Don Vialoux: Increase in Volatility Between Now and October Seasonally Common

Friday, August 10th, 2012

by Don Vialoux, EquityClock.com

Upcoming US Events for Today:

1. Import/Export Prices for July will be released at 8:30am.
2. The Treasury Budget for July will be released at 2:00pm. The market expects -$71.0B versus -$129.4B previous.

Upcoming International Events for Today:

1. German CPI for July will be released at 2:00am EST. The market expects a year-over-year increase of 1.7%, consistent with the previous report.
2. Canadian Net Change in Employment for July will be released at 8:30am EST. The market expects an increase of 8,000 versus an increase of 7,300 previous. The unemployment rate is expected to remain unchanged at 7.2%.

Recap of Yesterday’s Economic Events:

The Markets
Equity markets ended flat on Thursday despite better than expected reports in the US pertaining to employment and international trade. Volume was once again deadly, amounting to the lowest four-day volume in 5 years. In an article posted by Zerohedge.com, the website notes that “the last 4 days have been the lowest volume for a non-Xmas holiday week since 2007 in futures and NYSE volumes are just remarkably bad compared to even normal cyclical seasonal dips.” Looking at the 4-day simple moving average of the S&P 500 ETF (SPY) volume, the last time the average was this low outside of a Christmas holiday week was October 2007, the last market high prior to the significant decline in the months and years to follow in 2008/2009. Volume confirms conviction, of which very little exists. Conviction to equities remains low as debate grows over the sustainability of the present rally that appears based solely on hope of further monetary stimulus from one of the major central banks around the world.

The divergence between price and volume can also be picked up on the NYSE Cumulative Advance-Decline Volume line, which is derived from the volume of advancing stocks less the volume of declining stocks. The NYSE recently managed to break firmly above the high of early July, yet the NYSE Cumulative Advance-Decline Volume Line has yet to accomplish the same. The pattern of this breadth indicator and price typically match each other, showing similar highs and lows, therefore this divergence just adds to the concern that conviction to equities is lacking, often a precursor to market declines should buyers fail to accumulate.

Sentiment on Thursday, according to the put-call ratio, ended bullish at 0.86. The apparent declining wedge pattern that can be derived from the ratio over the past three months is reaching a peak, which could imply a significant jump higher should the tendencies of this pattern be fulfilled. A significant move higher in the put-call ratio would likely be accompanied by an increase in volatility, a pattern that is seasonally common between now and October.

S&P 500 Index

Chart Courtesy of StockCharts.com

TSE Composite

Chart Courtesy of StockCharts.com

Horizons Seasonal Rotation ETF (TSX:HAC)

• Closing Market Value: $12.37 (down 0.24%)
• Closing NAV/Unit: $12.39 (up 0.18%)

Performance*

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

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

Copyright © Don Vialoux, EquityClock.com

Tags: Canadian, Canadian Market, Central Banks, Christmas Holiday, Conviction, CPI, Dips, Divergence, Don Vialoux, Economic Events, ETF, ETFs, Export Prices, Import Export, International Trade, Moving Average, Nyse, Stimulus, Trade Volume, Treasury Budget, Unemployment Rate, Volatility, Xmas Holiday
Posted in Markets | Comments Off

The “What if” Games Begin

Friday, August 10th, 2012

by Peter Tchir, TF Market Advisors

What if Europe is actually really going to get aggressive?

What if housing has bottomed and is starting to improve?

What if the Q2 jobs data was affected by adjustments as much as Q1 and the economy wasn’t as bad as some feared?

What if Chinese stimulus works?

What if earnings rebound in Q4?

“What if” is a close relative of “Green Shoots”. The market doesn’t need actual data to support it, just needs to think it might be coming. There are a lot of shorts who are nervous about this week’s price action. We didn’t get the typical Monday pullback. Here it is Thursday and we continue to push up against the highs. That is making people question their beliefs, and wonder “what if”. And it isn’t just the bears. Many bulls are underweight and are wondering “what if” this is the real thing.

For myself, I still think 1,425 is a good target, but above 1,410 I start selling again. I think the “what if” analysis is what will push us to those targets.

Copyright © TF Market Advisors

Tags: Bears, Bulls, Earnings, Economy, Europe, Games, Jobs, Nbsp, Price Action, Pullback, Q1, Rebound, Stimulus, Target, Targets, Tf
Posted in Markets | Comments Off

The Race for Resources

Sunday, August 5th, 2012

The Race for Resources

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

The world watched in awe as American swimmer Michael Phelps became the most decorated Olympian of all time. I’ve read he’s been training in the pool for an average of 6 hours a day, 6 days per week, which equates to about 30,000 hours since age 13 and about 10,000 calories burned during a training day. It’s inspiring to see the incredible results of his tremendous sacrifice and commitment.

Investing in global markets requires the same sort of stamina, especially at times like this week, when the month’s reading on the manufacturing industry was not encouraging. The J.P. Morgan Global Manufacturing PMI of 48.4 for July was the lowest since June 2009.

However, I believe there are encouraging pockets of strength to energize and inspire investors.

For example, we’re coming up on the anniversary of the first stimulus move that kicked off the global easing cycle. On August 31, 2011, Brazil unexpectedly cut rates by 50 basis points, and since then, ISI says 228 stimulative monetary and fiscal policy moves have been initiated across several countries, including the Philippines, China, France, and Colombia.

In June and July alone, there were nearly 70 moves—the most since the world began this massive easing.

Generally, by the time central banks make a fiscal or monetary easing move, economic deterioration has already occurred. Even with these moves, it still takes several months for the stimulative measures to take effect and work their way through.

But while the world wades in the shallow end of the pool waiting for the economy to warm up, Asia has taken a deep dive into the energy space as they’ve recently announced acquisitions of Canadian resources companies.

In my presentations, I’ve discussed how resources companies have significantly underperformed their underlying commodities. During 2009 and most of 2010, the performance between oil and the S&P 500 Oil & Gas Exploration and Production Index was closely correlated. By the middle of 2011, oil and oil stocks started to separate, with crude continuing to rise while stocks deteriorated. Even with the recent drop in oil prices, oil stocks have continued to lag.

I’ve also discussed the strikingly similar trend occurring between gold and gold stocks. There’s been a spectacular pop in gold stocks recently, but it hasn’t been enough to catch up to gold’s performance.

The disparities mean that the cheapest resources are not found in the ground—they’re listed, and it’s been confirmed by recent energy company acquisitions.

Chinese oil company CNOOC put in a bid of $15 billion to purchase Canada’s Nexen. This was at a 61 percent premium to Nexen’s share price on July 20, according to Bloomberg. As you can see below, not only did the takeout announcement close the gap, now the company is outperforming the price of oil.

If CNOOC’s deal is approved, the state-run oil giant gets even bigger, gaining access to significant energy stores in several areas of the world, including Canada, the Gulf of Mexico, Colombia and West Africa, as shown below.

With a rapidly growing middle class and rising urbanization, Chinese leaders know they need to fill their country’s tremendous energy demands and are continually finding innovative ways to keep their country powered. CNOOC’s acquisition is one way China continues to acquire not only the resources needed to power the country, but also the technological innovations that come from countries with free markets and lower barriers to entry. According to The New York Times, China “has been garnering advanced production technologies to better draw oil and gas from nontraditional areas like deepwater fields and hardened rock formations.”

The other announcement came from Malaysia’s state-owned and natural-gas giant Petronas, which will purchase Canada’s Progress Energy Resources Corp. Petronas is one of the largest producers and shippers of supercooled LNG fuel in the world. According to the Vancouver Sun, the company is “anxious to increase its market share in Asia, where analysts expect demand to surge 75 percent by the end of the decade.”

After Petronas’ original bid was announced, Progress increased 74 percent—a record gain for the company, says Bloomberg. As shown below, Progress now dramatically outperforms the underlying commodity.

Ready to be a Buyer like Asia?
If you’re contrarian investor, there may be an additional reason to jump into the market today. According to research from J.P. Morgan, institutional investors have become extremely negative, as hedge funds “essentially short the market,” meaning that their expectation is that stocks will fall.

J.P. Morgan looked at the rolling 21-day beta of macro fund returns compared to the S&P 500 Index returns and found that the ratio is at an extreme level of -0.26. Research shows that the last two times the ratio fell this low—in September 2010 and February 2012—stocks rallied. In 2010, the S&P 500 climbed 26 percent in five months; in 2012, stocks rose 8 percent in two months.

These signs the market is sending out make it an especially attractive time to “mine” for investment opportunity. In July, we began to see energy stocks and oil get recharged, as the energy sector in the S&P 500 was the second best performer, increasing 4.17 percent and crude oil rose 3.68 percent. Unlike the start of an Olympic race, in investing, there isn’t a signal sounded to let you know when to dive off the starting block into the markets. Just make sure your portfolio is poised to participate in the race for resources.

Tags: American Swimmer, Basis Points, Canadian, Canadian Market, Canadian Resources, Central Banks, Chief Investment Officer, Deep Dive, Economic Deterioration, Frank Holmes, Global Markets, J P Morgan, Manufacturing Industry, Michael Phelps, Monetary And Fiscal Policy, Pmi, Policy Moves, Stamina, Stimulus, Training Day, U S Global Investors, Wades
Posted in Markets | Comments Off

The Economy and Bond Market Radar (August 6, 2012)

Sunday, August 5th, 2012

The Economy and Bond Market Radar (August 6, 2012)

Treasury yields were little changed this week as a tug of war continues between global central bankers and economic data. This week was all about the Fed and ECB announcements, which came in with a bang last week but went out with a whimper this week.  Neither central bank took action and, once again, tried to reassure the markets with words not action. Global economic data remains weak as can be seen in the JPM Global PMI chart below, which indicates a global contraction in manufacturing. Tempering this news was a better than expected employment report on Friday, potentially causing policy action indecision from the Fed.

Strengths

• July nonfarm payrolls grew 163,000 vs. the 100,000 that was expected and was the best showing since February.
• Retail sales posted surprising strength in July as same-store sales rose 4.4 percent.
• Consumer confidence unexpectedly bounced back in July, showing greater optimism about short-term business and employment prospects.

Weaknesses

• ISM’s July manufacturing index remained in contraction territory for the second month in a row.
• The Fed failed to take any action this week after it was widely viewed that the Fed planted those seeds in a widely disseminated story last week.
• The ECB also failed to follow through with any action and possibly lost some credibility with investors. The market has become used to a lot of talk from European officials but when the head of the Central Bank promises to do whatever it takes to save the euro and then is unable to articulate exactly what that entails, it raises credibility issues.

Opportunity

• The Fed and ECB are still talking about additional monetary stimulus and it may happen in the near future. Interest rates are likely to remain very low for the foreseeable future.

Threat

• Europe remains a wildcard with the markets shifting focus on a weekly basis.
• China also remains somewhat of a wildcard as the economy has slowed and officials appear in no hurry to take decisive action.

Tags: Bond Market, Consumer Confidence, Contraction, Credibility Issues, ECB, Economic Data, Employment Prospects, Employment Report, European Officials, Indecision, Market Radar, Nonfarm Payrolls, Shifting Focus, Stimulus, Term Business, Treasury Yields, Tug Of War, Whimper, Wildcard
Posted in Markets | Comments Off

The Economy and Bond Market Radar (July 30, 2012)

Sunday, July 29th, 2012

The Economy and Bond Market Radar (July 30, 2012)

After hitting a new low on Tuesday, Treasury yields bounced back sharply on Friday as ECB president Mario Draghi vowed to do whatever it takes to save the euro. This news sparked a “risk on” rally driving risky assets higher and bond prices lower. Yields on Spanish 10-year government bonds reversed course and dropped sharply on the news as it appears the likelihood of a sovereign default has diminished.

Strengths

• In addition to the ECB news discussed above, there was a front page story in the Wall Street Journal earlier this week that was widely believed to be leaked from the Fed to prep the market for potential Fed policy actions as soon as next week. Monetary policy-makers are taking action around the globe.
• Second quarter GDP grew 1.5 percent. While this is a slow level of absolute growth, it modestly beat expectations.
• Several homebuilding companies reported earnings this week which indicated orders in the second quarter were very robust.

Weaknesses

• June durable goods orders ex-transportation fell 1.1 percent, indicating broad-based weakness.
• The U.K. economy contracted by 0.7 percent in the second quarter, while Mexico’s economy shrank by 0.36 percent in May.
• Markit’s July eurozone manufacturing Purchasing Managers Index (PMI) fell to the lowest level since June 2009. The more traditional PMI reports will be released next week, but the indications obviously look weak.

Opportunity

• The Fed and ECB are both talking about additional monetary stimulus. Interest rates are likely to remain very low for the foreseeable future.

Threat

• Europe remains a wildcard with the markets shifting focus on a weekly basis.

Tags: Bond Market, Bond Prices, Durable Goods Orders, Ecb President, Fed Policy, Government Bonds, Homebuilding Companies, Mario Draghi, Market Radar, Markit, Monetary Policy, Pmi, Policy Actions, Purchasing Managers Index, Quarter Gdp, Risky Assets, Shifting Focus, Stimulus, Treasury Yields, Wall Street Journal
Posted in Markets | Comments Off

Stephen Roach: “QE3 Is Not Going To Work”

Wednesday, July 25th, 2012

Is it any wonder that Stephen Roach is now ex-Morgan Stanley? Today’s brilliant truthiness in his interview on Bloomberg TV is an absolute must-watch as the veteran market practitioner notes that the Fed is forced to act next week and while consumers are telling you that they want to pay down debt – which all the monetray stimulus in the world is not going to change – that QE is nothing but crack to a ridiculously addicted market. With 70% of the US economy in a balance sheet recession, the Fed knows this (which he notes is now run by WSJ’s Jon Hilsenrath since what he prints must be adhered to by Ben for fear of market disappointment) and is “dangling QE in front of the markets like raw meat – but it has not worked and it will not work!” But critically, he believes, the euphoric response of markets will be tempered since they have become “used to the fact that all of this unconventional monetary easing by the central bank is just not what it is supposed to be.”

Roach on whether more Fed stimulus is a good idea:

“The Fed is flailing and has been flailing for the better part of the last three years. We had QE1, which worked, and that’s it. We’ve had QE2, Twist 1, Twist 2 and now maybe QE3. The economy is in the doldrums. The biggest piece of the economy is the American consumer. 70% is in a balance sheet recession…The Fed knows this, but they are dangling this raw meat in front of the markets and the markets are salivating as they always do in that frenetic way that they try to believe in the Fed. But it has not worked and it will not work. “

On how likely it is that the Fed will issue more stimulus:

“Absolutely. They have no choice. They have gone about their usual pre-FOMC leak frenzy where they talk to this reporter and that reporter. Jon Hilsenrath is actually the chairman of the Fed. When he writes something in the Wall Street Journal, Bernanke has no choice but to deliver on what he wrote.”

On whether the Fed will move on stimulus next week:

“Absolutely. They will not disappoint the markets. The markets are now setting themselves up and discounting the next QE2. The Fed has just woken up to ‘oh my gosh, the economy is weak again.’ Well hello! The economy has been weak for the consumer for 18 quarters. The growth rate of consumption over the last four and a half years has averaged below 1%. 70% of the economy growing below 1% and the Fed is just figuring this out? Come on.”

“The point is, when they plant a story in the Wall Street Journal, and this story has been planted. Jon Hilsenrath is the weed that grows…the guy has a perfect track record…They’ll do some type of QE3. Twist 2 was a huge disappointment. It was a feeble flailing at the windmill and the economy is a lot weaker than when they reached the Twist 2 decision. They’ll have to do another round of quantitative easing. I don’t know exactly what securities will be involved. You could speculate it could be mortgage-backeds to try to help the housing market. There is some criticism they have been too focused on Treasuries. We’ll have to wait and see, but I think it will definitely be another round of quantitative easing as opposed to the twisting again like we did last summer.”

On whether QE3 will work:

“No, it’s crack! That’s what it is. It’s not going to work. QE1 worked because it was in the midst of wrenching crisis. QE2 failed, despite what the Fed’s research shows. Twist 1 has failed. Twist 2 is failing. When 70% of the economy is in a balance sheet recession and the growth rate for 18 quarters in row has been at less than 1% at an average annual rate, consumers are telling you something. They want to pay down debt and rebuild saving and all of the monetary stimulus in the world is not going to change what is a perfectly rational response. So the idea that the Fed is going to step in and save the day, it has not worked in the past except during the depths of the crisis and i give them credit for that. And it will not work in the future. Don’t believe the Fed PR that they put out while we have research that shows that it worked. Of course they do.”

On whether he expects futures to be higher than they are right now:

“The markets have responded positively to the leaks that came out late yesterday afternoon, but the response is small. I think the markets have gotten used to the fact that all of this unconventional monetary easing by the central bank is just not what it is supposed to be. In terms of delivering an actionable vigorous response in the real economy.”

Tags: Balance Sheet, Bernanke, Chairman Of The Fed, Consumers, Crack, Disappointment, Doldrums, Frenzy, Morgan Stanley, Qe, Qe1, Qe3, Raw Meat, Recession, Stephen Roach, Stimulus, Truthiness, Wall Street, Wall Street Journal, Wsj
Posted in Markets | Comments Off

4 Reasons to Like China

Thursday, July 12th, 2012

Last month, in my Investment Directions monthly commentary, I predicted that we’d see further stimulus from China this yearas officials try to keep Chinese growth at a respectable rate ahead of a fall 2012 leadership transition.

And as I suggested would happen, the Chinese central bank last week announced its second surprise rate cut within a month. The action from the central bank was an acknowledgement that the world’s second largest economy is slowing. In the first quarter, China’s growth decelerated to 8.1% year over year, the slowest pace since the summer of 2009 as a slowing United States and ongoing European sovereign debt crisis took a toll on Chinese exports.

Still, despite China’s economic slowdown, I continue to hold an overweight view of Chinese equities for the following four reasons:

1.)    Valuations: Chinese stocks are selling at a significant discount to both other Asian emerging market countries and to their own history, especially when you consider that Chinese inflation is decelerating. In addition, current discounted valuations appear to be already reflecting the risk of a hard landing, which I don’t believe is the most likely scenario for China.

2.)    Growth Expectations: While China is experiencing a slowdown, it’s important to put China’s growth in perspective. I expect second quarter Chinese growth to come in around 8%, a level consistent with a soft landing scenario, and not anywhere near the United States’ truly slow 2% growth. In addition, the preponderance of evidence – and the few bright spots among weak recent economic data — still suggest that China can engineer a soft landing and even if China ends up growing at 7% to 7.5% next quarter, Chinese equities still look cheap.

3.)    Economic Policy: That China lowered interest rates twice within a month suggests that Beijing is refocusing on, and is willing to go the distance to stabilize, growth. In fact, I continue to expect more stimulus from China as it tries to ensure a smooth upcoming leadership transfer and as cooling inflation in the country gives the government more room to focus on growth. In addition, the gradual liberalization of the financial industry is also a plus for long-term growth.

4.)    Relatively Low Risk: Based on my team’s analysis, China is not one of the 15 riskiest markets. In addition, China enjoys a relatively stable currency, which reduces the volatility of its USD returns.

To be sure, Chinese equities, along with other risky assets, are still vulnerable to the fortunes of the global economy, and an exogenous shock, such as a worsening eurozone crisis, could certainly knock China off of its trajectory. But in the absence of such an event, most evidence suggests that China can engineer a soft landing and its outlook seems more positive than investors may be discounting. I prefer to access Chinese equities through the iShares MSCI China Index Fund (NYSEARCA: MCHI) and the iShares MSCI China Small Cap Index Fund (NYSEARCA: ECNS).

Source: Bloomberg

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

In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Securities focusing on a single country and investments in smaller companies may be subject to higher volatility.

Tags: Acknowledgement, Chinese Central Bank, Chinese Exports, Chinese Growth, Chinese Stocks, Debt Crisis, Economic Data, economic policy, Economic Slowdown, Emerging Market Countries, First Quarter, Growth Expectations, inflation, Investment Directions, Leadership Transition, Preponderance Of Evidence, Sovereign Debt, Stimulus, Surprise Rate, Valuations
Posted in Markets | Comments Off

Recessions and Distorted Market Signals

Wednesday, June 13th, 2012

by Guy Lerner, The Technical Take

There is no question that the Federal Reserve’s market interventions have distorted market signals.  What used to be no longer applies.  The elephant in the room with the deep pockets has pushed bond yields down to historic lows, yet the desired effect – a growing economy — has been anything but that.  Despite the massive stimulus, the recovery is the weakest on record.  And now as the latest Fed incarnation of stimulus (i.e., Operation Twist) is about to end, the markets and economy are sputtering.  What will the Fed do next?  And this is the only thing that matters to a market hooked on the monetary morphine.

Figure 1 is a weekly chart of the SP500.  The red labeled bars are those times when the Economic Cycle Research Institute’s Leading Economic Indicator (ECRI) suggests that U.S. economy is in a recession.  The record of the indicator is not perfect in that it doesn’t always correlate with the National Bureau of Economic Research official recession calls, but the presence of a red labeled bar should alert one to look for other supporting factors that the economy may be sputtering.  (As an aside, the ECRI’s LEI is but one factor considered in my own Real Time Recession Indicator.)

Figure 1 SP500/ weekly

Now look at figure 1 and note the 2010 and 2011 time periods.  The ECRI’s LEI was suggesting that the economy was dipping into recession.  But rather than head lower in anticipation of a recession, the stock market bottomed and headed significantly higher.  So what gives?  Of course, thanks to QE2 (2010)and Operation Twist (2011), the Fed was able to avert the natural course of events and avoid the dreaded recession.  In other words, the ECRI’s LEI didn’t signal an oncoming recession; it signaled increasing liquidity and market intervention by the Federal Reserve.  What used to be no longer applies!  Fed intervention has distorted market signals.

Now comes 2012, which appears to be playing out like 2010 and 2011.  The market is selling off as another Fed program to stimulate the economy (and stock market) is ending.  The equity market is weak as the monetary morphine dissipates, and bond yields have hit new lows in anticipation of the economic weakness and a new round of bond purchases.  According to the ECRI’s LEI, the economy is weakening, and we should remember, this is just one tool to assess the health of the economy.  But if the Fed were going to intervene in the markets, now appears to be the time as economic growth is on the wane.

Of course the key questions remain: 1) Will doing more of the same avert the natural course of events — that is prevent another recessions?  and 2) How sustainable will the economic bounce be?  As I will show next time, the Fed appears to be losing the battle.

Copyright © The Technical Take

Tags: Bond Yields, Course Thanks, Deep Pockets, Desired Effect, Economic Cycle Research Institute, Ecri, Guy Lerner, Incarnation, Leading Economic Indicator, Market Intervention, Market Interventions, Morphine, National Bureau Of Economic Research, Qe2, Recession, Recessions, S Market, S&P500, Stimulus, Time Periods
Posted in Markets | Comments Off

China: A Mixed Bag Turns Very Ugly

Monday, June 11th, 2012

by Wolf Richter, www.testosteronepit.com

2010 was a magical year in China. Among the world records: 18 million new vehicles sold. Due to unprecedented stimulus, sales had skyrocketed 33% that year and 54% in 2009—mind-boggling growth rates which catapulted China to the number one new-vehicle market in the world, far ahead of the US which had never sold that many units in a single year, not even during the halcyon days before the financial crisis. In terms of passenger vehicles (excluding buses and trucks), 14.5 million units were sold in China that year, compared to 12 million in the US.

Exuberone, a hormone that governs industry thinking from time to time, had taken over. In January 2011 at the Automotive News World Congress in Detroit, Dazong Wang, president of Beijing Automotive, threw a number into a room: 40 million. That’s how many new vehicles would be sold in China by 2020, he said, roughly 30 million passenger vehicles and 10 million commercial vehicles.

People sucked in air. The number was beyond easy comprehension. But soon, it became a guidepost. Investment in manufacturing plants surged as foreign and Chinese automakers scrambled to get their share of that 40 million—and foreign automakers had to pay a steep price in terms of technology transfer, an inescapable feature of investing in China’s auto sector. For how automakers dealt with that last year, read…. China Puts the Screws to BMW.

Alas, in 2011, sales inched up only 2.5% to 18.5 million vehicles—though foreign brands still did well. 2012 may turn out to be even tougher. And now, the problem is production.

Automakers have ramped up at a torrid pace. In May, wholesale deliveries to distributors jumped 23% from prior year to 1.28 million units, higher than analysts had expected. Toyota and Honda, recovering from last year’s supply problems following the earthquake and tsunami, nearly doubled their sales to distributors. Ford pushed 23% more units into the pipeline, GM 21%. BMW announced on Monday that it had achieved record global sales in May, despite very tough conditions in some teetering Eurozone countries. Reason: China, where sales jumped 32%. And those are the sales that make their way into automakers’ financial statements.

Stunning as they may be, they’re wholesales to distributors, not to consumers. At dealerships, however, the scenario is turning from less rosy to gruesome—final sales in May were not robust enough to digest the flood of production. Inventories on lots across the country ballooned from 45 days’ supply at the end of April to 60 days’ supply by the end of May—a dizzying 33% increase in just 30 days.

And the ballyhooed 23% increase in wholesale deliveries that got analysts drooling all over themselves? Unsold. Added to inventory. Channel stuffing. Testimony of rampant overproduction. And it has turned into an inventory glut. Yet, not a week goes by without a major automaker announcing starry-eyed plans of investing in new plants or expanding existing ones. As these plants come on line, their production washes over the market, adding to a market that is already saturated.

The auto industry—not just manufacturing vehicles and components but also building plants and the infrastructure to supply them—has been a driver of economic growth. And it’s still playing that part, just like building ghost cities is contributing to growth. But for how much longer? [Bubbles can last far longer than reasonable observers might expect. For one of those, a bit off the beaten path, read.... Now They Have another Speculative Bubble in China: Art.]

Perhaps the People’s Bank of China saw a thing or two beyond publicly known data when it announced a 25-basis point rate cut last week, the first since 2008, because so far, economic data has been a mixed bag of decent numbers. Exports were strong, up 15.3% in May over prior year. Retail sales rose 13.8%, lower than expected, but still. And industrial production grew 9.6%, a healthy clip—but ominously, it included hundreds of thousands of new vehicles that have been overproduced and are now piling up on lots around the country.

And so there are divergent scenarios: automakers under the influence of euphorone are building plants, adding capacity, pumping out units, and stuffing channels with all their might—while dealers, who are forced to take their quotas, are unable to sell about a third of the new production. For them, it will turn into a nightmare as they drown in inventory, the costs of carrying it, and the losses inherent in selling vehicles that have been sitting on the lot too long.

Their only hope is that the government or automakers will introduce incentives to lure people into dealerships. Some are already underway, such as a subsidy for vehicles with engines of less than 1.6 liters. But vehicle sales to consumers would have to skyrocket to meet the phenomenal and still growing production. Unlikely. Next step will be production cuts and layoffs. When that proves insufficient, expansion plans will be trimmed. Another sharp hissing sound from the China bubble.

Populist and nationalist movements sweeping the world are another threat to China, globalization’s biggest winner, and are a visceral rejection of China as the world’s biggest exporter. For a fiasco in the making, read…. Death Of Globalization Will Shatter China.

Copyright © www.testosteronepit.com

Tags: 30 Million, Auto Sales, Auto Sector, Automotive News, Chinese Automakers, Commercial Vehicles, Dazong Wang, Financial Crisis, Guidepost, Halcyon Days, Investing In China, manufacturing plants, Million Vehicles, New Vehicles, Palas, Passenger Vehicles, Ppeople, Span Id, Steep Price, Stimulus, Technology Transfer, Torrid Pace, Wholesale Deliveries, World Congress
Posted in Markets | Comments Off

Niels Jensen: Investment Outlook (June 2012)

Sunday, June 10th, 2012

The Absolute Return Letter
June 2012

First Mover Advantage

“The problem with socialism is that you eventually run out of other people’s money.”
- Margaret Thatcher

Bubble? What bubble?

Sometimes I wish I could have a second go at my writing. Last month, and not for the first time, I realised that what had seemed pretty clear and unequivocal to me was misunderstood by many readers. More specifically, I am referring to the concluding remarks in last month’s Absolute Return Letter where I stated that Asia has the potential to become a re-run of Europe. My argument was based on the simple but undeniable fact that policy rates are well below where they ought to be when taking into consideration the overall level of economic activity and inflation (the so-called Taylor rule).

Those comments were interpreted by many readers as if I expect an imminent crisis in Asia of the sort we currently suffer from in Europe. Nothing could be further from the truth. Allow me to explain:

Following the introduction of the euro, Spain and Ireland, and to a lesser degree Portugal, experienced an enormous construction-led economic boom which was the direct consequence of easy access to cheap capital. The ECB was certainly aware of the potential problems this might create down the road; however, it had no choice but to set the policy rate at a ‘one size fits all’ level, and the German economy badly needed some stimulus back in the early stages of the euro era. By choosing to support the weakest link in the chain, the ECB had effectively sown the seeds of a bubble which would blow up almost a decade later.

There are at least two lessons to be learned from that experience, the first one being that bubbles take a long time (as in many years) to build up and, in the meantime, there is usually a great deal of money to be made. Secondly, when the ECB responded to the bursting of the dot.com bubble, as most central banks did in 2001-02, the law of unintended consequences kicked in. By their very nature, bubbles create echo bubbles. What is currently happening in Asia – and I throw in Australia for convenience – could very well turn out to be an early to mid stage echo bubble.

I had been planning on writing on the topic of Asia in much more detail this month, partly to clarify my views expressed in last month’s conclusion (which I hope I have accomplished now) but also to address some of the nearer term issues Asia is facing. Then things in Europe got out of hand again, following the Greek elections, so Asia will have to wait until next month.

As a primer to next month’s letter, I couldn’t resist the urge to throw in just one chart, produced by the great economist and blogger Steve Keen from Down Under. Steve has produced a long term chart of Australian versus US property prices (see chart 1 below and the whole paper here). Steve finds it outright comical that Australians are in complete denial as to where they are in the property cycle. Bubble? What bubble? Much more on this topic next month.

It is a banking crisis idiot!

Now back to Europe. The eurozone crisis has always been a banking crisis. It only morphed into a sovereign crisis because of political incompetence. Solve the banking crisis and you have solved the euro crisis. That is my prediction. On the other hand, as long as the Germans continue to say Nein to pretty much anything that anyone puts on the table, we are still a long way away from solving the crisis. Only a few days ago Angela Merkel reiterated her rejection of the idea of mutualising eurozone sovereign debt. The proposal came from SPD, the major opposition party in Germany, with the idea being that all eurozone debt within 60% debt-to-GDP should be mutually guaranteed. However, Merkel said Nein. Again.

Tags: Absolute Return, Central Banks, China, ECB, Economic Activity, Economic Boom, Enormous Construction, First Mover Advantage, German Economy, Imminent Crisis, Introduction Of The Euro, Investment Outlook, Margaret Thatcher, Niels Jensen, Stimulus, Taking Into Consideration, Taylor Rule, Undeniable Fact, Unintended Consequence, Weakest Link, Weakest Link In The Chain
Posted in Markets | Comments Off