The Exits

Tuesday, July 21, 2009

The earnings love-in rolls on, with another sea of green "beats" on the old Bloomberg earnings report monitor. More than 76% of companies reporting thus far have met or exceeded EPS estimates, a higher than usual ratio. This, in turn, has led to a flurry of upgrades and a "race to the top" which has even sucked in some of the top-down strategists.

A slight cause for pause is the fact the top-line revenues have been less impressive. Indeed, less than half of companies reporting this far have met or exceeded revenue forecasts. Now, perhaps this is indicative of a healthy degree of operating leverage in corporate America, or that ruthless cost-cutting is payind dividends. Then again, it could just mean that they are lying moe than usual to massage headline EPS figures through consensus. The reality probably involves a bit of both.

Regardless, attention switches back to the macro today, with Bernanke's testimony in front of Congress. He set out his stall in today's WSJ, sketching out how the Fed's exit strategy will work while stressing that it is far from imminent. No doubt more will emerge from the prepared remarks and especially the Q&A, but BB has probably defused a worst-case outcome by getting his thoughts out in the paper.

Perhaps more interesting than anything that the Fed can say or do have been the first rumblings of an exit strategy from the Chinese. The head of the China Banking Regulatory Commission noted that strong risk mangement will be required from China's banks in the wake of the orgy of fresh lending in H1.

While trailing NPL data looks healthy for China's banks, as does provisioning, it is probably safe to assume that it's too early for some of the recent loans to go bad. But have a read of Michael Pettis's latest post; it doesn't bode particularly well for the returns on huge swathes of real estate investment.

At the same time, it's worth commenting again on just how substantial China's money creation has been; by Macro Man's calculations, over the past year, Chinese M2 growth (in dollar terms) has exceeded that of the US, Eurozone, Japan, and UK....combined.
Now that the recovery is in place and the stock market's recovered, perhaps the authorities will turn an eye to mitigating the inflation and NPL threats that loom on the horizon. If they do, it could provide a nasty hiccup to Chinese equities.

Of more immediate concern to local punters is the looming in full solar eclipse in China tomorrow. Known locally as (Macro Man's not making this up) "sky dog eat the dragon's eye", it is traditonally associated with bad news....riots, famines, political upheaval, etc. Evidently, one onshore house is forecasting that the ol' sky dog will bring with it a secular bear market to the Shanghai Comp.

There you go, ladies and gentlemen, there's the lynchpin of your global economic and market recovery. Out-of-control bank lending and real estate speculation cannot put a dent in Chinese equities, but a "sky dog" can generate a secular reversal in trend. Good luck with that....

Posted by Macro Man at 9:13 AM  

26 comments:

Geez, MM, you are really out there today.."lying more than usual" "rumblings of an exit strategy" "sky dogs bringing down the market.

I just have one question about your chart on M2. my eyes maybe fooling me, but you said RMB M2 growth exceeds the combined M2 of the other 4 currences "combined",but as i look at the chart, it doesnt quite show that does it? can you recite the schedule of the numbers? not doubting you, but the chart doesnt show up well and would like to check your numbers.

Keith said...
10:05 AM  

Macro Man, when I started working under the head prop trader at a large German bank's credit/CB operations the guy was using moon charts and insisted I learn about Chinese astrology. Once again, do not expect too much from the Chinese punter viz a viz sensible behavior.

Nemo Incognito said...
10:07 AM  

Europe hasn't released money supply data for June yet (which you can see by the red line.) When it does, barring a shocking increase (which may be in the realm of possibility giben the LTRO), Chinese money growth (which surged in June) will have overtaken the combined G4 growth.

Macro Man said...
10:08 AM  

I've heard that a few big HF players take the lunar eclipse/astrology stuff very seriously - I've dismissed it all as rubbish - how much weight, if any, do you put on it?

Anonymous said...
10:25 AM  

Given the amount of chunky retail money in HK driving the market its hard not to.....

Nemo Incognito said...
10:27 AM  

I personally give it zero stock, though if the Chinese are going to whack the 'Comp on it then it's worth at least observing from afar. Selling European equities on it, as I tried this morning after a late-session dump in Shanghai, is NOT the thing to do.

Macro Man said...
10:27 AM  

Well, if it's worth anything, LEH went bankrupt on Sept 15th last year - the biggest full moon in the lunar calendar (Aug 15th) in 2008.......

Anonymous said...
10:37 AM  

Anyone see the news on this China solar subsidy? Unbelievable:

It (MOFCOM) will subsidize 50% of the upfront costs for grid connected solar systems (the bulk of demand) and 70% for off-grid. They point to a 500 MW Floor for the next 2 or 3 yrs - and no cap is included. (Everybody has been waiting to see what the cap would be.)

Nemo Incognito said...
10:57 AM  

Nemo, could you please post the link?

Anonymous said...
11:42 AM  

Here (but in mando):

http://jjs.mof.gov.cn/jinjijianshesi/zhengwuxinxi/zhengcefagui/200907/t20090721_185102.

Nemo Incognito said...
11:45 AM  

Sorry:

http://jjs.mof.gov.cn/jinjijianshesi/zhengwuxinxi/zhengcefagui/200907/t20090721_185102

Nemo Incognito said...
12:06 PM  

I think its funny how many western commenters are poking fun at Chinese astrology beliefs -- but meanwhile they have no problem accepting earnings before losses and expenses

I would believe the phases of the moon a lot sooner than I would the "earnings" of GE, BAC, WFC, etc

Anonymous said...
2:50 PM  

Lots of companies have managed to beat down earnings expectations, and then they "beat" those reduced expectations? That says a lot more about Wall Street analysts than it does about corporate earnings

And since revenue was flat and all the gains came from "cost cuts" -- why don't we just raise unemployment to 99% ??? (the CEO still needs to get paid millions for the leadership displayed in firing thousands of people)

Corporate earnings would soar!

Sorry for the sarcasm. I didn't believe the sky was really falling last March -- and I don't believe this "earnings" nonsense either

The financial markets are proving more gullible than ever

Gary said...
2:55 PM  

8pm tonight, ITV1: "Send in the Dogs". Spooooky.

SteveH said...
3:21 PM  

"The subprime contagion is well contained" -- Bernanke, March 2007

"The economy is starting to recover" -- Bernanke, summer 2008

"Green shoots" -- Bernanke, earlier this year

"The Fed has an exit strategy" -- Bernanke, today


How does that saying go? Fool me once, shame on you. Fool me four times....

Anonymous said...
3:45 PM  

"by Macro Man's calculations, over the past year, Chinese M2 growth (in dollar terms) has exceeded that of the US, Eurozone, Japan, and UK....combined."



muuuu ha ha ha ha ha ha

Anonymous said...
4:32 PM  

You can still buy sovereign 5yr CDS at around 70 bps, SOE banks at not much more. I remember after a trip to Kazakhstan as a junior analyst in early 2007 making a massive fuss to get a previous employer to ditch their Kazakh bank paper and in turn pissing off a bunch of carry monkey PMs. All I can say is that this is much bigger and is going to be much worse political stability wise when it unravels unless they tighten soon.

Nemo Incognito said...
4:35 PM  

For followers of Dow Theory, we closed yesterday in touching distance of confirming the first US equity bull-market in a couple of years. Interesting to note, that while the DOW is trading up today, transports are trading lower, thereby looking like they will firmly reject that idea.

Anonymous said...
4:40 PM  

Long Moon, short market.

http://www.youtube.com/watch?v=Z2GTKBx4H5Y

Nemo Incognito said...
4:42 PM  

Nemo's link: MOF Solar Subsidies

罗臻 said...
4:53 PM  

It's on, Macro Man. It is soooo on...

USD hit a new low for the year this morning and then roared back. JPY also catching a bid. Risk is off.

Now you can get back to the "sky dogs"...

leftback said...
6:40 PM  

Vikram Pandit has been assimilated by the Borg.

In the end, there will be only Goldman Sachs while the Democrats gargle the Devil's balls thrice-weekly.

And I'm pretty sure Toyota Priuses are stalking me. They're EVERYWHERE.

Ok, hope that helps everybody out.

Professional Gringo said...
7:56 PM  

I guess this is just another instance of stock prices driving earnings--if you are an executive at a S&P company you need to show "improvement" this quarter, and God knows it's easy enough to do that with earnings (a little harder with revenue--and besides, with lower revenue you don't need to pay the salesmen). With the writeoffs that could be taken in 2008Q4 and 2009Q1 (one-timers, wink, wink) there should be plenty of stuff in the cookie jar. . .

But What do I Know? said...
8:26 PM  

That’s a little worrying. How can the Chinese government grow the money supply, keep interest rates down and maintain the peg to the US dollar all at the same time? Shouldn’t the RMB shoot up against the USD?

oAxiom said...
1:22 AM  

No - its assumed their reserves are ok to cover everything but its quite likely that once all is said and done they will not have much reserves left after all the negative NPV projects, SOE bailouts, and banking sector recaps are done with. Its amazing how much capital is being destroyed by governments globally these days.

Nemo Incognito said...
1:33 AM  

Nemo -- "It's assumed" -- famous last words. It'll be assumed the US can finance $2 trillion deficits, until it can't. Probably the US and China will fail at the same time.

Anonymous said...
2:07 AM  

Post a Comment