Don Coxe – Investment recommendations (June 2010)

The June edition of Donald Coxe’s Basic Points research report (subtitled “Summer’s Storms and Norms”) has just been published. His investment recommendations, as summarized in this document, are listed in the paragraphs below, but I do recommend you also read the full report.

1.  Canadian bonds, equities and bank deposits are excellent investments for investors based in other currencies. Canadians should take advantage of the Loonie’s current weakness to borrow in greenbacks and otherwise hedge any risks they have to the outcome of a new global love affair with the Loon.

2. Resist the urge to buy the Macondo well-related stocks now that BP has somewhat capped the well. US trial lawyers cannot believe their luck: they will be able to sue, for treble damages, everybody involved in the well in the infamous “hellhole” courts of Louisiana and Alabama, where the judges’ electioneering costs are paid by plaintiffs’ lawyers. BP’s $20 billion payment will prove to be just a down payment. This is, for these predators, the equivalent of getting advance advice of the winning numbers in a multi-billion-dollar lottery.

3. The oil sands producers don’t benefit as much as the US trial lawyers from the BP  disaster, but there are two ways their stockholders benefit: firstly, by reminding the public that the large-scale alternatives to oil sands petroleum involve much greater environmental risks, they will take some heat off the beleaguered companies; secondly, an offshore oil boom that might have followed from Obama’s cautious reopening of offshore drilling has become a bust. That frees up investor capital allocated toward oil stocks to buy oil sands producers’ shares as the least-costly way to acquire multibillion-barrel North American exposures.

4. Remain heavily overweight oil compared with natgas. Gas prices have climbed because of the cutoff of expected production from the Gulf, but this should be only a temporary price boost. As Macondo has tragically demonstrated, finding big oil deposits is a high-cost, high-risk business. Finding gigantic natgas deposits is a low-cost, low-risk business. Natgas risks becoming the hydrocarbon equivalent of political hot air: cheap, never-ending and ubiquitous.

5. Gold is more than the Bad News Bear’s New Favorite. It is the completely inverse investment to paper money and complex financial derivatives, making it the multi-millennial belief system to which modern investors can return from the financial system’s current excesses, misrepresentations, and bad politics. In a bull market for gold, the well-managed mines will outperform the bullion. A recommended alternative is the royalty companies.

6. Barring some war in the Korean Peninsula or the Mideast, or the collapse of some major European banks, this stock market pullback should continue to be a correction, not the first chapter in a new horror story. A new crash at a time of zero rates remains an unlikely outcome − but not as unlikely as it seemed two months ago before we found out about where all those trichinositic eurobonds were stashed.

7. Remain invested in companies that produce what China and India need. No matter what happens in the OECD, these economies will continue to grow faster than the US or Europe. Their public employees aren’t paid more than their private sector earns, and they don’t retire young. Their governments are not laden with debts that can only be serviced with economic growth at unachievable levels. In other words, they are doing the big things right − and the OECD collectively is doing them wrong. There is no reasonable doubt about which economies will grow most rapidly, with the lowest recession risk.

The full report follows below. (Click on “Fullscreen” for readable version.)

Don Coxe, Basic Points – June Reflections: Summer’s Storms and Norms 061710

Source: Scribd, June 2010.

2010 Country GDP Growth Estimates

Below we highlight consensus 2010 GDP growth estimates for 28 countries (+Europe) based on Bloomberg’s survey of economists.  As shown, all but one country is expected to see GDP growth in 2010.  Spain is the lone country expected to see a decline in GDP at -0.40%.  China is expected to see the most growth by a wide margin at 9.40%.  Indonesia and Singapore rank second and third as 5.55% and 5.50% respectively.  The US is tied with Canada for the best GDP growth estimate (+2.6%) of the G-7 countries.  European G-7 countries and Japan are expected to see growth in the 1%-1.5% range.

Our research shows that in the four quarters coming out of a recession, the US has averaged GDP growth of 5.4%.  With a consensus estimate of +2.6%, economists are clearly expecting a weak recovery in the US.  However, does anyone remember a time when economists weren’t expecting a weak recovery?

Source: Bespoken Research

Five reasons China is not a bubble

A year ago, nobody thought China could manage 8 percent GDP growth in 2009. With year-to-date growth coming in at 7.7 percent through the first three quarters and getting stronger, China is poised to break that 8 percent mark rather easily.

The success of the stimulus and the lofty economic numbers China has managed to produce amidst a global crisis has led many to claim China is the next great bubble.

We see five reasons China is not a bubble and believe that its prospects remain strong for at least the next 20 years.

1) Consumption continues to be strong
China is transitioning to a consumption-based workforce. Retail sales rose 16.2 percent in nominal terms during October and have been accelerating. The retail sales figure isn’t a perfect proxy, but it is the best available indicator of overall consumption because it does include sales to consumers and not just purchases made by the government.

We also saw strong growth in industrial production (IP) and power generation both were up more than 16 percent on a year-over-year basis in October. Housing starts were up more than 50 percent (yoy) for the second straight month.

2) Structural changes to domestic economy
We’re seeing a transition to a service-related economy. The service industry is the fastest-growing sector (roughly 20 percent faster than construction) and now accounts for one-third of China’s workforce.

In general, the size of the service sector is directly correlated to the amount of goods and services an economy consumes. This is why the government has spent such a large amount of the stimulus on areas that benefit the domestic market – that’s where it thinks the economy is headed.

3) Stimulus exit strategy in place
China’s stimulus exit strategy is simple – create a strong economic base that the private sector can launch from. After private investment surpassed that of state-owned enterprises in September, the two flip-flopped during October.

Given the environment, month-to-month fluctuations like this are to be expected since private investment is dependent on how willing Chinese citizens are to put their own money at risk. Even though Beijing is determined to wean China’s economy off of government stimulus, the government will not hesitate to ramp up activity should the private investors become risk-averse.

4) Government controls on flow of money
After lending more money over the first five months of 2009 than all of 2008, we’ve seen loan numbers come down. There’s a longstanding pattern of new loans slowing down during the second part of the year as banks have historically rushed to meet government-mandated loan quotas.

The magnitude of this year’s slowdown – trillions of yuan – is evidence of Beijing’s dedication to prevent a bubble from forming. Once the figures grew too large, the government moved quickly to hit the brakes.

While US regulators have many holes to plug in order to keep the economy afloat, the limited number of investment options available to Chinese citizens – basically stocks, bank savings and property – makes it easier for the government to institute controls.

This is what happened in 2007 when the government forced a slowdown in the housing market before it overheated. After its economy grew 12.6 percent in the second quarter of 2007, China took more aggressive actions to cool its economic growth. The government raised lending rates and also raised reserve requirements to shrink the pool of money available for lending.

5) China’s long-term goals match up with short-term goals
In the US, the Federal Reserve and policymakers are faced with conflicting goals. They need people to spend in order to get the economy rolling again, but their end game is to have the American people spend less and save more.

It’s the opposite for China.

The problem in China is excess savings and not enough spending. The short-term and long-term challenges are the same – to get people to spend more.

Recent signals that China will begin letting the yuan appreciate against the US dollar are not new. For several years, Beijing has stated a gradual appreciation of the yuan will benefit the economy, and CLSA expects Beijing to resume a 5 to 7 percent annualized appreciation process about midway through 2010.

Rapid economic growth may be common in emerging economies, but there’s only one China. Already the world’s third-largest economy on a nominal GDP basis and second-largest based on purchasing power parity, the Chinese aren’t making a break from the back of the pack – they’re leading it.

Domestic consumption, the rise of the service sector and increased private investment won’t make China immune to economic bubbles, but these strengths will provide some protection from external forces.

Source:  Romeo Dator

2009 Country Stock Market Performance

Below we highlight the year-to-date percentage change (local currency) for the major equity indices of 82 countries.  So far this year, 71 of the 82 countries are in positive territory, and the average change of all countries is 33.27%.  With a gain of 20.76%, the S&P 500 is 13 percentage points below the average, yet it’s the second best G-7 performer behind Canada so far in 2009.

The BRIC countries (Brazil, Russia, India, China) have been standouts this year.  Russia is up the most out of all countries with a gain of 126.71%.  Brazil, China, and India are all up more than 70%.  Along with Russia, the Ukraine, Argentina, and Peru are up more than 100% year to date.

Eleven countries are down so far in 2009.  Ghana is down the most at -48.26%, followed by Puerto Rico (-40.56%), Bermuda (-38.36%), and Costa Rica (-35.37%).

Source:Bespoken Research

Australia: Taking the lead with higher rates, but who will follow?

In a move that surprised some analysts, the Reserve Bank of Australia (RBA) hiked its Overnight Call Rate by 25 basis points to 3.25%. After a spate of strong economic indicators, signs of recovery from Australia’s major trade partners and a moderation in price increases, the markets had priced in some monetary tightening before year-end. This hike confirms those expectations, and along with a few choice comments in the RBA’s accompanying statement, implies that another hike could hit by year-end. Given the economy’s recent performance, we have no complaints about tighter policy.

Today’s headlines made a special effort to point out the RBA’s move was the first tightening amongst the G-20, but in all candor we humbly ask who else could have been a viable contender? With the Euro-zone still struggling with problems in some of its weaker member countries, the US in quantitative easing mode and having posted negative GDP growth since Q4 2008 (although Q3 2009 figures due October 29 should break that streak), and Japan’s base rate having flatlined years ago, only a few niche players within the G20 could even offer a challenge against Australia for first to hike.

But now that the RBA has made its move, the more interesting question is who will be the next to pull the trigger. Right now, the likely candidates are all in Asia: Singapore, South Korea and China. Singapore currently stands as the favorite simply due to timing – the Monetary Authority of Singapore meets on Monday, and now has the opportunity to tweak its monetary stance without being the first in the pool. Its economy posted one of the first technical recessions in Asia due to a plunge in net exports, but in turn its recovery has been quite brisk and without any price pressures. While the temptation to let the economy feed off of cheap credit is very strong, the authorities now have some incentive to remove the ultra- from its ultra-loose monetary policy and start the long process of normalizing interest rates.

Also worth mention is South Korea, which just a year ago had to reassure foreign investors it was in fact not going to slide into the abyss a la 1998. The economy did go through a four-quarter weak patch, but in fact did not experience a technical recession and like many others came back strong in Q2 this year – thanks in part to a little fiscal priming. More to the point, the Bank of Korea timed its moves well over the past year, moderating its rate cuts as to not feed into a domestic asset bubble. Now with Australia taking the lead, the Bank can offer a hike as keeping in line with the regional recovery.

China is the least likely of the three to make a move, although the People’s Bank of China (PBoC) can throw a curveball now and then. Officials have offered the usual batch of central bank talk to cover all possibilities while not committing to a particular position, but the central theme from the PBoC suggests that while a recovery is well underway, it is an uneven rebound and there is still significant fragility in certain parts of the economy. Along with a few other key words we think China will remain on hold until early-2010, although given how much bank lending grew in the first half of the year we cannot help but wonder if inflation is a concern.

With global trade having restarted – although from a lower base – it is no surprise that Asia is seeing the first fruits of recovery. Now that the RBA has validated its personal belief that the worst has passed with its own rate hike, other economies will follow suit before the year is over. Whether those economies are ready for higher interest rates, however, is another story altogether.

International Stock Market Snapshot

Below we provide our unique trading range charts for 21 major country indices.  For each index, the light blue shading represents between one standard deviation above and below the 50-day moving average.  When the price is within this trading range, it is considered to be in “neutral” territory.  The red zone represents between one and two standard deviations above the index’s 50-day moving average.  Moves into or above the red zone are considered “overbought.”  Moves into the green zone (more than one standard deviation below the 50-DMA) are considered “oversold.”

With the exception of a few Asian countries, most indices shown below are trading into overbought territory.  China’s Shanghai Composite is the only index trading below its 50-day moving average.  Australia, Brazil, South Korea, Taiwan, the UK, and the US look to be the most overbought of the bunch.  After trading in perpetual downtrends for nearly all of 2008 and the first few months of 2009, most countries have now been trading in solid uptrends for five months now, with only a brief pullback here and there.  Brazil, China, Hong Kong, India, Malaysia, Mexico, Singapore, Sweden, Spain, South Korea, and Taiwan have all taken out their 52-week highs in recent months, while the rest still have a bit further to go.

Source: Bespoken Research

Country GDP Growth

Below we highlight 2009 estimated GDP growth for 21 countries.  As shown, only China and India are expected to actually grow in 2009, while the other countries are expected to contract.  China’s 2009 GDP growth estimate is at 7.66%, while India’s is at 4%.  The US is closer to the top of the list than the bottom with an estimate of -2.49%.  It ranks only behind Canada among other G-7 countries.  Japan and Germany are expected to see the biggest contraction in GDP in 2009 at -6.61% and -6.06% respectively.  The UK is at -3.74%, Russia is at -2.77%, and France is at -2.75%. 

Source: Bespoken Research

Country P/E Ratios

taking a look at valuations, growth expectations, and stock market performance for more than 20 countries that have trackable ETFs.   Russia currently has the lowest P/E ratio at 6, followed by Italy (10) and France (11).  At 14, the US is more attractive based on its P/E ratio than most countries.  Taiwan has the highest P/E at 60, and the UK is surprisingly bad at 34.  It’s valuation is worse than China’s.  Germany also has a very high P/E ratio at 27.

Source: Bespoken Research

Baltic Dry Index – more than a snap-back rally

The Baltic Dry Index – a measure of freight rates for iron ore and bulk commodities – rose non-stop for 23 sessions until Wednesday, before declining somewhat yesterday. This surge represents a gain of 517% from its low on December 5. But one needs to put this in perspective: the Index fell by 94% from its high in May 2008, and therefore still needs to rise by a further 188% to match the previous peak.

More importantly, this rise seems to be more than a snap-back rally and points to better economic tidings. This becomes apparent when considering the close relationship between China’s Purchasing Managers Index (PMI) for New Export Orders and the Baltic Dry Index, showing both indices turning sharply higher.

Source: Plexus Asset Management (based on data from I-Net Bridge)

Also, the improvement in China’s PMI (with the composite Index back in expansionary territory above 50) and the Baltic Dry Index is consistent with the improvement in the Metals Index.

Source: Plexus Asset Management

Asian markets won’t retest lows, says Chris Wood

Chris Wood, street smart Global Equity Strategist of CLSA, yesterday said in an interview on CNBC-TC18 that the US markets remained in a bear market rally while Asia and India were in a secular bull market.

He said the Indian and Asian rally was started by local money, which according to him was a big long-term positive. He added that Asia and emerging markets (EMs) would be the biggest beneficiary of the Fed’s monetary easing. He also said liquidity could lead to massive asset bubbles in Asia and EMs.

Q: What have you made of the markets’ move in the past few weeks?

A: I was expecting what I call a counter-trend rally, driven by a counter-trend rally in the S&P this year. The key point is that the S&P in the fourth quarter last calendar year went further below its 200 DMA, and at any point since 1932, in the midst of the Great Depression. So, it was almost inevitable that we were going to have a counter trend rally at some point in 2009. Actually, I thought it would start with the arrival of the new administration in January-February, but it didn’t start so much.

My guess as to how far this rally can go is 1000-1050 on the S&P, but I am viewing this as a counter-trend rally in a secular bear market for the US. I have a different view for Asia and India. I believe Asia and India remain in a secular bull market. So I have a fundamentally different view for the Western world and Asia.

Q: How would you describe what happened in 2008 then in India and other Asian markets like China? Deep cyclical correction? Over 10-15 months in an overall secular bull market?

A: I would describe that as a deep cyclical correction in Asia and EM driven by massive collective damage from what was going on in the Western financial system. That is why with my Absolute Return Portfolio I have been recommending to investors from the middle of 2007 only to own my recommended portfolio, by hedging the Western financial risk by being short on Western financial stocks. But in my view, the sell-off in Asian stocks last year was exacerbated by dramatic liquidation by foreign money, particularly by hedge funds and so-called funds of funds.

What is positive in the rally that began in Asia in October-November last year is that we’ve seen growing local investor participation in Asian market, so the people who bought earlier in this rally since late last year weren’t foreign fund managers but local investors throughout the region. That growing local investor participation is a long-term positive.

Q: So are you saying that the secular bull market has commenced again in India and other Asian markets?

A: Yes, I think it has recommenced. Two technical pieces of evidence support that view. First, Asian markets and EMs have been leading this rally ever since they bottomed last October-November. Second, when the S&P made a new low in March, the Asian markets and EMs did not make a new low. That is technical evidence to me that Asian markets and EMs have become the asset class of choice in global equities.

In the very short term, because Asian markets and EMs have outperformed dramatically, there is some scope for the S&P to outperform. However, in the long run, in my view, the asset class of choice in which to remain fundamentally overweight is Asia and EMs.

In my view, the biggest beneficiary of the dramatic monetary easing, quantitative easing undertaken by the Western central banks led by the Fed, won’t be American/British consumers or American/British stock markets. The biggest beneficiaries will be Asia and EMs. In fact, the dramatic monetary easing could lead to massive asset bubbles in due course in Asia and EMs because the excess liquidity will flow to the best growth story and the best growth stories in the world are Asia and EMs. They have the best demographic dynamics and have the healthiest economies because, unlike the Western world, they do not have the structural leverage problems.

Q: Often, the measure of the restart of a bull market after a bear market is when the previous highs get taken out. How long is it before you think India and other Asian markets can take out their old bull market highs?

A: I don’t assume that happens quickly, because I am bearish on the Western world. If I wasn’t bearish on the Western world, then I would say very quickly, but I am. So in my view we are in a process here, we have commenced a process of incremental decoupling from Western markets. At the beginning of 2008 many investors in China and Indian equities believed in decoupling but by the end of 2008, after a dramatic collapse in Asian stock markets after the Lehman bankruptcy, investors stopped believing in decoupling and started believing in the absolute opposite.

The absolute opposite was an export-correlated train wreck with the US consumer. People became extremely negative on the most important EM story, which was not India but China. This year the Indian and Chinese economies have shown growth momentum; those very bearish concerns were misplaced. So we now have some empirical evidence that Chinese and Indian economies are able to decouple to a certain extent from the American economy, from the American consumer.

The American economy is not growing, so that is building confidence in asset classes. We have begun the process of incremental decoupling. But I think unfortunately when the S&P turns down again, when people realise that it is an L-shaped situation in the US, not an U-shaped or V-shaped recovery, you will get renewed correction. But my view is that next time the Western stock markets go down the Asian markets will prove much more resilient. But this process is incremental; it is not going to happen on a 12-month view.

Q: How bearish are you on the US markets?

A: I would expect a retest of the 660 level in due course in the US if the equities correct and it coincides with the new dollar rally because the dollar rally is on deleveraging. But if the dollar keeps declining, the lows on the S&P need not be so large because some of the downside will be taken on the dollar.

Q: Even if the S&P were to go for a retest you think none of the EMs, including India, will go for a test of their 2008 lows?

A: I don’t believe in a world where the S&P revisits the lows of March. I don’t think the Asian equity markets, India, will revisit the lows because the Indian economy has demonstrated its domestic demand-driven resilience this year. We are now getting people talking of 5.5-6% growth – a few months back the RBI had come out with statements that growth was going to be much slower than expected and it said that growth was going to be 6%.

Reality is that at the beginning of this year investors thought 6% was not attainable, but the data that have been coming out have been a positive surprise. The Indian economy is keeping its growth – not by artificial stimulus measures by the government – so basically the data have been a positive surprise this year and the government has been another positive surprise, which has been a clear mandate that should allow a more coherent policy that should allow for a renewed vigour in the infrastructure cycle now.

Q: How positive is the election?

A: I don’t want to over-dramatize it because of the Indian government’s history of disappointing on reform expectations. But I what I do think is positive is that most foreign investors were on the sidelines before the election as they knew the situation is inherently unpredictable. So because of the clarity and because you don’t have a weak coalition government, I think that was a major catalyst for foreigners to reinvest in India, and logically the sector that should benefit is the infrastructure sector. The other point is that it has removed the risk that the fiscal deficit in India could get out of control.

Q: What are you overweight on in India and China?

A: I am overweight both on India and China but in the last quarter more India, because I was more overweight China in the first quarter. But in my long only portfolio, I am 33% in India and my biggest weight is in Indian banking though I did add an infrastructure name after the election.

Q: Public sector units or private sector?

A: Both, but if I were making a new allocation it would be to a private sector bank.

Q: This trait to tanking up to defensives, you think that trend is over?

A: Tactically, Asian markets have had a big rally and people were fortunate to be in the high-beta names and they should be thinking of moving to less-high-beta names now, 70-80 on the oil price, you should reduce the beta names. But I would reduce in the commodity-driven stocks, not banks.

Q: Do you find any discomfort with regard to valuations in India?

A: PEs look scary in India, especially infra, but India is a genuine domestic demand-driven growth story. So it deserves a high PE premium. On a price to book basis India looks undemanding. The whole risk in Asian valuations is in the potential negative correlation to the Western world.

Source:Prieur du Plessis

China – Secular bull in commodities remains intact

The Chinese Purchasing Managers Index (PMI) for May remained in the expansionary zone of higher than 50%, although it moderated to 53.1% from 53.5% in April, according to Li & Fung Research Centre. Although eight of the 11 sub-indices were slightly lower than their respective levels in the previous month, it is noteworthy that the new export orders index returned to the expansionary territory for the first time since June 2008. “Strong domestic demand, together with an improving export situation, has helped resume the expansion of the manufacturing sector in China, “said the report.

China’s PMI seems to indicate that the country might have seen the worst of the GDP growth statistics. (The Hong Kong PMI is used as a proxy of the Chinese PMI prior to 2004.)

Source: Plexus Asset Management (based on data from I-Net Bridge)

Importantly, China’s PMI for new export orders shows the Index again expanding (i.e. above the 50 level) and, based on the close relationship with the Metals Index, should provide further support for commodity prices.

Source: Plexus Asset Management (based on data from I-Net Bridge)

David Rosenberg, the closely followed chief economist and strategist of Gluskin Sheff, argues in a newsletter on Monday that the Asian economic revival, with strength spreading across the continent, may be for real. This is, needless to say, bullish for the commodity complex, with gold, copper and oil all having broken above their 200-day moving averages just as the US dollar has cracked below its key support level.

“The US is still the largest economy in the world by far, but it is losing its dominance each year and the fact of the matter is that it is a mature service-driven economy. Emerging Asia in general, and China in particular, are still the marginal buyer of basic materials, and their economic success is more critical to the outlook for commodities,” said Rosenberg.

He highlights that the world has just endured the steepest world economic setback in 70 years and yet commodity prices across a broad front – gold, oil, copper, soybeans -  managed to bottom at their highest “recession levels” of all time. “This attests to the supply discipline by today’s resource companies compared to their predecessors, and affirms our belief that what we experienced last year was a severe cyclical correction in what is still a secular bull market – you can connect the dots on the chart and see that the CRB looks a lot like what the S&P 500 looked like in the months following the sharp 1987 collapse,” said Rosenberg. It seemed like the end of the world in October of that year, and yet in retrospect it was just the fifth year in what proved to be an 18-year secular bull phase.

My research concurs with Rosenberg’s conclusion that commodities still seem to be in a supercycle that was only temporarily interrupted by the global economic malaise. As inflation money finds its way into commodities, it is still not too late to purchase these, but only on price corrections that are bound to occur from time to time.

Source:Prieur du Plessis

RBA on hold but surprisingly dovish

The RBA left the cash rate at 3% today. This was universally expected by forecasters and markets.

The surprisingly dovish accompanying Statement was of interest however. The RBA remains focused on underlying economic weakness and ongoing financial fragility. China was seen as an economy displaying the ‘clearest’ signs of recovery.

But most surprising was the explicit recognition that the RBA can cut further:
“…the prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy, if needed. In assessing how it might use that scope, the Board will continue to monitor how economic and financial conditions unfold, and how they impinge on prospects for a sustainable recovery in economic activity.”

This seems a little at odds with the better flow of economic information recently and improvements in global equity and commodity markets. Our guess is that the RBA is try to calm some recent trends in local markets, in particular rising term interest rates and the winding back of easing expectations, but probably more importantly the strong rise in the Australian dollar on both a $US basis as well as on a TWI basis (up 22% since the beginning of February).

While this is just a guess, the sentiment that rates can be cut further is consistent with our view that the Australian economy is likely to experience an extended period of weak economic growth and that we are yet to see the fall-out from rising unemployment (and falling employment). While the rapid policy stimulus of 2008-09 appears to be working well (tomorrow’s GDP is expected to rise by around 0.4%) it cannot be assured to continue to support growth through the back half of the year.

We expect the RBA is likely to be on hold for at least the next few months. We have the next cut in August but are ambivalent about the timing given the inherent difficulties in forecasting trends in employment and domestic demand at present. We are happy with the view that the RBA cash rate is likely to trough at somewhere between 2% and 2.5% in this cycle.

Source: ANZ Global Markets

International Market Snapshot

Below we highlight our trading range charts of the major stock indices of 22 countries.  For each chart, the light blue shading represents between one standard deviation above and below the index’s 50-day moving average.  The red shading is between one and two standard deviations above the 50-day moving average, and moves into or above the red zone are considered overbought.  As shown by the charts, markets aren’t just rallying in the US.  In fact, equities have rallied more in most other countries than they have in the US since the March 9th lows.  As you’ll see below, every single country is trading in overbought territory, with Hong Kong, India, Taiwan, Singapore, Russia, and South Africa the most overbought.

Source: Bespoken Research

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Emerging Markets Continue to Surge in 2009

Russia’s RTS stock index was up another 3.2% today, while China was up 1.71% and India was up 2.3%.  The BRIC (Brazil, Russia, India, China) countries continue to surge higher in 2009, as they’ve far outpaced stock markets of so-called “developed’ countries.  Below we highlight their year to date performance compared to the S&P 500.  As shown, Russia is up a whopping 72.1% this year, followed by India at 51.6%, China at 44.6%, and Brazil at 39.7%.  The S&P 500 is up 0.22%.

Source: Bespoken Research

Past the worst?

The debate rages on regarding whether the global business cycle has started to stabilize, with most of the “green shoots” arguments based on softer data such as Purchasing Managers Indices (PMIs) appearing “less bad”. Although this is not the same as “good”, one should be aware of the fact that a bottoming process of the economic cycle has commenced. Importantly, different countries will experience dissimilar rates of recovery that, in turn, will impact asset allocation decisions.

An interesting analysis by the Goldman Sachs Global Economics team suggests that every major economy has possibly already seen its worst rate of GDP decline, either in Q4 of last year or Q1 of this year (see graphs below). “Emerging markets are likely to see a return to trend growth about six months, on average, before advanced economies. Similarly, emerging markets on average will close their output gaps – the difference between actual growth and trend growth – about two years before advanced economies,” said the economists.

Although the Goldman team are not under the elusion that they will be entirely correct on the timing of these events, they do feel more confident about the relative order in which countries/regions will reach the above milestones. The analysis leads them to the following market implications as summarized in the report:

• Equity markets have most likely bottomed and volatility should start diminishing.
• Countries that get back to trend growth sooner will tighten monetary policy sooner.
• Countries that get back to trend growth sooner should see their currencies strengthen.
• As the output gap will take many years to close, there should be limited pressure on prices and wages. Deflation will still be a greater concern in the short term than inflation.

• Emerging markets, particularly Asia, should offer more opportunities for outperformance for equities and forex, and could support commodity prices, especially industrial metals.

Source: Peter Berezin and Alex Kelston, Goldman Sachs – Global Economics

Emerging Markets: Russia’s Market Has Surged

MOSCOW – Despite continuing weakness in the Russian economy, the stock exchange here has surged to become the best performing in the world, after being the worst last fall.

Dmitry Astakhov, via Reuters/RIA Novosti, via Kremlin
With an economy heavily skewed toward energy, Russia saw its stock market rebound to become one of the world’s best performers after falling the most last fall. Here, President Dmitry Medvedev, center, visits an oil refinery in the city of Khabarovsk.
After the sell-off last year pushed the valuations of Russian companies to record lows, rising energy prices in recent months have drawn investors back into the market, traders said, even as the government has twice downgraded its expectations for growth this year.Other big emerging markets, including China, India and Brazil, have rebounded sharply in recent months on signs that the fractured global economy may be beginning to heal, but none have been more buoyant than Russia.

When the authorities reported this month that industrial output declined 16.9 percent in April, the stock market still continued a five-day streak.

“Investors are not analyzing macroeconomics when deciding whether to invest in Russia,” the chief economist in Moscow for Merrill Lynch, Yulia Tseplayeva, said.

“They look at oil prices, and believe that when oil prices rise so will the Russian market,” she said. “And that is true.”

Officials now expect a contraction of more than 6 percent in the Russian economy before it begins to improve. Yet investors who braved the yo-yo bounce in the Russian market have profited handsomely.

The Micex index of major Russian company shares, for example, is up 105 percent after bottoming out on Oct. 27. It rose 19.66 points, or 1.9 percent, on Friday to close at 1,054.03.

For some investors, the very air of dismal news hanging over the country inspired contrarian bets in February and March that shares were oversold.

“It seemed a consensus emerged generally that Eastern Europe was going to hell,” Ian Hague, a partner at Firebird Capital Management, a New York hedge fund that focuses on the former Soviet Union, said by telephone. “When you see that, it is very bullish. Because the reality is never as bad as people’s fears.”

Firebird, after selling Russian shares in the second half of 2008, reinvested in February, he said.

But for all Moscow’s effort to diversify the economy, the rise in Russian equity values has closely tracked the price of oil, by far its largest export commodity – much as the market plunge last fall coincided with the collapse of oil prices.

Money is trickling back into Russian investments. For now, the inflow has not balanced the outflow of capital as companies repay foreign banks for loans that are not being rolled over. But the new money coming in was very nearly equal to the outflow in April, according to an estimate by Merrill Lynch.

In that month, the central bank reported a net loss of $2 billion of capital. Since roughly $10 billion in loan payments came due in April, the investor inflow probably was about $8 billion for the month, the bank said.

And the Russian stock market bounce came in spite of looming troubles in the real economy that analysts say make it look tenuous.

But given Russia’s dependence on the boom-and-bust commodity price cycles, a lack of so-called long money investing in the economy and a good deal of jitters about political stability and relations with the West, Russia’s stock market probably will remain highly volatile.

In fact, since its inception after the collapse of the Soviet Union, the Russian stock market has been either in the top five performing markets in the world or the bottom five in every year except one, according to Renaissance Capital, a Moscow brokerage.

Source: ANDREW E. KRAMER

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Year to Date Country Returns; US Lags

With global equity markets still in rally mode, below we highlight the year to date performance of the major indices for 83 countries around the world.  After nearly every country was down earlier in the year, 62 out of the 83 are now up in 2009.  Peru is up the most at 72.92%, while Costa Rica is down the most at -39.94%.  And the BRIC (Brazil, Russia, India, China) countries are significantly outperforming the developed G-7 countries.  Russia, India, and China rank 2nd, 3rd, and 4th in terms of year to date performance, and Brazil isn’t far behind in 10th place.  Canada has been the best performing G-7 country with a gain of 12.62% in 2009, but it ranks 35th out of 83.  The rest of the G-7 countries are bunched up in the 0%-5% range, which is closer to the bottom of the list than the top.  And the US is the worst of the seven with gains of less than 1%.  While the markets here in the states have rallied nicely off of their March lows, most other countries have bounced back even more 2009.

Source: Bespoken Research

Broader Market Technical Analysis Update

by Roy Martens

The big picture hasn’t changed much this past month. The most surprising news, at least for the ones in the dark, was that China is hoarding Gold. Their reserves have risen a lot and they intend to expand their stockpile even further. Although this is very good news for Gold in the long run it didn’t really have a big impact on the Gold price last month, which is kind of surprising.

Such news is huge because the monetary reserves of China are enormous and although they say they will not shift their reserves into Gold at this time, I wonder if they will still hold that position if the dollar should tank.

Most likely this positive news was put aside by the announcement that the IMF intends to sell a lot of its Gold in order to raise cash and support the various countries that are in trouble, which should have a negative impact. We, however, have to look past this negative force for Gold because once the Gold reserves of the IMF (and other Central Banks) are gone there is nothing left to cap the price of Gold!

Due to the selling of the IMF ,Gold could suffer in the short term but it is my opinion that this fall (should it happen) will be a very good entry level for people that don’t already own the yellow metal.

As the Gold chart will show from a technical point of view, Gold is currently at an important stage and this upcoming month could be the set up for a rise to the highs or a fall to retest the $700 level (Impact of IMF selling Gold).

Whatever the outcome, Gold bulls are certain that Gold will reclaim its power further down the road. Will China be the only one to see the light? I don’t think so, there will be many other countries that will follow in China’s footsteps and I wouldn’t be surprised if a few of them, for example the other BRIC (Brazil, Russia, India) countries are already doing the same as China.

All charts are courtesy of Stockcharts.com

GOLD

The picture for Gold hasn’t changed much this last month. The flag pattern is still intact.

However, this pattern can’t continue for much longer because it will get too big to remain a valid flag, rather, it will then change into a channel. For now the blue lines are the most important ones to watch. They have to support Gold together with the 34 w. MA at $859.

If this level fails we can brace ourselves for a big fall, because the $700 will then be the next target again. As long as the $850 holds we expect Gold to break out of the flag pattern and start a new run at the highs.

SILVER

The Silver chart remains fairly positive. The flag pattern is still intact and completion doesn’t seem that far off.

The current correction wave could be a wave 2 but it is still too early to tell so this EW count isn’t valid yet. The chart is improving further with the 24 w. MA starting to curl up in support of an upcoming move. This move could be the wave 3 higher triggered by a breakout from the pattern.

The RSI and MACD are in perfect position to move higher and a new buy signal in the DMI (cross of buying power over selling power) will follow quickly if Silver moves higher from here on.

OIL

Oil is taking a breather after the first breakout attempt failed. It successfully re-tested the

17 w. MA for support and is moving higher again towards the resistance zone and the 34 w. MA.

The 17 w. MA is rising and should support Oil in the upcoming attempt to break the heavy resistance zone. If Oil succeeds it will trigger a huge buy signal because it will automatically mean a break above the 34 w. MA, a new LT buy signal. The first target after a breakout will be the $80 level ($78 is a 38.2% monthly fibo level shown in last month’s chart).

The technical conditions are improving slowly but are still in negative territory (RSI, MACD) while the selling power remains in charge, meaning that the current move higher is still ‘just’ a correction in the ruling downtrend.

USD

The Bulls are doing a good job supporting the USD. They have manage dto keep it above the 34 w. MA and the uptrend is still very much intact.

The downward pressure is still there and keeps building so the bulls aren’t out of the woods yet. As long as the 34 w. MA holds firm the bulls remain in the driver seat, but once it is taken out we will see a big sell signal and a trigger for a huge fall towards the 72 level.

The technical conditions are still positive but this can change very quickly. The RSI is a whisker away from triggering a sell signal and the MACD is on its way towards the 0 line. This upcoming month will be very interesting to watch.

COPPER

The chart for Copper is coming along as expected and the presented EW count fits nicely into the monthly chart that was shown last month.

The technical conditions have improved further and are in perfect position to get this wave 5 underway. The RSI is back above the 50 level and should start rising from here, the buying power in the DMI is trying to take over and the MACD is steadily rising towards the 0 line and the magenta resistance line.

If copper breaks above the resistance zone the indicators all turn positive at once and could trigger a very big move higher. The $300 level could then come within reach very fast.

Emerging Markets on a Tear?

The Wall Street Journal has an interesting article in its Money & Investing section today titled “Emerging Markets Go on a Tear.”  China is one of the countries highlighted, which is now up 47% from its lows late last year.  As shown below, however, China’s Shanghai Composite still has a long, long way to go before it makes a dent in the losses it experienced in ’07 and ’08.  As shown, even after its 47% run, the index needs to gain 142% to reach its old highs.  From its peak, China is still down 59%.  Conversely, the S&P 500 is down 46% from its peak and only needs to gain 84% to reach its old highs.  Emerging markets like China have rallied significantly, but since its starting base was so low, its market is still in worse shape than the US.

Source: Bespoke Research

China: Signs of a recovery – already?

We are just over six months into this global financial crisis, and most major economies have yet to get back on their feet. Yet somehow, the numbers coming out of Beijing suggest that the Chinese economy has already dusted itself off and is preparing to take off at a dramatic pace. Is such a quick recovery possible, and if so, how do other countries get in on it?

Our first piece of evidence is found within today’s PMI release for March. Given the particular survey methodology behind this index, we do not give the PMI significant attention, although it does carry weight in the markets at large. The overall PMI rose above the breakeven line of 50, and new orders broke above the line for the second consecutive month. These numbers suggest that the manufacturing sector of the economy was in contraction for about five months and below its usual pace for about nine months. Considering the wealth of anecdotal discussion of widespread shutdowns and mass layoffs, it seems odd to think that the worst has passed.

It also seems odd to see that another key category of the overall PMI – export orders – is doing surprisingly well. While neither the export orders index nor the imports index has crossed above 50, they both have come back from horrible droughts and appear set to break the line in April. Again, this is reassuring to see, but it does seem odd that this same kind of turnaround has not been witnessed in China’s main trading partners. For all the energy of China’s export recovery, few countries are showing any increased import demand these days, and those countries that supply China with economic inputs have not been bragging about a recovery in sales.

One indicator that we do pay particular attention to is bank credit, and several sources in Beijing suggest that lending has been dramatic through Q1. The People’s Bank of China (PBoC) reports that lending has spiked since November, with the main indicators exceeding the 17% rate officials are comfortable with. This growth is driven primarily by the government’s fiscal stimulus drive and its call for banks to lend more vigorously to offset the economic slowdown. From this perspective it is difficult to argue against the figures, and we recognize that plenty of entities will be putting large amounts of yuan to work in the coming months.

Our main concern for the near-term, however, focuses on how these funds will be put to use. The Chinese banking system has been improving its balance sheets over the past few months, but a significant amount of non-performing loans and ‘special mention’ loans still weigh on the sector’s ability to generate credit. If this wild growth in credit generation does not ignite self-sustaining economic activity, there is every chance that today’s big loans could become tomorrow’s burdens. For now we remain cautious – more so than the rallying Asian markets – and wait for more signals that can either confirm or refute all this economic activity.

Source: James Pressler, Northern Trust – Daily Global Commentary, April 2, 2009.