China

Archived Posts from this Category

Sun 30 Dec 2007

Words from the wise for the week that was (Dec 24 – 30, 2007)

Posted by Prieur du Plessis under Markets, Investment, Housing, Money, Oil, Wall Street, US dollar, Stocks, Gold, Finance, Commodities, China, Business, Currencies, Economy, Equities, Emerging markets, Bonds
[4] Comments

Print This Post

This week’s edition of “Words from the Wise” is briefer than most as I must answer the call of family to spend a last few days with them before putting shoulder to the 2008 wheel.

My kids have asked me to help them fly a kite, but the wind seems to be a bit too gusty to achieve this with much success. This makes me wonder how stock markets are going live through the various tailwinds and headwinds that will invariably come to blow during 2008.

In the words of market veteran Richard Russell, author of the Dow Theory Letters: “This market cannot make up its mind. The bullish case is strong, the bearish case is strong, and a lot of very big money is very divide on the outlook for the stock market. Thus - we have a very nervous, high volatility market with the Dow jumping over 100 points (up or down) every other day. It’s enough to give an honest man the ‘willies’.”

And in the spirit of the holiday period, David Galland of Casey Research observed: “… we have the US stock market, which, despite the energetic efforts of government on many levels, is stumbling along like a blind drunk after a long and well-lubricated holiday season party. One minute, Mr. Market has a big happy smile on his face, but the next he’s flat on his face. Struggling to his feet, he is barely able to whisper an ebullient toast before tripping over his own shoes and falling back to the ground.”

I will be watching the market carefully as 2007 fades out and the New Year comes in. The market action during the few days of December and January often provides hints regarding the rest of the year. For example, if the so-called “Santa Claus Rally”, which has one more trading day remaining in 2007 and two more in 2008, does not materialize, it typically is a harbinger of a sizeable correction or bear market in the coming year.

The “January Barometer”, stating that as the S&P 500 Index goes in January so goes the year, will also be watched with more than a cursory glance.

Furthermore, the best years for stock market gains have been years ending in 5, with the second best years being those ending in 8. Since 1891 there have been only two years ending in 8 that were negative, namely 1948 when the Dow was down 2.1% and 1978 when the index declined by 3.2%.

Here’s wishing you a wonderful New Year. May it be truly joyful and exceptionally rewarding on all fronts.

Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the market’s ups and downs on the basis of economic statistics and a performance chart.

Economy
The assassination of Benazir Bhutto, Pakistan’s former prime minister and opposition leader, weighed heavily on markets during the past week, raising the possibility of instability in a volatile region.

An international crisis could not have appeared at a worse time with the global financial system appearing to be an unpredictable black hole. Also, further evidence of worsening economic conditions came in the form of new home sale tumbling by 9% in November to the slowest pace in 12 years and durable goods orders rising a disappointing 0.1% in November. More reassuring data on US mid-west manufacturing activity were largely brushed aside.

All this was piled on top of mounting concerns about more banking write-downs, rising inflation and a deteriorating outlook for economic growth.

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Dec 26	10:30 AM	Crude Inventories	12/21	-	NA	NA	-7586K
Dec 27	8:30 AM	Durable Orders	Nov	0.1%	4.0%	2.2%	-0.4%
Dec 27	8:30 AM	Initial Claims	12/22	349K	345K	340K	348K
Dec 27	10:00 AM	Consumer Confidence	Dec	88.6	87.5	87.0	87.8
Dec 27	10:30 AM	Crude Inventories	12/21	-3299K	NA	NA	-7586K
Dec 28	9:45 AM	Chicago PMI	Dec	56.6	52.5	52.0	52.9
Dec 28	10:00 AM	Existing Home Sales	Nov	-	NA	NA	4.97M
Dec 28	10:00 AM	New Home Sales	Nov	647K	700K	715K	711K

Source: Yahoo Finance, December 28, 2007.

The next week’s economic highlights, courtesy of Northern Trust, include the following:

•	Existing Home Sales (Dec 31) - Sales of existing single-family homes are down 31.0% from their peak in September 2005. The consensus is for a steady reading in November. Consensus: 4.97 million.
•	ISM Manufacturing Survey (Jan. 2) - The Manufacturing ISM survey for December is predicted to fall to 50.3 form 50.8 in November. Indexes tracking new orders, production and employment should be market movers. The employment index fell to 47.8 in November. Consensus: 50.3 from 50.8.
•	Employment Situation (Jan. 4) - Payroll employment in December is predicted to have risen 40,000 after a gain of 94 000 in November. The gradual upward trend of initial jobless claims suggests that hiring was probably slow in December. The unemployment rate should have risen to 4.8% in December following three monthly readings of 4.7%. Consensus: Payrolls +65 000 vs. +94 000 in November; unemployment rate - 4.8%.
•	Other reports - Construction Spending (Jan. 2), ISM Non-Manufacturing Survey, and Factory Orders (Jan. 3).

Markets
The performance chart obtained from the Wall Street Journal Online indicates how different global markets fared during the past week.

Source: Wall Street Journal Online, December 30, 2007.

US stock market indexes declined modestly during the past week on the back of increasing economic woes and worries about the situation in Pakistan. The worst casualties were REIT stocks (-2.1%), small caps (-1.8% in the case of the Russell 2000 Index) and financials (-1.2%). Energy (+1.4%), however, brought investors some joy.

The MSCI World Index recorded a gain of 1.1% for the week as a result of the strong performance of emerging markets (+2.6%), and also a small positive contribution from the Japanese Nikkei 225 Average (+0.3%).

On the currency front, the US dollar had its worst week in a year as the poor economic statistics increased expectations of more interest rate cuts, resulting in the US Dollar Index declining by 2.0%. Similarly, sterling hit its lowest level in one-and-a-half years against a basket of currencies after a report of slower growth in house prices raised expectations of interest rate cuts early in 2008. On the positive side, the euro, the Swiss Franc and Chinese renminbi increased strongly.

As far as money markets were concerned, the three-month dollar Libor rate eased to its lowest level since February 2006 and the three-month euro rate was set at its lowest level since November 22. Government bond yields declined during the course of the week, benefitting from more safe-haven buying.

The oil price came within sight of its all-time high after US fuel inventories fell more than expected and in reaction to tension in Pakistan and northern Iraq. Gold, fulfilling its role as a safe-haven investment in times of political uncertainty and a hedge against inflation, jumped by 3.4%. Silver (+2.8%) was in hot pursuit, but platinum (+0.3%) lagged somewhat after having hit a record on Thursday.

Although agricultural and base metal commodities experienced some profit-taking, the Dow Jones-AIG Commodity Index still managed a 1% gain for the week.

Now for a few news items and some words (and graphs) from the investment wise that will hopefully assist to make sense of financial markets’ shenanigans during the shortened week ahead.

John Carney (Dealbreaker): Why Bhutto’s assassination is very bad news
“The reason it’s terrible news is that Bhutto was actually a source of stability for the country. She was a reasonable and relatively US-friendly alternative to Musharraf. With her out of the picture, it’s unclear what direction the opposition to Musharraf will take. But what is clear is that the opposition will most likely strengthen and act with a greater sense of urgency. The world is slightly more dangerous this afternoon than it was when we went to bed last night.”

Sources: John Carney, Dealbreaker, December 27, 2007 (text); and Bloomberg, December 27, 2007 (photo).

ABC News: US checking al Qaeda claim of killing Bhutto
“While al Qaeda is considered by the US to be a likely suspect in the assassination of former Pakistani Prime Minister Banazir Bhutto, US intelligence officials say they cannot confirm an initial claim of responsibility for the attack, supposedly from an al Qaeda leader in Afghanistan.

“An obscure Italian Web site said Mustafa Abu al-Yazid, al Qaeda’s commander in Afghanistan, told its reporter in a phone call, ‘We terminated the most precious American asset which vowed to defeat [the] mujahedeen.’ It said the decision to assassinate Bhutto was made by al Qaeda’s No. 2 leader, Ayman al Zawahri in October. Before joining Osama bin Laden in Afghanistan, Zawahri was imprisoned in Egypt for his role in the assassination of then-Egyptian President Anwar Sadat.

“Bhutto had been outspoken in her opposition to al Qaeda and had criticized the government of President Pervez Musharraf for failing to take strong action against the Islamic terrorists. ‘She openly threatened al Qaeda, and she had American support,’ said ABC News consultant Richard Clarke, the former White House counterterrorism adviser. ‘If al Qaeda could try to kill Musharraf twice, it could easily do this,’ he said.”

Source: Brian Ross, Richard Esposito and R. Schwartz, ABC News, December 27, 2007.

Times Online: Main Bhutto suspects are warlords and security forces
“The main suspects in the assassination are the foreign and Pakistani Islamist militants who saw Ms Bhutto as a Westernized heretic and an American stooge, and had repeatedly threatened to kill her.

“But fingers will also be pointed at the Inter-Services Intelligence agency, (ISI) which has had close ties to the Islamists since the 1970s and has been used by successive Pakistani leaders to suppress political opposition. Ms Bhutto narrowly escaped an assassination attempt in October, when a suicide bomber struck at a rally in Karachi to welcome her back from exile.

“Ms Bhutto said after the attack that she had received a letter, signed by someone claiming to be a friend of al-Qaeda and Osama bin Laden, threatening to slaughter her like a goat. But she also accused Pakistani authorities of not providing her with sufficient security, and hinted that they may have been complicit in the Karachi attack.”

Source: Jeremy Page, Times Online, December 28, 2008.

(more…)

The Financial Ad Trader - banner ads

Digg

Del.icio.us

Technorati

Stumble

Facebook

Fri 21 Dec 2007

China and the Arabian Peninsula as market stabilizers

Posted by Prieur du Plessis under Oil, Stocks, Sub-prime, US dollar, Money, Markets, China, Economy, Finance, Investment, Business
[6] Comments

Print This Post

Why are stock markets not tanking against the background of the sub-prime meltdown and an increasing number of “experts” calling for a US recession? One explanation for this seeming anomaly has been offered by George Friedman, CEO of Stratfor. (Stratfor, short for Strategic Forecasting, focuses on analysis and forecasts of geopolitical, economic, security and public policy issues.)

Although one may quibble with some points, Friedman’s analysis is certainly thought-provoking and worthwhile spending a few minutes on.

“The most bizarre aspect of today’s global economy is what has not occurred. In 1979, oil prices soared to slightly more than $100 a barrel in current dollars, and they are approaching that historic high again. Meanwhile, the subprime meltdown continues to play out. Many financial institutions have been hurt, many individual lives have been shattered and many Wall Street operators once considered brilliant have been declared dunderheads.

“Despite all the predictions that the current situation is just the tip of the iceberg, however, the crisis is progressing in a fairly orderly fashion. Distinguish here between financial institutions, financial markets and the economy. People in the financial world tend to confuse the three. Some financial institutions are being hurt badly. Those experiencing the pain mistakenly think their suffering reflects the condition of the financial markets and economy. But the financial markets are managing, as is the economy.

“What we are seeing is the convergence of two massive forces. Oil prices, along with primary commodity prices in general, have soared. Also, one of the periodic financial bubbles - the subprime mortgage market - has burst. Either of these alone should have created global havoc. Neither has. The stock market has not plummeted. The Standard & Poor’s 500 fell from a high of about 1,565 in mid-October to a low of 1 400 on October 19. Since then, it has rebounded as high as 1 550. Given the media rhetoric and the heads rolling in the financial sector, we would expect to see devastating numbers. And yet, we are not.

“Nor are the numbers devastating in the bond markets. By definition, a liquidity crisis occurs when the money supply is too tight and demand is too great. In other words, a liquidity crisis would be reflected in high interest rates. That hasn’t happened. In fact, both short-term and, particularly, long-term interest rates have trended downward over the past weeks. It might be said that interest rates are low, but that lenders won’t lend. If so, that is sectoral and short-term at most. Low interest rates and no liquidity is an oxymoron.

“This is not the result of actions at the Federal Reserve. The Fed can influence short-term rates, but the longer the yield curve, the longer the payoff date on a loan or bond and the less impact the Fed has. Long-term rates reflect the current availability of money and expectations on interest rates in the future.

“In the US stock market - and world markets, for that matter - we have seen nothing like the devastation prophesied. As we have said in the past, the subprime crisis compared with the savings and loan crisis, for example, is by itself small potatoes. Sure, those financial houses that stocked up on the securitized mortgage debt are going to be hurt, but that does not translate into a geopolitical event, or even into a recession. Many people are arguing that we are only seeing the tip of the iceberg, and that defaults in other categories of the mortgage market coupled with declining housing markets will set off a devastating chain reaction.

“That may well be the case, though something weird is going on here. Given the broad belief that the subprime crisis is only the beginning of a general financial crisis, and that the economy will go into recession, we would have expected major market declines by now. Markets discount in anticipation of events, not after events have happened. Historically, market declines occur about six months before recessions begin. So far, however, the perceived liquidity crisis has not been reflected in higher long-term interest rates, and the perceived recession has not been reflected in a significant decline in the global equity markets.

“When we add in surging oil and commodity prices, we would have expected all hell to break loose in these markets. Certainly, the consequences of high commodity prices during the 1970s helped drive up interest rates as money was transferred to Third World countries that were selling commodities. As a result, the cost of money for modernizing aging industrial plants in the United States surged into double digits, while equity markets were unable to serve capital needs and remained flat.

“So what is going on?

(more…)

The Financial Ad Trader - banner ads

Digg

Del.icio.us

Technorati

Stumble

Facebook

Sun 25 Nov 2007

Words from the wise for the week that was (November 19 – 25, 2007)

Print This Post

This week’s edition of “Words” is again a “high-altitude delivery” as it comes from above the clouds en route from Cape Town to Ljubljana, the romantic capital of Slovenia right in the heart of Central Europe. After three recent aircraft incidents in South Africa (my home country), notwithstanding the fact that none resulted in any serious injuries, I am acutely aware of the risks of spending a disproportionate amount of time in the sky. It sure is a long way to the ground from up here …

Does the stock market have a tried and tested parachute? We can only guess, but in the words of market veteran Richard Russell (Dow Theory Letters), “it’s always best to hope for the best and be prepared for the worst

In the aftermath of Thanksgiving, may I remind you of the following old stock market adage: “The bears have Thanksgiving and the bulls have Christmas.” Let’s hope for an early Christmas!

Before highlighting some thought-provoking quotes from market commentators during the past week, let’s briefly review the markets’ actions on the basis of a performance chart

Economy
The past week’s movie has been playing for a while and was characterized by investors becoming increasingly jittery about the possibility of a US recession. Uppermost in their minds were burning questions such as: How is the economy going to perform during the next few months in the light of a deteriorating housing market and rapidly increasing number of mortgage delinquencies? And what are the investment implications of credit conditions being tighter now than before the Fed began cutting rates, the oil price trading just shy of $100 a barrel, and the US dollar hitting an all-time low against a basket of currencies?

Black Friday could not have arrived a moment sooner as the financial markets need a clearer picture of how the US consumer will be affected by this environment. The weekend numbers will be very important in assessing the lie of the economic land.

Markets
The performance charts usually obtained from StockCharts were unfortunately not available as a result of the short week, but the Wall Street Journal Online came to my rescue with the following chart indicating how different global markets fared during the past week. (Financial markets in the US and Japan were closed on Thursday and Friday respectively.)

Source: Wall Street Journal Online, November 25, 2007.

Global stock markets continued their slide and ended the week in the red as investors concerned about an array of negative factors (as mentioned under “Economy”) dumped stocks. Emerging-market stocks in particular performed poorly and shed 4.8% during the week, although the 52-week performance of 37.4% was still highly respectable. China’s Shanghai Index has lost more than 17% since its peak in October.

Wednesday witnessed the Dow Jones Industrial Index tumbling by 211 points, thereby confirming a so-called Dow Theory bear market signal with both the Industrial Index and the Transportation Index trading below their lows of August 16, 2007. Financial stocks dominated investors’ worries, but the week’s losses were tempered by a low-volume relief rally on Friday.

Economic woes caused a further steepening of the US yield curve with the yield on 10-year Treasuries falling to a two-year low at 4.01% (after having dipped to below 4.0% at one stage) as investors switched from stocks to bonds perceived to offer safe-haven status. Eurozone and UK bond yields were also sharply lower.

With credit markets pricing in further US interest rate cuts, the US dollar had another dreadful week and recorded an all-time low against the euro (approaching $1.50) and a fresh 30-month low against the Japanese yen. The latter, as well as the Swiss franc, gained more ground on the back of further unwinding of carry trade transactions.

With the dollar hitting new lows, the Dow Jones-AIG Commodity Index strengthened by 1.4% to trade near its highs. The star performers among commodities were gold bullion (+4.9%) and crude oil (+4.6%), with the latter reaching its highest level ever in thin and volatile post-Thanksgiving trade. Platinum also recorded an all-time high. Industrial metals, including copper (-5.3%), were the only weak spot in the commodities complex.

This week promises to be a key week for the direction of financial markets. Hopefully the words (and graphs) from the investment wise below will assist in guiding us through the stormy waters and making the correct investment decisions.

Richard Russell (Dow Theory Letters): Dow Theory - bear market signal
“I don’t know the full meaning of the (Dow Theory) bear market signal of November 21. Nobody does. But one guess is that the real surprise will come later. The real surprise could be that conditions are fated to become much worse than expected. For instance, analysts are talking about a ‘difficult 2008, but maybe not a recession.’ Others are talking about just a ‘growth slowdown.’ I hope I’m wrong, but the surprise could be a severe recession, even a global recession. In which case people will look back and say, ‘I should have taken that bear market signal of November 21 more seriously. The US, the market and my finances are in much worse shape than I had anticipated.’

“I expect a lot of wild and confusing movements from the stock market in the days ahead. But … a rally here, even a powerful rally, will not mean that the bull market has suddenly been reborn. Bear markets tend to be both costly and discouraging to stockholders. It is only natural and human nature that stockholders treat every rally as a sign that the bear market is over, and therefore that they’ll ‘get their money back.’ I warn subscribers not to be taken in by the powerful rallies that are certain to occur. They’ll be corrective rallies within the framework of a primary bear market.”

Source: Richard Russell, Dow Theory Letters, November 23, 2007.

John Hussman (Hussman Funds): Financial markets are at a critical point
In short, the financial markets are at a critical point. It’s possible that investors will somehow adopt a fresh willingness to speculate, but my impression is that in the weeks ahead, investors will be forced to recognize that recession risk has tipped. That’s not to say that this realization will produce one-way market movements. Seasonal factors tend to buoy the market a few trading days before holidays and a few days around the turn of each month, and … oversold conditions lend themselves to periodic short squeezes and spectacular but short-lived rebounds. So we will almost certainly observe advances driven by investors frantic to ‘buy the dip’ and ‘catch the rebound.’ Overall, however, the return/risk profile on both stocks and the economy as a whole appear increasingly lopsided toward bad outcomes.”

Source: John Hussman, Hussman Funds, November 19, 2007.

GaveKal: Stocks - downside breakout or rebound?
“… history shows that when the Fed cuts rates and stocks rally, then the US economy is likely facing no more than a mid-cycle slowdown. However, when rate cuts are met by sinking stocks, the US economy has tended to go into recession. So, will equity markets break out on the downside? Or will we see a rebound from the current levels?

“1. On the continued meltdown fears: The news, especially in the financial sector, continues to be dreadful! Needless to say, whipping oneself into a bearish frenzy is not such a hard thing to do today. And yet, there may still be hope …

“2. On the rebound hopes: The obvious hope is that, today, sentiment indicators are all once again painting a picture of a one-way market. Any kind of bad news is a reason to sell, while good pieces of news are swept away in the tide of negativity and uncertainty. … with a massively undervalued US$ and low interest rates, a recession would be quite surprising. Low rates and a weak US$ are the recipe for a boom, not a bust!

“We thus hope that the markets will be able to rebound from this important juncture. But we are fully cognizant of the fact that the next few days of trading are very important.”

Source: Gavekal - a Checking the Boxes, November 21, 2007

BCA Research: Too soon to bottom-fish global banks
“Global banks are becoming more attractive on a number of valuation measures. However, they do not look cheap versus the broad market. In addition, price-to-book valuations could be misleading until the hit to capital from the sub-prime and SIV losses are fully realized. Similar price-to-book-value buy signals were seen in the US homebuilding sector over the past year, which were erased by downward revisions to book value. Global dividend yields are now higher than G7 bond yields. However, dividends have the potential to be cut if the earnings environment continues to deteriorate. The average global bank dividend payout ratio is 35%, which is more than three times the 2000 payout ratio. Bottom line: Further de-rating of the banking sector is required before bottom-fishing.”

Source: BCA Research, November 19, 2007.
(more…)

The Financial Ad Trader - banner ads

Digg

Del.icio.us

Technorati

Stumble

Facebook

Sat 17 Nov 2007

Words from the wise for the week that was (November 12 – 18, 2007)

Print This Post

This week’s article comes from Windhoek and Swakopmund in Namibia where I am on a brief business visit. This desert country is located along the southwestern coast of the African continent and lies north of my home country, South Africa. Namibia is known for its contrasting landscapes – from the Namib dune sea to teak woodlands to the Etosha Pan, a dried-out saline lake surrounded by grasslands and bush that support a large and varied wildlife – and for its hospitality and orderliness (largely as a result of the German influence that has remained since the days when it was a German colony at the end of the 19th century).

Speaking of contrasts almost as stark as those in Namibia, is the performance of stock markets out of step with an increasingly recessionary looking US economy? On Monday widely-respected John Hussman (Hussman Funds) said: “I expect that a US economic recession is immediately ahead”, but on “turnaround Tuesday” (November 13) the Dow Jones Industrial Index shot up by 320 points (2.5%), representing the 17th largest points increase on record.

But wait, are markets not simply fulfilling their traditional role as a discounting mechanism of future events? Here is Richard Russell’s (Dow Theory Letters) take on matters: “Doesn’t the stupid Dow Jones Industrial Average see what’s going on? Is the stock market crazy or what?! I went through this same experience in 1957 when the Dow turned up amid a deepening recession. Of course, the stock market knows what’s going on. The stock market in late-1957 was looking past the bad news to a coming boom. I think the market (the Dow) is doing the same thing now.”

More from Russell in the paragraphs below, but before highlighting some thought-provoking quotes from market commentators during the past week, let’s briefly review the markets’ actions on the basis of economic statistics and my customary performance charts.

Economy
The past week’s US economic news tilted towards weak economic conditions. Indications from other parts of the developed world – notably Germany, the UK and Japan – also pointed to slowing economic activity.

Credit market concerns lingered, but without triggering the same degree of anxiety as in recent times, especially regarding the ongoing sub-prime-related write-downs by financial institutions. A large part of the economic debate focused on whether or not the American consumer is finally slowing down spending due to high energy costs, tighter credit conditions and a continuously falling dollar, and the implications thereof for global economic growth.

WEEK’S ECONOMIC REPORTS

Source: Gold Seeker Weekly Wrap-Up, November 16, 2007.

This week’s economic highlights include Building Permits, Housing Starts, and FOMC minutes on Tuesday, and Initial Jobless Claims, Leading Economic Indicators and Michigan Sentiment on Wednesday.

US markets will be closed on Thursday for the Thanksgiving Holiday and markets will close early on Friday.

Global stock markets
Global stock markets, including both mature and emerging bourses, ended a rather volatile week in the red. The American markets, however, followed a different course, with the Dow Jones Industrial Index, the Nasdaq Composite Index and the S&P 500 Index all three registering modest gains. Smaller cap US stocks lagged in negative territory as investors preferred the larger export-oriented companies.

The Hang Seng Index declined by a further 4.1%, bringing its losses since an all-time high on October 30 to 13%.

Source: StockCharts.com

Global fixed-interest and currency markets
Hawkish remarks by Fed Governor Randall Kroszner, implying a reluctance to lower the Fed funds rate on December 11, brought some reprieve for the US dollar after its relentless fall since mid-August. The Japanese yen and Swiss franc gained more ground on the back of further unwinding of carry trade transactions, hitting respectively 18-month and 12-year highs against the dollar. The British pound, on the other hand, came under pressure as a result of strong indications by Mervyn King, Governor of the Bank of England, regarding interest rate cuts.

Despite Kroszner’s comments, US treasuries gained over the week as the yield on the 2-year US Treasury Note declined to its lowest reading since February 2005 and the yield on the 10-year US Treasury Note dropped to a level not seen since September 2005. Elsewhere in the world the 10-year Japanese bond yield hit a 20-month low.

Source: StockCharts.com

Commodities
Commodities experienced another mixed week as investors pondered on how global demand would be affected by the fall-out of the credit crisis.

Gold bullion suffered from exhaustion and used the pause in the US dollar’s decline as an excuse to correct after its big run-up. Silver traded in lock-step with gold and also pulled back, but platinum bucked the trend.

The US Energy Department’s weekly inventory data showed the first increase in crude oil inventories in four weeks, thereby diminishing supply concerns and putting downward pressure on oil prices.

Base metals posted red numbers, but “Dr Copper” (usually a fairly good gauge of global economic activity) rebounded and ended higher for the week after a four-week slide.

Source: StockCharts.com

Now for some words (and graphs) from the investment wise that will hopefully assist to make sense of the shenanigans of the credit debacle and other pertinent issues.

Economy.com: Business confidence for world
“US business confidence remains moribund. Sentiment has not changed appreciably since plunging in August during the height of the subprime financial shock, and it remains consistent with an economy that is expanding very slowly. Businesses are particularly dour in their broad assessment of current conditions and expectations regarding the six-month outlook. Confidence is stronger outside the US, most notably in Asia. Sentiment is weakest among firms in housing and financial services, and strongest among high-tech businesses.”

Source: Moody’s Economy.com, November 12, 2007.

John Hussman (Hussman Funds): US recession immediately ahead
“On Saturday, the consensus of economists surveyed by Blue Chip Economic Indicators indicated expectations that growth will be sluggish into next year, but that there will be no recession. Unfortunately, the economic consensus has never accurately anticipated a recession. For my part, the outlook has changed. I expect that a US economic recession is immediately ahead. This conclusion is based on the combined weight of several classes of indicators, including asset prices, reliable survey measures, and measures of labor market activity.

“In every instance we’ve observed these conditions, the US economy has either already been in a recession, or has been within a few weeks of what turned out in hindsight to be the official beginning of a recession. There have been no false signals. Few things in investing or economics are certain, but my impression is that current evidence moves recession risk from ‘possible’ to ‘probable’.”

Source: John Hussman, Hussman Funds, November 12, 2007.

BCA Research: Has the Fed fallen behind curve?
“Increasing stress in the financial system and signs of reduced credit availability mean that the Fed has a lot more easing ahead. The shift to a neutral bias by the FOMC was misplaced given the renewed rioting in the financial markets. The earlier implosion in housing-related stocks has progressed to banks and consumer finance shares, where massive write-offs are occurring. Ominously, last week’s Fed senior bank loan officer survey warned that a credit crunch might be developing. A crunch could easily tip the economy into recession and risk an outbreak of deflation. Rather than panic and bet on Armageddon, investors should stay focused on the rapidly rising odds of a major reflationary program, i.e. much lower rates and yields than most have envisioned.”

Source: BCA Research, November 12, 2007.

(more…)

The Financial Ad Trader - banner ads

Digg

Del.icio.us

Technorati

Stumble

Facebook

Fri 2 Nov 2007

Q&A: Mark Mobius on China

Posted by Prieur du Plessis under Markets, Money, Stocks, Investment, Equities, China, Economy, Emerging markets, Business
No Comments

Print This Post

Is the Chinese stock market in a bubble, or are the lofty valuations simply a reflection of the country’s superior growth prospects? Who better to ask than Mark Mobius, Franklin Templeton’s roving emerging markets expert. (The interview is courtesy of Franklin Templeton Investments).

Q: Is it time to take profits in the Chinese stock market? Is the current trend sustainable or is it due for a correction?

Mobius: There is no way anyone can predict whether a market is at its peak. No one can predict the market direction and a bear or bull market could start or end at any time. However, the good news is that bear markets are shorter in duration than bull markets and bear markets go down a smaller percentage than bull market increases. This is why one must invest with a long-term view. It’s true that the excess liquidity in China is sending the A market valuations higher and higher but since China’s capital account is still under control, this situation of expensive valuations could last longer than most could expect. The Chinese government has realized that the risks associated with an overheated stock market could be tragic and we believe that it will introduce more measures to contain the excessiveness. Having said that, we also believe that they would not like to see the stock market experience dramatic falls as the impact would not just be limited to the economy. There could be social and political implications as well.

The “A” share market has become highly speculative as small Chinese investors try to achieve returns beyond those available from bank deposits given that interest rates have been kept deliberately low in China. But the experience of Japan in the 1980s and early 1990s suggests that markets can benefit from investors’ bullishness for much longer than outside observers believe possible.

Having said that, the valuations of the “A” shares are definitely excessive. But these higher valuations are a reflection of both the higher perceived growth potential of the companies there and the current higher risk appetite investors have on Chinese securities. However, the law of investing in every market is the same. A bull market is followed by a bear market; the only catch is that no one can predict the timing of either. Moreover, with China recently allowing domestic investors to invest offshore, we expect to see funds flowing into the Hong Kong-listed “H” and “red-ship” shares which are trading at a significant discount to their “A” share counterparts.

Q: How would you compare the market outlook of China with other emerging markets?

Mobius: China looks attractive because it is the largest emerging market today and with its accession into the World Trade Organization (WTO), will also become a significant player in the global trade arena. With a domestic market of 1.3 billion people, China has been experiencing strong consumer expenditures, per capita spending, and retail sales growth, the effects of which will continue to boost the country’s economic recovery. The full economic potential in China is far from being reached today and therefore it is possible that the high growth of the Chinese region could continue. Thus, the country presents significant investment opportunities for investors.

We view the market outlook for emerging markets including China to be positive. While the Chinese market may have higher potential due to the reasons discussed above, we believe that many markets continue to warrant our attention.

Q: In addition, the quality control issue of products produced in China has been under the spotlight lately, would this be one of your factors to evaluate the company during your on-site visit?

Mobius: Quality control has always been one of the many criteria we evaluate when visiting companies.

Q: The coming 17th Communist Party of China (CPC) National Congress is scheduled on 15 Oct, any insights or view that you could share with us relating to the measure that would be introduced?

Mobius: We don’t expect the government to implement any measures which could have a detrimental impact on the economy. Thus, the continuation of gradual cooling measures is expected.

Q: Is your outlook different for ADRs/ETFs compared to H shares open to foreign investors or the A/B shares available to Chinese investors?

Mobius: Well, an ADR is essentially a certificate issued by a US bank representing a specific number of shares of a foreign company, thus theoretically the outlook for the respective ADR shares should be the same as the underlying foreign company. As for ETFs, they track the performance of an index or exchange and will thus trade in line with the market sentiment on that market. Thus, if investors are very optimistic about a market, the ETF tracking that market could trade at a premium; conversely, if investors are pessimistic, a discount can be expected.

Q: Where do you see opportunity? Are there certain sectors that are attractive or now unattractive?

Mobius: We see opportunities across the board. In line with our long-term, bottom-up investment strategy, we do not intentionally over or underweight any sectors. Thus, our sector allocations are a result of our careful and in depth analysis of individual stocks. However, relatively speaking, we have higher weightings in energy, financials and consumers, more because of their relatively attractive valuations.

Q: Do you expect any financial crash in China in the near term? 2008-2009?

Mobius: That would be impossible to predict. However, given China’s strong economic growth and fiscal position, I do not expect to see any financial crisis in China. Having said that however, it is important to note that some form of correction in the Chinese stock market cannot be ruled out as the market is currently trading at excessive valuations and has experienced rapid price appreciation.

Q: Do you think that the Chinese Growth could affect other Non-Asian Emerging Markets such as Brazil or Mexico?

Mobius: Yes and it has already been doing so. China’s strong growth, for example has increased the demand for commodities such as iron ore and oil, which are major exports for Brazil and Mexico, respectively.

Q: Implications of foreign exchange rates? (The dollar is weak and the U.S. interest rate cuts were considered a boon for foreign markets) Should investors be using options or doing anything else to mitigate risk?

Mobius: The best and safest way to mitigate against foreign currency risk is to diversify your portfolio globally. This provides a natural hedge. The use of options or any other similar instruments bring along with it additional risk, and thus should probably only be used by more experienced investors. In my experience however, the best defense to risk is to adopt a long-term view, diversify your investment, and carefully evaluate their options.

Did you enjoy this posting? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

The Financial Ad Trader - banner ads

Digg

Del.icio.us

Technorati

Stumble

Facebook