Stocks rebounded but one still need to be mindful about the situation in North Korea, which relationships between two Koreas seemingly to be deteriorating with latest North Korea expelling eight South Korean government workers and threatening to close its borders to its neighbor to the south completely. Also, persistent concerns about the debt situation in Europe and the potential of it to evolve into a global problem have already wiped out about 6 trillion USD of value in global equities.
On top of that money supply had stopped increasing. Liquidity is drying up and a few short weeks ago, mutual fund cash levels reached a record low of 3.4% , according to Jason Geopfert, president of SentimentTrader.com. The old record of 3.5% was set in the summer of 2007 at the very end of a cyclical bull market off the 2003 lows. Back then, it took fund managers 41/2 years to get fully invested.
The chart pattern is clear to me. Valuation is still very high and monetary indicators are clearly negative for stocks. Longer-term sentiment indicators have not changed for the better – patterns that look like potential topping formations. If prices break below the lower boundary, the huge rally off the March 2009 low is over and the bear market is back.
Right now, the arguments for an eventual rather than an immediate.
Wednesday, May 26, 2010
Tuesday, May 25, 2010
In East and In West
Tensions mount in Korea and investors see caution flags in Spain as it bails out struggling savings banks. Overnight equity marts throughout Asia and Europe slumped.
North Korea has reportedly put its military on alert, either it is a bluff or not, it will weigh heavily on investor sentiment all the way. South Korean currency KRW has dipped to new 14-month lows against the greenback, adding to the 11.3% decline it has been forced to endure this month alone. It is perched to record its second-worse performing month since the Asian banking debacle shredded markets in the late 1990s. Relations between the two Koreas are at their worst for decades. The North says it has abrogated its non-aggression agreement with the South, trade links have been cut, shipping lanes closed, and the armed forces of both sides are on alert.
The latest move by the US isn’t helping either to lower the tension with its jets deployment in the peninsula. The arrival of the top-of-the line aircraft at Kadena air force base comes after U.S. President Barack Obama reassured Prime Minister Taro Aso in a telephone conversation this week of Washington's commitment to the defence of its Asian ally. And on the other hand, China, being the North Korea's most important ally, biggest trading partner, and main source of food, arms, and fuel, is not fully convinced by Seoul’s arguments. The communist North denies sinking the Cheonan, one of the South's worst military losses since the Korean War.
On the other end of this planet, Spain’s central bank has decided to bail out regional savings bank CajaSur with $621.75 million. The savings banks’ ownership models make it difficult to raise money as they are controlled by local politicians and cannot easily sell shares. CajaSur, formerly run by the Catholic Church, lost $748 million last year and there are 45 savings banks in Spain and investors have yet another reason to pull out of Europe and head for United States.
As risk aversion looks to be in full swing, commodities, coupled with equities and high yielding currencies have taken it on the chin. Oil prices have fallen in tandem with the slumping stock markets and sits south of $68/bbl.
North Korea has reportedly put its military on alert, either it is a bluff or not, it will weigh heavily on investor sentiment all the way. South Korean currency KRW has dipped to new 14-month lows against the greenback, adding to the 11.3% decline it has been forced to endure this month alone. It is perched to record its second-worse performing month since the Asian banking debacle shredded markets in the late 1990s. Relations between the two Koreas are at their worst for decades. The North says it has abrogated its non-aggression agreement with the South, trade links have been cut, shipping lanes closed, and the armed forces of both sides are on alert.
The latest move by the US isn’t helping either to lower the tension with its jets deployment in the peninsula. The arrival of the top-of-the line aircraft at Kadena air force base comes after U.S. President Barack Obama reassured Prime Minister Taro Aso in a telephone conversation this week of Washington's commitment to the defence of its Asian ally. And on the other hand, China, being the North Korea's most important ally, biggest trading partner, and main source of food, arms, and fuel, is not fully convinced by Seoul’s arguments. The communist North denies sinking the Cheonan, one of the South's worst military losses since the Korean War.
On the other end of this planet, Spain’s central bank has decided to bail out regional savings bank CajaSur with $621.75 million. The savings banks’ ownership models make it difficult to raise money as they are controlled by local politicians and cannot easily sell shares. CajaSur, formerly run by the Catholic Church, lost $748 million last year and there are 45 savings banks in Spain and investors have yet another reason to pull out of Europe and head for United States.
As risk aversion looks to be in full swing, commodities, coupled with equities and high yielding currencies have taken it on the chin. Oil prices have fallen in tandem with the slumping stock markets and sits south of $68/bbl.
Wednesday, May 19, 2010
The Fate of EUR
From Greece to France and latest German … the story line remains EUR bear. The common currency tumbled to its lowest point in over four years on the news that the German government temporarily banned naked short-selling. Instead of solving the problems, it created wilder volatility and more speculations with measures included bans on naked short-selling and naked credit default swaps of the Euro area government bonds, as well as a ban on the naked short-selling of shares from ten major German banks and insurers.
Let me clarify, there is one critical difference between conventional short-sell and naked short-sell – in the practice of a conventional short trade, the party executing the short trade secures or borrows the underlying assets if is shorting from a third party, whereas in the naked short, this is not done.
With investors shedding risk and seeking out the safe haven assets, pretty much all major currencies have retreated against the Greenback and the JPY. Oil will be at its lowest level and it is going to be interesting to observe the gap between the GBP and EUR to widen further. The coming US-China Strategic and Economic Dialogue that will commence in Beijing on May 24, will be less an event to talk about RMB revaluation. Still, the agenda this year bears similarities to the 2009 edition with trade and savings imbalances to dominate the economic talks followed by reviving ‘Six-Party Talks’ with North Korea among other. The RMB at this point will remains pegged to USD, though concerns about the EUR have boosted the Chinese currency’s valuation on a trade-weighted basis in any case, which could forestall a move or limit its degree.
Our markets will continue to be under selling pressure with the support level at 1,280 and lesser attention will be paid to current reporting season. For one strange reason or another, the usual dictum ‘ Sell in May, Go Away’ seems quite applicable in this case. Perhaps, just another coincidence, I guess. Of course, the run-up to the Jun-Jul 2010 FIFA World Cup finals in South Africa is not helping either.
Let me clarify, there is one critical difference between conventional short-sell and naked short-sell – in the practice of a conventional short trade, the party executing the short trade secures or borrows the underlying assets if is shorting from a third party, whereas in the naked short, this is not done.
With investors shedding risk and seeking out the safe haven assets, pretty much all major currencies have retreated against the Greenback and the JPY. Oil will be at its lowest level and it is going to be interesting to observe the gap between the GBP and EUR to widen further. The coming US-China Strategic and Economic Dialogue that will commence in Beijing on May 24, will be less an event to talk about RMB revaluation. Still, the agenda this year bears similarities to the 2009 edition with trade and savings imbalances to dominate the economic talks followed by reviving ‘Six-Party Talks’ with North Korea among other. The RMB at this point will remains pegged to USD, though concerns about the EUR have boosted the Chinese currency’s valuation on a trade-weighted basis in any case, which could forestall a move or limit its degree.
Our markets will continue to be under selling pressure with the support level at 1,280 and lesser attention will be paid to current reporting season. For one strange reason or another, the usual dictum ‘ Sell in May, Go Away’ seems quite applicable in this case. Perhaps, just another coincidence, I guess. Of course, the run-up to the Jun-Jul 2010 FIFA World Cup finals in South Africa is not helping either.
Tuesday, May 18, 2010
Investing in Commodity
It is not as simple as you think and I see kind of air turbulence for commodity in next couple of months. Things do look a little bit too perky for my taste in the short term.
There has been rapid demand for commodities from financial investors to the point that commodities have become a mainstream asset class. According to Barclay Capital, total commodity linked asset under management 36% last year to US$257 billion, with ETF program growing even faster. Only a few years ago, commodity-linked ETFs were a rare phenomenon and it has grown to become the product of choice for many commodity investors. Commodities now are becoming more financial rather than real assets. Over the past 15 years, financial futures have grown from 2 times the size of physical markets to almost 12 times the size.
As commodity markets are tiny compared to the size of financial markets, prices are easily distorted. In this respect, China – the largest nation on earth, is intimately linked to the growth story of commodities and there is no doubt at present, a desire of the Chinese authority to cool down things a notch or two. Deutsche Bank now expects growth in Chinese infrastructure spending to be slashed from 120% last year to just 4-10% this year. Industrial metals such as lead, zinc, copper and nickel are particularly sensitive to such investments.
It is also a fact that China stockpiled commodities en-masse last year and Royal Bank of Scotland has found a ferocious appetite for industrial metals from Chinese buyers throughout 2009. By stock piling commodities on a large scale, China is effectively placing their excess dollars in hard assets rather than buying the more dubious paper assets – US treasuries. It is also helped to lower large trade surpluses - a point of contention that will set RMB to appreciation path.
One should also beware of contango effects i.e. when the future is priced higher than the spot price and the roll yield is negative. Most commodities are in contango more often than not, effectively costing investors the spread between the nearby future and the more distant future every time the position is rolled. The danger is that for passive investors to be taken out by professional and active traders every time they need to roll their positions.
There has been rapid demand for commodities from financial investors to the point that commodities have become a mainstream asset class. According to Barclay Capital, total commodity linked asset under management 36% last year to US$257 billion, with ETF program growing even faster. Only a few years ago, commodity-linked ETFs were a rare phenomenon and it has grown to become the product of choice for many commodity investors. Commodities now are becoming more financial rather than real assets. Over the past 15 years, financial futures have grown from 2 times the size of physical markets to almost 12 times the size.
As commodity markets are tiny compared to the size of financial markets, prices are easily distorted. In this respect, China – the largest nation on earth, is intimately linked to the growth story of commodities and there is no doubt at present, a desire of the Chinese authority to cool down things a notch or two. Deutsche Bank now expects growth in Chinese infrastructure spending to be slashed from 120% last year to just 4-10% this year. Industrial metals such as lead, zinc, copper and nickel are particularly sensitive to such investments.
It is also a fact that China stockpiled commodities en-masse last year and Royal Bank of Scotland has found a ferocious appetite for industrial metals from Chinese buyers throughout 2009. By stock piling commodities on a large scale, China is effectively placing their excess dollars in hard assets rather than buying the more dubious paper assets – US treasuries. It is also helped to lower large trade surpluses - a point of contention that will set RMB to appreciation path.
One should also beware of contango effects i.e. when the future is priced higher than the spot price and the roll yield is negative. Most commodities are in contango more often than not, effectively costing investors the spread between the nearby future and the more distant future every time the position is rolled. The danger is that for passive investors to be taken out by professional and active traders every time they need to roll their positions.
Wednesday, May 12, 2010
UK – Will the New Government Helps?
We know for sure now the British general election produced a truly knife-edge results. With 326 of 650 members of parliament needed for a majority, the conservatives have 306, labour has 258 and the liberal democrats 57 and minor parties 28.
Question is that how this coalition government to change the façade of the UK economy and possibly lead to better days ahead. Out from the shadows comes the wrongly derided ghost of such coalition – the 1931 First National Government. The last such coalition took place in a time of equivalent financial crisis – the autumn of 1931. Then, as now – a Labour government (then a minority government) had increased public spending and run up deficits. Remember – we are talking about a period that was only two years removed from Wall Street’s Great Crash and one in which the global Great Depression was deepening.
The National Government was formed to solve the financial crisis. It acquired a mixed posthumous reputation and in its form, it lasted only a year as Home Secretary Samuel resigned over the issue of modest Imperial Preference tariffs in 1932. It then became a largely Conservative government, although it retained several ‘Liberal National’ cabinet ministers, including Sir John Simon.
However, its economy policy was remarkably successful. It took British off the Gold Standard, devaluing pound by about 20%. It cut public spending sharply, reducing public sector pay by 10% and ended the British policy of unilateral free trade, introducing modest tariffs with exemptions for the British Empire. As a result of that, Britian enjoyed the highest five-year GDP growth in its history – lasting until 1937. New industries such as automobiles, chemicals and aircrafts – energized the economy, as did such new inventions as radar, nylon and the intellectual underpinnings of the jet engine, the computer and atomic power.
The National government was able to take unpopular decisions because of its broad popular support – 67.2% of the voters had supported it in 193e1 and it was re-elected in 1935 with 53.3% of the vote.
This would be the principal advantage of a Conservative-Liberal Democrat coalition today, which would have 59.1% of the vote and would also have a House of Commons majority of 76 seats.
Question is that how this coalition government to change the façade of the UK economy and possibly lead to better days ahead. Out from the shadows comes the wrongly derided ghost of such coalition – the 1931 First National Government. The last such coalition took place in a time of equivalent financial crisis – the autumn of 1931. Then, as now – a Labour government (then a minority government) had increased public spending and run up deficits. Remember – we are talking about a period that was only two years removed from Wall Street’s Great Crash and one in which the global Great Depression was deepening.
The National Government was formed to solve the financial crisis. It acquired a mixed posthumous reputation and in its form, it lasted only a year as Home Secretary Samuel resigned over the issue of modest Imperial Preference tariffs in 1932. It then became a largely Conservative government, although it retained several ‘Liberal National’ cabinet ministers, including Sir John Simon.
However, its economy policy was remarkably successful. It took British off the Gold Standard, devaluing pound by about 20%. It cut public spending sharply, reducing public sector pay by 10% and ended the British policy of unilateral free trade, introducing modest tariffs with exemptions for the British Empire. As a result of that, Britian enjoyed the highest five-year GDP growth in its history – lasting until 1937. New industries such as automobiles, chemicals and aircrafts – energized the economy, as did such new inventions as radar, nylon and the intellectual underpinnings of the jet engine, the computer and atomic power.
The National government was able to take unpopular decisions because of its broad popular support – 67.2% of the voters had supported it in 193e1 and it was re-elected in 1935 with 53.3% of the vote.
This would be the principal advantage of a Conservative-Liberal Democrat coalition today, which would have 59.1% of the vote and would also have a House of Commons majority of 76 seats.
Methane Ice
For the second time of my useful life, geology is becoming part of me. The latest news to-date is that the 100-ton dome, which is designed to funnel leaking oil from the Gulf, is lowered into sea to cap oil leak this Friday. It is expected to be operational next Monday, when a large part of the oil would then be funneled up to a containment vessel on the surface for storage and processing. The BP is racing to contain an estimated 200,000 gallons of crude spewing into the sea daily, threatening the ecologically fragile Gulf Coast wetlands and shorelines.
Well, it is not my intention to dwell more than being told. What interesting to my finding is the possible cause to what went wrong in the Gulf. What possibly happened was that the drilling hit the area of unusual ice-like crystals called methane hydrates, hence the catastrophic oil spills.
We know for sure in the last 10 or 15 years, the industry will avoid methane hydrates, which a well known geological hazard and they are dangerous. But the rush to produce more oil for domestic consumption has forced companies like BP to take bigger risks by drilling in deep waters that are a breeding ground for hydrates. More worrying it’s the recent approval by President Barack Obama to drill in the Arctic Ocean, which could expose a fragile and remote environment to additional risks from catastrophic oil spills.
Methane hydrates only exist in cold water – just above or below freezing and at the undersea pressures found in deep water off the continental shelf. This slushy of sea mixture and methane gas makes drilling more complicated and makes the seafloor unstable. If hydrates are warmed by oil moving through pipes, they can turn into methane gas (known as ‘kick’ to drillers) that can shoot back up the drilling pipe and ignite the rig – a possible cause of the blast aboard the Deepwater Horizon rig on April 20.
In 2003, Unocal abandoned plans to drill in the deep water off Indonesia for the same reason. China has delayed plans for offshore oil development after finding large hydrate fields. The location of methane hydrate fields are well mapped but decisions are always commercial – a tug between risk and reward. As at now, the industry’s drilling and spill clean-up technology hasn’t caught up with the economic imperative to produce more oil.
Well, it is not my intention to dwell more than being told. What interesting to my finding is the possible cause to what went wrong in the Gulf. What possibly happened was that the drilling hit the area of unusual ice-like crystals called methane hydrates, hence the catastrophic oil spills.
We know for sure in the last 10 or 15 years, the industry will avoid methane hydrates, which a well known geological hazard and they are dangerous. But the rush to produce more oil for domestic consumption has forced companies like BP to take bigger risks by drilling in deep waters that are a breeding ground for hydrates. More worrying it’s the recent approval by President Barack Obama to drill in the Arctic Ocean, which could expose a fragile and remote environment to additional risks from catastrophic oil spills.
Methane hydrates only exist in cold water – just above or below freezing and at the undersea pressures found in deep water off the continental shelf. This slushy of sea mixture and methane gas makes drilling more complicated and makes the seafloor unstable. If hydrates are warmed by oil moving through pipes, they can turn into methane gas (known as ‘kick’ to drillers) that can shoot back up the drilling pipe and ignite the rig – a possible cause of the blast aboard the Deepwater Horizon rig on April 20.
In 2003, Unocal abandoned plans to drill in the deep water off Indonesia for the same reason. China has delayed plans for offshore oil development after finding large hydrate fields. The location of methane hydrate fields are well mapped but decisions are always commercial – a tug between risk and reward. As at now, the industry’s drilling and spill clean-up technology hasn’t caught up with the economic imperative to produce more oil.
Sunday, May 9, 2010
Euro in deliberate devaluation
Over last five months, euro has fallen 17% against the US dollar. It is clear that euro is in devaluation mode. Now, I think it is a covert policy decision by the European Central Bank (ECB) to use currency devaluation as a tool for the European monetary union to survive.
Of course, if that is the direction, then, it puts countries like Portugal, Spain, Italy, Greece and Ireland at a competitive disadvantage when trying to salvage themselves from debt burdens and feeble economic activity. It is also highly likely that the ECB to aggressively and openly buy up the government debt of the weak economies to keep them breathing.
Germany is the biggest and most robust country in the euro zone and for this plan to succeed, it has to be drag Germany headlong into it. Of course, they have already done so by agreeing to provide bailout funds to Greece. Germany has a lot to lose if other euro countries end up in shambles. Firstly, Germany is on the hook for $668 billion in PIIGS sovereign debt, and not to mention the fresh $30 billion they have agreed to give Greece. Secondly, if these countries continue their downward spiral, Germany’s intra-Europe exports of about 10% of total exports promise to dwindle with it.
Europe, the IMF and the ECB are demonstrating this week that it is ready to go all out to keep monetary union intact. They announced a massive multi-year bailout for Greece and perhaps to the extent of accepting Greece junk bonds for collateral, which may jeopardize the credibility and independence of the central bank.
In latest ECB press conference, its president Jean-Claude Trichet adamantly said that a Greek default is ‘out of question’ and a biggie…he ignored all questions about the value of euro, despite its slippery slide.
Of course, if that is the direction, then, it puts countries like Portugal, Spain, Italy, Greece and Ireland at a competitive disadvantage when trying to salvage themselves from debt burdens and feeble economic activity. It is also highly likely that the ECB to aggressively and openly buy up the government debt of the weak economies to keep them breathing.
Germany is the biggest and most robust country in the euro zone and for this plan to succeed, it has to be drag Germany headlong into it. Of course, they have already done so by agreeing to provide bailout funds to Greece. Germany has a lot to lose if other euro countries end up in shambles. Firstly, Germany is on the hook for $668 billion in PIIGS sovereign debt, and not to mention the fresh $30 billion they have agreed to give Greece. Secondly, if these countries continue their downward spiral, Germany’s intra-Europe exports of about 10% of total exports promise to dwindle with it.
Europe, the IMF and the ECB are demonstrating this week that it is ready to go all out to keep monetary union intact. They announced a massive multi-year bailout for Greece and perhaps to the extent of accepting Greece junk bonds for collateral, which may jeopardize the credibility and independence of the central bank.
In latest ECB press conference, its president Jean-Claude Trichet adamantly said that a Greek default is ‘out of question’ and a biggie…he ignored all questions about the value of euro, despite its slippery slide.
Friday, May 7, 2010
Hit from Down Under
This is a bad news. Australia just unveiled a mining "super tax" that the country plans to levy against its natural-resources sector starting in 2012.
Not that because mining is Australia's most important economic sector, this country is also an enormously important supplier of resources to the fast-growing economies of East Asia, where so many of the world's products are now manufactured. The mining super tax will cause prices to rise on the raw materials that are the key ingredients in so many of those products. And that means the levy from "down under" truly is bad news for the overall global economy as well.
The rationale for the super tax was that the percentage of mining revenue taken in taxes and royalties by Australia's state and national governments has declined during the past few years despite mineral prices have risen.
Since Australia's corporate tax rate is already 30%, the new super tax would raise the marginal rate on most profits to 70%. That's grossly excessive. It will badly discourage new exploration in boom years, since the additional profits to the mining company from a new discovery would be modest, indeed. The new super tax would take an additional 40% of mining-company earnings - over and above a "reasonable" return on capital, defined as the yield on long-term Australian government bonds.
You can see why Australian Prime Minister Kevin Rudd wanted the new tax as this tax will give him lots of juicy new revenue to spend on pet projects. After all, he faces an election in October.
Instead of improving Australia's budget position, the new mining super tax will actually make it much more difficult. And here's why. When prices are high, the tax will generate a bonanza of revenue - which will no doubt be funneled into all sorts of new projects and programs. But when prices fall, the tax will serve as a spigot that shuts off the revenue stream - leaving officials to search for funding for those new programs and thus exacerbating the cyclicality of Australia's resource-based economy.
The effect will be similar to that of California's capital gains tax, which left the state with a horrendous budget problem when the dot-com bubble burst in 2001. The only saving grace of this super tax is that - even if passed by parliament after the October election - it will not come into effect until 2012, by which time resources prices may have declined, making it irrelevant.
Not that because mining is Australia's most important economic sector, this country is also an enormously important supplier of resources to the fast-growing economies of East Asia, where so many of the world's products are now manufactured. The mining super tax will cause prices to rise on the raw materials that are the key ingredients in so many of those products. And that means the levy from "down under" truly is bad news for the overall global economy as well.
The rationale for the super tax was that the percentage of mining revenue taken in taxes and royalties by Australia's state and national governments has declined during the past few years despite mineral prices have risen.
Since Australia's corporate tax rate is already 30%, the new super tax would raise the marginal rate on most profits to 70%. That's grossly excessive. It will badly discourage new exploration in boom years, since the additional profits to the mining company from a new discovery would be modest, indeed. The new super tax would take an additional 40% of mining-company earnings - over and above a "reasonable" return on capital, defined as the yield on long-term Australian government bonds.
You can see why Australian Prime Minister Kevin Rudd wanted the new tax as this tax will give him lots of juicy new revenue to spend on pet projects. After all, he faces an election in October.
Instead of improving Australia's budget position, the new mining super tax will actually make it much more difficult. And here's why. When prices are high, the tax will generate a bonanza of revenue - which will no doubt be funneled into all sorts of new projects and programs. But when prices fall, the tax will serve as a spigot that shuts off the revenue stream - leaving officials to search for funding for those new programs and thus exacerbating the cyclicality of Australia's resource-based economy.
The effect will be similar to that of California's capital gains tax, which left the state with a horrendous budget problem when the dot-com bubble burst in 2001. The only saving grace of this super tax is that - even if passed by parliament after the October election - it will not come into effect until 2012, by which time resources prices may have declined, making it irrelevant.
Wednesday, May 5, 2010
Thailand – Red versus Green
Without military into action, current dead-lock will remain. General Anupong, the Army’s chief made it clear on April 12 that he was opposed to another crackdown on red shirt demonstrators, instead favouring the house dissolution and the use of political measures to solve the impasse. The use of force will lead to more deaths, and more importantly will break army right in the middle.
Military controls essentially have turned weaker after the first clash with the Red Army. Certain battalions especially right outside Bangkok have voiced their dissatisfaction through the command and there is a good likelihood that the chain of command could be compromised, if being stressed further. Their dissatisfaction with current government is increasing because of pressure from the government to use force to end the protests. Both field commanders and senior officers oppose the use of the military to end the rallies. To kill is easy, but what happen next is with far more implications - soldiers will become their targets after the crackdown. That will bring the country closer to civil war. And there will be more red shirts coming out in other provinces.
The Red spirit will turn bolder as they know for the fact that Abhisit’s government at most can do is to threaten and cannot push boundary more than being set.
Chairman of the United Front for Democracy against Dictatorship (UDD) Veera Musigkapong said on Wednesday that the rally against the government by red-shirts will soon come to an end as UDD agrees with the national reconciliation plan proposed by Prime Minister Abhisit Vejjajiva. He announced in a television appearance on Monday night that a general election would be held on Nov14. The government has shown spirit in taking one step backwards but the outcome remains uncertain.
The role of military will remain crucial and it has become the norm for change of political leadership and government. The modernization and strengthening of the armed forces has led only to an increase in the political power of the military elite, strengthening their advantage in the struggle for state power while personalization of politics bred factionalism within the armed forces.
Military controls essentially have turned weaker after the first clash with the Red Army. Certain battalions especially right outside Bangkok have voiced their dissatisfaction through the command and there is a good likelihood that the chain of command could be compromised, if being stressed further. Their dissatisfaction with current government is increasing because of pressure from the government to use force to end the protests. Both field commanders and senior officers oppose the use of the military to end the rallies. To kill is easy, but what happen next is with far more implications - soldiers will become their targets after the crackdown. That will bring the country closer to civil war. And there will be more red shirts coming out in other provinces.
The Red spirit will turn bolder as they know for the fact that Abhisit’s government at most can do is to threaten and cannot push boundary more than being set.
Chairman of the United Front for Democracy against Dictatorship (UDD) Veera Musigkapong said on Wednesday that the rally against the government by red-shirts will soon come to an end as UDD agrees with the national reconciliation plan proposed by Prime Minister Abhisit Vejjajiva. He announced in a television appearance on Monday night that a general election would be held on Nov14. The government has shown spirit in taking one step backwards but the outcome remains uncertain.
The role of military will remain crucial and it has become the norm for change of political leadership and government. The modernization and strengthening of the armed forces has led only to an increase in the political power of the military elite, strengthening their advantage in the struggle for state power while personalization of politics bred factionalism within the armed forces.
Tuesday, May 4, 2010
2Es in UK - Election and Economy
At this point, it appears to be anybody’s game with strong likelihood of a ‘hung parliament’ outcome, in which no party has a majority and a government is formed through backroom haggling.
Until 2008, the British economy looked to be in decent shape. Once the pound was allowed to float downward in 1992, the economy never looked back. From 1992-1997, Britain had the best-sustained growth in Europe but very sloppy about public spending. It was allowed to rise and the increase accelerated after 2000 as the Labour government elected in 1997 settled in and started implementing its wish list. British public spending, which had bottomed out at around 38% of GDP in 1989, Thatcher’s last full year – would actually exceed 50% of GDP by 2009. What more, tax revenue was allowed to fall behind, so that in 2007-2008, a boom year, Britain still ran a budget deficit of 5.3% of GDP. The other problem was that the economy became increasingly dependent on revenue from the City of London financial district. Needless to say, that is why there is a problem now.
In fact, a budget deficit of 12% of GDP is now nearing Greek territory and with the financial services business itself may get smaller and house prices in Britain yet to adjust as fast as its counterpart US, which could well mean that there are more huge losses to come in the housing-finance sector.
The expansion of government was twice rewarded with thumping election victories – one in 2001 and the other in 2005. Only now when disaster has occurred, is there any possibility of change? BOE Governor Mervyn King recently said that the party that wins this election would become so unpopular because of the policies it was forced to introduce that it would be out of power for a generation. I tend to agree!
The possibility of any reformer to be tossed out of office after one term is high as the eventual outcome of this long and painful story will either rebuild the country or else the probability of an eventual British default on debt to be high. In short, Britain is country in a great jam and it is going to take strong leadership and wisdom to fix its problems – possibly another Margaret Thatcher to leave a lasting legacy.
Until 2008, the British economy looked to be in decent shape. Once the pound was allowed to float downward in 1992, the economy never looked back. From 1992-1997, Britain had the best-sustained growth in Europe but very sloppy about public spending. It was allowed to rise and the increase accelerated after 2000 as the Labour government elected in 1997 settled in and started implementing its wish list. British public spending, which had bottomed out at around 38% of GDP in 1989, Thatcher’s last full year – would actually exceed 50% of GDP by 2009. What more, tax revenue was allowed to fall behind, so that in 2007-2008, a boom year, Britain still ran a budget deficit of 5.3% of GDP. The other problem was that the economy became increasingly dependent on revenue from the City of London financial district. Needless to say, that is why there is a problem now.
In fact, a budget deficit of 12% of GDP is now nearing Greek territory and with the financial services business itself may get smaller and house prices in Britain yet to adjust as fast as its counterpart US, which could well mean that there are more huge losses to come in the housing-finance sector.
The expansion of government was twice rewarded with thumping election victories – one in 2001 and the other in 2005. Only now when disaster has occurred, is there any possibility of change? BOE Governor Mervyn King recently said that the party that wins this election would become so unpopular because of the policies it was forced to introduce that it would be out of power for a generation. I tend to agree!
The possibility of any reformer to be tossed out of office after one term is high as the eventual outcome of this long and painful story will either rebuild the country or else the probability of an eventual British default on debt to be high. In short, Britain is country in a great jam and it is going to take strong leadership and wisdom to fix its problems – possibly another Margaret Thatcher to leave a lasting legacy.
Risk Appetite
I begin to sense kind of decline in risk appetite as investor sentiment ran dry. The reduction in positive price action can be due to several reasons, but much of the broad headlines are on news out of China, Greece and the Gulf of Mexico.
Forcing unwanted pressure on capital markets, China has once again been a catalyst for traders to largely take profits as it continues to take measures in an attempt to cool its booming economy. April PMI slipped to a reading of 55.4, compared to a March appraisal of a 57 – just enough among other to keep traders to lose faith and flee their positions. This one add to evidence that plenty of uncertainty persists through the global market place.
Weighing equally hard on equities and natural resources alike is the April 20 oil rig explosion that pumped at least 5,000 barrels a day of crude oil into the Gulf has been a disaster in countless ways. According to newswires, a concentrated efforts to mop up over the 200,000 gallons spilled on a daily basis since then could cost BP more than $12 billion.
Moving inline with the reduction in risk appetite, currency traders have favoured the safe USD at the expense of other majors such as the EUR and CAD. The eurozone currency has fallen through 1.31 for the first time since April last year as debt crisis in Greece has odds to multiply and stretch to peripheral countries like Spain and Portugal.
Forcing unwanted pressure on capital markets, China has once again been a catalyst for traders to largely take profits as it continues to take measures in an attempt to cool its booming economy. April PMI slipped to a reading of 55.4, compared to a March appraisal of a 57 – just enough among other to keep traders to lose faith and flee their positions. This one add to evidence that plenty of uncertainty persists through the global market place.
Weighing equally hard on equities and natural resources alike is the April 20 oil rig explosion that pumped at least 5,000 barrels a day of crude oil into the Gulf has been a disaster in countless ways. According to newswires, a concentrated efforts to mop up over the 200,000 gallons spilled on a daily basis since then could cost BP more than $12 billion.
Moving inline with the reduction in risk appetite, currency traders have favoured the safe USD at the expense of other majors such as the EUR and CAD. The eurozone currency has fallen through 1.31 for the first time since April last year as debt crisis in Greece has odds to multiply and stretch to peripheral countries like Spain and Portugal.
Monday, May 3, 2010
A Geologist’s Point of View
I am a trained but a practicing geologist. I guess not many people know this fact, simply that I hardly make use of this knowledge, except for my jade collection.
I have been following the broken Deep Horizons oil well for quite a while, but my sense is that this will not fade away in the foreseeable future. The flow is estimated at anywhere from 5,000 to 25,000 barrrels per day based on satellite imagery as well as BP’s deep-sea rovers that can see the oil pouring out of the well. One thing for sure, the deepwater Horizon disaster off the coast of Lousiana is not the first oil spill, but it is becoming among the worst.
Oil spill clean-up crews are already on the job, doing their best to contain the oil, disperse it, burn it or skim it. Burning oil on the water surface, however, does very little to help and is more of a public relations stunt that an effective way to reduce the oil. As of April 29, BP said it had deployed 76,104 gallons of dispersant and had the 89,746 gallons available. The solvent mix with oil and break it down into fine droplets that then disperse with natural water currents. I know for a fact that dispersants are more effective on fresh oil as opposed to crude oil that has become emulsified with wave of action over time.
Relief drilling remains the best option but it will take time to stop oil gush. First, is to drill down to the same oil-bearing rock from which the leaking well is getting its oil, but we cannot go too near the original hole with the drill rig because oil is under pressure.
Once the rig is in location, the long, difficult process of drilling can begin. We are drilling through mostly rock. Once it reaches the broken well, sealing can be started by having seawater pumped into the rock through the relief well. If all goes according to plan, that water should make its way into the lower end of the leaking well, displacing oil. If that succeeds, the next step is to pump in a mineral mud, which follows the sea water up the broken well. Once that mud fills the well, concrete can be pumped into the relief well. Until that happens, there could be a lot of oil pouring into the ocean for some time.
Many ocean scientists are now raising concerns that a powerful current could spread the still-bubbling slick from the Florida Keys all the way to Cape Hatteras off North Carolina. There is a lot of shoreline to be protected so it is not possible to boom off the entire shoreline.
I have been following the broken Deep Horizons oil well for quite a while, but my sense is that this will not fade away in the foreseeable future. The flow is estimated at anywhere from 5,000 to 25,000 barrrels per day based on satellite imagery as well as BP’s deep-sea rovers that can see the oil pouring out of the well. One thing for sure, the deepwater Horizon disaster off the coast of Lousiana is not the first oil spill, but it is becoming among the worst.
Oil spill clean-up crews are already on the job, doing their best to contain the oil, disperse it, burn it or skim it. Burning oil on the water surface, however, does very little to help and is more of a public relations stunt that an effective way to reduce the oil. As of April 29, BP said it had deployed 76,104 gallons of dispersant and had the 89,746 gallons available. The solvent mix with oil and break it down into fine droplets that then disperse with natural water currents. I know for a fact that dispersants are more effective on fresh oil as opposed to crude oil that has become emulsified with wave of action over time.
Relief drilling remains the best option but it will take time to stop oil gush. First, is to drill down to the same oil-bearing rock from which the leaking well is getting its oil, but we cannot go too near the original hole with the drill rig because oil is under pressure.
Once the rig is in location, the long, difficult process of drilling can begin. We are drilling through mostly rock. Once it reaches the broken well, sealing can be started by having seawater pumped into the rock through the relief well. If all goes according to plan, that water should make its way into the lower end of the leaking well, displacing oil. If that succeeds, the next step is to pump in a mineral mud, which follows the sea water up the broken well. Once that mud fills the well, concrete can be pumped into the relief well. Until that happens, there could be a lot of oil pouring into the ocean for some time.
Many ocean scientists are now raising concerns that a powerful current could spread the still-bubbling slick from the Florida Keys all the way to Cape Hatteras off North Carolina. There is a lot of shoreline to be protected so it is not possible to boom off the entire shoreline.
Sunday, May 2, 2010
The Big Picture
The drama continues in Europe following S&P’s slide on Greece debt to junk status and the two notch decline to Portugal’s rating. There are some news-flow that IMF is about to announce a stepped-up aid package and ECB’s Trichet is set to make a trip to Berlin to meet with German parliamentarians today. Perhaps, it would not be too long after Greece bailout then surely next to be Portugal, Ireland, Spain and may even be the Italy.
What is more important to note from this development is that the inability of Greece and others within EMU to enact an independent monetary policy at a times of crisis has exposed the flaws of the union. The lack of cohesive national government is another flaw in times of turbulence, which is why the US has longevity and the Eurozone likely does not. It seems that it strikes some similarities in attempts at unionization in the region – the Latin Monetary Union and the Scandinavian Monetary Union in the late 19th century, which ultimately fizzled out.
In the recent NYT, Barclay’s analysts believe that Greece needs Euro90 billion to see it through, Euro40 billion for Portugal and Euro350 billion for Spain. That is Euro480 billion of refinancing help, which dwarfs the latest Euro45 billion EU-IMF joint and announcement by a factor of ten.
Beyond Greece and Portugal to Spain, its combined fiscal and current account deficits are the highest in the industrialized world. Think of all the global banks, most of them in Europe, which hold onto all this spurious Club Med debt. The reality is that the downside to the Euro, even at 1.32, is huge. Think of a retest to the lifetime lows of 0.85 at some point down the line.
What is more important to note from this development is that the inability of Greece and others within EMU to enact an independent monetary policy at a times of crisis has exposed the flaws of the union. The lack of cohesive national government is another flaw in times of turbulence, which is why the US has longevity and the Eurozone likely does not. It seems that it strikes some similarities in attempts at unionization in the region – the Latin Monetary Union and the Scandinavian Monetary Union in the late 19th century, which ultimately fizzled out.
In the recent NYT, Barclay’s analysts believe that Greece needs Euro90 billion to see it through, Euro40 billion for Portugal and Euro350 billion for Spain. That is Euro480 billion of refinancing help, which dwarfs the latest Euro45 billion EU-IMF joint and announcement by a factor of ten.
Beyond Greece and Portugal to Spain, its combined fiscal and current account deficits are the highest in the industrialized world. Think of all the global banks, most of them in Europe, which hold onto all this spurious Club Med debt. The reality is that the downside to the Euro, even at 1.32, is huge. Think of a retest to the lifetime lows of 0.85 at some point down the line.
Wednesday, April 28, 2010
The Angry or Hungry China?
From once a ‘low profile’ China, and now to be transformed one that loves a good international bust up, it really comes with a price. Putting an Australian mining executive behind bars for 10 years, squeezing out Google, keeping EU at bay for the important dialogue and letting a mid-level official wag his finger at US President Obama at the Copenhagen Climate summit indeed a big doubt that China is engaging on constructive manner.
This is not withstanding that China has been stubbornly watering down sanctions on Iran and other African countries and it seems it is behaving very much like a ‘normal’ super- power, sharing world’s stage with other G-5. Having said that in the recent National People’s Congress, China Premier Wen Jiabao stressed that China should not punch above its weight and that the People’s Republic still needs stability if it is to become a society that offers a decent life to all of its citizens.
Nationalism in China is getting stronger by days. A foreign policy goal closely related to nationalism has been the desire to achieve territorial integrity and to restore to Chinese sovereignty. With China hosting its first-ever Olympics, the country has seen a surge in national pride. But Chinese are angry at what they see as the West trying to spoil their party. China’s nationalism today is shaped by its pride in its history as well as its century of humiliation at the hands of the West and Japan. China perceives itself as a victim of Western imperialism that began with the First Opium War and the British acquisition of Hong Kong in 1842 and lasted until the end of World War II in 1945, during which it suffered humiliating losses of sovereignty.
Beijing’s top priority today is to maintain peace at home while pursuing its development goals and a greater role in global affairs. Experts say while nationalism may be an effective tool for the Chinese regime to maintain control at home, it can harm its claim of “peaceful rise” globally. Nationalism is certainly an obstacle in China’s image as a responsible stakeholder.
Essentially, China needs a mature strategic dialogue, and comradeship should not guide policies. It should take a step back on its offensive charm, and back up with deeds and more initiative in fostering more effective cooperation.
This is not withstanding that China has been stubbornly watering down sanctions on Iran and other African countries and it seems it is behaving very much like a ‘normal’ super- power, sharing world’s stage with other G-5. Having said that in the recent National People’s Congress, China Premier Wen Jiabao stressed that China should not punch above its weight and that the People’s Republic still needs stability if it is to become a society that offers a decent life to all of its citizens.
Nationalism in China is getting stronger by days. A foreign policy goal closely related to nationalism has been the desire to achieve territorial integrity and to restore to Chinese sovereignty. With China hosting its first-ever Olympics, the country has seen a surge in national pride. But Chinese are angry at what they see as the West trying to spoil their party. China’s nationalism today is shaped by its pride in its history as well as its century of humiliation at the hands of the West and Japan. China perceives itself as a victim of Western imperialism that began with the First Opium War and the British acquisition of Hong Kong in 1842 and lasted until the end of World War II in 1945, during which it suffered humiliating losses of sovereignty.
Beijing’s top priority today is to maintain peace at home while pursuing its development goals and a greater role in global affairs. Experts say while nationalism may be an effective tool for the Chinese regime to maintain control at home, it can harm its claim of “peaceful rise” globally. Nationalism is certainly an obstacle in China’s image as a responsible stakeholder.
Essentially, China needs a mature strategic dialogue, and comradeship should not guide policies. It should take a step back on its offensive charm, and back up with deeds and more initiative in fostering more effective cooperation.
Euro to Pound
Political situation in the UK looks to be much murkier than ever suggested, but reaction to pound could suggest otherwise.
A sea-changed in British politics looks likely on general election day on 6 May. But it is not to everyone’s liking. The apparently sharp increase in voting popularity of the UK Liberal Democratic Party – the perpetual ‘third force’ in British politics – has thrown up a specter for the bond markets. A ‘hung parliament’ where no one party wins enough seats to command power on its own, could be highly dangerous for sterling and the markets. That is at least the view being put around by the Opposition Conservatives, who see the Liberals as possibly thwarting their bid to overturn the Labour government that has been in power since 1997.
I believe this pessimism has gone too far. The higher the Liberals voting score, the more apparently ‘uncertain’ the election results, the higher sterling will be against the euro, I believe. But because of dramatic deterioration of the euro situation, I see pound as one of the stronger currencies in the next six months.
A ‘cliffhanger’ election results, that give no party an absolute majority might actually quite good for sterling. Coalition government can be effective as happened in the past in the UK.
A sea-changed in British politics looks likely on general election day on 6 May. But it is not to everyone’s liking. The apparently sharp increase in voting popularity of the UK Liberal Democratic Party – the perpetual ‘third force’ in British politics – has thrown up a specter for the bond markets. A ‘hung parliament’ where no one party wins enough seats to command power on its own, could be highly dangerous for sterling and the markets. That is at least the view being put around by the Opposition Conservatives, who see the Liberals as possibly thwarting their bid to overturn the Labour government that has been in power since 1997.
I believe this pessimism has gone too far. The higher the Liberals voting score, the more apparently ‘uncertain’ the election results, the higher sterling will be against the euro, I believe. But because of dramatic deterioration of the euro situation, I see pound as one of the stronger currencies in the next six months.
A ‘cliffhanger’ election results, that give no party an absolute majority might actually quite good for sterling. Coalition government can be effective as happened in the past in the UK.
Tuesday, April 27, 2010
Eyjafjallajokull
This word is not only difficult to pronounce but also difficult to remember. This mighty Icelandic volcano that has wrecked havoc with European air traffic will be something to be remembered for a long time, if what being predicted is correct.
There is most definitely has investment point. I learned yesterday from some hedge fund sources that scientists believe the real threat is from the relatively small Eyjafjallajokull volcano that it could trigger an eruption in its much larger neighbor, which is called Katla.
University of Iceland geologist Andy Hooper told Reuters that an eruption of Katla would make the ash cloud from Eyjafjallokull look trivial. I was told there is better than even chance that this would happen, if our planet continues to warm. At the end of the last ice age, the rate of eruption in Iceland was some 30 times higher than historic rates. This is because the reduction in the ice-load reduced the pressure in the mantle, leading to decompression melting there.
The melting ice due to changing climate, this will lead to additional magma generation, so we should expect more frequent and more voluminous eruptions in the future.
Greg Neale, who edits BBC History magazine saidt hat the Laki volcanic fissure in southern Iceland erupted from June 1783 to February 1784, spewing lava and poisonous gases that devastated the island’s crops and livestock and lead to the deaths of a quarter of the island’s population through famine. The sky turned dark across Europe and even cast a shadow over the United States that was recorded by Benjamin Franklin.
The Krakatoa eruption of 1883 in Indonesia, one of the most violent natural events in recorded history, threw up so much ash that crops were devastated as far away as the United States.
In short, volcanic eruptions can have significant effects on weather patterns for from two to four years which in turn have social and economic consequences. As such, we should keep a close eye on companies and commodities in the food complex, including raw grain and livestock prices, fertilizer producers and packaged food makers.
There is most definitely has investment point. I learned yesterday from some hedge fund sources that scientists believe the real threat is from the relatively small Eyjafjallajokull volcano that it could trigger an eruption in its much larger neighbor, which is called Katla.
University of Iceland geologist Andy Hooper told Reuters that an eruption of Katla would make the ash cloud from Eyjafjallokull look trivial. I was told there is better than even chance that this would happen, if our planet continues to warm. At the end of the last ice age, the rate of eruption in Iceland was some 30 times higher than historic rates. This is because the reduction in the ice-load reduced the pressure in the mantle, leading to decompression melting there.
The melting ice due to changing climate, this will lead to additional magma generation, so we should expect more frequent and more voluminous eruptions in the future.
Greg Neale, who edits BBC History magazine saidt hat the Laki volcanic fissure in southern Iceland erupted from June 1783 to February 1784, spewing lava and poisonous gases that devastated the island’s crops and livestock and lead to the deaths of a quarter of the island’s population through famine. The sky turned dark across Europe and even cast a shadow over the United States that was recorded by Benjamin Franklin.
The Krakatoa eruption of 1883 in Indonesia, one of the most violent natural events in recorded history, threw up so much ash that crops were devastated as far away as the United States.
In short, volcanic eruptions can have significant effects on weather patterns for from two to four years which in turn have social and economic consequences. As such, we should keep a close eye on companies and commodities in the food complex, including raw grain and livestock prices, fertilizer producers and packaged food makers.
Sunday, April 25, 2010
G20/IMF – Quick Update
The meeting over the weekend was quite about the RMB issue as predicted earlier. Of course, they understand the more and lauder they clamor about RMB revaluation, the stronger the likelihood of Chinese government to resist to ending its stable currency policy.
I expect more discussion to take place in next month’s US-China Strategic Economic Dialogue and the G20 leaders’ summit in June.
Because of this development and the unlikelihood that China will make any change to its currency policy short term plus EUR weakness and Greek uncertainties, I am expecting a less dovish Fed, which will underpin performance of the USD, and naturally for market to shift its strategy towards buying Asian currencies for two reasons. Firstly, Asian currencies as a proxy for the CNY and secondly more against the JPY and EUR as opposed to the USD. It remains to be seen if the EU can work with the IMF to help Greece to put its fiscal house back in order and to prevent the debt woes from spreading to other weak EU nations such as Portugal, and Spain.
What would be more critical to watch is the April 28 US FOMC meeting with recent statement that coming out from the US is getting us closer to US Fed hiking cycle as there are signs that US recovery is showing signs of broadening. The futures market is expected to start discounting the US hike cycle if the Fed drops key terms like ‘exceptionally low rates’ and ‘extended period’. Since the start of April, we are beginning to see speculators are reversing from net short to net long positions in USD/JPY in the CFTC market.
I expect more discussion to take place in next month’s US-China Strategic Economic Dialogue and the G20 leaders’ summit in June.
Because of this development and the unlikelihood that China will make any change to its currency policy short term plus EUR weakness and Greek uncertainties, I am expecting a less dovish Fed, which will underpin performance of the USD, and naturally for market to shift its strategy towards buying Asian currencies for two reasons. Firstly, Asian currencies as a proxy for the CNY and secondly more against the JPY and EUR as opposed to the USD. It remains to be seen if the EU can work with the IMF to help Greece to put its fiscal house back in order and to prevent the debt woes from spreading to other weak EU nations such as Portugal, and Spain.
What would be more critical to watch is the April 28 US FOMC meeting with recent statement that coming out from the US is getting us closer to US Fed hiking cycle as there are signs that US recovery is showing signs of broadening. The futures market is expected to start discounting the US hike cycle if the Fed drops key terms like ‘exceptionally low rates’ and ‘extended period’. Since the start of April, we are beginning to see speculators are reversing from net short to net long positions in USD/JPY in the CFTC market.
Thursday, April 22, 2010
Ecuador – Game Changer
They say commodity producers are price-taker and that has been the belief since then. Today, I am sharing you with a piece on Equador’s recent move to redefine this rule.
Ecuadorean President Rafael Correa is pressuring foreign oil investors to change from production-sharing agreements (PSA) to service contracts, else to face expropriation. Correa is looking to make the state’s authority over oil revenues, hence his political security and also perhaps at the expense of Ecuador’s long term economic development.
The left-leaning President Rafael, an economist by training has frequently expressed his disillusion with market reforms in Latin America and believes economic power should reside within the state. Shifting from PSA to servicing contracts, under which producers would have to pay a production fee and then get reimbursed for the cost of their investment. The state will end up getting more revenue for itself and the producers end up making less money overall since it can only make profits from remuneration fees – the amount per barrel that government is willing to pay companies for producing its oil. In another words, the foreign companies will incur risk of investing resources into a project with none of the potential rewards associated with high oil prices.
With his populist-driven handouts to the poor, Rafael will certainly strengthen his political base, which also showing stronger signs of coordinated opposition.
Equador’s economy depends heavily on oil, which accounts for roughly a quarter of GDP, 68% of total export earnings and 35% of fiscal revenues. The country is exporting about 470,000 barrels per day of oil this year – a heavy sour crude called Napo and a medium-heavy, medium sour crude called Oriente that is produced in the northeast of the country.
Many of these companies have reasons to take Rafael’s expropriation threats seriously. After the state took over US oil company Occidental Petroleum’s asset in 2006, claiming the firm’s contract had expired, Rafael further raised investor fears in late 2007 when he imposed a 99% windfall revenue tax on foreign energy firms to help make up for the state’s commercial bond debt obligations. And that led to a number of arbitration suits at the World Bank’s International Centre for Settlement of Investment Dispute. Equador has also expropriate two blocks belonging to Anglo-French oil firm Perenco over tax disputes.
It looks like most firms will have to settle reluctantly on the new contractual terms to remain in the country and maintain minimal production. But they will not have good incentive to invest further in exploration and deep drilling, particularly in the technically more complex fields in the Amazon.
Ecuadorean President Rafael Correa is pressuring foreign oil investors to change from production-sharing agreements (PSA) to service contracts, else to face expropriation. Correa is looking to make the state’s authority over oil revenues, hence his political security and also perhaps at the expense of Ecuador’s long term economic development.
The left-leaning President Rafael, an economist by training has frequently expressed his disillusion with market reforms in Latin America and believes economic power should reside within the state. Shifting from PSA to servicing contracts, under which producers would have to pay a production fee and then get reimbursed for the cost of their investment. The state will end up getting more revenue for itself and the producers end up making less money overall since it can only make profits from remuneration fees – the amount per barrel that government is willing to pay companies for producing its oil. In another words, the foreign companies will incur risk of investing resources into a project with none of the potential rewards associated with high oil prices.
With his populist-driven handouts to the poor, Rafael will certainly strengthen his political base, which also showing stronger signs of coordinated opposition.
Equador’s economy depends heavily on oil, which accounts for roughly a quarter of GDP, 68% of total export earnings and 35% of fiscal revenues. The country is exporting about 470,000 barrels per day of oil this year – a heavy sour crude called Napo and a medium-heavy, medium sour crude called Oriente that is produced in the northeast of the country.
Many of these companies have reasons to take Rafael’s expropriation threats seriously. After the state took over US oil company Occidental Petroleum’s asset in 2006, claiming the firm’s contract had expired, Rafael further raised investor fears in late 2007 when he imposed a 99% windfall revenue tax on foreign energy firms to help make up for the state’s commercial bond debt obligations. And that led to a number of arbitration suits at the World Bank’s International Centre for Settlement of Investment Dispute. Equador has also expropriate two blocks belonging to Anglo-French oil firm Perenco over tax disputes.
It looks like most firms will have to settle reluctantly on the new contractual terms to remain in the country and maintain minimal production. But they will not have good incentive to invest further in exploration and deep drilling, particularly in the technically more complex fields in the Amazon.
Wednesday, April 21, 2010
G20/IMF Meeting
The G20/IMF meeting starts today in Washington and that will last until 25 April 2010. The message will be very clear – those with heavy debt should allow their currencies to depreciate and those in surplus position should allow their currencies to appreciate.
To add to the pressure on China, a US Senate Banking sub-committee will be holding a hearing today to examine the impact of the RMB on US manufacturing. US Senate Banking Committee Chairman Chris Dodd has responded to reporters concerning his expectation of what President elect Obama will do concerning the China Yuan currency manipulation. Higher-ups in the international economy are quietly buying China currency while the American dollar is strong and waiting for U.S. pressure legislatively to be applied to the Obama administration. Huge potential profits await as the RMB gets released from captivity to rise to all-time highs.
We could expect to see Obama administration to seek greater international cooperation via the G20 forum to pressure China into action. So far, two of the BRIC economies – Brazil and India, have joined in calls for a stronger RMB. Russia on the other hand, holds a common position with China to promote the greater use of IMF SDR for international trade and investment transactions.
In the end, the reality remains that China will make the final decision. Last night, the Commerce Ministry declared China will not be subjected to international pressure to revalue its currency. China doesn’t subscribe to the view that its currency is primarily responsible for US’s trade deficit woes, especially now that it has reported a trade deficit. China is more concerned now with its efforts to address its domestic imbalances – cooling its property sector.
With Eurozone in crisis, it makes less sense for China to abandon its stable RMB policy, which it said was an emergency against the global financial crisis. The IMF warned recently that Greece could mark the starting point of a new phase in the global financial crisis.
A RMB revaluation remains a possible but improbable outcome at this week’s G20/IMF meeting. One just should take note of the larger issue for the foreign exchange market is the depreciation pressure on the EUR from the deterioration in Eurozone’s sovereign debt crisis. Following next is the April 28 FOMC meeting as well as the Senate hearings on Goldman Sachs a day before.
To add to the pressure on China, a US Senate Banking sub-committee will be holding a hearing today to examine the impact of the RMB on US manufacturing. US Senate Banking Committee Chairman Chris Dodd has responded to reporters concerning his expectation of what President elect Obama will do concerning the China Yuan currency manipulation. Higher-ups in the international economy are quietly buying China currency while the American dollar is strong and waiting for U.S. pressure legislatively to be applied to the Obama administration. Huge potential profits await as the RMB gets released from captivity to rise to all-time highs.
We could expect to see Obama administration to seek greater international cooperation via the G20 forum to pressure China into action. So far, two of the BRIC economies – Brazil and India, have joined in calls for a stronger RMB. Russia on the other hand, holds a common position with China to promote the greater use of IMF SDR for international trade and investment transactions.
In the end, the reality remains that China will make the final decision. Last night, the Commerce Ministry declared China will not be subjected to international pressure to revalue its currency. China doesn’t subscribe to the view that its currency is primarily responsible for US’s trade deficit woes, especially now that it has reported a trade deficit. China is more concerned now with its efforts to address its domestic imbalances – cooling its property sector.
With Eurozone in crisis, it makes less sense for China to abandon its stable RMB policy, which it said was an emergency against the global financial crisis. The IMF warned recently that Greece could mark the starting point of a new phase in the global financial crisis.
A RMB revaluation remains a possible but improbable outcome at this week’s G20/IMF meeting. One just should take note of the larger issue for the foreign exchange market is the depreciation pressure on the EUR from the deterioration in Eurozone’s sovereign debt crisis. Following next is the April 28 FOMC meeting as well as the Senate hearings on Goldman Sachs a day before.
Tuesday, April 20, 2010
A Standstill Thailand
Neither party wants to budge. The stake at hand is large and it is oversimplification to view the current saga as a conflict of interest between Red Shirts and current government. Royal family has been dragged into this mess as part of preparation of power transfer, likely to Crown Prince Vajiralongkorn and the coming promotion in army in October following the retirement of Army chief Anupong Paochinda. The violence and the ongoing presence of protestors on the streets of Bangkok will stress Thailand’s current institutional framework to its full limit.
I could not discount the possibility of a violent confrontation between Red Shirts and government security forces, as both parties are building up their arsenal. Army chief talked tough and the stage seems set for operations to remove the red-shirted protesters from the Rajprasong intersection as the military boosted its forces while the protesters were in defensive mode yesterday, erecting barricades and assembling home-made weapons for the next battle. There are as many as 10,000 troops in position now in the areas near Rajprasong, the main protest site. source said the protesters also have M67 grenades, M79 grenade launchers and rocket-propelled grenade launchers. They also seized many assault rifles from the military during the clashes with security forces on April 10 at Khok Wua intersection, the sources said. Of the 500 Israeli-made Tavor Tar-21 assault rifles seized by the protesters on that day, only 200 were returned to the Army, the source said, suggesting the protesters might use the weapons in the next clash.
Crown Prince Vajiralongkorn rumored to be closely associated with former Prime Minister Thaksin and people have privately asked whether he has the natural authority to unify the nation, especially given his partisanship towards the military.
One should not also forget that commander-in-chief Anupong is going to retire soon and it is not too hard to see round of jockeying for positions among those in line of command. Military support for Prime Minister Abhisit and its ruling coalition may not be as committed as before, and if current government is losing its monopoly of the use of the force, PM Abhisit’s days in power would seem to be numbered. The Red Shirt protestors know this and those with long patience will win.
Early elections remain a remote possibility and at this stage, it would a task for royal intervention, especially so when His Majesty the King who is still recuperating at Siriraj Hospital.
For now, portfolio managers are taking a neutral stance, at best with portfolio rebalancing with a domestic flight to safety but if situation turns violent given the current political divide, this could lead to a clear reversal of previous Thai equity market outperformance.
I could not discount the possibility of a violent confrontation between Red Shirts and government security forces, as both parties are building up their arsenal. Army chief talked tough and the stage seems set for operations to remove the red-shirted protesters from the Rajprasong intersection as the military boosted its forces while the protesters were in defensive mode yesterday, erecting barricades and assembling home-made weapons for the next battle. There are as many as 10,000 troops in position now in the areas near Rajprasong, the main protest site. source said the protesters also have M67 grenades, M79 grenade launchers and rocket-propelled grenade launchers. They also seized many assault rifles from the military during the clashes with security forces on April 10 at Khok Wua intersection, the sources said. Of the 500 Israeli-made Tavor Tar-21 assault rifles seized by the protesters on that day, only 200 were returned to the Army, the source said, suggesting the protesters might use the weapons in the next clash.
Crown Prince Vajiralongkorn rumored to be closely associated with former Prime Minister Thaksin and people have privately asked whether he has the natural authority to unify the nation, especially given his partisanship towards the military.
One should not also forget that commander-in-chief Anupong is going to retire soon and it is not too hard to see round of jockeying for positions among those in line of command. Military support for Prime Minister Abhisit and its ruling coalition may not be as committed as before, and if current government is losing its monopoly of the use of the force, PM Abhisit’s days in power would seem to be numbered. The Red Shirt protestors know this and those with long patience will win.
Early elections remain a remote possibility and at this stage, it would a task for royal intervention, especially so when His Majesty the King who is still recuperating at Siriraj Hospital.
For now, portfolio managers are taking a neutral stance, at best with portfolio rebalancing with a domestic flight to safety but if situation turns violent given the current political divide, this could lead to a clear reversal of previous Thai equity market outperformance.
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