Falling Treasuries: A Currency Perspective (Merk)

Wednesday, March 21st, 2012

Axel Merk, Merk Funds

March 20, 2012

What are the implications for the U.S. dollar and investors’ portfolios if bond prices continue to fall, as they have of late? Within that context, should investors care whether the U.S. retains its status as a “reserve currency”? Should it effect the way investors think about their own cash reserves?

Until the end of last year, China had been a net seller of U.S. Treasuries for six consecutive months, spooking some investors that China might start to diversify its reserves in earnest. That trend was reversed in January, when its Treasury holdings grew by 0.7% in one month to $1.159 trillion; year-on-year, China’s holdings increased a mere $4.8 billion. China’s year-on-year increase in Treasury holdings is sufficient to finance the U.S. current account deficit for about 3 business days; that’s a good reason why investors should care, as the current account deficit reflects the amount of U.S. dollar denominated assets foreigners need to buy just to keep the greenback from falling.

Whereas China has taken a breather with regard to piling on U.S. debt, Japan has increased its purchases of Treasuries, possibly because it is eager to weaken its own currency. Japan’s Treasury holdings now stand at $1.1 trillion. Together, total foreign holdings of U.S. Treasuries rose 0.9% to a record $5.05 trillion in January.

Unfortunately, foreigners might be attracted to the U.S. dollar more for liquidity and less so for quality considerations. Central banks with billions to deploy are able to do so in U.S. Treasury markets without influencing market prices too much. Think of it as the upside of issuing a huge amount of debt: there’s lots of it one can buy and sell. Liquidity, however, doesn’t guarantee success, as the Italian bond market has clearly shown; when weaker Eurozone countries are engulfed in a crisis of confidence, Italian bonds have often been sold as a proxy due to the size and depth of the market. Japan represents another large bond market. Still, the U.S. bond market dwarfs all of these. When it comes to perceived safe havens, Swiss government bonds may be hard to come by at times; given the erratic actions of the Swiss National Bank in recent months and years, we have to caution that even Switzerland may not be the safe haven some perceive it to be. Moving to Germany – considered to be a large, mature market by many – note that even German Treasury bills have been extremely difficult to obtain during stretches of the financial crisis, even at negative yields.

Indeed, one of the most positive global developments would be if emerging market countries develop their domestic fixed income markets. If governments, particularly in Asia, were to issue more debt in their domestic currencies, they would be less dependent on U.S. dollar funding, reducing the so-called contagion risk in a financial crisis. Ideally, emerging markets would further develop both long-term bond markets, as well as short-term Treasury markets. The following example illustrates how global markets are so interrelated, and why such a development is so important: currently, a great deal of emerging market financing is U.S. dollar denominated, but originates from European banks. Those European banks, with trouble at home, are cutting their credit lines, to both shrink their loan portfolios, but also as their cost of borrowing U.S. dollars soared. That’s because European banks historically obtain much of their U.S. dollar financing through U.S. money market funds. On average, U.S. prime money market funds held about 50% of their assets in U.S. dollar denominated commercial paper issued by European banks. After lots of public scrutiny, including from us (see: Making the U.S. Dollar Safer: Return OF Your Money), those holdings fell to about 1/3rd of money market fund assets in late 2011. As U.S. money market funds reduced their appetite for debt issued by European banks, the Federal Reserve (Fed), in conjunction with other major central banks, put in place “central bank liquidity swaps”, a fancy way of describing U.S. dollar loans extended by the Fed to the European banking system via the European Central Bank (ECB) to alleviate U.S. dollar financing concerns and ultimately, contagion risks to the global economy.

A key attribute of liquidity is the ability to take money out of a country. An investor will be more willing to invest in a country when there are no capital controls, when there’s confidence in the rule of law, confidence that investors’ rights are protected. And while emerging markets are generally on the right path, it’s a path that takes a long time to build, as investors’ trust must be earned over many years.

As such, odds are the reserve currency status of the U.S. is likely to erode over time rather than overnight, if for no other reason than the lack of suitable alternatives. In our view, however, U.S. policy makers would be well served if they attempted to make the U.S. dollar as attractive as possible, rather than relying on the fact that foreigners have limited alternatives. As recent years have shown, the Chinese, for example, have gained operational experience in deploying their reserves into assets outside of U.S. Treasuries, in real assets, throughout the world: notably by investing in natural resources in Australia, Africa, Latin America and Canada.

For many years, until a month ago, the ECB, in its monthly communiqué, warned of a “potential for a disorderly correction of global imbalances.” That was central bank parlance for a dollar crash. For what it’s worth, the warning was missing for the first time in years in this month’s statement.¹ Like the boy who cried wolf, when someone warns about something repeatedly, few may take that risk seriously anymore. Is it complacency when one drops the warning?

What many don’t realize is that we don’t need a low probability / high-risk event – a “black swan” event – to be concerned. Take the recent turmoil in the Treasury market: from the high on February 28, 2012 until the close on March 15, 2012, the U.S. 30 year bond had fallen about 8.5% in value (with declines continuing as of this writing). Many have previously been chasing yields: a lot of money had moved into longer dated securities, the so-called long end of the yield curve. In that process, volatility in that market had come down, providing the illusion of safety. We don’t need a crash, we need a return to a more normal environment to have what may be a rude awakening for investors. The plunge in the 30-year bond in just over 2 weeks should serve as a wake-up call. It turns out that foreigners appear to have piled into longer-dated Treasuries just before the recent correction (net long-term TIC flows of $101 billion in January vs. $38.5 billion expected), possibly making for a few very unhappy, but very important investors.

What is the relevance for the dollar? Foreign investors tend to own a large amount of Treasuries. When Treasuries fall in value, their investments may go down, unless the dollar increases by the same amount. While some pundits – in an effort to comment on short-term currency moves on any one day – point out that falling bond prices make the dollar more attractive as yields are higher, that’s little consolidation to those already holding Treasuries. Indeed, historically speaking, our analysis indicates that the U.S. dollar tends to weaken during early and mid phases of an increasing interest rate cycle. That’s precisely because the bond market turns into a bear market in such an environment. It’s in the late phases of a tightening cycle that foreigners come back to the bond market, in anticipation that the next bull market for bonds is around the corner; in that phase, the dollar may get a reprieve.

However, when rates are rising, investors may want to consider reducing their interest risk, moving from longer dated bond funds to shorter dated ones. Looking at it from an international perspective, the same relationship applies; it should not be a surprise that the volatility in shorter dated fixed income securities is less than that of longer dated ones:

Performance data in the chart above represents past performance and is no guarantee of future results.

For investors concerned about plunging bond prices, the obvious move may be to trim interest risk. Some may appreciate the perceived safety of U.S. dollar cash, although, as our discussion of U.S. money market funds above has shown, not all cash is equal. Investors concerned about the purchasing power of the U.S. dollar may want to consider mitigating the potential risk of a declining dollar by diversifying to other currencies. Be warned, though, that currency risk is then introduced. A money market fund will thrive to hold a stable net asset value in U.S. dollar terms; a currency fund will not. Indeed, much of investing is about trying to preserve purchasing power. By moving to cash in other currencies, one does avoid equity risk, and possibly mitigates interest and credit risk. But risk-free it is not. Indeed, we have argued for a long time that central banks may be eroding the purchasing power of currencies around the world – risk free assets can no longer be thought of as such. It was in 2006 when I first said “there is no such thing anymore as a safe asset: investors may want to consider a diversified approach to something as mundane as cash.”

Notes:

Please sign up for our newsletter to be informed as we discuss global dynamics and their impact on currencies.We manage the Merk Funds, including the Merk Hard Currency Fund. To learn more about the Funds, please visit www.merkfunds.com.

¹Former ECB President Willem Duisenberg mentioned “risks pertaining to external imbalances” in the first time in March 1999. But he didn’t reference it again until 2002. (Instead, he mentioned “there are no major imbalances in the euro area which would require a longer-term adjustment process” in 2001.) In May 2002, Duisenberg brought up this topic again at the press conference, saying “there are still a number of uncertainties such as those related to … and to the impact of existing imbalances elsewhere on the world economy”. He used the similar phrasing in June, October and December 2002 but not every meeting.

It was January 2003 that for the first time Duisenberg referenced “a disorderly adjustment of global imbalances” by saying “there are still risks relating to a disorderly adjustment of the past accumulation of macroeconomic imbalances, especially outside the euro area.” Then he reiterated it a couple of times during his remaining term as ECB president ended in October 2003. A note here, current Greek PM and then ECB vice-president Lucas Papademos hosted the September conference in 2003, where he also referenced “macroeconomic imbalances in some regions of the world persist.”

Since Trichet took office in November 2003, it became almost a routine to reference “external/global imbalances” at the press conferences, though his wording changed over time. During November 2003 and June 2006, Trichet often used the word “persistent global imbalances” when talking about concerns and risks to growth. Then he referenced “a disorderly unwinding of global imbalances” for the first time in August 2006. He frequently used “possible disorderly developments owing to global imbalances” during 2007-2008 and “adverse developments in the world economy stemming from a disorderly correction of global imbalances” in 2009, and started to regularly reference “concerns remain relating to … and the possibility of a disorderly correction of global imbalances” since September 2009, through his last press conference in October 2011. During his eight years in office, the only times he didn’t mention “global imbalance” at all were August 2007, April 2005, and from October 2004 to January 2005.

Draghi continued the tradition of referencing “the possibility of a disorderly correction of global imbalances” in all of his press conferences from November 2011 to February this year. The past meeting in March was the first time he didn’t reference it.

Axel Merk

Manager of the Merk Hard Currency Fund, Asian Currency Fund, Absolute Return Currency Fund, and Currency Enhanced U.S. Equity Fund, www.merkfunds.com

Axel Merk, President & CIO of Merk Investments, LLC, is an expert on hard money, macro trends and international investing. He is considered an authority on currencies.

The Merk Hard Currency Fund (MERKX) seeks to profit from a rise in hard currencies versus the U.S. dollar. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.

The Merk Asian Currency Fund (MEAFX) seeks to profit from a rise in Asian currencies versus the U.S. dollar. The Fund typically invests in a basket of Asian currencies that may include, but are not limited to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

The Merk Absolute Return Currency Fund (MABFX) seeks to generate positive absolute returns by investing in currencies. The Fund is a pure-play on currencies, aiming to profit regardless of the direction of the U.S. dollar or traditional asset classes.

The Merk Currency Enhanced U.S. Equity Fund (MUSFX) seeks to generate total returns that exceed that of the S&P 500 Index. By employing a currency overlay, the Merk Currency Enhanced U.S. Equity Fund actively manages U.S. dollar and other currency risk while concurrently providing investment exposure to the S&P 500.

The Funds may be appropriate for you if you are pursuing a long-term goal with a currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Funds and to download a prospectus, please visit www.merkfunds.com.

Investors should consider the investment objectives, risks and charges and expenses of the Merk Funds carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Funds’ website at www.merkfunds.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

Since the Funds primarily invest in foreign currencies, changes in currency exchange rates affect the value of what the Funds own and the price of the Funds’ shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, emerging market risk, and relatively illiquid markets. The Funds are subject to interest rate risk, which is the risk that debt securities in the Funds’ portfolio will decline in value because of increases in market interest rates. The Funds may also invest in derivative securities, such as for- ward contracts, which can be volatile and involve various types and degrees of risk. If the U.S. dollar fluctuates in value against currencies the Funds are exposed to, your investment may also fluctuate in value. The Merk Currency Enhanced U.S. Equity Fund may invest in exchange traded funds (“ETFs”). Like stocks, ETFs are subject to fluctuations in market value, may trade at prices above or below net asset value and are subject to direct, as well as indirect fees and expenses. As a non-diversified fund, the Merk Hard Currency Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. For a more complete discussion of these and other Fund risks please refer to the Funds’ prospectuses.

This report was prepared by Merk Investments LLC, and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice. Foreside Fund Services, LLC, distributor.

Tags: Axel, Billions, Bond Market, Bond Prices, Business Days, Canadian Market, Cash Reserves, Central Banks, Current Account Deficit, ETF, ETFs, Eurozone Countries, Foreigners, Good Reason, Greenback, Guarantee Success, liquidity, Portfolios, Quality Considerations, Reserve Currency, Treasuries, Treasury Markets, Trillion, U S Treasury
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Everybody’s Unhappy!? (Saut)

Wednesday, January 25th, 2012

Everybody’s Unhappy!?

by Jeffrey Saut, Chief Investment Strategist, Raymond James

January 23, 2012

“Money managers are unhappy because 70% of them are lagging the S&P 500. Economists are unhappy because they do not know what to believe: this month’s forecast of a strong economy or last month’s forecast of a weak economy. Technicians are unhappy because the market refuses to correct and gets more and more extended. Foreigners are unhappy because due to their underinvested status in the U.S. they have missed a big double play: a big currency move plus a big stock market move. The public is unhappy because they just plain missed out on the party after being scared into cash. It almost seems ungrateful for so many to be unhappy about a market that has done so well. Unhappy people would prefer the market to correct to allow them to buy and feel happy, which is just the reason for a further rise? Frustrating the majority is the market’s primary goal.”

… Bob Farrell, Merrill Lynch; September 1989

The bears are unhappy since the Santa rally, which began last Thanksgiving, has given the short-sellers no comfortable place to cover their shorts. Last week the bears suffered even more angst as most of the indices I follow tagged new reaction highs. The upside skein from the December 19th “low” has left the senior index better by ~8.1%, and up an eye-popping 13.3% since Thanksgiving. Counting the trading days from that mid-December “low” shows the rally has now encompassed 21 sessions with no more than a 1 – 3 session pause and/or correction. That makes this a fairly long of tooth “buying stampede.” Recall, buying-stampedes typically last 17 – 25 sessions, with only 1-3 session pauses/corrections along the way, before they exhaust themselves on the upside. It just seems to be the rhythm of the “thing” in that it takes that long to get participants bullish enough to throw in the towel and “buy ‘em” right before the markets peak and have a downside correction. Moreover, during the current stampede just about everything has been “run,” including all the sectors punctuated by the Banks +11.6% performance YTD. Accordingly, the only thing missing for a short-term “top” is a final burst to the upside driven by short-covering. My sense is this will occur into tomorrow night’s State of the Union address, which should be followed by a post address letdown for the stock market.

To be sure, the recent rally has not been accompanied by a noticeable increase in Buying Demand as measured by Lowry’s Buying Power Index. Rather the rally has occurred more from a reduction in Selling, which is reflected in Lowry’s Selling Pressure Index. Then too, the percentage of stocks above their respective 10-day moving averages (DMAs) has failed to confirm the upside and the New High list is not expanding. In fact, 40% of my short-term indicators are now bearish and none are bullish. Meanwhile, the NYSE McClellan Oscillator is overbought, the stock market does not have much internal energy left for a big rally, the S&P 500 (SPX/1315.38) is three standard deviations above its 20-DMA, the Volatility Index (VIX/18.28) is telegraphing too much complacency, and we have negative seasonality for the next few weeks. Nevertheless, I continue to think it is a mistake to get too bearish because I believe any pullback in the various indices will be contained.

My bullishness was reinforced last week during a conversation with Frederick “Shad” Rowe, the sagacious general partner of Dallas-based Greenbrier Partners. Summing the conversation, we decided the world is becoming richer faster than debt is expanding. This is not an unimportant point since everyone seems to be focusing on the “debt bomb,” which likely means it is the wrong question. Clearly, some folks are living above their means, some below, but many are living within their means, which can be seen in the Household Debt Service Ratio chart that is plumbing generational lows. Manifestly, the world is getting more prosperous and is producing more for less driven by technology. Truly, it is “one world” and we should start thinking of the U.S. as a state within that “one world.” This view is plainly stated in Federal Express’ annual report. To wit:

“We’ve reached a tipping point in how the world works. The largest economy in the world is no longer the economy of any one country – it’s the economy of global trade of goods and services. Value: $18.3 trillion in 2010. At FedEx, our job is to facilitate these transactions, the heart of commerce, by providing access – moving goods across the global supply chain.”

Or, how about this from Google’s annual report:

“Google is a global technology leader focused on improving the ways people connect with information. We aspire to build products that improve the lives of billions of people globally. Our Mission is to organize the world’s information and make it universally accessible and useful.”

One world indeed and there are actually a lot of good things happening. While the world is still a violent place, it is becoming less so as the wars we have been fighting come to an end. Additionally, the U.S. finally appears to be heading down the road of energy self-sufficiency, which should increase employment, and the U.S. dollar is currently the least unattractive currency in the world. Furthermore, as scribed in previous reports, there is a huge hidden layer of the U.S. economy that is becoming the engine of growth and wealth creation; and, this hidden layer is misrepresented in corporate financial reports. Surprisingly, the equity markets appear to value this hidden layer at approximately zero suggesting huge opportunity for investors to profit. The hidden layer referenced is Organizational Capital and Knowledge Capital, both of which reside under the macro moniker – Intangible Capital – so often mentioned in these missives. As the astute GaveKal organization writes:

“When we account for intangibles the picture of the U.S. economy changes. It is revealed that we are saving more and investing more than we thought. This means our economy is much more dynamic than we thought. This result is relevant in view of the perception of a low rate of saving in the U.S. economy, particularly because existing measures exclude much of the investment in knowledge capital that is a defining feature of the modern U.S. economy. … Validating intangibles is the key to eliminating the guesswork in valuing a company correctly. Indeed, this ‘new view’ of intangibles suggests they are the missing link between financial accounting and financial valuation.”

These observations, taken in concert amid the backdrop of a world that is profoundly underinvested in U.S. equities, continues to leave me walking on the “sunny side” of Wall Street even though in the very short term I am looking for a trading peak. During the envisioned decline investors should consider companies playing to the Intangible Capital theme. While participants should study all investment situations for themselves, some names for your consideration from our research universe playing to the Intangible Capital theme, and favorably rated by our fundamental analysts, include: Micron (MU/$7.76/Strong Buy), Analog Devices (ADI/$39.78/Strong Buy), Maxim Integrated Products (MXIM/27.83/Outperform), Texas Instruments (TXN/$33.64/Outperform), Xilinx (XLNX/$35.77/Outperform), Nuance (NUAN/$29.08/Strong Buy), Google (GOOG/$585.99/Outperform), Delta Air (DAL/$9.41/Outperform), and Urban Outfitters (URBN/$25.40/Outperform). Of course there is a way to purchase all of these companies that are accumulators of Intangible Capital (and more) via the GaveKal Platform Company Fund (GAVIX/$11.18).

The call for this week: Last Thanksgiving I suggested the Santa rally was beginning. I stuck with that “call” into the new year. On January 3, 2012 I stated that session felt like an “emotional peak” and that January 10, 2012 felt like the “price peak.” Subsequently I wrote, “The only question in my mind is if the markets are going to have a pullback into the 1230 – 1240 support zone, or go sideways to correct their overbought condition and allow the internal energy to be rebuilt.” So far, it has been a sideways consolidation until last week’s upside breakout causing one old Wall Street wag to exclaim, “Breakout or fake-out?!” On a short-term basis I think it is a fake-out believing a trading top is due this week …

Copyright © Raymond James

Tags: Bears, Bob Farrell, Chief Investment Strategist, Comfortable Place, Double Play, Economists, Foreigners, jeffrey saut, Market Move, Merrill Lynch, Money Managers, Rally, Raymond James, Rhythm, Short Sellers, Skein, Stampede, Stock Market, Thanksgiving, Unhappy People
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Chinese Stocks Signal Warning Lights

Wednesday, April 27th, 2011

The disappointing manufacturing and non-manufacturing PMIs in April was not what the Chinese stock market was telling us in mid-April!

The Shanghai Composite Index tends to lead the China CFLP Manufacturing PMI by one month. In mid-April the market was actually anticipating stronger PMIs through end May! Sure, a weaker than expected PMI in April and perhaps May and therefore a slowdown of the terrific pace of economic growth is likely to put any further monetary policy tightening by the PBoC on hold and may entice buyers, especially on the outlook of reconstruction in Japan. But what about the impact on Chinese company profits? Over the past week realisation of the possible repercussions of Japan’s twin disaster hit the market as it fell by nearly 4% since April’s high.

Chinese stocks fell this morning for the fourth consecutive day on worries about the outlook for corporate earnings growth, reported Bloomberg. The Shanghai B Index in US dollar (in which most foreigners invest in China) plunged 5.4% in today’s trading session. The Shanghai Composite Index was down 0.7% at the time of writing. The Chinese equity slide could cast a cloud over emerging markets as a whole, at least in the short term. I will not join the bulls like PIMCO and others at this stage and will definitely not add to my Chinese and other equity positions … yet.

Tags: Chinese Company, Chinese Stock Market, Chinese Stocks, Company Profits, Corporate Earnings, Earnings Growth, Emerging Markets, Equity Positions, Foreigners, Monetary Policy, Pboc, PIMCO, Pmi, Pmis, Repercussions, S Trading, Shanghai Composite Index, Slowdown, Trading Session, Warning Lights
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Everybody’s Happy!?

Monday, November 8th, 2010

“Everybody’s Happy!?”

by Jeffrey Saut, Chief Strategist, Raymond James

November 8, 2010

… “Money managers are unhappy because 70% of them are lagging the S&P 500 and see the end of another quarter approaching. Economists are unhappy because they do not know what to believe; this month’s forecast of a strong economy or last month’s forecast of a weak economy. Technicians are unhappy because the market refuses to correct, and gets more and more extended. Foreigners are unhappy because due to their underinvested status in the U.S., they have missed the biggest double play in decades. The public is unhappy because they just plain missed out on the party after being scared into cash after the crash. It almost seems ungrateful for so many to be unhappy about a market that has done so well . . . Unhappy people would prefer the market to correct to allow them to buy and feel happy, which is just the reason for a further rise. Frustrating the majority is the market’s primary goal.”

… Robert J. Farrell

Bob Farrell was Merrill Lynch’s esteemed strategist for decades. He penned the aforementioned comments in September of 1989 after the D-J Industrial Average (DJIA) had risen from that year’s January price of 2100 to its September high of 2791 without any meaningful correction. Accordingly, those investors waiting for a pullback to “buy” were frustrated. Similarly, present-day investors are pretty frustrated as the DJIA has leaped from its August “low” of ~9940 into last Friday’s high of 11451 without any significant correction. The recent “Buying Stampede” began on September 1^st with a 255-point Dow Wow and has continued for the past 47 sessions without anything more than a one- to three-day pause/correction before resuming the onslaught. The latest upside skein has eclipsed the 38-session march into the August 1987 “highs” that preceded the crash, as well as the longest “Buying Stampede” chronicled in my notes of some 40 years. Over the decades I have come to trust my “day count” indicator because it has worked so well. As stated in past comments, it is rare for a “Buying Stampede” to extend for more than 30 sessions. That is why I wrong-footedly turned cautious, but not bearish, on day 33 of the stampede (October 18^th) with the DJIA at ~11159. Since then, the senior index has still not experienced anything more than a one- to three-day pause/correction; yet, has also not really moved significantly above the October 18^th intra-day high, that is until last Thursday’s 220-point Dow Delight.

Indeed, last Thursday’s triumph broke the DJIA (11444.08), as well as the D-J Transportation Average (DJTA/4923.40), above their respective Spring reaction highs of 11205.03 and 4806.10 respectively, thus rendering another Dow Theory “buy signal.” That signal reconfirmed the Dow Theory “Buy signal” I wrote about last July and continues to suggest the trend of the stock market is bullish. Still, Thursday’s session failed to qualify as another 90% Upside Day because while Points Gained exceed the 90% threshold, Up Volume didn’t, coming in at 89.3% of total Up/Down Volume. Nevertheless, since the late-June “lows” there have been ten 90% Upside Days, accompanied by strong Advance-Decline readings, reflecting the durability of this rally. In fact, the New York Composite Advance-Decline Line is well above its April rally peak and Lowry’s Buying Power Index has risen to a new rally high, while the Selling Pressure Index tagged a new reaction low, late last week. All of this only reinforces my view that any correction will be shallow and brief.

The explosive rally from the June “lows” has lifted the DJIA by some 16%. Meanwhile, the Dollar Index ($USD/76.76) has surrendered roughly 16% from its respective June high into its recent low, causing one savvy seer to exclaim, “Are stocks really going up, or is the measuring stick going down?!” Clearly, that is a valid question. Yet, my sense is the U.S. dollar “sell short” trade is getting profoundly crowded. To wit, I was on a number of TV shows last week where other pundits were beating the greenback like a rented mule. Most of their comments centered on the statement, “the dollar is worthless,” to which I replied, “If so, why don’t you send them to me!” To be sure, while I too am a long-term dollar bear, I think the dollar’s dive is long of tooth and believe it to be near a short/intermediate-term inflection point. Verily, I am confident the Dollar Index will not violate its 2008 “lows” located between 71 and 73, at least in the short/intermediate-term. If correct, a reversal in the dollar’s misfortunes might imply a pause/correction for my beloved “stuff stocks.” Inferentially, both of those thoughts gained traction over the weekend since Barron’s cover story was, “China’s Sure Bet.” The byline read, “With the dollar vulnerable, China for the first time is investing more overseas in hard assets, like copper, oil and iron, than in U.S. government bonds.”

Tags: Bob Farrell, Brazil, Chief Strategist, China, Decades, DJIA, Double Play, Dow, Economists, Foreigners, jeffrey saut, Last Friday, Merrill Lynch, Money Managers, Onslaught, Present Day, Pullback, Raymond James, Session March, Skein, Stampede, Unhappy People
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Canada Surprises Market by Rejection of BHP Billiton’s (BHP) Bid for Potash (POT)

Friday, November 5th, 2010

by TraderMark, FundMyMutualFund

A quite stunning rejection of the BHP Billiton (BHP) bid for Potash (POT).  While “conditional” on the surface, it appears to have driven a stake through the heart of the deal.  What is fascinating is these are 2 cultures that both derive from England, so it is not a matter of “some foreigners want to take our best assets” as we have seen in other countries.  Heck even the USA with Dubai Ports.  But if one thinks out 30-50 years, a case could be made for what Canada is doing in terms of securing a long term commodity asset.  Remember, the world’s potash supplies are essentially controlled by 2 mini cartels – one in the West and one in the Russian + its former satellites area.  With that said, I don’t know enough about the politics in Canada to determine if this move is truly a “long term” strategic decision or simply a short term political maneuver to placate the 80% of Canadians who were against the deal.   I am sure the “free marketists at all costs” are in complete horror over this type of move.

Stock wise, in retrospect the decision to sell Potash (around $144) very shortly after the deal was announced in retrospect was a smart one as the stock has done little in the meantime, while the market has gone parabolic.  I’d also offer that the U.S. cares little about its long term assets, so BHP should make a bid for Mosaic (MOS) – unlike China which is busy securing commodities for the next 50 to 100 years, American assets are happily sold to the highest bidder, whatever the long term implication.

Potash is down about 4.5% on the news, while BHP is rallying – this is the 2nd or 3rd mega purchase BHP has attempted the past 3-4 years that has failed.   As for a new bid for Potash – if the government is not willing to sell to Australians, you can forget any bid by the Chinese or Russians.

Via Reuters:

• While Canada gave BHP 30 days to come up with additional proposals that might make its offer for the world’s largest fertilizer producer more palatable, the chances of a successful modified bid appeared remote.
• “Marius Kloppers is going to be pretty frustrated. BHP is of a size now where just about anything it wants to do of any substance is going to get blocked on regulatory grounds,” said Cameron Peacock, market analyst at IG Markets in Melbourne. (except in the US where regulation of any sort is “evil”…or perhaps Hungary where red toxic sludge running through villages is just part of the ‘free market’)

• The decision was only the second time Canada has blocked a foreign takeover since 1985, sparking criticism the minority Conservative government was putting politics before business.  ”Some decisions can only be taken once and there is no turning back ever — such as the case today,” Industry Minister Tony Clement said in ruling he was not satisfied about the net benefit to Canada.
• Clement said he was unable to release the precise reasons for the decision, which came after strenuous objections from Potash Corp, its home province of Saskatchewan and customers of the crop nutrient essential for boosting crop production.
• The decision surprised investors as well as BHP’s executives and advisers. Potash Corp shares were down some 5 percent in after-the-bell trade while BHP shares rose 2.6 percent to A$43.72, their highest close since April, on expectations BHP would consider returning capital to shareholders.
• China, a major potash user worried about BHP’s influence over supply of another key commodity, welcomed the decision.  ”The failure by BHP is good for China … If we can largely meet our demand with our own supply, the market may not be controlled by one company,” said a senior official at the potash branch of the China Inorganic Salt Industry Association.
• Under the Investment Canada Act, a foreign takeover must have a net benefit for the country in terms of jobs, exports, production and investment.
• The Conservatives have most of the seats in Saskatchewan, the Prairie province where Potash Corp is based, and fervent Saskatchewan opposition to the bid meant they risked losing those seats in an election likely to take place next year.
• Saskatchewan argued it would lose tax and royalty revenues if the deal went through. It said it would be wrong to let a resource as strategic as potash fall into foreign hands.

I guess “Conservative” in Canada means a very different thing than in the U.S.

[Aug 20, 2010: Potash CEO Set to Receive Nearly Half a Billion if Buyout of BHP Billiton Goes Through]
[Aug 17, 2010: Potash in Play as Long Rumored Bid by BHP Billiton Comes to Fruition - Stock up 25% Premarket]

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Copyright (c) Trader Mark, FundMyMutualFund

Tags: Australians, Bhp Billiton, Canadian Market, Canadians, Cartels, China, Commodities, Dubai Ports, Foreigners, Highest Bidder, Implication, Lef, Move Stock, oil, Political Maneuver, Potash Corp, Potash Pot, Rejection, Retrospect, Reuters, Russia, Russians, Smart One, Term Assets
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Asian Growth, Commodities Demand, to Spur M&A Activity in Canada

Thursday, April 15th, 2010

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In today’s Globe and Mail, a couple of articles point reassuringly at the economic growth in Asia, in particular, emerging Asia,  and how that is fuelling commodity demand, today’s featured commodity being coal, and how that is expected to continue to drive M&A activity. It is however, the resultant investment opportunity Canadians have in our own backyard that keeps resonating. We are asleep at the wheel, while foreigners bid for ownership of what should remain Canadian-domiciled for the sake of the Canadian economy’s long-term eminence.

Our corporate landscape is a multicultural, multi-national tapestry of ownership that is led by companies from countries whose protectionist barriers are high, including the U.S. Other than the most obvious reason being, that they are sources of capital, why do we make it so easy for large Indian and Chinese (and American) companies to bid and takeover our natural resources by proxy of mergers and acquisitions? Are we that short sighted that we can’t see that we should be funding these same companies from homegrown sources. Are Canadians still too timid to take those risks?

We have highlighted in the past that Canadian investors for the most part are behind the proverbial eight ball, while foreign investors, Americans included, have been swallowing up once-Canadian domiciled interests in businesses and natural resources. On one hand, its evident that our companies need foreign capital to expand operations, but how is it advantageous to us in the long term, to give so much of what makes Canada great in order to get there.

As Asia Rolls on, a New World Order Emerges, Globe and Mail, April 15, 2010
Kevin Carmichael

Asia’s economy is no longer hot, it’s scorching, a shift that will force policy makers in the region to be more aggressive in efforts to contain inflation.

Singapore’s monetary authority increased the value of the island nation’s currency yesterday after a government report showed gross domestic product expanded at a gravity-defying annual pace of 32.1 per cent in the first quarter, the fastest recorded rate dating back to 1975.

…China also reported evidence of inflation, saying residential and commercial real estate prices in 70 cities jumped 11.7 per cent in March from a year earlier, a record increase that economists said will force President Hu Jintao’s government to take further steps to constrain its housing market or risk a bubble.

China’s economic growth surges in 1st quarter

Analysts say strong performance might allow a loosening of politically volatile currency controls

China’s economic growth surged to 11.9 per cent in the first quarter, possibly giving Beijing room to allow its currency to rise, but analysts warned it faces growing pressure to cut back stimulus and keep the world’s third-largest economy from overheating.

China’s move on oil sands is about more than money, Globe and Mail, Campbell Clark, April 14, 2010

This is a test. Chinese oil company Sinopec’s move to buy a piece of Alberta oil sands producer Syncrude is the latest move in Beijing’s step-by-step gauging of the investment waters in Canada.

China is watching to see if the deal sets off alarm bells in Canada, particularly in Prime Minister Stephen Harper’s Conservative caucus.

King Coal rides Wave of Asian Demand (only in print as of now), April 15, 2o1o, Brenda Bouw, Mining Reporter, G&M

Asia’s hunger for coal to make steel and provide electicity is creating a global shortage that is driving up prices and spurring a new wave of consolidation as companies try to secure supply and take advantage of rising margins for the coveted commodity.

The renewed coal craze is highlighted by the ongoing takeover battle for Australia’s MacArthur Coal Ltd., the world’s top exporter of pulverised coal, a cheaper and cleaner-burning type of metallurgical coal used in steel production.

Its time we took a long-term  domestic stance alongside foreign investors, whose need seems greater than ours for what we take for granted; Canada’s natural resources.

Tags: Asian Growth, Canadian Economy, Canadian Investors, Canadian Market, Canadians, China, Commodities, Corporate Landscape, Economic Growth, Email, Emerging Asia, Eminence, energy, Foreign Investors, Foreigners, Globe And Mail, Globe Mail, Government Report, India, Inflation Singapore, Investment Opportunity, Island Nation, Kevin Carmichael, Mergers And Acquisitions, Monetary Authority, Natural Resources, New World Order, Oil Sands, Own Backyard
Posted in Canadian Market, Commodities, Energy & Natural Resources, India, Markets | Comments Off

Emerging Markets Diary (4/10/2010)

Saturday, April 10th, 2010

Emerging Markets Diary (4/10/2010)

Strengths

• Taiwan’s exports surged 51.3 percent in March from a year earlier, accelerating significantly from Chinese New Year-affected 32.6 percent in February, with real trade volumes almost returning to pre-crisis levels.
• China’s passenger car sales jumped another 63 percent year-over-year to 1.26 million units in March, thanks to continued subsidies from the government. Passenger car sales rose 76 percent year-over-year to 3.52 million units in the first quarter.
• Industrial Production in Brazil in February rose by 1.5 percent month-over-month and 18.4 percent year-over-year.
• Car sales in March in Brazil increased 60 percent month-over-month and 30 percent year-over-year. We do not expect this trend to continue at such a rapid pace as March was the last month of a favorable tax treatment of new car purchases.
• Mexico saw creation of 290,000 formal jobs during the first quarter of 2010, of which 125,000 were created in March (much better than expected). The Finance Ministry expects GDP to increase by 4.1 percent this year, following a 6.8 percent contraction last year.
• The Financial Times published an article on real estate prices in Europe, showing Poland with the highest house appreciation of 17.3 percent against the backdrop of a 1.8 percent decline in neighboring Germany and 12.4 percent drop in Ireland.
• Russian car sales were up 38 percent higher in March than in the previous month, encouraged by the government’s introduction of a “cash for clunkers” program.

Weaknesses

• Foreigners turned net sellers of Thai stocks this week for the first time in 6 weeks after the Prime Minister of Thailand declared emergency rule in Bangkok because of street protests.
• Malaysia’s industrial production grew by a slower than expected 4.9 percent year- over-year in February, as lower than expected exports caused a moderation in manufacturing across all major categories.
• With European conventional gas production in decline, much hope hinges on extending the U.S. unconventional gas “revolution” to shale deposits in Europe. Merrill Lynch initial cost estimates show that European shale gas would not be competitive with gas from Russia, Middle East, or liquefied natural gas imports.

Opportunities

• While the U.S. dollar has strengthened by about 10 percent since late November, Asian currencies, thanks to much healthier economic fundamentals than Europe, have remained fairly resilient against the dollar, managing to rise around 1 percent during the period. Stable and potentially appreciating currencies in Asia may bring at least two benefits for the region—stronger asset prices including equities due to additional currency returns for foreign investors and higher domestic demand because of improved purchasing power for foreign goods.
• The Central Bank in South Africa recently cut interest rates by 25 basis points to 6.50 percent in light of a strong rand and CPI being under control. We expect a positive momentum for the country in expectation of the World Cup (June 2010).
• A Bloomberg article quoted Deputy Prime Minister Ali Babacan expecting 10 percent growth in the first quarter, among G20 second only to China. February industrial production in Turkey showed 18.1 percent year-on-year increase, higher than the consensus.

Threats

• Investor fears in the Chinese property sector intensified this week due to rising local media coverage of potential property tax collection in Beijing, Shanghai, Shenzhen, and Chongqing. Policy uncertainty may continue to weigh on the sentiment towards Chinese real estate developers.
• The authorities in Mexico have not agreed to extend a deadline (set for April 10) for a formal registration of all mobile users in the country. It is estimated that as many as 30 millions users are not registered and the authorities have threatened to cut service to them, which would negatively affect America Movil and Telefonice, both of which account for around 91 percent of mobile users in Mexico.
• According to the polls, opposition Fidesz party has 59 percent voter support and is likely to win this weekend’s elections in Hungary. Fidesz officials said they will focus on jumpstarting growth and abandon the fiscal austerity program imposed by the governing Socialist party. Fidesz wants to renegotiate emergency loan agreement with the International Monetary Fund and European Union, seeking permission to nearly double the budget deficit.

Tags: Backdrop, Brazil, BRIC, Car Purchases, China, Chinese New Year, Contraction, Conventional Gas, Crisis Levels, Emergency Rule, Emerging Markets, Favorable Tax Treatment, Finance Ministry, Financial Times, Foreigners, Hinges, India, Natural Gas, Passenger Car Sales, Prime Minister Of Thailand, Rapid Pace, Russia, Russian Car, S Industrial, Street Protests, Thai Stocks, Thailand Bangkok, Trade Volumes
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Chinese Stealth Treasury Purchasing Continues

Thursday, January 21st, 2010

This article is a guest post by Tyler Durden, of ZeroHedge.com.

A week ago we speculated that the mysterious “direct auction bidder” may be China, purchasing Treasuries  indirectly though offshore money centers. Yesterday’s Treasury International Capital data confirms that there is something strange happening with China treasury purchasing, and adds more fuel to the speculative fire that China is in fact acquiring Govvies through less than overt pathways.

The TIC data released yesterday showed a surge in Treasury buying, with foreigners purchasing $118.3 billion in Long-Term Securities (Bonds and Bills). As the chart below demonstrates, this was a record monthly purchase amount in the LTM period.

What was strange about this data point, is that European investors accounted for well over half of purchases, at $68.1 billion – also a record monthly amount. Of this, the UK accounted for a whopping $50.6 billion, and France also buying a sizable $11 billion. Accounting for all Bill sales in November, foreigners offloaded $18.9 billion in short-term securities yielding next to nothing, after selling $38.3 billion in October. Furthermore, as we speculated, paydowns added to run from short-dated securities: $134 billion in bills were paid down in October and $8 billion in November. While forigners no longer flock to Bills, their holdings of the low-yielding asset class is still elevated at well over pre-crisis levels:

On this backdrop, China was a purchaser of just $14.9 billion in Notes and Bonds, while at the same time it sold $24.2 billion in Bills, for a net outflow of $9.3 billion. This is confirmed by consolidated holdings data, which saw total Chinese holdings drop to $789.6 billion in November from $798.9 billion in October. China’s aversion to Bills is indicated in the chart below, yet it still has a long way to go before it reaches its 2007-2008 holdings of the short-end. In November China held $109 billion in Bills, down from $133 billion in October, and a peak of over $200 billion in May 2009. As the country’s Bill portfolio matures, we expect an accelerating reduction in China’s holding of Bills, especially if ongoing selling interest does not decline.

We will provide a more in-depth analysis of global fund flows in November later, although we are troubled by some odd revision to October data, particularly as pertains to short-term treasury holdings by the Channel Islands and the Isle of Man, which we are currently trying to reconcile.

Focusing back on China for the moment, among other things the country was a net seller of agency debt for the 17th month in a row, offloading $3.4 billion in the class. China also sold $146 million in corporate debt while buying $393 million in US corporate stocks: a token amount on both sides.

Yet what is most odd about China, as we pointed out previously when discussing Chinese FX reserves, is that while China grew its reserves by $55.7 billion in October and $60.5 billion in November, over the same period, it saw its net holdings of US debt decline by 9.3 billion: a $126 billion differential.

As has been widely speculated, China could simply be diversifying away from the dollar, although a $126 billion net purchasing of a UST alternative would likely have had much bigger repercussions on commodity prices globally in the October-November time period. Yet, as Market News points out, this fact does not explain the stability of the CNY, coupled with the ongoing positive trade surplus. Market News’ explanation:

First, it is possible that China is making purchases through other financial centers. The UK’s holdings of US Treasuries rose USD47.4bn in November, and Hong Kong’s holdings also ticked up. If a portion of those holdings can be attributed to China, that would explain part of the disparity between strong FX reserve growth and weak growth in Treasury holdings.

Second, Federal Reserve custodial data, which has a different coverage to the TIC data, shows a solid increase in US Treasuries held in custody for foreign official institutions in October and another smaller increase in November.

Zero Hedge will analyze Fed custodial account data shortly, to determine the nature of the noted discrepancies. Yet the original question does stand: if indeed China is accumulating Treasuries in a covert fashion that bypasses a “smoking gun” appearance on TIC data, why is it doing so? Who stands to benefit from this kind of indirect purchasing via “direct bidders”? The explanation that public and private bidders originating from the UK are accumulating US debt deserves much greater scrutiny: the buyer is certainly not the BOE, which has had its hands full monetizing its own gilts for the past several months (and yes, unlike the Fed, the BOE has no problems admitting it is directly monetizing). And Europe in general is now a funding basket case, exemplified by the events in Greece: the last thing European Central Banks will worry about is funding the U.S. exploding budget deficit when they have a ticking time bomb in their own back yard. So whether the U.K. is merely a hub for offshore purchases of US bonds, whether originating from China or Petrodollar countries, is unknown. If the buyer indeed is China, we raise the same question we did a week ago:

The Fed has now informally offloaded the Treasury portion of Quantitative Easing to China, which does so via the elusive Direct Bid. It also explains why the Fed has generically been much less worried about TSY purchases under Q.E. (a mere $300 billion out of a total $1.7 trillion in monetization). It does beg the question of just how much Chinese holdings of US Debt truly are, as this number is likely hundreds of billions higher than the disclosed $799 billion.

If true, this would imply that the UK “holdings” of $278 billion are highly suspect, as the country likely own a fraction of this total, with the balance held by Chinese and Petrodollar interests.

One thing is certain: if someone is trying to hide their purchases, this is never indicative of a good thing, and much more analysis must be performed to determine just why international fund flows need to be below the radar.

Tags: asset class, Auction Bidder, Aversion, Backdrop, China, Commodities, Consolidated Holdings, Crisis Levels, Emerging Markets, European Investors, Flock, Foreigners, Money Centers, Offshore Money, Outflow, Pathways, Purchaser, Stealth, Tic, Treasuries, Treasury International Capital, Tyler Durden
Posted in Canadian Market, China, Markets | Comments Off

A Yen for Canada?

Monday, January 18th, 2010

Back in September I wrote Canada on the Cusp of Something Big outlining my case about the Canadian economy, markets, and loonie. My central argument then, and now, was that Canadians need to get in front of the “invest in Canada,” theme before foreigners do. Sound fiscal policy, strong, well capitalized banks, a productive commodity complex, and our good-old-fashioned brand of conservatism, continue to make Canada the leading destination for investors, both on the domestic front, and internationally, in the G7.

There is more to the Canada story than meets the eye. The fundamentals, are only half the story, and relevant, particularly for the longer term outlook . What matters equally in the near and long term, however, is what is going on behind the scenes in the proprietary institutional and hedge fund trading rooms.

Read the whole article here.

Pierre Daillie (AdvisorAnalyst.com), GlobeAdvisor.com, January 18, 2009

Tags: Advertisement, Banks, Canada Story, Canadian Economy, Canadian Market, Canadians, Central Argument, Commodities, Commodity, Conservatism, Cusp, Foreigners, G7, Globeadvisor, Half The Story, Hedge Fund, Investors, Sound Fiscal Policy, Term Outlook, Yen
Posted in Canadian Market, Markets, Outlook | Comments Off

Niall Ferguson: US on a Collision Course with China

Tuesday, October 20th, 2009

Excellent interview with Niall Ferguson on Yahoo Tech Ticker this week.

Niall Ferguson, Part 1:

“People have predicted the end of America in the past and been wrong,” Ferguson concedes. “But let’s face it: If you’re trying to borrow $9 trillion to save your financial system…and already half your public debt held by foreigners, it’s not really the conduct of rising empires, is it?”

Niall Ferguson, Part 2

Ferguson dismisses the dollar loyalists, citing the British pound – the last international reserve currency – as his example. “These things don’t last forever” but don’t expect it to happen overnight. “It’s a long multi-decade process,” he states…

Niall Ferguson, Part 3

“People have predicted the end of America in the past and been wrong,” Ferguson concedes. “But let’s face it: If you’re trying to borrow $9 trillion to save your financial system…and already half your public debt held by foreigners, it’s not really the conduct of rising empires, is it?”

…

“When China’s economy is equal in size to that of the U.S., which could come as early as 2027…it means China becomes not only a major economic competitor – it’s that already, it then becomes a diplomatic competitor and a military competitor,” the history professor declares.

Tags: British Pound, China, China Economy, China S Economy, Collision Course, Decade, Dollar, Economic Competitor, Emerging Markets, Foreigners, History Professor, Loyalists, Niall Ferguson, People, Public Debt, Reserve Currency, Ticker, Trillion, Yahoo, Yahoo Tech
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