Posts Tagged ‘China’
Why Gold is Declining (The King Report)
Friday, March 12th, 2010
We received several inquiries about why gold is declining. Our view is gold is retrenching because:
• UK QE has ended (for now)
• US QE will end in three weeks (for now)
• The ECB did a massive €295B drain (can you imagine the market reaction if Bennie Mae drained $500B in one shot?]
• China is signaling that it wants to rein in inflation by tightening credit, hiking real estate down payments to 50% and allowing the yuan to appreciate
• Europe’s sovereign debt crisis has ebbed (for now)
• Food commodities have broken down
• Gold stocks have greatly underperformed gold since mid-January (gold stocks tend to lead) S&P
S&P 500 Index, Gold and Gold Stocks (GDX) – Gold stocks out-performed gold until late October. Then they traded together until mid-January. Since then gold stocks have under-performed gold.
Source: The Big Picture, March 12, 2010
Tags: Advertisement, Amp, Big 12, Big Picture, China, Debt Crisis, ECB, Europe, Food Commodities, Gold Source, gold stocks, Imagine, Index Stocks, inflation, Inquiries, Lead, Mae, Qe, Real Estate, Sovereign Debt, Yuan
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Get Ready for a Little Emerging Markets Inflation
Friday, March 12th, 2010
Today I was thinking about tightening cycles in emerging markets, and more specifically about those in China. Because let’s face it, China matters. China matters to the rest of Asia via competition for export income. China matters to Europe via competition for jobs. China matters to Brazil via domestic production via imports. China matters.
The inflation pressures are building in key emerging economies, especially in the BIICs (Brazil, India, Indonesia, and China) - see this previous post regarding my new acronym, and this article at the Curious Capitalist (curiously posted just shortly after my post), which leaves my omitted “R” but relays the intuition behind the second “I”.
Although the inflation is not prevalent in any BIIC except India, really, I wanted to comment about why it will build…quickly.
First round, the construction of consumer prices is heavily weighted towards food and energy costs across the BIICs. Indonesia, India and China are highly susceptible to food price shocks (either driven by shortages or demand growth). Expect this as a first-round driver of inflation as the global economy recovers further. It’s already happening.
Second round, the BIICs are growing quickly and nearing, or are already at, potential. Annual industrial production growth has recovered or surpassed its pre-crisis rate in China, Brazil and India - 19%, 16% and 17%, respectively. This is expected, given the drop-off in world trade (an illustration can be found from this May 2009 post), but unsustainable as the output gap closes.
Third round, interest rate differentials. This year, the BIICs’ central banks are expected to raise policy rates. In fact, Brazil, China and India have already boosted reserve requirements. But with US rates expected to stay low for an “extended period”, international interest rate differentials will change and monetary flows will shift. Capital inflows can lead to inflation if not properly sterilised.
To date, inflows have not been properly sterilised, as evidenced by the ongoing accumulation of reserves and rising money-supply growth (again, I refer you to my previous post on M1 growth rates.
The chart above illustrates the one-year-ahead nominal interest rate differential between the two-year forward government rate for each respective BIIC country versus the two-year forward US Treasury rate. The forward differentials for China and India are on a steady upward trajectory, while those for Brazil and Indonesia are simply steady. I believe this appropriately represents the sterilisation efforts and monetary policy management on the part of the BIICs’ central banks: more managed in Brazil and Indonesia, not as much in China and India.
So where does this analysis leave us? With a very interesting policy mix in the emerging-market space. In fact, in my view this is the riskiest part of the emerging-market cycle: the recovery. If policymakers get this wrong, we could see a lot of price action, final goods and assets alike, on the horizon.
Source: Rebecca Wilder, News N Economics, March 11, 2010.
* Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.
Tags: Acronym, Biic, BRIC, Capital Inflows, Central Banks, China, Curious Capitalist, Emerging Economies, Emerging Markets, Energy Costs, Export Income, Food Price, Gap, Global Economy, Illustration, India, India Indonesia, Indonesia, Inflation Pressures, Interest Rate Differentials, International Interest, Intuition, Jobs Brazil, Monetary Flows, Output Gap
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How China Sees the World
Thursday, March 11th, 2010
Source: The Economist, May 19, 2010 (hat tip: Atlantic Asset Management).
Tags: Asset Management, China, Economist, Hat Tip, World Source
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Confessions of a Bull.
Tuesday, March 9th, 2010
This article is a guest contribution from John Thomas, madhedgefundtrader.biz, via ZeroHedge.com
Confessions of a Bull. Barton Biggs, founder of mega hedge fund Traxis Partners, spent an hour outlining his current investment strategy with me. Barton is a man of strong opinions, backed with intensive research, which he communicates with his characteristic gravel voice. I spent the better part of the eighties debating every pebble of the investment landscape with Barton. As I recall, “what to do about Japan?” was the topic of the day, and I was bullish.
Today, Barton can say with “real certainty” that large cap multinational equities are the cheapest they have been in 30 years using sophisticated models that analyze price/sales, price/free cash flow, price/earnings, and a whole host of other metrics. Looking just at price/book ratios, these stocks have been this cheap only three times in the last 120 years.
Big cap technology stocks, like Microsoft (MSFT), Intel (INTC), Cisco (CSCO), and Oracle (ORCL) are at the top of his list. Other multinationals with plenty of emerging market exposure are attractive, such as Caterpillar (CAT). The easy way in here is to simply buy the S&P 100 ETF (OEF). The market is now at a 15-16 multiple, discounting S&P 500 earnings for 2010 at $75/share. A stronger than expected economy will take that figure as high as $90/share, which the market is not expecting at all.
| Microsoft Corpora - MSFT | 29.27 | ||
| Intel Corporation - INTC | 21.27 | ||
| Cisco Systems, In - CSCO | 25.88 | ||
| Oracle Corporatio - ORCL | 25.05 | ||
| Caterpillar, Inc. - CAT | 60.36 | ||
| iShares S&P 100 - OEF | 52.84 |
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The grizzled old Wall Street Veteran sees the US as half way through an economic recovery, and the main benchmark indexes could surprise to the upside, as they have such heavy big cap weightings. He would avoid domestic companies, such as those in real estate, as the environment for stocks generally is poor. He foresees a “new normal” of a lot of volatility in stocks for the next 4-5 years. Longer term he sees US GDP growth downshifting from the heady 3.8% annual growth rate of the last decade to only 2.5 % in this one. But big cap multinationals should be able to bring in a reliable 5%-6% annual return on top of inflation.
Looking at the world as a whole, Barton thinks Asia is the place to be. A mammoth bubble may be developing in China (FXI), but it is at least 3-5 years off, and there will be plenty of money to be made until then. India (PIN) is another big pick because it is ten years behind China, and has yet to experience its big growth spurt. South Korea (EWY), Thailand (THD), Taiwan (EWT), H-shares in Hong Kong (EWH), and Turkey (TUR) are also lining up in Barton’s sites. Looking at a 1%-1.5% growth rate, things look grim for Europe, with the possible exceptions of Poland (PLND) and Russia (RSX). Traxis is short Brazil (EWZ), because it has already had a great run, and because the country still faces some severe social problems.
| IShares Trust ISh - FXI | 41.24 | ||
| BMO CHINA EQUITY - ZCH.TO | 14.66 | ||
| ISHARES CHINA IND - XCH.TO | 20.31 | ||
| TAO.TO - TAO.TO | 0.00 | ||
| PowerShares Excha - PIN | 21.85 | ||
| ISHARES S&P CNX N - XID.TO | 20.26 | ||
| BMO INDIA EQUITY - ZID.TO | 14.05 | ||
| iShares Trust (Ba - EWY | 48.68 | ||
| iShares Trust iSh - THD | 43.92 | ||
| iShares Trust (Ba - EWT | 12.41 | ||
| iShares Trust (Ba - EWH | 16.06 | ||
| iShares Trust iSh - TUR | 52.34 | ||
| Market Vectors Po - PLND | 25.17 | ||
| Market Vectors Ru - RSX | 33.33 | ||
| iShares Trust (Ba - EWZ | 73.23 |
Commodities had their run last year, and won’t do much from here, but they aren’t going to crash either. He sees oil (USO) grinding up because the cost of new sources is becoming astronomically high. Barton avoids gold because it has no yield or PE, and would rather not be associated with the crazies that inhabit that space. Bonds (TBF) will be deflation driven for the next year, but are definitely not for your “Rip Van Winkle” investor, as they represent poor value for money. Real estate is dead money. To hear my interview with Barton at length on Hedge Fund Radio, please click at http://www.madhedgefundtrader.biz/Barton_Biggs.html
For more iconoclastic and out of consensus analysis, you can always visit me at www.madhedgefundtrader.com , where the conventional wisdom is mercilessly flailed and tortured daily.
Source: Zerohedge.com, March 9, 2010.
Tags: Barton Biggs, Cap Technology, Caterpillar Cat, China, Cisco Csco, Commodities, Downshifting, Emerging Markets, ETF, Free Cash Flow, GDP Growth, Gravel Voice, India, Intc, Intensive Research, Investment Landscape, Last Decade, Market Exposure, Msft, oil, Oracle Orcl, Price Earnings, Sophisticated Models, Street Veteran, Technology Stocks, Traxis Partners
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Yuan “Unlikely to Rise,” says Wen
Monday, March 8th, 2010
Three weeks ago I wrote that China was taking advantage of softness in the market t0 ‘talk’ tightening. Despite Jim O’Neill’s assertion that a hike in the currency’s value was imminent, I felt that China was less likely to raise the yuan’s value at present, as it would hamper the recovery of its coveted export sector, and that it would opportunistically continue talking.
New York Times confirms today that China’s bank chief, Wen Jiabao, has officially announced that it is unlikely to so.
BEIJING — China’s central bank governor indicated Saturday that the government was unlikely to detach the value of China’s currency from that of the dollar anytime soon, echoing Prime Minister Wen Jiabao’s statement on Friday that exchange rates would remain “basically stable” for now.
… At a Saturday news conference, the central bank head, Zhou Xiaochuan, said China should be “very cautious” about revaluing its currency, also known as the yuan, as long as major economies remained mired in slow growth.
Translation - We will continue to take advantage of our doubly cheap currency to drive recovery of our over-advantaged, over-capacity export sector, at the expense of our trade competitors, and Americans will continue to be able to buy cheap goods at Walmart during this difficult economy - sounds like a win-win.
For much more analysis on China, visit AdvisorAnalyst’s China page.
Tags: Assertion, Bank Chief, Beijing China, Central Bank Governor, Cheap Currency, China, China Currency, China Page, China Visit, Exchange Rates, Export Sector, New York Times, News Conference, O Neill, Prime Minister, S Central, Saturday News, Softness, Walmart, Wen Jiabao, Yuan, Zhou Xiaochuan
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Chinese Yuan v The U.S. Dollar: In The Case of Global Reserve Currency
Wednesday, March 3rd, 2010
By Dian L. Chu, Economic Forecasts & Opinions
The practice of accumulating dollar reserves by the central banks has become more pronounced after the 1997 Asian financial crisis, when currency speculators hastened a balance of payments crisis in Thailand, Indonesia and South Korea by demanding dollars for local currency, depleting the central banks’ dollar reserves.
Fast forward 13 years later, the dollar’s status as the world’s preferred reserve currency has come into question amid a ballooning budget deficit that keeps the U.S. dependent on foreign financing. Both Russia and China last year suggested a type of “super-sovereign reserve currency” to challenge the dollar, while Brazil and India also discussed substituting other assets for their dollar holdings.
IMF - “That Day Has Not Yet Come”
Reigniting the argument, Dominique Strauss-Kahn, the head of the International Monetary Fund (IMF), said last Friday that it would be “intellectually healthy to explore” the creation of a new global reserve currency to reduce dependence on the dollar.
Mr. Strauss-Kahn did say there could be a globally issued reserve asset some day, but “that day has not yet come.” However, his remarks signaled broader concern over the dominance of the dollar, and “the extent to which the international monetary system as a whole depends on the policies and conditions of a single, albeit dominant, country.”
All these beg the question - Who could be the next global reserve currency succeeding the dollar?
Dollar Reserve - A Decade of Decline
The most recent foreign exchange report from the U.S. Treasury Dept. shows that the dollar reserve holding percentage has been on a steady decline - even before the financial crisis. As of 2009, the dollar still comprised about 60% of foreign reserves, compared with less than 30% for the euro, followed far behind by the pound and the yen. (see graph)
According to the Peterson Institute for International Economics, although the dollar remains the most important reserve currency over the last ten years through the first quarter of 2009, adjusting for the exchange rate effects, the dollar’s share in foreign exchange reserves has declined on balance 4.3%.
Reserve Currency Factors
The U.S. Treasury report points to several key factors identified by economists that determine the use of a currency for reserves:
- the size of the domestic economy
- the importance of the economy in international trade
- the size, depth, and openness of financial markets
- the convertibility of the currency
- the use of the currency as a currency peg
- domestic macroeconomic policies
PIIGS Decimate Euro
Based on these criteria, the euro zone, similar to the United States in size, share of global trade, and currency convertibility, makes the euro a viable contender for the dollar’s crown. And in contrast to the dollar, the euro has steadily taken market share regarding global foreign reserves during the past ten years, and has become the second most popular reserve currency. (see graph)
Unfortunately, the debt and budget woes of the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) have seriously damaged the confidence and credibility of the European Union and the euro, essentially decimating the euro’s chances as an alternative to the dollar.
The euro has already hit a one-year low against the yen, and nine-month low against the dollar on speculation that Greece’s credit rating will be downgraded further. The viability of the European Union and the euro as a going concern has also come into question.
Dollar Reigns Liquidity Supreme
Even without the Greece debacle, the lack of liquidity within the euro zone also makes it difficult to compete against the dollar. One important reason the US dollar remains the reserve currency is that the U.S. treasury market is the most liquid market of its sort. A liquid debt market allows central banks to intervene in foreign exchange markets in order to smooth currency fluctuations.
As noted by the U.S. Treasury Dept. report:
“The euro has not become the dollar’s equal as a reserve currency because there is no common sovereign-debt market across the euro zone.”
From that perspective, sterling and yen, the next two preferred reserve currencies following the euro, pale in comparison to the dollar in terms of liquidity and facilitating global trade. Moreover, Moody’s (MCO) warned of possible downgrades on UK and Japan due to high debt, interest payments and slow GDP growth. (The pound was in virtual free-fall at one stage this Monday and sank to a ten-month low against the dollar on renewed worries about a hung parliament.)
Gold or Yuan?
While there are many advocating an international gold standard, or another international standard currency based on a basket of commodities and/or currencies, it is very difficult to see sufficient international consensus for this to be practical or feasible.
So, waiting in the wings is the Chinese renminbi (RMB) or yuan. The appointment of Zhu Min, the deputy governor of China’s central bank, as a special adviser to the IMF seems to signal China’s assertion in the global currency scheme. The fund, historically led by a European but dominated by the United States, has tried to engage emerging economies like Brazil, China, India and Russia.
But according to economist Geng Xiao, director of the Brookings-Tsinghua Center for Public Policy, it’s still in China’s—and the world’s—best interest not to dump the dollar just yet.
Yuan Revaluation Solves Nothing
In an interview with McKinsey Quarterly, Xiao noted that there’s no argument on either side about the trade imbalance between China and the US. However, there are some philosophical differences between the two as the US places more emphasis on the short-term adjustment through price and the RMB exchange rate, whereas the Chinese put more emphasis on medium and long-term structural and institutional change.
Xiao finds it quite difficult for the exchange rate to correct the trade balance:
“Even if you change the exchange rate, it will have very little impact on US trade deficit because the US is going to buy from some other countries.”
Time To Reform & Float
China needs time to push through difficult economic reforms at home before it can allow its currency to float freely against the dollar, as Xiao explains:
“China needs a benchmark so that the price can be compared to the global price, to the price structure, compatible with efficiency. That’s why price reform is more important than exchange-rate change… Exchange-rate change would not really change the inefficiencies … [as] the internal subsidies are still there.”
Xiao estimates it’s going to take 5 to 10 years for China to correct its distortions - land reform, reform of the energy sector, state-owned-enterprise reform, and social welfare. Only when the productivity of China reaches that of the United States will the two countries’ price structures converge.
The Worst-Case Scenario
A worst-case scenario might come to fruition if China allows RMB appreciation expectation to continue, building up more foreign-exchange reserves, as Xiao cautions:
“I don’t see that there’s any way that China can significantly reduce its holding of the dollar assets….But if pushed hard, China can always do more. And even marginally, a little bit more is going to have a big impact in the market.”
Dollar Rules … For Now
Indeed, overtime, China should be able to transform into a modern market economy. And if the Chinese economy continues to grow at its current pace, the RMB will eventually become one of the important reserve currencies, just like the US dollar.
But for now, there are several factors strongly supporting the dollar. In addition to a liquid debt market, many commodities, including oil and gold, are quoted in the US currency. Roughly 88% of daily foreign exchange trades involve US dollars. One currency essentially facilitates global trade, and commodities can be priced homogenously wherever traded.
And China, the top U.S. debtor with a massive holding of $894.8 billion in Treasury securities at the end of last December, is shifting to longer-term US treasuries and at the same time accumulating US stocks, raising its overall holdings of long-term American securities.
China’s huge holdings of dollar reserves in the form of Treasury securities has become a concern for officials on both sides of the Pacific. However, the fact remains that the dollar is still the most liquid, the most stable currency, comparatively speaking. In that sense, it is unlikely for China to significantly reduce its holding of dollar assets in the foreseeable future.
Dethroned By 2050?
Most Western experts seem to agree that the prospect of a dollar replacement for a new world reserve currency is unlikely to materialize anytime soon because there is no serious alternative on the horizon.
Doubts also remain that the Chinese can challenge the greenback. Nevertheless, there seems to be more or less a consensus forming among many Western experts that the Chinese are on an unmistakable path toward challenging the dollar in a transition period of 10 to 15 years, roughly coinciding with the projections of Mr. Geng Xiao.
British economist Angus Maddison predicts that China will surpass the US by 2015. Drawing historic parallels of the last switch in reserve currency (from pound sterling to the US dollar) would imply the Chinese renminbi may be expected to replace the US dollar as a reserve currency around 2050, the mid-21st century.
Dollar Demise by A Greece-Like Crisis?
Meanwhile, even though the debt crisis of troubled southern European nations have taken hold of headlines lately, Moody’s and its peers have expressed concerns about the financial health in Japan, UK and the U.S., mostly centered around debt and debt service in these larger nations.
For instance, interest paid on U.S. Treasury debt has been soaring the last two years and is expected to reach over $700 billion a year by the end of the decade. The U.S.’s ratio of total debt to GDP is likely to exceed 90% this year, making it more indebted even than Spain and Portugal.
While the US has been enjoying the reserve currency status, this is by no means assured for the future. For now, investors are seeking refuge in the U.S. Treasury market. However, a broken-down political system, the debt and the deficit inevitably could sink America into a Greece-like crisis, nudging the dollar’s demise sooner, rather than later.
Tags: Asian Financial Crisis, Balance Of Payments, Budget Deficit, Central Banks, China, Chinese Yuan, Currency Speculators, Dian, Dollar Terms, Dominant Country, Dominique Strauss Kahn, Economic Forecasts, Exchange Report, Gold Price, International Monetary Fund, International Monetary Fund Imf, International Monetary System, Investment Demand, Minor Currencies, Reserve Asset, Reserve Currency, South Korea, Steady Decline, Story Source, Treasury Dept, U S Treasury, Vote Of No Confidence
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China PMI - canary in a coal mine?
Tuesday, March 2nd, 2010
China’s PMI numbers for February were released yesterday and received surprisingly little media attention. Although I am usually not keen to slice and dice single-month statistics too intensely, the latest suite of manufacturing indices does seem to warrant more than cursory attention.
Firstly, a summary of the numbers as provided by the China Federation of Logistics & Purchasing (CFLP) and reported by the Li & Fung Group.
PMI Report on China Manufacturing: February 2010
The rate of expansion of China’s manufacturing sector that accounts for more than 50% of the economy has moderated sharply, with the overall PMI falling to 52. Just on its own (excluding the non-manufacturing sector) it seems as if China’s year-on-year economic growth in the second quarter could slow to 10% and even less.
The following graph provides the same information, but over the longer term.
The manufacturing industry has started to shed excess inventories as stocks of major inputs indicate contraction. This does not bode well for metal prices in at least the short term.
New orders are still expanding but at a significantly reduced pace. However, new export orders fell sharply from 53,2 to 50,3, indicating only marginal expansion. New orders and new export orders lead the Economist Metals Index by approximately one month. The drop in especially new export orders does not augur well for metal prices and downside pressure can be expected.
The roll-over in new export orders is particularly evident and the question is whether this could indicate a trend change.
The drop in both new orders and stocks of major inputs perhaps explains the weakness in the Baltic Dry Index. Imports of raw materials such as ores and metals have probably dropped significantly.
A major question is how the slowdown in China is going to affect the rest of the global economy. The contraction in China’s PMI for imports indicates that the US GDP-weighted PMI for exports could be negatively influenced in especially the second quarter of this year.
Likewise the US GDP-weighted PMI for imports could be under pressure …
The further austerity measures put in place recently by the Chinese authorities still need to rub off on China’s economy. As such the outlook for commodities, the US and global economy has possibly darkened somewhat.
Elsewhere, the PMIs of India and South Korea were also published, with both economies expanding at the fastest pace in nearly two years. There are already calls for India to suspend the stimulatory measures in order to cool the economy.
One swallow does not make a summer, but I will be monitoring the Chinese situation closely to try to gauge the possible impact of any cooling on the developed economies.
Note: The graphs in this post were provided by Plexus Asset Management (based on data from CFLP, ISM, I-Net Bridge and Dismal Scientist.
Tags: Baltic Dry Index, BRIC, Canary In A Coal Mine, China, China Manufacturing, Contraction, Cursory Attention, Downside, Economic Growth, Economist, Economy China, Emerging Markets, Excess Inventories, Export Orders, Global Economy, Manufacturing Industry, Manufacturing Sector, Media Attention, Metals Index, Raw Materials, Second Quarter, Slowdown, Us Gdp
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Marc Faber: Face-to-Face
Thursday, February 25th, 2010
Marc Faber, editor of the Gloom, Boom and Doom Report, sits down with Ben McLannahan, Asia Lex Writer of the Financial Times, to discuss a variety of pertinent economic and investment topics. In short, he suggests investors should make 2010 the year of “capital preservation”.
Part 1: Warns of partial US debt default
Faber says irrational monetary policy means there are asset-class bubbles forming somewhere, only we don’t know exactly where yet.
Click here or on the image below the view Part 1 of the interview.
Part 2: Forecasts negative US real interest rates
Faber says stocks won’t reach new highs this year.
Click here to view Part 2 of the interview.
Part 3: On gold and China’s economic slowdown
Faber predicts Asian stocks will underperform this year because of China’s inevitable economic slowdown and suggests accumulating gold and shifting more money to India and Japan.
Click here to view Part 3 of the interview.
Part 4: On the year of “capital preservation”
Faber says global investors should make 2010 the year of “capital preservation”.
Click here to view Part 4 of the interview.
Source: Ben McLannahan, Financial Times (here, here, here and here), February 23, 2010.
Tags: Asia, Asian Stocks, Boom, Bubbles, Capital Investors, Capital Preservation, China, China Economic, Debt Default, Doom, Economic Slowdown, Face To Face, Financial Times, Global Investors, Gloom Boom And Doom Report, India, interest rates, Interview Source, Japan, Lex, Marc Faber, Monetary Policy, New Highs
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WSJ: India Joins China in Global Hunt for Commodities
Thursday, February 25th, 2010
This article is a guest contribution by TraderMark, of Fund My Mutual Fund Blog.
A few weeks ago we noted the world’s largest coal producer, Coal India, was on the hunt for global assets to expand their reach. [Feb 12, 2010: WSJ - World's Largest Coal Producer Has $6 Billion in the Bank and is on the Prowl for Assets] It appears this is now part of a broader national strategy mimicking what China has been doing the past half decade+.
If you have any Malthusian bones in your body, [Mar 24, 2008: WSJ - New Limits to Growth Revive Malthusian Fears] [Jun 20, 2008: World Population to Hit 7 Billion by 2012] you have to wonder as certain countries waste all their national treasure on bailing out banks, financing the lifestyles of those who refuse to save for themselves, and funding pet projects of their politicians - while others are attempting to snatch up as many long lived assets across the globe, what the long term implications will be. This is more or less parallel to a company who lives for today - happy to kick the can down the road - rather than spends heavily on R&D to prosper for tomorrow. Of course any such national directives would be considered “socialistic” in certain countries, hence anathema to even consider as national policy. Oh well, much better to send countless paper monies out into the atmosphere to help prop up home prices and capital market values from going where they belong - a much sounder national directive.
Via WSJ:
- India wants to join the club of global energy giants. Some of the country’s largest private and state-run firms are in hot pursuit of oil and gas assets overseas as they seek to take advantage of depressed asset prices during the downturn and break free of burdensome regulations at home.
- In the latest move, oil-to-textiles conglomerate Reliance Industries Ltd., run by billionaire Mukesh Ambani, raised its bid over the weekend for LyondellBasell Industries, a bankrupt petrochemical maker and oil refiner. The new bid values the Netherlands-based firm at $14.5 billion, according to a person familiar with the matter. A deal with Lyondell would significantly advance the ambitions of Reliance’s Mr. Ambani to build a global energy conglomerate. It would create a behemoth with $80 billion in combined revenues and interests in oil-and-gas exploration, refining and petrochemicals used for food packaging to textiles. (Reliance is akin to a combination of General Electric and Exxon Mobil in the States - a powerhouse in India with hands in countless industries)
- Reliance, India’s largest private company by market value, already operates the largest oil refining complex in the world, a site in the western state of Gujarat that can process 1.24 million barrels of crude a day. The facility is designed to handle the kind of ultra-heavy crude that could be extracted from Value Creation’s oil sands.
- Reliance also is scouting other foreign targets, including Canada’s Value Creation Inc., which has large oil-sands deposits in Alberta, people familiar with the company’s thinking said. (China has also been in Canada purchasing oil sand deposits) Smaller rival Essar Group is stepping up its own bargain hunting abroad, with an eye on assets that Royal Dutch Shell PLC and other oil majors are unloading.
- In recent months, Reliance and Essar, both based in Mumbai, have hired top executives from global oil majors to aid their international expansion efforts.
- Meanwhile, India’s flagship state-run oil company, Oil & Natural Gas Corp., said recently it may spend as much as $30 billion over the next decade on an international acquisition binge.
- Indian companies are scouring the globe to secure crude resources and reduce their dependence on imported oil. India imports 70% of its oil, with a price tag of more than $90 billion annually. The companies are also looking to expand their global footprint with refineries and other assets in far-away markets. And they want relief from the regulatory headaches of their home turf, where government influence in exploration and pricing of natural resources has slowed expansion.
- India is likely to face competition as it shops for oil and gas, especially from Chinese firms. Last summer, Sinopec Group, a large Chinese oil company, paid $7.2 billion for Addax Petroleum, a Geneva-based company that has oil and gas assets in the Middle East and Africa. “We see the international players being more often the buyers of these types of assets now, and there’s no reason to think that won’t continue,” said Jon McCarter, oil-and-gas transactions leader for the Americas at Ernst & Young.
- Cross-border acquisitions by Indian companies fell 37% last year to $11.4 billion, according to Dealogic. But activity is picking up as Indian companies rev up for big-ticket deals in sectors such as energy, telecommunications and media.
- The country’s largest cellphone company, Bharti Airtel Ltd., offered $10.7 billion last week for most of the Africa assets of Kuwaiti operator Mobile Telecommunications Co., known as Zain. Essar Group, a conglomerate with $15 billion in revenue and interests in steel, oil and telecom, controls oil exploration blocks in places including Nigeria, Madagascar, Myanmar and Vietnam. Now the company has emerged as an eager buyer for European and U.S. oil companies that are struggling with extra refinery capacity due to slumping demand for fuels.
You can almost feel the sands shifting under our feet, month by month - year by year.
Source: TraderMark, fundmymutualfund.com
Tags: Asset Prices, Burdensome Regulations, China, Coal India, Coal Producer, Commodities, energy, Energy Giants, Gas Assets, Global Assets, Global Energy, Global Hunt, Hot Pursuit, India, Long Lived Assets, Market Values, National Strategy, oil, Paper Monies, Pet Projects, Reliance Industries, Reliance Industries Ltd, Term Implications, World Population, Wsj
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Carry Trade Withdrawal Gives China Safe Opportunity to ‘Talk’ Tightening
Tuesday, February 23rd, 2010
Chinese stocks, commodities, and global markets, for that matter, are not correcting due to the anticipation of reduced demand from China, as a result of its squawking about tightening. In fact, last year’s profitable trades are correcting because the U.S. dollar is climbing against the falling euro, and adding to that climb is short covering of the dollar as its carry trades of the last year are unwound.
With or without China’s ‘talk’ of tightening – i.e. reining in credit, suspending new loans, raising the value of the yuan, raising its interest rates, and past hikes in its Required Reserve Ratio – China’s stock markets would have corrected simply because carry trades tied to its market and commodities are being sold off.
What better opportunity, then, is there, than a technical global correction, to talk about the very thing, tightening, that is, which would bring about a correction in its own markets?
Pierre Daillie (AdvisorAnalyst.com), GlobeAdvisor.com, February 22, 2010.
http://www.globeadvisor.com/advisoranalyst/aa20100222.html
Tags: Anticipation, China, Chinese Stocks, Commodities, Dollar, Emerging Markets, Euro, February 22, Global Markets, Globeadvisor, interest rates, Loans, Opportunity, Profitable Trades, Reserve Ratio, Stock Markets, Yuan
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China, The Countervailing Force
Monday, February 22nd, 2010
If the by-products of the western credit crisis - tight credit, stimulus and quantitative easing, zero-percent interest rates, winning trades in risk - are elemental to the prevailing trend, then China, with its massive $586-billion spending program, its $1.35 trillion in new lending, and its (too?) rapid recovery, should be viewed as a significant balancing concern.
China is the countervailing global economic force, the antithesis of America, its cash-rich economy cantilevered against the weight of its debt-laden counterpart. Whether we believe it or not, China’s decisions do affect us, either balancing in our favour or not.
In a decade, China has amassed the bulk of it $2.4-trillion (U.S.) foreign exchange reserve, making it the lead financier of the spendthrift U.S. economy, owing to blockbuster exports growth to consumers seeking cheap manufactured goods.
In 2008, however, the credit crisis hollowed out the export sector as credit, the global shipping business, and consumption froze, and it’s growth engine seized. China’s reaction was, forcibly, to fix its exchange rate, and subsequently embark on a bold and massive $586-billion spending plan.
Pierre Daillie, (AdvisorAnalyst.com), GlobeAdvisor.com, February 21, 2010.
http://www.globeadvisor.com/advisoranalyst/aa20100221.html
Tags: Antithesis, Blockbuster, Cantilevered, China, Counterpart, Credit Crisis, Economic Force, Emerging Markets, Exchange Reserve, Export Sector, Financier, Global Shipping, Globeadvisor, Hollowed, Prevailing Trend, Rapid Recovery, Rich Economy, Shipping Business, Spendthrift, Stimulus, Tight Credit, Zero Percent
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Gold and Euro: A New Tango For 2010
Sunday, February 21st, 2010
By Dian L. Chu, Economic Forecasts & Opinions
The U.S. dollar rose, commodity prices dropped and stocks fell last Friday after the Federal Reserve unexpectedly lifted an emergency lending rate for the first time since the financial crisis.
The dollar hit an eight-month high against a currency basket, while gold prices rose as investors bought the metal to hedge against paper currencies and debt default risks in Europe. Gold futures ended on Friday with a weekly gain of 3.1% at $1,122.10 an ounce.
Gold’s Retreat
Gold had rallied to a record of $1,218.30 an ounce on Dec. 3, 2009, as near-zero U.S. interest rates and government spending weighed on the dollar and countries including India and China boosted gold reserves.
However, bullion in the spot market has declined more than 6% since December, as the U.S. dollar benefited from the unfolding debt crisis in Dubai, Greece and the rest of southern Europe.
New Inverse Tango with Euro
Since gold is primarily a hedge against the dollar and inflation, it typically has the strongest inverse correlation with the US dollar. In the last month, however, the trend has broken with gold trending inversely with the euro and positively with the dollar (Fig. 1). The euro has now taken center stage in dictating the price of gold as it pertains to the fiscal health of Greece and other eurozone countries.
Fears over the outlook for the euro have been driving investors out that currency, and lifted both bullion and the dollar as alternative assets. The euro has declined, particularly against the dollar and gold, almost 5% against the dollar, and gold in euro terms is up 4.2%, so far in 2010.
Mariachi - PIIGS & The Fed
The new trend between the euro, dollar and gold is expected to continue amid fiscal challenges in the UK and Eurozone, PIIGS (Portugal, Iceland, Italy, Greece and Spain) in particular. Uncertainty over the details of any financial rescue package for Greece will likely keep the mood in the markets nervous, and the currency markets volatile in the near term.
In addition, the Fed’s discount rate hike signals that other central banks will likely follow suit in exiting from stimulus measures, while the eurozone, UK and Japan will likely lag behind. This view has partly triggered selling of the euro against the dollar, and some other currencies to seek a positive yield and perceived safety.
These two factors will likely continue to be the major forces driving the euro’s direction for the rest of Q1, and may spill over into Q2 depending upon solutions to the Eurpoean Union`s debt problems and dearth of future growth opportunities.
Technicals - Short-term Mixed
Technically speaking, the short term indicators of gold are mixed and still trending bearish as gold prices remains in the lower part of its recent trading range.
Technical analysts have widely diverging views as well. For instance, Chartered Market projects gold to reach about $1,400 within 12 months as long as the $1,000 level holds; whereas Barclays Capital considers a “fair value” for gold around the $700 to $800 an ounce level.
Meanwhile, Nouriel Roubini, economics professor at the Stern School of Business, New York University, says that there is a bubble in commodities, and that the price of gold should be no higher than $1,000 an ounce given the current market conditions.
Techincal levels of significance would be a breakout above the $1150 level, which would be bullish; and breakout below the $1050 level of support, which would be bearish for the commodity. (Fig. 2)
Vulnerable to Rapid Unwind
According to the Commodity Futures Trading Commission (CFTC), NYMEX gold futures open interest increased 3.2% in January. Commercial traders increased their long positions, while holding net short positions. Non-commercial speculators held net long positions but increased their short positions. Overall, about 54% of the participants held net long positions in January. (Fig. 3)
Gold has attractions for those managers of private institutional funds. Many investors from George Soros to John Paulson have been buying gold as lower interest rates and continued money-printing could devalue the U.S. dollar in the long term.
Billionaire fund manager George Soros, for instance, told the financial elite at Davos that gold represented the “ultimate asset bubble”; however, data from SEC filing showed his fund more than doubled the stake in the SPDR Gold Trust (GLD) three months earlier. In fact, the gold trust is now his fund’s biggest investment, valued at $663 million.
The large number of long speculators playing in the Gold market could leave the market vulnerable to a rapid unwinding when sentiment changes – the crowded trade scenario. One can only speculate that Mr. Soros could be seeking to exploit this market vulnerability with his seemingly uncharacteristic and contradictory actions.
Other Market Factors
Furthermore, the gold price direction also hinges on several events about to unfold within the next few months:
1) Greece’s borrowing needs are covered only until mid-March, and is set to launch a new bond offering of $7 billion in coming days – Eurozone/euro could stand or fall on the success or failure of this bond sale.
2) European finance ministers gave Greece a one-month reprieve to show its deficit reduction plan was being rolled out effectively.
3) Dubai World will present a proposal to creditors in March to restructure about $22 billion of debt.
4) The IMF’s phased open-market sales of the remaining 191.3 tons of gold it planned to sell last year as there are no more official buyers – Bearish for gold, unless another central bank steps up.
5) The Federal Reserve will end a $1.25 trillion program of mortgage-debt purchases in March – Gold-bearish as it reduces liquidity.
As ever gold thrives on financial, economic and monetary uncertainty, there is certainly plenty of that in the world today. Sovereign risk will likely remain the main theme for 2010, and possibly 2011. This all sets the stage for the next five years of monetary and fiscal policy decisions around the globe which will ultimately define the future for this precious metal from an investment standpoint.
Disclosure: No Positions
Tags: Alternative Assets, China, Commodity Prices, Currency Basket, Debt Crisis, Debt Default, Economic Forecasts, Emerging Markets, Euro Dollar, Europe Gold, Eurozone Countries, Fiscal Challenges, Fiscal Health, Gold, Gold Bullion, Gold Futures, Gold Prices, Gold Reserves, India, Inverse Correlation, Italy Greece, Paper Currencies, Price Of Gold, Southern Europe
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