PBoC will stay tight (=>China property names getting caned)

Pretty tough talk from the PBoC chief Zhou Xiaochuan over the weekend, saying again that there's room for rate increases.

That's as you would expect, of course - there's no chance Chinese officials will say they are loosening policy while inflation remains above 8%, though in reality there may be minor moves in regulations and reserve requirements (each way) in the meantime.

Number to watch for is Wednesday's March CPI figure, which is expected to come in at 8.3% ("whisper") from February's 8.7%... but food inflation will be the key.


(Here's Frank Gong's note from last week on China inflation, incidentally, in which he comments on why food inflation is NOT what we should be so worried about.)

GE's really big miss - a really big surprise?

GE 1Q08 results missed and the shares dropped 13%, for the biggest fall since the October '87 Crash, leading the markets sharply lower. Etc etc. Etc.

• First of all, this is not Jack Welch's GE... it may be bigger, but it's really not the same.
  
• Secondly, 40% of 1Q07's "segment profits" (basically operating level ex-central overheads, as I understand it) came from the finance arms (commercial and consumer) with another 10% from the floundering healthcare business.
• Thirdly, in the month to last Thursday, from the recent low, GE was up 16% vs +6.8% for the S&P500. (After Friday's collapse, GE is still up 1.1% from the low, with the S&P500 up 4.7%.)

So where was the massive shock to the system? Half the earnings had been from financials and an under-performing business - and those were the areas that missed most severely.

So what did we learn about the economy and business environment from that? That financials have been having a hard time in recent months?

And the mid-March guidance from not-Jack came, to be fair, came just prior to Bear's going belly-up and all the turmoil surrounding it. Soooo... GE blew off a short period of Welch-era outperformance based on fantasies of "defensiveness" (40% financials?) and overseas earnings (true enough, but infrastructure's not all GE does) over the last month... and...?

What may be most telling is the volume traded not in GE (massive) but in the S&P500 names... for a 2% selloff in the market, we didn't see any significant pickup in volumes... in fact, marginally down from the day before.

So Asia is bound to trade weaker, but I think the bear rally should still be intact... for a little longer.

China inflation: Bang a Gong

(Get it On.)

JP Morgan's Frank FX Gong (Wharton PhD, ex-NY Fed... and his real initials) wrote in a very good piece last night on what to worry about in China and why we should not panic about food price inflation.

• China's food inflation (the key contributor to China's headline inflation) is very different from the global food inflation;
• The global food inflation has been led mainly by cereal (wheat, corn & rice) while China's food inflation has been mainly led by pork/meat;
• China is a net exporter of cereal (rice, wheat, & corn), while the global meat/pork prices are much cheaper than China's domestic price and China has not been a big importer of meat/pork despite higher domestic meat/pork inflation;
• No need to panic on China's food and headline inflation: if China really wants to kill the food inflation and bring down the headline CPI inflation, they can simply start to import meat/pork from the global market - especially so with a faster appreciating RMB. China absolutely has no need, and would NOT need to kill food inflation by hiking interest rates.

(Chart: JP Morgan)

Risk appears to be to the upside for refiners and IPPs in terms of the possible lifting of price controls if China's CPI figures, due late next week, remain under control. But I can't really understand why China is not ALREADY trying to bring food inflation down - food remains a significant part of rural household expenditure doesn't it? Is it just banking on a base effect kicking in during 2H to lower headline figures? (Peasants can't eat base effects!) Or perhaps the government wants a bit of pain on the cost/ margin front to squeeze out waste and inefficiency??

Slightly different from the Credit Suisse conclusion (from the Purchasing Managers Index input price trends) of widespread inflation kicking in that I mentioned on Monday. Looks like a fine line the PBOC is walking, if you ask me. On balance, I'm sticking to more accommodative policy for the time being.

Annoyingly, I can't figure out how to find his actual note on the MorganMarkets website to give you a document pull link. Maybe it'll come up on his page later in the day. (Even more irritating than Credit Suisse's site, but at least, unlike Merrill's, still works - just about - on Firefox.) AND yes, of course I'll e-mail you a copy if you ask nicely!!

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Earlier piece by Frank's colleague, Jing Ulrich, in which she points out China's shift in concern from inflation to growth. I also mentioned it in an earlier post, but hers is better!

FT: "US Olympic torch relay rerouted"

From The Times: " The Olympic flame’s procession through San Francisco drew world-wide ridicule when the torch-bearers ran only a few yards before disappearing into a warehouse, only to re-emerge on a bus half an hour later."

Hedge Thing has a much better idea. Why not pass the Torch to a San Francisco 49er running back and let him carry it through the crowd of protestors? Give the protestors a chance, some well deserved airtime for their cause and much more interesting press coverage.

(http://www.49ers.com)

An affordable sandwich in London by 2013

I'm not an avid (rabid?) Torygraph reader, but some interesting articles appearing there on UK housing and the economic beating the country's going to get as a result of its own stiff upper-lipped version of the sub-prime crisis.

1) The economy is going to get impacted, on a relative basis, more than any country in the world, according to the IMF:

"The IMF expects British banks to lose more than £20 billion - equivalent to three per cent of gross domestic product (GDP) - from the international meltdown in sub-prime mortgages. American banks, which had been thought to be bearing the brunt of the credit crisis, will lose £72 billion - equivalent to only 1.4 per cent of US GDP... European countries have lost £61.5 billion - 1.7 per cent of GDP. "

2) UK Housing prices... You Goin' Down, Sucka! (Now, there's a good Telegraph-style headline!)

"Many people... are mesmerised by the recent experience of constantly rising prices and they find it difficult to believe that prices could fall when there is such a "shortage" of houses and the demand is so great... What does it mean to say that there is a shortage of housing? A shortage of houses at what price? Without concern for price there is a shortage of Rolls-Royces."

If this goes on for another 5 years (it might) I'll finally be able to afford a sandwich for lunch in central London!

Mind the gap!

You'll just have to take my word for it, but while near term positive, i.e. riding the bear rally (while everybody's insisting it's "just a bear rally,") we've been positioning ourselves for a technical gap filling over the last couple of days. Awfully close to it now, after that odd afternoon swoon on no newsflow... what to do, what to do...?!


(Most other major markets in the region look pretty much the same, incidentally - the H-Share index I show here is just a particularly violent version!)

The Defence (of book sales) continues...

Now on... CNBC Part 1, CNBC Part 2 and The WSJ:








(Who will rid me of this "Turbulence" book?)

China inflation - chicken feet or Wal-Mart socks?

Contrasting interpretations of data coming out of China today.

Wang Qing at Morgan Stanley notes that "Food Prices in the 1st Week of April Continued to Decline" on a sequential basis. "Meat and vegetable prices experienced the largest drop. Meat prices declined by ...6.5% from the levels of ... the monthly average in March ... while vegetable prices declined by 12.3%." Not much commentary, but obviously positive news, on balance, even though "wholesale price indices ... show that the average prices for agriculture products and vegetables increased by 1.2% and 1.5% compared to the last week of March".

Meanwhile, Credit Suisse's big cheese economist, Dong Tao is reporting today that risk remains to the upside for inflation across the board, with the March Purchasing Manager's Index showing not only strength in the headline and new orders figures (second highest readings since inception 3 years ago) led by infrastructure investments, but also that INPUT PRICES are rising fast... to THE highest level ever. Good sign of a rebounding economy, but part of that is seasonal, part of that is catch-up from the snowstorm. Given inflation risks, he sees rate hikes in 2H08 and 10-12% RMB appreciation vs the USD in 2008.

He writes: "the pressure is all on the inflation front, as input costs continued to surge. While market consensus and the government are focused on food inflation, we see an across-the-board inflation on the horizon. Besides the rising material costs, anecdotally, the wage rate is also rising fast and accelerating, as people’s expectation on inflation has changed. The surge in global food prices does not help the situation. As wage pressure spills over from the manufacturing sector to the services sector, we anticipate a much quicker price hike given that the services sector does have the pricing power and has little room to improve productivity."

On balance, I think the figures are market positive near term. Comments from Wen last week on the importance of economic growth alongside inflation concerns indicates that the govt is aware of the continuing risks to growth, including softer net exports going forward... but food inflation remains the key, and with continued softer data on that front, policy developments may continue to surprise the market on the upside for the time being.

Greenspan: his culpa, her culpa, their culpa... not MEA CULPA!

1) Alan Greenspan is this morning reported on CNBC as saying that there is "more than a 50 percent chance the United States could go into recession," and that the Spanish property market is more f@cked than that in the US (so there!)

... during the meanwhilst...

2) He's also writing in The FT in response to those who say he replaced the dot.com bubble with the property bubble that it was NOT HIS FAULT! He says that other countries (like Spain?) were blowing bubbles at the same time... so how could it all be his fault?

Oh! Let me get this straight... you mean besides the fact that the world (ECB included, whatever they say) took its monetary lead from the Greenspan Fed? Maestro, not.

As William A Fleckenstein writes in his book "Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve'' : ``Greenspan bailed out the world's largest equity bubble with the world's largest real-estate bubble... That combination easily equates to the biggest orgy of speculation and debt creation the United States (and the world) has ever seen.''

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Soon enough we're bound to get this guy on YouTube imploring us to "Leave Alan alone!"

Agri/food plays, Consensus numbers

Due to overwhelming popular demand, here it is again, updated, expanded and better than ever in every way!

(In every way, that is, except for legibility... you need to CTRL-click on the little picture on the right and it'll be clearer... just.)


All data from Bloomberg.

Buy Rice? Sell Indonesia

Concern about the issue of rice shortages/ price dislocations continuing to make it in the papers - increasingly looking at implications not just for farmers in producing countries and consumers in general, but government fiscal balances and the poorest of the Asian Joe Consumers.

Marketwatch notes that lower Thai exports will raise prices in HK, while The FT takes more of a helicopter view on things, noting that "Asian governments have long focused on developing high-growth sectors... But that has been coupled with a neglect for farming... Agricultural spending in the region has often been misdirected as governments seek to avoid social unrest by keeping food prices artificially low, rather than improve productivity or increase acreage."

From ABN, looking at Indonesia specifically:

"As global commodity prices reach new highs, the government has been trying to control prices through subsidies, export taxes and supply management. None of these have been working... With the high cost of subsidies, Indonesia faces a growing budget deficit, which could put further downward pressure on the rupiah. We believe the government has the following options: 1. Cut subsidies... the less likely option... 2. Raise interest rates... an investment environment with a likely higher interest rate should be negative for Indonesian equities. We also see a higher probability of more widespread social unrest as the poor are priced out of necessities, especially with rising political tension ahead of 2009 elections."

Sell Indonesia.

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And from a fave salesman of mine at ABN: "Here's a ridiculously sad tale; it used to take a coconut farmer 10 trees worth of his coconuts to afford 1 kg of rice. Its now 40. Yet we all know, prices of such goods are rising. Why is he not enjoying the 'fruits of his labour'? Something's gotta give."

As Chookiat Ophaswongse, president of Thailand's Rice Exporters Association, told The FT just last week "I have no idea how importing countries will get rice." (He forecast prices would rise further and warned that importing countries such as Indonesia and Iran had yet to issue tenders, leaving them exposed.)

Possible Recession? Difficult Period?? Gawrsh!!!

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Well well well. And it didn't cause the market to tank, either - even after a massive day yesterday. Earlier in the day, we had Best Buy (BBY) numbers out, cheering the markets up. (See below.)

Let me refer to Gary Balter of Credit Suisse (ex-DLJ and who 28 years ago placed first in Canada in the Chartered Accountancy exams, thereby receiving the Governors General Gold Medal... just thought you'd like to know...) who I have in my very short list of must-read US analysts.

He wrote way back on March 10th in a piece entitled "The Current Crisis From A
Retail Analyst's Perspective" that

"We are in a recession. The jobs data pretty much confirmed that although we will have to wait for all the experts and officials to tell us that after the fact. There is a big difference between this recession and the mild one from 2001. In that recession... Mortgage Equity Withdrawals (MEW’s) effectively offset the declining growth in wages and other income to keep consumer spending at surprising strong levels. We do not have that luxury today.

"If that was the only problem we would be able to see the light. However, we have two other serious issues. The second major problem is liquidity. We have a credit crunch that, as we discuss below, in our opinion, is not as bad as it appears but is currently drying up important access to credit for both consumers and corporations.

"Third, consumers are facing inflationary pressures, which in our opinion, is the biggest threat of all." (I can't get the link to the actual piece, unfortunately - for some reason the CS system makes it really hard)

Pretty pithy, but obviously he wasn't alone in seeing a recession pretty much confirmed from his bottom up work. More interestingly, he notes in "The New Credit Crunch" 2 weeks later that "the bottom line of the lower availability of credit will be fewer shipments/tighter credit to higher levered or smaller less credit worthy retailers and market share gains by the large well financed players." More specifically, he explains that:

"... it is the vendors in most situations not the banks that cause retailers to declare Chapter 11. They are the ones that are cutting back credit, whether at a Linens N' Things, a Circuit City, or potentially a Borders. It was this reason that the Borders management said that they felt compelled to raise what looks like expensive financing. Expect to see it in other segments of retailing as vendors are also look at challenging credit conditions and need to conserve their exposure."

And who are the Winners and who are the Losers, so we (sitting thousands and thousands of miles away) can get a grip of implications from their results and guidance and NOT draw over-simple and inaccurate conclusions about the overall health the whole space and the beleaguered US consumer as a whole?

• WINNERS: Bed Bath & Beyond, Best Buy (see above!), Dick's, PetSmart, Staples, Barnes & Noble
• LOSERS: Borders, Circuit City, A.C. Moore (& Linen's N' Things, Sports Authority, Petco)

Of the names above, we just had BBY... its evil doppelgänger Circuit City CC is due to report next Weds 9th (along with Bed Bath & Beyond BBBY)... will the market get sold down if CC looks shoddy and guides low?

(If you want to take these as a long term retail stock long/short list, you could do worse, but that's not why I'm writing here!)

China's Priorities, Market Bottoms & Rice

I can't really take credit for the 6% morning session rally in H-shares (HK listed China domiciled shares... as opposed to red chips, which are HK listed China companies domiciled in HK) with yesterday's not terribly sturdy "analysis" of forecast earnings deceleration and a PEG under 1... UBS and steamy US overnight markets aside (forecast earnings deceleration and also a PEG under 1!) performance is more likely down to this, which should help give it some real legs (as reported by a smart Merrill sales-trader):

"LOST IN THE NOISE: CHINA State Council changes macroeconomic policy stance to now include "averting an economic slowdown as a top priority" alongside PREVENTING OVERHEATING and CURBING INFLATION. Spec INFRASTRUCTURE & ENERGY spend on the way. Markets rallying on this front." (Also here.)

I continue to be bearish, but I would participate in the market rally this time, and be greedy for a few days before locking in gains (we hope) and then sitting back. Bottom of the markets? (From MS: "SO BANKS OK, WHAT ABOUT THOSE WHO HAVE MORTGAGE PAYMENTS TO MAKE?" And worse, actually.) So probably not, in my view, but getting there - maybe more than halfway, but only just.

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Meanwhile, the Agri nightmare continues to unfold:

FT: "Governments across the developing world are scrambling to boost farm imports and restrict exports in an attempt to forestall rising food prices and social unrest... economists warned that such actions risked provoking an upward spiral in global food prices, which have already been pushed higher by rising demand from emerging markets like China and India and pressure on land from the growing production of bio-fuels."

China says it'll be OK for rice, though... which is a statement you'd expect given the piece mentioned above.

Snap!

Occasionally interesting Asian Investor reports this morning on a snap poll held at the GAIM conference (in HK.) Was too busy to go, so here's what I would've answered:

Best/most profitable growth for hedge funds in 2008
- Greater China
Best performing Asia ex-Japan strategy this year?
- Equity long/short
What will be the total size of global write-downs associated with the subprime crisis?
- $1 trillion
How long will the crunch continue?
- 1 year
Best currency returns over in next 12 months?
- RMB
Which asset class will generate the best returns in the next 24 months?
- Global private-equity buyouts
Japan is going to become:
- A vital integrated part of North Asia growth story
Will pollution drive hedge funds from Hong Kong?
- Yes

Street Over-Optimism?

Everybody and his dog is still looking for a bottom in the market.

Reading John Authers ("Short View") this morning in The FT in which he points out that with a recession clearly upon us, earnings growth forecasts for the US still show all sectors positive for the full year.

FT: "In spite of the widespread belief that the US is entering recession, no sector is forecast to suffer falling profits... Excluding financials, brokers now expect S&P profits growth of 7 per cent for the first quarter. Starting in this year’s third quarter, growth of at least 14 per cent is expected until the final quarter of 2009 – numbers that do not square either with a recession or with a tightening in the terms of credit... The last two recessions both saw several quarters where forecasts were written down by more than twice as much. So this implies downgrades have further to go."

Looks pretty bad.

SO I went off and did a bit of homework this morning myself, looking for what earnings growth was being forecast by the Street for Asian markets (according to Bloomberg data.) Looks like Asian markets are generally less bullish than the US in terms of current year forecast growth but, eyeballing it, more or less in step for next year. So positive for Asia, on a relative basis, it would seem.

THEN on the assumption that forecasts are generally still too positive, I got creative to see which markets were still expecting an acceleration in earnings growth into next year and were currently trading at a premium to growth (the nice-and-simple PEG or P/E-to-Growth ratio) - which if there are downgrades, should be bearish. (Flip side is an already forecast deceleration in earnings combined with a "discount" to PEG ratio, which should be more defensive.)

Possible (relative) Bear markets (not ranked):

• SHANGHAI SE B SH (Shanghai Bs)
• KARACHI 100
• NIKKEI 225
• NIKKEI 300
• TOPIX
• NZX ALL INDEX
• STRAITS TIMES

Possible (relative) Bull markets (not ranked):

• S&P 500
• NASDAQ COMPOSITE
• CSI 300 (Shanghai/Shenzhen As)
• SHENZHEN SE A SH (Shenzhen As)
• HSCEI HANG SENG CHINA (H-shares)
• JAKARTA LQ-45
• KOSPI INDEX (Korea)

These were NOT the results I was expecting to see - particularly surprising was that the US and China H- and A-shares appear in the bull table and that Singapore and Japan appear right up there with the bears.

We shall see! (And in the meantime, high volatility will continue...)