My Diary 572 --- Green Shoots Need Fertilizer

Trading Diary (May 14, 2009) --- Green Shoots Need Fertilizer

US equities turn weaker for a third day with S&P -2.7%, after retail sales data missed expectations, along with concerns about govt efforts to revamp compensation in Wall Street. Financials (-5.2%) continue to lead the selling along with materials (-4.48%) and industrials (-4.02%). It looks like the “Green Shoots” need some fertilizers, as macro April have been dreadful with the 2nd derivative turning -VE for important data series in China, India, Europe and US. That being said, let me go through those data – 1) China: Apr IP slowed to 7.3% yoy (vs. exp 8.6% and 8.3% in March). Electricity production dipped to -3.5% yoy (vs. -1.3% in March). But China Apr retail sales remained strong at +14.8% yoy (vs +14.7% in March); 2) US Apr retail sales fell 0.4% mom/ex-autos -0.5% (vs exp +0.1%/+0.2%). In addition, Mar retail sales was revised down (from -1.1% to -1.3% and ex-autos from -0.9% to -1.2%) which makes the Apr reading even worse. US business inventories fell 1.0% mom in March (-4.8% yoy). In addition, foreclosure in US (One in 374) rose to a record for the 2nd month in April, according to RealtyTrac; 3) EU Mar IP dropped 20.2% yoy (vs. exp. -17.6% and -19.1% in Feb revised). So far in Europe, the “Green Shoots” have been confined to PMI survey data mainly PMI, but the hard data still show sharp contraction with the scale of decline still surprising to the downside.

In short, if there are further weakness in US retail sales in May or June, the de-stocking and Capex weakness will likely extend into 3Q09, which imply another negative growth for 3Q09. if that is the case, then I think the market will see a deep correction, as earning prospects have not been able to catch up with expectation as well. Thus far, 435 of S&P 500 have reported Q1 earnings, which are down 37% yoy, the 7th consecutive period of falling earnings, longer than even the Great Depression. However, interestingly and as a reflection of how investor sentiment has changed, investors are forecasting that the S&P will rise for the 1st time since the BBG Professional Global Confidence Survey began in 2007. Thus, I think the markets may continue to see bull and bear fights underpinning by the liquidity. However, it seems the marginal buying is abating and recent relentless equity placements (primary +secondary + soon IPOs) over the past weeks have also suck out the excess liquidity on the sidelines

My base case scenario is 16000 will hold for ‘HSI and 8800 for HSCEI, while a deeper correction is depending on the upcoming US and China data. Whatever this is final outcomes or not, I think many stocks up +100% since early March should see pull back significantly, including

Ø         HSBC: + 110% since March low, US& UK bank stock proxy;

Ø         Li & Fung: +34%, the most correlated to US growth

Ø         Chalco: +100%, failed to sigh direct electricity purchases from the IPPs;

Ø         Jiangxi Copper: +330%, Cu price vulnerable to the -VE growth momentum.

Ø         Maanshan, +90%, over capacity and weak ASP imply +30% downside

Ø         China Cosco (+95%) and CSCL (+90%): growth sensitive along with industry oversupply

Ø         Highly geared /lower quality China property, including CC Land, Hopson and Agile

Ø         In the energy space, Short CCE & Yanzhou vs. Shenhua seems a LS trade, while CNOOC will depends on the view on oil price.

Overseas Markets Review

Overnight, stocks rose 0.5% in Japan, but fell 3.0% in US, -2.5% in EU, and -1.6% in EM. Globally, equities have declined 3.8% this week, after climbing 5.7% last week. Elsewhere, 2yr UST dipped 2bp to 0.87% and 10yr slid 5bp to 3.12%. Both are down sizably from multi-month highs last week—2s at 0.99% and 10s at 3.33%. 1MWTI oil contracted 83cs to $58.02/bbl from 6-month high. The oil price has run up about $7 this month. USD was mixed , rising 0.4% to EUR1.360 and 0.5% vs EM currencies, but slumping +1% to YEN95.3—an 8-week low.