My Diary 547 --- Liquidity Cycle vs Business Cycle

Market Thoughts --- Liquidity Cycle vs Business Cycle

My own view last week, that we would see markets correct 10% (vs -3% real correction) before the bull market could resume, seemed not to extend further into the past Easter weekend.

Instead, I have seen an extension of the rally on increasing volume thanks to good Chinese data and good earnings reports from Goldman and Wells Fargo. It seems that real money is coming back and that we may go further. Certainly, it now looks likely that the Hang Seng will see the 16,000 level. Most indexes, like the Hang Seng, will face into formidable overhead resistance as we run in to the back end of this week.

While I have been cautious about the immediate outlook, and remain bullish about the market outlook into mid-2010, I still have an uneasy feeling at this juncture for two reasons: 1) markets are overbought running into key resistance; and 2) “dumb money” investor sentiment (AAII & put-call ratio) is becoming increasingly bullish as we approach key resistance.

On average, these dumb money sentiment indicators are still short of the peak of May last year or even the lower peak of January this year, but they are rising. On Investors Intelligence, the ratio of bulls to bears is 0.97, versus 1.23 at the start of January and 1.5 last May. The last Investors Intelligence survey took place on 3 April. My guess is that the next results for last Friday will show us back at the January high, if not above. The AAII ratio of bulls to bears is at 0.81 versus the January peak of 1.27 and the May peak of 2.08. The latest survey date was on 9 April, so missed this latest rally. The bottom line is that dumb money sentiment is not yet extreme and so suggests this rally can run further. In hindsight, I should have waited until we got 1.3-1.5.

One reason why I am raising cash is that I want to reposition the portfolio somewhat away from high beta names and to play the recovery in the HK/China liquidity cycle rather than the recovery in the global business cycle. Theme wise, I am looking for 1) Inflation resurgence plays; 2) RMB or HKD currency plays; and 3) Alternative energy;

Recent China Data

Ø         Premier Wen Jiabao says Chinese IP (official release due Wednesday) grew 8.3% yoy in March, way above the market exp of 6.3% yoy;

Ø         Chinese loan growth hit a record of RMB1.89trillion in March, versus a market expn of RMB1.3-1.6 trillion;

Ø         Yuan loan growth accelerated to 29.7% yoy. Even if the rate of loan growth moderates substantially for the rest of the year we are looking at 30%-plus loan growth for 2009;

Ø         Chinese M2 money growth accelerates to 25.5% yoy in March from 20.5% yoy in March vs market expectation of 21.5% yoy;

Ø         Chinese exports down 17.1% yoy in March vs -25.7% yoy in Feb. Imports were down 25.1% yoy. The trade surplus grew to US$18.6bn from US$4.8bn in Feb