NYT: "In Asia, where markets have long been more volatile than in either Europe or America, the moves were even more startling. The Hang Seng index in Hong Kong gained 10.7 percent on one day, and lost 8.7 percent on another. In India, the Sensex index fell 7.4 percent on its worst day in the quarter, even worse than the 7.2 percent drop in the Shanghai composite in China. But the Chinese index did rise 8.1 percent on its best day."A surprise for some of his readers, perhaps, that our markets out here have been a wild and frequently rather painful ride!
FT: "While prices of wheat, corn and other agricultural commodities have surged since late 2006, the increase in rice prices only started in January."
CSM : "Rice farmers here are staying awake in shifts at night to guard their fields from thieves. In Peru, shortages of wheat flour are prompting the military to make bread with potato flour, a native crop. In Egypt, Cameroon, and Burkina Faso food riots have broken out in the past week... Some countries like Vietnam, India, and Pakistan have banned grain exports. On Wednesday, Cambodia’s prime minister ordered a two-month ban on rice exports to neighboring Thailand and Vietnam 'to guarantee food security.' "So what might be the next steps, broadly? Agri-exporting countries making such restrictions would see their current accounts and growth rates take a hit, possibly weakening their currencies and importing a bit of inflation... and making non-agri exports (if any) more competitive. Meanwhile, importers' domestic inflationary pressures will rise, driven by staples. To offset the possibility of (more) rioting, governments would probably prefer to spend more domestically, weakening fiscal balances and driving up growth, rates and their currencies... and weakening the competitiveness of its other exports. (Or is that projecting out too far?!)
Taiwan’s voters gave a resounding victory to Ma Ying-jeou of the opposition Kuomintang party in the island’s presidential election, raising hopes of a reduction in tensions with China. Mr Ma gained 58.45 per cent of the vote. Frank Hsieh from the ruling Democratic Progressive Party won 41.55 per cent.OK, so now pretty much EVERYBODY is bullish Taiwan, specifically focusing on the domestic (assets, retail), financial and Cross-Straits-Play names, and generally quite bearish on the tech plays (strong NTD, weak US etc.)
"The bottom line: we think that de-leveraging has now spread to the comMy view is that the commodity spike was excessive and ripe for profit taking (as was the obverse of that, the Dollar short) and that ahead of a long weekend it makes sense to reduce risk - especially with the lower than expected rate cut implying marginally less near term weakness in the USD. So lock in profits and sell commodities, lock in profits and cover USD shorts and then wait for next week to roll on by before putting the trades back on. Is the USD really going to strengthen that much, (if at all, given the liquidity injections) and have housing and consumer fundamentals really changed so much for the better??modity complex, and that this will probably see a nearly full retracement of the unprecedented spike in the broad CCI index of commodity prices that took place over the last six to seven months. Gold and oil coming back to around $800 and about $80 are quite possible in that event, with less damage likely in base metals. And even if we are right, that does not necessarily mean that the long-term bull market in commodities is over, especially perhaps for agricultural products."
The survey is a reminder that even in this difficult environment there exist the raw ingredients for an equity ‘bear squeeze’. Cash levels are high; risk appetite is close to the survey lows; and fund managers continue to believe that stocks offer value both in absolute terms and relative to fixed-income assets. The challenge is to find the catalyst, which is hard against a deteriorating macro backdrop and growing talk of recession.Merrill Lynch has carried out regular fund manager surveys for many years now, run by David Bowers, who (I think) has been doing it since his Smith New Court days, and I've found them to be quite insightful from time to time. The latest survey is a pretty good one (Link here if you have ML research access) especially in the light of the trough indicator "not yet"s I've been posting in the last couple of days. As summarised for me by a Merrill salestrader:
Wipro plans to open more centres in the US in a continuing trend of “reverse outsourcing”, as Indian information technology outsourcing companies recruit in the US and Europe... Wipro, India’s third-largest information technology outsourcing company, this week said it aimed to hire more than 1,000 people in the US... The recruits for Wipro’s centres in Atlanta and Troy, Michigan, would be trained for three months in India before returning to the US for jobs in software development and project management.
Indian IT outsourcing companies typically train their employees to have specific foreign accents depending on their customer bases (eg US vs UK English)... would the reverse be true for outsourced US employees?! OK, so that's call centres, not IT outsourcing... in fact, this just looks like a more permanent version of the onshoring model in response to currency trends.
But it's a fun thought to have hardened, former auto-workers in Troy, Michigan and bright-lights-big-city-bound rednecks in Atlanta, Georgia speaking Indian English, and smiling sweetly into mirrors at their workstations! (And enjoying extremely-sweet-tea breaks too, of course...)
Conclusions: Our six signposts for a market trough are yet to give a strong signal. Whilst the aggressive Fed and depressed sentiment are positive, valuation is still 9-19% above prior trough lows, our economic lead indicators are not yet at recession lows, and credit spreads, while high, are yet to form a peak.Everybody, myself included, has been saying beware of the bear rallies... which means it could rally longer than everybody (me included) is expecting. But first, I need to get a handle on apparently conflicting reports that the borrow, in HK at least, is the highest ever relative to free float, versus hedge funds apparently at record low net and gross levels. If both are true, the market is retail dominated and extra squeezable.
Six Signposts: To determine if we have reached a market trough, we analyse six signposts, including: a) monetary policy, b) credit spreads, c) valuation, d) duration, e) market sentiment, and f) economic lead indicators.
- Ultra-Easy Monetary Policy: The Fed’s ultra-easy monetary policy is very positive for equities. When the real Fed funds rate has turned negative in the past, APxJ equities have on average delivered a 30% return in the following year.
- The Ongoing Blowout in Spreads Is Negative: Credit spreads are at high levels, but do not always peak before equities. Nonetheless, as the credit markets are at the centre of this downturn, signs of stabilisation may be necessary before equity markets trough.
- Valuation Still Above Historical Troughs: Valuations for both APxJ and the US are still 9-19% above average trough levels, a negative.
- Duration: Equity market troughs occur anywhere from one to 12 months into a Fed easing cycle, so we find this an unreliable indicator. That said, we could be 3-6 months away from a trough based on this indicator.
- Sentiment Enters Capitulation: Two of our sentiment indicators have entered the capitulation zone, suggesting a market trough and rebound near-term.
- Economic Lead Indicators Should Deteriorate: Our G6 and the OECD Lead Indicators are well above historical troughs, suggesting further downside if this is an average downturn. However, we expect a shorter and milder downturn than the average.
Is this the real price?
Is this just fantasy?
Financial landslide
No escape from reality
Open your eyes
And look at your buys and see.
I'm now a poor boy
High-yielding casualty
Because I bought it high, watched it blow. Rating high, value low. Any way
the Fed goes Doesn't really matter to me, to me
Mama - just killed my fund
Quoted CDO's instead
Pulled the trigger, now it's dead
Mama - I had just begun
These CDO's have blown it all away
Mama - oooh
I still wanna buy
I sometimes wish I'd never left Goldman at all.
I see a little silhouette of a Fed
Bernanke! Bernanke! Can you save the whole market?
Monolines and munis - very very frightening to me!
Super senior, super senior
Super senior CDO - magnifico
I'm long of subprime, nobody loves me
He's long of subprime CDO fantasy
Spare the margin call you monstrous PB!
Easy come easy go, will you let me go?
Peloton! No - we will not let you go - let him go! Peloton! We will not let
you go - let him go Peloton! We will not let you go - let me go Will not let
you go - let me go (never) Never let you go - let me go Never let me go
- ooo
No, no, no, no, no, no, no, -
Oh mama mia, mama mia, mama mia let me go S&P had the devil put aside for me
For me, for me, for me
So you think you can fund me and spit in my eye?
And then margin call me and leave me to die. Oh PB - can't do this to me PB
Just gotta get out - just gotta get right outta here
Ooh yeah, ooh yeah
No price really matters
No liquidity
Nothing really matters - no price really matters to me
1) Persistent Weakness(CNBC video here.)
2) Definitive New Low
3) Must Close On The High Of The Day
4) Massive Volume
Sure, the buying had a large element of short covering to it and the sell pad left a lot to be completed (higher up). Many in the room take the above facts to be very bearish. They say we need to see more puking. We need to see more "bid wanted" screams. And we need to see more aggressive buying from Long Only customers, especially into distressed pricing sessions. I totally agree. Grinding lower. Rallies will tend to be sold. (Edited)
“Whereas before non-deposit taking broker/dealers might have been willing to help distressed funds stay afloat to avoid being left with illiquid assets they could not sell at good prices, now they can effectively exchange those assets for Treasuries,” said analysts at BNP Paribas. “With this incentive to support hedge funds facing liquidity problems removed for broker/dealers as well as banks, we may start to see more hedge funds coming under pressure.”This on top of reports such as this one in the Times... of London... of hedge funds ' “snapping like twigs”, with one failing every day.'
What gives? Back to short covering, I believe - participants were unwilling to sit on overnight positions, what chance sitting on weekend short positions especially with a Fed prone to emergency (read: panic) decisions? And having increased the Term Auction Facility ("Discount Window Lite" - not an increase in liquidity, just availability) shortly ahead of numbers that sucked, who knows? More bleed to come, in that case, with bear rallies custom made for heroes/zeroes. The prospects aren't great for US equity markets (white line) when NFP monthlies (yellow line) run negative, but Asia (orange line), last time around anyway, was boring but OK.
There is no stagflation in Asia – growth continues to be strong, and inflation is mainly in food.That was basically it. Brilliant.
Meanwhile, bullish talk is whizzing around the market that rates are not going to be hiked in China and that the currency will be ramped instead. "I'll take slower growth, dude, I just really don't wanna see anymore price hikes... Keep the pitchforks on the farm, bro'... I'm doin' what I can and I'm gonna stick wit my tight money policy, yo" (or words to that effect.)
"John Thain, Merrill’s new CEO, is the catalyst to unlock the earnings power of
the franchise which would then result in meaningful value creation. In our
view, Merrill will successfully execute on 1) creating a risk management
infrastructure / culture that won’t result in outsized losses, 2) execute on top
line growth initiatives across the major businesses, 3) leverage the untapped
earnings power inherent in Merrill’s franchise by removing silos and building
bridges across the wealth management and institutional businesses."
"Cutting again; big writedowns seem likelyInterestingly, this is probably a worse day for the HK/China (ie H shares) market than yesterday, when markets opened sharply down and then stayed there (bothered and bewildered) - and kind of hoping for a short squeeze... Which never came. Tried a squeeze again this morning after a nothing day in the US with a 1+% open, then proceeded to slide 3.2% steadily throughout the day (4.7% for H shares.) Volumes picked up in the afternoon relative to the morning session, maybe as hopes for a rally subsided.
Based on continued deterioration in US residential and commercial mortgage
markets, corporate debt markets, and key investment-banking categories, we are
reducing our Citi estimates for 2008. Our 1Q08E falls to ($1.66) from $0.55; our full-year estimate falls to $0.24 from $2.74. In particular we are forecasting
another very large writedown of Citi’s subprime-related exposures. This is
consistent with our view of the company’s excess-capital-raising exercise,
outlined in our report “Replacement Cost” dated 2/21/08."
"... the worry is that we could move to a bear steepening, with the gap rising because long-term yields are increasing... If the markets get the idea that the Fed has become lax on inflation, then one would expect long-term yields to rise... Andrew Smithers, of Smithers & Co, a consultancy, points out that for 20 years, financial markets have benefited from falling inflationary expectations. This has allowed nominal interest rates to fall, which has in turn pushed up asset prices... But now inflationary expectations are at best not falling, and may well be rising... as a result 'asset prices need to fall relative to incomes and profit margins will fall as household savings rise'." (Is it OK to quote from papers like this??)Yuck. And in the same article, at the end, addressing another of my recent (they're all recent!) topics:
"In economists’ jargon, higher commodity prices are a sort of trade shock for consuming countries and, however you spin it, the effect is always bad."
Double Yuck. Expectations appear to be building, though, that it's all gone too far and too fast, and therefore due for a correction. Maybe.
Since I quoted Credit Suisse last week, I thought I would stick with them - not as contrary indicators (!) but with a couple of interesting macro angles:
Kucukalic: "The key question for us is whether a US credit crunch is unfolding. If so, we would expect disinflation/deflation – a negative for commodity prices and exposures. On the other hand, if an investor believes that the credit crunch can be averted (e.g. because of aggressive central bank intervention), then one would expect that investor must also believe in inflation and strength in commodity prices." (Is it OK to quote from BROKERS like this??)
Wilmot: "(W)e are on the vertical part of the supply curve, where inventories tend to be very low and small shocks to either supply or demand can lead to unusually big price swings... Given the size of the recent price spikes across commodities and the disruptions being caused by them, we think it dangerous to assume that commodities are a one-way proposition. Expect more volatility, but some of it could be to the downside as well as the upside."
The Continuous Commodity Futures Price Index (the renamed CRB, I believe) had been in about a 200-250 index range for about 30 years (!) from 1974 to mid-2004... even now we're looking at a compound annual increase in the index of about 3%. So where does a reversion to mean take us... and which mean? Umm... US CPI has averaged 4.2% over the last 30 years (skewed to the '70s) which is oddly enough about where we are now. Okay, so how does a 30 year moving average help with a trading call? Pretty much doesn't on a minute/minute or day/day or week/week basis, but worth bearing in mind.
Some possible long or short direct (rather than indirectly via bread or noodle companies, for example) plays in Asia on higher agricultural prices, from a various brokers - list compiled a few months ago, prices as of today - all off Bloomberg:
(We may or may not have an existing position in some of these names. In fact, I don't even agree with some of these, so really really just FYI.)
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Stumble It!
... & Here's the dropdown ::
(...but really it's all the same thing!)
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