U.S. Equity Market Radar (June 11, 2012)

Sunday, June 10th, 2012

U.S. Equity Market Radar (June 11, 2012)

The S&P 500 Index rose 3.73 percent this week as the global equity markets bounced on global government policy initiatives or speculation of forthcoming stimulus. Financials were the standout performers this week on hope of some resolution in Europe. Defensive sectors lagged but even the worst performer rose more than 2.5 percent.

Strengths

• The financial sector took the lead, rising by 4.71 percent, with a diverse group of stocks leading the way. AIG, Invesco and Citigroup were the best performers in the sector, all rising by more than nine percent.
• The materials sector was not far behind with chemical names such as best performer Eastman Chemical, rising more than 9 percent.
• The best individual stock performer this week was Iron Mountain which rose 18.8 percent as the company announced it was converting to a Real Estate Investment Trust.

Weaknesses

• The industrial distributors were the worst-performing industry group, falling by more than 3 percent for the week. Following Fastenal’s disappointing May sales results, the company fell by 6.7 percent this week.
• The oil & gas services group also came under pressure this week as Halliburton fell by more than 6 percent as the company warned of lower profit margins.
• Alpha Natural Resources was the worst performer in the S&P 500 this week, falling 10.6 percent, as the company announced significant cuts to its production guidance for 2012 and 2013.

Opportunity

• The market feels like it may be at an inflection point as Chinese authorities enacted broad-based stimulus, essentially conceding the economic slowdown required decisive action. This is a very positive step and a change in tone for China. If Europe follows through in the near future it could be the catalyst for change.

Threat

• Stresses continue to build in Europe and missteps by policy makers could negatively impact the markets.

Tags: Alpha Natural Resources, Chemical Names, China, Chinese Authorities, Decisive Action, Eastman Chemical, Economic Slowdown, Estate Investment Trust, Fastenal, Global Equity Markets, Global Government, Government Policy Initiatives, Industrial Distributors, Inflection Point, Invesco, Iron Mountain, Market Radar, Materials Sector, Profit Margins, Real Estate Investment, Real Estate Investment Trust
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Cashin On Rumor Versus Reality

Wednesday, May 30th, 2012

The avuncular Art Cashin opines on the roller-coaster of unreality that has been the equity markets for the last few days as outcomes become increasingly binary and investors increasingly herded from one direction to another. His sage advice – as if spoken by the most-interesting-person-in-the-world – “Stay nimble”, my friends.

Via Art Cash of UBS,

Rumors Versus Reality With Rumors Resurgent At The Wire

Yesterday, there were rumors about that Chinese authorities were working on a new stimulus package. That cheered Asian markets and allowed European bourses to tiptoe around a deteriorating situation in Spanish banks.

Even before the U.S. markets opened, the semi-official Xinhua news agency of China began pooh-poohing the rumors. The rumormongers would have none of the denials.

A package would be announced after the markets closed (presumably in Europe – circa 11:30).

That backdrop allowed U.S. stocks to open better in a rather sharp, sigh of relief, oversold rebound.

They even shrugged off some lousy consumer confidence numbers at 10:00. Since the confidence data sharply countered Friday’s University of Michigan numbers, traders deemed them likely inconclusive.

The rebound rally held into the European close.

The rumors apparently morphed again. Simon Hobbs on CNBC said his sources suggested some announcement might come after the European close. The sense seemed to be that it would emanate out of Europe – not China.

After the 11:30 European close, U.S. stocks began to fade and rather rapidly at that.

The Euro fell through a trapdoor.

Was it just disappointment at no announcement? It looked a little too sudden and sharp for that.

Attention shifted to the cut in Spain’s rating by Egan-Jones. The timing was certainly coincidental, but did the somewhat small agency have that much clout?

Also contemporaneous with the Euro drop were analyses of an odd switch in a weekly ECB report.

There was a decline of over 25 billion Euros in collateral posted on the most recent LTRO. In another part of the ledger there was an increase of over 34 billion Euros in “other claims” (frequently smoke for emergency loans).

That raised speculation that the ECB may have “called” a loan, as the value of the posted collateral deteriorated. The bank, perhaps, could not find valid replacement collateral and shifted to emergency loan status.

While that seemed rather technical, if true, it raised fears that the banking situation in Spain, and elsewhere could even be worse than we knew.

The Euro-led selloff petered out around 1:30 EDT after cutting the morning gains in half.

As the day wore on, the China stimulus story began to resurface. That led to a bit of a flurry in the final half hour. Also, helping were media reports that election polls in Greece were shifting toward Euro-safe sentiments.

Overnight – EU Proposal Starts Roller-Coaster Ride – Pre-dawn this morning the situation in the Spanish banking community took several sharp turns.

The FT had reported that the ECB had vetoed the Bank of Spain’s plan to recapitalize its banks, particularly Bankia.

The Euro fell to a two year low before the ECB tweeted that there was no veto. European markets stabilized.

Then, the other shoe dropped.

Around 7:00 EDT, the EU commission issued a surprise plan to channel aid directly into European banks rather than through the treasury of their sovereign.

The announcement caught the European markets off-guard and sharp spike rallies erupted, erasing all, or most, of the earlier selloffs.

Then the doubts began to pop up. Would this clear the Merkel wing? Could it be set up within existing treaties?

The doubts stopped the rallies and prices faded but failed to go into freefall. That’s why I keep stressing staying nimble.

Tags: Art Cashin, Asian Markets, Chinese Authorities, Cnbc, Confidence Data, Confidence Numbers, Consumer Confidence, Denials, Egan Jones, European Bourses, Opines, Roller Coaster, S University, Sage Advice, Semi Official, Spanish Banks, Stimulus Package, Trapdoor, Unreality, Xinhua News Agency
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The Economy and Bond Market Radar (April 16, 2012)

Sunday, April 15th, 2012

The Economy and Bond Market Radar (April 16, 2012)

Treasuries rallied this week, sending yields sharply lower. The nonfarm payrolls report that was released on Good Friday disappointed and with negative rumblings out of Europe, it was a “risk off” week. China reported first quarter GDP growth below expectations, which increases the likelihood of additional policy accommodation from the Chinese authorities in the near future.

Strengths

• Natural gas fell below $2 this week, providing consumers with some relief to higher gasoline prices.
• Several inflation data points were released this week and were overall in line with expectations. This is generally supportive of the existing Federal Reserve policies.
• Wholesale inventories rose 0.9 percent in February, indicating continued restocking that should boost first quarter GDP in the U.S.

Weaknesses

• March nonfarm payrolls grew a modest 120,000, well below market expectations.

• Weekly initial jobless claims jumped to 380,000 this week, the highest reading since January.

• Spain remains in the spotlight as yields spike higher and investors remain nervous about long-term solutions for the country’s financial woes.

Opportunity

• The weak Chinese GDP number implies that the current global easing policies are likely to remain in place for the foreseeable future.

Threat

• Rising oil and gasoline prices, combined with liquidity implications of global easing led by Europe, may raise the prospect of higher inflation going forward.

Tags: Bond Market, Chinese Authorities, Federal Reserve, Financial Woes, Gasoline Prices, GDP, GDP Growth, Good Friday, Inflation Data, Initial Jobless Claims, liquidity, Long Term Solutions, Market Expectations, Market Radar, Nonfarm Payrolls, Quarter Gdp, Reserve Policies, Rumblings, Treasuries, Wholesale Inventories
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Albert Edwards: JPY Devaluation Exacerbates Risk of China Hard Landing, Drags them into Currency war

Thursday, March 8th, 2012

by Daily Colateral

“What do people think will happen if another recession strides into sight any time soon? We are a hair’s breadth or, more exactly, one recession away from a market panic on outright deflation — a panic that will send the central banks into a printing frenzy that will make their balance sheet expansion so far seem like a warm-up act for the main show.” Albert Edwards in his latest note, taking a look at wage inflation (or lack thereof) in the United States:

Edwards calls the current environment the “Ice Age reality of ever lower nominal quantities” and references Lakshman Achuthan of ECRI’s recent interview in which he reaffirmed his call for a recession in the U.S. as well as John Hussman’s latest comment, which discusses the same.

Albert Edwards’ Soc Gen colleague Dylan Grice in his most recent note described the decision behind the Bank of Japan’s latest move to ease further, weakening the yen. Further, current inflation expectations remain below target in many DM economies, providing central banks further justification to continue printing.

Edwards notes that Asian currencies like the Korean won haven’t been taken down by the BoJ move yet due to the risk rally that’s played out so far this year, but sees that changing if markets reverse. Then, Edwards points out that “if the yen’s decline takes other Asian currencies lower, it would leave the renminbi as the anomalously strong currency in the region – much to the annoyance of the Chinese authorities,” like so:

This, of course, will not sit well with Chinese authorities, who are currently dealing with a renminbi at all-time highs in real terms, which is necessarily foreboding for the Chinese export situation:

Edwards on the inevitable consequences:

We have long stated that if the Chinese economy looks to be hard landing, as we believe it will, the authorities there will actively consider renminbi devaluation, despite the political consequences of such action. The renminbi devaluation option is widely ignored by the markets in the same way they ignore the likelihood that the Chinese economy is hard landing. The devaluation option should be seen as “in play” however unthinkable it is believed to be at present.

Tags: All Time Highs, Asian Currencies, Bank Of Japan, Central Banks, Chinese Authorities, Chinese Economy, Chinese Export, Colateral, Currency War, Devaluation, Ecri, Grice, Inevitable Consequences, Inflation Expectations, John Hussman, Lakshman, Market Panic, Renminbi, Target, Wage Inflation
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China – The Great Stabilizer

Friday, September 30th, 2011

For the past ten years, whenever global base metals demand dissipated, China’s voracious appetite stepped in to gobble up the leftovers. Since 2001, China has increased the country’s share of total global demand for base metals from about 15 percent to over 40 percent in 2011, as shown in the yellow line. This has made China more important to commodities than ever before, according to Macquarie.

Macquarie says China has been a “great stabilizer” for commodities: “As growth elsewhere in the world tends to weaken, Chinese call on supply from the rest of the world tends to rise and visa versa when demand weakens.”

As global demand declines, the world “exports disinflationary pressures to China in the form of lower Chinese export demand and also lower energy and other commodity prices. When inflationary pressures ease in China, the Chinese authorities have generally eased monetary and fiscal policies, leading to a strong restocking and domestic demand recovery,” says Macquarie.

The stabilizing effect we’ve seen over the past decade could be in danger if Chinese demand continues to weaken. So far this year, China’s metals demand has slowed despite continued growth in industrial production and construction.

Macquarie thinks there are near-term downside risks in prices due to weak financial markets but things look rosier farther out on the time horizon. The firm says demand for base metals will be weak but not “disastrously” so. Industrial growth in many developed economies has mostly recovered from the Japan earthquake in March and Chinese industrial production growth will likely remain strong around 12 percent on a year-over-year basis in 2012.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Tags: Base Metals, Chinese Authorities, Chinese Demand, Chinese Export, Commodities, Commodity Prices, Downside Risks, Export Demand, Financial Markets, Fiscal Policies, Global Base, Global Demand, Inflationary Pressures, Japan Earthquake, Leftovers, Rest Of The World, Stabilizer, Time Horizon, Voracious Appetite, World Exports
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TD Waterhouse’s Ryan Lewenza: U.S. Equity Strategy Quarterly (July 4, 2011)

Tuesday, July 5th, 2011

TD Waterhouse Vice President and U.S. Equity Strategist, Ryan Lewenza, shares his outlook and strategic direction on U.S. stocks. In particular, Lewenza cites 4 causes for the markets’ recent weakness – Greek debt crisis, China’s monetary tightening bias, the end of QE2, and normal seasonal trends. On an absolute basis, stocks are now undervalued, and there is still the possibility markets could experience more weakness, with the S&P ranging lower to 1225-1175 if the important 1250/65 level doesn’t hold.

He/they “continue to recommend an overweight in the energy, information technology and health care sectors. We remain market weight on financials, materials, industrials, and consumer staples. We recommend an underweight in the telecom, utilities and consumer discretionary sectors.”

Here are highlights from the report (page 1; you may read the whole report in the slidedeck below (click fullscreen for larger view), or download a copy by clicking on the cloud/arrow button):

- Q2 was the ying to Q1’s yang. Outside of the Japan sell-off in mid-March, Q1 saw decent gains with generally lower volatility, while Q2 posted negative returns on the back of higher volatility. Thanks to a late-June rally, the S&P 500 Index (S&P 500) declined a modest 0.4% in Q2, erasing some of the gains realized in Q1 (5.4%). The NASDAQ declined a similar 0.3%, while small-caps fared the worst, with the Russell 2000 falling 1.9% in the quarter. Large-caps outperformed small-caps by 150 bps, while growth outperformed value by 70 bps.

- The reasons behind the recent weakness are manifold, but we believe the following factors were most at play: 1) mounting concerns over a Greek default and potential contagion effects, 2) continued monetary tightening by Chinese authorities, 3) the end of Quantitative Easing in June, 4) a deceleration in global economic growth, and 5) normal seasonal trends.

- We continue to believe that the U.S. economy is recovering, albeit at halfspeed, and maintain our below-trend view of 2.5% U.S. GDP growth for 2011.

- With the Q2 weakness, the U.S. equity market has become more attractive with the S&P 500 forward P/E dropping to 13.5x – roughly 3 multiple points below its ten-year average of 16.5x.

- U.S. equities are attractively valued on an absolute basis, as well as relative to bonds. With the S&P 500 earnings yield (inverse of P/E) at roughly 7.5% and the 10-year U.S. Treasury yield at just over 3%, the gap is almost 450 bps in favour of stocks.

- We see the potential for more near-term weakness, and see the S&P 500 possibly retesting the important 1,249.05 level (March 2011 low). With the 200-day moving average at 1,265 we believe the S&P 500 needs to hold this important 1,250/65 range, or it could decline further with the next technical support range coming in at 1,225-1,175. However, we believe we are getting closer to a technical bottom, which is likely to be achieved over the next few months.

- In trying to isolate the bottom for U.S. equities, we will be closely monitoring the following: 1) a bottom in the Shanghai Index and copper prices, 2) a peak in US. Treasury bond prices, and 3) a large decline in bullish investor sentiment.

- We continue to recommend an overweight in the energy, information technology and health care sectors. We remain market weight on financials, materials, industrials, and consumer staples. We recommend an underweight in the telecom, utilities and consumer discretionary sectors.

US Equity Strategy Q2 11

Tags: Absolute Basis, Arrow Button, Bps, Chinese Authorities, Consumer Staples, Contagion Effects, Debt Crisis, Deceleration, Energy Information, Equity Strategy, Global Economic Growth, Health Care Sectors, Mid March, Qe2, Russell 2000, Seasonal Trends, Small Caps, Td Waterhouse, Telecom Utilities, Underweight
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More Than Meets the Eye: China Manufacturers Overstocked!

Monday, May 9th, 2011

China’s CFLP manufacturing PMI for April came in at 52.9, down from 53.4 in March.

While the figure still indicates further expansion in the Chinese manufacturing sector, it surprised on the downside as it was significantly lower compared to the apparent historical seasonal patterns where April is normally a bumper month.

Sources: Li & Fung; CFLP; Plexus Asset Management.

Sources: Li & Fung; CFLP; Plexus Asset Management.

Although most commentators ascribe the lower-than-expected PMI to the action taken by the Chinese authorities to tighten credit conditions and reign in the property sector, my analysis indicates that the external sector and especially the fallout of Japan’s twin disaster played a major role in the weak PMI number. The new export orders PMI registered a paltry 51.3, whereas in normal circumstances it would have been in excess of 54, given the historical seasonal pattern.

Sources: Li & Fung; CFLP; Plexus Asset Management.

The same is evident in the import PMI that came in at a barely growing 50.6, whereas in normal circumstances it would have been in excess of 53, given the historical seasonal pattern.

Sources: Li & Fung; CFLP; Plexus Asset Management.

In contrast, the stocks of major inputs PMI followed the historical seasonal pattern and the 52.0 was in fact somewhat stronger than what would otherwise have been expected.

Sources: Li & Fung; CFLP; Plexus Asset Management.

But where does that leave China’s manufacturing industry, you may ask. In short: “Overstocked!” The ratio between the stocks of major inputs PMI and the new orders PMI is approaching high levels similar to that of mid-2008 during the commodity frenzy that lasted until July that year. (Please note that the axis is in reverse order). We all know what happened afterwards! Where the ratio between the stocks of major inputs and new orders normally follow the same pattern, it is evident that Chinese manufacturers have changed tack since the start of last year.

Sources: Li & Fung; CFLP; Plexus Asset Management.

A relatively high stock to orders ratio is followed by a weaker manufacturing PMI a month later and vice versa. The stock to orders ratio therefore leads the PMI by one month. It seems to me that the Chinese manufacturers are much more inventory conscious than in the past, because their monthly responses to the PMI questions are highly influenced by the ratio of stocks to new orders of the previous month.

Sources: Li & Fung; CFLP; Plexus Asset Management.

The said pattern that has emerged is not limited to stocks of major inputs, though. A similar pattern is evident in the ratio of stocks of finished goods to new orders (please note the reverse axis).

Sources: Li & Fung; CFLP; Plexus Asset Management.

Sources: Li & Fung; CFLP; Plexus Asset Management.

My conclusion is that Chinese manufacturers are currently overstocked given April’s PMI for new orders. The PMI ratio for stocks of major inputs to new orders indicates that the manufacturing PMI in May could fall to below 51.0, while the PMI ratio for stocks of finished goods to new orders indicates a drop to below 52.0. That corresponds to the seasonal lull that starts to set in from May to July.

It certainly does not bode well for the Baltic Dry Index in coming months.

Sources: Li & Fung; CFLP; I-Net Bridge; Plexus Asset Management.

With the Chinese as the driving force behind commodity prices, the high stocks to orders ratio raises questions about the sustainability of high commodity prices in coming months.

Sources: Li & Fung; CFLP; I-Net Bridge; Plexus Asset Management.

The significant gap that has opened between China’s new export orders PMI and metal prices specifically is most worrying.

Sources: Li & Fung; CFLP; I-Net Bridge; Plexus Asset Management.

Although China’s Shanghai Composite Index pulled back to be more or less in line with the PMI, I think that there is still downside ahead and will bide my time before venturing into that market.

Sources: Li & Fung; CFLP; I-Net Bridge; Plexus Asset Management.

Tags: Analysis Indicates That, Asset Management, China Manufacturers, Chinese Authorities, Chinese Manufacturers, Commentators, Downside, Export Orders, External Sector, Fallout, Frenzy, Management Sources, Manufacturing Industry, Manufacturing Sector, Overstocked, Pattern Sources, Pmi, Property Sector, Seasonal Pattern, Seasonal Patterns
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Emerging Markets Cheat Sheet (January 3, 2011)

Monday, January 3rd, 2011

Emerging Markets Cheat Sheet (January 3, 2011)

Strengths

• China’s total online population reached 450 million at the end of November, growing 20.3 percent year-over-year and up from 420 million at the end of June. Around 33.9 percent of the country’s population has used the internet, higher than the world average of 30 percent.
• The Chinese yuan strengthened beyond 6.6 per U.S. dollar for the first time in 17 years, bringing total appreciation for 2010 to 3.6 percent, ahead of President Hu Jintao’s state visit to Washington in January. Chinese authorities may have allowed this move to tame domestic inflation as well.
• Russian service industries accelerated growth this month at the fastest pace since May, according to HSBC. The Service Purchasing Managers’ Index (PMI) rose from 54.1 in November to 56.4. The survey based index indicates a contraction when it is below 50 and growth with a figure above 50.
• The Republic of Georgia attracted more than two million visitors in 2010, the highest figure since 2003. The number of visitors has increased since Georgia’s five day war with neighboring Russia, when tourism’s share of GDP fell to 3.6 percent. Georgia’s economy is projected to expand as much as 6.5 percent in 2010.
• Ten years ago, when the Economist Intelligence Unit calculated scores for countries’ sovereign-debt risk, the riskiest countries by some distance were Russia, Brazil and China, three of the four emerging-market BRICs. Now, some European economies look riskier, according to the Economist.

Weaknesses

• China’s central bank raised one-year benchmark lending and deposit rates by 25 basis points on Christmas day to better manage rising inflation expectations and preempt a usual surge in lending at the beginning of a new year. Short- term interbank liquidity has dropped significantly so far this month.
• The HSBC / Markit China Manufacturing Purchasing Managers’ Index declined to 54.4 in December from 55.3 November, the first moderation in five months, as both new orders and production eased.
• Hungary sovereign ratings by all three agencies are at the lowest level of the past ten years and all three agencies maintain a negative outlook. Controversial decisions include the financing of permanent tax cuts with temporary revenue sources, reversal of pension reforms and changes to the independent Fiscal Council.

Opportunities

• China’s real interest rate has become increasingly negative even after the most recent central bank hike and ranks among the lowest in G-20 countries. Adjusted for inflation, Chinese savers now would lose 2.4 percent on their one-year bank deposits. With the government’s resolve not to relax policy restrictions toward physical residential properties, Chinese investors, still deprived of investable asset classes apart from bank deposits, real estate, and stocks, are likely to allocate more liquidity in domestic equities next year.
• Savings and debt service payments take a relatively small toll on the average household budget in Russia, opening it for discretionary spending on goods and services. Renaissance Capital expects retail spending to grow 13 percent in 2011, with spending on consumer electronics exceeding 20 percent.

Threats

• The overall tax burden for the oil sector will rise as Russia begins to equalize heavy and light oil products. From February 2011, heavy and light product export duty will be set at 46.7 percent and 67 percent of crude export duty vs. 38 percent and 73 percent currently, respectively. From 2012, heavy and light product export duty will be set at 52.9 percent and 64 percent of crude export duty, and from 2013 the duty will be equalized for heavy and light products at 60 percent of crude export duty.

Tags: Basis Points, Brazil, BRIC, BRICs, China Manufacturing, Chinese Authorities, Chinese Yuan, Christmas Day, Debt Risk, Domestic Inflation, Economist Intelligence Unit, Emerging Market, Emerging Markets, European Economies, Hu Jintao, Inflation Expectations, Interbank, Markit, President Hu Jintao, Purchasing Managers Index, Republic Of Georgia, Russia, Russian Service, S Central, Sovereign Debt
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Rebalancing the World (Mobius)

Monday, December 6th, 2010

by Mark Mobius, Vice-Chairman, Franklin Templeton Investments

It seems we are currently witnessing a largely one-way flow of capital, as money moves from countries of disinflation or deflation to countries with inflation, possibly perpetuating the situation for both. Most developed economies are still mired in slow growth, prompting measures to kick-start their domestic economies such as continued loose monetary policy, quantitative easing and government bailouts, while deficits are spiraling out of control.

The rapid growth in money supply stemming from these expansionary policies is leading to rising commodity prices as investors have higher inflation expectations and thus invest in commodities and equities. This, of course, pushes up domestic prices since the value of raw materials is increasing. As a result, authorities in emerging economies with high growth, such as Brazil, China and India, are trying various methods to prevent their own economies from overheating.

For example, a few weeks ago, the U.S. Federal Reserve launched its second round of quantitative easing or QE2, and more recently, the European Union and the International Monetary Fund bailed out Ireland. Meanwhile, several months ago, Brazil, a country that already saw hyperinflation in the past and is very concerned about inflationary pressures, imposed a tax on foreign inflows. The Indian government has gradually tightened monetary policy for most of this year, and the Chinese authorities have also selectively tightened policy to battle inflation. With commodity prices on the rise, I believe inflation is going to be a continuing challenge for a number of high-growth emerging countries.

In order to “equalize” these opposing economic trends—deflation and inflation—I believe that we need to see a gradual restriction in monetary expansion, an elimination of non-productive spending (reducing government activities) and less borrowing on the part of deficit nations. To combat inflation without endangering economic growth, we need to see investments made in high-productivity industries and services. If productivity goes up then prices move down or stay steady. However, if investments are made in unproductive or even counter-productive activities such as increased government regulatory agencies and high-cost regulations, then productivity will suffer and inflation will ensue.

In the near term, central banks in emerging countries are likely to buy dollars to prevent their currencies from rising too fast. For now, capital flows into emerging stock markets are being counterbalanced by capital raised in new and secondary stock sales. If capital keeps pouring in and companies that have raised cash begin using it to buy assets, prices could be pushed up in a snowball effect.

Therefore, for long-term equilibrium, we need to see a rebalancing of the world economy. In recent history, financial authorities in the developed world have encouraged a period of easy credit and loose monetary policy, driving a debt-fuelled rise in consumption. Meanwhile, the household savings rate in many emerging markets continues to be at very high levels, and is projected to grow. There needs to be more ‘balance’ in the world economy, so high-savings countries should spend more and develop their own vibrant domestic market as we see in the U.S. I’ve seen this shift gradually take place in China and India. However, in order to encourage people to spend there needs to be pension systems, health care systems and free schooling, so that people do not need to save so much for such services.

Copyright (c) Franklin Templeton Investments

Tags: Brazil, Chinese Authorities, Commodities, Commodity Prices, Deflation, Disinflation, Economic Trends, Emerging Economies, Franklin Templeton Investments, Government Activities, Hyperinflation, India, Indian Government, Inflation Expectations, Inflationary Pressures, International Monetary Fund, Mark Mobius, Monetary Expansion, Monetary Policy, Money Moves, Money Supply, Raw Materials, Vice Chairman
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China Halts Rare Mineral Exports To US And Europe, Prices Set To Surge (?)

Tuesday, October 19th, 2010

This article is a guest contribution by ZeroHedge.com

The latest escalation in the binary version of modern warfare (i.e., that fought with a Bloomberg instead a stealth fighter), comes from China, which the NYT reports has just halted shipment of rare minerals to the US: “China, which has been blocking shipments of crucial minerals to Japan for the last month, has now quietly halted shipments of some of those same materials to the United States and Europe, three industry officials said on Tuesday.” As we disclosed a few weeks ago, prepare for an explosion in various rare metal prices…

More from the NYT:

The Chinese action, involving rare earth minerals that are crucial to manufacturing many advanced products, seems certain to further ratchet up already rising trade and currency tensions with the West. Until recently, China typically sought quick and quiet accommodations on trade issues. But the interruption in rare earth supplies is the latest sign from Beijing that Chinese officials are willing to use their growing economic muscle.

“The embargo is expanding” beyond Japan, said one of the three rare earth industry officials, all of whom insisted on anonymity for fear of business retaliation by Chinese authorities. They said Chinese customs officials imposed the broader shipment restrictions Monday morning, hours after a top Chinese official had summoned international news media Sunday night to denounceUnited States trade actions.

China mines 95 percent of the world’s rare earth elements, which have broad commercial and military applications, and are vital to the manufacture of diverse products including large wind turbines and guided missiles. Any curtailment of Chinese supplies of rare earths is likely to be greeted with alarm in Western capitals, particularly because Western companies are believed to keep much smaller stockpiles of rare earths than Japanese companies do.

Dudley Kingsnorth, a rare earth market analyst at the Industrial Minerals  Company of Australia in Perth, said that if China adopted a further reduction in export quotas of 30 percent for next year, manufacturers elsewhere could face difficulties.

“That will create some problems,” he said. “It’ll force some people to look very carefully at the use of rare earths, and we might be reverting to some older technologies until alternative sources of rare earths are developed.”

Actually, no. All it means is that a little of all the record liquidity sloshing around is about to make its way to the latest bubble. And for those wondering just what the rare mineral bubble will look like, here is a reminder:

And the narrative we presented in early October:

Ever heard of the oxides of Lanthanum, Cerium, Neodymium, Praseodymium and/or Samarium? With price surges between 250% and 600% in one quarter, you may wish you have. The recent pissing contest between Japan and China, which culminated with a temporary export ban in rare earth metals such as those named above, translated in ridiculous price jumps in some compounds most have never even heard of, let alone traded, yet which would have made not only the year, but the decade for hedge funds invested in them. And with China producing more than 90% of the world’s supply of rare earth minerals, coupled with increasing probability of escalating global (and regional) trade wars, it is distinctly possible that the gains recorded recently in gold will be dwarfed by the imminent Samarium Oxide bubble, which 3 months ago was trading at $4/kg and is now over $30.

Again, we were correct. The next move will be higher. Much higher.

Copyright (c) ZeroHedge.com

Tags: Binary Version, China, Chinese Authorities, Chinese Customs, Chinese Official, Customs Officials, Diverse Products, Guided Missiles, Industry Officials, Mineral Exports, Nyt, Quiet Accommodations, Rare Earth Elements, Rare Earth Minerals, Rare Earths, Rare Metal, Rare Mineral, Rare Minerals, Stealth Fighter, Western Capitals, Wind Turbines
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