Survey shows that the USD was named as both investors’ second favourite and second least favourite currency heading into 2010. Since hitting a 16-month low on a trade-weighted basis at end of November 2009, the USD has risen more than 5% given its strong correlation with risky assets such as equities are showing signs of breaking down.
Investors are split as to whether the resurgence reflects a squaring up of bets against the dollar ahead of the end of 2009 or whether it is the start of a longer-term upward trend in the US currency. The fragile finances of Britain, Japan, Russia, Spain, Ukraine and other nations increasing the chances of a scary market event that the assumption of the dollar’s straight line decline is no longer a given.
Low short-term interest rates in the US encouraged asset re-allocation with the US dollar being used as a funding currency for carry trades, thus undermining the currency’s strength. But this situation is balanced up with the view that the recovery in the US economy is gaining momentum and should it proved to be sustainable, this will help to ensure that capital flows become more balanced and thereby less dollar-negative.
Volatility of the dollar is increasing and there is broad consensus in the market that the dollar will rally once the Fed signals that it is ready to drop its pledge to keep US interest rates at ultra-low levels for an ‘extended period’. It is just the timing of such a move that is polarizing views on the currency.
Investors are now looking for signs for shifts in correlation which may signal the end of the US as a pure safe-haven play and becomes a value proposition instead. A full shift perhaps may still take months away, but the relationship between the dollar and stocks and commodities has weakened in November 2009. Two key indicators to watch – the sustainability of economic growth and build up in inflationary pressure, which would lead to higher interest rates, hence would undermine the dollar’s role as a borrowing currency of choice.
History, however tells us the US dollar shouldn’t start rising on a sustainable basis until 12 months after the Fed starts to lift rate. It will take time to drain the oversupply of dollars from the market and the currency will remain weak until the Fed’s rate rises above the competitors. After policy makers started boosting borrowing rates in July 2004, the dollar index tumbled 10% and didn’t get back to where it had been before the first increase and stay there for more than a month until November 2005. Intercontinental Exchange Inc’s dollar gauge fell 6% and took 7 months to recover after the Fed began lifting borrowing costs in July 1999. It dropped 16% following the Fed’s 1994 move without regaining lost ground until 1997.
Wednesday, December 30, 2009
Tuesday, December 29, 2009
Illiquidity & Pessimism
Last 24 hours, I have seen extreme volatility in FX markets, first seeing the USD shed valued across the board but on illiquid trading conditions. USD regained strength with confirmation that US consumer confidence improved markedly from the previous reading.
This illiquid holiday trading conditions are still affecting markets – a phenomenon that we will see for the remainder of this week and possibly early part of next year with many market makers and dealers are still away from their desks for holidays.
On the other hand, the short-term momentum indicators of pound sterling are showing that bearish sentiment continues to build over the UK’s rather abysmal fiscal condition and still deteriorating economy. I am seeing rising trading positions adding to the short GBP positions.
Treasury two-year note yields reached the highest levels since October. Least money overall is bidding on US debt but specifically less foreign central bank money is buying US debt. And this is on the short end of the yield curve!
I have been surprised to see the air thick with pessimism in recent weeks. Not so much the stock market, where the sentiment indexes show the bulls are dominating the bears by slightly more than 52%, but among the general public.
An NBC/Wall Street Journal poll last week found that 55% of all Americans feel the nation is heading the wrong decision. This is the highest level since January of this year – when the financial crisis was red hot and US President Obama was just entering the White House. Also, a recent CNBC ‘Wealth in America’ report found more negativity. Negative sentiments were expressed about the economy, home values and wage growth. Faith in institutions like the Fed Reserve, the US Treasury and the financial sector were very low.
President Obama’s approval rating has fallen below 50% for the first time. And now what? Well, we have moved from abundant optimism in 1999 to rampant pessimism in 2009. But there is one equal possibility that from this environment of low expectations, great things can happen.
Trust me, I was there back in 1999 when optimism reigned!
This illiquid holiday trading conditions are still affecting markets – a phenomenon that we will see for the remainder of this week and possibly early part of next year with many market makers and dealers are still away from their desks for holidays.
On the other hand, the short-term momentum indicators of pound sterling are showing that bearish sentiment continues to build over the UK’s rather abysmal fiscal condition and still deteriorating economy. I am seeing rising trading positions adding to the short GBP positions.
Treasury two-year note yields reached the highest levels since October. Least money overall is bidding on US debt but specifically less foreign central bank money is buying US debt. And this is on the short end of the yield curve!
I have been surprised to see the air thick with pessimism in recent weeks. Not so much the stock market, where the sentiment indexes show the bulls are dominating the bears by slightly more than 52%, but among the general public.
An NBC/Wall Street Journal poll last week found that 55% of all Americans feel the nation is heading the wrong decision. This is the highest level since January of this year – when the financial crisis was red hot and US President Obama was just entering the White House. Also, a recent CNBC ‘Wealth in America’ report found more negativity. Negative sentiments were expressed about the economy, home values and wage growth. Faith in institutions like the Fed Reserve, the US Treasury and the financial sector were very low.
President Obama’s approval rating has fallen below 50% for the first time. And now what? Well, we have moved from abundant optimism in 1999 to rampant pessimism in 2009. But there is one equal possibility that from this environment of low expectations, great things can happen.
Trust me, I was there back in 1999 when optimism reigned!
Monday, December 28, 2009
2010 Tech Outlook
I wrote a piece on this matter couple of months ago and I reaffirm my belief on this industry with a positive bias for 2010. Tech counters are up at least 50% since then with Japan leading the way.
Demands are improving, companies are skeptical so inventory to remain low a capex is held down. Valuation kept in the middle of the zone and these dynamics are unlikely to change in 2010.
Tech demand is been driven by PC. Data from the US shows that demand for PC could have an upside of 15%, and this comes from significantly revised up 2009 base. Penetration rate in China, India and Russia remains strong. Consumer PCs grew 30%yoy in the bad year shows the driver. Corporate, which commonly are replacing a quarter of PC, have slowed to one-sixth, is set to get back to 1 out of 4. Replacement market will be one of the principal drivers for handsets as well. Window 7 is less resource hungry and 70% of the consumer machines with Windows 7 has 64-bit, 4 GB is the least amount, essentially more bits can be used.
World is expecting launching of new products of e-paper, batteries, LEDs on TV and touch.
Inventories are at 10-year low. I don’t expect to see inventory rising up that much in the near term due to some supply constraints. While, I am seeing a rise in capex numbers, these are essentially to meet current demand. It is likely going to be an issue at some point, perhaps two quarters away from now. The supply curve cannot be shifted due to semi-equipment bottlenecks. Contacts of mine suggest that we are likely to see 25-30% upside for revenue growth and margins.
Backend pricing is firm with shorter lead time on equipment. It remains under-invested and that should keep pricing firm. It is not easy to change the supply curve with better mix for high-end wafers.
Demands are improving, companies are skeptical so inventory to remain low a capex is held down. Valuation kept in the middle of the zone and these dynamics are unlikely to change in 2010.
Tech demand is been driven by PC. Data from the US shows that demand for PC could have an upside of 15%, and this comes from significantly revised up 2009 base. Penetration rate in China, India and Russia remains strong. Consumer PCs grew 30%yoy in the bad year shows the driver. Corporate, which commonly are replacing a quarter of PC, have slowed to one-sixth, is set to get back to 1 out of 4. Replacement market will be one of the principal drivers for handsets as well. Window 7 is less resource hungry and 70% of the consumer machines with Windows 7 has 64-bit, 4 GB is the least amount, essentially more bits can be used.
World is expecting launching of new products of e-paper, batteries, LEDs on TV and touch.
Inventories are at 10-year low. I don’t expect to see inventory rising up that much in the near term due to some supply constraints. While, I am seeing a rise in capex numbers, these are essentially to meet current demand. It is likely going to be an issue at some point, perhaps two quarters away from now. The supply curve cannot be shifted due to semi-equipment bottlenecks. Contacts of mine suggest that we are likely to see 25-30% upside for revenue growth and margins.
Backend pricing is firm with shorter lead time on equipment. It remains under-invested and that should keep pricing firm. It is not easy to change the supply curve with better mix for high-end wafers.
Sunday, December 27, 2009
2010 – Risk Taking or Risk Aversion
2009 is coming to a close. It is all about a tug of war between risk aversion and risk taking, dictated by what happening with global currencies, stocks, bonds, commodities and for most part of the year, the battle is clearly won by an increasing global appetite for risk.
After the global financial system was on the brink of collapse in late 2008, it became apparent in early 2009 that disaster had been averted. It was a green light for global investors to start dipping their toes back in the water. In a sense, risk trade has been easy to understand as the US dollar has moved one way and practically everything else such as currencies, global stocks and global commodities have moved in the opposite direction.
When risk aversion is king, the US dollar wins and practically everything else loses. And conversely when risk appetite improves, that trade reverses. Now that the perception that the US recovery is on track, market focus is beginning to shift back to the traditional drivers of capital flow – interest rate differentials and economic growth differentials. That’s why we are seeing the US dollar recovers recently, even while stocks and commodities move higher. A clear decoupling of the correlations we have seen to this point will define the risk taking component of the risk trade for 2010.
The issue now is the economic recovery that we are seeing so far is sustainable or not? We have seen the positive GDP numbers that have technically ended most recessions. But now the forces pulling and pushing between risk aversion and risk taking are about the sustainability of the recovery. If the recovery proves sustainable, then the market focus should ultimately transition back toward relative growth and relative interest rate prospects between countries.
But this argument has a lot of detractors. There are some very serious problems that remain and risks that make sustainable growth a low probability, in my view. Key threats include: (1)the rising prospects of a sovereign debt crisis, which was Dubai that stroke fear in the financial markets and now Greece, Italy, Spain, Ireland and Portugal – all are coming under scrutiny for the same reasons and it can be contagious to investor confidence.(2 threat of asset bubbles with new bubbles in real estate are popping up in the areas that were relatively out-performers in the downturn such as China, India and Canada. (3 rising protectionism on global trade and capital flows. Considering protectionism was a key accomplice in fueling the Great Depression, this activity represents a major threat to global economic recovery. As the issue with China’s currency gains in intensity, I expect protectionist acts to rise in retaliation.
After the global financial system was on the brink of collapse in late 2008, it became apparent in early 2009 that disaster had been averted. It was a green light for global investors to start dipping their toes back in the water. In a sense, risk trade has been easy to understand as the US dollar has moved one way and practically everything else such as currencies, global stocks and global commodities have moved in the opposite direction.
When risk aversion is king, the US dollar wins and practically everything else loses. And conversely when risk appetite improves, that trade reverses. Now that the perception that the US recovery is on track, market focus is beginning to shift back to the traditional drivers of capital flow – interest rate differentials and economic growth differentials. That’s why we are seeing the US dollar recovers recently, even while stocks and commodities move higher. A clear decoupling of the correlations we have seen to this point will define the risk taking component of the risk trade for 2010.
The issue now is the economic recovery that we are seeing so far is sustainable or not? We have seen the positive GDP numbers that have technically ended most recessions. But now the forces pulling and pushing between risk aversion and risk taking are about the sustainability of the recovery. If the recovery proves sustainable, then the market focus should ultimately transition back toward relative growth and relative interest rate prospects between countries.
But this argument has a lot of detractors. There are some very serious problems that remain and risks that make sustainable growth a low probability, in my view. Key threats include: (1)the rising prospects of a sovereign debt crisis, which was Dubai that stroke fear in the financial markets and now Greece, Italy, Spain, Ireland and Portugal – all are coming under scrutiny for the same reasons and it can be contagious to investor confidence.(2 threat of asset bubbles with new bubbles in real estate are popping up in the areas that were relatively out-performers in the downturn such as China, India and Canada. (3 rising protectionism on global trade and capital flows. Considering protectionism was a key accomplice in fueling the Great Depression, this activity represents a major threat to global economic recovery. As the issue with China’s currency gains in intensity, I expect protectionist acts to rise in retaliation.
Sunday, December 20, 2009
Why Are We Different?
I have been receiving great diverse views of what holds for 2010. Some are saying we are going to grow at 5-6% or at least 1-2% or dip back into recession. Why such disparity? I think part of the reason is a basic disagreement on the nature of the just-lapsed recession.
The optimistic argue that look that the past recoveries from recessions, they were always strong in the first year and suggesting a 5-6% is not all that aggressive. And I would tend to agree that if the past recession was a typical recession. But what we have just gone through a recession that was unlike any other we have experienced since the Great Depression. Typical recessions are inventory-adjustment recessions, caused by businesses getting too optimistic about sales and then having to adjust. We get temporarily higher levels of unemployment as inventories drop and they we get the rebound. It is not quite as simple as that this time around.
This recession was caused by not too much inventory but by too much credit and leverage in the system. And now we are in the process of de-leveraging. It is a process that is nowhere near complete. While the crisis stage is over, at least for now, there is still a lot of debt to be retired on the consumer side of the equation and a lot of debt to be written off on the financial system side. Total consumer debt is shrinking for the first time in 60 years and the decline shows no sign of abating. Credit card companies have reduced available credit by $1.6 trillion dollars while credit card delinquencies are hovering near all time highs.
Strain is also seen in the housing sector. Residential delinquencies are up and now stand at a stunning 9%. We are likely to see a significant increase in mortgage resets in 2010, which will see even more foreclosures. There is a lot of pain to come. This is not an environment that is typical of past recessions. There is certainly a lot of de-leveraging to be done, both as banks write-off bad debts on homes and as consumers walk away from mortgages badly underwater. The next coming debacle is on commercial real estate loans as total loan delinquencies at banks are rising precipitously every month.
While Obama is urging banks to lend, bank regulators are telling banks to raise capital and shore up their balance sheets. One way is to lend less and invest in US government bonds. Past post recession expansions have been built on growing credit and leverage and this will not be the case this time around. There will be little political will to continue with massive stimulus as the federal government is running massive deficits.
The optimistic argue that look that the past recoveries from recessions, they were always strong in the first year and suggesting a 5-6% is not all that aggressive. And I would tend to agree that if the past recession was a typical recession. But what we have just gone through a recession that was unlike any other we have experienced since the Great Depression. Typical recessions are inventory-adjustment recessions, caused by businesses getting too optimistic about sales and then having to adjust. We get temporarily higher levels of unemployment as inventories drop and they we get the rebound. It is not quite as simple as that this time around.
This recession was caused by not too much inventory but by too much credit and leverage in the system. And now we are in the process of de-leveraging. It is a process that is nowhere near complete. While the crisis stage is over, at least for now, there is still a lot of debt to be retired on the consumer side of the equation and a lot of debt to be written off on the financial system side. Total consumer debt is shrinking for the first time in 60 years and the decline shows no sign of abating. Credit card companies have reduced available credit by $1.6 trillion dollars while credit card delinquencies are hovering near all time highs.
Strain is also seen in the housing sector. Residential delinquencies are up and now stand at a stunning 9%. We are likely to see a significant increase in mortgage resets in 2010, which will see even more foreclosures. There is a lot of pain to come. This is not an environment that is typical of past recessions. There is certainly a lot of de-leveraging to be done, both as banks write-off bad debts on homes and as consumers walk away from mortgages badly underwater. The next coming debacle is on commercial real estate loans as total loan delinquencies at banks are rising precipitously every month.
While Obama is urging banks to lend, bank regulators are telling banks to raise capital and shore up their balance sheets. One way is to lend less and invest in US government bonds. Past post recession expansions have been built on growing credit and leverage and this will not be the case this time around. There will be little political will to continue with massive stimulus as the federal government is running massive deficits.
Wednesday, December 16, 2009
Oil & Gas Outlook
I expect order flow recovery in 2010. The sharp financial meltdown in 4Q 2008 has led to temporary and indiscriminate stalling of projects in 2009 was more of a reaction to an exogenous factor. As such it is likely that to see the new orders returning quickly back to the levels in 2007/08 as in the past year of cautious contract wards act like a compressed spring that is finally being released.
Companies that have raised equity in early and mid 2009 should benefit as the industry recovers in 2010. Asset acquisition news is likely to be one of the key pillars in 2010.
The International Energy Agency (IEA0 has revised upwards its global oil demand projection in mid November to 84.4mbd for 2009 (+1.7%yoy) and to 86.2mbd for 2010 (+1.6%yoy). The IHS Cambridge Energy Research Associates had earlier predicted that the global oil demand would start growing by 2010, rising to 89.1mbd in 2014.
More governments are encouraging more investment in downstream petrochemical facilities, especially in the Middle East. The award of sub-contracting works in the Middle East to pick up momentum by 1H2010 versus the more usual exporting of crude oil. This growing preference towards producing higher value derivatives and functional products have resulted in the award of construction projects like the Saudi Aramco Total Refinery and Petrochemical Company’s Jubail Refinery and Petrochemical Complex in Saudi Arabia.
I expect new orders for deepwater rigs to flow through more strongly from mid 2010. The conversion/new build of fixed/floating production platforms will lead the way in 2010. My industry compilation shows that 21% of the leading global rig owners’ offshore drilling rig fleet is currently warm/cold stacked, in line with global rig utilization rates. Most of these rigs are able to find new offshore exploration jobs as oil price stabilizes amidst strengthening oil demand.
Pressure on AHTS may also mitigate in 2010. As the rates have fallen about 35-40% from peak levels in 2008, further downside from the current US$1.55-1.60 per bhp is likely to be limited in 2010.
Key inflection points for my view will be (i) W-shaped economic recession, (ii) dip in oil prices back to less than US$50/bbl or sharp run in oil prices to beyond US$85/bbl, (iii) weaker-than-expected margins for new orders due to stiff competition which to be met with global players who are relatively more desperate for new jobs and (iv) failure to secure big offshore vessel/onshore plant construction contracts in face of slower than normal easing of tight credit.
Companies that have raised equity in early and mid 2009 should benefit as the industry recovers in 2010. Asset acquisition news is likely to be one of the key pillars in 2010.
The International Energy Agency (IEA0 has revised upwards its global oil demand projection in mid November to 84.4mbd for 2009 (+1.7%yoy) and to 86.2mbd for 2010 (+1.6%yoy). The IHS Cambridge Energy Research Associates had earlier predicted that the global oil demand would start growing by 2010, rising to 89.1mbd in 2014.
More governments are encouraging more investment in downstream petrochemical facilities, especially in the Middle East. The award of sub-contracting works in the Middle East to pick up momentum by 1H2010 versus the more usual exporting of crude oil. This growing preference towards producing higher value derivatives and functional products have resulted in the award of construction projects like the Saudi Aramco Total Refinery and Petrochemical Company’s Jubail Refinery and Petrochemical Complex in Saudi Arabia.
I expect new orders for deepwater rigs to flow through more strongly from mid 2010. The conversion/new build of fixed/floating production platforms will lead the way in 2010. My industry compilation shows that 21% of the leading global rig owners’ offshore drilling rig fleet is currently warm/cold stacked, in line with global rig utilization rates. Most of these rigs are able to find new offshore exploration jobs as oil price stabilizes amidst strengthening oil demand.
Pressure on AHTS may also mitigate in 2010. As the rates have fallen about 35-40% from peak levels in 2008, further downside from the current US$1.55-1.60 per bhp is likely to be limited in 2010.
Key inflection points for my view will be (i) W-shaped economic recession, (ii) dip in oil prices back to less than US$50/bbl or sharp run in oil prices to beyond US$85/bbl, (iii) weaker-than-expected margins for new orders due to stiff competition which to be met with global players who are relatively more desperate for new jobs and (iv) failure to secure big offshore vessel/onshore plant construction contracts in face of slower than normal easing of tight credit.
Shipping Business Outlook
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.
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.
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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