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David Fuller and Eoin Treacy's Free (Abbreviated) Comment of the Day.
Monday 27th June 2011
Jackson Wong: Running With Global Leaders 2011 - My thanks to friend and colleague Dr Jackson Wong for his latest blockbuster (402 slides) presentation. Here is the introduction page: A year
ago, I published a report called \Running With Global Leaders 2010". (Click
here for the report) The aim of that study was to determine, categorise, and analyse stocks that were leading the post-crisis rally. This
report is a continuation of that investigation. Here, I attempt to shed some
light on these interesting questions: My view - This is a diligently researched report, drawing on examples selected from the world's markets. I think subscribers will find it fascinating and informative. It is also a superb primer for anyone interested in factual technical analysis.
"On the subject of recent decline in bond yields, one would assume that it is the change in growth and, in turn, inflation expectations that's behind this but I was wondering whether you could comment on at what stage, declining growth assumptions starts to become a headwind for bond prices (given its impact on tax receipts etc..). I have also noticed that v few commentators can bring themselves to talk about flights to safety or quality when explaining recent price action in the bond markets, not surprising I guess!" My comment - Thanks for these interesting points. The supply/demand imbalance behind any significant market move can be subject to many influences, some of which may seem obscure, surprising or illogical. This is why price charts are so helpful. Price is the distillation of every influence acted upon by people who are buying and selling in the marketplace. My guess is that slower GDP growth is a factor, as is central bank buying, but CPI inflation should actually be a headwind because it has been edging higher in the UK, USA and much of Euroland. Regarding falling tax receipts, this is more likely to push up yields among heavily indebted countries in a currency union such as the euro, which they cannot control. In contrast, the UK and USA can and have let their currencies devalue. In the
global beauty contest, as I have often described the market environment, momentum
is an understandably compelling force for investors. Momentum colours fundamental
interpretations and also becomes self-feeding for a while. "I took your advice from the audio and did something that was of interest to me this weekend: I sat in my flat -- which overlooks Wimbledon Park and where the spectators stream towards the tennis championships -- and listened to the Fullermoney audio and read Comment of the Day. I enjoyed my Saturday as much as anyone with a Centre Court seat. My comment - Thanks for the lovely message. My daughter took me to Wimbledon on Saturday and we had the good fortune to be on Court 1 where I saw my favourite athlete, Rafael Nadal, close out his match in style. We also saw the impressive new Australian talent, Bernard Tomic, who has the game to win Wimbledon one day. The chart with which we opened, that of the UK bank rate between 1700 and 2011, is frightening for a number of reasons. One, because it smacks of desperation on the part of the monetary authorities. Two, because it is forcibly impoverishing a cohort of investors who can either sit on the sidelines quietly watching their savings evaporate in real terms courtesy of state-sanctioned inflationism, or who feel obligated to put their capital to work in risk asset markets for which their capital may never have been originally intended. Now that is moral hazard on the part of our monetary authorities ! Three, because artificially suppressing the cost of capital - assuming that individuals or corporations can admittedly borrow at anything close to those headline rates, if at all - sends out hugely destructive and plainly incorrect price signals to businesspeople and entrepreneurs. This runs the real risk of provoking a huge wave of malinvestments - investments undertaken solely because the market's price mechanism has been wilfully distorted, investments that would never be undertaken if market interest rates were at a more meaningful "high" level in real terms. The financial crisis was provoked in large part because monetary policy rates were kept artificially low. Do we really think it can be resolved by allowing history to repeat itself ? Four, because maintaining base interest rates at zero - and manipulating the price of government bonds higher with some vague sense of creating higher confidence in the process - makes it impossible to fairly and objectively value all risk assets, and not just debt. There is not one single market investment in existence the value of which has not been affected in some way by quantitative easing. Central banks might argue that that was precisely the point of the exercise. But playing a game against a dealer who arbitrarily makes and rewrites all the rules is not a game that many investors would voluntarily play. My view - This may be true but you and I can only deal with the reality that markets provide, whatever the causes. A graph of the UK bank rate from 1700-2011 from the Bank of England is certainly notable.
Mrs Fuller and I attended the opening night on 21st May and it was a magical evening.
Transitory Gloom Clouds Deere Boom as U.S. Shows Resilience - This article by Timothy R. Homan and Shobhana Chandra for Bloomberg may be of interest to subscribers. Here is a section: The strength
of the U.S. economy depends on whether you believe optimists like Mark Zandi
or pessimists like David Rosenberg. "The whole recovery's been a soft patch." Another recession "is practically baked in the cake, barring another round of policy stimulus." My view - Disagreement between what exactly the problems are and how best to fix them has been a significant characteristic of the response to the economic slowdown and subsequent recovery in the USA. In addition countries such as Canada, Australia, the UK, Ireland and others share the characteristic that exporters leveraged to the growth of the global middle class are outperforming whereas companies exposed to their respective national consumers, outside of the discount sector, are struggling. Hundreds of millions of newly minted consumers, primarily in Asia, can now afford to consume more calories which is helping fuel demand for agricultural products over the medium to long term. However, while the farm machinery sector has been among the better performers, it has entered a corrective phase in common with the wider stock market. Deere & Co. hit a new high near $100 in April and subsequently pulled back to break the two-year progression of higher reaction lows. It is now testing the region of the 200-day MA but will need to sustain a move above $84 to confirm more than temporary support in this area. Toro Co. has, so far, held its progression of higher reaction lows but needs to continue to find support in the region of the 200-day MA for the medium-term uptrend to remain relatively consistent. (Also see Comment of the Day on March 29th). CNH Global has experienced a deeper reaction and a sustained move above $64.50 would be required to break the six-month downtrend. Fiat Industrial and AGCO Corp have experienced similar declines. In India, Mahindra & Mahindra has been among that stock market's better performers and continues to outpace the wider market. It rallied impressively last week, from above the March low and a sustained move below INR600 would be required to question medium-term scope for additional upside.
Liu proposed that the country study allowing provincial governments and some city authorities to sell an appropriate amount of debt. The plan should get an approval from the State Council, he said. The financing vehicles will have to pay interest and principal by year-end, said Liu Li-Gang, who formerly worked for the World Bank and is chief China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. If the local governments can't issue debt in the next three years, they would have to cut their combined fiscal spending by 5 percent to 7 percent of GDP to meet obligations, he said. "If the central government can allow local governments to issue long-term debt, then the liquidity problem won't look very serious," he said. "I don't think this will necessarily run into a banking crisis in China given the balance sheet condition of the central government is very good at this stage." The audit gave a number lower than the central bank, which said June 2 that more than 10,000 financing vehicles had been set up. The banking regulator has estimated local government financing vehicle debt at over 7.7 trillion yuan. "It seems the government doesn't have a concrete idea what is a local government financing vehicle and what isn't," Credit Suisse's Chan said. "The biggest problem is it's very difficult to define in China what is private and what is public." My view
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The problems with funding China's local governments has long been an issue.
Since there is no residential property tax and local governments do not have
the ability to issue debt in their own names, they are forced to depend on land
sales to raise capital. This has created an unseemly alliance between the interests
of local officials and property developers which has led to some notable cases
of overbuilding, graft and bad planning. The use of special purpose vehicles
has also become ubiquitous in circumventing debt issuance rules and has contributed
to the issue of bad loans. The fact that the auditor's estimated figure for outstanding debt was below that of the central government is a positive development which appears to have been welcomed by the stock market. The potential problem of bad debts remains serious but does not appear to pose a systemic risk to the Chinese economy at present. Significant additional reform will be required to remove the threat. The Shanghai A-Share Index of large caps formed a weekly upside key reversal last week signalling a low of at least short-term significance. A break of the almost two-year progression of lower highs, currently in the region of 3400, would signal a return to medium-term demand dominance.
This action has the superficial appearance of a political move by the US government, related to gasoline and diesel fuel prices in the OECD. The alternate, and official reasoning, is that major forecasting houses, including DB, calculate that the "call on OPEC" (simply global oil demand growth less Non-OPEC supply growth) will be up more than 1Mb/d between 2Q and 3Q on seasonal and developing country economic demand strength. Saudi Arabia and its Gulf producer allies recognise this, but OPEC, under the presidency of Iran, refused to raise production at their recent meeting to accommodate the squeeze. It is well established that Iranian-Saudi relations are poor. This release is designed to prevent a spike going into 3Q. But equally it roils markets by absolutely raising the question of how much spare capacity Saudi really has, including the knowledge that the Kingdom has become a major demand growth driver in its own right, particularly in summer. That raises the question, in tandem with a known move by Saudi to secure more rigs, even as they announced move to 10mb/d of production, of how much spare capacity there really is. Furthermore, assuming that Non-OPEC is producing all-out, how much spare capacity there is globally. The answer seems to be: less than you think. My view - Part of the reason there has been such a divergence between the price of Brent and West Texas Intermediate crude oil markets has been the differing supply situations between the USA and Europe. The removal of Libyan supply, at least temporarily, coupled with maintenance in the North Sea have put upward pressure on Brent. Excess supply at the Cushing facility in the USA has acted as a drag on WTI's advance. The reasons behind the IEA's decision to release supply from its Strategic Reserve are probably rooted in OPEC's refusal to raise production even when prices have been in excess of $100 for a sustained period. The timing probably has much more to do with the USA's driving season. With only a week before the July 4th weekend US Average Gasoline prices are currently at $3.58, having hit a peak near $4 in mid May. It continues to revert towards the 200-day MA and a clear upward dynamic would be required to check potential for additional downside. Brent crude hit a medium-term peak in April, while WTI hit an incrementally higher high almost a month later, but subsequently experienced a more abrupt decline. Downward dynamics have proliferated even as prices have spent the last six weeks unwinding overbought conditions relative to the 200-day MA. Both are somewhat oversold in the very short term so there is room for some steadying. However, sustained moves above $120 and $105 respectively would be required to check current scope for an additional test of underlying trading.
"Is it possible to get a graph of the US Purchasing Managers Index (ISM)? Similar indices are available for the Eurozone and Asia. Could we have all the Manufacturing Purchasing Managers Indices that are available? "Thank you for including the Citigroup Economic Surprise Index in the chart library." My comment - Thank you for this suggestion which has been added to the Chart Library. I have not added additional indices for other countries because they only tend to be of occasional academic interest and the cost incurred would not be justified.
Anyone interested in securing a place at any of our events should contact Sarah Barnes at sbarnes@fullermoney.com. The full rate is £950 + VAT. The early booking rate of £875 for non-subscribers expires on September 30th. Paid-up Fullermoney subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates. The date and venue for my remaining seminar in 2011 is: London - November 3rd & 4th at the Radisson Edwardian Hampshire.
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Many thanks for the great service - I particularly enjoy the Friday Audio which I usually listen to in the car over the weekend. 
