My Diary 331 --- It Is Times Now, Rocking the Sterling Boat

 

My Diary 331--- It Is Times Now, Rocking the Sterling Boat, The White-hot China’s Talks and Soybean Is NOT Soft!

 

 

 

 

September 17, 2007

 

 

Over the weekend, US market saw a set of mixed data --- a weaker than expected August retail sales and industrial production as well as a rebound on Michigan Confidence. Following that, Aug PPI and Sep NAHB Index will be released on tomorrow, along with the FOMC meeting. Market consensus is for at least a 25bp cut …judging from the option and future markets with 92% and 90% of >25bp cut, the Wall Street’s desire for a rate cut could be compared to a spoilt child, but the rest of boy and girls has just started to hear screams….

 

 

It Is Times Now!

An headline news from today’s Bloomberg caught my eyes as the same kind of loan-default problems that created the US sub-prime mortgage crisis appear to be emerging in the country's USD300 bln car-loan market, as evidence suggests a surge in the number of borrowers in arrears, reported the London-based Times citing data from the NAFA.

 

Beyond that, it is also times for reporting cards in Wall Street and it is expected Q307 would be the worst since 2001 when Goldman’s one-off gain (the sale of Horizon Wind Energy) is excluded. According to a Bloomberg survey, Bear Stearns probably will report a 41% drop in EPS, Morgan Stanley -11% and Lehman Brothers - 5.1 %.  This is reasonable as fixed-income trading, the industry's biggest source of revenue, faltered as sales of mortgage and ABS dropped 36% in the quarter.

 

Across the Ocean, there are two more banks (BOE & Northern Rock) get caught by the US subprime flu.  Bank of England Governor Mervyn King is getting dragged in only 2-days after he told lawmakers on Sept 12 that central banks should avoid giving the impression they will help lenders that made bad decisions. Clearly, Mr. King wants to be hands-off, but in this situation he can't be… Remember, a Chinese proverb says QUIET IS KING (gold)!!!

 

Last weekend, after the BOE provided emergency funds to Northern Rock in the biggest bailout of a British bank in three decades, King is finding himself subject to the same charge of excessive caution being leveled at FED Chairman Ben Bernanke. I made a quick background check and found two similarities (Academic and Inflation Targeting) between the chiefs of two most powerful central banks in the world.

 

·         King was a former London School of Economics professor

·         King is an architect of the bank's inflation-targeting strategy, helping end the UK's decades-long fight with rising prices.

 

Echoed on the King and Ben’s policy stand, the former Fed Chief, Greenspan endorsed his successor’s handling of the markets in an interview with CBS television that he is “not certain I would have done anything different”. Now, we have three Chief of monetary policies commenting on the same topic… Will the markets follow? No, they are spoilt Kids who will always come back to their “RICH DADDY”.

 

 

Rocking the Sterling Boat

The sterling continued to sell off sharply today on the back of the news that Northern Rock had to seek emergency funding from the BoE and Rightmove House Prices falling -2.6% in September.

 

Both news indicate that the recent turmoil in financial markets and the BOE rate hikes are finally taking its toll on the UK economy. Given the tough stance of the BOE in terms of not providing term liquidity and not bailing out insolvent institutions the UK consumer is likely to face real tightening, which should weigh on consumption and on house prices. It seems that any adjustment in the UK housing market may be accelerated going forward, given that backs become more reluctant to lend to household in this difficult environment…Hey, do I smell sth bad, sorry I am in cold already!

 

Also, with the financial sector contributing 1/3 of the GDP, the downside risk to growth is increasing the longer the current market turmoil lasts. Overall, I hold a view that the securitized dispersed nature of the current credit crisis is highly deflationary in nature and will raise concerns about liquidity traps unless central banks are super aggressive.  However, Central bakers are be torn by a natural desire not to repeat the policy errors that lead to the era of the Greenspan Put and the resulting credit bubble.

 

 

The White-hot China’s Talks

According to the regional fund flow statistics, Net inflows to HK funds entered the sixth week and reached USD 199mn, compared with the now second-biggest inflows of USD 127mn reported the week before … thanks to the QDII stimulus and China Stories!!! In fact, YTD, net inflows to HK total USD 0.5bln, still behind that of Singapore whose 07E P/E is at 20% premium relative to Hong Kong, but with EPS growth at a 77% discount… Who keeps saying H shares are expensive, give him/ her a telescope for watching Singapore…J

 

Back to HK market, today HIS was down 1.2% while HSCEI marginally dropped 0.41%. Interestingly and excitingly, A-shares market is very bullish after the interest rate hike as SHCOMP Index added 109 to 5421. Sector wise, Airlines were based its strong performance on three different versions of M&A rumors related to Shanghai Airline --- 1) merge with Air China; 2) with CEA; and 3) Oversea Airline.

 

Talking to ppl who join today’s CLSA’s Investors Forum, it’s obvious that China is now central to regional and global economic and market developments, whatever one is in the bull or the bear camp. Indeed, there is no doubt that growth in China is strong… the PMI say so, exports and imports say so, inflation say so and money supply say so.  And there is no doubt that it is too strong given the FAI growth, asset price and credit growth. The economy is burning white hot and one hot topic sitting on everyone’s lips in these days is inflation ---- someone is expecting more to come, while others are beginning to worry about Beijing’s ability to control things effectively.

 

I had a few discussions with my colleagues and friends in China over the past five days. So far inflationary pressure is mainly contained in food and related sectors, and there is little sign that rising prices are spreading to other sectors In addition, personally I think the surging food costs may in fact be deflationary for the overall economy as these effectively reduce discretionary spending on other household consumer items.  However, my later argument does not mean that inflation risks should not be ignored in an economy that is flush with liquidity and with a constant tendency to accelerate. It is more related to the difficulty facing by the PBOC that inflation has not yet broken out of food. Taking a closer look at the breakdowns of Chinese CPI, non-food inflation remained stable on a year-on-year basis at 0.9% yoy. Interestingly, price deflation for garments is deepening (to -1%) from stable prices at beginning of year, and durable goods inflation is down to 1.1%, compared to 2%+ at beginning of year. Thus, the overall non-food inflation picture suggests we are yet to see wider inflationary pressures emerging…

 

But this does not end the story. The other two things that are worrying the PBOC are 1) asset prices bubbles and 2) asset price inflation. But I think all the risks stemming from the negative real interest rate as it encourages people to take on risks and indulge in speculative activities. It also encourages credit growth and this is why domestic depositors to take money out of bank and put in into stock (+100% YTD) and property (+100% yoy). 

 

Bottom-line: I think the current tightening campaign is a process of “normalization” from a highly stimulative policy starting point.

 

 

Soybean Is NOT Soft!

Soybean futures in Chicago today jumped to a 3yr high, rallying for a seventh day, on concerns a freeze over the weekend in the northern US Midwest may damage crops.

Soybeans for November delivery rose as much as 17.25 cents, or 1.8 percent, to $9.72 a bushel, the highest intraday level since May 2004.

 

While the hard commodity, gold may rise to a 27yr high, extending its rally to a fifth week, on speculation the dollar will decline further against the Euro, boosting demand for the precious metal as an alternative investment. The metal, which reached a 26yr high of $732 on May 12, 2006, is up 13% this year.

 

Saying the USD/Euro crosses, I have to acknowledge that it's a US dollar bearish environment. Ultimately, the Fed is the only central bank that is cutting rates at this moment. The dollar traded within a cent of its record low against the Euro and reached the weakest in 30yr vs CAD on bets the Federal Reserve will lower its benchmark interest rate tomorrow.

 

The Dollar traded at 1.3927 per Euro on Sept. 13, the lowest since the single European currency was introduced in 1999. The U.S. currency dropped to CAD1.0256, the weakest since February 1977 and It was at 115.21 yen. In fact, to the foreign investors today, they are now more alerted to both credit risk and currency risk in US. This is not a small matter as suggested by the recent decline in foreign holding of US Treasuries. Foreign official holdings of US treasuries have reduced by USD 46 bln over the past 6 weeks to USD 1.2 trn…Maybe it is TIME  to look at Euros… and I am the only person saying so, my camp includes Alan Greenspan and President Hugo Chavez.

 

Good night, my dear friends