Inflation trends positive for Asian markets

Lehman and JP combining to set up quite a bullish set up for Asian markets.

First off, Lehman notes that inflation is coming off, and that will lead, as it always has, to P/E expansion which, they believe, will offset the cr@ppy earnings prospects into a slowing global economy.

"... the recent drop in oil prices and, in developed economies at least, absence of significant second-round effects should mean that global inflation falls from 4.4% in 2008 to 2.4% in 2009... if the historical relationship is maintained, this decline in headline inflation ought to be consistent with... an expansion in the P/E multiple from 13.9x to 20.0x."

Meanwhile, back in Asia, JP notes a clear decline in food prices, which should lead, in my view, to an outsize improvement in inflation prospects and hence, if you follow Lehman, an outsize Asian market re-rating.

"While recent declines in oil prices have grabbed more attention, food price trends are actually more important for inflation in Emerging Asia because they have much bigger weights than energy prices in most countries’ consumer price indices."

And since I'm so good at Excel stuff and not messing it up...




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Argh! Need some Excel chart tutoring, clearly...

Well, even in 2002, NASDAQ probably wasn't quite down over 100% Y-o-Y, as I indicated in a recent posting "US Dollar up, US Financials up, Asian Banks... up?"... and I did get some inkling that things in (my) Excel-space were not quite right when I left off the y-axis in another, more recent, one, "The (bullish?) link between the USD and oil"...

So here they are, done properly. (Conclusions unchanged, though.)

Apologies.

• USD index, Asia ex-Japan & India equities, NASDAQ

• USD index, Asia Financials, S&P Financials
  

• S&P500, WTI (oil), USD index

(You can imagine the temptation to just go back and change 'em after the fact, but...)

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The (bullish?) link between the USD and Oil

Morgan Stanley has an interesting note out On the Link Between the USD and Oil. Basically, what Stephen Jen is saying is that the USD and oil price will be remain negatively correlated for a while yet. He lists 3 reasons each of how oil prices could drive the USD and vice versa. (See link above, or ask me for a copy.) "Specifically," he writes, "lower and stable oil prices should be positive for the USD, while rising oil prices should be negative for the USD."

I have made a bit of a hash of the y-axis on the Excel generated chart below, so I have left it out, but you get the idea, and they're all on the same scale. (Starting 1996, weekly data, Y-o-Y % change.)

Basically it looks more like Jen's call is "it's different this time."


He concludes, "For the global economy, a strong dollar/low oil price combination is much better than a cheap dollar/high oil price combination. Calmer commodity prices should also temper the hawkish bias some inflation-targeting central banks have had." That's pretty bullish for equities, but assumes that a strong dollar/low oil price combo really is what we're looking at. This time.

*** late addition: see here for correct chart!!
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The Olympic MARKET Record! (So China will...)

So the rumour mill is working overtime in HK/China and pumping up the market with talk of various Government led schemes (like new short selling restrictions, bailouts of sponsored entities and... wait... oh, that's the other one) to ramp up the stock-markets post-Olympics, which, as we all know, is traditionally a time of economic and market misery after a helluva party in the lead up. Or is it?!

Turns out that that little snippet of conventional wisdom (at least for the equity markets) maybe ain't quite so wise after all.

The record is actually, based on Jan to end June and July to end December performance, surprisingly even, over the past 8 Summer Olympiads (ex-Moscow) at three apiece between Going-from-Up-to-Up and Going-from-Up-to-Down.

So there! (Actual numbers visible if you click below, showing China traded A-shares as well as HK traded H-shares, plus the HSI for good measure. And just in case you're wondering, nobody gives a sh1t about B-shares anymore.)

But then again, none of the other home markets were down 48% in the first half year of their Summer Olympics, either, so perhaps China will try and manipulate the markets and "do an LA'84" which saw markets off 7% in the first half before closing out the year almost flat with a 9% Carl and Mary Lou inspired 2H burst.

(Not that I'm implying that anybody in power in the US would ever look to manipulate the markets in the cradle of free market capitalism, no no no. No. No!)

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Wishful thinking in US real estate

Mike Luckovitch, via NEWSWEEK

OK - a bit slow with these items off CNBC and Bloomberg the last couple of days. So a quickie:

First off - Almost One-Third of Homeowners Who Bought in the Past Five Years Underwater

• "Almost one-third of U.S. homeowners who bought in the last five years now owe more on their than their properties are worth". ie Negative equity. "For those who bought at the 2006 peak of the housing market, 45 percent are now underwater, Zillow said. Negative equity and declining prices are making it difficult for homeowners to sell property for a profit. Almost one-quarter of U.S. homes sold in the past year were for a loss"...
  

Then - More Homeowners Have Problems Paying Mortgage

• "Seventy-two percent of borrowers were making less than full interest payments, and 12.4 percent were at least 90 days delinquent." Unclear if this is just for borrowers of option adjustable-rate mortgages, but either way it's not looking good.
  

Followed by - Mortgage Applications Fall as Loan Rates Jump

• "Applications for U.S. home mortgages edged lower last week as home loan rates jumped, an industry group said on Wednesday." Well, this is off surprising firmness... which was a positive sign... or a sign that those who were applying for loans kept getting turned away? And now they're giving up as they maybe don't quite feel like buying a home now that they need to look for a job? I don't think it's simply a function of higher rates - all that does is make it more painful for existing borrowers.

... then Finally - Home Prices Start to Show Signs of a Turnaround

• "... a slew of factors suggest the worst may soon be over.Among the strongest signs that the the hard-hit sector could be recovering, home prices in many regions of the country are now falling at a slower rate"

Huh? "Signs of a turnaround"?

I borrowed to buy into a rising market way beyond what I could afford, lived off capital appreciation by borrowing even more, watched prices disappear down the toilet along with my home equity line - grocery and transport prices have shot up, and I just gotta hope I don't lose my job. I can't sell now because then I'd have nowhere to live and still owe the bank money... should have sold, should have sold... held out too long... as soon as I break even, I'm getting the ^%$# out...

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Meanwhile, Merrill Lynch strategist Rich Bernstein is saying that the credit crisis, which he has been warning the whole world about (except, evidently, for anybody in Merrill management) since at least the middle of last year, will be "broad, deep and global" - which seems to have become the broker sound-bite of the day. (Was he on CNBC or something?)

• "The problems in the Financial sector appear to us to be far from over, and we are skeptical that trying to bottom-fish will prove to be profitable. However, we continue to think that there quite a few over-looked and unexploited opportunities. Among them are companies in more-stable, cash-generating areas (Health Care, Consumer Staples) and “chicken cyclical” sectors (Telecom, Industrials, and Technology)."

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Goodbye HTC (... but not HelloMoto!)

I don't do much in the way of specific individual stock picks on this blog, but I wrote back in late June to go long HTC (2498 in Taiwan) "over the next few weeks".

"GoodbyeMoto... Hello HTC?!?!" I wrote after dissing the company here and calling a sell here earlier in very the same month.

Assuming "a few" weeks meant two, your average in price would have been NT$516, based on closings from the 26th on. As of yesterday's close, you'd be up 12.6%... compared with a Taiwan local market decline of ~0.7% on the same basis. Not too shabby. (Buying in over 3 weeks would've given an even more flattering in price, but who really does THAT in their PA!)

This week we have news from C|Net (and every broker in Taipei) of HTC's pioneering Google/Android phone set for a launch in September (just slightly earlier than expected,) with volume shipments in October. Look for positive newsflow, forecast revisions, recommendation upgrades and... opportunities to sell out... er... "over the next few weeks."



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US Dollar up, US Financials up, Asian banks... up?!

Great note from Ken Landon of JP Morgan overnight.

• The attached chart shows the change in the S&P 500 Financial Sub-Index (i.e., S5FINL Index on Bloomberg) that accompanied various changes in the DXY dollar index (using year-over-year changes for both).
• As can be seen, U.S. financial stocks tend to have the best performance when the dollar strengthens. The magnitude and direction of the change in the USD corresponds with the magnitude and direction of the change in Financials.
• During the time period that the chart covers (1990-2008), Financials have generally performed well, which is why most of the bars are in positive territory. But the important point is that Financials had their best performance when the dollar was the strongest and the worst performance when the dollar was weakest.
• A long-held premise stated in the Lowdown has been that rebuilding of the US financial system would require a strong dollar in order to attract the necessary capital from overseas. We are now at that point in the cycle when everything is coming together: 1) Previous changes in the US yield curve suggest that the worst of the business cycle downturn is over; 2) Emergence from recession in the US while the rest of the world slows down supports the dollar; 3) A huge amount of bad debt has already been written off while the upward-sloping curve is allowing many financial institutions to improve operating income.
• The macro environment is improving for both the USD and financials. The two go hand-in-hand.

Now, lacking a bit in inspiration today, I decided to see how that conclusion might fit with Asian banks, just for a broad feel for what is going on. Looks at first glance, Asian Financial Crisis recovery period aside, that Asia's banks benefit more than those of the US from a firming USD.

Could we actually see a secular upswing in our banks, if the USD really does continue its upswing?!

Tried to do it on Bloomberg, but too hard! Data from Bloomberg, but my Excel manipulation.

OR maybe a strong USD can just lead to a strong NASDAQ or... just Asia ex-Japan in general?! (Or just all equities???)

Strong USD is certainly not my null hypothesis for the longer term, but could well continue for another few months as Europe and Japan show even worse growth characteristics than the US.

And THAT could carry my now-famous "leggy markets" further than even I was expecting.



*** late addition: see here for correct chart!!
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Dear investor...

A new classic post from the always readable Cassandra Does Tokyo much earlier today. First few lines below, please see the rest here.

Dear Investor,

This letter is to inform you that the wheels have come off of the proverbial wagon at ACME Systematic Leveraged Macro Momentum Fund LP, and that the same awesome thematic portfolio that made you feel (in the first half-year) as if you'd become very rich in comparison to those sucking wind on their leveraged MBS portfolios or Japanese Small-Cap Value Funds, has, quite literally, spontaneously combusted in our faces.

Our long-oil (PBR, SU, SWN), long coal (MEE, BTU), long fertilizer (POT, MOS), and long iron ore (CLF, RIO) positions have been crushed (no pun intended), and…

cont...

I especially like the reference to Taleb. Must all be somewhat close to the bone for some, to say the least.

(For more, check out the Hedge Fund Implode-o-meter.)

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It's all going Pair shaped!

So, reading a free copy of Forbes a couple of weeks ago, I came across an article on the "Oracle of Manitoba" himself, Randolph McDuff.

Who?

Exactly! He's "the best stock picker the world has never heard of"... with an eight year compound annual growth of 36%... vs 1.1% for the S&P500 (and 11% for Buffett's Berkshire.)

Sadly, it's all imaginary... but in a trackable form via Marketocracy, a pretty realistic online portfolio management site which I had never heard of, and subsequently looked up (and compared with similar offerings.)

Not sure if I will be the Oracle of Anywhere, but I am toying with running a long and a short fund (Marketocracy doesn't -yet?- allow combined long-short funds for some reason) based on fundamental pairs in Asian (non-Japan) ADRs on a medium term horizon. Based on what actually trades in reasonable volume, that's a universe of about 70 counters, of which less than a fifth have a market cap of under a billion bucks.

(IF I can work out how it all works - a bit of a struggle with the short book orders last week!)

Pairs I am working on at the moment for a portfolio startup position - ie likely to be adjusted faster than my planned steady state 3-9 month holding period going forward:

• +SINA -SNDA,NTES
• +VISN/-AMCN (careful --- corporate action)
• +CEA/-ZNH (careful --- corporate action)
  
• +CHU/ -CN
• +KTC/ -SKM,KEP

Thinking is to be broadly market neutral on a beta adjusted basis (+/- 15%, occasionally wider), but with scope to take directional bets on the pair net positions themselves.

No trades on yet (see above), but will keep you all... posted.
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Foreign Reserves - no correlation with land mass, amazingly enough!

8.8.8!

So if the % of world reserves were proportional to land area...

• The US (0.6% of world reserves/ 6.5% by area) would be the size of Nigeria (0.87% of reserves.)
• Japan (13.9% reserves/ 0.25% area) would be larger than Russia (8.5% rsvs), say with an Indonesia (0.9% rsvs) or Libya (1.3% rsvs) stuck on the side.
• Both The Untied Kingdom, sans Empire, (0.7%/ 0.16%) and the ECB (0.7%/ 3.0%) would be about the size of Egypt (0.5%) or Mauritania (0.009%)
• China (25.9%!/ 6.4%) would a bit larger than Russia (8.5%), Canada (0.6%) and the US (0.6%) combined.
• Singapore (2.5%/ <0.01%) would be bigger than India (4.3%.)
• So would Brazil (2.6%/ 5.7%), for that matter...
• ... while India (4.3%/ 2.3% would be itself... PLUS Argentina (0.6%.)

You get the idea.

And no, I really can't draw any investment conclusions from this "analysis"!!

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I won't do the exact same thing with populations (too obvious!) but I will say that China's current population is about that of the whole world in ~1850. India's lagging behind only slightly, matching the whole world maybe twenty years earlier? The USA, #3 in the headcount stakes, clocks in at about 1,000 AD (or CE) with #4 Indonesia only about 100 years earlier. Brazil at #5 is only 200 years into AD-space, while #6 Pakistan and #7 Bangladesh individually would be like the world about 200 years the other direction, ie ~200BC (or BCE.)

Err... Buy the BRICS? Yeah! Think about the compounding effect since 1850! Scratch that.

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China's manufacturing contraction... tighter money or...

The latest from that "great sucking sound"*...


So which way will the PBOC move - ever more inflation bashing tightness? Yes for rhetoric, IMHO, but not by action.

(As suggested here a couple of weeks ago.)

(* Originally of manufacturing jobs going to China)

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Suddenly, Sellside Sez. . . S E L L !

Having taken a break from polling during July, I asked my salespeople/salestraders this morning at/around market opening (with, you recall, the US off hard overnight and ETFs indicating close to a -3% day across the region)

"Quick poll - do you expect mkt to be UP in August... OR DOWN?"

The results, as of lunchtime, were 2:1 SELLERS with (unusually) nobody sitting on the fence at all! Admittedly, only a third or so responded, so things could feasibly change over the next day or two - if it does so materially, you know where to look.

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Moi? Not (just) because the sellside is net bearish, but markets (globally) remain very squeezy - so I would go for flat by month end, but with a trajectory the reverse of July's... ie squeeze higher then at some point OMG! OMG! OMG! crash and sail on south through September. Something like that!!

We shall see...

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2008 Beijing Olympic Manners

1) Wear no more than 3 colours (bye bye, Thais)
2) Shake hands for no more than 3 seconds (Team India, please cancel your flights)
3) No white socks with black shoes (the English squad should stay home, then)
4) Do not jump queue, spit, or remove shoes in public (don't get on the plane, Malaysians)
5) "Older women" must wear skirts that extend to 3cm below the knees (Philippine team... think again)
6) Men should avoid helping women carry their handbags (so long, Singaporeans - no golds for you...)
7) Avoid sticking your face too close to members of the opposite sex when talking in public (see ya in 2012, Koreans)
8) Do not visit your neighbours in your pyjamas & slippers (OK, this really IS Chinese)

(Actually just for Beijing citizens, apparently)

(AP)
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"Meredith, can Lehman survive this?"

"Umm... I... I... I... um... I think..."

(Thinks: I really want to say they have no chance in hell, but I don't wanna get sued!)

"I don't know... I don't know... "


On CNBC, overnight, at 8:17.

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Meredith factoid - she's married to a (former) champion professional wrestler, JBL... who, rather interestingly, briefly wrote a regular stock column for TheStreet.com!

(images from Bloomberg.com and 411mania.com)

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Market stability... and a measure of calm?

Low vol = low volatility or low volume?


(From The Daily Telegraph online - a few days ago.)



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