of government-purchased solar panels to be Chinese-made. And at the same time, China recently took a big step to enhancing cooperation with Western solar companies by signing a deal with the Phoenix-based First Solar to build world’s largest solar plant – 2,000 megawatt complex in Ordos City in Inner Mongolia in 2019.
Since 2007, about 54 gigawatts – about 7% of the nation’s electricity-generating capacity – of coals and oil-fired power plants have been closed down as part of the effort to reduce carbon emissions. It plans to reduce energy consumption per unit of its GDP by 20% of 2005 levels by the end of next year.
According to some estimates by China Greentech Initiative and the American Chamber of Commerce, China’s market for green technology could reach $1 trillion annually, or about 15% of the country’s forecast 2013 GDP. China plans to install more than 500 megawatts of solar pilot projects in two to three years. It might not be a huge, but it sends a strong signal that China is serious about developing its domestic solar market.
In July, the central government said it would subsidize 50% of investment for solar projects as well as transmission and distribution systems that connect to grid networks. The subsidy rises to 70% for independent photovoltaic power generating systems in remote regions of the country that have no power supply.
One problem, however, is that businessmen are not just benefiting from the growing market of the mainland. Many are now building factories in the United States as it seeks to expand its presence in the US solar market – thanks to the generous subsidies it receives from Beijing.
Some call this as China’s dumping strategy and companies like Conergy and Solarworld – two German solar companies – have called on Western governments to protect the solar industry with import tariffs on Chinese products. But so far, there has been no action on the part of US and European governments.
Chinese government on the other hand, sets a requirement that 75% of the content of government-purchased solar panels to be Chinese-made. And at the same time, China recently took a big step to enhancing cooperation with Western solar companies by signing a deal with the Phoenix-based First Solar to build world’s largest solar plant – 2,000 megawatt complex in Ordos City in Inner Mongolia in 2019.
Thursday, September 17, 2009
Debunking Recovery Hype
The bear market is over and a new bull market is back – at least that is the conventional wisdom of the top 55 economists, who predict that the economy will grow in the fourth quarter through the first half of 2010.
Having said that these are the same economists reported that the economy was in the ‘worst recession since the Great Depression.
What really change between then and now is – psychology.
As optimism builds, so does the perception of a recovery. It is to be expected, after all, the simple truth is that investors, advisors and analysts alike herd. It is all too similar to the optimism I observed in late 2007 – when various markets stood at or near all-time highs.
One has to balance with the reality – that large pockets of the US real estate market are till racking up record monthly foreclosures. Bank credits and M3 have been contracting at rates comparable to the onset of the Great Depression.
Robert Prechter, one of the great Elliot Wave theorists that I have a great respect, says limited gain remains possible, but various technical measures, historical correlations and sentiment extremes all suggest that the rally is waning.
Economists’ opinions lag stock trends and series of valuation indicators such as annual dividend yield and price/earnings ratio are remain at exceptionally bearish levels.
Hong Kong billionaire Li Ka-shing who predicted China’s stock market bubble would burst in 2007, said the global economy would not recover this year and told investors to be “cautious” about buying shares, especially with borrowed money. “The worst is over for the global economy,” Li, Asia’s second-richest man, yet it’s too optimistic to say the global economy has reached a turning point. The degree of decline has shrunk but that doesn’t mean it has stopped shrinking,” he said.
With 69 failed US banks already this year, bank failures are already on course to exceed the number of failures in 2008 by 400%. However, if they continue accelerating, that increase could easily rise to 500% or 600%.
In short, the same Wall Street banksters who are leading the chorus of “happy days are here again!” are the same individuals throttling the U.S. economy through reduced lending and credit – the exact opposite of what they predicted they would do, once they got their $10 TRILION in hand-outs, loans and guarantees.
Does this sound like an economy which is “recovering”?
Having said that these are the same economists reported that the economy was in the ‘worst recession since the Great Depression.
What really change between then and now is – psychology.
As optimism builds, so does the perception of a recovery. It is to be expected, after all, the simple truth is that investors, advisors and analysts alike herd. It is all too similar to the optimism I observed in late 2007 – when various markets stood at or near all-time highs.
One has to balance with the reality – that large pockets of the US real estate market are till racking up record monthly foreclosures. Bank credits and M3 have been contracting at rates comparable to the onset of the Great Depression.
Robert Prechter, one of the great Elliot Wave theorists that I have a great respect, says limited gain remains possible, but various technical measures, historical correlations and sentiment extremes all suggest that the rally is waning.
Economists’ opinions lag stock trends and series of valuation indicators such as annual dividend yield and price/earnings ratio are remain at exceptionally bearish levels.
Hong Kong billionaire Li Ka-shing who predicted China’s stock market bubble would burst in 2007, said the global economy would not recover this year and told investors to be “cautious” about buying shares, especially with borrowed money. “The worst is over for the global economy,” Li, Asia’s second-richest man, yet it’s too optimistic to say the global economy has reached a turning point. The degree of decline has shrunk but that doesn’t mean it has stopped shrinking,” he said.
With 69 failed US banks already this year, bank failures are already on course to exceed the number of failures in 2008 by 400%. However, if they continue accelerating, that increase could easily rise to 500% or 600%.
In short, the same Wall Street banksters who are leading the chorus of “happy days are here again!” are the same individuals throttling the U.S. economy through reduced lending and credit – the exact opposite of what they predicted they would do, once they got their $10 TRILION in hand-outs, loans and guarantees.
Does this sound like an economy which is “recovering”?
Wednesday, September 16, 2009
The Sell-Down on Property Stocks
The widely watch US Dollar index, a measure of the dollar’s performance against a basket of six of the world’s major currencies, has plunged 15.1% since its high of March 4. It could potentially put the greenback in free-fall territory. It is plunging against the euro, the Japanese yen, the British pound, the Swiss franc, the Canadian dollar. It is even sliding against the currencies of lesser developed economies. On top of that, risk reduction and profit taking are among the theme that I am seeing to emerge in recent months, and likely to continue as amplified investors anxiety have crept in.
But on the other hand, as the US government imposed a new tariff of a 35% duty on imported Chinese tires, sparking speculation that Chinese government could retaliate with their own actions. With both sides at odds, the upcoming G-10 summit in Pittsburgh will keep this story in the headlines for some time.
If this turns out to be the case, the recent drubbing US dollar could quickly come to an end as the clash between two of the world’s biggest economies could force an escape into safe haven outlets.
One of the main casualties will be property related stocks. Singapore government, among other, put up measures designed to prevent future dramatic price swings in the residential property market. With immediate effect, banks and developers will not be allowed to offer loans on homes under construction, where the borrower need only put down as little as a 5% cash down-payment and defer payment of the principal until after building is completed. The government will reinstate its ‘confirmed list’ of land sales in the first half of 2010 and increase the supply of land available to developers.
And in China, while government officials are pleased to see a recovered real estate sector, they also are starting to worry that prices are rising too quickly, luring speculators into the market and turning it into an asset bubble - not an economic driver. Latest statistics show that housing prices in China's 70 major cities grew 1 percent in July from a year earlier - the biggest increase over nine months. China's property sales surged 60 percent by value in the first seven months. The A-share market also echoed the property sector's strong rebound.
More Asian governments are warning of speculative bubbles in real estate markets and they said they may take steps to cool an overheated market. Bank of Korea said it would lift interest rates if home prices climbed further.
It is really hard to find a time when these four factors worked together. Investors and policy makers should be alert to this. I re-call that in the recent stock market bubble in China, it collapsed from more than 6,100 points in October 2007 to 1664.93 points last October.
But on the other hand, as the US government imposed a new tariff of a 35% duty on imported Chinese tires, sparking speculation that Chinese government could retaliate with their own actions. With both sides at odds, the upcoming G-10 summit in Pittsburgh will keep this story in the headlines for some time.
If this turns out to be the case, the recent drubbing US dollar could quickly come to an end as the clash between two of the world’s biggest economies could force an escape into safe haven outlets.
One of the main casualties will be property related stocks. Singapore government, among other, put up measures designed to prevent future dramatic price swings in the residential property market. With immediate effect, banks and developers will not be allowed to offer loans on homes under construction, where the borrower need only put down as little as a 5% cash down-payment and defer payment of the principal until after building is completed. The government will reinstate its ‘confirmed list’ of land sales in the first half of 2010 and increase the supply of land available to developers.
And in China, while government officials are pleased to see a recovered real estate sector, they also are starting to worry that prices are rising too quickly, luring speculators into the market and turning it into an asset bubble - not an economic driver. Latest statistics show that housing prices in China's 70 major cities grew 1 percent in July from a year earlier - the biggest increase over nine months. China's property sales surged 60 percent by value in the first seven months. The A-share market also echoed the property sector's strong rebound.
More Asian governments are warning of speculative bubbles in real estate markets and they said they may take steps to cool an overheated market. Bank of Korea said it would lift interest rates if home prices climbed further.
It is really hard to find a time when these four factors worked together. Investors and policy makers should be alert to this. I re-call that in the recent stock market bubble in China, it collapsed from more than 6,100 points in October 2007 to 1664.93 points last October.
Monday, September 14, 2009
China – The Giant to Bet
This tectonic shift and the economic shockwaves that will result from it will provide is with some of the greatest profit plays they will see in your lifetimes. The China-spawned changes are headed our way.
In 1990, the US banking system was 2.3 to 2.7 times of its counterpart in China. Today, the situation has been reversed and there is much more of an imbalance. China’s banking system has 25 times the reserves of the US Federal Reserve. And that could mean at some point, the US will no longer be able to dictate international monetary policy. At the end of WWII, virtually the entire world functioned on dollars - 100% of the world’s money supply and that figure has dropped all the way to less than a quarter.
Clearly, the greenback has lost its mojo and the US government is losing out its international monetary leverage. On the flip side of it, China’s on the rise economically, while its currency is advancing with the unstoppability of a diesel locomotive operating at a full throttle.
Beijing is taking steps to keep the yuan from being tradeable and knowingly very well that the dollar is increasingly a liability as it minimizes the Red Dragon’s dollar-based exposure. In the last six months, China has signed at least $95 billion in swap agreements, under which it can trade directly with countries for payment in yuan. Those countries sign these deals are getting huge discounts from China in exchange for their participation and for buying goods from China.
In last spring, China organized a meeting in Moscow, attended by Brazil, India and Russia, where the main goal was to supplant the US dollar as the world’s main reserve currency, replacing it with a yuan-led market basket of currencies or even one based on the IMF’s Special Drawing Right (SDR). Today, the SDR consists of the euro, yen, pound sterling and US dollar.
The list of potential implications is very long, including the US dollar goes into freefall. Inflation will strike with a vengeance, as everything bought, sold or priced in dollars will instantly rise in price to offset this fall. It increases repatriation risk and prices throughout the value chains would rise sharply to compensate.
The bottom line – no matter how this plays out, there will always be an upside for investors who are willing to seek it out.
In 1990, the US banking system was 2.3 to 2.7 times of its counterpart in China. Today, the situation has been reversed and there is much more of an imbalance. China’s banking system has 25 times the reserves of the US Federal Reserve. And that could mean at some point, the US will no longer be able to dictate international monetary policy. At the end of WWII, virtually the entire world functioned on dollars - 100% of the world’s money supply and that figure has dropped all the way to less than a quarter.
Clearly, the greenback has lost its mojo and the US government is losing out its international monetary leverage. On the flip side of it, China’s on the rise economically, while its currency is advancing with the unstoppability of a diesel locomotive operating at a full throttle.
Beijing is taking steps to keep the yuan from being tradeable and knowingly very well that the dollar is increasingly a liability as it minimizes the Red Dragon’s dollar-based exposure. In the last six months, China has signed at least $95 billion in swap agreements, under which it can trade directly with countries for payment in yuan. Those countries sign these deals are getting huge discounts from China in exchange for their participation and for buying goods from China.
In last spring, China organized a meeting in Moscow, attended by Brazil, India and Russia, where the main goal was to supplant the US dollar as the world’s main reserve currency, replacing it with a yuan-led market basket of currencies or even one based on the IMF’s Special Drawing Right (SDR). Today, the SDR consists of the euro, yen, pound sterling and US dollar.
The list of potential implications is very long, including the US dollar goes into freefall. Inflation will strike with a vengeance, as everything bought, sold or priced in dollars will instantly rise in price to offset this fall. It increases repatriation risk and prices throughout the value chains would rise sharply to compensate.
The bottom line – no matter how this plays out, there will always be an upside for investors who are willing to seek it out.
The Next Big Bet – Semicon Cycle
A long time investment adage holds that ‘as goes Intel, so goes the rest of semiconductor industry’.
Given that microchips are present in virtually every type of product, an uptick in semiconductor sector business activity today will represent a jump in broader economic growth tomorrow.
High proprietary chip content stocks are poised for breakout sales and earnings, probably quickly returning to levels before last summer’s plunge, according to an article in Forbes colum earlier this summer.
Semiconductor players are ramping up production to meet what they believe is a growing consumer demand. While it has yet to traverse the economic neutral zone to break into positive territory but at least the hemorrhaging is subsiding.
Inventories from many chipmakers are at a lower level compared to their average level for the past three years. Intel recently boosted its Q3 earnings revenue outlook by $500mn. The increase in Intel’s sales forecast could be attributed to a rebound in PC orders by consumers in Asia.
Dell, which until traditionally only sold its computers on-line and via telephone orders, continues to expand its retail presence from 30,000 stores last quarter to 43,000 so far. Demand for a lot of consumer devices like cell phones, e-books and mobile Internet devices seems to be picking up from six months ago, particularly non US.
Chip-making firms invest in new gear to expand the capacity to move to the newest technology or both. The financial crisis has kept players to minimal and several of the equipment players have filed for bankruptcy as a result. United Microelectronics Corp announced it is boosting its outlays for new equipment, Chartered Semiconductor will increase capex to $500mn from the 400mn announced earlier this year. The weak US dollar will also help in making American products cheaper in foreign currency terms.
Users are likely tot take advantage of technology improvements like Window 7 and Microsoft’s Office 2010, predicated on improving economy and related improvements in customer profits and government tax receipts.
Given that microchips are present in virtually every type of product, an uptick in semiconductor sector business activity today will represent a jump in broader economic growth tomorrow.
High proprietary chip content stocks are poised for breakout sales and earnings, probably quickly returning to levels before last summer’s plunge, according to an article in Forbes colum earlier this summer.
Semiconductor players are ramping up production to meet what they believe is a growing consumer demand. While it has yet to traverse the economic neutral zone to break into positive territory but at least the hemorrhaging is subsiding.
Inventories from many chipmakers are at a lower level compared to their average level for the past three years. Intel recently boosted its Q3 earnings revenue outlook by $500mn. The increase in Intel’s sales forecast could be attributed to a rebound in PC orders by consumers in Asia.
Dell, which until traditionally only sold its computers on-line and via telephone orders, continues to expand its retail presence from 30,000 stores last quarter to 43,000 so far. Demand for a lot of consumer devices like cell phones, e-books and mobile Internet devices seems to be picking up from six months ago, particularly non US.
Chip-making firms invest in new gear to expand the capacity to move to the newest technology or both. The financial crisis has kept players to minimal and several of the equipment players have filed for bankruptcy as a result. United Microelectronics Corp announced it is boosting its outlays for new equipment, Chartered Semiconductor will increase capex to $500mn from the 400mn announced earlier this year. The weak US dollar will also help in making American products cheaper in foreign currency terms.
Users are likely tot take advantage of technology improvements like Window 7 and Microsoft’s Office 2010, predicated on improving economy and related improvements in customer profits and government tax receipts.
Thursday, September 10, 2009
Gold Breaks $1,000 An Ounce
I told you that I am a dollar-bear and commodity bull many times. Two days ago, gold broke the $1,000 an ounce barrier, from $950 a week ago. From November 2008 through February 2009, gold rose from around $700 to nearly $1,000. The ensuing consolidation ended last week and with the breakout above the upper boundary of this triangle, a clear buy signal is generated.
The momentum is bullish and perhaps there is a lot of room for additional price gains. Sentiment indicators point in the similar direction. The next immediate target could be $1,100 – another 10% upside, but it is just a minimum target. If you take a step back a bit and look at a longer-term gold chart, you would know the significance of a clear break above the resistance zone around $1,000 level. It signals the end of huge consolidation and the start of the next medium term uptrend.
If we going by this count, the target moves to $1,300 and even then, this could just be another interim target, partly because of weaker US dollar and possibility of higher inflation. Government debt, as a consequent of financial and economic crisis, is going through the roof, not just in the US but all over the world. World-wide central banks are printing money like there is no tomorrow. The US government has made $11.6 trillion in financing commitments, many of which will saddle us with debt for generations – some of it forever.
Gold supply is stagnating or even slightly shrinking. The demand of this yellow metal is too strong despite the metal’s price rise since 2001. This is because it is getting ever more difficult and expensive to get gold out of the earth.
So, now we have the confluence of important technical breakout and strong fundamentals in place, I expect the long-term bull market to continue.
The momentum is bullish and perhaps there is a lot of room for additional price gains. Sentiment indicators point in the similar direction. The next immediate target could be $1,100 – another 10% upside, but it is just a minimum target. If you take a step back a bit and look at a longer-term gold chart, you would know the significance of a clear break above the resistance zone around $1,000 level. It signals the end of huge consolidation and the start of the next medium term uptrend.
If we going by this count, the target moves to $1,300 and even then, this could just be another interim target, partly because of weaker US dollar and possibility of higher inflation. Government debt, as a consequent of financial and economic crisis, is going through the roof, not just in the US but all over the world. World-wide central banks are printing money like there is no tomorrow. The US government has made $11.6 trillion in financing commitments, many of which will saddle us with debt for generations – some of it forever.
Gold supply is stagnating or even slightly shrinking. The demand of this yellow metal is too strong despite the metal’s price rise since 2001. This is because it is getting ever more difficult and expensive to get gold out of the earth.
So, now we have the confluence of important technical breakout and strong fundamentals in place, I expect the long-term bull market to continue.
Wednesday, September 9, 2009
Earnings – My Story
I have been reading quite a number of broking reports on second quarter earnings indicating that worst are over, as most reported earnings are beating analysts’ expectations by a margin. But a closer look at these numbers tends to suggest the alternative explanations than the headline numbers would suggest.
I believe this cloud of euphoria had more to do with extraordinarily low expectations than to any meaningful and lasting improvement in prospects. If one to bet this on stock market, I think the recent equity rally off the back of these results is overdone.
Also, there is a plenty of evidence to show that the exclusion in adjusted operating earnings and often this contain useful information that may suggest a possibility of weaker cash flows ahead.
A big thank should go to production and job cuts. There is no doubt that strong earning numbers in the last several years reflected extraordinarily high, debt-fueled margins that are difficult to imagine again in deflating and deleveraging economy. Sustainability earnings growth must entail some combination of increased profit margins, rising turnover or greater leverage. In current situation, increased leverage is unacceptable to managements and investors alike. Wider profit margins and higher turnover may be possible in short run, but are much less attainable in a deleveraging cycle.
I strongly believe that the most important ingredients for rising stock prices are not corporate earnings and global economic growth. Instead, the key elements are interest rates, inflation and sentiment along with help from government fiscal and tax policy. Historically, this is the environment in which stock prices have done their bests. As long as the recovery remains anemic with lackluster job growth, it remains the subject of tender mercy by policymakers desperate to placate an unhappy electorate. A full 65% of all companies are still in the process of slashing their headcounts. There is also the problem of the rising ranks of long-term unemployed as more job losses are permanent rather than temporary lay-offs.
The recent fall in China is a perfect example of this theory in action. The declines come amid new evidence of economic strength. Traders were spooked by Beijing’s efforts to tighten runaway loans growth.
If recovery is indeed drawn out, this is paradoxically great news. U-shaped recovery is exactly what investors should want to see.
I believe this cloud of euphoria had more to do with extraordinarily low expectations than to any meaningful and lasting improvement in prospects. If one to bet this on stock market, I think the recent equity rally off the back of these results is overdone.
Also, there is a plenty of evidence to show that the exclusion in adjusted operating earnings and often this contain useful information that may suggest a possibility of weaker cash flows ahead.
A big thank should go to production and job cuts. There is no doubt that strong earning numbers in the last several years reflected extraordinarily high, debt-fueled margins that are difficult to imagine again in deflating and deleveraging economy. Sustainability earnings growth must entail some combination of increased profit margins, rising turnover or greater leverage. In current situation, increased leverage is unacceptable to managements and investors alike. Wider profit margins and higher turnover may be possible in short run, but are much less attainable in a deleveraging cycle.
I strongly believe that the most important ingredients for rising stock prices are not corporate earnings and global economic growth. Instead, the key elements are interest rates, inflation and sentiment along with help from government fiscal and tax policy. Historically, this is the environment in which stock prices have done their bests. As long as the recovery remains anemic with lackluster job growth, it remains the subject of tender mercy by policymakers desperate to placate an unhappy electorate. A full 65% of all companies are still in the process of slashing their headcounts. There is also the problem of the rising ranks of long-term unemployed as more job losses are permanent rather than temporary lay-offs.
The recent fall in China is a perfect example of this theory in action. The declines come amid new evidence of economic strength. Traders were spooked by Beijing’s efforts to tighten runaway loans growth.
If recovery is indeed drawn out, this is paradoxically great news. U-shaped recovery is exactly what investors should want to see.
Tuesday, September 8, 2009
Exclusivity in China-Australia Deal
When China buys, it buys big. Most recently, China’s global resource acquisition spree has centered on Australia, after tours through Canada, the Middle East, South America and Africa.
Following the recent arrest of four Rio Tinto employees in China on corporate espionage charges, the two countries are doing something mutually beneficial to smooth over relations. For China, it is a matter of face-saving and to Australia, it is a source of cash that will flow right into the government coffers.
A lot of people have not heard of – Barrow Island and this is where the place for transaction to take place. It located about 30 miles off the northwest coast of Australia and about 80 square miles in size. The island sits atop a supply of natural gas – a portion of which now will be liquefied and send to China. The deal will cost US$15billion, with some 15 million metric tons of the fuel each year and is expected to create 6,000 jobs initially with another 3,000 to follow.
It is not the China wants to spend this money, but it is because China has to spend that money. It is a matter of the country’s long term survival. It is aimed to avoid ‘social unrest’ – the word phrase that scare Beijing more than anything else. This is why China leaders have been so resolute in their drive to lock up supplies of raw materials and other key commodities.
On the other hand, Australia is caught between citizens who get uncomfortable at the thought of selling valuable national interests to a trading partner they don’t really know or understand well. It has some similarities with failed Unocal Corp of 2005 because US interests were appalled that a Chinese company could acquire ‘national interest’. Yet few take a look for the fact hat most of Unocal’s assets are actually located in Asia.
The changes are under way and are inevitable. Fight them if you must, but realize it is at your own cost or embrace them and ride along, which is not only the path of least resistance. It is also the most profitable trail to take, after all.
Following the recent arrest of four Rio Tinto employees in China on corporate espionage charges, the two countries are doing something mutually beneficial to smooth over relations. For China, it is a matter of face-saving and to Australia, it is a source of cash that will flow right into the government coffers.
A lot of people have not heard of – Barrow Island and this is where the place for transaction to take place. It located about 30 miles off the northwest coast of Australia and about 80 square miles in size. The island sits atop a supply of natural gas – a portion of which now will be liquefied and send to China. The deal will cost US$15billion, with some 15 million metric tons of the fuel each year and is expected to create 6,000 jobs initially with another 3,000 to follow.
It is not the China wants to spend this money, but it is because China has to spend that money. It is a matter of the country’s long term survival. It is aimed to avoid ‘social unrest’ – the word phrase that scare Beijing more than anything else. This is why China leaders have been so resolute in their drive to lock up supplies of raw materials and other key commodities.
On the other hand, Australia is caught between citizens who get uncomfortable at the thought of selling valuable national interests to a trading partner they don’t really know or understand well. It has some similarities with failed Unocal Corp of 2005 because US interests were appalled that a Chinese company could acquire ‘national interest’. Yet few take a look for the fact hat most of Unocal’s assets are actually located in Asia.
The changes are under way and are inevitable. Fight them if you must, but realize it is at your own cost or embrace them and ride along, which is not only the path of least resistance. It is also the most profitable trail to take, after all.
Monday, September 7, 2009
US Housing Market – False Dawn?
Is the U.S. housing market truly at a turning point, as investors seem to increasingly believe? Or is this actually a false dawn, meaning that there are problems and pain ahead for those who turned bullish too soon?
At one hand, new home sales jumped almost 10% in July, while the Case-Shiller home price index rose for the second successive month. Yet luxury homebuilder Toll Brothers lost $493 million in the quarter ending July 31, considerably worse than analysts had expected. Housing stocks are certainly acting as if a recovery must be on the way. Pulte Homes Inc. has more than doubled from its low. Toll Brothers Inc. is up around 70% from its bottom. D.R. Horton Enterprises is up almost four times from its bottom. Lennar Corp. is up about 4½ times from its low. Finally, Hovnanian Enterprises Inc. is up almost tenfold from its low after a flirtation with bankruptcy. Yet all of these companies are still racking up quarterly losses.
In terms of house prices, it would seem unlikely that a bear market bottom has been reached. The Case-Shiller 20-cities index is still 42% above its January 2000 level, having outpaced inflation during the last 9½ years.
We also have to remember that the U.S. federal government is hugely subsidizing the market. Interest rates are artificially low, and the U.S. Federal Reserve has bought more than $1 trillion worth of housing debt. Fannie Mae and Freddie Mac have been rescued by the government, and provided with more than $100 billion of taxpayer capital. And Ginnie Mae (the Government National Mortgage Association), directly a government agency, has provided almost $1 trillion of mortgages that require a 3% down payment.
And that’s not all.
The government is spending additional billions helping homeowners avoid foreclosure. First-time buyers are given a tax credit of $8,000 towards the down payment on their house – this credit currently runs out on December 1. So the current overall market bottom is propped up artificially. Even if the proposed tax-credit extension is approved, at some point, those props will be removed.
Again, with the government bailouts of both companies, there may be something of a recovery in the local housing market.
From a nationwide standpoint, the most likely path for the housing market is for a modest recovery, with some later slippage as subsidies are removed. As for homebuilding stocks, they appear to already be discounting a recovery in their businesses that may well be years away. Selling at well above net asset value (NAV), with Price/Earnings (P/E) ratios that are infinite because the companies continue to lose money, shares of homebuilders represent a very poor value, indeed.
At one hand, new home sales jumped almost 10% in July, while the Case-Shiller home price index rose for the second successive month. Yet luxury homebuilder Toll Brothers lost $493 million in the quarter ending July 31, considerably worse than analysts had expected. Housing stocks are certainly acting as if a recovery must be on the way. Pulte Homes Inc. has more than doubled from its low. Toll Brothers Inc. is up around 70% from its bottom. D.R. Horton Enterprises is up almost four times from its bottom. Lennar Corp. is up about 4½ times from its low. Finally, Hovnanian Enterprises Inc. is up almost tenfold from its low after a flirtation with bankruptcy. Yet all of these companies are still racking up quarterly losses.
In terms of house prices, it would seem unlikely that a bear market bottom has been reached. The Case-Shiller 20-cities index is still 42% above its January 2000 level, having outpaced inflation during the last 9½ years.
We also have to remember that the U.S. federal government is hugely subsidizing the market. Interest rates are artificially low, and the U.S. Federal Reserve has bought more than $1 trillion worth of housing debt. Fannie Mae and Freddie Mac have been rescued by the government, and provided with more than $100 billion of taxpayer capital. And Ginnie Mae (the Government National Mortgage Association), directly a government agency, has provided almost $1 trillion of mortgages that require a 3% down payment.
And that’s not all.
The government is spending additional billions helping homeowners avoid foreclosure. First-time buyers are given a tax credit of $8,000 towards the down payment on their house – this credit currently runs out on December 1. So the current overall market bottom is propped up artificially. Even if the proposed tax-credit extension is approved, at some point, those props will be removed.
Again, with the government bailouts of both companies, there may be something of a recovery in the local housing market.
From a nationwide standpoint, the most likely path for the housing market is for a modest recovery, with some later slippage as subsidies are removed. As for homebuilding stocks, they appear to already be discounting a recovery in their businesses that may well be years away. Selling at well above net asset value (NAV), with Price/Earnings (P/E) ratios that are infinite because the companies continue to lose money, shares of homebuilders represent a very poor value, indeed.
Sunday, September 6, 2009
A Growing List of Troubled Banks
The Federal Deposit Insurance Corp (FDIC) reported that the number of distressed banks rose to the highest level in 15 years. The number of troubled banks rose to 416 at the end of June from 305 at the end of March. Assets at these troubled institutions totaled $299.8 billion – the worst level since the end of 1993.
The FDIC’s insurance fund, as of March 31, was down to its last $13.5 billion. Bank failures in the 2Q cost the insurance fund an estimated $9.1 billion, but were mostly offset by an emergency special assessment of $6.2 billion and an additional $2.6 billion raised as part of the regular quarterly assessment on FDIC-insured banks.
With the recent failure of Colonial Bank, the FDIC took another hit with an estimated loss of $2.8 billion and the failure of Guaranty Bank is expected to cost $3 billion. It is no surprise if FDIC to draw on a $500 billion line of credit set up from US Treasury Department, if we are going to take into account for possible situation in 1Q2010 which may tip several more banks into failure.
The cost could be even higher if the agency cannot merge that failed institutions with a healthy player, or can’t sell it outright. Otherwise, it has to manage the ‘unwinding’ of every failed bank’s stockpile of illiquid and toxic assets.
Alternatively, private equity firms could be an option and they could be spared the requirements of other bank holding companies and will not be called upon as a ‘source of strength’, should their investment in a bank need shoring up. Private equity companies don’t want to expose their vast pools of capital to any one investment. The agency spared them from having to cross-guarantee their portfolio bank investment – unless they owned at least 80% of two or more banks.
The day of reckoning is on its way. We have no one to blame but ourselves.
The FDIC’s insurance fund, as of March 31, was down to its last $13.5 billion. Bank failures in the 2Q cost the insurance fund an estimated $9.1 billion, but were mostly offset by an emergency special assessment of $6.2 billion and an additional $2.6 billion raised as part of the regular quarterly assessment on FDIC-insured banks.
With the recent failure of Colonial Bank, the FDIC took another hit with an estimated loss of $2.8 billion and the failure of Guaranty Bank is expected to cost $3 billion. It is no surprise if FDIC to draw on a $500 billion line of credit set up from US Treasury Department, if we are going to take into account for possible situation in 1Q2010 which may tip several more banks into failure.
The cost could be even higher if the agency cannot merge that failed institutions with a healthy player, or can’t sell it outright. Otherwise, it has to manage the ‘unwinding’ of every failed bank’s stockpile of illiquid and toxic assets.
Alternatively, private equity firms could be an option and they could be spared the requirements of other bank holding companies and will not be called upon as a ‘source of strength’, should their investment in a bank need shoring up. Private equity companies don’t want to expose their vast pools of capital to any one investment. The agency spared them from having to cross-guarantee their portfolio bank investment – unless they owned at least 80% of two or more banks.
The day of reckoning is on its way. We have no one to blame but ourselves.
Tuesday, September 1, 2009
China and You II
Fresh news out of China is not that encouraging. I talked to several contacts in China last week and it seems that Chinese officials may attempt to dampen stock market growth. The Shanghai Composite Index slumped the most since June 2008, sinking a monstrous 23% since August 4th of this year.
Rumors that Chinese state-owned companies will be permitted to default on their commodity derivatives contracts have also hit the street. This in turn, as we know the world’s third largest economy and major commodity consumer, has sent resource-based currencies into a tailspin.
There are signs that Chinese companies remain cautious, as the economy may take a slower path. June PMI increased slightly to 53.2, firmer than expected. The forward looking new orders index, however, was down 0.7pp to 55.5, reflecting slower infrastructure investments. Local government’s outstanding debt exceeded RMB4 trillion by end 2007 and given the large amount of infrastructure spending and increased reliance on debt financing, I believe their outstanding debt could reach RMB12 trillion by end 2010. Combined with treasury debt, public debt-to-GDP ratio could hit 55%.
The amount of excess liquidity (measured by the gap between M2 and nominal GDP growth) available to the stock market is now more abundant than at any time from the early 90s onwards. Without either monetary tightening and/or a sharp rise in nominal economic growth, it could be very difficult to prevent a huge and damaging bubble from emerging.
The level of retail participation in the market, reflected in the number of new accounts opening, is showing not sign of abating while the valuations of the Shanghai A-share index is now well above the long-term average (the index will need to drop over 20% to get back to the average) based on all four yardsticks: forward P/E, trailing P/E, trailing P/B and the forward yield gap, and approaching or having passed the +1 standard deviation (SD) level based on both trailing and forward P/E.
I believe that there is a good chance that A and H-share premium set to shrink. After the 20% outperformance in the last few months, A shares are now trading at a 50% premium to H shares. With no obvious difference in the cost of capital plus the A-share market being far from the bull market of 2007 (when retail investors dominated), it is difficult to see how this premium can further widen.
Rumors that Chinese state-owned companies will be permitted to default on their commodity derivatives contracts have also hit the street. This in turn, as we know the world’s third largest economy and major commodity consumer, has sent resource-based currencies into a tailspin.
There are signs that Chinese companies remain cautious, as the economy may take a slower path. June PMI increased slightly to 53.2, firmer than expected. The forward looking new orders index, however, was down 0.7pp to 55.5, reflecting slower infrastructure investments. Local government’s outstanding debt exceeded RMB4 trillion by end 2007 and given the large amount of infrastructure spending and increased reliance on debt financing, I believe their outstanding debt could reach RMB12 trillion by end 2010. Combined with treasury debt, public debt-to-GDP ratio could hit 55%.
The amount of excess liquidity (measured by the gap between M2 and nominal GDP growth) available to the stock market is now more abundant than at any time from the early 90s onwards. Without either monetary tightening and/or a sharp rise in nominal economic growth, it could be very difficult to prevent a huge and damaging bubble from emerging.
The level of retail participation in the market, reflected in the number of new accounts opening, is showing not sign of abating while the valuations of the Shanghai A-share index is now well above the long-term average (the index will need to drop over 20% to get back to the average) based on all four yardsticks: forward P/E, trailing P/E, trailing P/B and the forward yield gap, and approaching or having passed the +1 standard deviation (SD) level based on both trailing and forward P/E.
I believe that there is a good chance that A and H-share premium set to shrink. After the 20% outperformance in the last few months, A shares are now trading at a 50% premium to H shares. With no obvious difference in the cost of capital plus the A-share market being far from the bull market of 2007 (when retail investors dominated), it is difficult to see how this premium can further widen.
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