Q) "What's driving commodities?" A) CALPERS...?

Direct from my friends at what used to be called CSFB:

• What's driving commodities?
  There are likely three main factors at work here:
  
• 1) Global supply/demand fundaments including political risks to supply;
  
• 2) Impact from a weaker US dollar or strength of non-dollar currencies; and
  
• 3) the maturation of commodities as a viable investment class.
  
• Speaking to the last factor, the California Public Employees' Retirement System, the largest U.S. pension fund, said it may increase its commodities investments 16-fold to $7.2 billion through 2010 as raw materials prices surge to records according to a Bloomberg article. The fund invested its initial $450 million into the commodity markets last year. Calpers, which has $240 billion in assets, agreed at a Feb. 19 board meeting to hold between 0.5 percent and 3 percent of its assets in commodities, according to a spokesman for the fund. While many analysts, investors and economists chose to call the influx of money into commodity markets speculation, its time to wake up to the reality that its becoming a viable investment class. What's more is that unlike the equities markets, which can satisfy demand for new investment funds by creating IPOs, the amount of commodities is rather finite. Therefore, the $11-12 trillion invested in equities has an enormous impact when even small portions are re-allocated to commodities. And if you disagree with the conclusion, more importantly ask yourself "will this change?"
  

(Tom Marchetti, Director, Energy Strategy)

"There is seldom just one cockroach in the kitchen."

Excerpted from 2002 Berkshire Hathaway Chairman's Letter:

• Three suggestions for investors:
• First, beware of companies displaying weak accounting. If a company still does not expense options, or if its pension assumptions are fanciful, watch out. When managements take the low road in aspects that are visible, it is likely they are following a similar path behind the scenes. There is seldom just one cockroach in the kitchen.
• Trumpeting EBITDA (earnings before interest, taxes, depreciation and amortization) is a particularly pernicious practice. Doing so implies that depreciation is not truly an expense, given that it is a “non-cash” charge. That’s nonsense. In truth, depreciation is a particularly unattractive expense because the cash outlay it represents is paid up front, before the asset acquired has delivered any benefits to the business. Imagine, if you will, that at the beginning of this year a company paid all of its employees for the next ten years of their service (in the way they would lay out cash for a fixed asset to be useful for ten years). In the following nine years, compensation would be a “non-cash” expense – a reduction of a prepaid compensation asset established this year. Would anyone care to argue that the recording of the expense in years two through ten would be simply a bookkeeping formality?
• Second, unintelligible footnotes usually indicate untrustworthy management. If you can’t understand a footnote or other managerial explanation, it’s usually because the CEO doesn’t want you to. Enron’s descriptions of certain transactions still baffle me.
• Finally, be suspicious of companies that trumpet earnings projections and growth expectations. Businesses seldom operate in a tranquil, no-surprise environment, and earnings simply don’t advance smoothly (except, of course, in the offering books of investment bankers).
• Charlie and I not only don’t know today what our businesses will earn next year – we don’t even know what they will earn next quarter. We are suspicious of those CEOs who regularly claim they do know the future – and we become downright incredulous if they consistently reach their declared targets. Managers that always promise to “make the numbers” will at some point be tempted to make up the numbers.

One of my (and others') favourites. Hard to add much value to it (obviously... the man is The Man!) but I can apply at least the cockroach analogy to writedowns the financial industry in the US. Chucking absolutely everything into charges against SIV, CDO, ABS etc exposure? There is seldom just one cockroach in the kitchen sink.

(Does that actually make any sense?)

Benny love (big) bank long time

So Mr Bernanke now says that the US is not headed toward stagflation... well, what else would he say? The US hasn't seen stagflation since before the days of Paul Adolph Volcker, far less Bubble-Man Greenspan.

• "Bernanke said the Fed was closely watching the slumping dollar, which hit a record low against the euro on Thursday, but added that he believed foreign investors still had confidence in the United States."

Right.

He also said that "I expect there will be some failures" among smaller banks. If I read it correctly, smaller banks will be allowed to go under, but the bigger ones will not, one way or another. So as if the smaller banks were not already having a hard enough time, the Fed is now saying that you're better off yanking your hard earned deposits from your local bank and plopping the cash down at poorly managed BAC, WB, C or some other subprime villain since besides the FDIC's USD100k you now have the Mighty Fed standing behind it.

Meanwhile, CNBC reports that mortgage rates continue to rise:

• "What people are realizing is that the interest-rate cuts haven't helped anybody but the banks," said Michael Cohn, chief investment strategist at Atlantis Asset Management. "They're taking these rate cuts and pocketing the money ... to shore up their own balance sheets."

(Not sure why the orange line's down right at the end - source is the same - but you get the idea.)

And on the other side of this wide spread...? Of course it's the good old, non-delinquent, borrower (again) that is also helping to shore up bank balance sheets.

Jim Rogers on... everything

As reported to me by a CLSA broker, from the CLSA Japan Forum where Mr Rogers spoke at lunchtime:

Clearly still pleased by his second trip around the world and the arrival of a second daughter, Jim impressed upon us all to have more kids and to learn the Chinese language – as quickly as possible. Below are a couple of bullet points that highlight some of the themes covered.

a) The Chairman of the US Federal Reserve is an idiot who will print money until he runs out of trees. As a result, inflation will accelerate dramatically, the dollar will likely collapse and we will enter a longer-term bear market for bonds.

b) Commodities, hard & soft, will remain in a secular bull market until 2020. Quit your job as a bond trader and try to open a lead mine (only one has been opened in the last 25 years). Commodity prices are determined by changes in supply and demand.

c) Jim did not offer numbers, but it was clear he believes that the commodities themes is going to GET CRAZY – so fill your boots NOW. Agricultural prices are set to EXPLODE – with food stocks at a 40 year low and a 40 year sustained drop in acreage dedicated to wheat. Start hoarding sugar now – starting with the lumps placed on your coffee saucer at dinner this evening.

d) Equity markets in most western/advanced countries will remain range bound over the medium-term. It is no surprise that the S&P 500 is below 2000 levels. Japan is probably a better place that the USA for equities, as there is less room to fall. Jim’s daughter has also been buying Yen as a directional bet against the carry trade. He is buying “baby stocks” ….

e) China is absolutely not a bubble for equity markets … as you need to look at the percent of the local population with money invested in equities (small at 7%) and the extent of the run-up in prices since 2000, rather than just the last two years. Buy infrastructure plays, power plants, environmental themes, tourism, companies levered into agriculture. Chinese currency could go up 4x vs the USD over the next 30 years. Sounds crazy, but think of the Yen:USD over the 1960 to 1990 period.

f) Russia is not an investment opportunity despite the commodity base. Jim’s wife is opposed to the corruption and is generally not impressed by the “bandit capitalism”. Russia will eventually be 50 to 100 countries.

h) Jim and his family are keen on Singapore – the only Chinese city with a passable environment. The casinos and population growth will probably work.

i) Bullish on Africa due to commodities. I am guessing there is less corruption and violence on the continent than there is in Russia (given f above).

j) Most of China’s neighbors will be dragged along by the growth the giant… but Taiwan is probably the best placed. This is the big winner among regional China plays.

I DON'T guarantee that this is an accurate summary of what he actually said or that I have even taken everything down correctly (... but it sure does sound like him.)

"We got a Dollar down, we got a Dollar down" (crackle)

Not sure if you can see this article from John Authers of the FT, but he raises the idea that the FX markets may be more worried about inflation than the Fed. Admittedly, the Fed is not expressly mandated to focus on inflation; while "independent within government", it has the unenviable job of balancing growth against inflation.

He ends with a comment on the recent strength of the S&P... in USD terms. Rebased into Euros, it's rather less thrilling.

SPX in USD

Hurray - the pain's all over... phew!










SPX in EUR


Unless you're an investor who's not denominated in USD...



(Is it really that obvious that I am only an occasional chartist?)





A N Y W A Y . . . I think the point is that there is more to the decision making than Bernanke appears to focus on - the inflationary consequences of rate cutting and the ongoing demise of the Greenback through imported inflation seems to be a sacrifice he is willing to make (or ignore?) in order to boost growth via the relatively moribund export manufacturing sector (and the overseas revenue translation gains of big MNCs) and reduced imports? OK - here's a bit of a stretch, but will the future US look anything like this?

• "The government boosted the country's exports and mollified the private sector not by encouraging research, development and innovation, but by cheapening the currency"... "breathing 'the last sigh of an industrial system' that was shored up 'with enormous public expenditure'" ... "narrow-minded venality"... "74 percent... say they are worried about the economy... 71 percent... say they are satisfied with their own lives"... "years of great missed opportunities"... "utterly dependent on the world market for high-cost energy"
  

(OK, so it's a really big stretch!)

----------------------

Great FT Weekend article from last year on Italy. Maybe this is why they're all happy?

Good news... Bad news... Who cares...?

From overnight:

GOOD NEWS

• IBM announces a big buyback and raises guidance
• Moody's reaffirms MBIA
• Fed vice chair Kohn said inflation not much of a worry

BAD NEWS

• Fed vice chair Kohn said inflation not much of a worry because growth is slowing so much
• Moody's keeps AMBAC on review
• US PPI ex food and energy MUCH worse than expected
• US home prices (broad) down by more than expected
• Consumer confidence at a 5 year low
• Google, Target and Wal-Mart horrible results
• Oil up >$101, Gold up to a record, Wheat shooting up - still, USD down to a record low vs the Euro
  
• ...and... oh, who cares...

... The markets just want to go up and are only looking at the good news as a handy excuse. This happens from time to time.

And here in Asia, freshly dressed wounds from the pre Chinese New Year short squeeze are still stinging... fears of short positions being squeezed are being stirred up by a few brokers going to a buy on the China banks (big in the indices), and quite a bit of long money just now stepping in off the sidelines. Having a "generous" HK budget today and a well taken HK$1bn Swire placement last night (in under half an hour) helped too. But what's really changed, eh?

So cover a bit, let the longs run for a short while and then be brave and put on your shorts again... I'm taking the time to look for short stock ideas to work on.

Inflation and hunger

I am not usually much of a Grauniad reader, but this article, flagged to me by a good broker, on WHERE inflation "bites deepest" is very interesting, and does have some bearing (quite a lot, actually) on my comments below about pitchforks and torches (and the impact on public policy etc.)

• "This is the new face of hunger," Sheeran said. "There is food on shelves but people are priced out of the market. There is vulnerability in urban areas we have not seen before. There are food riots in countries where we have not seen them before."

And yes, there are many ways to play this "theme" in the market, but maybe the first things to buy would be a gun, a house in the woods and a couple of years' supply of water and canned food.

Being sold a car without a steering wheel

The Brits (at least the press) do enjoy the misery of the Americans... right here!

From The Times (or "The Times of London" as Americans insist on calling it)

• “For all the headlines we are seeing, this situation is going to get worse,” said Kathleen Day, a C.R.L. spokeswoman. “There has been irresponsibility all along the line. Many of these loans were made to people who never had the ability to repay. It’s ridiculous, like selling someone a car without a steering wheel and then being surprised when they crash. Sub-prime loans need not be bad but once you stop assessing the borrowers’ ability to pay and the interest payments don’t reflect the borrowers’ ability to pay, that’s crazy.”

(Not sounding much better in the UK either, actually, but let's leave that for the time being.)

It sounds harsh, but in my view, at the end of the day, too many people who "shouldn't" (financially speaking) own homes in the US do, and until they no longer own them, one way or another, the housing related problems in the US will persist. That's why I remain cautious of the markets, regardless of progress on the monoline front and all the recent helicopter activity from the Fed.

-----------------------------------

Yanks getting their own back on the Brits here though, in one of my favourite articles from last year (also in The Times... of London.) "What the hell happened to all the beautiful (English) girls I knew? My first assumption was that one half of them had eaten the other half and washed them down with a crate of lager." Don't complain to me - write to the journo.

Pitchforks and torches in China

The thinking among a number of contraaaaarians (said like a sheep) out there is increasingly turning to China starting to maybe think about considering mulling over possibly relaxing some of its tight money policies. And maybe lifting some of those price controls too, since there's hoarding (Malaysian cooking oil style) and the supply is being choked off, exacerbating shortages etc.

Well, the PBOC doesn't seem to think so, according to CNBC.

For what it's worth, I think the pain felt by (second) property owners is bearable - for the government. Even the pain felt by manufacturers/exporters having a hard time (as long as it doesn't lead to mass layoffs.) What is NOT bearable is millions of starving peasants taking to the streets wielding pitchforks and torches to protest food shortages, inflation and profiteers...

(I would add a link to a vidclip from Frankenstein at this point, but can't find one - so this will have to do. Wrong continent, race, era, rationale etc, but you get the idea.)

Inflation is more important. So, tighter for longer, I think.

MonoBuffett

There's still probably some confusion about who and what the monolines are: The Economist wrote a good piece last year (which I had to reread not so long ago) but in brief: monoline insurers, with AAA ratings themselves, insure the repayments of bond issuers therefore lowering the cost of borrowing for the issuers. Then they got greedy and started insuring not boring municipals but structured products. (Yes, exactly...)

What's interesting is that Warren Buffet is getting really stuck in - According to CNBC he signed up 100+ munis last week in 2 days alone.

He recently made a nice public statement about the desirability of the safe muni side of it by making that audacious "bid" for MBIA and AMBAC's good stuff - here's the reaction, again on CNBC, from AMBAC to that original proposal.

So, with Warren Buffett's AAA standing available, who is actually going to go to (or stay with) MBIA and AMBAC now? (And how much will a $3bn injection help anyway? I thought Dinallo said $15bn for the industry?) Instead of buying the good part of the businesses off MBIA and AMBAC, he's just going to take it.

If AMBAC's $3bn gets signed in the next couple of days, I expect there will be a rally and then a selldown - the problems out there are not just about monolines!

More Facts About England.

Now I know how to embed YouTube stuff... d'uh, it's really easy!!

This is one of my ALL TIME favourites. (Nothing at all to do with financial markets, trading, hedge funds, Asia or anything.) You either get it... or... you don't.



If you think this is funny, try reading some of the comments... some people clearly do not get it... AT ALL.

Some Taiwan election plays

Taiwan's presidential elections take place next month. Implications generally taken to be positive, but historically, election rallies have peaked on election day, if I recall correctly. But I must say, Taiwanese politics are fun - really! Not gender-specific, too. Just like in (pre-) school.

How do you embed stuff? Just cut and paste like this? (Start at 0:24, about a third of the way in.)



A N Y H O W... a selection of non-tech "election plays" - mostly quite predictable

• Eva Air
• Evergreen
• Yuanta
• TW Fert
• TW Cement
• FE Tex
• FEDS
• Fubon
• Eva/CAL
• Huaku

(I may have long or short positions in some of these names)

The Edison Effect

So the Edison Chen news conference (in which he quits showbiz) started about the same time HSBC said it may not be cutting rates inline w US monetary policy - thereby leading to a sharp drop in the market.

The Edison Effect, they called it.

I thought the Edison Effect was a tech bubble as people replaced instead of fixed their PCs.

Or started using Gillette (now P&G) products more, maybe? (That's just a smutty joke, by the way. Sorry.)

(In case you care, here's the REAL Edison Effect.)




.

D'Oh!

I got this picture from one of John Mauldin's excellent and highly recommended (and free!) newsletters back in late January.


Says it all.

Yield curve: Steeper = Techs will... ???

Theory: Steep/Steepening yield curves imply stronger economic growth in future - hence future tech earnings positive, hence tech stock bullish... techs generally being econ sensitive growth stocks. (Link to more on interest rates.)

Reality: I can't really see it... at least over the last 5 years. What am I missing?

White line: US yield curve, 30yr minus 3 months

Orange line: NASDAQ Composite - known to be tech heavy

Yellow line: Taiwan Tech sub-index

Green line: Asia ex-Japan index

Chart from Bloomberg. All rebased to 100 5yrs back. Yield curve inverted (<0%) at from July '06 to May '07, then again at end July '07.


(TSWEELEC and NASDAQ Composite - twins separated at birth?!)

I like some tech names going forward anyway, but...

US markets, inflation and (lack of) growth

As I dimly recall from B-School, conceptually, lower interest rates are good for markets; higher rates are bad. At a simple level, lower rates are good because they stimulate growth through lower borrowing costs AND lead to higher discounted valuations for earnings (actually, free cashflow) streams. (Let's leave exchange rates out of it for now!) BUT in doing so they can lead to economic overheating, and inflation, if too high, is a Bad Thing for umpteen reasons battled out in academia and the markets over the last million years or so. (More here.)

So all that is to say that the US markets swung wildly last night - inflation came in higher than expected (booo! hissss!! The Fed can't cut for fear of stoking inflation further!) but then it appears that growth is even more at risk (booo! hissss!!... No! Wait! That's good, because the Fed will probably cut! Hurray!)


But inflation and low or negative growth... I donno... doesn't sound all that appealing to me.

French Rubber

From a broker (edited) "HANKOOK TIRE (000240): Based on the findings for the cause of employees death, Korea Occupation Safety & Health Agency made an announcement that there is a connection btw employees death and work environment. Most likely cause for employee heart disease is due to over work & extended work period. However, contrary to earlier concerns, no correlation was found w/ using chemical products at work."

Was the poor departed worker French or something?

Bad idea

In hindsight, obviously, you would think that borrowing in the commercial paper market to invest in “Alt-A” loans (home loans barely a notch safer than subprime) was a pretty bad idea.

KKR Financial (KFN) news (delaying repayment of billions of dollars) hitting the markets just before midday, along with rumours of massive writedowns at another big bank.)

And basically the whole C.P. market has seized up. We're SO not out of the woods yet! Odds on there will be more Credit Suisse-type announcements as we approach the release of audited bank results at the end of the month.

Hedge funds vs The Market

So now I know how to add images. Rock on!

This one is a 1 year (Bloomberg) chart of the Eurekahedge Asia ex Japan Long Short Equities Hedge Fund Index vs the MSCI AC Asia ex-Japan index.

What does it tell you? I guess it shows that equity hedge funds, in aggregate (subject to survivor bias) tend to underperform in upmarkets and outperform in downmarkets. Over the last 12 months, you'd be about flat vs the market, up in absolute $ terms, but with quite a lot more hair left.

That said, there are so many different styles and mandates out there even within the that an aggregate performance figure can only tell you so much.

Chart - what to do?

What shall I do with this counter? (Chart from Bloomberg)

Just came out with good 4Qs aftermkt yesterday, decent value, good company etc... but has moved a bit... about 50% (!!!) from that spike down at the end of Jan. Liquidity not an issue - buy half of it today and the balance over the next few days if there's a pullback?

Or wait for a pullback and a better price? Or whack it all in right here, right now and ride the trend?

(I don't have a position in this company)

HK scandals - PC or not PC?

It's a sad life we lead when Edison Chen's private life is of less interest than that of Walter Kwok (and it's not because market participants all disapprove of Edison's PC repairman, or that the PC police at investment banks track and block all such references...)

Daily must read: Alex

Click on the "ALEX" button on the right hand side of the Daily Torygraph website

- Here's a good recent one after the Kerviel affair(e).
- This one cut a bit close to the bone for many, I think!
- And this one's a classic

Playtime

Oh.. so THAT's how you embed links to posts. (It's so easy! Who knew? OK, you did.)

Any excessively anal parents out there by any chance? Looking for a squash coach off the national team for your pre-schooler because you hear that's what the Ivy Leagues don't have enough of?

Before you get too sucked into that world (it's not too late!) just remember one word: PLAY

General Castro Suisse

Fidel Castro has resigned? Wow. (Just as Pervez Musharraf gets booted out.) And all the market cares about (me too) is the giant Credit Suisse writedown... less than a week after announcing 4Q results on the 14th that topped hated rival UBS and got gushing Valentine articles all over, like in the Economist: http://www.economist.com/finance/displaystory.cfm?story_id=10700678 )

Don't Panic

Looks like another squeeze on the cards in HK/China, right after the lunchtime open.

My thinking is that the (portions of the) shorts that were lifted prior to Chinese New Year are waiting to come back on... But there's still such a big short base out there that it's very squeezable, especially with incrementally good news (sort of) and the US still on its long weekend yesterday.

Shall I buy more? Now that it's ticked down a bit? Yes, I think so.

Don't panic!

I can't find just a clip of this on its own, but check this out (0:42)
http://www.youtube.com/watch?v=oHCc-olG8mY&feature=related
Now THERE's an obscure TV reference!

So here it is - long awaited (by nobody)

I thought it would be interesting (for me) to jot down some of my thoughts as we navigate these choppy markets... Sometimes it seems like a whole week of activity passes in the space of a single trading day. So maybe, just maybe, I can snatch a little time between Doin' Stuff (there's a lot of that!) and Doin' More Stuff to centre myself with a quick post here (though lunchtimes and at the end of the day is more likely and practical.)

Probably nothing too deep or meaningful, but it's live and it's from the trenches, and if you listen closely, you can probably hear the bullets whistling overhead (that whiff of mustard gas wasn't me.)

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