Emerging Markets Highlights (week ending 2/15/2010)

Monday, February 15th, 2010

Emerging Markets Highlights (week ending 2/15/2010)

Strengths

• China’s passenger car sales continued to surge by 113 percent in January from a year earlier to 1.32 million units. While year-over-year growth may be affected by the low base one year earlier, January’s print represented a solid 20 percent increase from December.
• Indonesia’s GDP expanded by a higher than expected 5.4 percent year-over-year in the fourth quarter, as lower interest rates and government stimulus continued to encourage consumer spending.
• Taiwan’s exports grew 75.8 percent in January from a year earlier, the highest year-over-year increase in more than thirty years and ahead of expectations, thanks to better electronics demand driven by holiday spending before the Chinese New Year.
• The 4Q 09 results of Itau Unibanco and Vivo in Brazil slightly surpassed market expectations reinforcing the view that Latin American largest economy is on the way to recovery. The results of the home builder, Gafisa, were also ahead of expectations.
• Brazilian industry capacity utilization in December rose to 81.7 percent from 81.3 percent in November, above the consensus expectation of 81.4 percent.
• Brazilian air traffic in January rose 31.6 percent year-over-year with the load factor rising by 6 percent to 78 percent as a result of stronger economic activity.
• At 25.2 percent growth over last year, December industrial production in Turkey came in considerably stronger than expected. It is also worth highlighting that the increase was broad based (see chart below, courtesy of Citi research), with capital and durable consumer goods leading the advance.

Weaknesses

• Although attributable largely to a jump in labor force participation in response to government’s job creation programs, South Korea’s unemployment rate climbed to a ten year high at 4.8 percent in January from 3.6 percent in December.
• Despite government intervention, average property prices in 70 cities in China continued to rise 1.3 percent month-over-month in January, an eleventh consecutive monthly increase.
• Chile CPI in January came in at 0.5 percent month-over-month (vs. 0.1 percent expectation) while CPI in Colombia reached 0.69 percent month-over-month (vs. 0.6 percent expectation).
• All the three airport groups in Mexico (ASUR, GAP, OMA) posted declines in traffic in January.
• January sales of new vehicles fell by 37 percent year-over-year in Russia. There was a strong base effect from January of last year when buyers rushed in to convert collapsing currency into hard assets. Also, the start of its “cash for clunkers” program was postponed from January 1 March 8, so customers are holding out for the state subsidy.

Opportunities

• Weaker than expected inflation in consumer prices, moderating bank lending, and narrowing trade surplus in China in January may provide some relief to lingering fears of early monetary tightening from Chinese policymakers in the near term.
• Grupo Televisa in Mexico, the largest media group in the Spanish speaking world, received a permission from authorities to bid for a stake in the mobile operator, Nextel Mexico (NIHD) that will permit it to offer triple play services for clients. Televisa and NIHD are expected to bid jointly for a new 3G spectrum.
• Earnings release by a bellwether bank in Turkey provides a positive glimpse into outlook for 2010, according to Morgan Stanley banking analyst Magdalena Stoklosa. Margin contraction is less than expected as rebalancing out of government securities had already begun, and improvement in asset quality is coming sooner than expected.

Threats

• If the higher than expected rise in China’s Producer Price Index (PPI) in January, primarily driven by energy and raw materials, proves more than transient, Chinese manufactuers’ profit margin may face challenges as their costs inflate whereas competition severely limits their pricing power.
• A potential deceleration in the economic activity in China would negatively impact resource rich countries in Latin America.
• Continued monetary tightening in China would have a cooling effect on commodity exports, despite current strong demand for steel and raw materials.
• Risk aversion over public finance in crisis Greece is likely to spill over to the periphery countries of European Union, such as Poland, Czech Republic, and Hungary.

Tags: 4q, Brazil, Brazilian Industry, Capacity Utilization, China, Chinese New Year, Cities In China, Consumer Spending, Contin, Creation Programs, Durable Consumer Goods, Emerging Markets, Gafisa, Government Intervention, Holiday Spending, India, Job Creation, Labor Force Participation, Latin American, Market Expectations, More Than Thirty Years, Passenger Car Sales, Russia, South Korea, Unemployment Rate, Unibanco
Posted in Emerging Markets, India, Markets | No Comments »

Q&A with Mario Gabelli: The Strong Will Get Stronger

Tuesday, September 8th, 2009

An upshot of the financial crisis could be that investors go back to basics. In the case of equities, the means “plain old stock-picking” as Mario Gabelli of Gabelli Asset Management describes it. The paragraphs below are an excerpt of a recent interview Hedgeweek had with Gabelli.

GFM: Will the US be the first country to lead the way out of the crisis? How do you assess the administration’s actions up to now?

MG: Economic stimulus is co-ordinated, global and powerful. The US economy represents 24 per cent of nominal world GDP, and is about 60 per cent greater than the faster-growing China, Russia, India, and Brazil combined. However, we have our challenges. Within the US, the consumer is about 70 per cent of our economy and has been in a recession for the past year and a half. About nine per cent of Americans are now unemployed, and consumer spending remains hamstrung by rising unemployment, reduced wealth and the decline in stock market and housing prices, but also by the limited availability of credit.

An unintended consequence of the stimulation is likely to be inflation. We think the stimulus will work and that stocks are a good place to be. Both fiscal and monetary policy will work on a global basis, with speed bumps along the way. President Obama inherited a very difficult situation. Under the new administration we have had significant government intervention in the markets, which will be reduced as conditions in the economy improve.

GFM: What are you telling your clients? Have you changed anything in your investment strategy?

MG: The US economy should improve in 2010, helped by an uptick in auto spending and improvement in housing and the ongoing stimulus. There is upside operating leverage in corporate earnings, partly due to cost cutting. The secular themes are the US deleveraging and transferring its wealth to China. We expect more strategically-driven deal activity, as companies buy other companies to enhance growth. Our emphasis, as always, is on POSP - plain old stock-picking.

Click here for the full interview

Source: Hedgeweek, August 28, 2009.

Tags: China Russia, Consumer Spending, Corporate Earnings, Economic Stimulus, Emerging Markets, Fiscal And Monetary Policy, Gabelli Asset Management, Gfm, Global Basis, Government Intervention, India, Investment Strategy, Mario Gabelli, New Administration, Operating Leverage, Secular Themes, Speed Bumps, Stock Market, Unintended Consequence, Upshot, Uptick, World Gdp
Posted in Emerging Markets, India, Markets | No Comments »

Barry Ritholtz: Analyzing the Analyzers

Saturday, August 1st, 2009

This is a guest post by Barry Ritholtz, editor of The Big Picture Blog and author of the newly released book, Bailout Nation

One of the more fascinating things about a crisis and its resolution is the post-mortems: The after-the-fact analyses that some folks do to explain what occurred.

These analyses are fascinating for what they reveal about the beliefs, methodologies, biases and cognitive failures of the many crisis watchers.

Human fallibility being what it is, we can divide this universe into 3 buckets of observers:

(1) Those who get it mostly wrong.

(2) Those who can correctly describe a small slice of what happened.

(3) Those who understand the full boom and bust - how all the moving parts came together to cause the crisis.

The first bucket is the easiest to both understand and dismiss: It contains the ideologues and market worshipers, as well as the perma-bulls - none of whom have much in the way of methodology. They are believers who know that in the long run stocks (and houses for that matter) will come back, whether we are dead or not. For the most part, they missed all of the warning signs of recession, credit crisis and boom and bust of the housing collapse. They called it a “mental recession”.

This motley crew says it was all the fault of too much regulation, no it was CRA/Fannie Mae - Why do we even have a Fed? That was the cause - No its mortgage interest deduction - No its all Barney Frank’s fault, no wait, it was caused by too much minority home buying - No, it goes back to FDR - No, its all the Government’s fault, there should be no State - All hail John Galt, we should be free without any government intervention whatsoever - Bababooey!

As you might imagine, their ravings throw off a lot more heat than light. They provide no insight into the what actually occurred - But hey, its great theater.

The second group is a lot more instructive and interesting. They accurately detail a tiny aspect of the crisis in great detail. These observers are like the six blind men describing an elephant: Partly correct, yet mostly incomplete. Their individual descriptions accurately describes various body parts (trunk, tusk, ear, etc.) but they never describe the creature in its entirety.

This group includes those who blame the entire debacle on derivatives or the formula for Value at Risk. The original concept of securitization. Wildly misaligned compensation incentives. They blame the ratings agencies and/or the deification of markets via EMH [efficient market hypothesis], or the massive increase in use of credit since the 1950s. Some blame allowing Lehman to fail as the cause; others blame bailing out Bear Stearns, yet still others say it was all Goldman Sach’s fault. Fill in your own blank.

In the hunt for the unified field theory of the economic crisis, these observers may accurately describe a single aspect of what happened, but they fail to capture the fullness of what caused the debacle. They miss the crisis’ gestalt.

Lastly, we have the Big Picture observers (no pun intended). These folks try to put all of the moving pieces together. They look for proximate causes, not abstract theories. They try to see how one event led to the next event and the next and so on down the entire cascading collapse. These folks understand complexity, causation, risk, statistics and cycles. They are pragmatic, not ideological.

They are unfortunately, all too rare.

I only can wish that more of the people trying to repair what happened, and prevent the next crisis, were in the third group ….

Source: Barry Ritholtz, The Big Picture, July 30, 2009.

Tags: Bailout, Barney Frank, Barry Ritholtz, Biases, Boom And Bust, Buckets, Cra, Credit Crisis, Fannie Mae, Fdr, Government Intervention, Hail John, John Galt, Mortgage Interest Deduction, Motley Crew, Moving Parts, Post Mortems, Second Group, Warning Signs, Worshipers
Posted in Gold, Markets | No Comments »

Robert Arnott: Reversion To Which Mean?

Monday, July 6th, 2009

Rob Arnott, founder of Research Affiliates, innovators of FTSE RAFI Fundamental Equity Indexes discusses the concept of ‘reversion to the mean’, but asks, ‘ which mean?‘

Here are highlights:

Mean reversion is one of the most powerful and reliable drivers of long-term capital markets returns. It’s like a pendulum. When valuation levels get high (or low) by historical standards, they’ll usually swing back to past norms, often overshooting as a pendulum might. To be sure, mean reversion works its magic slowly, so one can often wait a long time for values to revert.

One challenge with relying on mean reversion is that we don’t know what the “right” mean is. Stocks today look cheap relative to the “mean” of the last 20 years, but expensive relative to the “mean” of the last 100 years. So, which is right?

About stocks:

Spreads between growth and value stocks widened to near record levels in March. Even now, deep value stocks are priced for a bleak outcome. If these prices are right, then the growth stocks are ridiculously expensive. If the growth stocks, which are priced to reflect an economic recovery in the next 6-12 months, are right, then deep value stocks are cheap.

About corporate bonds:

Investment grade corporate bonds also yield 2 per cent to 4 per cent more than the stocks of the companies that issued the bonds, so the bonds can beat the stocks if earnings and dividends grow slower than 2 per cent to 4 per cent. Over the past 50-100 years, earnings and dividends have grown about 4 per cent to 5 per cent a year, of which 3 per cent was inflation. This means stocks should edge past their own corporate bonds, unless the growth rate has changed.

Treasury inflation- protected securities represent a useful hedge against renewed inflation. And, they’re priced at a yield about 2 per cent lower than notional Treasury bond yield of the same maturity.

Government intervention is changing the landscape, and altering the market norms of last twenty years:

The market is trying to figure out what equity and bond ownership means in an order that chooses direct intervention over Adam Smith’s “invisible hand”.

Will this move towards centralised control deliver unintended consequences? Of course. The most obvious is that if secured bondholders are no longer assured of being “first payee” in bankruptcy, then bondholders will demand more reward to compensate for an unexpected new layer of risk. If stockholders are subject to expropriation, then stock prices will reflect a new layer of risk.

The most important consequence is whether centralised management of the economy will lead to improved economic growth. History suggests the contrary. So, the “mean” moves. But by how much? Ben Graham drew a distinction between price-based losses and a permanent loss of capital. The former represents a buying opportunity; the latter does not. We’re seeing more of the latter imposed on the capital markets – by government fiat – than we’ve seen in the past.

In other words, be careful and don’t rely strictly on what you think you know about the market, nor your assumptions as to what you think the mean might be to guide you here. (Read the June 28, 2009 article here.)

Back in late April, we published the note, Bonds: Reversion Cuts Both Ways, in which Rob Arnott asserts that investors should take care to not make broad assumptions about which asset group will outperform over the long term. Arnott, who is the founder of FTSE RAFI Fundamental Indexes, willingly explains why he’s been favouring bonds.

Suggestion: Get to know as much about the bond market, interest rates, and currency relationships as you can.

Here is some suggested reading (and viewing) from items we have covered that you may have missed:

Hugh Hendry: 10-year Treasury Signals Deflation

August 6, 2008 - Hendry points out that 10-year treasurys are up 15% YTD, and are signalling deflation - in the same segment, he also skewers Lloyd’s Nick Hodson.

Hendry: Not Yet Time to Invest in Inflationary Assets

March 17, 2009 - Though Hendry appears to be wrong about investing in inflationary assets in the short term back in March, when the recovery rally started, his arguments are compelling, and he gets into an impassioned debate/argument with Liam Halligan over which side of the trade one should be on. Its enlightening and educational, because it highlights the debate between inflationists and deflationists.

Peter Thiel: Letter to Clarium Capital Partners

April 21, 2009 - Clarium’s Managing Director, Patrick Wolff does an excellent and interesting job of explaining the credit market, Quantitative Easing, and among other things how it is and is not inflationary, given the consensus over the whirring of government printing presses. Believe it or not - the amount of money being printed may not be sufficient - yet.

Make Sure You Get This One Right

July 3, 2009 - Niels Jensen discusses the inflation/deflation debate and about what side of the trade investors should consider.

These are good start for now.

Source: FT.com, Robert Arnott, June 28, 2009

Tags: Corporate Bonds, Economic Recovery, Equity Indexes, Ftse Rafi, Government Intervention, Growth Stocks, Inflation Protected Securities, Innovators, Long Term Capital, Market Norms, Mean Reversion, Pendulum, Research Affiliates, Reversion To The Mean, Rob Arnott, Robert Arnott, Treasury Bond Yield, Treasury Inflation Protected Securities, Valuation Levels, Value Stocks
Posted in Markets | No Comments »

Memo to All My Valued Employees

Monday, December 29th, 2008

Listening to AM640 here in Toronto today, I heard an excellent discussion about the letter from “The Boss,” a truth-be-told debate about the value of tax-cuts, stimulus and taxation. In the current climate of government intervention, and neo-socialism, the letter is a breath of fresh air for those of us who have made the greatest productive contribution. Thanks to Charles Adler for posting the letter at his blog.

To go one step further, it is reminiscent of the world of Ayn Rand’s “Atlas Shrugged,” in which the story’s heroes, the entrepreneurs, the innovators, the captains of industry, the prime-movers, decide the best remedy is to withdraw, to go on strike, as the world is looted by bureaucrats, socialists, pseudo-intellectuals, and mystics.

Memo to All My Valued Employees

Author: The Boss

There have been rumblings around the office about the future of this company and, more specifically, your job. As you know, the economy has changed for the worse and presents many challenges. The good news, however, is this: The economy doesn’t pose a threat to your job. What does threaten your job, however, is the changing political landscape in this country.

First, while it’s easy to spew rhetoric that casts employers against employees, you have to understand that for every business owner there is a back story. This back story is often neglected and overshadowed by what you see and hear. Sure, you see me park my Mercedes outside. You’ve seen my big home at last year’s Christmas party. I’m sure all these flashy icons of luxury conjure up idealized thoughts about my life. But you don’t see the back story.

I started this company 12 years ago. At that time, I lived in a 300 square foot studio apartment for three years. My entire apartment was converted into an office so I could put forth 100% effort into building a company, which, by the way, would eventually employ you. My diet consisted of noodles because every dollar I spent went back into this company. I drove a rusty Toyota Corolla with a defective transmission. I didn’t have time to date. Often times, I stayed home on weekends, while my friends went out drinking and partying. In fact, I was married to my business — hard work, discipline, and sacrifice.

Meanwhile, my friends got jobs. They worked 40 hours a week and made a modest $50K a year and spent every dime they earned. They drove flashy cars and lived in expensive homes and wore fancy designer clothes. Instead of hitting Nordstrom for the latest fashion item, I trolled through the Goodwill store extracting any clothing item that didn’t look like it was birthed in the ’70s. My friends refinanced their mortgages and lived lives of luxury. I did not. I put my time, my money, and my life into a business with a vision that, some day, I too, would be able to afford the luxuries my friends had.

So, while you physically arrive at the office at 9 a.m., mentally check in at about noon, and then leave at 5 p..m., I don’t. There is no “off” button for me. When you leave the office, you are done and you have a weekend all to yourself. I, unfortunately, do not have that freedom. I eat and breathe this company every minute of the day. There is no rest. There is no weekend. There is no happy hour. Every day this business is attached to my hip like a one-year-old special-needs child. You, of course, only see the fruits of my labor — the nice house, the Mercedes, the vacations. You never realize the back story and the sacrifices I’ve made.

Now the economy is falling apart and the guy who made all the right decisions and saved his money have to bail out all the people who didn’t. The people who overspent their paychecks suddenly feel entitled to the same luxuries that I earned and sacrificed a decade of my life for. Yes, business ownership has its benefits, but the price I’ve paid is steep.

Unfortunately, the cost of running this business and employing you is starting to eclipse the marginal benefit. Let me tell you why:

I am being taxed to death and the government thinks I don’t pay enough. I have state taxes. Federal taxes. Property taxes. Sales and use taxes. Payroll taxes. Workers’ compensation taxes. Unemployment taxes. Taxes on taxes. I have to hire a tax man to manage all these taxes and then, guess what? I have to pay taxes for employing him.

Most of my time is now occupied with government mandates and regulations and all the accounting that goes with them. On October 15th, I wrote a check to the US Treasury for $288,000 for quarterly taxes. You know what my “stimulus” check was? Zero. Nada. Zilch.

The question I have is this: Who’s stimulating the economy? Me, the guy who has provided 14 people good-paying jobs and serves more than 2,200,000 people per year with a flourishing business? Or the single mother sitting at home pregnant with her fourth child waiting for her next welfare check? Obviously, government feels the latter is the economic stimulus of this country.

The fact is, if I deducted (read: stole) 50% of your paycheck, you’d quit and you wouldn’t work here. Why should you? That’s nuts. Who wants to get rewarded for only 50% of their hard work? Well, I agree, which is why your job is in jeopardy.

Here is what many of you don’t understand: to stimulate the economy you need to stimulate what runs the economy. Had suddenly government mandated to me that I didn’t need to pay taxes, guess what? Instead of depositing that $288,000 into the Government black-hole, I would have spent it, hired more employees, and generated substantial economic growth. My employees would have enjoyed the wealth of that tax cut in the form of promotions and better salaries. But you can forget it now.

When you have a comatose man on the verge of death, you don’t defibrillate by shocking his thumb to bring him back to life, do you? No. You defibrillate his heart. Business is at the heart of our economy and always has been. To restart it, you must stimulate it, not kill it. Suddenly, the power brokers believe the mud of economy is the essential driver of the economic engine. Nothing could be further from the truth.

So where am I going with all this? It’s quite simple. If any new taxes are levied on me, or my company, my reaction will be swift and simple. I’ll fire you. I’ll fire your co-workers. You can then plead with the government to pay for your mortgage, your SUV, and your child’s future. Frankly, it isn’t my problem anymore.

Then, I will close this company down, move to another country, and retire. You see, I’m done. I’m done with a country that penalizes the productive and gives to the unproductive. My motivation to work and to provide jobs will be destroyed and, with it, will be my citizenship.

While tax cuts to 95% of the people sounds great on paper, don’t forget the back story: If there is no job, there is no income to tax. A tax cut on zero dollars is zero. Who understands the economics of business ownership and who doesn’t? Whose policies will endanger your job?

Answer those questions and you should know who might be the one capable of saving your job. While the media wants to tell you “It’s the economy, stupid,” I’m telling you it isn’t. If you lose your job, it won’t be at the hands of the economy; it will be at the hands of a political hurricane that swept through this country, steamrolled the Constitution, and changed the landscape forever. If that happens, you can find me in South Caribbean sitting on a beach, retired, and with no employees to worry about.

Signed,

Your Boss

Who is John Galt?

Tags: Ayn Rand, Breath Of Fresh Air, Bureaucrats, Business Owner, Canada, Captains Of Industry, Charles Adler, Christmas Party, Flashy Icons, Government Intervention, Innovators, Intellectuals, Mystics, Noodles, Political Landscape, Prime Movers, Productive Contribution, Socialists, Square Foot Studio, Stimulus, Studio Apartment, There Have Been Rumblings
Posted in Economy, Markets | 5 Comments »