With the sharp falls in commodities prices in the second half of 2008,
investors are questioning the concept of the commodity super cycle and the
rationale for investing in that asset class.
Indeed, this year's 15 per cent rally in commodities is being ascribed to
temporary factors, including speculative short covering and stockpiling in
China. Last year's near 40 per cent pullback in commodities, though, should
be viewed as a healthy correction in a secular commodity bull market.
Indeed, there are three reasons for expecting commodities to perform well
over coming years.
First, the structural strength in the global economy resides in the
emerging market economies. Since experiencing significant economic hardship
during the series of EM crises between 1997 and 2001, these economies have
been paying down debt, increasing savings and building reserves. As a
result of that structural economic strength and the stimuli now being
applied to these economies, we expect the EM economies to act as the major
driver of global growth over the coming decade. Most importantly, given the
voracious appetite for commodities in these industrial- ising economies,
demand for major global commodities should rise significantly. Already
China's consumption of copper has risen rapidly in 2009, as the fiscal
stimulus plan and rapid lending growth combine to drive a recovery. Our
long-term demand forecast suggests consumption of key commodities by the
Brics (Brazil, Russia, India and China) alone, especially China, will
account for the majority of global consumption by 2020 as their economic
growth remains rapid and becomes increasingly commodity intensive.
Second, the Federal Reserve is boosting the money supply by creating
commercial bank reserves, the modern day equivalent of printing money. This
year the Fed has announced and embarked upon its version of quantitative
easing, which it prefers to label credit easing. By creating commercial
bank reserves at the Fed and using those reserves to purchase $300bn of US
Treasuries and $1,250bn of mortgage backed securities, the Fed will more
than double the monetary base. If successful in reigniting the economy then
our analysis of the history of quantitative easing over the past 150 years
points to eventual high inflation. Furthermore, given the concerns
expressed by Washington policy makers about the fragility of the recovery
and the structural weaknesses of the US economy, it's likely the stimulus
will be removed too late. Commodities, as a physical asset, are a store of
value and consequently a natural hedge against inflation, and should
perform well in that environment.
Third, the commodity super cycle is alive and well. Last year's pullback in
prices was a typical mid super cycle break in the commodity price upswing.
Both the recent two commodity super cycles experienced major pullbacks
several years into their bull runs. Both times the pullbacks proved
temporary and the upswing resumed. During the last commodity super cycle
(1968 through to 1980) commodities fell by approx 25 per cent from mid 1974
through to the end of 1975. Equally in 1937, during the first half of the
1932 to 1951 super cycle, commodities also suffered a major correction,
falling a cumulative 40 per cent before resuming their upwards trajectory.
Both mid cycle corrections were similar in size to last year's weakness.
Both were also associated with major global recessions.
Indeed, the existence of the commodity super cycle can be shown back to
1750 (ie as the start of our data series) while academic work exists
showing long cycles in prices dating back to the 12th century in Europe.
Since the mid 1700s the average bull cycle has been 20.7 years with average
cumulative gains of 293 per cent and a range of gains of between 135 per
cent (1788 to 1814) and 689 per cent (1932 to 1951). This latest cycle
began in 2001 and is therefore eight years old. To date, cumulative gains
are 76 per cent. If history and long-term demand expectations are any
guide, then several years of significant upside should be expected.
The writer is chief executive of Longview Economics
Monday, June 29, 2009
Friday, June 26, 2009
The Shocking Truth About the Obama Stimulus Plan
The untold story is that Obama’s stimulus plan has crushed the dollar, increased interest rates and triggered another bold new energy run.
The result will …
- Slow the U.S. economy
- Increase U.S. unemployment, AND
- Crush U.S. manufacturing jobs as it creates new opportunities in China.
All at a time when China is moving at light speed to boost its internal growth rate.
Most investors don’t realize this, but China’s growth will hit a mind-boggling 7% in 2009.
To be sure, that’s less than the sizzling hot years of 11% annual growth, but compared with the expected U.S. contraction of negative 3% in 2009, you don’t have to be a computer scientist to know where the big money will be made in the next two years.Macroeconomics
The US economy continues to see light at the end of the tunnel. 1Q GDP registered a 5.5% contraction instead of 5.7% decline estimated earlier (4Q: -6.3%). The smaller contraction was due to upward revision to inventory investment and a downward revision to imports. Initial jobless claims however unsurprisingly increased last week to 627k from 612k a week earlier, reflecting a still sluggish labor market.
· On the contrary, New Zealand’s GDP fell more than expected by 1% in 1Q, exceeds the -0.7% forecast and extending a fifth straight quarter of declines. New Zealand’s economy is unlikely to grow until the final three months of 2009 as the recession curbs exports and damps investment, prompting Reserve Bank Governor Alan Bollard to possibly keep interest rates at record lows until late next year to kick-start spending.
· In Eurozone, companies cut demand for machinery, transport equipment and consumer appliances, pushing industrial orders lower by 1% in Apr. Consumer prices in Japan contracted at the fastest pace on record in May on lower energy prices and rising unemployment.
· Weak global trade continues to depress exports of Asian economies. Hong Kong’s exports dropped 14.5% YOY in May, a seventh consecutive monthly fall as demand for Chinese products shipped through the city eased. Imports fell 19.2% YOY, resulting in a trade deficit of HKD11bn. Exports in Vietnam also decreased at a faster pace of 10.1% in Jun compared to 6.8% in May.
Thursday, June 25, 2009
Greed & fear - Gangreen
The only interesting point about this week’s FOMC meeting is that Billyboy seems to be less worried about “deflation”. This is another contrarian reason to be constructive about government bonds. There is zero definitive evidence that housing is about to “bottom” in the US. While the American commercial real estate market continues to deteriorate.
· A stronger oil price continues to be a sign of rising risk tolerance and a falling oil price of rising risk aversion, with the US dollar trading inversely to that. As was the case this time last year, GREED & fear believes the oil price is now being pushed by financial players. While GREED & fear is as bullish as anyone on the structural story for emerging markets, the view here remains that the commodity complex is now vulnerable if there is renewed disappointment about Western growth prospects in coming months.
· “Global warming” maintains its status as the developed world’s new religion. This is why “climate change” seems almost as high on the list of the priorities of the Obama administration as “healthcare reform”.
· The arbitrary nature of “green” investment mandates is obviously irrational from an investment perspective. From a longer term perspective it is almost inevitable that the frenzy for green will attract to the area the usual mob of con men and spivs who jump on every bandwagon. There is also a more fundamental risk that government sponsorship of alternative energy leads to massive over investment in the area.
· Regardless of the fundamental merits or otherwise of the climate change story, alternative energy stocks will, for now, continue to trade as high beta proxies for the oil price. They, therefore, have no diversification merit.
· There is a very strong economic case for growing links between Malaysia and Singapore. Singapore needs land and space to grow into, in the sense that southern Johor could become the equivalent of what the Shenzhen special economic zone became for Hong Kong. Malaysia could also profit from Singapore’s skill sets and capital. Any such development would be a major positive for both stock markets.
· Lee Kuan Yew’s eight day visit to Malaysia is interesting since, in GREED & fear’s view, nothing significant is going to happen in terms of new bilateral agreements between Malaysia and Singapore unless it is approved by the “minister mentor”.
· Najib’s first three months in power since he took over from Badawi have at least seen some dilution of the New Economic Policy (NEP). Any dilution of the NEP should be viewed as a positive, even if investors should also remain fundamentally sceptical about whether UMNO is capable of wholesale reform of this outmoded policy.
· The Malaysia stock market has been relatively unexciting in the Asian equity context reflecting its by now well established low beta status. This means it underperforms the regional index in a rally and outperforms in a correction.
· The presidential election season is approaching in Indonesia with all the evidence suggesting a landslide victory for incumbent president Yudhoyono. The reasons why Yudhoyono looks an overwhelming favourite to win are his appealing acronym, his “clean” image and the relatively stable economy.
· The Indonesia economy has so far shown impressive resilience this year, because of its domestic demand orientation as well as its commodity gearing. This resilience also reflects the economy’s lack of corporate or consumer debt.
· Assuming a “SBY” victory, looking forward a critical issue from a macro economic perspective is domestic infrastructure where there has been a disappointing lack of progress in Yudhoyono’s first term despite an almost ridiculous amount of talk.
· Indonesia still offers a fundamentally exciting long term consumption story with a positive demographic. Another positive point is that Indonesia is now the marginal supplier of coal and palm oil to the resource deficient economies of China and India.
· Having fended off for now calls for the passage of a modern version of the Glass-Steagall Act, the vested interests behind securitisation are emerging from their caves to argue their case. But in GREED & fear’s view securitisation only makes sense in a “market” system where financial entities face the risk of going bust. America clearly does not have such a system.
· Agricultural machinery maker Kubota will be added to the Japanese thematic portfolio this week with an initial weighting of 3%. The investment will be paid for by removing Inpex. As for the Asia Pacific ex-Japan relative-return portfolio, the overweight in China will be increased by 1ppt will the money taken from Hong Kong.
Monday, June 22, 2009
US market this week
Recent economic development and central bank statements added to signs that the worst is over, but the road to a sustainable recovery is still bumpy and long. Equities declined for the week, on the back of uncertainties arising from the US government’s proposed regulatory reform and S&P downgrades on 18 US banks. Worries that the emergence of commodity-price inflation also threatens to stunt economic recovery and constrain corporate-profit growth.
· This week, FOMC rate decision will take place Thursday, as well as the third and final round of US Q1 GDP estimates. A weaker than expected GDP could be market-moving; GDP is forecasted to go unrevised at -5.7% in 1Q (4Q: -6.3%). Other significant indicators to watch out for include home sales, personal spending and Uni of Michigan sentiments. There will only be one economic release for Malaysia this week, namely foreign reserves as at 15 Jun.
Malaysian Stocks Valuation Has Moved 'Too Fast'
By Chan Tien Hin
June 22 (Bloomberg) -- Malaysia's stocks have risen "too
far, too fast" given that corporate earnings will shrink this
year, Maybank Investment Bank Bhd. said in a strategy report.
"The market rally has stretched valuations to levels
unjustified by earnings growth," Andrew Lee, an analyst at
Maybank Investment, wrote in the report. "An economic and
corporate earnings recovery is likely to be anemic."
A "fair valuation" for the market by the end of 2009
would be at a price-to-earnings multiple of 13 to 14 times,
representing an index level of 970 to 1,040, the report said.
The benchmark Kuala Lumpur Composite Index dropped as much as
1.8 percent to 1,040.40 and traded at 1,051.82 as of 12:12 p.m.
local time, set for the lowest close since May 29.
The Malaysian index has risen 23 percent in the past three
months, after Prime Minister Najib Razak, who took office on
April 3, announced stimulus plans valued at 67 billion ringgit
($19 billion) to help resuscitate economic growth.
Malaysia's economy shrank 6.2 percent last quarter and will
probably post a "similar" contraction in the three months
ending June as exports slump amid the global recession, the
central bank said last month.
Corporate profits in the Southeast Asian country will
shrink 8.4 percent this year, pricing the market at 15.6 times
earnings, Lee said in the report. Earnings will grow 9.8 percent
in 2010, he said.
"It is difficult to justify equities trading" at a 15.6
times price-to-earnings multiple "if the prospective growth is
on average less than 1 percent for each of the next two years,"
Lee said. Malaysia is the second-most expensive market in the
region based on both 2009 and 2010 earnings, yet has the second-
lowest prospective growth in 2010, he said.
To be sure, "there is money to be made yet in equities"
as Najib's "new initiatives may inject positive sentiment,"
Lee said. Najib will make "significant announcements" related
to his plans to ease restrictions on foreign investment, the
nation's stock exchange said on June 16.
June 22 (Bloomberg) -- Malaysia's stocks have risen "too
far, too fast" given that corporate earnings will shrink this
year, Maybank Investment Bank Bhd. said in a strategy report.
"The market rally has stretched valuations to levels
unjustified by earnings growth," Andrew Lee, an analyst at
Maybank Investment, wrote in the report. "An economic and
corporate earnings recovery is likely to be anemic."
A "fair valuation" for the market by the end of 2009
would be at a price-to-earnings multiple of 13 to 14 times,
representing an index level of 970 to 1,040, the report said.
The benchmark Kuala Lumpur Composite Index dropped as much as
1.8 percent to 1,040.40 and traded at 1,051.82 as of 12:12 p.m.
local time, set for the lowest close since May 29.
The Malaysian index has risen 23 percent in the past three
months, after Prime Minister Najib Razak, who took office on
April 3, announced stimulus plans valued at 67 billion ringgit
($19 billion) to help resuscitate economic growth.
Malaysia's economy shrank 6.2 percent last quarter and will
probably post a "similar" contraction in the three months
ending June as exports slump amid the global recession, the
central bank said last month.
Corporate profits in the Southeast Asian country will
shrink 8.4 percent this year, pricing the market at 15.6 times
earnings, Lee said in the report. Earnings will grow 9.8 percent
in 2010, he said.
"It is difficult to justify equities trading" at a 15.6
times price-to-earnings multiple "if the prospective growth is
on average less than 1 percent for each of the next two years,"
Lee said. Malaysia is the second-most expensive market in the
region based on both 2009 and 2010 earnings, yet has the second-
lowest prospective growth in 2010, he said.
To be sure, "there is money to be made yet in equities"
as Najib's "new initiatives may inject positive sentiment,"
Lee said. Najib will make "significant announcements" related
to his plans to ease restrictions on foreign investment, the
nation's stock exchange said on June 16.
Sunday, June 14, 2009
U.S. Said to Plan Approval Today for 10 Banks to Repay TARP
By Robert Schmidt and Christine Harper
June 9 (Bloomberg) -- The Treasury is preparing to
announce today it will let 10 banks buy back government shares,
people familiar with the matter said, signaling confidence some
of the largest U.S. lenders won't again need a taxpayer rescue.
JPMorgan Chase & Co. is among those cleared to repay
Troubled Asset Relief Program funds, a person said on condition
of anonymity. Goldman Sachs Group Inc., American Express Co.
and State Street Corp. are also among those that have sold
shares and debt unguaranteed by the government, demonstrating
they can raise funds without federal aid.
The approvals may relieve investor concerns about
government ownership after a popular outcry against bailouts
for Wall Street. At the same time, they contrast with warnings
from International Monetary Fund chief Dominique Strauss-Kahn
and others that the financial system remains distressed.
"None of this means that we're out of the woods yet;
there's a lot of work that the banks have to do and the
regulators have to do," said Richard Spillenkothen, a director
at Deloitte & Touche LLP in New York who served as the Federal
Reserve's head of bank supervision from 1991 until 2006.
The Fed yesterday also approved capital-raising plans at
the 10 banks judged to have shortfalls after last month's
stress tests on the 19 biggest U.S. lenders. That list includes
Citigroup Inc. and Bank of America Corp., firms that have had
more than one round of federal rescues.
Compensation Guidelines
On June 10, the Treasury will likely release its
guidelines for executive compensation at banks that retain
government shares, a person familiar with the matter said.
Treasury Secretary Timothy Geithner may be asked about the
TARP repayments, compensation rules and the outlook for
financial markets in a Senate Appropriations Committee hearing
at 10:30 a.m. today in Washington.
Nine of the 19 banks subjected to stress tests by U.S.
regulators were told last month they needed no additional
capital to withstand a deeper economic downturn. Officials
later told some of the banks, including JPMorgan and American
Express, they still needed to boost their common equity.
The number of banks likely to be allowed to retire
government shares indicates the Treasury will receive more than
the $25 billion of repayments that the department anticipated
this year. JPMorgan alone received $25 billion of TARP funds
last year and Goldman Sachs got $10 billion. American Express
has received $3.4 billion, Bank of New York Mellon Corp. has
taken $3 billion and State Street has $2 billion.
Morgan Stanley
Morgan Stanley has raised $6.8 billion in two separate
common equity offerings since May 7, exceeding the $1.8 billion
it was required to raise by the stress tests, as the company
sought to be included in the first round of banks allowed to
repay the TARP money. Morgan Stanley received $10 billion from
program last year.
The repayments come almost eight months after the Treasury,
seeking to quell market panic that followed the Sept. 15
bankruptcy of Lehman Brothers Holdings Inc., provided nine
banks with the first $125 billion of $700 billion in money
allocated to the TARP.
Banks have unveiled plans to raise a total of $100.2
billion since the stress tests found 10 of the 19 biggest
lenders needed $74.6 billion in additional capital buffers.
Financial shares have surged on rising confidence that the
financial crisis is past its worst and that banks are viable
enough to survive the deepest recession in half a century. The
Standard & Poor's 500 Financials Index has gained 49 percent in
the past three months.
Retire Warrants
Even after paying back the preferred shares issued to the
government, banks that took TARP money will still need to
retire warrants given to the government to allow taxpayers a
potential return on their investment.
Herb Allison, the Obama administration's nominee to run
TARP, told lawmakers last week that the Treasury would soon
announce details of its policy handling the warrants. The total
value of the warrants is about $5 billion, according to
Treasury calculations made last month.
Some analysts estimate that banks will still face mounting
losses as defaults on credit cards rise and commercial property
values sink.
Jan Hatzius, chief U.S. economist at Goldman Sachs, said
at a conference in Montreal yesterday that "U.S. banks
probably need to recognize another $500 billion or so in
losses."
Strauss-Kahn, managing director of the IMF, said at the
conference that banks must disclose any losses on their balance
sheets to help restore confidence in the global financial
system.
"If the banking crisis is not resolved, growth will not
come," Strauss-Kahn, speaking in French, told reporters after
his speech. "What strikes me today is that the credit market
is not yet functioning normally."
June 9 (Bloomberg) -- The Treasury is preparing to
announce today it will let 10 banks buy back government shares,
people familiar with the matter said, signaling confidence some
of the largest U.S. lenders won't again need a taxpayer rescue.
JPMorgan Chase & Co. is among those cleared to repay
Troubled Asset Relief Program funds, a person said on condition
of anonymity. Goldman Sachs Group Inc., American Express Co.
and State Street Corp. are also among those that have sold
shares and debt unguaranteed by the government, demonstrating
they can raise funds without federal aid.
The approvals may relieve investor concerns about
government ownership after a popular outcry against bailouts
for Wall Street. At the same time, they contrast with warnings
from International Monetary Fund chief Dominique Strauss-Kahn
and others that the financial system remains distressed.
"None of this means that we're out of the woods yet;
there's a lot of work that the banks have to do and the
regulators have to do," said Richard Spillenkothen, a director
at Deloitte & Touche LLP in New York who served as the Federal
Reserve's head of bank supervision from 1991 until 2006.
The Fed yesterday also approved capital-raising plans at
the 10 banks judged to have shortfalls after last month's
stress tests on the 19 biggest U.S. lenders. That list includes
Citigroup Inc. and Bank of America Corp., firms that have had
more than one round of federal rescues.
Compensation Guidelines
On June 10, the Treasury will likely release its
guidelines for executive compensation at banks that retain
government shares, a person familiar with the matter said.
Treasury Secretary Timothy Geithner may be asked about the
TARP repayments, compensation rules and the outlook for
financial markets in a Senate Appropriations Committee hearing
at 10:30 a.m. today in Washington.
Nine of the 19 banks subjected to stress tests by U.S.
regulators were told last month they needed no additional
capital to withstand a deeper economic downturn. Officials
later told some of the banks, including JPMorgan and American
Express, they still needed to boost their common equity.
The number of banks likely to be allowed to retire
government shares indicates the Treasury will receive more than
the $25 billion of repayments that the department anticipated
this year. JPMorgan alone received $25 billion of TARP funds
last year and Goldman Sachs got $10 billion. American Express
has received $3.4 billion, Bank of New York Mellon Corp. has
taken $3 billion and State Street has $2 billion.
Morgan Stanley
Morgan Stanley has raised $6.8 billion in two separate
common equity offerings since May 7, exceeding the $1.8 billion
it was required to raise by the stress tests, as the company
sought to be included in the first round of banks allowed to
repay the TARP money. Morgan Stanley received $10 billion from
program last year.
The repayments come almost eight months after the Treasury,
seeking to quell market panic that followed the Sept. 15
bankruptcy of Lehman Brothers Holdings Inc., provided nine
banks with the first $125 billion of $700 billion in money
allocated to the TARP.
Banks have unveiled plans to raise a total of $100.2
billion since the stress tests found 10 of the 19 biggest
lenders needed $74.6 billion in additional capital buffers.
Financial shares have surged on rising confidence that the
financial crisis is past its worst and that banks are viable
enough to survive the deepest recession in half a century. The
Standard & Poor's 500 Financials Index has gained 49 percent in
the past three months.
Retire Warrants
Even after paying back the preferred shares issued to the
government, banks that took TARP money will still need to
retire warrants given to the government to allow taxpayers a
potential return on their investment.
Herb Allison, the Obama administration's nominee to run
TARP, told lawmakers last week that the Treasury would soon
announce details of its policy handling the warrants. The total
value of the warrants is about $5 billion, according to
Treasury calculations made last month.
Some analysts estimate that banks will still face mounting
losses as defaults on credit cards rise and commercial property
values sink.
Jan Hatzius, chief U.S. economist at Goldman Sachs, said
at a conference in Montreal yesterday that "U.S. banks
probably need to recognize another $500 billion or so in
losses."
Strauss-Kahn, managing director of the IMF, said at the
conference that banks must disclose any losses on their balance
sheets to help restore confidence in the global financial
system.
"If the banking crisis is not resolved, growth will not
come," Strauss-Kahn, speaking in French, told reporters after
his speech. "What strikes me today is that the credit market
is not yet functioning normally."
Wednesday, June 10, 2009
Bull-Market Story Awaits Goldman Sachs Blessing: Matthew Lynn
une 9 (Bloomberg) -- Plenty of people will dismiss the
recent stock-price recovery as a dead-cat bounce. Even more will
call it a bear-market rally.
Yet as equity prices creep higher, the bears may soon have
to concede defeat. The Standard & Poor’s 500 Index has gained
about 15 percent since early December and most other major
benchmarks have made solid gains in the same period. At some
point, it will become known as the 2009-2013 bull market.
Only one thing is missing: a story. A real bull market
needs a simple narrative that convinces investors that equities
are worth double what they were valued at only a few months ago.
So what could be the story this time around? There are four
plausible candidates: rising savings, accelerating inflation, a
takeover boom, and the scarcity of capital.
Markets need stories as much as any Hollywood scriptwriter
does. Stock prices go up, down and sideways for reasons we will
probably never quite figure out. Human brains find that hard to
handle, so we like an easy explanation that puts things in
order. Chaos and randomness are the scary alternatives.
During the bull market of the 1990s, we had the dot-com,
New Economy story to explain the surge in stock values.
During the 2003-2007 bull market, we had globalization and
the emerging markets of Brazil, Russia, India and China.
And for the next bull market? Here are four “stories”
that could be used to justify it.
Save Money
The Savings Story: People are putting money aside again.
The U.S. savings rate in April jumped to 5.7 percent, the
highest rate for 14 years. Michael Darda, chief economist at MKM
Partners LP in Greenwich, Connecticut, estimates it will reach 9
percent, compared with a low of minus 2.7 percent at the peak of
the housing boom. There’s no mystery about that. Households,
much like banks, are repairing their balance sheets, and they
can only do that by saving more.
The same will probably be true of other heavily indebted
economies such as Britain. All that saved money has to go
somewhere. With interest rates close to zero, there’s no point
keeping it in the bank. Instead, a wall of money is about to
descend on the market, creating huge demand for equities.
The Inflation Story: Central banks around the world are
following the policies of “quantitative easing,” or what used
to be known as printing money. At a certain point, it is bound
to cause high inflation rates, or at the very least an investor
fear of surging prices. It may already have done so.
Real Assets
You don’t want to be holding cash while inflation makes it
less valuable by the day, and central banks keep creating more
of the stuff. Instead, investors will switch into real assets
that can hold their value, such as stocks, real estate or
commodities. Equities are the simplest to trade, and more demand
equals higher prices.
The Takeover Story: The last rally was all about the
emergence of the BRIC economies. This one will be about them
buying North American and European assets. The rising BRIC
giants are going to need technology and brand names, and they
will want to buy them. That is already happening -- Russian
interests just acquired a big stake in General Motors Corp.’s
European unit Adam Opel GmbH.
Expect a massive takeover boom as the BRIC giants clamor
for the prizes. They will end up paying a premium for trophy
assets, another good reason to push up the value of equities.
Access to Capital
The Shareholder Story: Over the last decade, chief
executive officers loved to talk about shareholder value. Mostly
it was just nonsense. CEOs didn’t need stockholders because
capital was easily accessed from banks or the bond market. If
that didn’t work, they could get a friendly private-equity firm
to buy them out, or pay a crazy price for a unit. Shareholders
were about as influential as the cleaners or the secretaries,
and ranked about as high in corporate priorities.
Now that is about to change. In the coming years, capital
will be in short supply. The only place that companies will be
able to get it will be from their shareholders. In return, they
will have to be rewarded with higher dividends and stock prices.
Now all we need is for Goldman Sachs Group Inc. to pick one
of those stories, put it into every research note, and this bull
market can get some real momentum.
Who knows, investment bankers may be out buying Bentleys
again this year if this rally has legs.
recent stock-price recovery as a dead-cat bounce. Even more will
call it a bear-market rally.
Yet as equity prices creep higher, the bears may soon have
to concede defeat. The Standard & Poor’s 500 Index has gained
about 15 percent since early December and most other major
benchmarks have made solid gains in the same period. At some
point, it will become known as the 2009-2013 bull market.
Only one thing is missing: a story. A real bull market
needs a simple narrative that convinces investors that equities
are worth double what they were valued at only a few months ago.
So what could be the story this time around? There are four
plausible candidates: rising savings, accelerating inflation, a
takeover boom, and the scarcity of capital.
Markets need stories as much as any Hollywood scriptwriter
does. Stock prices go up, down and sideways for reasons we will
probably never quite figure out. Human brains find that hard to
handle, so we like an easy explanation that puts things in
order. Chaos and randomness are the scary alternatives.
During the bull market of the 1990s, we had the dot-com,
New Economy story to explain the surge in stock values.
During the 2003-2007 bull market, we had globalization and
the emerging markets of Brazil, Russia, India and China.
And for the next bull market? Here are four “stories”
that could be used to justify it.
Save Money
The Savings Story: People are putting money aside again.
The U.S. savings rate in April jumped to 5.7 percent, the
highest rate for 14 years. Michael Darda, chief economist at MKM
Partners LP in Greenwich, Connecticut, estimates it will reach 9
percent, compared with a low of minus 2.7 percent at the peak of
the housing boom. There’s no mystery about that. Households,
much like banks, are repairing their balance sheets, and they
can only do that by saving more.
The same will probably be true of other heavily indebted
economies such as Britain. All that saved money has to go
somewhere. With interest rates close to zero, there’s no point
keeping it in the bank. Instead, a wall of money is about to
descend on the market, creating huge demand for equities.
The Inflation Story: Central banks around the world are
following the policies of “quantitative easing,” or what used
to be known as printing money. At a certain point, it is bound
to cause high inflation rates, or at the very least an investor
fear of surging prices. It may already have done so.
Real Assets
You don’t want to be holding cash while inflation makes it
less valuable by the day, and central banks keep creating more
of the stuff. Instead, investors will switch into real assets
that can hold their value, such as stocks, real estate or
commodities. Equities are the simplest to trade, and more demand
equals higher prices.
The Takeover Story: The last rally was all about the
emergence of the BRIC economies. This one will be about them
buying North American and European assets. The rising BRIC
giants are going to need technology and brand names, and they
will want to buy them. That is already happening -- Russian
interests just acquired a big stake in General Motors Corp.’s
European unit Adam Opel GmbH.
Expect a massive takeover boom as the BRIC giants clamor
for the prizes. They will end up paying a premium for trophy
assets, another good reason to push up the value of equities.
Access to Capital
The Shareholder Story: Over the last decade, chief
executive officers loved to talk about shareholder value. Mostly
it was just nonsense. CEOs didn’t need stockholders because
capital was easily accessed from banks or the bond market. If
that didn’t work, they could get a friendly private-equity firm
to buy them out, or pay a crazy price for a unit. Shareholders
were about as influential as the cleaners or the secretaries,
and ranked about as high in corporate priorities.
Now that is about to change. In the coming years, capital
will be in short supply. The only place that companies will be
able to get it will be from their shareholders. In return, they
will have to be rewarded with higher dividends and stock prices.
Now all we need is for Goldman Sachs Group Inc. to pick one
of those stories, put it into every research note, and this bull
market can get some real momentum.
Who knows, investment bankers may be out buying Bentleys
again this year if this rally has legs.
Tuesday, June 9, 2009
Asian Stocks Have Yet to Reflect Recovery, Mowat Says
By Bloomberg News
June 8 (Bloomberg) -- Asian stocks have yet to reflect
expectations for a “powerful, synchronized” recovery in the
global economy, JPMorgan Chase & Co.’s chief Asia strategist
Adrian Mowat said in a Bloomberg Television interview today.
The global economy will rebound on record fiscal stimulus
by governments worldwide and low interest rates, he said, adding
that airlines and travel industry stocks are among those that
will do “very well.”
The MSCI Asia Pacific Excluding Japan Index is trading 42
percent lower than its peak in October 2007. The gauge has
advanced 34 percent this year.
Asian stocks “have yet to price in a recovery in trade
that’s going to be powerful, synchronized,” said Mowat.
“Markets are still bearish on global growth, on emerging
markets growth.”
MSCI’s Asian ex-Japan index will rise to 400 by the end of
the year, Mowat wrote in a June 1 note. That would be a 21
percent gain from last week’s close and a 62 percent annual
rally, the best since 1993.
The rally this year means the MSCI gauge is now valued at
18.9 times reported earnings, more than its five-year average of
14 times, according to Bloomberg data.
Templeton Asset Management Ltd.’s Mark Mobius said June 4
the money supply is set to “explode” worldwide and boost
emerging-market stocks as central banks pump cash into the
financial system to counter the global recession.
Taiwan, South Korea
Mowat said he’s “still positive” on China stocks. Markets
including Taiwan, South Korea and Mexico may offer “higher
returns,” he added.
The rally in China’s stocks may end as corporate profits
fail to recover, Xue Lan, head of China research at Citigroup
Inc. said in a June 4 Bloomberg Television interview.
The MSCI China Index of mostly Hong Kong-traded Chinese
stocks has rallied 34 percent in the second quarter, compared
with 15 percent for South Korea’s Kospi Index, 27 percent for
the Mexico Bolsa Index and 28 percent by Taiwan’s Taiex Index.
George Soros, chairman and founder of Soros Fund Management
LLC, said China will be the first country to recover from the
global financial crisis, the Shanghai Daily reported today.
June 8 (Bloomberg) -- Asian stocks have yet to reflect
expectations for a “powerful, synchronized” recovery in the
global economy, JPMorgan Chase & Co.’s chief Asia strategist
Adrian Mowat said in a Bloomberg Television interview today.
The global economy will rebound on record fiscal stimulus
by governments worldwide and low interest rates, he said, adding
that airlines and travel industry stocks are among those that
will do “very well.”
The MSCI Asia Pacific Excluding Japan Index is trading 42
percent lower than its peak in October 2007. The gauge has
advanced 34 percent this year.
Asian stocks “have yet to price in a recovery in trade
that’s going to be powerful, synchronized,” said Mowat.
“Markets are still bearish on global growth, on emerging
markets growth.”
MSCI’s Asian ex-Japan index will rise to 400 by the end of
the year, Mowat wrote in a June 1 note. That would be a 21
percent gain from last week’s close and a 62 percent annual
rally, the best since 1993.
The rally this year means the MSCI gauge is now valued at
18.9 times reported earnings, more than its five-year average of
14 times, according to Bloomberg data.
Templeton Asset Management Ltd.’s Mark Mobius said June 4
the money supply is set to “explode” worldwide and boost
emerging-market stocks as central banks pump cash into the
financial system to counter the global recession.
Taiwan, South Korea
Mowat said he’s “still positive” on China stocks. Markets
including Taiwan, South Korea and Mexico may offer “higher
returns,” he added.
The rally in China’s stocks may end as corporate profits
fail to recover, Xue Lan, head of China research at Citigroup
Inc. said in a June 4 Bloomberg Television interview.
The MSCI China Index of mostly Hong Kong-traded Chinese
stocks has rallied 34 percent in the second quarter, compared
with 15 percent for South Korea’s Kospi Index, 27 percent for
the Mexico Bolsa Index and 28 percent by Taiwan’s Taiex Index.
George Soros, chairman and founder of Soros Fund Management
LLC, said China will be the first country to recover from the
global financial crisis, the Shanghai Daily reported today.
Nobel Winner Krugman Sees U.S. Recession Ending Soon
2009-06-08
By Courtney Schlisserman
June 8 (Bloomberg) -- The U.S. economy probably will emerge
from the recession by September, Nobel Prize-winning economist
Paul Krugman said.
"I would not be surprised if the official end of the U.S.
recession ends up being, in retrospect, dated sometime this
summer," he said in a lecture today at the London School of
Economics. "Things seem to be getting worse more slowly.
There's some reason to think that we're stabilizing."
U.S. stocks erased an earlier decline after Krugman made
his comments. The Standard & Poor's 500 Stock Index was little
changed at 939.14 at 4:07 p.m. in New York after slumping as
much as 1.5 percent earlier, and the Dow Jones Industrial
Average gained 1.36 points to 8,764.49.
Krugman, a Princeton University economist, has warned
recently that the U.S. government hasn't done enough to help the
country's economy recover. Last month, at a conference in Abu
Dhabi, he said the fiscal stimulus is "only enough to mitigate
the slump, not induce recovery."
The National Bureau of Economic Research, based in
Cambridge, Massachusetts, is the official arbiter of U.S.
recessions and expansions. Last week, Robert Hall, the head of
the NBER's business-cycle-dating committee, said it's "way too
early" to say the contraction is over.
The U.S. has been in a recession since December 2007, and
the NBER may take months to decide when a trough has been
reached. Recent reports have shown an easing of declines in
industrial production and other measures that the group reviews
when determining whether the economy is in a recession.
Unemployment to Rise
Even with a recovery, "almost surely unemployment will
keep rising for a long time and there's a lot of reason to think
that the world economy is going to stay depressed for an
extended period," Krugman said.
The unemployment rate jumped to 9.4 percent in May, the
highest since 1983, partly reflecting more people joining the
labor force to look for work.
The U.S. Federal Reserve's efforts to stabilize markets --
measures that have swelled the central bank's balance sheet --
have helped, Krugman said. "A lot of the spreads in the markets
have come down" and "the acute financial stuff seems to have
come to a halt," he said.
Fed officials lowered the benchmark interest rate to a
target range of zero to 0.25 percent in December and have
switched to using credit programs and outright purchases of
Treasuries, mortgage-backed securities and housing agency debt
as the main tools of monetary policy.
$2.31 Trillion
The balance sheet's size peaked at $2.31 trillion in
December. It has fluctuated around $2.1 trillion over the past
two months.
The Fed's swollen balance sheet is "a little alarming. In
the long run you really don't want the central banks to be so
involved in the business of lending," Krugman said. "But it's
arguably necessary" even if there are questions about "where
does it stop?"
By Courtney Schlisserman
June 8 (Bloomberg) -- The U.S. economy probably will emerge
from the recession by September, Nobel Prize-winning economist
Paul Krugman said.
"I would not be surprised if the official end of the U.S.
recession ends up being, in retrospect, dated sometime this
summer," he said in a lecture today at the London School of
Economics. "Things seem to be getting worse more slowly.
There's some reason to think that we're stabilizing."
U.S. stocks erased an earlier decline after Krugman made
his comments. The Standard & Poor's 500 Stock Index was little
changed at 939.14 at 4:07 p.m. in New York after slumping as
much as 1.5 percent earlier, and the Dow Jones Industrial
Average gained 1.36 points to 8,764.49.
Krugman, a Princeton University economist, has warned
recently that the U.S. government hasn't done enough to help the
country's economy recover. Last month, at a conference in Abu
Dhabi, he said the fiscal stimulus is "only enough to mitigate
the slump, not induce recovery."
The National Bureau of Economic Research, based in
Cambridge, Massachusetts, is the official arbiter of U.S.
recessions and expansions. Last week, Robert Hall, the head of
the NBER's business-cycle-dating committee, said it's "way too
early" to say the contraction is over.
The U.S. has been in a recession since December 2007, and
the NBER may take months to decide when a trough has been
reached. Recent reports have shown an easing of declines in
industrial production and other measures that the group reviews
when determining whether the economy is in a recession.
Unemployment to Rise
Even with a recovery, "almost surely unemployment will
keep rising for a long time and there's a lot of reason to think
that the world economy is going to stay depressed for an
extended period," Krugman said.
The unemployment rate jumped to 9.4 percent in May, the
highest since 1983, partly reflecting more people joining the
labor force to look for work.
The U.S. Federal Reserve's efforts to stabilize markets --
measures that have swelled the central bank's balance sheet --
have helped, Krugman said. "A lot of the spreads in the markets
have come down" and "the acute financial stuff seems to have
come to a halt," he said.
Fed officials lowered the benchmark interest rate to a
target range of zero to 0.25 percent in December and have
switched to using credit programs and outright purchases of
Treasuries, mortgage-backed securities and housing agency debt
as the main tools of monetary policy.
$2.31 Trillion
The balance sheet's size peaked at $2.31 trillion in
December. It has fluctuated around $2.1 trillion over the past
two months.
The Fed's swollen balance sheet is "a little alarming. In
the long run you really don't want the central banks to be so
involved in the business of lending," Krugman said. "But it's
arguably necessary" even if there are questions about "where
does it stop?"
Monday, June 8, 2009
Tuesday, June 2, 2009
CIMB raises year-end KLCI target
MALAYSIA'S key stock index may rise to a 12-month high by year-end, said CIMB Investment Bank Bhd, which recommended investors buy “bombed-out cyclical” stocks in construction, building materials and property.
Companies reported better-than-expected earnings in the first quarter, CIMB said in a report today. Earnings will grow a “stronger” 19 per cent in 2010 after shrinking 5.7 per cent this year, it said.
CIMB raised the year-end Kuala Lumpur Composite Index target to 1,220 from 1,060, the highest since June 18. The gauge, up 21 per cent this year, gained 0.2 per cent to 1,063.76 as of 11:53 am local time.
“There is a good chance we are past the worst,” said Terence Wong, an analyst at CIMB. “The gradual reinvestment of institutional funds’ spare cash will sustain the market rebound in the second half” of 2009, it said.
More than RM20 billion (US$5.7 billion) of spending on infrastructure will help spur a recovery in the economy with “pump priming” to intensify in the second half, CIMB said. The government is betting on two stimulus plans totaling RM67 billion to reinvigorate Southeast Asia’s third-largest economy as it heads for its first recession in a decade.
The central bank has said previous interest-rate cuts and the stimulus plans will help revive growth in the second quarter.
“Domestic catalysts” and “huge pools of liquidity not yet deployed by local and foreign funds should keep the medium- term momentum strong, at least” in the second half, it said.
Market Rebound
Property stocks including SP Setia Bhd “should outperform” in this market rebound as they tend to move in tandem with the stock market. Further, they were the worst performers last year, CIMB said.
Oil and gas-related stocks will also gain as rising crude oil prices spur more exploration contracts, increasing the demand for service providers such as SapuraCrest Petroleum Bhd, it said.
Malaysian stocks have become cheaper, it added. The “resurgence” of regional markets has lowered Malaysia’s price- to-earnings multiple premium over the region from up to 45 per
cent earlier in the year to as low as 14 per
cent, the report said. -- Bloomberg
Companies reported better-than-expected earnings in the first quarter, CIMB said in a report today. Earnings will grow a “stronger” 19 per cent in 2010 after shrinking 5.7 per cent this year, it said.
CIMB raised the year-end Kuala Lumpur Composite Index target to 1,220 from 1,060, the highest since June 18. The gauge, up 21 per cent this year, gained 0.2 per cent to 1,063.76 as of 11:53 am local time.
“There is a good chance we are past the worst,” said Terence Wong, an analyst at CIMB. “The gradual reinvestment of institutional funds’ spare cash will sustain the market rebound in the second half” of 2009, it said.
More than RM20 billion (US$5.7 billion) of spending on infrastructure will help spur a recovery in the economy with “pump priming” to intensify in the second half, CIMB said. The government is betting on two stimulus plans totaling RM67 billion to reinvigorate Southeast Asia’s third-largest economy as it heads for its first recession in a decade.
The central bank has said previous interest-rate cuts and the stimulus plans will help revive growth in the second quarter.
“Domestic catalysts” and “huge pools of liquidity not yet deployed by local and foreign funds should keep the medium- term momentum strong, at least” in the second half, it said.
Market Rebound
Property stocks including SP Setia Bhd “should outperform” in this market rebound as they tend to move in tandem with the stock market. Further, they were the worst performers last year, CIMB said.
Oil and gas-related stocks will also gain as rising crude oil prices spur more exploration contracts, increasing the demand for service providers such as SapuraCrest Petroleum Bhd, it said.
Malaysian stocks have become cheaper, it added. The “resurgence” of regional markets has lowered Malaysia’s price- to-earnings multiple premium over the region from up to 45 per
cent earlier in the year to as low as 14 per
cent, the report said. -- Bloomberg
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