I expect freight rates to be on downward bias and volatile given the China’s strategic shipbuilding policy. This will ensure continual deliveries of dry bulk carriers to the market, on top of lower ship demolitions and lesser order cancellations.
The influence of China on the dry bulk shipping in 2009 was unexpectedly strong and will be one of the key influences into 2010 unless China or South Korea unexpectedly reduce subsidies or support to its established yards. China is aiming to be the largest global shipbuilding nation, which should have resulted in most of the 48% order placed with Chinese yards being delivered. The short 10-14 months construction timeframe for dry bulk carriers and more than 30% down-payments and progressive payments would not help either to slow down the trend.
The current short-term charter rates for Capsize and Panamax vessels are significantly above longer-term charter rates and this reflects the possibility of high speculative activities. The smaller-sized dry bulk carriers, namely Handymax and Handsize will face better supply/demand dynamics in 2010, anchored by a return of positive growth for grains and minor bulk. The order-book to fleet ratio for Handsize is 0.3x and Handyman of 1.8x are significantly lower than the 4.7x order to fleet ratio for Capsize vessels.
On the other hand, the monthly deliveries of new-build Capesize/Panamax vessels since June 2009 have been above the peak in the previous cyclical upturn for drybulk shipping industry, which could negatively affect the day charter rates.
The key turning point in this case will depend on China’s import of iron ore and that can be traced to production of steel, also the Chinese government’s stimulus policies, which have resulted in strong rebound in construction, infrastructure development, car production, new factories etc. Having said that, headwind for steel production could become stronger should Chinese authorities choose actions over words. The Ministry of Industry and Information Technology, the Ministry of Commerce and the CISA have warned about steel production oversupply in 2009.
The high iron ore surplus and huge 66m iron ore inventory at ports are also not helpful to China’s likely attempt to negotiate downward the annual iron ore prices for supplies in 2010. The premium of local iron ore prices over imported iron ore has been greatly reduced. China’s iron ore (Hebei, Tangshan) have dipped from an undeserving 8% premium over imported iron ore in late 2008 to the current 22% discount. This is even lower than the historical average 15% price discount to imported iron ore.
Chinese government is setting up the China Shipbuilding Industry Investment Fund by December 2009 as to give further support to its shipbuilding industry and this will increase the supply of dry bulk carriers globally. The demolition activities, which are on a a steady downtrend, are needed to resume to assist the rebalancing of demand/supply dynamic.
Wednesday, December 16, 2009
Tuesday, December 15, 2009
Playing a Devil Advocate
In 2009, we can safely say that three inter-related trends have dominated financial markets – US$ dollar secular weakness, rally in commodity prices and a pronounced out-performance of emerging markets, including Asia. Question is that will these three trends to continue into 2010, as there are signs that they are to be running out of steam. For us, this begs the question whether the trends of 2010 will prove different to those of 2009, given what was happening in the Middle East recently?
The news of a Dubai World would be suspending payments to creditors, which was promptly followed by the rumor that defaulted Saudi groups – the Saad group and the Aran group were really nerve wrecking news and make many to think hard how the Middle East could find itself in this tight spot?
Of course, one argues that this may be nothing more than a few bad apples that blatantly mismanaged the liabilities and blew up balance sheets.
But I am also intrigued by the recent announcements that some of the region’s sovereign wealth funds – Qatar and Kuwait – have lately been selling the large stakes that they acquired in Western financials at the beginning of last year’s financial crisis. Of course, this could be guided by the simple fact that banks are back above their purchase price and they are happy to turn the page or perhaps, the sales are an indication that the Middle East needs US$ right now and that we are confronting some kind of squeeze on the US$.
One thing that I am very sure is that the recent developments in Saudi and Dubai will most likely give pause to foreign banks looking to expand their lending operations in that region. This raises question of whether the Middle East will look to pump more oil in a bid to generate the revenue necessary to keep the wheels churning? Could this be the beginning of financial squeeze in the Middle East that lead to the kind of massive cheating on OPEC quotas that we witnessed in the 1980s?
With these confluences development, where would all this leave other emerging markets, most specifically Asian equities, which have soared in the past year? Historically, Asian equities tend to struggle when the US$ rallies as a strong US$ forces Asian central banks, who typically run pegs or managed floats, to print less aggressively. But at the same time, most Asian economies would likely welcome the extra liquidity that lower oil prices would provide, not to say anything about an environment of continued low interest rates.
If that is the saying of the day, it is likely lead to massive rotation within the markets away from commodity producers and property developers and towards manufacturers and exporters.
The news of a Dubai World would be suspending payments to creditors, which was promptly followed by the rumor that defaulted Saudi groups – the Saad group and the Aran group were really nerve wrecking news and make many to think hard how the Middle East could find itself in this tight spot?
Of course, one argues that this may be nothing more than a few bad apples that blatantly mismanaged the liabilities and blew up balance sheets.
But I am also intrigued by the recent announcements that some of the region’s sovereign wealth funds – Qatar and Kuwait – have lately been selling the large stakes that they acquired in Western financials at the beginning of last year’s financial crisis. Of course, this could be guided by the simple fact that banks are back above their purchase price and they are happy to turn the page or perhaps, the sales are an indication that the Middle East needs US$ right now and that we are confronting some kind of squeeze on the US$.
One thing that I am very sure is that the recent developments in Saudi and Dubai will most likely give pause to foreign banks looking to expand their lending operations in that region. This raises question of whether the Middle East will look to pump more oil in a bid to generate the revenue necessary to keep the wheels churning? Could this be the beginning of financial squeeze in the Middle East that lead to the kind of massive cheating on OPEC quotas that we witnessed in the 1980s?
With these confluences development, where would all this leave other emerging markets, most specifically Asian equities, which have soared in the past year? Historically, Asian equities tend to struggle when the US$ rallies as a strong US$ forces Asian central banks, who typically run pegs or managed floats, to print less aggressively. But at the same time, most Asian economies would likely welcome the extra liquidity that lower oil prices would provide, not to say anything about an environment of continued low interest rates.
If that is the saying of the day, it is likely lead to massive rotation within the markets away from commodity producers and property developers and towards manufacturers and exporters.
Sunday, December 13, 2009
Five China Precepts
If you are long-term investor, you cannot afford not to look at China.
Consumerism is taking root. According to China’s National Bureau of Statistics, the country’s retail spending advanced 16.2% in October and should easily hit the 15% to 19% target for 2009, essentially that the increase in consumer spending in China will be larger than the retail spending growth in the US, Europe and Japan combined. Government stimulus programs, including rebates on ‘white goods’ and tax cuts for low-emission vehicles – helped China’s car sales increased 43.6% in October. Now, China is the world’s largest car market, having replaced the United States earlier this year. Sales of home appliances are also up sharply, rising more than 35%. According to Carbon Monitoring for Action, China’s power plant capable of handling Kansas City’s electricity needs every nine days and a city of the size of Philadelphia every 30 days.
China is ready to serve with its service sector is now growing twice as fast as its construction and infrastructure segments. More than 30% of China’s workers are employed in service-sector jobs. Beijing has shrewdly directed huge portions of its stimulus package into the country’s service sector as part of its broader strategy to reduce its dependence on exports and transform China into a stronger, standalone economy.
There is more to China than exports. Truth to be told, net exports account for only 20% of China’s GDP. According to BNP Paribas, China imports nearly 90 cents worth of goods for every $1 in exports – means that at most there is 10 cents worth of ‘flux’ in China’s economy.
China has an exit strategy with its global financial crisis stimulus initiatives and is utilizing private spending to address any interim shortfalls. Beijing has raised capital requirements for banks, raised lending standards and generally put the kibosh on easy money. On an overall basis, China is well ahead of the curve while the US is trapped in an economic minefield of its own making.
Spending pattern is undergoing a needed shift. In the old days, public spending and that of state-owned enterprises outweighed private investment. The two have flipped and it is a significant shift.
The $2.3 trillion of capital reserves give it almost unlimited flexibility. It almost needs no explanation.
As for the contention that China’s economic and stock market growth rates are unsustainable, I can certainly envision a near term pull back. They are probably right. That is normal for any financial market and here is the thing – When it comes to China, I am investing for the long haul. I know where I will be putting my money!
Consumerism is taking root. According to China’s National Bureau of Statistics, the country’s retail spending advanced 16.2% in October and should easily hit the 15% to 19% target for 2009, essentially that the increase in consumer spending in China will be larger than the retail spending growth in the US, Europe and Japan combined. Government stimulus programs, including rebates on ‘white goods’ and tax cuts for low-emission vehicles – helped China’s car sales increased 43.6% in October. Now, China is the world’s largest car market, having replaced the United States earlier this year. Sales of home appliances are also up sharply, rising more than 35%. According to Carbon Monitoring for Action, China’s power plant capable of handling Kansas City’s electricity needs every nine days and a city of the size of Philadelphia every 30 days.
China is ready to serve with its service sector is now growing twice as fast as its construction and infrastructure segments. More than 30% of China’s workers are employed in service-sector jobs. Beijing has shrewdly directed huge portions of its stimulus package into the country’s service sector as part of its broader strategy to reduce its dependence on exports and transform China into a stronger, standalone economy.
There is more to China than exports. Truth to be told, net exports account for only 20% of China’s GDP. According to BNP Paribas, China imports nearly 90 cents worth of goods for every $1 in exports – means that at most there is 10 cents worth of ‘flux’ in China’s economy.
China has an exit strategy with its global financial crisis stimulus initiatives and is utilizing private spending to address any interim shortfalls. Beijing has raised capital requirements for banks, raised lending standards and generally put the kibosh on easy money. On an overall basis, China is well ahead of the curve while the US is trapped in an economic minefield of its own making.
Spending pattern is undergoing a needed shift. In the old days, public spending and that of state-owned enterprises outweighed private investment. The two have flipped and it is a significant shift.
The $2.3 trillion of capital reserves give it almost unlimited flexibility. It almost needs no explanation.
As for the contention that China’s economic and stock market growth rates are unsustainable, I can certainly envision a near term pull back. They are probably right. That is normal for any financial market and here is the thing – When it comes to China, I am investing for the long haul. I know where I will be putting my money!
Thursday, December 3, 2009
6 Trades for 2010
Accept my 6 trading recommendation for 2010:-
Oil Floats – the number of oil tankers floating in the Mediterranean and English Channel is up by 71% in the last two months. Each ship can hold nearly 1 million barrels, so a jump in price of just US$1 means an instant profit of a million dollars per ship. Goldman Sachs predicts a bull run in oil prices for the next 4 years and specifically, US$85 a barrel in the next 90 days. Between today and New Year’s is the perfect time to construct a doubler trade in oil.
Copper Trade – China is a manipulator of copper and it is being stockpiled by Beijing. China’s imports of copper are up 70% from last year. Officially, China says it holds roughly a quarter of a million tons of copper in its warehouses, valued at US$1.3 billion. To-date, copper is up 110% - it is a vital component in China’s attempt to establish a reliable electric grid across the Middle Kingdom. It pays to listen not what she does, but not what she says.
Gold Double – gold prices are the favourite plaything of manipulators. The shock is how little gold has moved, compared to say lead – another base metals.
Money Market Funds – they are in the hand of rogue traders. With US$3.5 trillion just lying around like a honey pot, someone had to figure a way to put it to a good work. When the US$62.5 billion Revenue Primary Fund failed last year, it was not because the money fund was sitting in safely in Treasuries, but in a ton of Lehman’s commercial junk paper to juice yields. Recently, Paul Volcker, financial adviser to President Obama, ignited a firestorm by suggesting that money market funds be bought under control.
Bank It – Stay away from banks. Even the best-run banks are now having trouble, but that of course, is not what the FDIC wants you to know. With 115 banks down, we have still got another 300 bankruptcies to go. That is why financial stocks have now become the most actively manipulated on Wall Street.
Small Cap Clean Tech – last year, it was solar and this year is clean tech. This is exactly what happened with SmartHeat, a totally boring heat exchange manufacturer that got romanced from $3 last December to %10 this August.
The current rally has all the features of manipulation. The media cheerleading, especially from Bloomberg, has been relentless. Trading desks have been quietly told to squeeze the shorts until they scream.
Oil Floats – the number of oil tankers floating in the Mediterranean and English Channel is up by 71% in the last two months. Each ship can hold nearly 1 million barrels, so a jump in price of just US$1 means an instant profit of a million dollars per ship. Goldman Sachs predicts a bull run in oil prices for the next 4 years and specifically, US$85 a barrel in the next 90 days. Between today and New Year’s is the perfect time to construct a doubler trade in oil.
Copper Trade – China is a manipulator of copper and it is being stockpiled by Beijing. China’s imports of copper are up 70% from last year. Officially, China says it holds roughly a quarter of a million tons of copper in its warehouses, valued at US$1.3 billion. To-date, copper is up 110% - it is a vital component in China’s attempt to establish a reliable electric grid across the Middle Kingdom. It pays to listen not what she does, but not what she says.
Gold Double – gold prices are the favourite plaything of manipulators. The shock is how little gold has moved, compared to say lead – another base metals.
Money Market Funds – they are in the hand of rogue traders. With US$3.5 trillion just lying around like a honey pot, someone had to figure a way to put it to a good work. When the US$62.5 billion Revenue Primary Fund failed last year, it was not because the money fund was sitting in safely in Treasuries, but in a ton of Lehman’s commercial junk paper to juice yields. Recently, Paul Volcker, financial adviser to President Obama, ignited a firestorm by suggesting that money market funds be bought under control.
Bank It – Stay away from banks. Even the best-run banks are now having trouble, but that of course, is not what the FDIC wants you to know. With 115 banks down, we have still got another 300 bankruptcies to go. That is why financial stocks have now become the most actively manipulated on Wall Street.
Small Cap Clean Tech – last year, it was solar and this year is clean tech. This is exactly what happened with SmartHeat, a totally boring heat exchange manufacturer that got romanced from $3 last December to %10 this August.
The current rally has all the features of manipulation. The media cheerleading, especially from Bloomberg, has been relentless. Trading desks have been quietly told to squeeze the shorts until they scream.
Wednesday, December 2, 2009
Why I Am Suspicious
Rising prices must be accompanied with rising volume – this is an old and time-honored stock market analysis concept and probably one of the most profound insights into market behaviour. Usually, a rally with declining volume is a sign of a weak market and usually a harbinger of a correction if not an outright trend change.
The whole rally of the March 2009 of the S&P 500 is characterized by low volume and since the late October the signs are more visible. It is declining markedly and the recent break out in prices to new highs for the year is on very thin ice.
The divergence between advance-decline line and momentum indicators is just another tell-tale signs to watch out for. Sentiment indicators got frothy.
The news of the financial woes in Dubai should remind investors that the major debt problem associated with the global real estate bubble have not been solved. So over the next two years, I expect that we will hear from many more defaulting borrowers in and outside the U.S.
I also expect a new wave of mortgage resets starting to hit the US banking system in the second half of 2010. It will be interesting to see how the governments around the globe react. The weaker ones may find themselves trapped, not being able to absorb a new surge of losses.
The worst case scenario will be not only banks going bust, we may well see banks plus some governments going bust.
For now, I would treat any potential stock market weakness as a buying opportunity since I don’t yet see an end to the medium term up trend that started in March. But we should never forget the long term risks, either.
The whole rally of the March 2009 of the S&P 500 is characterized by low volume and since the late October the signs are more visible. It is declining markedly and the recent break out in prices to new highs for the year is on very thin ice.
The divergence between advance-decline line and momentum indicators is just another tell-tale signs to watch out for. Sentiment indicators got frothy.
The news of the financial woes in Dubai should remind investors that the major debt problem associated with the global real estate bubble have not been solved. So over the next two years, I expect that we will hear from many more defaulting borrowers in and outside the U.S.
I also expect a new wave of mortgage resets starting to hit the US banking system in the second half of 2010. It will be interesting to see how the governments around the globe react. The weaker ones may find themselves trapped, not being able to absorb a new surge of losses.
The worst case scenario will be not only banks going bust, we may well see banks plus some governments going bust.
For now, I would treat any potential stock market weakness as a buying opportunity since I don’t yet see an end to the medium term up trend that started in March. But we should never forget the long term risks, either.
After Dubai
Restructuring of Dubai’s obligations implies that the creditors will take a share of the pain for the most distressed assets. Following this, we learned one hard lesson that never assume of an implicit government support and going by that, things had to get worse before they got better.
The risk from Dubai is not likely to systematically important on a global level, it is significant on a UAE and GCC level. They are a reminder that vulnerabilities and imbalances that contributed to the credit crunch have not disappeared. It clearly tells us that default risk of Dubai World may be only one of the risks that market actors were under-pricing. In particular, world’s attention now is shifted to the Eurozone and its periphery, where weaker countries like Greece and the more indebted of the Central and Eastern European countries, are under pressure.
UAE banks, which are already challenged by losses on mortgages as well as exposure to quasi-private companies that are undergoing restructuring, can access a new facility if needed as the size of exposures became clear and hopes of support from Abu Dhabi rose.
The bubble in Dubai can end in a number of ways – it can end in an economic collapse and general default as Dubai has done now or as Argentina did back in 2001. It also can end in massive hyperinflation, as with Latin America repeatedly in the 1950s through the 1980s and in the Weimar Republic of the 1920s.
The risk from Dubai is not likely to systematically important on a global level, it is significant on a UAE and GCC level. They are a reminder that vulnerabilities and imbalances that contributed to the credit crunch have not disappeared. It clearly tells us that default risk of Dubai World may be only one of the risks that market actors were under-pricing. In particular, world’s attention now is shifted to the Eurozone and its periphery, where weaker countries like Greece and the more indebted of the Central and Eastern European countries, are under pressure.
UAE banks, which are already challenged by losses on mortgages as well as exposure to quasi-private companies that are undergoing restructuring, can access a new facility if needed as the size of exposures became clear and hopes of support from Abu Dhabi rose.
The bubble in Dubai can end in a number of ways – it can end in an economic collapse and general default as Dubai has done now or as Argentina did back in 2001. It also can end in massive hyperinflation, as with Latin America repeatedly in the 1950s through the 1980s and in the Weimar Republic of the 1920s.
Tuesday, December 1, 2009
2 Property Market News Update
Signs are clearer. Bulls are retreating and bears are taking shape.
Our immediate neighbour – Singapore is experiencing the first squeeze in office rents. Singapore’s Straits Times reported that it is a great news for office tenants, but far leaner times for landlords as office rents have plummeted by more than half in the past 12 months. On average, they fell a whopping 53.4 per cent from their peak in the third quarter of last year to Sept 30 this year - the second-fastest rate of fall in the world. Only rents in Kiev, Ukraine, fell more quickly, by 64.6 per cent.
That meant the Republic fell from 9th spot to No.32 in the latest Top 50 most expensive markets list, according to a half-yearly global survey done by US-based consultancy CB Richard Ellis.
The occupancy cost here - rent plus local taxes and service charges - is now US$63.89 (S$88.25) per square foot (psf) a year, down 23 per cent from six months ago when it was in 15th place. That is down more than half from US$135.13 psf a year ago.
A little bit farther to north east – Hong Kong’s home market is taking a breather. Cheung Kong launched Le Prime in Tseung Kwan O for sale last Friday, with about 180 units being sold over the weekend. The selling price was largely in line with the secondary market price in the neighbourhood. Market response was weaker than that of its neighbouring Le Prestige, which was launched in July 2009 and sold out in three weeks.
In short, buyers seem to adopt a ‘wait-and-see’ approach amid uncertain global economic outlook. The home market in Thailand is also showing sign of losing momentum since October. Residential prices have ceased to rise since October, according to some of my contacts in Thailand.
Our immediate neighbour – Singapore is experiencing the first squeeze in office rents. Singapore’s Straits Times reported that it is a great news for office tenants, but far leaner times for landlords as office rents have plummeted by more than half in the past 12 months. On average, they fell a whopping 53.4 per cent from their peak in the third quarter of last year to Sept 30 this year - the second-fastest rate of fall in the world. Only rents in Kiev, Ukraine, fell more quickly, by 64.6 per cent.
That meant the Republic fell from 9th spot to No.32 in the latest Top 50 most expensive markets list, according to a half-yearly global survey done by US-based consultancy CB Richard Ellis.
The occupancy cost here - rent plus local taxes and service charges - is now US$63.89 (S$88.25) per square foot (psf) a year, down 23 per cent from six months ago when it was in 15th place. That is down more than half from US$135.13 psf a year ago.
A little bit farther to north east – Hong Kong’s home market is taking a breather. Cheung Kong launched Le Prime in Tseung Kwan O for sale last Friday, with about 180 units being sold over the weekend. The selling price was largely in line with the secondary market price in the neighbourhood. Market response was weaker than that of its neighbouring Le Prestige, which was launched in July 2009 and sold out in three weeks.
In short, buyers seem to adopt a ‘wait-and-see’ approach amid uncertain global economic outlook. The home market in Thailand is also showing sign of losing momentum since October. Residential prices have ceased to rise since October, according to some of my contacts in Thailand.
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