Emerging Markets Highlights (3/15/2010)

Monday, March 15th, 2010

Emerging Markets

Strengths

• The number of people living at or above the level of “medium development”— considered to live in reasonable conditions and have access to education, health care, clean water and electricity—has grown by more than 2 billion people during the past several decades. That is more than the entire global population in 1900.
• The Asia Pacific region provided 234 names to the latest Forbes World’s Billionaires list released this week, up from 130 last year. The region accounted for 23 percent of the total 1,011 billionaires globally.
• China’s February exports grew by a higher-than-expected 45.7 percent year over year due to a strong rebound in exports of textile, steel products, televisions and motorcycles. Imports rose 44.7 percent in February from a year earlier thanks to a large swing of crude oil prices from last year.
• Brazil highway traffic in February rose by 6 percent year over year. It was driven mainly by heavy vehicles traffic (up 11.9 percent) and passenger traffic (up 4.3 percent).
• Brazil’s budget minister says his country is likely to see 6 percent GDP growth this year and the creation of 2 million jobs.
• January retail sales in Brazil increased 10.4 percent year over year.
• Industrial production in India in January rose 16.7 percent and was driven by higher activity in the mining sector (up 14.6 percent) and manufacturing (up 17.9 percent).
• Turkish new-car sales in February jumped 42 percent year over year, aided by tax incentives and a low base. The rise was above industry expectations.

Weaknesses

• China’s growth in fixed-asset investment moderated to 26.6 percent year over year in January and February combined, compared with the stimulus-driven rate exceeding 30 percent between March and October 2009, as the government wound down new public investment projects.
• Despite restraining government policies, property prices in 70 cities in China climbed another 10.7 percent year over year in February, the fastest pace in 23 months, after January’s 9.5 percent gain. New and existing home prices increased 1.3 percent and 0.4 percent month over month, respectively.
• All three publicly traded airport groups in Mexico reported declines in passenger traffic during February.
• Turkey ended IMF negotiations without a loan agreement. In absence of the IMF loan, there will be little upside to 4 percent GDP growth projections for 2010.

Opportunities

• If home-buying sentiment in China has shifted toward “wait and see,” auto purchases have remained very strong as the government maintained policy incentives. Even in the seasonally slowest month of February, 1.21 million vehicles were sold. The combined 2.88 million units sold in January and February was 84 percent higher than the same period in 2009. Such strength is likely to carry into March and April, typically strong months for car sales, as potential auto buyers rush to purchase before subsidy programs are withdrawn. Opportunities still exist for Chinese automakers and steel mills.

• It is estimated that damage to Chile’s infrastructure from recent earthquakes will be $20 billion to $30 billion, and will result in a massive government revival program. Dealing with effects of the earthquake is going to be a priority for the new president, Sebastian Pinera. Chile has a very healthy fiscal position and should easily fund the program from its copper fund, as well as from local and external debt.
• After years of neglect, there is a structural shortage at the residential end of Russian real estate market. New strategy announcements from the Russian real estate companies suggest that they are coming out of hibernation and are planning to launch construction and start pre-sales.

Threats

• While China’s central bank governor said February’s 2.7 percent increase in consumer prices from a year earlier was in line with his expectation, the latest inflation figure did surpass the one-year deposit rate of 2.25 percent. Negative real interest rates may provide an additional incentive to drive asset prices further ahead, creating fears of imminent monetary tightening that may introduce short-term volatility into the market.

• Mexico’s official inflation in February rose 0.58 percent month over month (vs. 0.50 percent expected) and was up 4.8 percent on an annualized basis. While the rate is still within the 4.75 percent to 5 percent target range, we will closely monitor the trend in coming months.
• The issue of exiting from monetary stimulus becomes pressing in countries like Brazil and Turkey, where inflation pressures are building. The chart below shows Citi’s estimates of upcoming rate increases in emerging countries in 2010.

Tags: Asia Pacific Region, Asset Investment, Billionaires List, Brazil, Budget Minister, China, Cities In China, Crude Oil Prices, Education Health Care, Emerging Markets, Forbes World, GDP Growth, Global Population, Heavy Vehicles, Highway Traffic, Img Src, India, Industry Expectations, Investment Projects, Motorcycles Imports, New Car Sales, Openx, Passenger Traffic, Public Investment, Random Number, Russia, Steel Products, Target, Tax Incentives
Posted in Emerging Markets, India, Markets | No Comments »

Chart: US Consumer Holds Back Growth

Friday, March 12th, 2010

An interesting chart comes from the Consumer Metrics Institute (via Clusterstock - Chart of the Day) that constructs a US consumption index based on actual transactions data for a range of major discretionary purchases such as cars, houses, durable goods, and vacations.

Although the time series is rather short, the “Daily Growth Index” usually leads changes in US GDP (see chart below). Based on the historical relationship, the Index would seem to indicate slower GDP growth ahead. This concurs with a recent analysis of the US ISM non-manufacturing and ISM manufacturing surveys posted on the Investment Postcards site about ten days ago.

Source: Clusterstock - Chart of the Day, March 11, 2010.

Tags: Advertisement, Ahead, Cars, Consumption, Durable Goods, GDP, GDP Growth, Growth Chart, Growth Index, Houses, Ism Manufacturing, Leads, March 11, Metrics, Postcards, Relationship, Surveys, Time Series, Vacations
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Stock Markets in Review – celebrating one year of gains, but only Chile above 2007 peak

Thursday, March 11th, 2010

The bull market that commenced on March 9, 2009, has just market its first anniversary. A summary of the movements of major global stock markets for the past 12 months, as well as various other measurement periods, is given in the table below.

The MSCI World Index notched up one-year gains of 70.5%, whereas the MSCI Emerging Markets Index was on fire with +103.2%. As far as the US indices are concerned, the Dow Jones Industrial Index (+61.4%) and the S&P 500 Index (+68.6%) underperformed mature markets, but the Nasdaq Composite Index (+84.5%) and the Russell 2000 Index (+95.1%) gave investors reason to smile.

BRIC countries such as Russia (+117.5%) and India (+109.0%) were in the lead on the performance rankings, but China (+44.9%) - the first country to commence a bull market advance in November 2008 - has slipped badly over the past few months.

Notwithstanding the huge rally since the March lows, only the Chile Stock Market General Index has been able to reclaim its 2007 pre-crisis peak and is now trading 8.4% higher. Mexico and Israel could be the next countries to eliminate the bear market losses. The Dow Jones Industrial index and the S&P 500 Index are still 25.4% and 27.1% respectively down on their October 2007 bull market peaks.

Click here or on the table below for a larger image.

Considering stock market performance against the background of economic growth, Asha Bangalore (Northern Trust) said: “Real GDP growth across the world is yet to match the noticeable gains seen in equity prices during the past year. The US economy largely held steady on a fourth-to-fourth-quarter basis in 2009.  Growth in the European Union fell 2.3% in the final three months of 2009 on a year-to-year basis. Real GDP advanced at a rapid clip in China (+10.7%), while India (+6.1%) and Australia (+2.1%) also recorded gains in real GDP in 2009. Although equity prices advanced in Argentina and Brazil in the last 12 months, real GDP fell 0.3% in Argentina and 1.5% in Brazil during in the third quarter of 2009 compared with the year ago level.

“Typically, equity prices are leading indicators of economic growth. Based on this consideration, are the sharp upward movements of equity prices over the past year sending a message of robust economic growth in the quarters ahead? The answer depends on the economy in question. With regards to the US economy, credit market headwinds and weak labor market conditions cast a shadow on the possibility of a strong recovery.”

Be cautious out there!

Tags: Bric Countries, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Index, Final Three Months, GDP Growth, Global Stock Markets, Market Advance, Market Losses, Mature Markets, Msci Emerging Markets, Msci Emerging Markets Index, Msci World Index, Nasdaq Composite Index, Performance Rankings, Quarter Basis, Rapid Clip, Real Gdp, Russell 2000 Index, Stock Market Performance
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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	29.63		+0.00
Intel Corporation - INTC	22.24		+0.00
Cisco Systems, In - CSCO	26.26		+0.00
Oracle Corporatio - ORCL	25.47		+0.00
Caterpillar, Inc. - CAT	60.22		+0.00
iShares S&P 100 - OEF	53.58		+0.00

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	41.62		+0.00
BMO CHINA EQUITY - ZCH.TO	14.72		+0.00
ISHARES CHINA IND - XCH.TO	20.28		+0.00
TAO.TO - TAO.TO	0.00		+0.00
PowerShares Excha - PIN	22.39		+0.00
ISHARES S&P CNX N - XID.TO	20.63		+0.00
BMO INDIA EQUITY - ZID.TO	14.49		+0.00
iShares Trust (Ba - EWY	49.43		+0.00
iShares Trust iSh - THD	46.42		+0.00
iShares Trust (Ba - EWT	12.54		+0.00
iShares Trust (Ba - EWH	16.35		+0.00
iShares Trust iSh - TUR	55.15		+0.00
Market Vectors Po - PLND	25.74		+0.00
Market Vectors Ru - RSX	33.86		+0.00
iShares Trust (Ba - EWZ	73.57		+0.00

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
Posted in Emerging Markets, India, Markets | No Comments »

Emerging Markets Highlights (March 7, 2010)

Monday, March 8th, 2010

Emerging Markets

Strengths

• South Korea’s exports increased by a higher-than-expected 31 percent in February (year-over-year), a fourth month of expansion. The increase came as external demand remained strong for semiconductors, automobiles and flat panel screens thanks to continued recovery in China and other economies.
• The Chinese Premier Wen Jiabao said the mainland is willing to make sacrifices in the negotiations over the Economic Cooperation Framework Agreement ahead of the second round of talks scheduled to take place mid-March with Taiwan.
• Peru’s fourth quarter 2009 GDP rose by 3.4 percent with full year GDP growth of 0.9 percent, the best in Latin America.
• Brazil’s Industrial Production (IP) rose 1.1 percent month-over-month (16 percent year-over-year) in January.
• Both Standard & Poor’s and Moody’s confirmed that Chile will retain its A+ and A1 investment ratings, respectively, following last Saturday’s massive earthquake. The agencies cited “strong institutions” and “financial flexibility” as well as “sound fiscal policy and a stable political backdrop” in Chile.

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• The Russian MICEX benefited this week from significant demand for Russian bonds and equities with the 5-year Russian credit default swaps (CDS) now below a level of 160 basis points, almost back to summer 2008 levels. The market was also boosted this week by government inflows of $3.3 billion into state pension funds, some of which should see its way into the Russian equity market.
• Even after the exodus of scientists and engineers from the Soviet bloc in the 1990s, the intellectual capital in Russia and its former satellite states in Emerging Europe is on par with that of the U.S., the European Union and China. In addition, it is multiples ahead of India and Brazil, two of Russia’s BRIC counterparts.

Weaknesses

• China’s Purchasing Managers’ Index moderated in February, albeit still in the expansionary territory. The slowing was due to adverse weather, the Chinese New Year holidays and liquidity tightening.
• Malaysia’s central bank surprisingly raised its overnight policy rate by 25 basis points to 2.25 percent to normalize monetary conditions and prevent risks of financial imbalances as the economy exited recession last quarter and continued to recover.
• February traffic for Mexican airport operator Grupo Aeroportuario del Sureste declined by 6.9 percent year-over-year. However, note that despite a 5 percent drop in passengers in fourth quarter 2009, EBITDA (earnings before tax, depreciation and amortization) rose by 3 percent in light of higher revenue per passenger. Watch to see if the trend continues in the first quarter of 2010.
• The Czech economy contracted by 4.2 percent year-over-year during the last quarter of 2009, a decline similar to that seen during the third quarter. According to monthly data, industrial production decreased by 1.8 percent, while business services dropped by 7.7 percent year-over-year.

Opportunities

• China pledged to spend $19 billion on agriculture this year to help raise government purchase prices of crops and fund research in agricultural technology. Going forward, the government is expected to continue its focus on boosting rural income, a key political mandate to preserve social stability, as the income ratio between urban and rural China reached 3.33-to-1 in 2009, the highest in three decades. Chinese agriculture should remain a major investment theme in the intermediate future.

Tags: BRIC, Chinese Premier Wen Jiabao, Credit Default Swaps, Economic Cooperation, Emerging Europe, Financial Flexibility, Flat Panel Screens, Framework Agreement, GDP Growth, Intellectual Capital, Investment Ratings, Massive Earthquake, Micex, Premier Wen Jiabao, Purchasing Managers Index, Russian Bonds, S Industrial, Sound Fiscal Policy, Soviet Bloc, State Pension Funds, Weat
Posted in Markets | No Comments »

Whither Deflation?

Thursday, February 4th, 2010

This article a guest contribution by Leo Kolivakis, of Pension Pulse.

Last week, I warned my readers to get ready for more upward growth revisions. I believe that US growth in Q1 2010 will surprise even the most optimistic forecasters.

Why am I so confident? After all, my last call before the December employment report was way off. The bond market didn’t go ‘boo’ back then and more jobs were lost. Today, Bloomberg published a sobering article stating that 824,000 jobs will disappear on February 5th.

No doubt, when all is said and done, and the government bean counters finish tallying up the wreckage, job losses from this recession will be far worse than what was initially thought. And this recession hasn’t been gender neutral. By far, men have suffered a lot more than women as cyclical industries got hit harder.

But all that is about to start changing in Q1 2010. Consider the following very carefully:

• The Conference Board Leading Economic Index™ (LEI) for the U.S. increased 1.1 percent in December, following a 1.0 percent gain in November, and a 0.3 percent rise in October.
• The January 2010 ISM Manufacturing report showed widespread growth. Importantly, the manufacturing sector grew for a sixth straight month, and both the New Orders and Production Indexes are above 60 percent, indicating strong current and future performance for manufacturing.
• US real GDP surged 5.7% in the fourth quarter 2009, confirming that the recession is over and the recovery is gaining traction. While the acceleration in real GDP growth in the fourth quarter primarily reflected an acceleration in private inventory investment, there was a pick-up in non-residential investment, exports and investment in equipment & software, a harbinger of future job growth.

In the near term, it is highly likely that US growth will continue to surprise to the upside. Interestingly, Tom Braithwaite of the FT reports that US deflation no longer seen as a risk:

The US has escaped the danger of a Japanese-style deflationary trap, according to James Bullard, a voting member of the Federal Reserve’s key policy-setting committee.

Mr Bullard, president of the Federal Reserve Bank of St Louis, told the Financial Times in an interview that his preoccupation throughout 2009 had been deflation, but the risk had “passed”.

Last week’s Fed meeting produced a dissenting vote for the first time in a year when Thomas Hoenig, president of the Kansas City Fed and a rate hawk, argued that financial conditions no longer warranted a policy of holding rates at “exceptionally low levels . . . for an extended period”.

Other members of the Federal Open Markets Committee voted to preserve the “extended period” phrase, generally taken to mean near-zero interest rates will continue for at least six months. But they are also working on an exit strategy from the exceptionally loose policy used to fight the financial crisis.

Mr Bullard, who is considered a centrist member of the FOMC, said he was happy to continue with the current guidance, but he did have some sympathy for Mr Hoenig’s argument that “if you come off zero and you move up a little bit, it’s still a very easy policy. You’ve still got a very large balance sheet and you’re still at very low interest rates.”

He added that, although it was not time to tighten policy, members of the committee would weigh in their decisions factors other than inflation and unemployment. Factors to consider would include asset bubbles.

“I think they’re gaining weight with many people because of the bad experience we had in the aftermath of the last recession, the housing bubble and how that really has blown up and caused so many problems,” he said.

When the Fed does come to raise rates it may have to switch from its traditional benchmark of targeting the federal funds rate to targeting a repurchase rate because of the upheaval in the two markets over the last two years.

“I think what the operating regime will really look like going forward is an open question and one that the committee is working on,” said Mr Bullard, who said the Fed could consider using interest it paid on reserves as the main rate but that it might prefer a market measure such as the repo rate.

The broader post-crisis economy was “on track” with its recovery, he said. “It’s not a real strong recovery but that’s what we had predicted anyway. But it will be above-average growth for the first half of 2010 and we’ll probably see some positive jobs growth in the first part of 2010 here.”

He “hoped” that improvement in the labour market would come in the first quarter.

Following harsh criticism of Ben Bernanke in the Senate ahead of his reconfirmation as Fed chairman last week, Mr Bullard warned that political interference with the Fed would be dangerous and he strongly opposed plans to strip banking supervision from the central bank’s roster of duties.

“I think it’s dangerous for America and dangerous for a global economy to try to divorce this central bank from true understanding of financial markets, and I think that that’s the direction we’ll be going in if we separated out the central bank from regulation,” he said.

“What this crisis has shown is that our understanding of financial mediation and how it can impact on macro economy was not good enough. So what you want is to force the central bank to get better understanding and more information about financial markets as they’re making monetary policy decisions.”

Not good enough? I’d say the Fed’s understanding of how financial mediation impacts the macro economy was downright pathetic pre-crisis and has only marginally improved post-crisis. Who is tracking flows into hedge funds, commodity funds, private equity funds, and flows coming from sovereign wealth and global pension funds?

More importantly, who is tracking leverage being built into the bond market? There too, pension funds are playing an increasingly important role as they leverage up their fixed income holdings to deliver on their required actuarial rates of return.

I urge you to carefully read Niel Jensen’s February 2010 letter from Absolute Return Partners, aptly titled If PIIGS Could Fly. Mr. Jensen’s conclusion is a stark reminder of the challenges that lie ahead:

As far as the bond market is concerned, as often pointed out by Martin Barnes at BCA Research, if you want to know where the next crisis will be, then look at where the leverage is being created today. And nowhere is there more leverage being created at the moment than on sovereign balance sheets. What is happening is an experiment never undertaken before. As John Mauldin puts it, we are operating on the patient without anaesthesia.

The big challenge will be to get the timing right. These situations can run for longer than most people imagine. Japan’s crisis has been widely predicted for almost a decade now, and the ship appears to be as steady as ever. As I suggested earlier, the key to predicting the timing of Japan’s demise – because there will be one – may very well be embedded in the savings rate, which could quite possibly turn negative in the next few years.

The Dubai crisis taught us that markets are in a forgiving mode at the moment and, before long, Greece could very well find some respite from its current problems. But then again, ultimately, governments will find – just like millions of households have found over the years – that you cannot spend more then you earn in perpetuity. The enormous debt levels being created at the moment will haunt us for many years to come and we may have to wait a long time to see PIIGS fly again.

While I agree with many of the arguments Mr. Jensen puts forward, I am not convinced that the bond market will be the next crisis. You will likely see the short end of the curve getting hit hard in Q1 2010 as the market adjusts its expectations on the Fed’s next move, but not a full-fledged crisis in bonds.

Neither am I convinced that deflation is dead. The risks of deflation have subsided but the bigger test will come in the following few years, especially if stimulus programs do not translate into a sustained improvement in US and global labor markets. And that still remains the overarching concern of policymakers across the planet. If they fail to achieve this, a nasty deflationary spiral will ensue, in which case high quality government bonds will look very attractive, even at historic low yields.

Tags: Bean Counters, Bond Market, Commodities, Cyclical Industries, Economic Index, Employment Report, Fourth Quarter, GDP Growth, Harbinger, Inventory Investment, Ism Manufacturing, Manufacturing Sector, No Doubt, Optimistic Forecasters, Private Inventory, Q1, Real Gdp, Recession, Residential Investment, Upward Growth, Wreckage
Posted in Bonds, Markets | No Comments »

Which Way Now? Hard Assets or Government Bonds?

Sunday, January 31st, 2010

The debate in the market between inflationists (majority) and deflationists (minority) continues to complicate investors’ ability to make decisions about where to deploy funds.

During the course of the year, inflationists benefited from the tailwind provided by the declining value of the dollar. The rally in risk assets came thanks to Bernanke’s deflation-busting policy, and, ironically, therefore, as long as the news remained dire on GDP growth and unemployment, we could count on interest rates to remain around zero percent, and the dollar to continue lower as faithless investors ditched it.

For nine months, the dollar declined as the market put risk back “on.” At the very beginning of the rally, in March 2009, the market’s mood was very dark. The genesis of the rally was the short covering of bank stocks and financials, and the full scale launch of the dollar funded carry trade, mostly taking place in institutional and hedge fund trading rooms. Except for the wiliest, it most certainly was not driven by retail investors. The retail investor is usually late to the party once fear of missing opportunities sets in.

The rally in the dollar as of late November has confused the inflationist view as the tailwinds appear to have reversed. This has been, and remains a difficult time to make risk-based investment decisions.

Read the whole article here.

by Pierre Daillie (AdvisorAnalyst.com), GlobeAdvisor.com, January 31, 2010.
http://www.globeadvisor.com/advisoranalyst/aa20100131.html

Tags: Bank stocks, Bernanke, GDP, GDP Growth, Genesis, Globeadvisor, Government Bonds, Hedge Fund, interest rates, Investment Decisions, Late November, Launch, Nine Months, Rally, Retail Investor, Retail Investors, Short Covering, Tailwind, Tailwinds, Zero Percent
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Stock Market Leadership Points to Risk Aversion

Wednesday, January 27th, 2010

As far as leadership since the start of the nascent US stock market correction on January 20 is concerned, it is interesting that cyclical sectors such as the Materials SPDR (XLB), Financial SPDR (XLF), Energy SPDR (XLE) and Technology SPDR (XLI) have been leading the market lower. Traditionally defensive sectors such as Consumer Staples SPDR (XLP), Utilities SPDR (XLU) and Health Care SPDR (XLV) also declined, but to a lesser extent than the S&P 500 Index as a whole (-5.1%) and the cyclical sectors.

This is the type of pattern one would expect typically to emerge during a correction phase.

Source: StockCharts.com

Turning to the broader market, Adam Hewison (INO.com) provides a short technical analysis and poses the question “Is the Dow in trouble?” Click here to access the presentation.

The final words go to David Fuller (Fullermoney) commenting as follows from across the pond: “Why might this be no more than another correction rather than the beginning of a new bear trend? Unless the modest global economic recovery is about to slide back into another slump, which I doubt, I do not see the catalysts for another stock market collapse. Instead, and despite the current uncertainty, I think this could still be an economic sweet spot for stock markets characterized by modest global GDP growth, reasonably accommodative monetary policy and generally low inflationary pressures.

“Yes, there has been some overheating in emerging Asia, especially China where the PRC’s monetary authorities have moved early and incrementally to contain this problem, as I have said before. In North America and Europe central banks are talking about ending quantitative easing but that is not the same as a monetary squeeze. Historically, the US stock market has usually continued to rise during the early stages of a cycle of higher short-term interest rates from the Fed, and this has yet to commence.”

Tags: Central Banks, China, Consumer Staples, Correction Phase, David Fuller, Emerging Asia, Emerging Markets, Energy Spdr, GDP Growth, Global Gdp, Inflationary Pressures, Leadership Points, Market Collapse, Market Leadership, Monetary Authorities, Stock Market Correction, Stock Markets, Us Stock Market, Xle, Xlp, Xlu, Xlv
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China Rate Hikes May Be Premature

Thursday, January 21st, 2010

An interesting report on China reveals that 8.0% growth is the minimum GDP growth China needs to achieve in order to keep things there going, and despite the 10.7% print this week, Michael Pettis of Peking University, discusses the fact that without the currency subsidy or the interest rate subsidy, many companies just won’t be able to make money.

Reading between the lines, it seems continued rate hikes as policy tightening, which has spooked world markets and commodities prices, would be premature. While China is experiencing asset price inflation, the export sector continues to be deflationary as there is still an enormous amount slack to take up.

Tags: Asset Price, China, China Rate Hike, Commodities, Commodities Prices, Currency, Emerging Markets, Export Sector, GDP, GDP Growth, Interest Rate, Michael Pettis, Money Reading, Peking University, Price Inflation, Rate Hikes, Reading Between The Lines, Slack, Subsidy, World Markets
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The Key to Normalcy in World Markets?

Wednesday, January 13th, 2010

The yen must replace the dollar in carry trades to restore normalcy to the global economy and markets, including Canada’s.

For nine months we were trapped in the bizarre world of “bad news is good news.” To the puzzlement of investors, stock markets rallied despite deteriorating economic fundamentals, negative GDP growth, 10%-plus unemployment, and the erosion of the dollar’s value globally.

Here’s why…

Read the whole article here.

Pierre Daillie (AdvisorAnalyst.com) GlobeAdvisor.com, January 13, 2009

Tags: Bad News, Bizarre World, Canada, Dollar Value, Economic Fundamentals, Erosion, GDP, GDP Growth, Global Economy, Globeadvisor, Investors, Nine Months, Normalcy, Puzzlement, Stock Markets, Trades, Unemployment, World Markets, World News, Yen Dollar
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Roundup: Economy and Bond Market

Monday, January 4th, 2010

The Economy and Bond Market

The Treasury yield curve flattened this week as yields rose on the short end of the curve while the 30-year bond experienced a modest decline in yields. The Treasury issued $118 million in 2-, 5- and 7-year maturities, pressuring the short end of the market. In addition, economic data continues to show improvement and that also weighed on investor sentiment.

One of the strongest signs that the economy continues to progress is the improvement in employment indicators such as the weekly initial jobless claims data, shown below. While there is still plenty of room for improvement, we are at the lowest levels since mid-2008.

Strengths

• All indications are the holiday shopping season was a relative success and consumers were willing to open their pocketbooks for a little holiday cheer.
   
• The Consumer Confidence Index bounced back this month and expectations are improving.
   
• South Korean president Lee Myung-bak expressed confidence that the South Korean economy will grow faster in 2010 than the official government forecast of 5 percent. Historically, South Korea has been a good barometer for global growth and this news is very supportive of strong global GDP growth in 2010.

Weaknesses

• The Federal Reserve is considering options for withdrawing the emergency monetary stimulus that was put in place to combat the global financial crisis. This week’s proposal included potentially selling term deposits to banks to reduce excess reserves. The market is concerned that the termination or reversal of these programs could put upward pressure on bond yields.
   
• Money supply in the Euro zone fell slightly on a year-over-year basis in November for the first time since records began in 1991 and indicates potential headwind for future growth.
   
• China is also targeting a slowdown in money supply to about 17 percent in 2010, versus roughly 30 percent in 2009.

Opportunities

• Expectations continue to build for growth in the U.S. in the current quarter, possibly as much as 4-5 percent. The global economic recovery appears to be taking hold.

Threats

• The Fed reiterated their monetary policy stance at the December 16 Federal Open Market Committee (FOMC) meeting and on the surface nothing really changed. However, they are incrementally moving to reduce the policy accommodation and often these changes move more quickly than many expect.

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Gravity Will Drag the US Dollar

Thursday, December 24th, 2009

The US dollar ($US) is on a roller coaster. And since S&P downgraded Greece to BBB+, the dollar has been on the rise. One can attribute the recent shift in the $US to many things - improving US economic conditions, return to risk, or relative weakness in other G7 countries, whatever. But what is clear, is that the dollar’s gaining some strength, 4.7% since the beginning of December on a trade-weighted basis.

But this is not sustainable. As economic recoveries diverge (i.e., the G7 recovery is expected to be slower than that in key emerging markets), the dollar will likely fall. That’s just gravity, and a necessary condition for sorting out global trade flows.

The chart illustrates the effective value of the $US, which is a composite index of the value of the $US against US trading partners (one source for this data is the Bank of England). As recently as November, the $US slid to its lowest value since March 2008. At that time - and really anytime the $US initiates a descent - Washington gets all worked up; but why? One of the necessary conditions for the re-balancing of trade flows between major trading partners is dollar depreciation.

Just look at the contribution to GDP growth from exports in 2006 and 2007, when not coincidentally the dollar was sliding.

The chart illustrates export growth and the contribution to GDP growth, as released by the Bureau of Economic Analysis. Note: an easy way to get this data is to simply download the excel file in the right sidebar of the release page.

A weak dollar can drive economic growth - especially as trade resumes, and emerging markets see a much quicker rebound than that expected for the G7. According to the Financial Times, its already happening - Asia ex-Japan is moving Japan’s export market:

Japanese exports continued to increase in November because of robust demand from Asia, easing concerns about the strength of the country’s economic recovery.

Real exports were up by 0.6 per cent on October, according to Bank of Japan data. This was the eighth consecutive monthly rise, although the pace of increase was the slowest since exports began to recover in April.

A weaker dollar is a big part of the story for a re-balancing of trade flows. And its not just a US and China problem. According to the IMF, the 2007 US current account deficit was $731 billion, while the value of China’s surplus was just half that, $372 billion. It’s much of Asia and the Middle East that are likewise driving imbalances (of course, the US is not an innocent bystander here). The dollar will see weakness again on a trade-weighted basis; that’s gravity.

Rebecca Wilder

Tags: Accordi, Bank Of England, Bbb, Bureau Of Economic Analysis, China, Composite Index, Economic Recovery, Emerging Markets, Export Market, Financial Times, G7 Countries, GDP Growth, Global Trade, Japanese Exports, Major Trading Partners, Necessary Condition, Necessary Conditions, Page Advertisement, Relative Weakness, Robust Demand, Roller Coaster, Weak Dollar
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