Declining Long Term Trendline Suggests Near Term Peak in Equities

Tuesday, August 14th, 2012

by Don Vialoux, EquityClock.com

Upcoming US Events for Today:

1. Retail Sales for July will be released at 8:30am. The market expects an increase of 0.3% versus a decline of 0.5% previous. Excluding Autos, the market expects an increase of 0.4% versus a decline of 0.4% previous.
2. Producer Price Index for July will be released at 8:30am. The market expects an increase of 0.2% versus an increase of 0.1% previous. Core PPI is expected to increase by 0.2%, consistent with the previous report.
3. Business Inventories for June will be released at 10:00am. The market expects an increase of 0.2% versus an increase of 0.3% previous.

Upcoming International Events for Today:

1. French GDP for the Second Quarter will be released at 1:30am EST. The market expects a year-over-year increase of 0.2% versus an increase of 0.3% previous.
2. German GDP for the Second Quarter will be released at 2:00am EST. The market expects a year-over-year increase of 1.0% versus an increase of 1.2% previous.
3. Great Britain Consumer Price Index for July will be released at 4:30am EST. The market expects a year-over-year increase of 2.3% versus 2.4$ previous.
4. Euro-Zone GDP for the Second Quarter will be released at 5:00am EST. The market expect a year-over-year decline of 0.5% versus no change (0.0%) previous.
5. German Economic Sentiment Survey for August will be released at 5:00am EST. The market expects –18.5 versus –19.6 previous.

Recap of Yesterday’s Economic Events:

The Markets
Equity markets traded mixed on Monday during a low volume session that saw the S&P 500 trade on either side of the 1400 mark. Volume has been a significant factor in recent trade, showing some of the lowest levels in years. Monday was no different with the S&P 500 ETF (SPY) showing the lowest volume day since April 25th 2011, approximately the 2011 peak. Volume has clearly been problematic as it provides evidence of a lack of conviction to equities; investors are showing no impetus to buy or sell. Investors are clearly waiting for a catalyst, preferably in the form of central bank easing to give equities a quick boost, despite how bad economic fundamentals get. The sustainability of this is obviously questionable.

Equity markets have had a substantial run since the low set at the beginning of June. The S&P 500 has added over 140 points from the low of 1266 to the recent high of 1407. Resistance is now at hand, as presented by the March and April peaks. Reaction to this peak will be critical in determining the strength behind this market. Rejection from this level could chart a double top, which would likely follow with a significant selloff. A healthy breakout, ideally accompanied by a pickup in volume, could see the continuation of this rally into the fall, a period that is typically negative on a seasonal basis. An increase in the number of stocks breaking out to new 52-week highs is an ideal tell to hint of a breakout to come. Unfortunately, the number of stocks breaking to new 52-week highs has been declining since the start of July, a situation similar to what was realized from February through April of this year in which equity market trends remained positive, but momentum deteriorated prior to a peak. This divergence compared to recent price activity could be warning of a near-term peak in equities.

World equity benchmarks are also approaching a level of resistance presented by a declining long-term trendline. Reaction to this point of resistance is expected, potentially bringing an end to the bullish rally that has remained intact for two and a half months. Descending triangle patterns, potentially a bearish setup, can also be derived from the charts, suggesting negative things ahead for equities. June’s lows will be critical point to watch upon any pullback from the recent intermediate positive trend.

Sentiment on Monday, as gauged by the put-call ratio, ended bullish at 0.80. The ratio is back within the bounds of the falling wedge pattern.

S&P 500 Index

Chart Courtesy of StockCharts.com

TSE Composite

Chart Courtesy of StockCharts.com

Horizons Seasonal Rotation ETF (TSX:HAC)

• Closing Market Value: $12.36 (down 0.08%)
• Closing NAV/Unit: $12.37 (down 0.15%)

Performance*

* performance calculated on Closing NAV/Unit as provided by custodian

Click Here to learn more about the proprietary, seasonal rotation investment strategy developed by research analysts Don Vialoux, Brooke Thackray, and Jon Vialoux.

Copyright © EquityClock.com

Tags: Amp, Business Inventories, Consumer Price Index, Conviction, Core Ppi, Decline, Don Vialoux, Economic Events, Economic Sentiment, ETF, ETFs, Euro Zone, GDP, German Gdp, great Britain, Impetus, Producer Price Index, Report Business, Retail Sales, Second Quarter, Thackray, Trendline, Volume Session
Posted in Markets | Comments Off

David Rosenberg On Headless Chickens, Topless Americans, And Bottomless Europeans

Thursday, August 2nd, 2012

The S&P 500 has made little headway for two years running and as Gluskin Sheff’s David Rosenberg points out, it first crossed 1380 on July 1, 1999 and since then has run around like a headless chicken (while other asset classes have not). Meanwhile, Europe’s bottomless pit of debt deleveraging (which is as much a problem for the US and China but less ion focus for now) makes the entire discourse of some new and aggressive intervention by the ECB even more ridiculous (and all so deja vu); and the US is facing up to an entirely topless earnings season as revenues are coming in at only 1.2% above last year as it appears Q2 EPS is on track for a 0.2% YoY dip – with guidance falling fast. But apart from all that, Rosie sees the only source of real buying support for the stock market is the stranded short-seller forced to cover in the face of CB-jawboning as there is little sign of long-term believers stepping into the void.

Headless Chicken Markets: BULL OR BEAR?

The cup is half full camp would lay claim that the S&P 500 is not only still up on the year in what has been a challenging 2012 but it is more than twice the lows posted in March 2009.

A discerning bear, however, would point to the fact that the index has made little headway for two years running and keep in mind that it first crossed the 1,380 mark on July 1, 1999 and since then:

• It has crossed 59 times above and below the 1,380 level on a closing daily basis
• Gold is up 515%
• The producer price index is up 45%
• The consumer price index is up 37%
• The 10-year Treasury total return index is up 160%
• The 30-year Treasury total return index is up 215%

So bench-marked against gold prices, producer prices, consumer prices, or bond prices, the secular bear market in equities remains an ongoing phenomenon.

Bottomless Europe: UNRESOLVED DEBT ISSUES

Quote of the day:

What can they do and what would bring about a sustained turnaround in market confidence? There I struggle to find something that would really be convincing.

 

From Jacques Cailloux, chief European economist for Nomura, in yesterday’s NYT (page B3).

Indeed, this entire discourse on some new and aggressive intervention by the ECB is all so ridiculous, and all so déjà vu. The ECB has already done two LTROs and bought bonds outright before. Draghi is still throwing spaghetti against the wall to see what sticks. The bottom line is that monetary policy is a blunt tool to deal with structural insolvency issues as they pertain to bank and government balance sheets. The ECB has only a temporary effect and then bond yields go back up in the periphery. Until there is a move to solve the issue of too much debt relative to the economy’s capacity to service the debt, the problem will re-emerge.

Meanwhile, the credit crunch in the euro area continues unabated, exacerbating recessionary pressures. Cross-border lending by German banks to the periphery has declined nearly 20% in the past seven months to stand at the lowest level since 2005. Overall bank loan books in Spain. Greece and Portugal have contracted 2% as deposits shift to the northern regions. At the same time, the entire regional banking sector is beset by a trillion euros worth of impaired loans, which have expanded 9% from a year ago (2.5 trillion euros are non-performing) with Spain, Ireland and Italy suffering with the largest increases.

Europe for some reason continues to believe that a debt crisis can be fought with more debt. Maybe because they think this strategy has worked in the United States. But it hasn’t and the U.S. is either recession-bound or at best left with a listless economy, and also will likely soon face its own existential moment from a fiscal crisis perspective if it doesn’t get its act together. If left unchecked, the day will come when the entire revenue base will be absorbed by interest expense, defense, health care and social security.

TOPLESS EARNINGS SEASON

The numbers vary by the hour and the data source. but it looks like Q2 operating EPS of S&P 500 companies is on track for a 0.5% YoY dip — by far the weakest since the recovery began three years ago (and well below consensus views of +3% a month ago) . The big problem !s revenues which are coming in just 1.2% ahead of year-ago levels and only 43% are beating their sales targets the lowest since the first quarter of 2009 (only the fourth time in the past 10 years that the beat-rate was under 50%).

The other problem is guidance. The WSJ cites research that finds that 40 companies have already warned about Q3 versus only eight who have raised guidance. We have not seen a gap like this since the onset of the tech wreck in the second quarter of 2001. The bottom-up consensus is now looking for just +3.3% for YoY EPS growth for Q3 — last October, the analysts collectively were calling for 14.5% for the quarter. Talk about a mea-culpa.

Summing It All Up

All that said, the key for all of us is to understand that we are still in the throes of a debt deleveraging cycle that first engulfed the housing and consumer sectors and is now attacking the government sector in country after country. It is not only Europe. China and the U.S.A. too. There is still far too much debt at all levels of society relative to the world’s capacity to service it. This is a critical reason why government and central bank policies aimed at fighting traditional recessions in the past have so far been ineffective and now we have monetary authorities dipping into the toolbox of unconventional balance sheet expansions and contortions.

We have governments battling a debt deleveraging cycle of epic proportions, and by definition, these phases involve debt paydowns, defaults, and rising savings rates — a highly deflationary brew. And it also means that we now reside in a world of fat-tail distribution risks, where the range of outcomes is unusually wide, as opposed to the comfort zone of a classic post-WWII cycle, where we understood what caused recessions and we knew exactly what it took to get out of them, and where there was a much thinner tail to the probability curve.

May those days rest in peace. But once we can acknowledge that we are in a fat-tail world, it is akin to moving into the acceptance phase of the classic five Kubler-Ross stages of grief. This is no time for denial.

Tags: 10 Year Treasury, 30 Year Treasury, Aggressive Intervention, Asset Classes, Basis Gold, Bond Prices, Bottomless Pit, Chicken Markets, Consumer Price Index, Daily Basis, David Rosenberg, Debt Issues, Earnings Season, Gluskin Sheff, Gold Prices, Headless Chicken, Headless Chickens, Producer Price Index, Producer Prices, Secular Bear Market
Posted in Markets | Comments Off

Energy and Natural Resources Market Radar (July 30, 2012)

Sunday, July 29th, 2012

Energy and Natural Resources Market Radar (July 30, 2012)

Strengths

• The yield on 10-year Treasury notes closed the week at 1.534 percent, still below the June Consumer Price Index of 1.7 percent. The dividend yield of the stocks in the Global Resources Fund’s portfolio increased from last week to an average of 3.68 percent.
• Eagle Ford oil production more than tripled in May year-over-year, according to the Texas Railroad Commission, and this may be an underestimate. Experts believe that production here in Texas may reach one million barrels a day in the next couple of years.
• Speculation of Europe’s plan to spur economic growth by purchasing government bonds caused oil to increase 2.2 percent this week. Copper also climbed 2.1 percent from Tuesday this week on the New York Mercantile Exchange. Mario Draghi said that the ECB will do whatever it takes to “preserve the euro.”
• Peru’s mining ministry reported that from January to May, production of copper increased 2.5 percent. It was also noted that production in May was up 8.04 percent year-over-year.

Weaknesses

• The same report from the mining ministry of Peru also showed a decline in zinc and iron ore production. Zinc declined about 4.5 percent during the January-to-May time period and iron ore declined further at 16.02 percent.
• The Western Australian Mines Minister has banned coal mining in the Margaret River region based on the “potential ground water impacts.” All applications to mine in this area will be denied and companies have already started to withdraw their requests. Mineral titles already granted, however, will remain intact but any coal mining project proposals will be rejected.

Opportunities

• Tenova Mining and Minerals was awarded a contract to design a copper ore handling and processing system as well as a solvent extraction and electro-winning plant, which could potentially produce 80,000 metric tons per year of copper cathodes. This will support Minera Antucoya’s copper oxide deposit in Chile.
• Aluminum Bahrain BSC (Alba) has hired BNP Paribas to assist the company in a $2.5 billion dollar expansion plan to add 400,000 metric tons of capacity annually (currently 881,000 metric tons) to its operations. According to Reuters, this could be completed by 2015. Alba is currently the fourth largest aluminum smelter.
• In China, the capital of Hunan Province has announced plans of a 195 project undertaking for 2012. It will involve airport, urban transit, and residential infrastructure development.

Threats

• Iron ore prices are now at $116.20 per metric ton, the lowest since December 2009. Small traders in China are now selling their stockpile for a loss, and this would have a very negative impact on the commodity if larger traders were to follow.
• Lakshmi Mittal, CEO of ArcelorMittal, the world’s largest steel and mining company, said that the steel market would remain week going into the second half of the year, especially in Europe. The company lowered expectations of European consumption to between 3 percent and 5 percent for 2012.

Tags: 10 Year Treasury, Coal Mining, Consumer Price Index, Copper Cathodes, Copper Ore, Dividend Yield, Eagle Ford, Government Bonds, Handling And Processing, Margaret River Region, Mario Draghi, Market Radar, Mineral Titles, New York Mercantile Exchange, Ore Production, Project Proposals, Resources Fund, Texas Railroad Commission, York Mercantile Exchange
Posted in Markets | Comments Off

Energy and Natural Resources Market Radar (July 23, 2012)

Saturday, July 21st, 2012

Energy and Natural Resources Market Radar (July 23, 2012)

Strengths

• The yield on 10-year U.S. Government Treasury Notes dropped 2 percent from last Friday, closing the day at 1.4576 percent, below the June Consumer Price Index of 1.7 percent. Currently, the average dividend yield of stocks in the Global Resources Fund portfolio is 3.64 percent.
• Bloomberg reported that coal workers have gone on strike at a Glencore mine in Northern Colombia, and output is expected to be cut by half. The workers are demanding higher wages to compensate for the increases seen in production. The National Federation of Coal Producers has forecasted that Colombia, the largest supplier of coal in South America, will increase output by 16 percent this year.
• Copper futures reached their highest level this past Thursday at $3.534 per pound after about two-and-a-half weeks. This came after China’s Premier, Wen Jiabao, commented that China’s employment situation is “severe” and that China will make job creation the number one priority when undertaking plans of economic restructuring.
• OPEC will begin cutting shipments as oil sanctions continue to be imposed upon Iran. Exports are estimated to drop by 0.9 percent per day until August 4 (excluding Angola and Ecuador). Brent increased 4.3 percent through the week before dropping slightly on Friday.
• Clarkson reported that Chinese oil demand is up about 15 percent for this year, 10 percent more than expectations, demonstrating that China’s slowing GDP growth rate does not translate into a slowing energy demand.

Weaknesses

• Rio Tinto is beginning to cut an undisclosed number of jobs at its Clermont mine in Australia due to low thermal coal prices. Output at the Clermont mine was down 200,000 tons year-over-year from January to June.
• Spot iron ore prices dropped to 8-month lows this week, hovering at $125 per metric ton. The last time prices were this low was in November 2011, when iron ore was recovering from a year-low of $116.90 in October. Mining companies such as Anglo American and BHP continue to increase output despite weaker demand from China, which may contribute to a global surplus in 2013, according to Reuters.
• Worldsteel’s June crude steel output data shows that global crude steel output decreased 0.2 percent year-over-year for the first time since January. Western Europe’s output is down 5.3 percent year-over-year, however, second quarter production was up 0.9 percent year-over-year.

Opportunities

• Italy is aiming to attract $18 billion in investment from oil and gas exploration companies in an effort to decrease government expenditure and put an ease to its debt situation. Mario Monti, the Prime Minister of Italy, wants to soften the oil and natural gas exploration ban that was imposed after the Gulf of Mexico spill in 2010. Ninety percent of Italy’s oil and gas demand is currently being imported.
• Codelco is seeking rights to the Junin Deposit in Ecuador that has enough copper and molybdenum reserves to make it a strong competitor with top mining companies in Peru and Chile, two countries that are dominant in the global supply side of these metals. Reuters reported Santiago Yepez, President of Ecuador’s Mining Chamber, as saying that “Junin could be one of the most significant copper deposits in South America.”
• HSBC reported that demand for coking coal is expected to grow by 4 percent per year through 2016. Australia will look to gain from this as it is likely to remain the dominant producer of coking coal through 2030, with control of more than half of the market share.
• Barclays highlighted that the biggest four Chinese banks have increased lending in July, as new loans in the first half of July are double the amount given out in the same period last month. These loans account for about 35 percent to 50 percent of total new loans.
• Clarkson reported that China’s demand for Very Large Crude Carriers (VLCC) has risen 75 percent since 2008. China’s oil demand represents one-fifth of OECD per capita demand, and if that demand increases to Mexico levels (representing 50 percent of OECD per capita demand), China will need 225 new VLCC tankers.

Threats

• Zambia, Africa’s largest coal producer, has proposed a new regulatory act requiring foreign mining companies to place the revenue generated from export sales in local banks for 30 days. Deputy Finance Minister Miles Sampa said this will go into effect within the coming weeks.
• Reforms of increasing nationalism are evident in Bolivia’s recent possession of one of Glencore’s tin and zinc mines. The government wants to take more control over the mining industry. According to Bloomberg, Vice President Garcia Linera said in an interview that “We’re not going to hand our country to foreigners who destroyed Bolivia and left it stagnating for 20 years.”

Tags: Chinese Oil, Coal Prices, Coal Producers, Coal Workers, Consumer Price Index, Copper Futures, Dividend Yield, Economic Restructuring, Employment Situation, Gdp Growth Rate, Iron Ore Prices, Market Radar, Northern Colombia, Oil Sanctions, Premier Wen Jiabao, Resources Fund, Rio Tinto, Thermal Coal, Treasury Notes, Undisclosed Number
Posted in Markets | Comments Off

Is Higher Inflation on the Horizon?

Wednesday, July 18th, 2012

by Orhan Imer, Ph.D., Columbia Asset Management

For nearly two decades, inflation in the U.S. has been fairly contained except for a few periods of moderate acceleration around peak levels of economic activity. More recently, headline inflation as measured by the year-over-year change in the CPI-U (Consumer Price Index for Urban Consumers) declined from 3.9% in September 2011 to 1.7% in May 2012, driven primarily by the slowdown in the U.S. economy and the sharp drop in energy and commodity prices.

While the current level of inflation remains subdued, investors should be prepared for risk of longer-term inflation associated with highly accommodative monetary and fiscal policy actions taken by the Fed and the U.S. Government since 2008.

During the past several years, the Fed’s monetary policy decisions, intended to stimulate U.S. growth, have become less centered on containing inflation. In particular, the Fed’s near-zero interest rate policy and expanded balance sheet along with deficit spending by the government to lift the economy out of recession have raised the risk of future inflation. Other conditions that may add to inflationary pressures over the next decade and beyond include:

1. Accelerated government spending on healthcare and other non-discretionary spending programs (such as Social Security, Medicare and Medicaid) necessitating continued high levels of federal borrowing
2. Demographic shifts in the U.S. population as baby boomers begin to retire leading to lower savings and productivity
3. Higher tax rates on income and capital gains raising the cost of capital dampening capital investment and productivity
4. Weakening of the U.S. dollar due to Fed’s interest rate policy and massive monetary easing which may promote inflation through higher energy and commodity prices
5. Emerging market countries representing a growing share of global GDP and driving up the demand for scarce resources (commodities, land and other real assets)

While the recent slowdown of the global economy along with the continuing weakness in the U.S. housing market and excess manufacturing capacity in many industries may keep inflationary pressures at bay near term, investors should protect themselves against unexpected inflation, as surprises in inflation can have a meaningful impact on the performance of inflation-sensitive assets.

Read more in this week’s Perspectives.

See more Market Insights from Columbia Management.

Tags: Baby Boomers, Columbia Asset Management, Commodity Prices, Consumer Price Index, Deficit Spending, Demographic Shifts, Discretionary Spending, Emerging Market Countries, Global Gdp, Headline Inflation, Imer, Inflationary Pressures, Interest Rate Policy, Monetary And Fiscal Policy, Monetary Policy Decisions, Peak Levels, Policy Actions, Real Assets, Term Inflation, Urban Consumers
Posted in Markets | Comments Off

Energy and Natural Resources Market Radar (July 16, 2012)

Saturday, July 14th, 2012

Energy and Natural Resources Market Radar (July 16, 2012)

Strengths

• The yield on 10-year U.S. Treasury Notes closed at 1.488 percent on Friday, below the May Consumer Price Index of 1.7 percent, giving investors a negative real return. Comparatively, the Global Resources Fund’s portfolio currently has an average dividend yield of 3.75 percent.
• China’s GDP grew 7.6 percent for the second quarter year-over-year, slightly lower than expected, leading to a gain in copper and crude oil futures toward the end of the week. It seems that the market is expecting a stimulus to come about from China to offset all the pressures of slowing growth. The global financial crisis was the last time China’s demand slowed this much, having a GDP increase of only 6.2 percent during the first quarter of 2009 year-over-year.
• Corn prices hit 52-week highs this week after the U.S. Department of Agriculture estimated a drop in crop yields of 12 percent, the largest month-over-month drop in nearly a decade. Jerry Norton, chair of the Interagency Commodity Estimates Committee, stated that “It’s a very unusual situation.” Only 40 percent of the nation’s corn crop is in good to excellent condition, significantly lower from last year’s 69 percent rating.
• Oil prices (Brent) gained over 4 percent this week to close at a six-week high of $102.76 per barrel as hopes for additional stimulus from the Chinese government boosted sentiment.

Weaknesses

• Statoil was set to shut down operations until the government of Norway intervened on the 16-day oil strike, putting an end to the restriction of supply that was driving up oil prices. The workers were forced back to work and the National Wages Board will attempt to resolve the conflict.
• Although China imports were up year-over-year in June, they increased by only 6.3 percent, less than half of forecasts, contributing further to an already stressed demand with regard to commodities. One factor of the increase in China’s trade surplus can be attributed to the excess stockpiling measures China took before Indonesia’s export tax on metals went into effect in May.
• China’s main coal mining provinces have plans to cut back on output in an effort to alleviate market conditions. According to Platts, a number of Shanxi-based miners have already cut output by 20 to 30 percent since May.
• U.S. net new aluminum orders fell sharply in June, according to data released from the Aluminum Association. Aluminum orders (less can stock) fell 4.4 percent year-over-year in June.

Opportunities

• China Copper Mines has applied to exploit five mineral waste dumps in Zambia which may have a yield of 600 metric tons of copper cathode per year. This project will increase China’s presence in Zambia, Africa’s largest producer of copper.

• Julio Velarde Flores, President of the Central Reserve Bank of Peru, commented this week on the growth prospects of the country. He is optimistic and believes they can exceed the economic growth targets for the year. Peru, the world’s second largest producer of copper, is in the process of seeking investment from wealth funds in Singapore.
• Anglo American has reached a deal with the government of Moquegua to build a $3 billion Quellaveco copper mine, according to Oscar Valdes, Prime Minister of Peru. 220,000 tons of copper per year is estimated to come out of Quellaveco, which is close to one-fifth of Peru’s 2011 total output.

Threats

• By 2016, the Democratic Republic of Congo hopes to triple its current output of copper to 1.5 million, according to Mines Minister Martin Kabwelulu. The Congo has about half of the world’s cobalt reserves, and is aiming to boost output by 65 percent. The government, however, plans on increasing the state’s stake in mining operations which will be used to promote the growth of industry, the country, and its people.
• According to Reuters, Baoshan Iron & Steel, China’s biggest listed steelmaker, will cut August prices of its main products by 4.6 percent as seasonal demand slows. Global Times recently reported that China’s domestic steel prices hit two-year lows during the first week of July. Until we see more quantitative easing in China, we will be unlikely to see any large gains in steel prices in the near future.
• The U.S. Energy Information Administration lowered its 2013 forecast of global oil demand to 730,000 barrels per day. The International Energy Agency however took a contrarian viewpoint with their forecast, estimating that oil demand would rise by one million barrels per day, 1.1 percent higher than in 2012, but still lower than levels seen prior to the financial crisis.

Tags: 52 Week Highs, China Imports, Consumer Price Index, Copper Futures, Corn Crop, Corn Prices, Crop Yields, Crude Oil Futures, Department Of Agriculture, Dividend Yield, Gdp Increase, Global Financial Crisis, Global Resources, Government Of Norway, Market Radar, Oil Strike, Resources Fund, Time China, Treasury Notes, U S Treasury
Posted in Markets | Comments Off

China’s PMI, Hong Kong Retail Disappoint; Philippines, Russia, and Korea Lead in Improvement (June 4, 2012)

Monday, June 4th, 2012

Emerging Markets Radar (June 4, 2012)

Strengths

• The Philippine’s GDP increased 6.4 percent year-over-year in the first quarter this year, greater than estimated, and exceeded the previous quarter’s revised 4 percent. In Korea, industrial production rose 0.9 percent month-over-month in April, the biggest increase in three months, and it saw the Consumer Price Index (CPI) rise 2.5 percent in May, holding at a 21-month low.
• Thailand’s CPI for May rose 2.53 percent year-over-year, in line with expectations.
• Hunan Province in central China announced a provincial investment plan totaling RMB 4.2 trillion for 12th 5-years, or about Rmb 800 billion a year.
• China’s State Council has announced it will provide RMB 26.5 billion in subsidies to promote energy-efficient appliances, one of a series of stimulus measures that the market is expecting from the Chinese government.
• Turkey’s trade deficit was much better than expected in April, down to $6.6 billion from $9.1 a year ago.  Exports have been resilient in the first four months of 2012, rising by 10.9 percent over the same period a year ago. The eurozone is Turkey’s largest partner, and as a result of weaker demand in the region, exports to eurozone countries fell by 6.1 percent year-over-year in January through April. On the other hand, exports to North Africa rose by 63.3 percent (after falling by 23.9 percent in 2011), and exports to the Middle East increased by 35.5 percent.

Weaknesses

• China’s official PMI for May was 50.4 versus the estimate of 52; the reading was also the lowest in the year. The new order index dropped 470 basis points to 49.8 percent, which doesn’t bode well for productivity in the next few months if the downtrend is not stopped.  The HSBC final China flash PMI was 48.4 versus 49.3 in the previous month, a consecutive seventh month below 50. A PMI below 50 indicates industrial activities are contracting. HSBC China flash PMI tells more about export contraction at the moment.
• Hong Kong retail sales grew 11.4 percent in April versus estimate 16.4 percent, disappointing the market.
• Korean exports fell 0.4 percent year-over-year in May, exceeding estimates but still declining for a third month.
• The European Central Bank said that Hungary’s amended draft law still fails to address a number of previously highlighted concerns over central bank independence and executive powers of monetary council.

Opportunities

• The Russian manufacturing sector gained further growth momentum in May, with PMI remaining above 50.0 for the eight month running, rising to 53.2 in May.  Output and employment are higher, while inflationary pressures remain relatively weak.
• The Philippine’s GDP went up 6.4 percent in the first quarter, illustrating the fact that infrastructure investment and domestic demands are driving economic growth and corporate profits.

Threats

• With China PMI in May weakening and key sub-indices reflecting weak demand in the economy, this increases the probability of further policy relaxation and accelerated approval of infrastructure projects.
• Czech PMI fell to 47.6 from 49.7 in April, pointing to downside risk in coming quarters. HSBC survey data and anecdotal evidence suggested weak demand from both domestic and external markets, linked to the crisis in Western European economies.

Tags: Basis Points, Central China, Chinese Government, Consumer Price Index, Emerging Markets, Energy Efficient Appliances, Eurozone Countries, First Quarter, Four Months, GDP, Index Cpi, Investment Plan, Korea Industrial, North Africa, Pmi Hong Kong, Provincial Investment, Stimulus, Subsidies, Trade Deficit, Trillion
Posted in Markets | Comments Off

The Economy and Bond Market (May 21, 2012)

Saturday, May 19th, 2012

The Economy and Bond Market (May 21, 2012)

Treasuries rallied this week, sending long-term yields sharply lower. With headlines touting bank runs in Greece and Spain, the risk-off trade was in full swing this week as both gold and the U.S. dollar rallied along with Treasuries. Ten-year Treasury yields hit the lowest level in 60 years this week and German 10-year bonds hit new record lows as part of the risk-off/fear trade.

Strengths

• The consumer price index for April was unchanged and the trend in inflation data is lower.
• Housing starts rose 2.6 percent in April as the housing market remains a bright spot.
• Central banks remain supportive as the Fed minutes released from the April Federal Open Market Committee (FOMC) meeting hinted at more monetary easing if the economy slows. The Bank of England echoed similar thoughts and the market sees higher chances of additional quantitative easing.

Weaknesses

• The Conference Board Leading Economic Index fell 0.1 percent in April.
• Chinese power production rose a modest 0.7 percent, the smallest gain since May 2009.
• Eurozone industrial production fell 0.3 percent in April; expectations were for a gain of 0.4 percent.

Opportunity

• Bonds continue to grind higher and appear to be forecasting benign inflation and slow growth.
• The Federal Reserve appears willing to increase monetary accommodation if necessary, which would be a boost to the bond market.

Threat

• China’s economy is slowing faster than expected and government policy makers appear comfortable with this dynamic.
• Europe remains a wildcard with austerity programs under pressure, creating significant uncertainty.

Tags: 10 Year Treasury, Austerity Programs, Bank Of England, Bond Market, Central Banks, Chinese Power, Consumer Price Index, Economic Index, Eurozone, Federal Open Market Committee, Full Swing, Government Policy Makers, Housing Market, Housing Starts, Inflation Data, Open Market Committee, Record Lows, Term Yields, Treasuries, Treasury Yields
Posted in Markets | Comments Off

The Investing Implications of Price Creep (Koesterich)

Friday, May 18th, 2012

Tuesday’s April Consumer Price Index (CPI) report was generally received as providing more evidence that inflation is under control. What many market watchers missed, however, was that core inflation, inflation excluding volatile food and energy prices, is displaying a worrisome trend for both consumers and investors — price creep, or a gradual and almost imperceptible increase in prices.

Here are just a few of the concerning core inflation data points:

1.)    At 2.31%, April’s core inflation figure was the highest since September 2008.

2.)    April was the seventh month in a row in which core inflation was above the Fed’s stated target of 2%.

3.)    April’s core inflation reading was nominally above the 20-year average.

To be clear, this doesn’t suggest that alarmist predictions for Weimar-style inflation are about to come true. As I’ve mentioned before, it’s hard to argue that inflation in the United States is about to accelerate in any meaningful way this year. Wage growth is slow, most of the US manufacturing sector is still struggling with excess capacity and up until late last year, the dearth of bank lending prevented any acceleration in the money supply.

That said, while double-digit inflation still looks fanciful, the rise in core inflation shows that prices are slowly creeping up and US consumers and investors are likely accepting, and becoming accustomed to, higher prices and higher valuations without even noticing. In other words, US consumers and investors may be the proverbial frog in the pot of slowly heating cold water and this is only likely to continue.

High unemployment will probably prevent any meaningful acceleration in wages, though the skills mismatch between employees and potential employers may still result in some wage acceleration. In addition, monetary conditions are no longer quite so innocuous when it comes to inflation. Bank lending to businesses – measured by commercial and industrial loan demand – is now rising 13% year over year and is close to a 3 ½-year high. Meanwhile, M2 has been growing at about 10% year over year since last summer. Though it still takes time for growth in the money supply to translate into inflation, the monetary environment is slowly turning.

For investors, there are a couple of implications:

1.)    Recognize purchasing power erosion: Even if inflation stabilizes at current levels, over the long term 2.3% inflation would still cause prices to rise by 50% in less than two decades time. In other words, inflation of this magnitude would cause a one-third erosion in purchasing power over the next 18 years. This is an important consideration for investors with large cash positions. And for bond investors – particularly those with large Treasury positions – this is one more reason to question the wisdom of accepting sub-2% yields for the next decade.

2.)    Consider equities and commodities: While uncertainty over Europe and Chinese growth are likely to keep volatility high this summer, investors should consider using near-term market weakness to add to long-term equity and commodity positions. To be sure, neither asset class is likely to offer double-digit returns over the long term. However, both may help investors keep their purchasing power from being slowly heated away.

Source: Bloomberg

Russ Koesterich is the iShares Chief Investment Strategist and a regular contributor to the iShares Blog.  You can find more of his posts here.

Tags: 3 April, Acceleration, Cold Water, Consumer Price Index, Core Inflation, Cpi Report, Dearth, Energy Prices, Excess Capacity, Index Cpi, Inflation Data, Inflation Figure, Manufacturing Sector, Mismatch, Monetary Conditions, Money Supply, Target, Valuations, Volatile Food, Worrisome Trend
Posted in Markets | Comments Off

Emerging Markets Radar (May 14, 2012)

Sunday, May 13th, 2012

Emerging Markets Radar (May 14, 2012)

Strengths

• China’s April Consumer Price Index (CPI) was 3.4 percent, 0.2 percent lower than March but equal to market consensus. This is below the government target of 5 percent, leaving room for further monetary easing if needed.
• Passenger vehicle sales in April were up 13 percent to 1.28 million units, the China Association of Automobile Manufacturers said Wednesday. Sales were forecast to increase 11.3 percent.
• Indonesia’s real GPD rose 6.3 percent for the first quarter, in-line with market expectations. In spite of a slowdown from the previous quarter’s GDP growth of 6.5 percent, the market was satisfied with the outcome considering the headwinds faced by the economies elsewhere.
• Standard & Poor’s stable outlook on Turkey’s long term rating is supported by the agency’s view of the country’s generally effective policymaking and institutions, its moderate and declining public debt burden, and its monetary policy flexibility, said S&P analyst Eileen Zhang.
• Separately, Sam Zell spoke at the annual CFA conference in Chicago.  He mentioned that one of his key theses in emerging markets is to invest in a country 3 to 4 years before it attains investment grade, because the process keeps policy makers honest in the run up to the upgrade.

Weaknesses

• Russian electricity distribution companies were denied transition to Regulated Asset Base (RAB) pricing by the Federal Tariff Service, throwing utility sector reform into disarray.  The Eastern European Fund has no exposure to Russian utilities.
• Taiwan exports disappointed again in April, falling at a faster pace of 6.4 percent vs. 3.2 percent in March, partly due to holidays in China. China’s April trade number was also weak. China’s exports were up 4.9 percent vs. the estimate of 8.5 percent, while imports were up 0.3 percent vs. the estimate of 10.9 percent.
• China just released April economic data. April industrial production was up 9.3 percent year-over-year, vs. the estimate of 12.2 percent; retail sales were up 14.1 percent, vs. the estimated 15.1 percent; new loans were RMB681.8 billion, vs. the estimate of 780 billion; M2 money supply grew 12.8 percent vs. the estimate of 13.3 percent; and fixed asset investment was up 20.2 percent year-to-date, vs. the estimated 20.5 percent. Due to the weak economic numbers, the market speculation this morning was that the People’s Bank of China (PBOC) will cut the bank reserve ratio tonight.
• The bank of Korea maintained its benchmark rate at 3.25 percent for the 11th successive month as expected, while Indonesia also kept its benchmark rate at 5.75 percent, but raised the central bank rate and term deposits to absorb excessive liquidity.
• Elsewhere in Asia, Malaysia’s industrial production gained only 0.6 percent in March, vs. the estimated 3.3 percent; Philippine export unexpectedly dropped 1.2 percent in March.
• China’s home sales transaction value fell 16 percent in April from the previous month as the government reiterated it will keep curbs on the property market.

Opportunities

• A significant portion of global equity returns comes from the local market currencies effect.  The chart below from BCA Research plots country equity valuation along the horizontal axis and proprietary “currency valuation” along the vertical axis.  From that perspective, China, Taiwan, and Emerging Europe markets look undervalued, while Indonesia, South Korea, and Latin America look overvalued.

• In April, China’s power production growth was less than 1 percent, one of the lowest monthly numbers. If the past is any guidance, the Chinese equity market will rally following a dismal monthly power generation.

Threats

• One of Russian President Vladimir Putin’s first acts in his new/old job was to sign a directive for the government to implement affordable and comfortable housing. Among the tasks set to be achieved by 2018, the government must bring down the spread between average mortgage rates and inflation to a maximum of 2.2 percent.  If implemented as such, net interest margins at the banks would come under pressure.
• Weaker-than-expected April economic numbers strongly suggest the People’s Bank of China needs to cut rates or bank reserve ratio to provide liquidity to the economy.

Tags: Asset Base, Automobile Manufacturers, China Association, China China, Consumer Price Index, Debt Burden, Electricity Distribution Companies, GDP Growth, Gpd, Headwinds, Holidays In China, Index Cpi, Investment Grade, Market Consensus, Market Expectations, Sam Zell, Sector Reform, Stable Outlook, Target, Utility Sector
Posted in Markets | Comments Off