trader's market commentary

The light at the end of the tunnel?

Today, CAF, the shanghai index’s rep in US, closed at $32.22, above Feb 26’s opening of 31.44.

CAF is one of my recommended bargains for readers to load during the current correction, see my posts on 022707, 030107 and other posts, marketreflections.com.

Also coming out of the current trough today is DAX, German’s stock index, a relative of relative of Chinese communist uncle, via its “East German” connection.

The strong tailwind for US equities from overseas is probably more of “animal spirits” than anything else. The housing problem and its impact on US economy are still “on going” as Fed said, and making it worse, Fed is not going to reduce rate anytime soon. In terms of GDP and earning growth estimate, we have been going “lower high and lower low”. In terms of inflation, employment, capacity utilization rate, the “support line” seems very hard to break.

Nevertheless, market is always a forward information processing system, supposedly 6 months ahead. In that sense, I still think the worst has been priced in around March 5, 2007 in equity market, see my previous posts on marketreflections.com.

The “bottom” was also confirmed in bond market, particularly by the price of admission ticket to “safe heaven”, i.e., 2Y and 10Y Treasury, when their prices hit all time high YTD, on March 5 and March 14. You have to make people extremely fearful to pay that kind of price.

“Bottom” may have been reached, but the current trough still has length to go, given the picture on FA side.

How long? Supposedly Ben is counting on spring times, when the new home residential construction may have a chance to “break ice”, and really get going in summer. marketreflections.com
 
Will Fed burn Bill Gross again?

KOSPI Composite Index (S.Korea) last night came out of the trough.

So, after Shanghai index corrected the “correction” later March 2007, Dax followed yesterday, and Kospi followed last night.

Against strong overseas headwind, it’s very difficult for US bears to push down equity price in an any meaningful way.

For bulls, the headwind comes from weak economic data points, almost one after another.

The ISM report today was the worst since mid-03:
The business activity index from the ISM non-manufacturing survey fell sharply to 54.3 in February, from 59.0 in January, and this index has not been below the breakeven point of 50 since March 2003, then with a level of 46.3.


Nevertheless, Ben and his Fed comrades seem pretty cool, with their composure well maintained, despite of the “wolf is coming” type of crying from Gross and his alike, and the constant flow of bad economic data.

Today, Fed’s Fisher noted that longer dated interest rates remain low due to foreign confidence in the economy & the USD. So, Fed’s hands are not really tied by USD and US bond market: Fed is confident that capital and support for USD will come in from Asian countries, and Fed is comfortable with where the rate is now. marketreflections.com

Supposedly, Greenspan is more intuitive and Ben is more analytical. Ben is said to have a big team developing and using a fancy macro model to monitor US economy very closely. Does Ben have an information edge over Bill Gross’s Pimco? If so, Gross’s bet that Fed will reduce rate several times from this year on may burn him again, just like last year as reported.

Tomorrow: the MPC policy statement

Friday: payrolls
 
“The way we were”

A nice song sang by Barbara Streisand in a movie with story about American young intellectuals in 1960’s if I remember correctly.

“If memory is too painful, we simply choose to forget”, the song says.

Memory, painful or not, is however hard to forget.

According to memory, the cyclical force, already seen in the housing sector, is supposed to bring down US economy in a hard landing fashion, and a bear market as a consequence;

According to memory, the S&P’s has been due for a 10% correction for long time, even the current market is a bull market.

May be “things are different this time”.

Today, Spain’s stock index came out of the trough, followed China, German, and Korea, and all these made it very difficult for US bears to do more “correcting”.



Besides, from Fed’s point of view, the economy seems doing just fine:

The Friday’s payroll report is predicted to have about 135,000 non farm payroll added for 032007, and that may be just as many as needed by Joes.

“Chicago Fed President Michael Moskow estimates the sustainable rate of labor force growth has dropped to about 100,000, from 150,000 a month in the last decade.

That may be one reason that unemployment remains near the five-year low of 4.4 percent reached in October.”(Bloomberg.com).

As long as Joe has a job, he is going to carry his house, with or without a positive return.

Internationally, “globalization” has changed the world economic landscape dramatically.

According to Steven roach,

“Global trade is now closing in on a record 31% of world GDP – up 10 percentage points from the mid-1990s and double the pre-globalization ratio of the mid-1970s”.

And more profits for S&P 500 and its alike:
“For the “G-7-plus” – the US, Japan, Canada, the UK, and the Euro-zone – the share of national income going to capital currently stands at a record high of 16% whereas the share going to labour stands at a record low of 54%.”

Still, Japanese “labour” has plenty of “savings”.

According to MS:

“Japanese HHs have massive financial holdings: close to US$13 trillion in gross terms and US$10 trillion in net terms. Japanese HHs now hold close to US$13 trillion worth of financial assets, with a net asset position of US$9.6 trillion, which is roughly equivalent to around 220% of GDP. While the economy as a whole, including all seven key sectors, owns nearly US$80 trillion of assets, the Japanese HHs have the largest net asset position of all. Thus, the HH sector is most important for the purpose of thinking about the capacity of capital outflows from a sector that is most likely not bogged down by concerns about asset-liability mismatch.”

“Japanese HHs have a cash-rich portfolio. Incredibly, 50.5% of Japanese HHs’ assets are held in currency and deposits; the comparable figure in the US is around 10%. Direct JGB holdings account for 2.1% and equities account for 11.9% of retail investors’ portfolios. Another 25.9% are held in insurance and pension reserves, which, in turn, are mostly invested in bonds and equities. In any case, Japanese HHs’ cash holdings are still meaningfully larger than the total holdings of securities at around 40.0%, excluding investment trust beneficiary certificates. (The comparable figure for the US is 83%, based on the Fed’s Flow of Funds data.) This suggests to me that the current level of risk-tolerance of Japan’s HHs is still extraordinarily low, and has scope to increase in the future.”

“Japanese investors’ direct holdings of foreign currency assets are very low. Japanese HHs’ direct holdings of foreign securities account for only 0.5% of their total wealth. Even the economy-wide average of 5.5% is rather low. Adding on top of these figures the foreign currency cash deposits, the Japanese HHs hold less than 1% of their financial wealth directly in foreign assets, and the economy as a whole has only about 6.1% directly held in non-JPY assets.

Financial institutions may have raised their non-JPY asset holdings, on behalf of the Japanese HHs. The BoJ’s Flow of Funds data don’t offer new information on the non-JPY asset holdings by Japanese financial institutions. What is reported is that investment trust funds have grown by around US$300 billion in size (¥33.6 trillion) in the last two years. A good portion of this increase may have come from the foreign currency component”

“The ‘JPY carry trades’ became especially popular toward the end of 2005, when it, ironically, became clear that the BoJ was preparing the market to terminate QE (quantitative easing) and ZIRP (zero interest rate policy). While ‘JPY carry trades’ are clearly an important factor keeping JPY weak now, it is not clear why they were not a factor prior to 2005, when the JPY’s yield deficits were also quite large against several currencies. I suspect that there have been both cyclical and structural factors that triggered such a shift in risk-taking. One of the possible explanations of a structural shift in risk-taking could be demographics, whereby Japan’s ageing population has finally realized that a relatively straightforward way to help finance their lengthening retirements (as longevity improves and workers retire as scheduled) is to deploy cash to riskier assets.”

“There is significant potential for Japan’s retail sector to continue to raise its investment in risky assets in general and non-JPY assets in particular. The sector’s cash holdings of 50% and securities holdings of 40% of its total financial wealth are very puzzling (the figures are 10% and 83%, respectively in the US) and could potentially rise sharply. The possibility that the Japanese investor base may be undergoing a structural shift may pose a lingering threat to the JPY. Capital outflows from Japan could continue to over-rule economic fundamentals and keep the JPY under-valued.”

So, the financial market today is driven by not only “macros”, but also “liquidity”.

from daily market commentary at marketreflections.com
 
Bad is ok , worst is just bad, all messed up

By bears, possibly, in terms of market’s reaction to the economic data, including tomorrow’s payroll number.

According to ML, many hedge funds and institutions have piled up huge short positions on US equities and USD, betting their going down further.

Bears’ script of “macro play”: cyclical force ignites subprime, which will make housing melt down further and spread into other parts of US economy, and with a US recession, the world economy is going to struggle, plus the risk aversion and unwinding of yen carry trade, and at least a 10% correction, if not a start of bear market for equities.

The script probably worked very well for some bears right after Feb 27, 2007, but it may not work any more.

Bulls, already caged in the current trough, are counting on Joes, and the bulls’ script:

Every month US economy generates about 135k jobs (estimate for 032007), and 135k may well be roughly the numbers of new Joes coming to workforce every month. So as long as all old and new Joes have jobs, they will work, live, and spend; and they are not going to put their houses on market, even the house may be a negative carry per Gross’ calculation.

In that sense, tomorrow’s payroll number has to be really worse to be “bad”, and a “bad” number may be even an “ok” to the market.

In my previous script, I had said that during a correction, bulls are on “trial” in terms of proving that stocks are still worth “carry” on FA side, and bulls are “guilty” unless proven otherwise.

Now, bears are in for a mini TA trial:

Although there may be no directional and institutional buying of equities until real buying signals come out of FA side, bears have to worry about their increasingly vulnerable short positions, at least TA and short-term wise.

Short term, market has already “corrected”, and bulls are kind of like “dead pigs are not fearful of getting burned by the boiling hot water”, in Chinese saying. So, unless some really bad economic data comes out, and which had not been priced in the panic selling around 03052007, market is kind of saying to bears: “now what?” In that sense, bears may have “overshorted” the market.

Some weak bears may not be able to stand this mini TA trial, and start to cover their short positions, particularly after seeing China, German, S. Korea, Spain stock indexes already came out of the “trough”.

This kind of short squeeze may be what is behind the market’s recent rally of unimpressed volumes. And next week, if FTSE, the Dow’s British cousin goes up another 30 points, like it did today, and come out of the “trough”, the US bears are going to be further nervous about their short positions: cover or not cover?

from daily market commentary at marketreflections.com
 
US Joe vs. China Joe, S&P500 vs. CCP200

It is actually very interesting to look at the following numbers are
from US BLS (numbers are n thousands, 032007

Total civilian noninstitutional population: 231,034

Total civilian labor force: 152,979
Participation rate: 66.2

Employed: 146,254
Employment-population ratio: 62.6

Unemployed: 6,724
Unemployment rate 4.4

Of nonfarm payroll: 137,622
Construction 7,718 or 5.6%
Manufacturing: 14,103 or 10.25%
Service-providing: 115,092 or 83.6%



So, Fed is actually doing a fairly good job in terms of its employment mantra.

And we could probably make a few guesses with those numbers:

With pretty much every new and old Joe at work, it would be very unlikely to have a full scale “housing blow up” and consequently a recession, a bear market for stocks.

With US population trending an annual growth of 1% and payroll annual growth of 1%, productivity annual growth of 2%, US GDP would grow at about 3% over long term.




S&P500 earnings growth to be slowed



Assuming 2 1/2% inflation, revenue growth for large US companies would be about 5.5% nominal per year, about the same as nominal GDP growth rate of 5.5%.

If profit margins don’t slip, the 5.5% revenue growth will translate an equivalent 5.5% profit growth.

Margins are slipping: rising labor costs and slower productivity growth are now pushing unit labor costs higher. As the cost of producing each unit of output increases, companies are pressured to either raise prices or accept lower margins.

US business investment as driver for productivity growth has slowed

US business investment as % of GDP peaked in 2000 (6.7%, Department of Commerce), and it has fallen since then, to below 6% more recently.

M&A will help cutting cost and raise productivity to some extent, but not “shares buy back”.

Do all these mean a mid-single digit price gain for S&P500?

Let’s take a “bird view” of China’s numbers:

Population: 1.3B

Peasants: 0.9B, or 70%, with most of them “waiting to be employed”

Government/CCP employee: 40M, or 3%

Compared to their US counterpart, China’s government/CCP employee actually is “under represented”.
As to the measure of efficiency or “cost effectiveness”, that is really “beauty in the eyes of beholders”.

Aside from government/CCP employees, CCP also owns and manages about 200 state companies, and I call them CCP200.
Of course, there are disputes about the profitability and competitiveness of CCP200, just like there were “theories about China’s bankrupt state banks” a couple of years ago.

Given the special character of “Chinese socialist capitalism” (my term), it will be most likely a futile effort to evaluate these CCP200 with numbers even they are available.

Nevertheless, metrics is still needed for analysis and which may be just a “rule of thumb”:

One thing Steven Roach comes out with from his years of “China watch” is:

Never underestimate CCP.

And for those who may not know, CAF is some kind of proxy of CCP200, which has been one of my LT holdings and recommendations as such.

from daily market commentary at marketreflections.com
 
Roof over Joes” head: too heavy to support?

Bears and bulls actually share the same diet: Information. With a strong dose of information, bears and bulls produce adrenaline for their traders. With adrenaline, traders “fight or flight”.

Today’s two key FA information are Fed’s minutes and IMF’s report. Fed’s minutes made uncertainty even more uncertain, and IMF expected global growth to moderate to 4.9% in 2007 and 2008 from 5.4% in 2006, with US GDP growth slowing down to 2.2 % in 2007 from 3.3% in 2006.

Overall, IMF’s tone sounds similar to that of Fed, betting that US housing sector crisis would not have a full scale blow up, that US economy’s slowing down is more of a “midcycle slow-down than a full-blown recession”.

US economy all depends on Joe and his house for now.

As long as Joe has a job, he would keep his house, so he has a roof over his head, per common sense.

Just how long can Joe keep his job? Until ex-post, bears and bulls always agree to disagree.

Checking 2006 4Q GDP numbers, I was a bit surprised to find out that US GDP 2006 4Q would have just grown 0.83%, instead of 2.5%, if US trade deficit had not decreased significantly from $628.8B in 2006 3Q to $582.6B in 20064Q, as calculated from numbers of BEA.

So, US Joes actually got some support from his international “proletarian” comrades, in terms of US exports to those countries and its contribution to US GDP growth.

Per Reuters, IMF’s new chief economist, Simon Johnson today “likened the current global economic expansion to the early 1970s, but predicted no repeat of the oil-fed inflationary shocks that smothered growth at the end of that decade.”

Simon Johnson is optimistic and he doesn’t think that “we're going to rerun the 1970s," with a list of reasons he listed as an economist.

Aside from oil, union contract, inflation, regulation, government deficit, stagnation and other “economic phenomenon” with differ today from 1970’s, one thing less talked about is actually more of a “political phenomenon”:

The driving engine of “emerging markets” which drives today’s global growth is actually not Latin America, Africa or even those “Asian tigers”. It is those ex-communist nations, with India as an exception perhaps.

These ex-communist nations have education, talents, etc., and the most importantly, the vigorous “animal spirits” which had been both subdued and enhanced in their past “communist long march”. They are marching on capitalist road now, with Russia as one model and China the other.

No wonder Poland is one of top contenders for Citibank’s 9500 back-office jobs.

From daily market commentary at marketreflections.com
 
Bears and bulls: just keep wrestling

Looking at daily charts of major indexes, yesterday’s selling off crossing the indexes broke the “handle” on the fifth day with a heavy-volume “distribution”, and that’s bearish short term, per IBD’s TA term.

Instead of a follow-through of yesterday’s distribution, today we had an impressive intraday reversal of early session selling, with major indexes almost recouped yesterday’s losses, although on weaker volumes.

Since Feb 27, 2007, I think both bears and bulls have chewed FA information thoroughly: growth is going to be below the long-term rate of 3% of GDP 2007 and possibly 2008, inflation has been and probably will be above Fed’s comfort zone of 1-2%, and Fed is not going to cut the rate in the foreseeable future. Of course, the final outcomes are different: recession for bears and “soft landing” for bulls.

I, think, most market participants in between, particularly the institutional ones, have not decided which side to place their bets on , until they see further information coming out of FA side.

Before that happens, there will be no directional and institutional moves in any directions, of bears or bulls.

In bond market, bets on Fed’s rate cut have recently been taken off the short end of the yield curve, reducing 2-10Y spread into almost zero, making yield curve flat, just with yields rising on both short end and long end to about 4.73%, already above the level on Feb 27, 2007.

So, bond market is thinking more like Fed now: between the risk of slowing growth and the risk of inflation, inflation is the “the worst of two evils”, and as to the risk of slowing growth, bond market and Fed don’t or do not want to see the recession until it comes.

Against this backdrop of “stagnation”, it is very hard to dump or carry stocks big time: with earning growth slowing and interest rates rising, why carry stocks? On the other hand, stocks are cheap now with S&P’s PE around 17, as compared to 26 in 2002, why dump them?

So, there will be no “home runs” for bears or bulls for a while, they just have to keep wresting with each other.

As traders, we have to follow the winner all the time, and the winner keeps changing, even in intra day, like today.

from marketreflections.com
 
Why “Red Bears” in China got no paws?

Bears had actually been running the shows in China stock market for long time, longer than most can remember, before the beginning of 2006, when china stock index took off.

Bears sometimes are thought of “smarter than bulls”: particularly here in US, if you don’t know how to short or trade, others would make fun of you.

As smart as they are, bears in China probably have quietly transformed themselves into bulls.

It seems that before the beginning of 2006, everything was bearish in China stock market, and after that everything has been bullish: “ownership” got fixed, many of CCP200, particularly banks, successfully IPOed in HK, liquidity suddenly jumped out from no where, and CCP’s “branch” suddenly became the most popular “club” in Wall Street, etc.

Of all the bullish factors, the most important is actually just one: CCP premium, as termed in my posts.

CCP has proven from time and again that they can play capitalism game just well, or even better.

If bears are “smarter” than bulls, and bulls are smarter than commentators and economists, then I would say politicians are always the “smartest”. Have you ever thought about the numerical values of Fed’s employment and inflation mantra? Yes, 4.5% of labor force or 6.7M unemployed is OK; No, 2.5% inflation is not ok to bond holders. It is just never been published officially.

“Laissez Faire” is historically an “anglo saxon” thing: it started with Adam Smith, and ended with Keynes. Keynes had always denounced “Laissez Faire”. So, don’t blame British, they had a full disclosure on this one.

CCP is probably the master of all politicians. They don’t believe in “Laissez Faire”, just like Fed. Being the manager of a “bond standarded” US economy, Feds has to make sure that bond investors’ principle and coupon don’t get “eaten away” by inflation, unless “default risk” is really a “risk”. For CCP in the Chinese socialist economy, the CCP200 have to be funded preferably via domestic savings, and operate profitably in the most important sectors of the economy. CCP knows that for China to prosper, fundamentally, China’s 1.3B people have to be transformed into “good workers, consumers, and investors” within CCP managed Chinese socialist capitalist economy, and CCP200 is an important part of it. Right now, the stock market is a nice place to get this “transformation” started and going, to get CCP200 and Chinese Joes hooked up with each other.

CCP’s “macro play” probably made everyone else’ “marco play” look humble. Since CCP managed to get China joined WTO, two months after US “911” in 2001, CCP just got better and better in “marco play” games, politically and economically, domestically and internationally.

So, how do you short CCP200?

As to the “one way street” features of China stock market, why feel bothered? Why it has to be “two way street”? Marx never believed in the capitalism, and you think CCP would?

marketreflections.com
 
Bears are free, bulls expensive

I am not talking about perm bears and perm bulls, the former never buy and the latter never sell, why bother with them?

This morning’s trade balance and PPI number made me thinking of Gavekal.com, one of the analytical bulls for hedge funds, they do research and hedge fund investment as well.

One of their bullish theories is that instead of stagnation, US will have a “deflation boom”: inflation will be under control largely due to the globalization, productivity and GDP growth will pick up after soft landing or midcycle slow down.

Short term, I would guess that there is no recession, or serous stagnation, in my view as an investor. As a trader, I prefer not to see deflation boom until it comes, just like Fed doesn’t or does not want to see recession until it comes.

For a trader, FA is a must, but it hangs in the background. In short term, there is no FA, not even TA to some extent: all traders do is actually just to identify and follow patterns, to identify and follow big traders., whatever they do. In a way, traders are like politicians, with no “beliefs”, just follow bids or votes, or whatever works, “black or white cat”, one of the two, or both, and never let your “beliefs” block your way.

Speaking of Gavekal.com, they are expensive: at least $20K fee for just login into their website or $3M to buy shares of their funds. Pimco.com publishes commentaries and reports from Gross and his associates for free, and they are always good readings, but if you invest with them, they will put most of your money into the front end of yield curve, betting Fed will reduce the rate. If you can only bet with one of them, which one to pick?

Today’s market: would it be a repeat of yesterday? a reversal of early session sell-off, and as a trader, if you can’t come out of short quickly, and jump on long side, your short positions would be on slow cooker, getting hotter and hotter, although slowly.

Overall, market has been very resilient recently although on lighter volumes, Briefings.com reported that
“A survey by The Wall Street Journal yesterday showed that over the past month Wall Street forecasts for GDP have been lowered including a cut to just a 2% rate for the first quarter; inflation forecasts have been raised; interest rate forecasts have been raised to take into account a lower probability of the Fed easing; and home price forecasts have been lowered to -1.3% for 2007. The average forecast for oil prices for 2007 went up, and the probability of a recession was raised to 26%.”
All these worsen fundamentals have been priced already by stock market?, or stock market is just slow compared to bond market: today yields continue to rise along the short and front ends of the yield curve, bond investors don’t like the worsen inflation expectation and weak dollar, despite a better than expected core PPI.

We will see how markets react to next Tuesday’s CPI.
marketreflections.com
 
In front of the rising wall of worries

In short term, market is not FA, not TA, not anything, but a combination of FA, TA and everything, with the mysterious “cooking receipt”, which may be “guessed about”, “felt about”, “experienced with”, but can never be really understood or known.

Reviewing the hourly charts of Dow, S&P and Naz of last 10 days, I am amazed by the three impressively resilient formations bulls have formed on the three indexes, since March 29, 2007, the day after Ben told congress and market that ``Our policy is still oriented towards control of inflation, which we consider to be at this time to be the greater risk''. Before March 29, 2007, it was already bad enough: subprime and its spreading out, and it got even worse after March 29, 2007 for stock market: Fed is going to take care of bond investors first, if the “Titanic” is going to slow down, and when woman and children should be the first to be rescued.

In front of the rising wall of worries, stock market bulls’ long upward formations just got longer and longer, to everybody’s surprise. The formations remain intact as of today. It got torn apart by bears on April 11, but bulls quickly closed the gap on the second day, and marched on, and have successfully defeated bears ‘ two surprise AM attacks yesterday and today, amazingly.

I would guess that the many solders in the bulls formations are involuntary captives from bears’ camp: short coverers. But why you would care? CCP would have told you. CCP got many solders from KMT , changed their uniforms, brain-washed them a little bit, and eventually got KMT beaten up, almost to death.

I would further guess that as the formations got stronger and marched on and on, many onlookers such as those of FA and TA would join in, led by traders. Why not? After all, if you joined CCP’s formation before or on Oct 1, 1949, you would at least get free medicare in retirement now, if not houses, servants, and daily “red titled” important party documents.

Of course, risk remains: IBD would say that the volumes still too thin. Of course volumes would be thin: the thinner, the earlier prior to Oct 1, 1949. More recently, the bull’s formation when coming out of the correction last summer had been pretty thin until September when everybody was “pulled in”, although they all claim that their FA or TA told them to “average down”, that they were not simply following the crowd. Why not? even for those who jumped in after September, there is still some free medicare left.

Nevertheless, after looking at bull’s recent long formation, the true uniform guy would comment that the “lines are too long, too spread out”, vulnerable to “encirclement”, “flank attacks”, etc.

So, buyers be aware of the risk, and for traders, two set of uniforms have to be handy.

Let’s see what happens next Tuesday.
marketreflections.com
 
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