Marching into 2011

In all likelihood, would the chance of printing presses around the world operating in full capacity getting a bit less?

Who can guess what's the real inflation in China?

What is to happen to Spain?  anyone after Spain?

EUR, are you still there?

Equity, equity, equity, is it going to be a good year for equity? or commodity still?

Bond, bond bubble still blowing?

Gold is gold.  Has everyone already got a piece?  then what?

More currency and trade - G20

From weekend G20 meeting, now it's head-on between developed world (largely US and Euro zone) and emerging markets.

Tim Geithner:
“The IMF must strengthen its surveillance of exchange-rate policies and reserve accumulation practices,” he told the IMF’s ministerial steering committee. “[E]xcess reserve accumulation on a global scale is leading to serious distortions in the international monetary and financial system, and is inhibiting the international adjustment process.”

Zhou Xiaochuan:
"The continuation of extremely low interest rates and unconventional monetary policies by major reserve currency issuers have created stark challenges for emerging market countries in the conduct of monetary policy,” he said.

“The Fund’s current surveillance framework, which focuses on exchange rate policies, effectively leaves developed countries outside the Fund’s oversight.”

Currency is politics.  Since Bretton Wood, the US government perfected it... unfortunately when you are using it for too many times, others will eventually be fed up.

My bet is neither side will back off on its position.

More currency and trade

Douglas A. Irwin, the Professor at Dartmouth College write a piece on Wallstreet Jounal:

Goodbye, Free Trade?

High tariffs and currency wars cost us big in the 1930s. We can avoid making the same mistakes again.

 http://online.wsj.com/article/SB10001424052748704696304575538573595009754.html

On infation, he wrote
"The great concern is that an expansionary monetary policy will lead to uncontrolled inflation, destroying faith in the dollar. Similar sentiments were expressed in the 1930s by advocates of "sound money" who opposed going off the gold standard. Such fears may be justified in ordinary times of full employment, but when there is considerable slack in the economy and unemployment remains high, monetary policy can help to raise output before it leads to higher prices."

Sure enough that's the solution Feb is seeking.  However before the US finally raises output the rest of the world may have been inflated to the moon.

Related stories:
Brazil doubled tax on currency transaction - a "Tobin tax" and other currencies Korea/India/Philippines/Indonesia/Thailand/Japan
http://www.bloomberg.com/news/2010-10-05/currency-controls-tighten-as-korea-audits-banks-brazil-doubles-bond-tax.html

The government printing press

Financial times has in the past week a few articles talking about "currency war"

http://www.ft.com/cms/s/0/da5dfb94-d30a-11df-9ae9-00144feabdc0.html
and see other related links.

Financial investors since 2 years ago have entered a roller-coaster ride and up until today had at least both the down and up phase... thrilling and pleasant to some... there are more tricks to come, definitely... let's pray not to fall out of the chair.

This time round, though, anyone who observed market closely may have to agree that ever since the play got out of control of the free-wheeling American (more precisely Wall Street) capitalist, central bankers have taken over the driving seat.  As central bankers cranking up their printing presses and getting set for the competition, the only way for the financial markets is up, up, and up...

I am still appalled at how far the central bankers are willing to go to fight to make their own endorsed green/yellow/whatever color paper worth less by the day...

Anyway, the ride is far from over so sit tight and enjoy it.  Anyway, as of Fri 8Oct:

Gold - 1340
USDJPY - 82
UST 10-yr 2.4%
Emerging market stock index - back to climax, wah hoo! (with the exception of China A share market which is also crawling back)
Commodities, food, and property - you know
Inflation - I feel steamingly hot here... but sadly the one owns the largest printing press is missing the action
Bond - hope you didn't buy the Mexico century bond... 100 years is a looong time... fund managers are telling me to stretch the tenor.  I've already stretched it to cover at least 2 cycles of future crisis
Currency - where most actions are happening.  keep eyes open wide

9 Oct 10

Euro fear getting deeper

On Friday, headlines were on weak job number and Euro.

May non farm payrolls +431k turned out to be lower than consensus and worse, most of the increase were made up from census job, rather than from private sector.

Euro fear is getting deeper.  It's about Hungary. Euro tanked 1.6% during the session and moved below 1.2 for the 1st time since 2005.

Over the weekend, some positive progress on oil spill is reported BP. Its cap system was reported to be capturing 90% of the crude oil gushing from the crack at the sea bed.  Should be a good sign on the speculative position on BP and Transocean.  Will see on Monday.

Anyway, Hungary shouldn't be the last one in this European domino show which began being played out in March.  I still remember vividly the troubles with Ukraine, Turkish banks in the mid of banking crisis in 2009... Hungary is weak, others may not be able to hang on for much longer either...

From Wiki:
Hungary:
 - Capital: Budapest (beautiful place.  one of the top 15 tourist destinations in the world)
 - population: 10m
 - GDP 2009: 130b

 - joined EU in May 2004
 - Privatization wave: The PM started the austerity program in 1995. The government privatization program ended on schedule in 1998: 80% of GDP is now produced by the private sector, and foreign owners control 70% of financial institutions, 66% of industry, 90% of telecommunications, and 50% of the trading sector (doesn't look really pretty to me)
 - Real wage growth was negative from 2007.  in the midst of 2008 banking crisis, the Hugarian National Bank raised interest to 11.5% and Hugarian Government took a 25.1b rescue package from IMF, EU and World Bank.

Seekingalpha/David White

Apparently a significant number of Hungarians have historically taken out mortgages denominated in Swiss Francs. They liked the low interest rates those mortgages offered. Unfortunately over the last 6 months the Forint (Hungarian currency) has gone down against the Swiss Franc. See the 6 month chart below:

At the time of this writing, the Forint is trading at 204.33 Forints per Swiss Franc. It was higher on Friday. More importantly, it is approximately 10% lower against the Swiss Franc since March. This means that all of those with Swiss Franc denominated mortgages suddenly owe approximately 10% more. They suddenly have to make payments that are approximately 10% higher.
Hungary is worse off fiscally than the US. Can you imagine what it would do to the US real estate market if an appreciable number of home owners suddenly found that they owed 10% more than they had a couple of months ago? How would US citizens react if they had to make 10% higher payments in a high unemployment environment? Do you think Hungary’s real estate market may flounder? Do you think a good number of Hungarians are suddenly poorer? What do you think will happened as this gets worse?
The cumulative probability of default for Hungary is already 23.82%. The 5yr CDS spread is 400bps (up 91.5bps Friday alone). The current debt rating for Hungary is Baa1, but Moody's has a negative outlook on this. If previous market behavior is any indication, this is likely to worsen in the near future.
Do you think the extra Hungarian real estate problems due to the Swiss Franc mortgage problems will help Hungary’s credit ratings? Apparently the failure of a debt auction and a few negative comments by Hungarian officials started the recent credit slide. Can it cascade based on fundamentals such as increasingly troubled Swiss Franc denominated mortgages? A wild guess might be “yes”.
Before the IMF bailout in 2008, many mortgage were denominated in Swiss Francs. In 2006 and 2007 80% - 90% of new mortgages were denominated in Swiss Francs. After the bailout, banks virtually stopped making Hungarian mortgages denominated in Swiss Francs. A chart of the variety of interest rates is below:

If this wasn't bad enough, pre-recession the Hungarian real estate market was being pushed upward by foreign speculators. Many of these were Irish and Spanish. Need I say more?
Good luck trading.

What makes it breaks it

Working on REIT again, I am having the opportunity to look at the failed models of General Growth (an internally managed Real Estate fund in US) and Centro (an Australian asset management company).

No doubt that these structures (including other property funds and trusts) all suffered from excessive leverage which ultimately pushed them either into bankruptcy or re-structuring when the property value falls, the process of levering up by these funds and the shocking cliff diving of their stock price performance in 2008 are quite intriguing.

I think the key reasons that pushed these vehicles over the cliff within such short period of time are primarily driven by the securitization model.  The securitization model made these trusts and eventually broke their back.

General Growth represents a piece of the evolving CMBS market in US.  Beginning in the 90s, upon taking over the failed balance sheet of banks suffered in the Savings and Loans crisis, the CMBS market quickly took steam.  With a few billions in the beginning, it quickly evolved into a trillion dollar business by 2007.  An active secondary market and strong liquidity for CMBS transfers into lower cost of capital for real estate borrowers.  Coupled with rising valuation, the real estate investors took on the ride of no return...

Centro rode on a similar wave yet in a slightly different way... Centro started the fund management model as listed funds became popular in Australia.  Through acquiring properties via private funds and selling funds public, Centro was able to arbitrage the dividend multiple and generate additional cash flow from acting as the asset managers for those funds... (look at today's Capitaland model)

As you see, the securitization model made the property market exciting, and lots of people rich during the process up until the credit crunch of 2008, when the market froze over.  In a credit crunch, liquidation began with the more liquid assets such as the stock, bond, CMBS or anything that is traded. A fire-sale will send the CMBS price into a free fall which quickly eliminates much of the equity value within a very short period of time - this is what happened during the 2008.  As CMBS prices drop to rock bottom, valuation of the property is "expected" to fall substantially and re-financing of the CMBS becomes near impossible because of the valuation gap, which pushes the property fund/trust into a liquidity crisis (admittedly for those over-leveraged like General Growth, investors quickly realized that a drop of 30% of the valuation already put the fund into insolvency), which in turn sends the equity to a point of no return.  The case of MIREIT (Macarthurcook REIT in Singapore is an example which had $200mm of outstanding loan expiring in the mid of the credit crisis.  The stock price dropped to basement level although its "theoretical" property valuation remained at $500mm).

Well, what makes it breaks it.  Your strength is your weakness.  well said.  Lessons learnt: be cautious when others are greedy.

Thank God I was born in 70s

For Saturday night entertainment, I watched Phoenix TV's 9pm live debate (hosted by 胡一虎). Again, it's about the property prices (According to Contrarians it should be indicator that price is about to fall - hope they are right). There were some insightful comments - there are certainly not short of insightful people not in control of power in China. Anyway, it was lively debate.  It just got me into another point to be posted here.

I am not trying to be sarcastic by writing such a title. The reality is that those born in 80s, 90s, and maybe subsequent generations are, in general, less privileged than my generation (yes, 70s!). we had the chance of swimming naked in crystal water before growing up, being "the country's flowers" before going to college (if admitted), getting a job before leaving the school, paying affordable mortgages before getting married... Things just became dearer and dearer afterwards.

I have to pause and think how the next generation is going to prop up the social costs if there aren't significant structural changes made in the coming years. High property cost, as many blames, is driven by land cost and "excessive" local government spending.  I don't know what's excessive or un-excessive, but clearly there is already stress in filling up the budget, at the time when the national GDP is still going strong at minimum 8%+.

How long this 8% can be here, when the rest of the world want to export as well?  When US transformed itself into a consumer-driven economy, its GDP was growing at 3-4% when it was healthy. And it still ran on borrowing from the rest of the world.

Today's China is hard to sustain at 3-4%.  Simple reasons i have include:
* there is a bigger government to sustain.  Cost of sustaining the government should also include those "grey income" of the public servants as eventually productive labors have to bear it
* aging population and its healthcare costs
* less efficient use of resources as a result of wasteful state infrastructure investments in recent years and large sections of economy remained under state controlled enterprises

On the contrary, let's see what we have:
* less productive workers as a result of one child policy
* restrictive immigration policy, meaning less frequent exchange of capital and talents and potentially lower productivity
* other things - social inequality, lower education, etc...that points to a possibly lower productivity than today's US

Clearly GDP won't go on at 8%+ for ever.  Is China sustainable when it's below 8%? what about 3-4%? To me those are structural issues that needs to be addressed.  I have not found an answer so can only observe as it develops - that's what i can do as a "roadside economist" (watching events develop while standing on the road side).

This week: RMB, Property Price, Inflation

Just a short post. I am urged to do so when the headlines in the past 4 days shows the same thing - Renmingbi and property prices/ land sales.

Clearly Renmingbi has become a political issue - both China and US politician enjoy very much wrestling on the point whether a piece of paper bearing Chairman Mao's face is worth more or less, now both sides are getting even more excited by spitting on each other's face... we observers please don't forget both are secretly cranking out their own paper as much as they want... I just don't know when it will stop.  Just enjoy watching it when it's going on...

I checked my eco101 and find this term called "PPP" invented by economists in an ideal world... I am not sure what's an ideal world but let me just use this methodology, I realize that the money I have to pay to buy an apartment at my hometown (Wuxi), at the current exchange rate, can already afford me a no-worse house in a small city in of US along East Coast!  Gosh! I bet most Chinese people would choose to move to US if allowed ...  So i don't know where is the under-valuation from.  it may be 5 years ago.  but now a 1/2kg of bakchoi costs 7 yuan.  US politicians should be pitiful about Chinese people.

This brings about the topic of inflation.  Property price is not the only one catching the headline. Electricity, water, and gasoline costs already moved up.  The only thing has not yet moved, probably, is wage.  But i think it won't be long.  Our economists/statistician selectively "ignored" too many items on the CPI check... soon i think they themselves will scream for wage inflation to keep up with expenses.

On international front, Fed maintained its previous statement that it will keep interest rate low for "extended" period. I hate linear projection but have to think about the inflation scenarios more seriously.  The beast may turn out to be uglier than expected...

The money tap is still turned wide open by the Central Bankers, in the name of "still fragile" global recovery. Soon my wallet may indeed become very fragile because it can't keep the money inside from not shrinking...

Capital markets, risk model, and globalization

James Rickards, a former LCTM legal counsel and long-time capital market practitioner talks about capital markets, risk models and effect of globalization on the capital markets.

An interesting piece. James G. Rickard

Interesting points include:
* How the faulty Wallstreet's VaR model does not model the capital market risks and a "power model" derived from physics would be a better one in constructing a stable capital markets.  A good analogy of how Richter scale is created to build cities around world regardless it's not forward-looking.  (It's intriguing how a lawyer is so attracted to physics being applied to economics, and a new field of science - Econophysics)
* Wallstreet greed, arrogance, and repeal of glass-steagal act created the same bubble leading to 1929 crash. 
* This time is no different to depression era essentially. Market is in a critically unstable state with tensions building up between deflation force and inflation attempt by government printing press.
* How globalization and unregulated derivative markets created a system that's strongly co-related and eventually too big to fail.
* Regulations on OTC derivative market, developing exchange-traded derivative market, breaking up of big banks, Volcker rule, etc.
* Banks' role and CDS trading on Greece problems

PIMCO Bill Gross the Ring of Fire

In his new year's investment outlook, the chief of PIMCO talks about public debt, consumer debt deleveraging, and prospects for emerging/advanced economies after financial crisis.

On public debt, he points out that Mckinsey study finds:

1. The true legacy of banking crises is greater public indebtedness, far beyond the direct headline costs of bailout packages. On average a country’s outstanding debt nearly doubles within three years following the crisis.
   
2. The aftermath of banking crises is associated with an average increase of seven percentage points in the unemployment rate, which remains elevated for five years.
   
3. Once a country’s public debt exceeds 90% of GDP, its economic growth rate slows by 1%.

A different study by Mckinsey also notes that:

1. Typically deleveraging begins two years after the beginning of the crisis (2008 in this case) and lasts for six to seven years.
   
2. In about 50% of the cases the deleveraging results in a prolonged period of belt-tightening exerting a significant drag on GDP growth. In the remainder, deleveraging results in a base case of outright corporate and sovereign defaults or accelerating inflation, all of which are anathema to an investor.
   
3. Initial conditions are important. Currently the gross level of public and private debt is shown in Chart 2.

So with IMF's projection of public debt as shown in Chart 3, his advice to investors:


1, for equities, go where the growth is, where the public debt is low, and where savings and trade surplus will help transform the economy into a consumer-driven economy, namely, China, India, Brazil...
2, hand the safe money to Canada and Germany, definitely avoid UK...

Enjoy reading the full article here:  PIMCO investment outlook

Politics dictates market

Three days of continuous heavy selling and spike in VIX set the stage for some further fall next week?  If January is any indication of what's ahead for the year, I am tightening the seat belt for a bumpy year.

Doubts over the economic and political front seem to suggest that there will not be short of company by short-term bumps. There is no way to tell whether the past week's selling may be the beginning of a larger correction or not, i'll focus on issues that may have a longer-term impact on the market, several to watch next week:

Bernanke's re-confirmation as Fed chief.   Removal of either (Fed chief Bernanke and Treasury Secretary Tim Geithner) sends bad signal to the market.

Budget deficit. Healthcare plan as part of it. Obama endorsed deficit task force. Up for Congressional approval. This is a long term problem needing long term solution. Any other solutions than higher taxes and less spending? inflate the debt off?

Fed meeting. Given employment number staying above 10%, do not have false hopes that it's going to raise rate soon. All the talks about "recovery" are smokes...

Obama State of the Union address. Upon one-year anniversary of his presidency the economy becomes Obama's economy, as people began to forget George W. Bush. The difficult part has just begun.

New banking regulation. Main street or wall street? Obama seemed to have made the choice. The former Fed chair Volcker made a comeback. He'll play the dragon slayer. The banks will fight viciously.

2010 Week 3 market

Equity market pulled back sharply this week, with DJI, S&P down over 4% (biggest weekly drop since Mar 09), in Asia HSI and STI down 3%.  Crude and Gold slipped 5% and 3% respectively.

Currencies Euro is the biggest loser against JPY losing about 6%.  USD also slipped against JPY by over 2% and ended the week at 89.85.

Upbeat corporate earnings reports yielded to negative news one after another - first is doubt over Greek government's ability to rein in debt issues, then China's Dec CPI release fueling tightening concerns, followed by uncertainty over several large banks' fate upon Obama administration's proposal to regulate and restrict banking activities.  The proposal is not a turning-back to Glass-Steagall which forced separation of commercial banks and investment banks after 1930 crisis, rather, it proposes to separate gambling activities (using bank's own capital) from investment banking's service business so proprietary trading, PE fund, Hedge Fund housed under the banks will go.  The revenue impact on the large banks varies but is estimated to below 10%. The proposal is up for Congressional approval and signifies another big challenges for the Obama administration after his Healthcare Plan.

A pull-back has been long-due given the uncertainties surrounding the economy as discussed before. How much further adjustment is hard to predict.  Standing on the sidelines and watching the development is the best thing to do. Of course, don't miss the chance to pick up some cheap stocks if the sell-off continues. My bet is it's driven by profit-taking and I'll position for a rebound shortly.

Break the banks up! or not?

The Obama administration is now ready to whip the banks' asses:

President Obama Calls for New Restrictions on Size and Scope of Financial Institutions to Rein in Excesses and Protect Taxpayers

The proposal would:
1.   Limit the Scope - The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.
2.   Limit the Size - The President also announced a new proposal to limit the consolidation of our financial sector.  The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.

http://www.whitehouse.gov/the-press-office/president-obama-calls-new-restrictions-size-and-scope-financial-institutions-rein-e

Ever since the financial market was created, market makers (investment banks) were positioned to arbitrage the information asymmetry and to game the system.  It was the the academics who placed the aurora on the head of the surreptitious dealer whose actual well-being depended on the size of the gamble other people took.  Well, how the investment banks came to this "To-Big-To-Fail" is a long story.  This is a good book to read.

The point i want to make - Asian banks are as big as what they can get, what's making them not "Too-Big-To-Fail" down the road?  Singapore banks house investment banking activity and deposit-taking/lending business under one roof.  No doubt regulatory supervision is tighter here than US, is it the solution to excessive risk-seeking and conflict of interest?  (Well neither DBS nor UOB are seen as risk-seeking banks at present, however let's not mix incompetence with good risk management.  Assume one day Shenton Way become as competitive as Wall Street).  I always have doubt when the banks talking into your face about "one-stop service" and "better customer solution" - just look at Citigroup. One-stop shop helps the bank more than the customer.  The world will be a better place when hedge funds are hedge funds, investment banks are investment banks, commercial banks are commercial banks, research houses are research houses... Fortunately, for Chinese banks, the regulators separated investment banking business from commercial banks.  When regulations aren't working - it won't work as much as you wanted in a world where laissez faire capitalism is at heart, break the banks up.  Why not re-enact the Glass-Steagall Act?

Fear of sovereign risk

Big sell-off in EUR in the past a few days as sovereign debt issues dominated news headlines. At focus were Greece's ability to rein in its fiscal problems, Iceland president's veto on repaying UK and Netheland government the bailout fund for depositors who lost on the now-defunct Icesave bank, and lower German Economic Sentiment measured by ZEW survey.

ZEW is a collection of survey results with hundred of financial experts and is referred to as indication of economic sentiment.

http://www.zew.de/en/

ECB kept rate at 1% as expected on 14 Jan decision and warned the recovery of Euro zone would be bumpy. EUR has come down by 3% since then. It fell to 5-month low against USD yesterday morning to 1.407.

The fear of sovereign default is ongoing development. Financial crisis normally accompanies fiscal crisis/currency crisis/sovereign default as the days of extravagant spending of the welfare states is over and the payback time nears. It's a social and political struggle to face the bitterness of reality. Now Greece's 5-yr CDS trades at over 300bps, higher than Philippines and Indonesia. It adds further cost to Greece government and makes raising new debt more difficult.

Other news that's driving the market include China's increase of deposit reserve and fear of asset bubbles. China GDP grew at 8.7% in 2009, amid banking lending at 9.6 trillion yuan, which is a 96% increase over 2008. Central government has spoken a few times on reining in credit growth in 2010 and targeted new lending limit of 7.5 trillion yuan this year, a 24% drop. Yesterday friend in China told me that banks have frozen (yes literally no work for credit officers) new loan approvals until Feb.

Equity market and emerging market/commodity currencies also pulled back a bit in the past a few days.

US 10-yr bond yield dropped to 3.65% from 3.8% of last week.

Google drama

Google China office staff is back to work. Looks it was just a young man's outburst of dissatisfaction. It's inexperienced and may be a bit naive in trying to push Chinese government back. Too much testosterone. But that's why techies love it.

Unfortunately this incident will leave it with some scars. Just hope that it can skillfully walk out of this crisis with minimum damage. After all, it has already won the popular hearts of its supporters in China and around the world.

Bravo, Google!

Singapore December export number

Non-oil up 26%, amongst which electronics up 25%, pharma up 76%, petrochemcals up 64%
Oil up 60%

Export to major trade destinations China up 20% Europe up 27% US up 6%.

This is consistent with China's December export/import number.  Indication of inventory replenishment yet encouraging data. We may see consistent improvement for next a few more months. Faster inventory re-building also indicates potential production slowdown in several more months once re-building is completed as sales need to catch up.

US business inventory and sales data:

Industrial production

 Other data for reference: housing start

car sales

2010 Week 2 market

This is an eventful week.  Major market indices started the week down from Fri of Week 1, moved up in the middle of the week and fell back to where it started at close of the week.

Monday was the start of the earnings report season.  Alcoa's below-expectation Q4 result jittered the market. Tech stock was in spotlight in expectation of the Intel result. By Friday, another notable earnings report by JP Morgan and its revenue number didn't help lift the market. During the week, there is Google's high-profile announcement to potentially exit China - that's an interesting piece in that Google made headline again even when admitting its failure and frustration over its business in China! I am inclined to believe that this is a carefully deliberated strategy of exiting China.  At present its China business is insignificant - making less than 1% of its top line and given the painful progress it's making with the time and investment spent on China, i think the US managers have probably eventually came to conclusion that it's not worth throwing more money in any more for the moment.  Well, ebay, Yahoo had the same fate in China... but Google is Google.  "Do no Evil" - it wants the moral high ground and it reinforces its brand.  So the hackers' attack was a good excuse. Has Google ever feared hacker attack? how many attacks are happening every day around the world? After all Baidu - China's dominant search engine, was blacked out for 2 hrs just a few days ago and it hasn't warranted Baidu to point fingers at other people. Anyway, criticism and threat are not the way to resolve problems and it's Google's loss (I don't mean Google overall may lose in business sense. Instead the incident may help its international revenue in near term).  See you in five more years Google.cn!

During the middle of the week discussion on banker's pay and bonus tax re-ignited. Obama was adamant to make back 90 bln out of the 120 bln it lost on TARP funds (the number puzzled me though.  why not just 120bln?).  The tussle will go on.  The root of the problem i think is executive pay and corporate governance. In the past decade US executives paid themselves rich and in contrast companies, big or small, failed. The model clearly failed. I will be eager to see whether the managers are ready to accept changes.

Buried in the earnings numbers are the unemployment claims and retail data which are both slightly worse than expected. EUR and AUD pulled back against dollar and Yen strengthened by end of the week with pull-back of risk appetite.  Oil fell back to 79 dollars a barrel on both stronger USD and inventory data. Overall, it's another week of mood-swinging back.  I think we will go through a few rounds of back and forth by mid of this year with hope of strong recovery lifted and then receded again.  Yet my basic scenario has not changed.  I am keeping long commodities as inflation hedge as Fed will keep interest rate low at extended period and liquidity will remain plentiful so time of pull-back is opportunity to buy.

Surprises brewing?

What would be the major risks for the market in the new year? Will there be surprises that can bring the market down again to the levels of Mar 09 that is brewing? I would like to know. Unfortunately as someone said "Surprises won't be surprises if you and me know".

Still i am happy to make some wild guesses so i can observe it along the way -

1) Making to the top of the list is Sovereign Risks - watch out some European countries like Greece. Bad budget, high unemployment coupled with slow recovery can do damage to their debt rating. Downgrades of country ratings will drive away risk capital. There are more than one country on the watch list - Greece, Ireland, Spain, UK... Ukraine and East European countries are vulnerable. (should count Dubai in as well).

2) Fed stops printing money. The $1.25 tril asset-purchase program is due in march and non-extension of it will be signal to withdrawing liquidity. And depending on market interpretation (too soon) it may rattle the market. (may not be likely given the unemployment numbers)

3) Emerging markets face run-off inflation. As a consequence of keep printing money (as opposed to 2), high commodity price and other input price starts to feed into prices hikes of everything... It's likely to happen and no doubt there is concern over inflated asset prices. Some adjustments is due to come when central banks in Asia start to withdraw liquidity.

4) Run-off commodity prices... Are we going to see oil prices go above $100 again? maybe.

5) Commercial Real Estates write-down. Some estimates it's in the range of trillions (amount lost on Residential Mortgage comes to around $2 tril i think).

6) US unemployment numbers up again or stayed high for too long.

7) China export numbers down again

8) Major terrorist attacks, war in Iran, North Korea issue

2010 Week 1 market

Making up for last Sunday's writing.

Week 1 of 2010 ended on positive notes... Bulls in charge for the week globally. Global equity indices ended higher by Friday. Oil price broke $83 and Gold traded in the range of 1110 and 1120 as USD index maintained its strength.

No major downside surprises during the week but at weekend news of potential JAL bankruptcy filing came out (on Monday the news did some damage to Japanese market however was contained).

US bond yield continue to drift higher... 10-yr yield moved up to 3.85% by Friday and i think it's at 10-month high. News of faster-than-expected US recovery and inflation concern seem to have dominated the market for the week.

Most notable equity sector performance is energy related stocks. Conocophilips, China Oilfield services, EZRA, Rotary engineering all appreciated in the range of 10 to 25%.

On China announcement of measures to curb property speculation (mainly to 2nd home buyers by increasing installment to no less than 40%) did not make big impact on equity market. Eyes were on new year's monetary policy and government signaled tightening by increasing 3-mo bill yield. (More news broke out on Tues of the Week 2 that PBOC's increased deposit reserve by 0.5%). - It's evident that China is shifting policy gradually amid rapid price increases (not just housing, food, gasoline... too)

(Major news coming out of China on Sunday was December export number up 17.7% which is a big positive surprise. will see next a few months)

So the momentum has continued (in fact too buoyant) and i have no major change in view of the market direction.

A "W" shape recovery?

From Creditwritedown.com:

Double dip recession and the perverse math of GDP reporting

http://www.creditwritedowns.com/2009/12/double-dip-recession-and-the-perverse-math-of-gdp-reporting.html

The effect of stimulus and credit expansion has been felt strongly, in the financial assets and commodity prices. However we're all aware of many other indicators showing weakness in real economy... I think the question is whether the pace of recovery will be fast enough to take over the waning government stimulus by late 2010 to 2011.