Feb 28, 2012

Increasing Likelihood of Policy Error in China

With the upcoming once-in-a-decade leadership transition, many inconsistencies are showing up in China's monetary and fiscal policies. The most famous example was with the relatively small city of Wuhu in southern China, which tried to implement incentives to spur home purchases, only to retract them later, with a fairly unconvincing explanation. More recently the government of Shanghai announced a plan to ease restrictions on purchases of second homes, which is certainly at odds with the central government's stated goal of trying to cool the housing market.

Undoubtedly a lot of the inconsistencies are due to different entities and midlevel communist party

Feb 25, 2012

More Cracks Appear in AUD's Facade

According to Marketwatch and other sources, Fitch has lowered the ratings of three of the top four Australian banks. As discussed previously, the action has been flagged well in advance. The Marketwatch article says the AUD dropped and it probably did to a small extent right after the announcement. Overall though, the market is still quite complacent of the issues "down under" and trades with a built-in expectation of continued strength in the Australian economy. The focus has been almost exclusively on the Greek drama and the Iran standoff and its impact on the world supply of oil. It appears that investors are still not really making the link between the weakness in China and its suppliers of raw materials.

Feb 21, 2012

RBA Complacent on China as Evident in February Minutes

If China's bubble were to burst, that would clearly take Australia's economy down with it. The minutes of RBA's February meeting show a complete complacency over China's economic slowdown (and the power of Beijing to control it):
Importantly, though, the Chinese economy continued to expand strongly, albeit below the pace of the past couple of years, and inflation there had moderated. Prices and turnover in the Chinese residential property market had fallen, especially in the coastal provinces, where measures by the authorities to cool the market had been most aggressive;

Feb 16, 2012

3 Reasons Why Spx is Due for a Pullback

Technically the market has broken the uptrend started with the low of 11/25 and tested again on 12/20 and 1/30. The 14-day RSI has also just come off overbought levels thus triggering a sell signal.

Individual investors are more bullish than anytime during the past 6 months. The weekly sentiment survey by the American Association of Individual Investors shows 51% bullish, which is higher than at any time going back until at least the 9/22 survey. Having retail involvement is generally sign of a healthy market, except that

Feb 15, 2012

BOJ Inflation Targeting Spurs Japan Outperformance

Japan's economy has been mired in deflation for the most part of 2 decades. Consequently capital stays idle in zero-yielding bank accounts (where it is duly recycled into purchases of government bonds) rather than invested in a productive way. This is all likely to change with the Bank of Japan yesterday finally announcing a specific inflation target. The combined savings of all the people in Japan amount to a massive amount of financial capital. If inflation does pick up, and people wake up to the need to look for meaningful ways to invest it, this can really jump-start the economy and propel the Nikkei to ever higher levels. (Especially if you

Feb 14, 2012

Sentiment on Australian Stocks is Slowly Turning Bearish

In relation to an earlier WhatIf post on the wisdom of RBA's decision not to cut rates, it was quite interesting to see Australian currency, policy may limit stock gains on Marketwatch. Higher rates are clearly a potential danger for Australia's economy. This had been pretty much ignored by the market and mainstream media, but it appears that the trend is changing. Also please refer to this WSJ article that came shortly after the rates announcement.

(For more WhatIf posts, click here)

Feb 10, 2012

Australia's Two Speed Economy

The Reserve Bank of Australia has released its quarterly statement on monetary policy and economic conditions. In it they note that the resource sector is indeed booming, as
it is likely that over the next year the level of business investment in the economy
will reach its highest level, relative to GDP, in at least half a century.
The report also goes on to say about the rest of the economy:

Feb 9, 2012

Beijing's Iron Grip Fails to Fine-Tune China's Economy

The Chinese economic super-bubble is currently all about real estate which is vehemently refusing to follow the direction set by the omnipotent hand of the central government. WhatIf surmised in an earlier post that such attempts are likely to fail. And true enough, the situation appears quite dire as Xinhua reported yesterday that
Commercial property sales in China's booming Zhejiang province fell sharply in 2011 following tough government curbs. The total floor space sold slumped 20.5 percent year-on-year
This slump has also had a devastating impact on the highly leveraged smaller developers, as the article goes

Feb 7, 2012

RBA Playing With Fire - Keeps Rate Unchanged

Today the Reserve Bank of Australia decided to keep the cash rate unchanged at 4.25%. Analyst consensus was for a quarter point cut. Also the OIS market was implying a ~75% chance of a cut. RBA's decision comes as a surprise, given the recent labor market weakness and drop in retail sales. Governor Stevens' statement reads a little bit like "everything is on track and on trend so why change anything?", but does recognize that
Year-ended CPI inflation will fall further over the next quarter or two. In underlying terms, inflation is around 2½ per cent. Over the coming one to two years, and abstracting from the effects of the carbon price, the Bank expects inflation to be in the 2–3 per cent range.
As inflation is unlikely to present a problem in the near future and given the challenges to global growth (and China in particular) a rate cut might have been a lot more prudent. As always time will tell.

Feb 6, 2012

Israeli Strike on Iran Appears Ever More Likely

In a recent interview for NBC quoted by Reuters, Obama says
I don't think that Israel has made a decision on what they need to do. I think they, like us, believe that Iran has to stand down on its nuclear weapons program.
What he does not say, however, is that the US would be against such an attack. He appears to leave the diplomatic door completely open for Israel to do as they see fit to protect their national security. The timing
of Netanyahu's statement that
In such a region, the only thing that ensures our existence, security and prosperity is our strength
as quoted by Bloomberg is certainly no coincidence. Overall it looks ever more likely that Israel will resort to military action against Iran, barring a breakthrough in the talks on Iran's nuclear program.

Feb 5, 2012

At Least One Seller Cashing Out on Facebook Before the IPO

The forthcoming Facebook IPO has been all the hype - and large amounts of it. Most of the pundits have been negative, citing overblown Price/Sales ratio and a shift in user base from developed to developing countries. Since the sentiment is quite negative, the IPO would probably do OK at least at first. The Nasdaq closing at an 11-year high on Friday certainly indicates strong investor demand for tech stocks and the social network space has a scarcity of liquid public stocks as a vehicle for betting on the future of the sector.

There are signs that the hype may be too much. According to Reuters, a woman in Wisconsin was arrested

Feb 4, 2012

Beijing Cannot Deflate China's Real Estate Bubble

According to comments made at a State Council meeting and published by Reuters, Chinese Premier Wen Jiabao
wants to see a "reasonable pull-back" of housing prices.
The government will clearly keep tightening credit to developers and restricting purchases of multiple homes for speculative purposes. The intentions are certainly admirable - everyone agrees that affordable housing is a must for social stability. However once the bubble has inflated, it often can only either keep inflating further or simply burst.

Feb 1, 2012

Can One Trust China's Economic Statistics?

The Dec reading of the Chinese official Purchasing Managers Index came in better than expected at 50.5. This would indicate a small expansion in manufacturing activity. If it were free of official manipulation, that is. And therein lies the issue with China's economic statistics - it is not clear if the numbers can be trusted.

Anecdotal evidence has been pointing to shrinking margins and difficulty in obtaining financing for the majority of Chinese small and medium manufacturers. Guangdong province is home to a large percentage of Chinese manufacturing and has in the past been dubbed "the factory of the world". However a survey by the