The market activity will, as usual, be lower after the weekend until New Year but during the last days of this decade we have the chance to enjoy a few important numbers.

Here is what I am looking for the coming days:
From Japan, before 28th Dec the Dec business
conditions for small businesses is released. It’s almost a preliminary number, that alone makes it interesting though the survey itself is also worth to notice. Last month it was 43,0. Please note that the big business worsened in the period October to December due to MOF. Downside risk for Japan.

On Monday from Japan the Nov preliminary industrial production and the retail sales is published, interesting numbers from the second largest economy in the world.

In my view US offers one really important number the coming week. On Tuesday, the Dec consumer confidence will give us a hint about the very much watched US consumers. The average of economists go for 52,8, up from 49,5 last month. Most likely, but a higher number than 53,0 is needed to boost stock markets further.

Towards end of the week (maybe Saturday included) 2 UK organizations announces the house price developments in Dec. Nationwide first and then Halifax, a small increase in December is expected.

One could almost feel tempted to say, that China never sleeps so they announce the interesting NBS Manufacturing PMI 1st January, 55,2 last month with an increase expected again.

As mentioned will next week only offer low activity but stocks will follow the fundamental data (better than expected = rising markets and vice versa).

The currency market will be dominated by “end of year” adjustments without any clear trend. Next year the Dollar will move lower anyway.

Peter

Just to mention the positive Japanese stocks this morning. The banking sector went up as it seems likely that the tougher capital rules will be delayed. The Japanese banks will probably get 10 years to adopt the new rules. Short term, it of course helps the profitability in the banking sector and give some relief (also the reason for the delay I assume). One of the reasons to tighten the rules was to protect the investor, but to give a 10 years deadline is equal to cancel them. Within the next 10 we will have had another crisis again, but fewer banks than today would then need to care about the new rules. So, no reason to fill up your stock accounts with Japanese banks……

The Dec PMI’s from Europe this morning should keep us occupied for a moment while waiting on US. The market expects the readings to be a touch higher (PMI Manufacturing at 51,4 and service at 53,1). I could see the numbers slightly lower. If they are around the expected I do not see it as positive enough to help stocks today, so I go for a minus until US opens.

US will offer several really interesting data. The last days inflation has gained attention, fair enough, as especially food inflation is jumping (watch India and China). Right now I am not scared about inflation on a global perspective (more on that particularly in the New Year), but the market talks, so I am more alert. The headline inflation in November is expected to be +0,4%, that will be in focus with a clear upside risk due to food, a risk for stocks.

Fundamentally I regard housing starts as the true number to watch, the market expects 575k in November compared to 529k last month. It’s very important to see if the US housing is finding more stability. If so, I might need to adjust my skeptical picture of the world…..A good number will help stocks and vice versa.

Bernanke’s words tonight we will all listen very carefully to, but he will tell us that the world has improved a bit again. He might also hint a rate hike one day, but what else can he do – they are at zero. It’s priced in the market but could give a short term reaction. No doubt that the statement is interesting because this is the main focus in the market this week.

The Dollar has already reacted too much on this. But if we look at the trading volume, then it is low in a December trading that reminds me of the good old days where nobody touched a position if they could avoid it. EUR/USD will trade towards 1,4750 again the coming days.

Peter

I think the quarterly Bank of England report released Wednesday 11^th give some good hints to the market. Particularly when we bear in mind that Bank of England has been very negative. The Bank forecast growth rates of 2.1 per cent for 2010 and 4 per cent for 2011. This is suddenly much higher than the outlook of private sector economists and the Treasury’s forecast.

Bank of England still tells us not to be too excited with the wording from the governor Mr. King “Small movements in quarterly growth rates will not alter the extent of the challenges now facing the economy, such is the scale of the fall in output over the past 18 months,” he said. “We have … only just started along the road to recovery.”

I fully agree that the recovery (where ever we look) will take a long time. Though, I take this as a further sign of a good chance that UK will leave the crisis before the European continent. I continue to like GBP and some UK stocks.

The victory for The Democratic Party of Japan (DPJ) and their party leader Mr. Yukio Hatoyama is not a surprise. Though, after almost 50 years LDP government leadership of the second largest economy in the world, I certainly think the political change in Japan is a Hot Topic. This is a short view on what we can expect of political changes and what to watch out for as an investor and in corporate treasuries.

DPJ will surely try to outlive two headlines from their election campaign. One is to change the export dependent economy into a domestic demand economy. Second is to loosen the tight bands between the government and the large corporations. Let’s take the policy changes first.

1.      Children families will receive a monthly payment of Yen 26.000 ($275) per child.

2.      High road tolls will be scraped, a surcharge on gasoline will disappear and other car related taxes will be cut.

3.      Corporate tax for smaller firms will be lowered from 18% to 11%.

4.      DPJ will work for a higher minimum wage, up from the current Yen 700 to Yen 800 and later raised to Yen 1000.

5.      The new government wants to cut the 1990 gas emissions by 25% in 2020 and by 60% in 2050.

6.      Regarding public spending DPJ will cut what they call “waste” referring to al sort of non productive infrastructure projects the prior government used to spend money on.

Point 1 and 2 is fully aimed at low income families. This income group does in all countries tend to spend 100% of their disposal income, also in Japan. No doubt that it will increase consumption, many economists says it increases GDP with 0,6% in the fiscal year starting in April 2010.

To be honest, this has nothing with a reform to do nor a structural change of the big and long lasting issues there are to solve in Japan. This can not inspire any stock market anywhere. The next question is how to finance it ?

To cut useless projects within infrastructure makes sense, but it will just sponsor the new spending slightly. DPJ has no answer on this, and there is even the risk that markets gets tired of government spending packages – this risk should by the way not be understated.

Cutting taxes for the small enterprises only, when the corporate tax for large corporations is 40%, is a way to show distance to the large companies, as was DPJ’s second big campaign headline.

To raise minimum wages is a fight that many governments have lost. I would say that it is hard to increase salaries so much in a low growth environment. Though, it emphasizes DPJ’s wish to move towards more domestic demand.

Some environmentalists would probably question why DPJ favour more gasoline consuming traffic combined with high targets for emission cuts – doubtless a fair question.

Market implications

 DPJ’s Secretary-General Katsuya Okada (possible finance minister) has said that trying to move exchange rates artificially is undesirable in the long run. It means they will leave FX rates to the market unless the Yen exchange rate clearly is much to under- or overvalued. This is a direct consequence of moving away from the almost unlimited support to the export industry. Should USD trade below 90,00, then it won’t harm the new government.

Private investors once more will absorb the even higher public debt, but as mentioned before, more debt suddenly might be out of fashion. One important fact has changed over time. In the early 1990s Japans saving ratio was around 20, next year it is estimated to be 1,4, meaning less private savings to finance the public debt.

In the stock market I pay attention to segments that profit from the higher disposal income in families with children. These stock segments are low cost durable goods producers, low cost restaurant chains (they are also placed at the highways where the tolls are removed), nursing stuff to kids. Trucking companies will also benefit from highway tolls disappearing.

On the risk are clearly companies involved in infrastructure constructing, but there could also come new restrictions for consumer lenders and a higher tobacco tax might be in the cards.

Changes always create new opportunities like mentioned above. Honestly are the opportunities few and I think the biggest reason is, that after so many years of political miss management in Japan plus a global recession, then did LDP loose because of the deep pain – DPJ didn’t win by suggesting new ideas.

To be honest, the China piece required the deepest thinking, so you get some extra. When a stock market drops 20% within 2½ weeks, and furthermore in an economy that lives on a public boost and excess liquidity the thinking needs to be accurate. The drop was over a period long enough to be traded, and not just a couple of days with panic. This makes the set-back more remarkable.

The boost and the bubble

The equity market got a boost from the very famous anti recession package. It’s ok that this supported the stock market, but the bubble like rise since March is caused by the sharp lending increase from all banks to the corporate and private sector. I have earlier mentioned that 20% of the lending went into the stock market on the mainland and in Hong Kong.

It is now widespread knowledge and seen as a fact, also understood by China’s State Council. There have been official comments indicating that this will have an end and all banks have suddenly announced a pull back in lending for the rest of this year. No surprise that the market gets more nervous when this cash generator disappears.

Fundamentally it just means less inflow of risk capital in the second half of this year. What we all are watching is if the speculative capital from the spring will move out of the market again. There are no signs yet, but it makes the moves more choppy.

Commercial properties will get a boost

Since end of last year bankruptcies among Chinese real estate developers have been expected. Most have actually survived after they sold out at fire sale prices. After a panic sale or forced sale markets normally sees the lows as a bottom and is ready to buy at higher levels. In addition the general rebound in China naturally also comforts the commercial property market.

There are clear signs of higher risk appetite towards commercial real estate in Hong Kong and China mainland.

On 29^th July Hong Kong Stock exchange had the fist property developer IPO in a year, the company BBMG Corporation. The issue was oversubscribed by a stunning 235 times at HK$ 6,38 – the first trading price was HK$ 10,20. It belongs to the story that BBMG is not a 100% property developer as they run different production brands as well. Never the less it has supported the sector in general pushing P/E above 10 again and signals more investor appetite for commercial property. The next large IPO is likely to be Evergrande in October and more will follow.

The Chinese government is doing everything possible to fuel the boost. Chinese insurance companies are hungering for investment alternatives as they are limited to a few asset classes like stocks and a small bond market. Early 2009 the Chinese insurance law was revised to include fixed investments like properties. Before a total of only 20 billion Yuan was allowed to be invested in properties. After the new rules get introduced the amount could exceed 300 billion Yuan.

The latest unconfirmed news from end of August are that fund houses and brokerages should be allowed to offer exchange traded real estate investment trusts (REITs). This needs to be confirmed by the China Securities Regulatory Commission.

Yes, it smells of a boost and fast profits, and make my alarm bells ringing. This is an opportunity that needs to be explored, but the investor needs to be very careful.

I can find a number of people who claims that commercial properties already are priced too high. That alone is a risk, but one thing is sure, a lot of unfinished projects and properties without occupation will be sold in different packages.

My conclusion is that it should be explored but the quality is very essential. If it is unsatisfactory, then stay away as the bubble will clear the air one day again..

Production overcapacity is a problem

The Chinese industrial production looks fine and is developing better than the numbers from the old economies. There has been a real turnaround from the slump last year.

That the growth rate never went down in negative territory partly justify the rebound in equities since last autumn. So what is the problem ?

The leaders of the Communist Party have a very good micro and macro economic understanding. The problem is further down in the hierarchy as the main part of enterprises is state owned. The management of corporations across China is heavily influenced by the Communist Party heads of the local provinces. Some of these heads and the corporate managers do not always take economic sinful investment decisions, but compete with the neighbour about being the biggest. The result is overcapacity, apparently so big that China’s State Council chaired by Premier Wen Jiabao intervenes.

Overcapacity in the steel business I mentioned for some weeks ago issue but now is cement, plate glass, coal chemical and wind power equipment added to the list. High-tech and service sectors are said to receive more support.

This is very interesting information as it means a lot for stock pricing in the different sectors. The way to curb sectors with overcapacity is to sharpen the conditions for new approvals but also to tighten credit for the existing business.

I expect the mentioned sectors to underperform compared to other stocks, but it also tells us, that the overcapacity is serious. The wind power sector is worth to notice, where investors throughout the world are upbeat on the sector, does China report about overcapacity.

1st half year results comfort investors

During the last week of August the 1^st half year results from several leading listed companies ticked in. Good and bad, but in general good enough to comfort local investors.

As the only airline company in the world Air China surprised on the upside due to growing demand. China Life and China’s top homebuilder released positive news as well. Below the blue chip size a range of good results was posted as well.

Car producers surprised on the downside where DONGFENG Motor Group didn’t deliver the expected income growth and SAIC Motor was weak as well, a bit surprising and should be noted.

Like in other stock indices are the banks quite heavy. The half year results are ok, but more difficult to judge due to the enormous lending growth. I am not so impressed of the banking results.

During the 20% drop in August foreign investors left the stock market but locals, and in particular private investors, bought around the bottom. It signals local comfort, though from private investors and not from the large accounts with borrowed funds behind.

Regarding the A stock index is the 3050 important, where a close above will be seen as good support. Very important is 2900 as it is watched by all participants in the market.

The August drop was steep but basically just down to more sustainable levels with a domestic average P/E value at 25 instead of 30 at the high. Some sectors are under growth pressure and the speculative money is a risk we need to watch.

The Chinese stock story suddenly has turned somewhat more complicated and I have earlier warned about uncomfortable high levels. Despite the downside risks have increased I can not recommend to leave China stocks yet, but I follow it very closely.

The uptrend in global equity markets is still intact and some factors will be supportive in September. The very important gold digger mood among private investors, who believe in the V-shape recovery means a lot for the uptrend. This combined with plenty of funds to invest and professional money managers being behind going long stocks all in all creates a natural demand.

I am also behind the curve, as the frequent reader knows, I didn’t believe in the V-shape recovery, and still don’t. The consequence is, that I am forced to recommend to enter the market when it goes up despite I am uncomfortable with the levels.

Other market participants are in the same situation, so if signs of a turnaround in the equity markets become evident, then a massive crowing out will result in steep sell offs. It’s not sure it will happen, but the risks for such a situation are rising in my view, but the market will find comfort during September.

Industrial production and US housing supports

The positive tones are also founded in real numbers I admit.

One of the reasons why we saw the steep drops in GDP was because corporations took their stock of produced goods much lower. Most likely was it below what is needed to supply the new lower consumer demand. The logic consequence is that production of goods will go up a new normalised level the coming months.

In June there was a small improvement to “only” a drop of 17% in the industrial production within the Euro Zone on a year-on-year basis. The “improvement” was seen as a real improvement but the year-on-year development needs to move against zero, otherwise the production is in an ongoing negative spiral. It feels positive but it is also a technical rebound.

What truly has turned around for a period is the US housing market. The most significant turn is in existing home sales. It belongs to the story that inventories are still high at 9,4 months of demand, but off the high at 11 months supply. Prices paid have increased a little but just a few percentage points. As I wrote earlier in August is the housing market important in my view. No doubt that the good impulse from the housing markets will continue for some months. A closer look will disclose that a growing number of house owners in US are defaulting, but it is not in focus right now. I note it, and keep the information on my risk monitor, but on the side right now.

Elections in Japan and Germany won’t help

Two large economies elect a new parliament within a month. Very interestingly, also the two countries with the biggest structural reform need. This global crisis should be the catapult for totally new politics one should think, but reality is more to continue as always. Concerning Japan I recommend to read the Hot Topic covering the new Japanese government and politics.

In Germany a coalition between the Conservatives and the Liberals is the likely outcome with Ms. Merkel in the lead again. I am almost tempted to say that nothing will happen the next 4 years, and even Germany has also a large deficit to fight with as an additional problem.

It’s hard to see that the elections will give any new impulse to the equity markets.

Unemployment is a monster

The German election most likely blocks for further large reduction of jobs, but the rumours are that it happens after the election. I think the speculations are closer to reality than many can imagine.

It is in line with the ongoing global growing unemployment. I recognise that the first July labour market data from different countries have been slightly better than expected, though I judge it as a summer blip. Not only is unemployment still rising but wages are under pressure and the working hours for the people in job are lower. Unemployment is a monster problem with no improvement in sight combined with the same taxpayers that suddenly have to service a much higher public debt. It results in a fundamental pressure on the consumer purchasing power and the debt might lead to higher taxes.

How to play the equity market ?

With the view I have is investing a true challenge. I do not expect any impulse from corporate investments either, as the corporate sector has a production overcapacity.

The global companies manage the product adjustment fastest and most efficient. That was also the reason why I recommended global stocks as the first entry together with Chinese stocks.

S&P 500 managed to close just above 1.030 triggering the second entry round in global blue chip stocks. Together with the first entry at 925 it gives an average of 977,50. The stop loss level is 900 and next entry point is 1.110. On my list of global blue chip stocks I have a couple of oil companies as well. These I consider to remove as the high oil price is not justified by real demand.

Nikkei broke 10.500 last week which was the entry with the first 1/3 of expected total investment in Japan. The stop loss is 9.000 and next entry point is 11.700.

As you can imagine am I not at all comfortable with the entries, but respect the higher markets we currently have – but for how long ?

After hitting a bottom at 82,2 in March the German IFO index has gone steadily up since to reach 87,3 at the latest reading in July. Are the people at the German companies cheered by the investor optimism or are things simply improving ? Honestly, I also feel at bit more comfortable and would rate the world less bad than for six months ago. The people I speak with at different companies have the same feeling, but in Germany are companies also getting a few more orders than in March / April. As mentioned in the China article, some selected Japanese and German companies will benefit from the large Chinese fixed asset investments. Another reason for the pick up is that inventories have been run down to the absolute minimum. Some inventories now need to be rebuild and traditional export countries will benefit slightly from this effect. This will not rebound the world, but just confirms that the world didn’t drop into a black hole. We do still consume, but as mentioned in prior comments are the consumers buying goods that they need to have, and not those who are nice to have. The goods bought in emerging countries are still cheaper low technology products produced in low cost countries and not the high tech stuff. A consumption pattern I think that investors should have in mind when picking the stocks.

It would be tempting to conclude that the US consumer is alive again, and just recommend to buy more stocks as US consumer confidence also hit a clear bottom in March / April. The common sense speaks against it. We all know that many private households are heavily indebted, the unemployment continues up and that the housing market is just looking less bad. The way I read the consumer confidence numbers is that, US consumers also have concluded that the world didn’t disappear but continue at a slower pace.

In the context of expecting a lot from each other, did the Asian Development Bank (ADB) publish a very interesting report on the economic outlook for the Far East. It confirms that things are improving, but to get the economy rolling again, the western old economies should start to import and consume more.

The old western economies hope that China can save the world, particularly the Euro Zone wants to export more. Far East waits for the old western economies to consume more again. At the same time are all public stimulus packages designed to help the domestic demand. So we all wait on each other. This way the economic recovery will move on, but not as fast as the expectation indices signal.

All stock markets are bid

Where ever we look it says recovery. I fully admit that I am behind the curve regarding the turnaround in the stock markets since March. So I am trapped between the currently very bid market and my view that it has already gone too far this year.

As mentioned earlier this year I found it necessary to buy 1/3 of the intended portfolio of global stocks when S&P 500 broke 925. The next tranche is when the index trades at 1030. I have always argued that Far East will turn first, but the speed surprised me. The first allotment of Japanese shares (1/3 of intended total portfolio) is when Nikkei breaks 10.500. As the rest of the world I also look for Japanese corporations with good Chinese market share within fixed asset segments, special machinery tools and luxury consumer goods.

Globally I still search for companies who sells products that supports internet based sales or services. Preferably products that generate steady fee incomes. The entry levels I mention above are stop entry levels, i. e. a stop loss on my sceptic view regarding the current uptrend in all stock markets.

As you can read, I am uncomfortable with going longer in equities but I need to respect the market. Please be aware of the relative low turnover there has been as stock prices has gone up lately. It is dangerous, and the bullish sentiment is based on our expectations to each other instead of real earnings. If stocks goes up without earnings are rising, then it can be explained by the cheap liquidity the central banks flood the world with = an asset bubble, that’s the risk.

I agree with the upbeat market participants, that unemployment is the last number to peak, and also are different expectation indices showing clear improvements. But does it justify the V shape recovery that is priced in the equity market right now? I apologise, it would be most pleasant to say buy! Reality is as usual tougher.

Demand, unemployment and production capacity

Let’s start with the good one first. Demand is there, but it has changed. No secret that in the so-called rich countries demand has changed from “nice to have” to “need to have”. This has created the consumption drop together with a consumption stop due to debt among private households. In general do consumers still purchase, but when, then cheaper and low technology products. As an example, in the old economies are mobile phones still sold, but with fewer functions. The sold cars are smaller and many consumers buy small used cars all of a sudden. In low income countries without significant private household debt, the demand for goods is somewhat more stable, but these consumers have always bought less advanced products. The advanced high technology and work intensive products from the old economies (very particular Western Europe) are not in demand, but the less advanced products from low cost areas are still in demand.

Global unemployment is still rising and will continue to go up for some time. Right now everybody expect the peak to emerge Q1 or Q2 next year. Maybe, but what happens afterwards? The V shape believers simply argue that the world recovers again including the jobs, and it is certainly priced in at the current share prices. It won’t be that easy, and further negative implications need to be resolved. Across Europe are people willing to reduce their salaries, this indicates that assets should be cheaper as a compensation. In Europe, corporations to a large extend use to share jobs now to avoid more layoffs. In US the average weekly working hours are at a 40 year low. Both facts actually tells us that the unemployment should be higher. Just to get weekly working hours and the shared jobs back to normal will take time. Thereafter hiring will start, but much later than Q1 or Q2 next year…..

Many company news are concerning production cuts as a natural consequence of the above arguments (or, facts in my world). Just to take one example might be too simple, but statistics about the car industry is very accurate and a good global demand / capacity indicator. One could wonder why global political leaders are so eager to fight to keep all car production plants (yes, it is many jobs). The global car production capacity is 90 million units per year but the current demand is 60 million units. Of course the overcapacity has to be reduced, and other sectors will be in the same process for some time as well.

What now ?

Demand is there and the world won’t disappear, but the V shape recovery priced in the equity markets came too fast. In my view, the market sentiment has already changed towards negative, while we mentally still think that the market is on the way up. The frequent readers know that I for a long time have fancied Far East, and I still do, but so do a growing number of market participants. It correlates well with the under performance of European stocks during the last 2 months. Despite the emerging regional differences in the assessment of the markets, the global macro economic trends will dominate. For the above reasons I argue for a 10% downwards correction for equity markets in general. The coming reporting season from US companies might give relief one or two trading days, but it won’t beat the global macro economy.

No doubt that I am very sceptical about the current rebound in the global equity market, or at least the speed of it, but right now we play the “all happy” game. I continue to believe in the W shape recovery, where the global markets currently are in the first V. I acknowledge that the low of the second V won’t reach the lows we had in the markets earlier this year (or last autumn in the BRIC countries).

I also agree that the world didn’t end in a black hole. We might have seen the worst in Far East, seeing some signs of stabilisation in US but the outlook for Europe cannot cheer anybody.

The market was too short equities in February/March and the global banking sector leads to significant volatility, but the whole market rebounds so I am soon forced to enter partly (I regard it as a stop entry). Private investors have serious poured money into mutual equity funds who again are forced to buy. Several professionals I speak are still more side lined (like myself) than we suddenly are comfortable with. This gives an unusual market situation, as normally are professionals more ahead.

Are the consumers alive ?

The consumer is still alive but consumption has changed back from “nice to have” to “need to have”, and everything that requires financing is much more difficult. Consumers in countries with high saving ratios (or at least low household debts) are doing fairly well. A nice example is the German private consumption that has been almost flat the last 6 six (within index 100 – 105 for the whole period). It means that households in Germany, China, several countries in Far East and Africa are buying more or less as usual, but basic stuff and non expensive household appliance.

I have observed that business done on internet is growing and companies active on the internet are performing quite well. It’s all sectors involved from advertising, direct sales, software tools for internet based business. It would be tempting to argue that the global slowdown has moved customers to the cost effective internet shopping. Surely its right, but be careful, it could also be a behavioural trend among consumers that just takes off and is growing. I think that this is the case, and simply see internet stocks being a strategic holding for the next 10 years. This segment I suggest to manage in a separate portfolio of it’s own along with other geographical linked portfolios.

Allocation strategy

If S&P 500 has a Friday close above 925 I need to entry the stock market. On the next pages I list the expected future allocation, the currency mix of the first allocation. I primarily go for Chinese stocks (please read the China part) and global blue chips to balance each other (high risk against value stocks). I list the segments and the exchanges they trade on, but I am afraid of giving exact company names due to the heavy regulated environment the financial market is working under. The details can be mentioned in bilateral conversations.

The first allocation will be 1/3 of the final intended investment amount in Chinese stocks and ½ half the intended in global blue chips. Second round will include the internet portfolio, Far East (ex. China) and US.

The benchmark for the global blue chips is “The World Index” from MSCI.

The segments I choose:

Beverages: A well known producer of soft drinks. The company is listed on New York Stock Exchange.

Chemicals: All chemical companies are giving weak outlooks, but if the world starts to move then chemicals will be in demand. I choose a world leading German based one which is listed on Xetra in Frankfurt.

Food producers: I take 2 companies in the portfolio. Both are extremely good in sales globally and are very well positioned in countries like India to benefit from growing incomes among the lower middle class. The companies are listed on Virt-x in Switzerland and on London Stock Exchange (I take the UK listed to get the GBP risk).

Household goods: One US based company with the same sales profile as the 2 companies in the “food producer” segment, the company will also benefit from the same positive development among low income groups. The company is listed on New York Stock Exchange.

Personal goods: Basically same arguments as above, just the stuff is for more personal use. The company is listed on New York Stock Exchange.

Industrial engineering: If the world moves upwards, then it happens in Far East first and most significant. This Japanese company is positioned in all over Far East to participate in that potential development. The company is listed on Tokyo Stock Exchange.

Mobile telecommunication: If we like it or not – it’s here to stay and will grow. It’s always more interesting to participate in a growth market where China and Far East will outperform the world, so I choose a large Chinese and a Japanese one. The first company is listed in Hong Kong and the second on Tokyo Stock Exchange.

Oil: The oil price already has moved upwards on expected future demand but in a balanced simply and demand environment the oil price should be $85-90 (Hot Topics from last year). The conclusion is that we need oil in the portfolio and preferably companies with own reserves. I add 2 companies to the portfolio, the first is listed on New York Stock Exchange and the other one on London Stock Exchange.

Fast food: It works in good and bad times as long as the well known company can expand into new areas, which seems to be the case – even during extreme bad times. The company is listed on New York Stock Exchange.

The number of companies is right now 12.

Average P/E is 13.

Benchmark for the global blue chips is “The World Index” from MSCI.

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

I apologise for not having updated with comments the last 3 weeks but I had 1½ weeks holiday on 2 very nice hotel. Very unfortunate did the wifi not work. Then Easter arrivved……

The 4 entries from today are:

Currency markets – Back in the risk aversion / appetite game again

Equities – A new recovery shape has been invented – the W shape recovery.

China – The Ox is strong

Central bank rates – What can they do? Print more money…..

Equities – A new recovery shape has been invented – the W shape recovery.

Nikkei 225 (8.743)  Topix (835)  Dax (4.542)  FTSE 100 (3.989) Dow Jones (7.920)  S&P 500 (835) Nasdaq Comp (1.626)  

The current uptrend in global equity markets is so persistent that I am very close to revise my view on this asset class. So far, I have for a very long time (since early 2007 or longer) argued to stay away from stocks. If the current upside momentum continues for just another week or two I will adjust my view to be 25% long of the total expected allocation to equities.

The downturn will reassume, the question is just when. With all the stimulus packages a W shape recovery is about to be created – what is a W shape recovery? Personally I have never heard about it before, but I think it is a simple way to explain what will happen.

The left downwards line in the W is the crash the world has explored since late 2007. The far right upwards line in the W is of course the healthy and real upswing that will return one day – hopefully. In between we have the difficult stuff. The first line up in the W might be where we are now. If it’s steep, the second downturn will be very steep and the low in the second part of the W will be lower than in the first part. Official stimulus packages are made for borrowed money meaning the governments move future consumption (public and private) to current consumption. Too enthusiastic public spending (stimulus package is the new official buzz word) will lead to a prolonged up- and downturn in the middle of the W shape recovery. Higher public spending now leads to higher probability of a lower bottom in the second part of the W (debt repayment or some governments simply might run out of money…..).

There is a chance that the second bottom in the W will be higher than after the first down line. This argues for going long as mentioned in the start. Right now there is a global consensus about better times next year. After a negative GDP growth of 5-10% this year is +1% next nothing to cheer about, but investors do, and I need to respect this. Some argue that the negative growth rates are less steep, which is correct but we still haven’t got any feeling about where the bottom is. One thing I take as positive is a few good signs from the housing markets in US and UK. In the areas with very large price reductions some buyers are emerging, but it also indicates for rest of the world how low housing prices needs to go before a two way market is working again.

Realisticly seen is the current positive consensus more based on expectations than anything else. All the PMI’s and ISM’s plus other expectation surveys have turned around late but reality looks really nasty. Credit is tight but we can live with that, industrial production has dropped but partly due to destocking. Other negative impulses are a true threat, corporate investments (particular in the industry) are dropping like a stone this year and unemployment is on the rise. Fed’s Fischer says that US unemployment will be above 10% next year and weekly working hours are on a multi year low. Same picture in Europe, but there is risk of an explosion in continental Europe. The number of employees who have been saved from getting fired by lowering their working hours to a de facto part time job is massive. I see a big risk of these jobs disappearing, but it is hard to say if it will be by end of Q2 or Q4.

The hope is caring the current uptrend because investors still live in the V thinking. I expect the hope to be strong enough to represent 1/3 chance that the second bottom in the W is higher than the first one. This is against 2/3 risk of a lower second bottom in the W. 1/3 chance for a higher future bottom might be enough to argue for entering the stock market with 25% again. For a long time bear it’s not so easy, but within the next 1 or 2 weeks I should make my mind up, well aware that it is a W shape recovery……..

Targets: Nikkei 225 6.683  Topix 697  DAX 3.075  FTSE 100 3.456  Dow Jones 6185  S&P 500 656 Nasdaq Comp 1191

China – The Ox is strong

Hang Seng (15.670)  Shanghai B (168,00)  USD/CNY (6,8320)

For the next 12 months we won’t see the lows from last autumn and I need to revise my thinking about Chinese stocks.

I have always argued that the turnaround should come in China and other countries in that area. But I admit that I didn’t expect the turnaround to happen so fast and I will claim that it is not sustainable. The counter reaction might come next year.

No doubt that domestic China has seen some improvement. The number of passengers on domestic Chinese flights lately have shown y/y growth rates of more than 10%. Different consumer segments also have shown good signs. But in reality are we talking about small indications.

The rest for sure is partly influenced by the government. The government officials talk the market up. The car sales numbers are helped by government buying of new cars that should have been bought later in the year. Rumours that the slightly positive housing market sales partly is caused by state run banks that are forced to increase their lending (fake mortgages might be in the game…..).

The Q1 GDP numbers that will be released Thursday are long awaited. The expectations have been around +6,3% within a range of 6% – 6,8%. Based on comments Wednesday the number will be around 6,0% in the very low end of expectations. The market will look at the q/q development and I think it could give a positive impulse to the stock market Thursday. What is very important to note, is that whatever the number will be, then it is inflated – it should have been lower……The government have done everything to keep the growth running. State owned companies have been persuaded not to fire people, companies are importing raw materials with the sincere hope they will be used later etc.

If the Communist Party finds it necessary with an additional stimulus package, I take it as a clear sign that the situation is worse than expected. It seems likely that the package is under way.

Earlier this week Financial Times had a very interesting article about the Chinese housing market. Mr. Cao Jianhai, professor at a leading government think tank, argued that property prices will drop another 50% during the next 2 years.

All these alarming signals are not having any impact on the market right now, but fit well into the W shape recovery.

While I consider the strategy about Chinese stocks I remove the targets.

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 5 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 5 entries from today are:

Currency markets – Finally reacting on different factors

Equities – Another bull go, backed by the US tax payer – PPIP it’s called this time….

China – Reorganizing the car industry

Hot Topic – EUR/USD – Did Fed start a new EUR/USD trend ?

Central bank rates – They did, quantitative easing from Fed…….

Equities – Another bull go, backed by the US tax payer – PPIP it’s called this time….

Nikkei 225 (8.216)  Topix (792)  Dax (4.719)  FTSE 100 (3.974) Dow Jones (7.555)  S&P 500 (792) Nasdaq Comp (1.509)  

It almost feels like history, but I need to touch base on the surprise announcement from Fed last week about buying T-bonds. If you had asked me even 1 minute before the announcement, I wouldn’t have believed it to happen. Mr. Bernanke is truly living the “helicopter speech” (if you need a copy I can provide it).

The bond market intervention from Fed only helped US equities for a few trading hours, so why spend time on the plan? The plan is of serious magnitude and has 3 short to long term implications. The 10 year T-bond rates dropped 50 basis points within minutes. This should be a very strong impulse to buy stocks but this basically faded out very fast. A good sign that the bull sentiment was about to end for this time.

Long term, the intervention plan is serious interesting for the stock market. Fed says, that they want to stabilise the housing market. I trust them, and they know that the US economy won’t find foothold before private households feels confident about the future and their own wealth situation. I fully agree with the observation and it’s a clear signal about how worried Fed is, which the equity investor should take as a warning signal.

The hidden agenda is really important. Fed simply wants to create inflation to help the highly indebted private households. Deflation is bad for assets (a true risk right now), what some call natural inflation around 2% we like but higher inflation is unpleasant for assets – this should worry equity investors. The old Fed Chief Mr. Greenspan was correctly criticised for “the big experiment”, but this time the game is highly toxic……

Talking about toxic, then the new bull hit in the market is called PPIP (Public Private Investment Program) presented by US Treasury Secretary Timothy. A burden will disappear from US banks, that’s correct, but they also need to take the loss if the toxic assets haven’t been valued at the sales price. Private investors are intended to join PPIP, but investors should only join if it’s a good deal – if it’s a good deal for investors, why should the banks sell the assets? The US Government will try to sponsor both sides so the deal is acceptable for banks and private investors participating. The bulk of toxic assets is mortgage bonds, basically debt issued by the normal tax payer. As mentioned above must the deal somehow be sponsored by the US Government, backed by US tax payers. So the US tax payers sponsor financial market participants to trade their own debt – did somebody mention the ponzi scheme……it’s toxic.

I fully accept that the market use all positive signals to buy stocks, and that leading indices are trading above important support levels now. DAX stayed above 4000 on Friday, Monday Nikkei just went straight up through 8000 and Dow Jones will stay fine above 7000. This alone will create short term support. In addition we have the financial year end coming in Japan, where it seems, that there have been a serious interest in buying stocks higher from official or semi official names.

An even stronger force is the mutual interest among investors and market participants in higher equity prices. It sounds strange, but should not be underestimated. Many would prefer to live with higher P/E ratios just as long the stock markets trades upwards as well. The hope must of course be that corporate profits turn around from the current downward trend. This I consider a lot.

I might be about to make a serious mistake by not acknowledge the current bull market, but I just see the underlying fundamentals as continuing lower.

Global unemployment continues to rise, and maybe even accelerates. This might go on for another 12 months or so. Parallel the global downturn in the private housing market is spreading and accelerating (including China but with Switzerland as the only exception). Despite the many stimulus programmes it’s a natural reaction if consumers simply scale down, and continue to reduce spending.

BASF AG, the world’s biggest chemical producer, has halted construction at two facilities in China. The company simply is in line with all other companies reducing Capex. The significant reduction in company investments adds to the lower global demand, and it will take time to speed up again.

About BASF AG, the following comment came from their Chairman Mr. Jürgen Hambrecht saying that, “demand for chemicals will not rebound this year. It may recover next year, or at the end of next year.” I note the comment because chemicals are used everywhere around the globe. He might be too pessimistic but it could also be that the view turns out to be optimistic, as we haven’t seen the bottom yet.

The price action during the last 2 weeks shows that the market is closer to a level where investors are comfortable to be long, but for the above reasons I stay with the view that it is too early to enter the market.

Good arguments for going long equities are more than welcome, as I consider the current market a lot.

Targets: Nikkei 225 6.683  Topix 697  DAX 3.075  FTSE 100 3.456  Dow Jones 6185  S&P 500 656 Nasdaq Comp 1191

China – Reorganizing the car industry

Hang Seng (13.447)  Shanghai B (152,00)  USD/CNY (6,8330)

This week the market will chew on the old data once more and focus on different rumours about old or coming numbers.

The domestic sentiment is still positive and will trade higher. Hang Seng is very bid due to the large component of real estate and banks, so up as well, following the world.

A currently battled sector might be worth to have a look at.

If you believe that car producers will belong in the future equity portfolio (it will in mine portfolio), then the Chinese government has decided how the Chinese controlled car industry will be shaped in the future. The interesting plan was published 20th March.

According to a State Council statement it plans to reduce the number of automakers before end 2011. The spilt will be to two or three groups with an annual production volume and sales of 2 million vehicles each. The next level is expected to be four or five companies at 1 million each. Today 14 carmakers produces 90% of the domestic sales, the number of companies is planned to be 10 in 2011.

The 4 surviving major groups are indentified:

FAW

Dongfeng Motor Corp

Shanghai Automotive Industry Corp.

Chang’an Auto

These companies have been encouraged to pursue mergers and acquisitions. How and in what direction, the statement didn’t mention.

A bit interesting about SAIC, China’s largest automaker by sales, as this group is thought to be in the second wave of mergers. The company merged with Nanjing Auto in 2007.

Please note that the above information is not a trade recommendation, but is seen as important information when building the equity portfolio…..

Maybe a word about the February Chinese auto that jumped 25% y/y. No doubt that the reduction in taxes on cars with small engines had an effect but the February 2007 number was very low due to Lunar New Year. The rumours also say that the government and public departments bought many cars in February, though unconfirmed as usual.

I keep the target, but know that I am under pressure like with the rest of my views..

Targets: Hang Seng 11.000     Shanghai B 110

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – Feels like waiting for the next hurricane.

Equities – The bulls are having a party

China – Still joining the bull party

Central bank rates – One cut more from ECB in April and we are there.

Equities – The bulls are having a party

Nikkei 225 (7.949)  Topix (760)  Dax (3.988)  FTSE 100 (3.864) Dow Jones (7.217)  S&P 500 (753) Nasdaq Comp (1.404)  

Do doubt that the current environment is positive – is it a trend turnaround or a bear market rally? The rational answer is, that it is a bear market rally because there is still no rational reason for rising stock markets. The major problem with my opinion is that the market many times isn’t particularly rational. In addition I acknowledge that this rebound has been more forceful and more substantial than prior.

I actually spend the weekend reading some bull articles and research to test my bearish view. For the frequent reader it won’t be a surprise that I keep my worried and bearish view on the world.

I respect the desire among many to buy (more) stocks, and fully acknowledge that a majority of ongoing positive investors will turn the market around. So it is a very good reason to take the up move last week very serious. Anything could have triggered the move but it can be that banks have been sold too much down. Just, one should read the message very carefully when Bank of America said they expected to be profitable before provisions and write offs. In the next sentence they mention that they hope it also will be the case for the real bottom line, but they were not sure. This is not a buy signal for me, because the investor is simply betting the credit related losses will be lower than priced in the market. In a world where well educated people discus if the recession is the worst since 1930 or 1980. I remain sceptical about these reasons to become cheerful and just go long stocks.

One of my serious concerns is that the global unemployment just goes up and up, and the jobs don’t come back within near future. The real estate market is going lower around the globe – any country (including China) sees lower prices for commercial and private properties. If you observe how many corporations per day, that announces postponed or cancelled investments, then it’s a good reason to rethink any stock purchase plan. Is it all priced in? It’s hard to believe.

One good thing in my opinion is that many corporate balance sheets are in fairly ok shape. I look at sub investment grade corporate bonds, as the debt quality is better than how it is priced……

Tactical I watch the flowing this week:

Japan: As mentioned last week, it will be difficult to imagine Nikkei below 7.000 this month due to year end position closing and window dressing. Please note the government report released Monday. A quote from the monthly report that says everything “the economy is worsening rapidly while in a severe situation”…….During the week, I watch another monthly report, the one from Bank of Japan on Wednesday.

Europe: UK stocks will still swing with the financials, but on Wednesday the unemployment data are more than interesting (exp. 6,5%). I think the fundamental concern will return to the market. In Germany, the reality arising from the discussions about Hypo Real Estate and Opel, the GM company, will also gain focus once more.

US: Financials surely did their part, the next question simply is, if the spill over on other sectors is strong enough to get them going. As written above, am I doubtful, but there is a lag of truly interesting economic data this week. So it’s still bullish to sideways for the week. 

Targets: Nikkei 225 6.683  Topix 697  DAX 3.075  FTSE 100 3.456  Dow Jones 6185  S&P 500 656 Nasdaq Comp 1191

China – Still joining the bull party

Hang Seng (13.031)  Shanghai B (144,00)  USD/CNY (6,8340)

The economic numbers from China are mixed. Domestic car sales went up but import and export dropped further in February. What is more mixed are the different economists views on the economic data.  It seems that each economist uses the arguments that fits to the personal view, and these are in all directions. It also shows how devoted the market is.

We will need more data to get a clear idea about the next move in domestic equities. The global positive sentiment should spill over on the Chinese stock market during the week keeping the bulls happy.

Some interesting information always come out. Friday, People’s Bank of China and also China’s Premier Wen Jiabao gave some comments. They show a very interesting concern about the future value of China’s US bond holding, both in respect of the real value, the US fiscal discipline but also concerning the Dollar. Again they gave the warning about deflation (it must on top of their minds so often it’s said), but the official China apparently also has an opinion about gold – they think it raise towards the all time high again.

The credit market in China is under clear observance after the significant numbers in January and February. I argue, that a major part has been allocated to relative safe lending like the big government supported public projects and the smaller companies have difficulties getting funding. Several well known loan guarantee companies are in difficulties. The companies have been involved in different financing of the small and medium sized companies (SME). The finance companies are de facto providing SME’s with working capital but the source is drying out. At the same time is the grey lending market under pressure as mentioned in prior comments (after all the grey market counts for around 25% of the total Chinese credit market).

It has two effects, run on official bank lending but also squeezing the liquidity for the SME’s that can’t access bank lending. The official credit growth is not as big as expected but is more moved around in the Chinese box system.

As usual, I remain skeptical about the current positive sentiment and keep the targets.

Targets: Hang Seng 11.000     Shanghai B 110

Below you will find my weekly view on the very challenging financial markets.

The week has been extremly busy and then I caused some technical problems – all in all it gave some days delay with I apologise for. Probably also causing some text problems this week, not always so easy J

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – The Greenback is the key again

Equities – Realistic risk conversations would help the market.

China – Wen thinks its ok, or does he?

Central bank rates – they give it another try at ECB……

Equities – The storm reaches new highs but the ship has less and less water under the keel.

Nikkei 225 (7.376) Topix (722) Dax (3.923) FTSE 100 (3.697) Dow Jones (6.926) S&P 500 (720)

Nasdaq Comp (1.358)

Despite some relief these days, the big picture is still “serious storm”.

The target in S&P 500 at 656 was nearly reached at an intraday low of 666 Monday this week. The sell off

during the last 2 weeks might have been too fast, but I take it as a clear sign of a sentiment change among

some investors. Occasionally I have mentioned, that buying stocks since January would be a bet on an early

ending of the global economic crisis.

It’s getting clear for many people that 2009 unfortunately wont bring any turnaround or any clear signs in

that direction. What gave some comfort, despite the stormy weather, was the expectation about corporate

earnings falling, but not dropping out of the bed. Like when a ship still has water under the keel so it is able

to manoeuvre. Now corporate earnings deteriorate and it’s difficult to give guidance, like there is less and

less water under the keel before the ship strands. The risk of companies stranding is increasing, so it’s not

just a question of investors not getting any return on their investment short term. It’s a growing and real risk

that listed companies will go bankrupt.

It seems understandable what happens, as the market once more reprices the value of assets given the lower

earning expectations and the prolonged macro economic uncertainty. It is unpleasant, but as long as we can

explain what happens, it’s not that bad.

The recent sell off bring more newly convinced bears in the headlines calling for S&P 500 in 525. Normally

it’s a good sign of the steepness of the fall is fading out (by not a turnaround yet).

The market will find some support in Japan this month as I expect Nikkei to be very well supported at or just

below 7000 due to financial year end window dressing. Public like funds will act as buyers. In addition the

Japanese government can buy stock holdings from Japanese banks, but the banks would then have to book

the loss.

A public French pension fund last week announced that they will invest EUR 900 Mio in Japanese stocks

during 2009. It can’t save the market, but it is a sign of very fundamental long term investors planning to

return to the stock market during this year. Important information to notice.

I keep the targets.

Targets: Nikkei 225 6.683 Topix 697 DAX 3.075 FTSE 100 3.456 Dow Jones 6185 S&P 500 656

Nasdaq Comp 1191

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – The Greenback is the key again

Equities – Realistic risk conversations would help the market.

China – Wen thinks its ok, or does he?

Central bank rates – they give it another try at ECB……

Equities – Realistic risk conversations would help the market.

Nikkei 225 (7.280)  Topix (735)  Dax (3.719)  FTSE 100 (3.665) Dow Jones (7.063)  S&P 500 (735) Nasdaq Comp (1.378)  

How to start the equity comments this week…..The DAX target at 3.906 was reached. It’s just to follow up on the targets and not to flag that I was lucky to be right. The new target is by the way 3.075.

Back in October/November last year when I calculated the next and lower target for S & P to be at 656, the world was different despite the steep sell off at that time as well. At that time I used the total expected earning for S & P 500 for 2009, a fair P/E value and then subtracted some uncertainty. With the expectation that the target should be reached in May/June this year (can still be the case) and it would then be time to consider when to go long.

But I am worried. The development since the start of this year has given us horror news every week. At the same time we have politicians bailing different sectors and/or companies out every week across the globe plus poring new stimulus packages into the black economic hole. Parallel the global economy is getting more unstable. The same politicians are conducting crisis management and general policy as would the economies return to earlier absolute levels – still talking about the recovery starting sometime during H2 2009.

It’s most likely a good idea with stimulus packages, it is also very vice to assure that payment systems functions and that the depositors money are safe (basic banking). But we need to be honest, because the stimulus packages will not create the turnaround but only smoothen out the downturn.

This type of crisis management is deeply worrying because politicians back it with comments about keeping everything as it was. We all know about the biggest ever credit bobble leading to overconsumption and an asset bubble.

When we get the disastrous data like output numbers dropping with 40%, then I also agree that they will rebound, but to what? If the new absolute level is 15% lower than earlier, then it’s still a significant worse new level than the world was used to. We can unfortunately not expect the future production capacity (and income) to run at the same speed as in the bubble times.

Sort of the same picture when we talk about asset prices. When I by coincident meet wealthy people they normally ask if I also agree that stocks soon will go up. Basically fine in line with many forecasts in the financial industry, where last week gave us a good example. A prestigious house lowered their end of year S & P 500 forecast from 1100 to 940, and at the same time mentioned that it indicated a 22% gain for rest of this year – now it’s 28% away (34% p. a.). The continued upbeat forecast is mainly based on a 50% higher total S & P earnings in 2010 compared to 2009 – is it realistic? It is hard to imagine, but in line with many other forecasts.

It is very though to get a sensible discussion about what to expect because the wishful thinking about returning to prior levels is unrealistic in my view. If we are mentally blogged we by far don’t get a prober risk management discussion. I fear that the talk about saving and backing everything, blogs for rational thinking about what needs to be saved and how to protect the rest as much as possible. It would also spur the financial industry to advice about how to survive the financial turmoil instead of blindly recommend a general turnaround.

It might sound ironic, but when it’s time to move away from cash, then is investing in strong companies the answer to preserve the money long term, maybe even in a bearish market – not yet and it is another story J

I have not included any tactical comments for the week as we need to get the big picture sorted out first. Naturally do all the above comments go well in line with my targets, but I have not made long term conclusions based on the above thinking yet.

It might be that this is the final meltdown to 656 in S & P 500, and this was it. Even if one is right on the trend it’s always very difficult to judge when the market enter the final stage of the big move. Several typical indicators are missing if this should be the final sell off. First, the horror news are getting more frequent and bigger proving that the famous light in the tunnel is coming very fast towards us – it still looks like that escape is the best solution. This is fine in line with the feeling that there is no foothold in any economy anywhere (in China maybe, but I belong to the sceptical camp). Then we have the equity strategists, ongoing talking about higher stock markets (they surely can’t invest for their own money), we still need to have them forecast flat or lower markets. Finally the good old one, my mother in law and the taxi driver are still not telling me that stock markets will drop further.

If all these important groups of usually good (reverse) indicators were more clear, then 656 in S & P 500 might have looked attractive as entry point in selected strong companies. Right now I am doubtful.

As said above am I deeply worried about the growing bailouts and stimulus packages combined with talk about returning to the old economic world, instead of discussing how the new world will be and how to move on when we have landed.

It will hurt currencies from weak economies and stock markets further in the coming months because investors face even bigger uncertainty, partly due to the missing realistic risk discussion.

One piece of economic data is the number of all numbers this week, US labour market data on Friday. We all know it will be bad, but how bad? Good question but depending on the movements this week, the market can move steeply in both directions after the release.

I keep the targets plus the new one for DAX.

Targets: Nikkei 225 6.683  Topix 697  DAX 3.075  FTSE 100 3.456  Dow Jones 6185  S&P 500 656 Nasdaq Comp 1191

China – Wen thinks its ok, or does he?

Hang Seng (13.437)  Shanghai B (148,50)  USD/CNY (6,8340)

Chinese stocks went lower last week. I say it makes sense because equities only went up each time a new part of the stimulus plan was released. The bulls will say that the China mainland economy has seen the worst, and therefore one of course needs to be long China mainland stocks. To be honest it’s not an easy call, but you know my standing. I see the recovery in the stock market as premature and too early, but there is a lot of information to elaborate.

During this weekend the Chinese Premier Wen Jiabao was on the first ever on-line chat with the public. His comments have been covered by several media reports but the headlines are like this. He speaks openly about the unemployment among migrant workers, and the problems finding jobs for the college graduates finishing their studies this year i.e. it must be a problem they can’t hide anymore. He also mentions that the global crisis is spreading, also within China, where he sees the export dependent eastern part of China as most hit. He talked about a long crisis.

On the upside he said that the government was willing to support more if needed. He referred to the increased consumption and bank lending in January as a sign that the stimulus packages have started to help. Furthermore he noted that the power generation and consumption is higher this February compared to 2008. It’s a number the Chinese government focuses a lot at, but could there be a Lunar New Year effect?   

Due to one report Wen also said that he is worried about the stock market. Not in what direction, but on the downside I suppose. In my view it’s a signal that the government will support if it drops too low.

Why this openness one could ask? It could be another small step towards more openness in general, or it can be because the problems from the economic downturn are so big that the Communist Party needs to communicate with the public about it. It’s China so you never know, but I am a bit to the last one.

Announced initiatives, but somehow less public, that are worth to keep an eye on. Ten industrial sectors have so far received help in different ways. The next on the agenda is the logistic sector, where the government will try to encourage more growth but also reorganize the industry into bigger players. The government will also allocate more investments in the non-ferrous metals industry. It will partly be done through direct investments in companies, but also by setting up a national reserve system for non-ferrous metals. A last point that will please G20, is to increase the export rebate……

From the unofficial information channels comes the most alarming news as usual. It’s about the commercial property market. Hong Kong is easier to evaluate because some companies are listed. Some property companies in China mainland are also listed, but there the financial information from the companies might not have the same quality as we are used to outside China. The empty office space in large metropolitan areas is simply just growing. At the same time are very large developers and projects coming very much closer to the credit renewal season – probably within the next 12 months. We are talking about very big financing needs and partly are western money involved. Lower rental income than planned for the projects and with the western pockets empty it will be a tough task…….Despite that property prices has come down in China, one still needs to sit on the hands to wait and see what happens.

I keep the targets.

Targets: Hang Seng 11.000     Shanghai B 110

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – Event risks are rising

Equities – It feels heavy……

China – So far the Ox turned out to be a bull.

Central bank rates – The next in line is ECB

Equities – It feels heavy…….

Nikkei 225 (7.750)  Topix (770)  Dax (4.381)  FTSE 100 (4.190) Dow Jones (7.850)  S&P 500 (827) Nasdaq Comp (1.535)  

Also this week US markets will be leading, but with some regional twists.

First a quick comment on the G7 meeting from the weekend. I hope they enjoyed the nice Italian food because that must have been the best outcome. In good times, G7 had very difficult to agree about anything so it’s an illusion to believe they find each other in tough times. The statement confirms that there are no common goals or mutual interest in coordinated economic action. Each country goes back to continue with what they are doing. The statement from the next G20 meeting will be very colourful but very limited in terms of what markets will expect of good news.

US:

Dow Jones is leading the way for US stocks again so I expect S & P and Nasdaq to follow despite some appetite for large tech stocks.

The General Motors plan that they have to present Tuesday will attract attention. I think it will highlight the problems for the automotive industry in particular and the manufacturing sector in general. In that context we should expect the US car part suppliers to ask for USD 25 billion in support as well.

Last week we had 2 important reactions in the US stock market. The much stronger than expected January retail sales which didn’t cause any buying at all – that would have had been the case 1 week earlier. Every body knows that it was a very short lived winter sales hype behind the upbeat number. Investors are getting very serious concerned about the macro economy. The second happening was the news from Thursday about the help package for house owners. I wonder if this came as a reaction on Dow Jones touching the November lows or was it just a coincidence ? I watched the market rebound 3% 1 hour before the bell – very sad for a bear, probably speculative, but also a sign that it’s important to get the housing market stabilised before the economic downturn can find a bottom. 

More about the help package for house owners should come out during the week, which might give support to the equity market, but short lived. The US housing market will also be of interest with NAHB on Tuesday (exp. and housing starts on Wednesday (exp. 530.000).

Germany:

I addition to the impulses from US, the possible government intervention in the case Hypo Real Estate confirms the severe situation. The growing focus on the serious economic problems for Eastern and Central Europe will weight as well.  All this topped with some earning reports. Daimler AG on Tuesday, Merck KGaA on Wednesday and MAN AG Thursday. 1 or 2 could surprise and support the market.

Japan:

This morning we got the long awaited Q4 numbers, unfortunately worse than expected. Wisely the Japanese government tried to front run the bad news by announcing an even bigger stimulus package during the weekend. The market reaction shows that investors want to see real economic growth or as minimum a feeling of foothold – not in sight yet. Best support, window dressing ahead of year end next month.

Targets: Nikkei 225 6.683  Topix 697  DAX 3.906  FTSE 100 3.456  Dow Jones 6185  S&P 500 656 Nasdaq Comp 1191

China – So far the Ox turned out to be a bull.

Hang Seng (13.437)  Shanghai B (148,50)  USD/CNY (6,8340)

Chinese mainland stock markets continues up with domestic investors (A indices) as the key driver. No doubt that a part of the force is the fact that investors only can invest in real estate, stocks and place money on deposit.

Very understandable that stocks looks as the preferred alternative as long as the stimulus packages are rolled out. An example from last week was the ship builders that got a national protection, sending shares significant up within the same day. The usual question is, if this is sustainable?

It continues to be a matter of faith, where I continue to be skeptical. The reaction on economic data (particularly the Jan trade data) last week proves this situation. The absolute numbers were down, partly due to the Lunar New Year taking place in January instead of normally in February. Some economic models suggest an adjusted rise in exports, but does this day count game make sense when we know, for sure, that there is spare production capacity? If production had been running at its maximum, then holidays would have lead to a drop in output. Everybody knows when the Lunar New Year is, so with spare production capacity producers easily could have increased production in early January to meet demand during the month. The conclusions from different analysts depend on what direction they in general argue for.

The January credit growth data that I wrote about last week, continues to surprise. Even higher than first announced, so my reservation towards the cheerful analyst might be wrong. But very interesting has the Chinese central bank asked to get more details about how the commercial bank lending is allocated. PBoC has also heard the rumours about the lending not going to the sectors that are desired.

Over the weekend a couple of interesting things came up. According to a newspaper article, the company DDMA Market Research & Consulting released a survey showing that 60% of consumers in 5 big Chinese cities have reduced or plans to reduce spending. Unfortunately, the survey didn’t give the respondents the possibility to tick off “increased spending” just “not reduce spending” as the most expansive. Though the conclusion should be, that consumption risks entering the contractive zone – very much against expectations in the stock market.

A very important comment from Yi Gang, Vice Governor of the People’s Bank of China, where he in a speech Saturday hinted another possible interest rate cut. He also said that “China’s main task in the short term will be to fight against deflation”. Two immediate thoughts when I saw that one was, that if this is the case for China it could easily be the same for the rest of the world. Secondly, deflation is poison for assets…….

Last, a more Hong Kong and Hang Seng related comment from Hong Kong’s finance chief, Financial Secretary John Tsang who also spoke Saturday. He said that Hong Kong probably had negative growth in Q4 2008 and that the economy will deteriorate further in 2009. Very realistic he also said, that he was not sure when the global financial downturn will come to an end. Unemployment will continue to rise, particularly when college students graduate around mid 2009. He thinks this will be the peak.

I remain a bear in general and therefore cautious even regarding China and keep the targets.   

Targets: Hang Seng 11.000     Shanghai B 110

Equities – A story about P/E ratios.

Nikkei 225 (7.969)  Topix (779)  Dax (4.635)  FTSE 100 (4.284) Dow Jones (8.281)  S&P 500 (869) Nasdaq Comp (1.592)  

In early October 2007 the S & P 500 was trading at 17,0/17,5. About one month later in mid November the level was at 16,5/17,0, a bit lower after the October high in the stock market. Despite clear signs of a slower US economy, investors also in November 2007 believed in “the sky is the limit”. I surely remember it, as I was bearish on the world already then (what a surprise) and was about to think that I had made a mistake of the century by not owing any stocks.  

Last week the small quality equity research house Bernstein lowered their total S & P 500 earning forecast for 2009 from $66,10 to $58,10. Using the Friday S & P 500 close at 869 it results in an expected P/E ratio of 15 for 2009.

Now, you might start to figure my point out J

I would never argue just to look at P/E, or say that S & P 500 is the whole world nor might the research forecast be right. But P/E ratio’s can be an interesting piece of information and S & P 500 is after all a leading stock index. The forecast off course fits my opinion, but I still argue that there is quality behind the forecast.

My thinking is very simple. In the autumn 2007 the world was running for full speed with high expectations to corporate profits. Even growing corporate earnings were priced in the market. In the meantime the global economy is in the worst crisis since 1930 some say (I would argue since 1982 – 1983, but it will soon be worse than the early 80’s). Corporate profit deteriorates at a pace we haven’t seen long, the US housing market continues down, countries within the Euro Zone might default, Central and Eastern Europe is heading towards yearly negative growth rates of 10%, Far East suffers in general from bad to worse.

The global economy will not V shape rebound but L shape meaning we won’t see a jump in corporate earnings later this year. It’s most likely that the results this year will be repeated in 2010 because the world totally is gearing down in activity.

Added all this global macro economic and corporate earnings turmoil together, I ask myself if it makes sense that the P/E just goes down from 17 to 15? You know my answer, it’s no.

Last week Dow Jones found support below the 7950 area again (S&P 500 around 810), and I respect that right now is the investor world betting on the US stimulus package once more. All in all giving wind to the large bull fraction in the market (those who beat the benchmark last year by only losing 40%……). This fraction certainly is looking forward…..One day it works of course, but we haven’t found true economic foothold yet. I continue to argue that the P/E ratio needs to be lower with the current risk scenario.

Ok, back to the tactical decisions. Last week equities were bid, but Japan didn’t really perform. Investors in Japanese stocks have within the last year been very realistic despite Japan would benefit relative more from a Chinese rebound than other old large economies. Either, Japan will go up this week or the world will correct lower – I go for the last one. The Japanese machinery orders form this Monday surely didn’t support a rebound in Japan.

Targets: Nikkei 225 6.683  Topix 697  DAX 3.906  FTSE 100 3.456  Dow Jones 6185  S&P 500 656 Nasdaq Comp 1191

China – China mainland is going from upbeat to real bid……

Hang Seng (13.769)  Shanghai B (141,00)  USD/CNY (6,8325)

Shanghai B is up from 126,50 to 141,00 on the week (11,5%) and up more than 50% since November last year.

This is serious for a bear like myself. It would not be trustworthy just to keep a target on the downside without reacting on the developments. I remain skeptical but raise the target from 90 to 110 for Shanghai B.

The current development is very tricky as we have the Communist Party using all possible methods to create a turnaround feeling, hungry Chinese investors buying A shares sending B shares higher as well, foreign investors jumping on the B wagon. All partly based on some official data combined with rumours, where the last part paints a worrisome picture.

As mentioned last week, we are playing on the same hand as Chinese government if we buy Chinese mainland stocks because the government influence the economy so strongly. So I will try to highlight the supportive measurements that are initiated but also what developments we should worry about.

The current growth incentives that the government is taking are CNY 130 billion investments primarily in rural areas (this is a batch of the CNY 4 trillion package, I can provide you with the details if any interest). Additional support have been given to the following sectors, machinery builders, textile (though less increase in export rebate than expected), automotives and future measures are soon to be announced for electronics and the real estate sector.

The banking sector is expanding after lending restrictions were lifted. This must give stimulus impulses, certainly in the stock market.

Now, many are very happy about the expansion in banking lending as it signals new growth. Can we trust the figures? Yes. What do they show? We don’t know……..This what some say. In reality is bank lending not expanding at all. 25% of the increased lending in January was provided by one bank to power grid, railway, road and hydroelectric power projects plus a large portion to discounted bills to small and medium companies.

The project finance is apparently hunted by all Chinese banks due to the stable returns (and very smart with the Chinese government supporting these projects). The discounted bill business is fine, but it is basically just providing working capital to existing business in a corporate world where liquidity seems to bee tighter.

Some sources claim that under the lending restrictions during 2007 and 2008 bank lending was taken off the balance, and this lending is simply coming back on the balance sheet again. And last to the unofficial lending market. A couple of times I have mentioned that hot money are leaving China, which corresponds well with less activity in the unofficial credit market (25% -33% of the total market).

Wenzhou is the capital of informal banking in China. Very funny can some analysts out People’s bank of China branch data from Wenzhou see that the unofficial lending is shrinking.

The conclusion is that lending is not growing as the figures suggest, maybe not at all. It correspond well with the PMI numbers for January that went up from 41,2 in December to 45,3. Is was widely celebrated as a turnaround but it is contractive as long as it stays below 50,0 (the employment component actually was lower).

Of the companies listed on Shenzhen Stock Exchange that so far reported the result for last year, 20% suffered losses, which for many companies was the first time. Among the profitable firms around half experienced a deteriorating profit.

That happens these days, but where there is a concerning Chinese twist is regarding lay off’s. Companies in China are now urged to maintain jobs. This is mainly a subject for government owned companies but also spilling over to private owned companies.

I respect that if enough investors believe that the market will go up, then it goes up. It can be that the Chinese government can change the development, but the stakes have grown very large pretty fast. Not only regarding the stimulus package, but also the “official intervention” towards private companies in attempts to avoid social unrests and further economic downturn.

I still go for a downwards correction in equities, but respect that the chips on table now is a high rolling game. One day the China turnaround is reality, but I fear that people betting on fast recovery are cashing in before we have seen all hands.

The Hang Seng target is unchanged.

Targets: Hang Seng 11.000     Shanghai B 110

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – A bagful of mixed sweets this week.

Equities – Which late night show are you watching ?

China – So far China mainland is upbeat.

Central bank rates – Another cut to save the world this week……

Equities – Which late night show are you watching ?

Nikkei 225 (7.874)  Topix (778)  Dax (4.267)  FTSE 100 (4.072) Dow Jones (7.922)  S&P 500 (822) Nasdaq Comp (1.483)  

My wife now and then complains about that I occasionally watch late night shows. Around 11 in the evening it gets exciting. I need to admit that some of them are good looking, tall, blond, present hot stuff, they look deep in your eyes and show very nice curves – Sorry, did I forget to say, that I am talking about “after the New York Stock Exchange closing bell” commentators and quests turning up on the business channels (late evening I like Bloomberg TV in particular, because of the US twist and the ongoing upbeat view on equities.

Last Friday evening it happened again. A quest speaker (though asset manager and therefore most likely long stocks) explained that shares would go up but near term they might drop further. An important precondition was just that the credit market and lending to private consumers would get going again.

I went puzzled to bed and concluded that they haven’t got the full picture yet. People do not really understand how difficult it is to run a bank (or other financial companies) when the clients can’t make the monthly repayments on their loans. Regardless if there is provided sufficient liquidity for banks and even risk capital, then do the banks of course not lend out if they think that clients can’t repay the debt.

Private households might be too optimistic in booming times, but private individuals are actually fairly realistic when times changes. A majority are not interested in taking new loans if the outlook is that they will have too big difficulties to repay (or no fortune growth in sight).

Surely there is a difference in what banks currently can offer in credit and what private households dream about. If both groups take the realistic view, the difference might not be that big because people in both camps clearly feels the very difficult economic outlook (always too late but that’s another story).

The group that remains very unrealistic is to find among market participants. Some still don’t want to understand that we had a global liquidity and credit oversupply. The natural consequence was an overconsumption that now leads to an oversupply of production capacity. This oversupply is now getting closed down. Some investors still argue for a rebound, but to what ? New oversupply of goods or credit ?

We mentally need to understand that the world is gearing down to a new absolute activity level with lower income opportunities for both individuals and corporations.

So what do we do now ?

Hmmmm, I am bearish, so it might sounds strange, but don’t worry, because what happens is very natural. We come from an over-everything situation in a world that turned out to be more global than anyone thought. It leads to this severe and deep downturn and recession as there are no economic zones to compensate. This is how the world is and it’s very difficult to change.

Allow me to refer to the equity comments from the first week of this year – the limbo dance comment about “how low can you go in 2009”. When I prepared the comments it felt very bearish to suggest a zero gain in stocks this year and a realistic -10% performance seemed almost unserious. Simply due to too many late night show quests who talked shares higher.

Over the weekend it became clear that many have turned bleak after the January negative performance for most markets. As mentioned in the limbo article I expect that stocks will be down with around 25% sometime during 2009, but end the year down between -10% to 0%.

Despite that people say I am very bearish (I call it realistic), you should notice that I am not in the camp that forecast another 3 years of downturn. This camp will grow from now until summer, sending equities lower as the sour mood spreads.

The well prepared investor that sees the current trend as unpleasant, but at least understandable for the above reasons, also considers what areas to enter when it’s time (more on that when we are so far). Right now I forecast that it will be this year but we need to detect some economic foothold first.

Fundamentals are back in focus so the rumours about a Japanese double digit negative GDP growth in Q4 won’t cheer too many (released by end February). This week, the Jan US labour market data will overshadow any other number by far (exp. -500k / 7,5%). With the big attention on the labour market, I watch the US ADP employment report on Wednesday (exp. -530) closely as well.

Also on earnings is US dominating this week where the important are Motorola Inc and Walt Disney on Tuesday and Cisco Systems and Kraft Foods on Wednesday.

Just to conclude on the start of these comments, then don’t trust the late night shows, as it’s a fake what they want to sell you……..again, I of course only speak about the business channels J

I keep the targets.

Targets: Nikkei 225 6.683  Topix 697  DAX 3.906  FTSE 100 3.456  Dow Jones 6185  S&P 500 656 Nasdaq Comp 1191

China – So far China mainland is upbeat.

Hang Seng (12.861)  Shanghai B (126,50)  USD/CNY (6,8475)

China mainland stocks continued up on the first on the first trading day after the Chinese Lunar New Year celebrations.

I have long argued that Chinese shares will be among the first to rebound when its time to go long again, but is it time now ?

Chinese mainland stocks have shown some strength since the low last year, but as always, are stock investors playing on the same hand as the Chinese government. The current positive sentiment is mainly due to trust in increased government support rather than healthy growth. This makes the position as investor more difficult and life after the stimulus packages even more unclear. It’s also the reason why I believe in a new dive for mainland equities.

Today’s rise in the agricultural sector was on the back of Beijing’s efforts to support farmers, the same for the textile industry (Sunday, the Chinese government issued guidelines for agricultural development this year – I can provide you with more information if needed). For some time ago it was different sectors within machinery and other manufacturing sectors. Banks are getting told to boost credit growth to private households, with lower loan quality as a consequence i.e. losses will rise over years to come.

In earlier comments I have mentioned stocks in or linked to the agricultural sector as interesting but due to the fundamental changes for pheasant farmers. The above developments include a big risk for a set back if the state is involved too much.

Another very important message Sunday was in the Financial Times interview with the Chinese Premier Wen Jiabao. He is already now talking about a second economic rescue package even before the one announced last year is implemented. Short term equity markets like such news but it also shows how severe the situation is.

With interest for the US Treasury he also mentions China’s appetite for US Treasuries. One quote I find worth to note is “Whether we will buy more US Treasury bonds, and if so by how much, we should take that decision in accordance with China’s own need and also our aim to keep the security of our foreign reserves and the value of them”.

There can be many reasons why he says exactly so, but nowhere it’s just a one way street anymore. 

That was about the fundamental thoughts. Here is a short update on some indications from the last 24 hours. The CLSA manufacturing PMI in January increased to 42,2 from 41,2 last month. It’s still a low level, but export showed the biggest rise.

The Shanghai housing market showed a month on month drop of 43,53% in January a statistic from Shanghai Uwin Real Estate Information Services Co showed. It seems as a large drop, but it happens every year due to the Chinese New Year. This year the decrease was lower than other year, but the supply of new homes is falling very fast which is a sign of slowing activity.

The first numbers from Shanghai regarding consumption during the Lunar New Year week has been released. The number of tourists went up with 4,39% to 2,49 Mio but the turnover in hotels only went up with 1,6% to approximately 2 billion Yuan, though not adjusted for inflation.

The Shanghai numbers do not have any statistical value but it still underline the global picture of consumption – it is dropping in real terms.

Other funny numbers from the week in Shanghai where, 21 million passengers were transported by taxis, 12 million people used the 8 Metro lines, 30.000 staff worked during the week to collect garbage and the number of consumer complaints dropped with 9% to 425 cases.

As of national Chinese numbers this week offers one, but important, on Wednesday. The NBS PMI for January, that many would expect to point upwards after the higher manufacturing index today.

I keep the targets as they are.

Targets: Hang Seng 11.000     Shanghai B 90

Equities – Testing, testing the downside

Nikkei 225 (7.682)  Topix (768)  Dax (4.237)  FTSE 100 (4.118) Dow Jones (8.078)  S&P 500 (832) Nasdaq Comp (1.477)  

Equities continue to be the most interesting asset class with significant importance for the other classes as well. As suggested last week is the corporate earnings season the hurricane season for the stock markets. The combination of quarterly results, renewed volatility in the banking sector and swings in energy stocks gave a pretty wild result, overall negative.

The US stock remains extremely interesting for the rest of this month. Two times the US stock market tested the downside very seriously but it rebounded. I now watch 7.950 in Dow Jones and 800 in S&P 500 as important to break but it might be difficult this week for the below reasons.

Energy I believe will be less volatile this week after the fast rise in the oil price. Some banks show good swings today, but I could imagine the volatility fades out later in the week.

It leaves earnings but adds some fundamental data compared to last week. As we saw last week are not all companies just reporting bad news. Many negative corporate news are priced in, so like last week there might be some better earnings than expected to support the market. The 2009 earning outlooks will be very unclear but it seems that the market doesn’t react much on the forward looking comments – despite its where the trouble is…..

The US corporate earnings I watch are American Express Company, Caterpillar, McDonald’s Corporation and Texas Instruments on Monday. Tuesday its Bristol-Meyers Squibb, DuPont and Yahoo, Inc. On Wednesday it’s AT&T, on Thursday it’s Altria Group, Inc, Colgate-Palmolive, Ford Motor Company and finally on Friday ExxonMobil Corporation and Procter & Gamble Company – yes, a busy week….. J

Stocks also reacts on fundamentals these days where the US GDP number on Friday (exp. -5,0%) is more than important and the highlight of the week. That number easily could decide if US stocks will end the week in positive or negative territory.

One joker is short positions. I haven’t seen any statistic lately but judged on what I am hearing, it feels like investors are more short equities than prior.

The sum of some quarter results that are better than expected, but weak outlooks in a market with more short positions makes me believe that the US GDP number on Friday will decide if the week end up or down. I mainly see the upside this week.

The above view on the US market reflects my view on the global market as well, though with a few differences.

Monday’s close at 3 month low in Japan was surprising for me after the rebound end of last week in US. A clear sign of investors truly are worried about Japanese companies due to the global downturn. It’s fair, but I still claim that Japanese companies will profit the most from a Chinese rebound, but that’s for the long term view. Two macro economic numbers will have importance on Friday, the December jobless rate (exp. 4,1%) and December industrial production (exp. -9,0%).

Regarding UK shares I still see the domestic economic situation as so severe that it dominates everything in that market. Meaning any rebound will be short lived.

The German stock market will follow the US market in particular, though there are couple of things to watch. Two company result, Siemens AG on Tuesday and SAP AG on Wednesday. This month the IFO indicator (exp. 81,4) on Tuesday is important and the December unemployment data (exp. 7,7%) on Thursday is worth to watch as well.

I keep the targets as the downside will be tested again…..

Targets: Nikkei 225 6.683  Topix 697  DAX 3.906  FTSE 100 3.456  Dow Jones 6185  S&P 500 656 Nasdaq Comp 1191

China – The Ox has arrived…….

Hang Seng (12.579)  Shanghai B (124)  USD/CNY (6,84)

Again very interesting with China mainland ending last week higher and Hang Seng dropping further. Hang Seng is a fair picture of the global movements. The domestic investors might have bought stocks at the Chinese year end with the expectation that the year of the Ox will be better than the year of the Rat.

With the Chinese Lunar New Year celebrations going on for some days, the financial markets will be closed. The days are normally good for retail sales, though it should be priced in the market.

Some statistical data from last week is worth to use in the big picture.

The sales of condominiums to private individuals went significant up in December compared to November. One company reported a jump of 57% in sold living space month-on-month, but for the same company the total sales in 2008 were down 9%. Other development companies reported even higher increase in their December sales numbers.

The rise in sales has a reason – mainly rebates. It seems to be around 7 – 10% on the price but some developers have paid for the interior construction and maybe even delivered a car together with the condo as well.

Data from the National Development and Reform Commission showed that property prices fell with an average of 0,5% from November to December in the 70 main cities of China. Most negative for new buildings in Shenzen (-18,1%) and Guangzhou (-9,4%), both numbers are yearly changes. It’s unclear if these numbers include all types of real estate.

The jump in private households buying condos in December might explain some of the credit growth in December, which is a healthy component in the credit growth. Overall are the news not encouraging – if prices on property continues down, then we all know it is a true headwind for the government that hopes on a domestic demand boost.

The GDP numbers released Thursday last week confirmed a slower growth which isn’t a surprise. Due to the way data is collected and presented by the National Bureau of Statistics the discussion is about if we get the full picture.

Apparently a government economist said before the release of the GDP figures, that the actual number should be below 6,0% but would be reported as above (that part was right as it was 6,8% growth). Some economists also think that the first part with below 6,0% is right. This view is supported by much lower factory output, power generation and activity indices that all in all suggest an even lower GDP number.

I keep the targets for the Chinese stock markets. Hang Seng is moving in the right direction but China mainland stocks are holding well, which I observe closely.

The year of the Ox will be very difficult with a lot of state support already priced in the market. The Ox symbolizes patience, hard work and tenacity – quite a good picture of what is needed……..

Targets: Hang Seng 11.000     Shanghai B 90

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – Capital flows are gaining in importance again……

Equities – Is the earning season also a hurricane season ?

China – the credit growth in December a true credit growth ?

Central bank rates – Still pointing lower……….

Equities – Is the earning season also a hurricane season ?

Nikkei 225 (8.257)  Topix (818)  Dax (4.438)  FTSE 100 (4.228) Dow Jones (8.281)  S&P 500 (850) Nasdaq Comp (1.529)  

We are of course already looking forward, but in the assessment of the markets we need to remember a couple of numbers from last week.

The US retails sales number was even a surprise for the most bearish followed by a natural sell off in the equity markets. But other official forecasts came out. A new, not yet confirmed, official German forecast for the GDP in 2009 is now at -2,25%, Spain changed their GDP forecast for 2009 to -1,6%, down from +1,0%. The forecast for 2010 is now +1,2%, but how on earth can they expect to have positive growth in 2010 under the current circumstances – when and from where should that turnaround for Spain come? It should worry any investor.

The latest joke in the market is, what is the difference between Iceland and Ireland? One character and 6 months…..Yes, it’s a joke right now but I fear how reality looks like in 6 months.

Japan is an endless stream of bad economic news, coming out even below the worst forecast. Today it was announced that property deals plunged 80% in the October – December quarter compared to 12 months ago and even the central Tokyo Ginza district faces falling prices now.

The shocks are so many that we don’t get shocked anymore, but it is impossible to price in. I repeat myself, but I still have the opinion that this is one of the reasons why stocks are overpriced.

Monday morning in Europe is one big cheer after more banking rescue packages. It can be difficult to figure out if existing share holders in banks can profit from the government rescue packages. This should be the only reason for short lived upticks in the banking sector.

For me it confirms that banks are very difficult to get back on track when they are in trouble and how serious the economies are hit. Particularly in the UK, with the crisis of historical dimensions. Also in this sector I would stay out of trouble for my own money.

Macro economic we certainly need to wait for less negative economic data before considering going long stocks.

It leads to the other important factor – corporate earnings. We are now really entering the Q4 result season, mainly from US which will dominate the global equity market this week. Especially during a week with limited macro economic data, the corporate earning reports could make it hurricane season like. 

The company reports I watch are Johnson & Johnson on Tuesday, on Wednesday it is Apple Inc, Thursday its Google and Microsoft ending the week on Friday with General Electric and Xerox Corporation. In addition I find the Nokia results on Thursday very interesting as they tell us a lot about global consumer demand. A range of US banks release their Q4 results as well, with a trading sentiment where share prices in banks have huge swings again, they are worth to follow as well.

Last week US equities tested interesting lows but followed by a rebound so far. Before the bears can roar again a close below 810 in S&P 500 and 7950 in Dow Jones is needed. Until then the hopers will feel relief for a short period.

Targets: Nikkei 225 6.683  Topix 697  DAX 3.906  FTSE 100 3.456  Dow Jones 6185  S&P 500 656 Nasdaq Comp 1191

China – Was the credit growth in December a true credit growth ?

Hang Seng (13.256)  Shanghai B (121)  USD/CNY (6,83)

Hang Seng lost a couple of percent last week which was fine compared to the swings in global equity markets. More remarkable are the China mainland stocks where A shares are underlying supported (actually A shares are up 7,34% this year so far) and Shanghai B ended the week unchanged.

Friday Chinese stocks went up due to speculation about state support to the shipbuilding and machinery manufacturing sectors. It happens after tax cuts and other support initiatives for the automobile industry were announced earlier last week.

It shows that the current sentiment for China mainland stocks is positive and investors have appetite for China stocks. Despite my targets of lower stock indices, I have deep respect for this situation. The market is always right, but is it a short term reaction?

I think, yes it is. The Chinese economy is still heavily dependent on export (please read last weeks comments about delay in the rescue package and new budget deficits), plus despite some economic muscles, the Chinese state can’t bail the whole country out. It worries me when stocks markets go up on increased economic aid from the state.

Last Friday the People’s Bank of China came with a statement where the central bank governor Zhou Xiaochuan of curse said that they are focused on delivering stable and quite fast economic growth – this he needs to say. Zhou also said, that “China’s economy faces a harsher and more complex environment as the global economic crisis deepens in severity” – this comment would only come if it was truly needed…..

It leads me back to the Chinese December credit growth number that was taken as a relief, and even a possible turnaround in the market (certainly supported the positive bias in the stock market).

Detailed information about Chinese economic numbers is for different reasons difficult to become. It’s the same about the credit numbers, so it takes time before rumours and indirect calculations maybe crates a picture.

From what I hear, I note the following observations as important:

-          Most of the growth came from an increase in bill discounting, that include a risk of double counting. Some rumours say that companies are taking more short term funding, but not for investment purposes, apparently more because of serious cash flow problems. If these 2 things are connected, I don’t know but the latter rumour is simply very bad if it is correct.

-          The “hot money” are moving again. Until recently hot money went into China mainland through different channels. With dropping Chinese interest rates and it also is obvious that the CNY won’t appreciate within near term the “hot money” now moves out of China. I haven’t heard any numbers, but money is on the move and it leads to the below point.

-          Estimates say that 25 – 30% of the total lending in China mainland is informal. With “hot money” flows out of China one could imagine that this part of the lending system has less capital to circulate, sending borrowers into the official lending system (and the official numbers). It seems to be a public secret that a whole range of informal banks has closed lately. I don’t know the reason, but it corresponds well with the tighter informal lending system.

The combination of rising share prices on the back of growing state aid to industries, the ongoing concern from the central bank and the maybe “not as good as thought” December credit numbers confirms my skeptical view on the stock market.

I respect the wish among investors to jump on equities because it will turn the long term trend one day, but I regard it as a current optimism and keep the targets.

Targets: Hang Seng 11.000     Shanghai B 90

Equities – Stock markets reacts natural which is healthy.

Nikkei 225 (8.837)  Topix (855)  Dax (4.756)  FTSE 100 (4.414) Dow Jones (8.599)  S&P 500 (890) Nasdaq Comp (1.572)  

Globally we are through the first rounds of stock buying for fresh money. Natural reactions on fundamentals are taking over, which was particular significant last week after the ADP report and labour market data Friday.

Reality still is bleak and it might not be the most pleasant to either write or read about, but its life right now. It would have been worse if the market neglected the dull facts and just going up every day as it would be unsustainable followed by huge drops.

In the never ending hunt for opportunities and sectors / stocks to keep an eye on, I found some cheerful data from Japan. Out of 3788 listed companies 184 expect their fiscal 2008 sales and pretax profits to surge more than 10% year on year. It needs to be said, that it is a study conducted by Nikkei News based on financial statements – not a survey done within like the past weeks.

The study shows that particular retailers offering alternative marks in good quality at competitive prices are faring well, also retailers who are able to lower their profit margins and save costs elsewhere can generate more sales. Very interestingly are the new coming companies those who offer the internet platform where consumers can compare prices.

It confirms the defensive status of retailers in an equity portfolio during a downturn, though this time it is worth to be even more selective.

Looking at Japan I think USD/JPY is the most important factor for the Japanese blue chips this week as they typically are exporters. With USD/JPY around 90,00, Nikkei should come under pressure again.

For continental Europe the ECB meeting on Thursday is the important happening. A 50 basis point rate cut is priced in but depending on the sentiment that day it could result in intraday buying. In Germany the new bank rescue will take a few days to digest, resulting in a negative environment. Impulses from the starting US earning season will give the last flavour of the week.

Partly the same picture for UK, though I expect it to be influenced from the bleak domestic situation but mainly tracking US stock markets.

In US the Dec retail sales on Wednesday will be extremely important (expected -1,4% ex. autos). In addition the earning season is kicked off. The Alcoa Inc. numbers today Monday will be followed closely and so will the Intel Corporation on Thursday.

I keep the targets as they are.

Targets: Nikkei 225 6.683  Topix 697  DAX 3.906  FTSE 100 3.456  Dow Jones 6185  S&P 500 656 Nasdaq Comp 1191

China – waiting for the Ox

Hang Seng (13.971)  Shanghai B (120)  USD/CNY (6,8350)

Very interesting with Hang Seng down 10% since last Monday and Shanghai B up with 5% during the same period. So let’s see what market is behaving most realistic.

Last Monday I mentioned the risk that the Chinese government could force Chinese banks to abandon normal risk control and management regarding lending to private households. On Tuesday (6^th Jan) the Peoples Bank of China came with different statements, among these:

“PBOC to guide banks to increase lending” and “PBOC to boost financing channels for small, medium-size customers”.

As you know, do I not recommend to be long any shares at all. Should there by coincidence be any, then I still argue that Chinese bank stocks are difficult to hold as the banks might be forced into lending risks they shouldn’t take.

Friday, the China business confidence for Q4 2008 was released showing 94,6. This is the lowest since the index was introduced in 2001. The manufacturing sector is the most pessimistic where we all know the story about the falling Chinese export, but domestic demand is also getting weaker and weaker.

The well known CNY 4 trillion rescue package announced last year, that lifted the global equity market for several days, is still on the drawing board with many details missing. In the meantime the first rumours about budget shortfalls are circulating. Some mention numbers between CNY 500 – 800 billion, where a somewhat higher number is more likely. If you subtract the already planned investments that very funny were included in the CNY 4 trillion package, and also subtract the coming budget shortfalls (in 2009 and probably also in 2010), then most of the CNY 4 trillion are gone………

Peoples Bank of China last week warned about difficult times, and also high ranking Communist Party officials have said that difficult times are under way for China mainland.

Even journalists lately were upgraded with an allowance to indicate the economic difficulties, though not write the full truth yet.

Coming back to the equity markets. Hang Seng is not like many other indices because of the over weight of banks and property companies. But it did actually react on the lending comments from PBOC and the general negative impulses from US. I would say it reacted realistic to the news.

As the frequent reader have noticed do I believe that Chinese stocks will turnaround among the first and that China will be a domestic driven economy sometime in the future. But it’s too early to enter the market. In Shanghai B is a full effect from the CNY 4 trillion rescue package and an upturn in the mainland economy priced in. In reality is the rescue package getting diluted and the economic downturn is accelerating.

I continue to keep the 11.000 target in Hang Sang and the 90 target in Shanghai B, as I see Shanghai B 25% overvalued.

It requires a very strong Ox to change that economic downtrend as soon as priced in the stock markets. 

Targets: Hang Seng 11.000     Shanghai B 90

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – Fundamentals will continue to work……
Equities – 2009 will be a limbo dance – how low can you go?………

China – many hope that the year of the Ox will be better.

Central bank rates – Cutting as much as possible, and then what?

Equities – 2009 will be a limbo dance – how low can you go?………

Nikkei 225 (9.043)  Topix (875)  Dax (5.010)  FTSE 100 (4.613) Dow Jones (9.035)  S&P 500 (932) Nasdaq Comp (1.632)  

The good news are that equity markets in 2009 won’t perform as bad as in 2008. I continue to be bearish on the world but the equity markets will not drop another 40 – 50% this year.

Very interesting, it all of a sudden seems extremely bearish just to suggest that 2009 could end with a small minus. The world of analysts is trumpeting the entry of 2009 with a fanfare of bullish forecasts on global equity markets.

I respect that stock markets in general have creped up since mid November. It should be noted as we might have seen the bottom.

I have seen one analyst suggesting stock markets up with 30% during 1^st half 2009, some says up and some point at a rally in 2^nd half of 2009. It’s very hard to find analyst or strategists who expect that the year could end lower.

Mentally I understand that it is hard to see everything dropping every day and talk bearish talk week after week (I don’t find it very funny either). I clearly understand the desire to forget 2008 and enter 2009 with fresh hopes for a good year. Being in the financial markets are unfortunately not to tell nice stories but to give a realistic view on the future. A large part of the bulls mentioned above notoriously also argued for a positive 2008 until last summer – but of course, one day they will be right………

I deeply consider all the facts that could add up in a bullish trend. A lack of new selling, that fundamentals investors starts to buy again, that private consumption rebounds and very important that risk appetite gets so big that it can turn the market despite current bad macro and micro economic news.

A brave heart and a clear view saying that enough is enough and that the stock market has started the uptrend, I respect and will consider the persons arguments.

Many bulls argue that the economic slowdown will bottom out in 2^nd half of 2009 followed by a new upswing in 2010. As the equity market always is ahead of the curve buying will gain momentum during Q2 and Q3 2009. A main reason for the turnaround is the rescue packages.

The government rescue packages prevent the economies from dropping into a black hole but are not blocking a further downturn is my view.

In my opinion it is very optimistic to set a date on the downturn with the Japanese Q4 GDP to drop with up to 12% year/year, the US GDP for the same period to take a severe hit and the German GDP outlook for 2009 to be deep in the negative territory. Companies are closing whole factories to adjust capacity and some analysts forecast the corporate default rate to reach 12 – 15% in US later this year.

I find it fair to repeat, that before talking about real upside potential we need to find some sort of support on the downside in the major economies – until then it is very difficult to come back into the market.

Like usual I like to look at S&P 500, where I find a P/E of 10 in uncertain times a fair price (not low or cheap if you wish). In October last year the average earning forecast for S&P 500 for 2009 was at around $91 but where do you think that forecast is now? I would also expect it to be lower but S&P 500 is trading higher – looks like another imbalance.

The stock markets in general might end 2009 around zero or with a slightly negative result (-5 – -10%), but the limbo dance from now until yearend, is how low can you go during that period? I expect the dance to be very exciting………

If I in my optimistic moments believe in a general performance around flat, then it also means that some shares will rise during the year. It would be good to build a shadow portfolio during Q1 to be prepared if some selected shares should look attractive. The same argument I can use about my view, that equities will drop further this year, but rebound. That bottom could be a true bottom.

It is the most optimistic approach I can offer, though somewhat more positive than last year J

Targets: Nikkei 225 6.683  Topix 697  DAX 3.906  FTSE 100 3.456  Dow Jones (6185)  S&P 500 (656) Nasdaq Comp (1191)

Equities – Riding the rescue wave but don’t flip over on the surfboard – it hurts……..

Nikkei 225 (8.665)  Topix (847)  Dax (4.729)  FTSE 100 (4.226) Dow Jones (8.630)  S&P 500 (880) Nasdaq Comp (1.540)  

S&P 500 is trading at an expected P/E of around 10, based on the latest average of economists forecasting the S&P 500 earning next year to be $91.

A P/E at 10 is not aggressive either way given the very difficult macro-and micro economic conditions against historical higher P/E values. So will it go up or down from here?

As mentioned a couple of times before it will be a bet about, in particular, when the investor thinks that the recession is over. Right now there is no doubt that the environment is positive and it has been so for some weeks now. Stock markets trades slightly higher while more and more are talking about new lows – that should always make us alert. It normally smells of people who didn’t see the trend turning, but this time the downturn is so severe that nothing is like normally. So despite the current positive environment I stay in the sceptical camp as the macro economic clouds are getting darker and bigger.

What is behind the positive sentiment?

The rescue packages overshadow everything, but it must be a matter of trust to believe that moving debt around can rescue anything in the world. Fiscal stimulus will help short term, but in US is the bill that needs to be repaid mounting. Fundamentally I am very reluctant to go fundamental long equities on this story.

Surely hedge funds are not forced to reduce equity holdings with the same pace as before. Not that they are buying in the market, but just that a big selling source is quiet helps the market.

At the same time I have the feeling that private investors are back in the market buying typical value stocks. There has always been a tendency that private investors come out of the market too late or come in the market too early. I hear too much of people buying local well known classical value stocks at prices they haven’t seen for long, where the reason to buy is the actual “low” price. Only problem is, it might not be cheap – most likely not.

In Far East the Chinese Government does everything to keep up the stock market, in what I call intervention. Very possible some of the same is going on in Japan where one fund has showed interest to buy (explained a couple of times the last 2 months). All in all it helps to stabilise, or maybe even turn, the market for a period.

Day traders or short term traders have understood that rescue packages equals bullish markets where the negative news send stocks lower. One very simply could say, that due to more good than bad rescue package news the last 2 weeks short term traders have pushed equities higher.

There is speculation about the settlements in US equities on Friday 19^th December. Some claim that market participants have closed short positions due to rising prices. Maybe, but in that case it should be settled and I don’t think that these currently closed shorts will be reopened again.

It’s all just assumptions or market feelings, but all in all is my opinion that the current uptrend mainly is based on private investors buying into a dropping market, some state interventions in parts of the world and short term players riding on the rescue package wave. In my world are none of these reasons truly substantial buying reasons. That would be fundamental long term buyers like pension funds, asset managers coming back to the market, good macro economic news and/or company earnings that start to point upwards.

It leads me back to the expected S&P 500 P/E for next year. No trading cycle is like prior cycles but there is a pattern. During the last recessions economists have overshot S&P 500 earnings with about 1/3. If one thinks that a P/E value at 10 in S&P 500 is fair during uncertain times and economists once more overshoot earnings with 1/3 meaning $60 instead of $91 for 2009, then S&P 500 should trade towards 600…….

Targets: Nikkei 225 6.683  Topix 697  DAX 3.906  FTSE 100 3.456  Dow Jones (6185)  S&P 500 (656) Nasdaq Comp (1191)

China – More wants to be long but the reality is nasty.

Hang Seng (15.046)  Shanghai B (114)  USD/CNY (6,8440)

Several times I have mentioned that Far East, and maybe even China as the very first, will be the region/country to rebound. Due to higher savings among many households in Far East, stronger balance sheets at many financial institutions in the region compared to the world, flexible labour market, low wages and very important a strong political will to get growth back on track as soon as possible.

In addition, the Chinese Communist Party tries to create a new domestic demand culture, and they are really putting effort into this.

Investors smell the corporate profit from this and the appetite for Chinese mainland stocks and Hong Kong based companies has been growing the last 2 – 3 months.

I can only repeat that I agree in being positioned in this area, when the timing is right.

When we reached the targets at 11.000 in Hang Seng and 90 in Shanghai B I suggested a rebound and then a move down towards these levels again. Now we certainly have the rebound, and you can blame me for not recommend to participate in the rebound. My fundamental view is longer and that makes tactical rebound positions more difficult.

The reason why I still think we will have the down move again is reality.

The Chinese export drop announced last week has almost become famous (-2,2% against expected +15%), but the details include even worse information. The export shows that global demand is cooling faster than anyone thought possible, but it might not be a surprise. The very unpleasant information, in respect to the above described investor hope, comes from the import figure.

Import was down with 17,9%, where lower commodity prices only explains half of the drop. We are talking about a real contraction in import volume that suggests a fast shrinking domestic demand in China.

The above described investor bet on being long or more long China is mainly based on the domestic demand story (of course supported by the very large fiscal stimulus package). Long term its right but it certainly looks like it will get worse before it gets better.

By the way do some bright people say, that in RMB terms the export was down 10,1% ………

Another number from China this week that could be interesting, the Real Estate Climate for November (no forecast but last time it was 99,68).

I keep the targets.

Targets: Hang Seng 11.000     Shanghai B 90

Currency markets – Mr. Trichet will cut but EUR is still a high yielder among G7.

EUR/USD (1,2640): This week the full attention is on ECB on Thursday and the US labour market data Friday. My best guess is that the market expects a 75 basis points rate cut from ECB on Thursday. I think it’s a fair guess where 100 basis points is more likely than 50 basis points if they consider anything else than 75 basis points. The comments will, as usual, be very interesting but hardly anything but sluggish. This might be expected but I think it will move the market anyway – lower within the current range. Mid term it will have an effect that the EUR rate is a high yielding currency among the major currencies when investors start to search for some return on the cash positions.

The US labour market data is the event of the week. Of course it will be a bad figure, we all know that (expected -325k / 6,8%), but fundamentally it is difficult to buy the greenback on the back of these numbers. The worry about the steepness of the US downturn will return. This combined with more people realising a coming problem from the fast growing US public deficit finally leads to a lower Dollar – have a look at the Treasury credit default swap, it widens every day…..

In the first part of the week I expect the current 1,2400 – 1,2900 range to hold, but the EUR/USD New York close on Friday is above 1,3000 going towards 1,3250.

Target: Range 1,2400 – 1,2900 followed by 1,3250.  

 
EUR/GBP (0,8315) – GBP/USD (1,5200): The 0,8250 target in EUR/GBP was reached followed by a nice rebound. I fear that the positive GBP sentiment mainly was based on the rising equity market last week. If that is the case I go for a offered Sterling sentiment this week. The big day is on Thursday where Bank of England will cut rates with 50 – 75 basis points, where 75 basis points is priced in the market. I actually think that the market reaction will be limited confirming that Sterling will enter a range for rest of this year.

The short term move will be to 0,8450 in EUR/GBP but I go for a 0,8100 – 0,8600 range for the rest of this year. Volatilities are high, but in my view it’s more a sign of usual risk takers are unwilling to take new risk than expectations about higher volatility in the underlying cash market. For those who have some risk appetite left, selling volatility with maturity before year end is an option. GBP/USD will move towards 1,5500.

Targets: EUR/GBP short term 0,8450, range 0,8100 – 0,8600 – GBP/USD 1,5500.

EUR/JPY (118,25) – USD/JPY (93,75): When I started on these comments during the weekend, EUR/JPY I judged EUR/JPY to be around 120,75. The views behind the comment are the same.

How many bad news can a market absorb? I don’t know, but Yen should have been beaten up. It’s only due to the well known capital flows that JPY is supported. The bad news out of Japan simply accelerates in speed. Japan is very export dependent so it’s natural Japan is hurt even more than the other major countries. As written under the equity part I continue to be bearish on the stock market which could force further JPY purchase leading to the target in EUR/JPY at 118,50 for the 3rd time. As I go for a stronger EUR, the 118,50 level could be a good entry point for a mid term long EUR/JPY position depending on how the market looks like if the level is reached. USD/JPY trades towards 90,00 followed by intervention from Bank of Japan, this will support the EUR/JPY position further.

Targets: EUR/JPY 118,50 – USD/JPY 90,00.
Equities – What a rebound but based on a partly state owned and weak banking sector…….

Nikkei 225 (8.397)  Topix (827)  Dax (4.570)  FTSE 100 (4.226) Dow Jones (8.829)  S&P 500 (896) Nasdaq Comp (1.536)  

Honestly, the rebound last week of course made me think, anything else wouldn’t be serious.

Last weeks rebound was significant but banks were in the lead. Some very respectable people in the market say that they buy shares in the banks where governments participate because it’s unlikely these banks will go bankrupt. I respect and even agree in that view. But that the banks have a major shareholder called “The State” doesn’t guarantee against bad business – on the contrary. The sector is reducing business globally, many can not pay dividends and more losses will come due to the global recession. I would avoid investing in this sector and I think some had, or will have, the same thoughts – pointing lower again.

The November car sales numbers released from Japan and Spain this Monday morning shows even worse drops than in October. Very symptomatic for the global demand that only will be helped slightly by some Christmas shoppers. That’s over in 3 weeks time, and I fear that Q1 will be ice cold.

The rate cuts from Bank of England and ECB on Thursday are priced in the market. The big event in the stock market is also the labour market data on Friday (expected -325k / 6,8%). Very bad numbers are expected, where some would claim that a “not as bad number as expected” will lift shares. Maybe, but I just have difficulties to believe that investors are happy to buy stocks with ongoing worsening macro economic data.

One thing I noticed, is that the lows in November in US and Europe were lower than the lows in October. But in Japan and Hong Kong the lows in November were above the lows in October. Maybe just a coincidence, but the turnaround will happen in Far East first when it happens.

My expectation is lower share prices in general by the end of this week.

I have adjusted the targets for Dow Jones and Nasdaq Comp accordingly to the new S & P 500 target at 656.

Targets: Nikkei 225 6.683  Topix 697  DAX 3.906  FTSE 100 3.456  Dow Jones (6185)  S&P 500 (656) Nasdaq Comp (1191)

China – The Friday package a usual, but the Monday version the world be more aware of.

Hang Seng (14.109)  Shanghai B (110)  USD/CNY (6,8600)

It seems to be a new habit among Chinese senior politicians to announce a new support package for the whole economy or the financial markets on Friday’s. This Friday it was meant to cheer the stock markets due to a report from Xinhua News Agency.

China’s national pension fund (China’s National Council for Social Security Fund) should plan to increase its investments in listed stocks. It plans to take strategic stakes in China Development Bank and Agricultural Bank of China. I doubt this can make Chinese equity investors more confident and it was more or less expected from some market participants.

Again it more shows how concerned the Chinese leaders are for a sharp downturn. This became very clear last Thursday as Mr. Zhang Ping, Chairman of the National Development and Reform Commission, warned against a coming decline in economic activity. He stressed that the government needs to take “forceful” measures to change the current slowdown. He directly mentioned excessive production cuts, factory closures and massive unemployment leading to social unrest.

The Communist Party seems deeply worried about this risk. Factories close down every day around in China and the unemployment is rising, but I fear that the Communist Party knows economic data that we don’t know……..

Mr. Zhang also gave some more details on how the RMB 4000 billion big economic rescue package will be used:

RMB 3000 Billion will be spent on infrastructure. The RMB 1800 billion goes to railways, roads and airports. Another RMB 1000 billion of the 3000 is allocated to disaster reconstruction particular in the Sichuan province, hit by a serious earthquake in May.

 RMB 370 billion China will use on rural development and RMB 40 billion health and education. More details will follow when they are released.

From another source I have heard that many hotels in Beijing around the government offices who handle these funds are fully booked. Province government officials have rushed to Beijing to apply for the funds.

A lot of work is done to change and push the domestic part of the Chinese economy. It will succeed one day, but as mentioned I am afraid that the economic truth is more unpleasant than we are aware of.

This was repeated by President Hu Jintao over the weekend, where he confirmed the worries of too low growth to meet the needs from a growing population.

Very coincident USD/CNY jumped to 6,8600 and even higher. The reason was said to be the bad PMI number Monday but we are talking about a small devaluation to support Chinese exporters. As mentioned for some weeks ago, G20 will have a more than a difficult job because all countries just want to export more in a world with less demand……..

A long term thought that investors should consider. The Chinese government is doing a big effort to develop the Chinese consumers as a part of changing the economy to a domestic growth story. It most likely also means that the Chinese people develop an opinion about their life as a whole. Ask Mr. Gorbachev if he succeeded in creating a system with free and liberal market economy but without a free political system………

Hang Seng proved to be more influenced by the global stock market environment, whereas Chinese mainland stocks are dominated by domestic China news. I think it will continue so this week as well. I see no reason to change the targets despite the current positive sentiment for global equities.

Targets: Hang Seng 11.000     Shanghai B 90

Peter

Delayed update from 26th Nov.

Stocks: Sunny side up these days, but don’t get toasted.

We never see the bottom, before after the bottom, but I doubt it was last week.

Stock markets are globally in the good mood due to the above rescue packages. Good that many equity investors focus at the short term benefit instead of the coming higher government bond yield. Going forward the higher yields will compete with stocks. With lower corporate earnings in the coming years is the only compensation to buy stocks at a lower price than current levels.

I conclude that global demand for all sorts of goods has declined so much (not just temporary stopped), that the market place has become smaller. Either can all sellers of the goods accept to sell with a loss or some needs to disappear. A simple protection for investor is to buy market participants with high equity (or small debt ratio’s), but it will be really hard for these companies to obtain a satisfactory ROE. A lower share price before investors buy is a compensation.

It could be that all bad recession news is priced in the stock market. It would just be very early in the cycle that the market is able to price the whole downturn in.

All in all am I still very sceptical regarding stocks. As mentioned last week when S & P 500 broke 820 on the downside I was going for a new and lower target – it is 656.

I respect that we are in a tricky territory, so I will look closer at equities in the next Weekly. Targets for Dow Jones and Nasdaq will be corrected lower accordingly.

Currency markets: Swinging like a share.

Almost as usual is the currency market following stocks. The 1,3250 target in EUR/USD is getting closer, but my view is based on a Dollar sell off and not a bullish equity market. I expect EUR/USD to move back to the 1,2400 – 1,2900 range followed by a break upwards.

The EUR/JPY target at 118,50 has been reached 2 times now but I believe in a 3rd times as well. USD/JPY is currently well supported around 94,00 out of Japan, but I stay with the 90,00 target followed by intervention by Bank of Japan.

Round about the same story for Sterling as it was helped higher by the dollar going lower, but I keep the downwards target in EUR/GBP

China: Fighting the recession dragon

Just a few, but important, numbers to highlight this time.

Today’s rate cut of 108 basis points is another sign of how fierce the Communist Party fights to boost the domestic economy.

I simply stay with the view the that one day China will become a new US demand machine, but the number of people who believes in that probably has gone up. A study I got across last week showed that for 12 months ago 19% of all asset managers was overweight China stocks, lately this number was 67%. Maybe the asset managers just reduced other countries, all in all there fewer remaining buyers. On the other hand, last week it was possible for an asset manager to raise USD 1 billion to invest in Chinese stocks.

Yesterday the World Bank revised the growth forecast for 2009 down to 7,5%, well below the official target of 9,0%. Why is the Chinese Communist Party so worried about that when rest of the world is in recession? Net 20 million people enter the labour market yearly. China needs a yearly GDP growth rate around 9% to absorb the growing labour force otherwise it feels like recession.

I stay with the targets reached once at 11.000 in Hang Seng and 90 in Shanghai B. 

Below you will find my weekly view on the very challenging financial markets. In my view it is still too early to enter anywhere with the strategic investments apart from oil – please read the Hot Topic below this entry. The China update every week is worth to read as China will overcome……

Read more about all the interesting happenings in the financial markets in the outlook here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

Currency markets – Capital flows are still making the lead.

EUR/USD (1,2710): Last week I thought it was time to focus on fundamentals. It turned out to be wrong and we are back in the situation where other currency pairs and equities decide EUR/USD movements. It’s difficult to say what economy looks worst but I keep my opinion that US is in the steepest downturn, leading to a rebound in EUR/USD one day. EUR/USD is nicely trading in the 1,2500 – 1,3000 range but a 1,2400 – 1,2900 is the one for this week.
The range trading in EUR/USD is a sign that the isolated EUR/JPY selling has stopped. We need to watch out for new lows in European equities. At that level further long European equities / short Yen could be closed.
The most interesting fundamentals this week are out of US, but they are not that serious as all eyes are on growth numbers. The US housing starts on Wednesday (expected 780k) I watch and then Philly Fed on Thursday (expected -35,0).
As I had the expectation of fundamentals returning as the key driver in FX I raised my target. I need to put it back to the range followed by 1,3250

Target: Range 1,2400 – 1,2500 followed by 1,3250.  

EUR/GBP (0,8460) – GBP (1,5020): 1½ weeks ago Bank of England surprised with 150 basis points. Last week they chocked the market with one of the most bearish central bank outlook I have seen for a long time. I thought all negative news was priced in but that was certainly not the case.

Regarding Sterling it’s more fundamentals deciding the trend compared to other currencies. Growth outlook is in focus but also public borrowing gets attention now. The political and central bank comments mean more than economic data. That’s what I keep an eye on this week.

The only good thing about the recommendation last week was the stop loss at 1,5420. The target was of course totally wrong. The economic situation in UK is gloomy, also more than in rest of Europe. Sterling will remain under pressure after the last Bank of England report. Depending on news about public finance I have the feeling that GBP will rebound a bit, and then we need to see what happens.

Targets: EUR/GBP 0,8250 – GBP/USD 1,6500 / stop loss 1,5200.

EUR/JPY (123,35) – USD/JPY (97,05): Good swings in JPY is still the case but as mentioned under EUR/USD it’s not limited to EUR/JPY anymore. Capital moves towards Japan sent EUR/JPY to the target of 118,50 last week, though also partly caused by EUR/USD trading lower instead of higher.

All economic data from any country is negative but I need to mention the Japanese GDP numbers. Not only was July – September negative but the April – June was revised further down. Some recessions have been technical recessions with 0,1 or 0,2% negative growth in 2 quarters. This time the numbers are very different – unfortunately.

If fundamentals decided the JPY trend, Yen would be much lower but the capital flows is the name of the game. Watch the stock market comments, it’s where the clues are. I keep the targets.

   
Targets: EUR/JPY 118,50 – USD/JPY 90,00.

Equities – Any good news left ? Certainly, the price for the last one was $700 bio, how much next ?

Nikkei 225 (8.523)  Topix (850)  Dax (4.616)  FTSE 100 (4.174) Dow Jones (8.497)  S&P 500 (873) Nasdaq Comp (1.517)  

Let’s start wit G20. G7 never really agreed on something apart from where to meet next time. Should it be easier when 20 countries needs to agree who should suffer the most (remember we are in a downturn – it’s not growth we are sharing) – to be honest I doubt it (please also read the China part).
They agreed to control the financial sector more. It might be correct to do so, but it doesn’t bring any growth right now. On the contrary will banks be more reluctant to do anything at all, including lending money out.
The coordinated fiscal driven global growth plan was postponed is my feeling. Or each country goes back home to support the domestic economy.
It’s ok that equity markets react negative as it underlines how serious the situation is. The politicians have realised how badly the global economy is looking and the markets can smell it.

As mentioned several times, is what we go through now the consequence of a credit bobble that busted. The asset markets are repricing, it’s very painful, but not a punishment of anybody. It feels like a punishment and those with high debt ratio’s are feeling this in particular.

If we believe in repricing of assets, there will be an overshooting on the downside, meaning cheap assets can be bought at a certain time. The golden question is, if one should buy at -25% or -90%? Too early to say, I can just repeat, don’t buy yet.

I feel it’s a bit overdone to mention any macro news from last week as they were all between very bad and awful.
No wonder that the G20 people are unhappy about the situation. They can’t avoid the recession, but should focus on avoiding the depression.
It seems sensible to use fiscal policy to fight the depression, but the good news cost a lot of money now. My best guess is that financial institutions will require more money. The automobile and automotive sector is the next to be rescued – how much do you want to pay? The rescue till come but not jobs will be saved, meaning more unemployed but not so many that we enter a depression.

Apart from the Chinese stocks (please read below) I still watch one thing in the Japanese market. Last week I wrote about the Japanese GPIF fund might buy stocks short term. Naturally it’s hard to get precise information, but during several sessions the Japanese morning is fairly negative but then the market turns back to almost positive territory followed by another sell off. A trading pattern that indicates a big player is in the market.

In US we actually reached the 820 in S&P 500 last week followed by an enormous rebound. I don’t regard the target as reached in the way that there is any need to change it. The rebound indicates that 820 in S&P 500 is a very interesting level (don’t buy even if we touch).
It also confirms that we enter a life where people buy shares for different reason. Long term technical support, emotional reasons like it feels cheap, or it’s a well known must have company. Different factors that aren’t based on rational thinking. Within the last days I have spoken with several private investors, who simply are happy to buy now – one day it will take over…..

In absence of true important macro economic figures this week, the markets will be dominated by the underlying macro gloomy outlook. Now and then with emotional or technical caused buying.
Just a few earning reports from US this week, Home Depot Inc. on Tuesday and Dell, Inc. is out Thursday.
 

Targets: Nikkei 225 6.683  Topix 697  DAX 3.906  FTSE 100 3.456  Dow Jones (7730)  S&P 500 (820)  Nasdaq Comp (1489)

China – Mainland stocks should have gone down but they went up……

Hang Seng (13.529)  Shanghai B (110)  USD/CNY (6,8235)

As discussed last week, the Chinese stimulus package was good news if the headlines were the truth. As mentioned, some economists took the news cautious and they were right to do so. Ahead of the weekend (but late enough so the G20 participants learned about it after the summit), it became clear that the stimulus package in reality is ¼ of the promised amounts. The rest (after all 75%) is planed to come from commercial banks, regions and other sources, but very unfortunate it is less realistic.

The Communist Party was very smart to let the stimulus package news overshadow the partly very bad news during last week. Fair, the Chinese equity market was buoyant, but maybe strange that it continued this morning, despite the adjusted details about the stimulus package.
 
There are rumours about a large government backed stabilisation fund in the size of RMB 600 – 800 billion aimed to support the domestic A shares.
As usual is nothing really confirmed but it sounds very possible. This was another key to the 17% rebound in A shares last week (B shares went 8% up).
At what level the fund gets active (if at all) is the current speculation, but some point at 1500 in Shanghai A as very important. That’s 30% down from today’s close, but when the plan was thought out the index was trading at 1800.

Last week I mentioned that some funds might be running short positions in Chinese B shares. If some are closed out I can’t say, but it of course fuels the upside.

I keep the targets for Hang Seng and Shanghai B. The reason is as mentioned several times earlier that I regard the globally bearish markets as the biggest danger to Chinese stocks. China will feel the global crisis even more, but the government is of all governments, the most active in supporting the domestic demand.

This leads to a line on USD/CNY. People’s Bank of China’s Zhou Xiaochuan hinted that China might let their currency depreciate. China also announced more export rebates (another word for subsidies) so they just need to restrict import, then they are running a full blown protection policy. All announced the days around the G20 summit – it look’s difficult for G20.    

Targets: Hang Seng 11.000     Shanghai B 90

Central bank rates

US Federal Reserve Bank: Now Fed is at 1,00%. They might cut again, but going below 0,50% is very difficult as money market funds will create a negative return. This would create too big problems is my view.

Bank of England: Now at 3,00% and they will take the base rate lower is they find it necessary.  

European Central Bank: Further cuts are already priced in. Some ECB members signalised another 50 is possible, and it seems to happen before Christmas.

Bank of Japan: 0,30% and they might even cut again, but of course it won’t change anything.

I am looking forward to your comments and wish everybody a profitable week.

Peter