Intel Cuts 2012 Outlook

Wednesday, July 18th, 2012

INTC missed the Q2 topline ($13.5 billion vs Exp. of $13.54 billion), even as it met bottom-line estimates of $0.54, but it is the company’s forecast for 2012 that has caught traders off guard, because the technology company is merely the latest one to revise its outlook for the year lower. To wit: “Revenue up between 3 percent and 5 percent year over year, down from the prior expectation for high single-digit growth.”

From the Press release:

Business Outlook

Q3 2012 (GAAP, unless otherwise stated)

• Revenue: $14.3 billion, plus or minus $500 million.; Wall Street’s estimate was for $14.58 billion
• Gross margin percentage: 63 percent and 64 percent Non-GAAP (excluding amortization of acquisition-related intangibles), both plus or minus a couple of percentage points.
• R&D plus MG&A spending: approximately $4.6 billion.
• Amortization of acquisition-related intangibles: approximately $80 million.
• Impact of equity investments and interest and other: approximately zero.
• Depreciation: approximately $1.6 billion.

Full-Year 2012 (GAAP, unless otherwise stated)

• Revenue up between 3 percent and 5 percent year over year, down from the prior expectation for high single-digit growth.
• Gross margin percentage: 64 percent and 65 percent Non-GAAP (excluding amortization of acquisition-related intangibles), both plus or minus a couple points.
• Spending (R&D plus MG&A): $18.2 billion, plus or minus $200 million, down $100 million from prior expectations.
• Amortization of acquisition-related intangibles: approximately $300 million, unchanged.
• Depreciation: $6.3 billion, plus or minus $100 million, down $100 million from prior expectations.
• Tax Rate: approximately 28 percent, unchanged.
• Full-year capital spending: $12.5 billion, plus or minus $400 million, unchanged

Tags: Acquisition, Amortization, Amp, Bottom Line, Business Outlook, Depreciation, Digit Growth, Equity Investments, Expectation, Gaap, Gross Margin Percentage, Intangibles, Percentage Points, Q2, Q3, Tax Rate, Technology Company, Wit, Year 2012
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U.S. Exports: A Lower Gear, but Still Cruising

Tuesday, July 10th, 2012

by Milton Ezrati, Lord Abbett

July 2, 2012

Exports have remained one of the few consistent bright spots in this otherwise subpar economic recovery. The growth of exports at times has added as much as two percentage points to the overall pace of the economy’s expansion and is a major reason why American manufacturing has staged a comeback in recent years—a “renaissance” some have called it. But of late, with the dollar rising against both the euro and the yen, and with growth overseas slowing or, in Europe’s case, falling, questions have arisen about the sustainability of U.S. export strength. Doubtless, the pace of gain will slow, but probabilities suggest that the growth will continue.

The American export boom actually took off in 2007, stood up remarkably well during the 2008–09 recession, and has generally picked up momentum since. As Table 1 shows, exports of goods and services jumped 13.3% in 2007 and continued to grow almost apace in 2008, even as the global financial crisis rocked world economies. Unsurprisingly, exports fell during the global recession year of 2009, but they rebounded into 2010 and 2011, despite the disappointing pace of the global expansion. Even more recently, as China has reduced its overall growth expectations and Europe has fallen into recession, export growth so far this year has actually accelerated. Because exports amount to barely 15% of all U.S. economic output, this performance, impressive as it is, could not turn a sluggish recovery into a rapid one, but it has been fast enough at times to add considerably to the pace of growth. In late 2007, net exports accounted for more than half the economy’s overall expansion. In 2010 and early 2011, they accounted for one-third of the economy’s overall growth.

The expansion of the global economy, especially the emerging world, explains some of these gains. The 2007 export jump, especially, reflected the booms in China, India, and other emerging economies that were proceeding at the time and that consumed industrial supplies and raw materials for which the U.S. economy, among others, was in a good position to provide. Of course, the global downturn in the late 2008/early 2009 helps explain the export drop averaged in 2009, but that picture quickly changed as the emerging economies resumed their rapid growth trajectories in 2010 and in the early part of 2011.

Also explaining the American export picture are the declines in the dollar’s foreign exchange rate, which cumulatively enhanced American producers’ price competitiveness. Between 2002 and 2007, for example, the euro rose about 40% against the dollar, while the yen rose more than 15%. These favorable (for exports) currency patterns continued through much of this more recent period too, further enhancing America’s competitive position. In 2007 alone, the dollar cheapened almost 10% against the euro and then rose only slightly since, at least until much more recently. The move against the yen was even more dramatic. Between mid-2007 and late 2011, the yen rose almost 40% against the dollar. Not only did the currency moves give U.S. producers inroads into the European and Japanese markets but, more significantly, they also gave a significant edge against the European and Japanese competition in faster-growing third markets, such as China, India, and Brazil.

There can be no denying, however, that the dollar’s recent gains, if they persist, will strip away some of this competitive edge. In recent weeks, for instance, the euro and the yen have each cheapened almost 5.5% against the dollar. But because previous dollar declines had given American producers such huge pricing advantages, even recent dramatic currency moves leave much of this country’s former global pricing advantage intact. According to calculations by the OECD (Organization for Economic Cooperation and Development), underlying measures of comparable pricing (what econometricians refer to as purchasing power parity), put today’s euro, at about $1.25, only just on a competitive par with dollar-based production. Comparable calculations for Japan show the yen still giving American producers a huge 35% pricing advantage against the Japan-based competition.

Though combined with slowing global growth, recent dollar strength will retard the future rates of export gain, but it should be clear that relative pricing advantages have hardly proceeded far enough to erase it. For one, trading arrangements are based on ongoing pricing and supply relationships built over long periods of time. Those that have developed in favor of American products during these past years of great American pricing advantages will take a long while to unwind. Given the American advantage implicit in the still pricey yen, it is doubtful that such a process has even begun or will begin for some time yet. If the euro is closer to competitive parity, it still offers no special pricing advantage that would prompt buyers to switch away from established American suppliers. On this basis, exports should continue to contribute to aggregate growth in the U.S. economy, albeit at a reduced rate, say, growing 8–10% rather than within the 14–17% range of the past three years.

Table 1. U.S. Exports of Goods and Services

Source: Bureau of the Census, Department of Commerce.
*Through April annualized.
+ Calculated from December through April and expressed at an annual rate.

The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

Investors should carefully consider the investment objectives, risks, charges, and expenses of the Lord Abbett funds. This and other important information is contained in each fund’s summary prospectus and/or prospectus. To obtain a prospectus or summary prospectus on any Lord Abbett mutual fund, contact your investment professional or Lord Abbett Distributor LLC at 888-522-2388 or visit us at www.lordabbett.com. Read the prospectus carefully before you invest.

Tags: American Export, Booms, Economi, Economic Output, Economic Recovery, Export Boom, Global Economy, Global Expansion, Global Financial Crisis, Global Recession, Growth Expectations, Lord Abbett, Milton Ezrati, Momentum, Pace, Percentage Points, Probabilities, Renaissance, Sustainability, World Economies, Yen
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China Joins Global Easing Party By Cutting The Lending And Deposit Rates By 25 bps

Thursday, June 7th, 2012

Update: 9:00 am has come and gone… and no global bailout unlike November 30, 2011. Not a good sign for those expect a central-bank D-Day.

While minutes ago the Bank of England followed in the ECB’s footsteps, it was the China central bank that stole England’s thunder, announcing an unexpected rate cut moments before 7 am, and thus finally joining the global easing party: this was the first Chinese interest rate cut since 2008. As a reminder, hours before the global central bank intervention on November 30, China announced its first (50 bps) reserve requirement cut since 2008. Is today’s PBOC move, which is the first cut of deposit and 1 year lending rates also since 2008, a harbinger of something much bigger to come any second now?

From the PBOC:

The People’s Bank of China decided to cut financial institutions RMB benchmark deposit and lending interest rates since June 8, 2012. One-year benchmark deposit rate cut of 0.25 percentage points, year benchmark lending interest rate cut by 0.25 percentage points; other deposit and lending interest rates and individual housing provident fund deposit and lending rates be adjusted accordingly.

 

Since the same day: (1) the upper limit of the floating range of interest rates on deposits of financial institutions was adjusted to 1.1 times the benchmark interest rate; (2) loans from financial institutions interest rate floating range of the lower limit was adjusted to 0.8 times the benchmark interest rate.

And from Bloomberg:

China Cuts Interest Rates for First Time Since 2008

China cut interest rates for the first time since 2008, stepping up efforts to combat a deepening economic slowdown as Europe’s worsening debt crisis threatens global growth.

The benchmark one-year lending rate will drop to 6.31 percent from 6.56 percent effective tomorrow, the People’s Bank of China said on its website today. The one-year deposit rate will fall to 3.25 percent from 3.5 percent. Banks can also offer a 20 percent discount to the benchmark lending rate, the PBOC said, widening from a previous 10 percent.

European stocks and U.S. index futures extended gains as China’s move fanned optimism that policy makers around the world will do more to bolster growth. The announcement, two days before China is due to report inflation, investment and output figures, may signal that the economy is weaker than the government expected.

“This will be the beginning of a rate cut cycle and there will be at least one more reduction this year,” said Shen Jianguang, a Hong Kong-based economist with Mizuho Securities Asia Ltd. “The data to be released over the weekend must be very weak and inflation must have eased sharply.”

The MSCI All-Country World Index added 0.8 percent at 7:30 a.m. in New York. The Stoxx Europe 600 Index jumped 1.2 percent, extending yesterday’s biggest rally in six months, while the Standard & Poor’s 500 Index futures advanced 0.7 percent.

Slower Growth

The central bank last reduced benchmark interest rates in late 2008, when the government unveiled a 4 trillion yuan ($586 billion at the time) stimulus package to counter the effects of the global financial crisis. Interest rates have been unchanged since an increase in July 2011.

Industrial output in China, the world’s biggest producer of steel and cement, probably rose 9.8 percent last month from a year earlier, close to the slowest pace in three years, according to the median estimate in a Bloomberg News survey of 27 economists ahead of a National Bureau of Statistics report due June 9.

Inflation may have moderated to 3.2 percent in May from a year earlier after a 3.4 percent rate in April, a separate survey showed, the fourth month consumer prices have risen by less than the government’s 2012 target of 4 percent.

Today’s move signals policy makers are concerned that the cost of borrowing is crimping companies’ spending and holding back expansion in the world’s second-biggest economy. Three bank officials told Bloomberg News last month that the nation’s biggest banks may fall short of loan targets for the first time in at least seven years as demand for credit wanes.
Slowdown Worsening

The PBOC cut banks’ reserve requirements in November for the first time in three years, and again in February and May, to spur lending.

China’s manufacturing expanded at the slowest pace in six months in May, a government report showed on June 1, adding to signs the nation’s slowdown is worsening. A separate purchasing managers’ index from HSBC Holdings Plc and Markit Economics pointed to a seventh straight contraction, the longest stretch since the global financial crisis.

Premier Wen Jiabao and the State Council, or Cabinet, pledged last month to place greater emphasis on stabilizing growth after data showed April industrial production, new loans and exports all increased less than economists forecast. The data prompted banks including Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp. to cut their economic-growth estimates.

Slowdown Worsening

The PBOC cut banks’ reserve requirements in November for the first time in three years, and again in February and May, to spur lending.

China’s manufacturing expanded at the slowest pace in six months in May, a government report showed on June 1, adding to signs the nation’s slowdown is worsening. A separate purchasing managers’ index from HSBC Holdings Plc and Markit Economics pointed to a seventh straight contraction, the longest stretch since the global financial crisis.

Premier Wen Jiabao and the State Council, or Cabinet, pledged last month to place greater emphasis on stabilizing growth after data showed April industrial production, new loans and exports all increased less than economists forecast. The data prompted banks including Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp. to cut their economic-growth estimates.

Tags: Bailout, Bank Of China, Bank Of England, Benchmark Interest Rate, Bps, Central Bank Intervention, China, China Cuts, D Day, Debt Crisis, ECB, Economic Slowdown, Financial Institutions, Footsteps, Global Growth, Gold, Harbinger, interest rates, Pboc, Percentage Points, Provident Fund, Reminder
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Highest Number of Oversold Stocks Since October (Bespoke)

Wednesday, April 11th, 2012

Following today’s sell-off in the equity market, there are now 226 stocks in the S&P 500 that are currently in oversold territory (more than one standard deviation below 50-day moving average).  On a percentage basis, this works out to 45.2% of the stocks in the index.  The last time there were more oversold stocks in the S&P 500 was back on October 4th.

Granted, the current sell-off hasn’t been nearly as bad as the one we saw last September (yet), but because of the lack of volatility in the market over the last several months, the trading range for individual stocks became much narrower leading up to the current sell-off.  Therefore, it didn’t take as big of a sell-off to move the market and individual stocks into oversold levels.

To illustrate this, let’s use the S&P 500 as an example.  The chart below shows the price of the S&P 500 along with its trading range of one standard deviation above and below its 50-day moving average (gray region).  In the lower chart we show the size of the trading range in percentage points from top to bottom.  Back in early October, the market was significantly more volatile than it is today.  As a result, the size of the S&P 500′s trading range was above 9% and coming down from as high as 12.5%.  Today, after months of a relatively placid market environment, the size of the S&P 500′s trading range from top to bottom is 4.14%, or less than half of what it was then.

Tags: Amp, Gray Region, Last September, Last Time, Market Environment, Moving Average, Oversold Stocks, Percentage Basis, Percentage Points, S Trading, Standard Deviation, Volatility
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Update on Brazil, BRICs

Thursday, December 29th, 2011

In response to Brazil is World’s 6th Largest Economy, Overtaking UK Earlier this Year. Can Brazil Overtake France by 2016? What about BRICs in General? I received a nice email from Felipe Fiel, an economist from Brazil working in the hedge fund industry for Fram Capital.

Felipe writes …

Hi Mish, hope is all well with you. First of all I would like to congratulate you for your blog and outstanding contribution do financial observers. I’m an economist who lives in Brazil, working for the hedge fund industry.

I agree entirely with you about Brazil’s skepticism.

I would like to highlight that the way you show inflation and GDP might cause a distorted impression to your readers.

You show GDP growth quarter-over-quarter seasonally adjusted, without annualizing it, which is the norm for US viewers. It was running at almost 8% annualized growth before 2008 crises and even recently it grew at 3.2% in the 4 quarters before stagnating in 3Q.

For next year, even the most pessimistic projections see growth at 4.3% on average, which is more or less what is seen at GDP potential. However, I personally think we cannot growth at that rate without generating too much inflation.

Best,
Felipe Fiel

BRIC Decade Ends as Growth Peaked

According to Goldman Sachs, BRIC Decade Ends as Growth Peaked

Dec 28, 2011

In the past decade, mutual funds poured almost $70 billion into Brazil, Russia, India and China, stocks more than quadrupled gains in the Standard & Poor’s 500 Index and the economies grew four times faster than America’s.

Now Goldman Sachs Group Inc. (GS), which coined the term BRIC, says the best is over for the largest emerging markets.

BRIC funds recorded $15 billion of outflows this year as the MSCI BRIC Index sank 24 percent, EPFR Global data show. The gauge, which beat the S&P 500 by 390 percentage points from November 2001 through September 2010, has trailed the measure for five straight quarters, the longest stretch since Goldman Sachs forecast the countries would join the U.S. and Japan as the top economies by 2050.

BRIC indexes may fall another 20 percent next year, buffeted by the liquidity squeeze stemming from Europe’s sovereign debt crisis, Arjuna Mahendran, the Singapore-based head of Asia investment strategy at HSBC Private Bank, which oversees about $499 billion, said in an interview. Nations such as Indonesia, Nigeria and Turkey may overshadow the BRICS in the next five years as they expand from lower levels of growth, he said.

“The slowdown we’re seeing in the BRICs will continue for most of the first half,” Mahendran said. “Compared to the U.S., corporate profits haven’t been that good as companies face higher wages, higher interest rates and currency volatility, and at best, we’ll only start to see the effects of monetary policy loosening in the second half of 2012.”

2011 Losses

The BSE India Sensitive Index led declines among BRIC equity gauges this year, falling 23 percent. China’s Shanghai Composite Index also dropped 23 percent, while Russia’s Micex retreated 18 percent and Brazil’s Bovespa sank 16 percent. The 21-country MSCI Emerging Markets Index (MXEF) lost 20 percent, while the S&P 500 gained 0.6 percent.

The time to warn about BRICs and emerging markets was a year ago, which I did, specifically in regards to China (but also with many references to trade surplus nations and commodity producers throughout the year).

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Tags: 3q, Bric Funds, BRICs, China Stocks, Crises, Decade Ends, Emerging Markets, Fiel, GDP, GDP Growth, Global Data, Goldman Sachs, Goldman Sachs Group, Goldman Sachs Group Inc, Hedge Fund, Percentage Points, S 500, Sachs Group Inc, Skepticism, Straight Quarters
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China Manufacturing Deteriorates to 32-Month Low

Thursday, December 1st, 2011

Equity markets soared on central bank manipulations and various rumors the past few days. However, neither rumors nor trivial actions (which is all that happened) can save the global economy.

Yesterday stocks rallied on news China Cuts Bank Reserve Ratios by .5 Percentage Points and Central Banks Cut Rates on Dollar Swap Lines.

However, the reason Chinese central bank reacted is hugely deteriorating conditions in China. The reason the Fed reacted is hugely deteriorating conditions in Europe.

Equities have rallied on reported “good news”. However the first irony is the global economic picture outside the US is horrendous. The second irony is bottoms are formed on bad news (and tops on good news), but central banks intervention is really bad news widely recognized as good news.

With that in mind, please consider the HSBC China Manufacturing PMI for November 2011.

November data showed Chinese manufacturing sector operating conditions deteriorating at the sharpest rate since March 2009. Behind the renewed contraction of the sector were marked reductions in both production and incoming new business. The latest survey findings also showed a marked easing in price pressures, with average input costs falling for the first time in 16 months. In response, manufacturers reduced their output charges at a marked rate.

After adjusting for seasonal variation, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – dropped from 51.0 to a 32-month low of 47.7 in November, signalling a solid deterioration in manufacturing sector performance. Additionally, the month-on-month decline in the index was the largest in three years.

Manufacturing production in China fell for the first time in four months during November, with the rate of decline the fastest since March 2009. Panelists generally attributed reduced output to falling new business. The latest decline in new orders was marked, and the steepest in 32 months. Moreover, the month-on-month decline in the respective index was among the greatest since data collection began in April 2004.

China Manufacturing PMI

Stocks ignoring bad news is normally a very good sign. Stocks rallying on government intervention as bad news is presented as good is a different story indeed.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Tags: Central Banks, China Manufacturing, Chinese Central Bank, Composite Indicator, Contraction, Global Economy, Hsbc, Input Costs, Irony, Manipulations, Manufacturing Sector, Panelists, Percentage Points, Pmi, Price Pressures, Purchasing Managers Index, Reserve Ratios, Seasonal Variation, Sector Performance, Survey Findings
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Global Manufacturing PMI (Sept 2011): U.S. Shines in Suffering Global Manufacturing Sector

Wednesday, October 5th, 2011

Growth in the global manufacturing sector is on the brink of contraction. The global manufacturing PMI that I calculate on a GDP-weighted basis for the major economic regions fell to 50.1 in September from 50.4 in August, while the JP Morgan Global Manufacturing PMI fell to 49.9 from 50.1. The U.S. ISM Manufacturing PMI masks the state of the manufacturing sector elsewhere around the globe, though. The gauge jumped to 51.6 in September, indicating acceleration in growth from a paltry 50.6 in August.

While Germany is still showing signs of growth the recession in the rest of the Eurozone’s manufacturing sector is deepening. However, it seems as if the contraction in Italy is easing somewhat, but France, the second largest economy in the Eurozone, is sliding fast. In contrast, the manufacturing sector in the U.K. has managed to grow again after contracting in August. The cold spell has spread to emerging Europe as well, with Poland leading the way as growth in its manufacturing sector is close to stalling. Turkey was the exception as its manufacturing sector is growing again.

Asian countries are also suffering. China was the major disappointment as the CFLP Manufacturing PMI only managed to rise by an abysmal 0.3 percentage points to 51.2 in a month that is normally a very strong month from a seasonal perspective. The result was that my seasonally adjusted CFLP PMI fell 2.1 percentage points to 50.1 and therefore indicates that growth in China’s manufacturing sector has stagnated. It had a severe ripple effect on the rest of Asia. Growth in India’s manufacturing sector slowed sharply, while the contraction in Taiwan, South Korea and Australia deepened.

Russia and South Africa held up reasonably well in the other BRICS countries but the contraction in Brazil’s manufacturing sector quickened.

Sources: Markit*; Li & Fung**; Plexus Asset Management****; ISM*****.

Sources: Markit*; Li & Fung**; Plexus Asset Management****; ISM*****.

Tags: Acceleration, Asian Countries, Brazil, BRICs, Brink, Cold Spell, Contraction, Disappointment, Economic Regions, Emerging Europe, Eurozone, India, Ism Manufacturing, Jp Morgan, Leading The Way, Manufacturing Sector, Percentage Points, Plexus Asset Management, Recession, Ripple Effect, Sector Growth, South Korea
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Canada’s Market Cap Growing Like a BRIC – Percentage of World Market Cap (Bespoke)

Tuesday, August 23rd, 2011

by Bespoke Investment Group

In what could certainly be used in the textbook for Globalization 101, below is a table highlighting the percentage of world market cap for the largest countries in the world.  For each country, we show where its share of world market cap currently stands as well as where it stood five years ago and at the start of 2011.  To make the list, the country’s stock market has to make up at least 1% of total world market cap.

As shown, US equities still make up the largest portion of world market cap at 29.14%.  However, it has lost 0.54 percentage points this year alone as well as 6.91 percentage points over the last five years.  While not shown in the table, the US made up a whopping 45% of world market cap back in 2003, so it has experienced a major decline over the last eight years.  Our loss has been China’s gain, as it has seen its share of world market cap skyrocket from just 1.36% five years ago to 7.87% today.  In August 2006, China had just the 15th largest equity market in the world.  Today, China ranks second ahead of Japan, the UK and Hong Kong.

Japan has seen its share of world market cap decline the second most behind the US over the last five years.  Surprisingly given the earthquake it experienced in March, Japan has seen its share of market cap increase so far in 2011.

China and Russia have seen their shares increase the most in 2011, while the US, India, Australia and Taiwan have seen their shares fall the most this year.

[aa] Canada’s market cap performance (chart below) shows a striking resemblance to that of the BRICs. [aa]

Below we provide historical charts of percentage of world market cap for the ten largest countries at the moment.

Copyright © Bespoke Investment Group

Tags: Aa Canada, Bespoke Investment Group, Canadian Market, Cap Increase, Countries In The World, Decline, Earthquake, globalization, Hong Kong, India, India Australia, Largest Countries In The World, Market Cap, Percentage Points, Performance Chart, S Market, Skyrocket, Stock Market, Striking Resemblance, Textbook, World Market, World Today
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Emerging Markets Cheat Sheet (July 25, 2011)

Sunday, July 24th, 2011

Emerging Markets Cheat Sheet (July 25, 2011)

Strengths

• The Chinese government set up an Affordable Housing Work Group, headed by Deputy Premier Li Keqiang, to supervise local governments to make sure that 10 million units of affordable houses are built this year. Along with administrative supervision, the government will help finance the cause.
• Russia’s unemployment rate fell to 6.1 percent in June, the lowest level since 2008, and real wages advanced 4.2 percent. Retail sales grew for the 18th month in a row, rising by 5.6 percent from a year earlier.

Weaknesses

• The HSBC Flash China PMI for the month of July was at 48.9, versus 50.1 in June. When China’s official July PMI is announced on August 9, we expect it to be much lower than June’s reading of 50.9.
• Taiwan’s export orders increased 9.2 percent in June, lower than the growth rate of 11.5 percent in May.
• Shenzhen and other Chinese cities are reportedly preparing to cap housing prices after the central government started preparing a list of second- and third-tier cities for which tightening housing policies will be applied.
• Poland’s industrial output slowed in June to the lowest growth rate in 20 months, supporting central bank forecasts that the economy will lose steam in the second half of the year.
• Turkish equities sold off after Fitch said an upgrade to investment grade is uncertain due to current account deficit concerns.

Opportunities

• Indonesia’s manufacturing production accelerated in May, and expanded 9.1 percent on the year. The chart below shows that the manufacturing production in Indonesia consistently outperformed Southeast Asian peer countries since 2007. A significant part of the production growth is driven by domestic demand and consumer consumption.

Threats

• The HSBC Flash China PMI dropped by 1.2 percentage points to 48.9 in July. This is the first time it fell below 50 since July 2010. PMI indicates industrial manufacturing activities are in expansion mode if PMI is above 50. A reading of 50 or below indicates the country is in contraction mode. It is worth noting that HSBC PMI is a leading indicator for China’s official PMI that will be announced early next month. We can predict that the official PMI has a high probability of falling below 50 for the month of July. The declining trend of PMI is a direct result from the Chinese government’s tightening monetary policy, which will be continued until there is a clear sign that China’s inflation is completely in control.

Tags: Administrative Supervision, Affordable Housing, Central Government, Chart Below Shows, Chinese Cities, Chinese Government, Consumer Consumption, Current Account Deficit, Emerging Markets, Expansion Mode, Export Orders, Industrial Manufacturing, Investment Grade, Local Governments, Month Of July, Percentage Points, Pmi, S Industrial, Shenzhen, Unemployment Rate
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Plantar Fasciitis? (Jeffrey Saut)

Tuesday, May 17th, 2011

Plantar Fasciitis?

by Jeffrey Saut, Chief Investment Strategist, Raymond James

“About ten years ago I had an acute case of plantar fasciitis in the left foot, a condition in which the fascia, or the covering right beneath the skin, had become highly inflamed. I asked Pete Egoscue, a renowned postural specialist but one without medical training, to take a look at my foot. Pete had, after all, healed a number of people I knew, including my wife. Because Pete was self-taught, I was a skeptic – as any good trader would be. Pete said that he did not need to look at my foot because my foot was not the problem – a response that suggested I was dealing with a quack. But I was patient and continued to listen. He proceeded to explain that the pain in my left foot was the consequence of a structural, postural deficiency in my hip alignment. My right hip was rotated in such a fashion as to make the left side of my body do all the work and bear all the weight, culminating in the inflammation of my left foot. ‘The pain you feel in your left foot is just the symptom,’ Pete said. ‘If you treat it symptomatically and ignore the structural issue, you will never solve the problem.’ I did not immediately grasp the full meaning of his words, but I followed his prescription and in a few days the pain was gone. Some time later I realized that those words were probably the wisest I have ever heard from any human being, and that they apply to more than just the human body.”

“The root cause of the unemployment woes is quite obvious. In the United States alone, in the last two decades, nearly six million jobs in manufacturing have been lost overseas. This equates to nearly four percentage points of the current 9.7% US unemployment rate. As importantly, the migration of these jobs contributed to the most unsustainable economic imbalance in the world today – China’s persistent bilateral trade surplus with the United States. During the last decade, China accumulated almost $1.4 trillion of US debt and at least $2.3 trillion in global assets. These figures could grow to $3.8 trillion and $7 trillion, respectively, over the next decade if the current renminbi/US dollar (RMB/USD) exchange rate continues to be artificially suppressed from appreciating. One entity owning this much debt of one debtor, let alone a foreign government, creates too much risk concentration, and has possibly repressed volatility for debtor and creditor alike. The risk may seem manageable now, but who knows what the nature and temperament of the Chinese and American leaders will be in ten years? Isn’t it possible that either side could weaponize financial imbalances to the detriment of domestic and global stability?”

… Paul Tudor Jones (10/26/10)

He said, “(Your problem is) the consequence of a structural, postural deficiency in your hip alignment.” Similarly, the world’s biggest “structural problem” is the misalignment of China’s Renminbi (aka, its currency); and as stated, “If you treat it symptomatically and ignore the structural issue, you will never solve the problem.” Fifteen years ago China devalued its currency by ~50% in a single day (1/1/1994) and has experienced a manufacturing/export boom ever since. Indeed, 15 years ago China didn’t even register as one of the top trading partners with any of the G20 countries. Today it is the biggest trading partner for six of them. Interestingly, in January 1981 the Renminbi was changing hands at $0.6551 basis the U.S. dollar (RMB/USD). In 1Q94, following the devaluation, the RMB/USD exchange rate stood at $0.1144. It resided in the range of $0.1144 to $0.1208 until the summer of 2005, when cajoled by the U.S. Congress, the Chinese reluctantly began to revalue the Renminbi upward. It currently trades at $0.153889, and while that is roughly a 35% appreciation over the past six years, it is still materially undervalued. In fact, on an absolute purchasing power basis many savvy seers believe the Renminbi is 60% undervalued.

In past missives I have opined that China is slowly revaluing its currency in an attempt to create more domestic demand, dampen its inflation rate, and placate U.S. leaders. To be sure, the Chinese realize in the long-run the manufacturing/export driven economic model will eventually morph to the lower cost of labor, which is quickly becoming the Vietnams of the world. Accordingly, they are following what Brazil did with its currency (the Real) a few years ago. To wit, Brazil raised interest rates and increased the value of its currency. Surprisingly, Brazil’s economy continued to perk along, inflation subsided, and domestic demand improved. I see no reason why that formula won’t work for China as well. Therefore, going “long” the Renminbi still seems like a good investment strategy. As former Treasury Secretary Lawrence Summers states, “When somebody writes the history of our time 50 or 100 years from now it will be about how the world adjusted to the movement of the theater of history towards China.”

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