An L Of A Recovery

Thursday, July 09, 2009

Macro Man was pleased to receive plenty of kind feedback on yesterday's little hip-hop effort, though somewhat chagrined to see that "California Love" is apparently now considered "old school." Speaking of old school, "Going Back to Cali" was suggested as an alternative source of inspiration.....hmmmmm.....I don't think so.

Anyhow, we finally started to get some signal yesterday with the release of Alcoa's earnings after the close last night, which apparently means the return of sweetness and light. True, Alcoa's earnings losses were somewhat smaller than expected, which, for an aluminum producer like AA, might appear to have implications for the global economy.

At the risk of facing accusations of viewing the world through blood-tinted spectacles, Macro Man is sceptical. Last quarter saw an unprecedented action from the Chinese to support ally prices via unprecedented import activity. The chances of a repeat performance would appear sketchy. Moreover, even with this demand and price boost rom China (presuumably to keep Chinalco afloat), Alcoa's revenues barely budged....even though Q2 is seasonally their strongest revenue quarter. In fact, y/y revenues actually fell from 40% in Q1 to 44% in Q2.
So it would seem that the vast bulk of the surprisingly small losses was down to cost-cutting, a fact apparently confirmed in last night's statement. So you'll have to pardon Macro Man if he views Alcoa's "triumph" as a micro issue, not a macro one. From his perspective, that revenue curve looks decidedly L-shaped.

(edit: Alcoa lost $142 in shutting money-losing oprations, which has somehow been magically wiped from the headline EPS figure. If you add that back in, the actual loss per share was worse than expected. If only Macro Man could wipe the losses from closed, unprofitable trades from his headline P/L, this job would be a helluva lot easier....)

Earlier in the day yesterday, European asset markets were impacted by a "massive" rise in German industrial production (3.7% m/m), which comfortably exceeded expectations. While that certainly confirms the end of the production free-fall, it hardly suggests an imminent growth phase. Indeed, an index of the actual IP index shows a) that the May blip barely registers, and b) that up and down changes in monthly production are the norm.

.A stabilization in demand, which appears to be the new bullish theme, doesn't actually imply growth of a V or a W shape. It actually implies an L.....which is hardly good news, and far from what is priced. It's an interesting coincidence, but two banks yesterday presented Macro Man with research that Asian equities are pricing in an ISM reading of between 55 and 60. That's a hell of a lot of good news (and growth) that is already in the price.

And despite today's Aloca-inspired bounce and scepticism from many quarters, the head and shoulders patterns in a number of markets continue to work. Given the optimism embedded in prices and Macro Man's view on the likelihood of an L-shaped recovery, he looks for further downside in risk asset prices.
Finally, it's worth noting that today sees an announcement from one of the few CBs in a tighter spot than the Fed....the Bank of England. Inflation has consistently exceeded expectations, and a prior raft of better-than-expected activity data has recently receded into sharp declines. Oh, and the fiscal situation is worse than that in the US, and adminsitered by a government that's now utterly bereft of credibility.

The market seems to ecpect a £25 billion extension of QE, with a risk that the BOE requests an increase in the size. Macro Man has no real view on the outcome, but it should make for interesting viewing. At the very least, it should take the market's near-term focus away from West Coast rap....

Posted by Macro Man at 9:00 AM  


Im not sure Alcoa's results were actually better than expected, their real loss was .47c a share. They exclude 15 cents of this as being from discountinued operations and a further 6 cents as restructuring charges to reach a number that "beats expectations". Im not an equity analyst (THK G*D) but doesnt look particularly "good" to me.

Anonymous said...
9:46 AM  

China imports have stopped, imports are donezo. That being said, rally I saw in HK afternoon feels like it could run - everyone seems to think HSI at 17500 is a steal.

Nemo Incognito said...
9:58 AM  

Ha, I hadn't seen that (I'm not equity analyst either!) If so, it just underscored the point that much more. I haven't been able to find those figures, but I do see that GAAP earnings were 2.5c/share wors than estimate.

...a deeper inquiry reveals a $454 million net loss, versus 975 million shares outstanding...which certainly seems like a lot more than 26c/share. What a joke

Macro Man said...
9:58 AM  

What about Pepsi? Their earnings were a mildly positive surprise, as well, it appears.

I agree with you, MM. The China story, that I never completely bought in the first place (all sorts of suspect circular reasoning in there), seems to sound increasingly more hollow with every passing day. Not sure whether that coal shipment cancellation and the detainment of the Rio workers are massively significant events, but I do believe they're meaningful signs...

Dimitry said...
10:08 AM  

China's buying of AL was done to support local industry (domestic employment). It also had the unintended consequence of speculative buyers arbing the London and Shanghai exchange. As MM noted the fundamentals for Ally are ugly, stocks-to-consumption (based on the LME inventory alone) suggest that the Ally price should be a lot lower..

Anonymous said...
10:20 AM  

As Garthwaite highlighted yesterday there is a strong belief (rightly or wrongly) that liquidity will drive HK equities and property. The money base is up 116% yoy and HK rates are low due to the USD peg. HK is also attracting mainland money as HK listed stocks are cheaper than A shares (relatively speaking). Should HK equities re-rate up to 25 times or should mainland shares de-rate to 15x?

Anonymous said...
10:30 AM  

So, for the nerds and economic historians, what does China look more like: Khodorovsky/Yukos era Russian governance or Brazil economic fundamentals circa 1970? Command economy, incipient inflation, terrible lending policies, bad wealth transfer infrastructure, and an increasingly repressive regime?

Nemo Incognito said...
10:34 AM  

Also viz HK/mainland cash never underestimate the stupidity of punters out here. Tight stops are the order of the day since when this stuff breaks it breaks hard but you can get carried out on shorts pretty well.

Nemo Incognito said...
10:35 AM  

I am increasingly thinking Brazil (1970) may be an appropriate historical template for China today. Nice one Nemo Incognito

Anonymous said...
10:42 AM  

Bachman Turner Overdrive if I want the West Coast rap. I do regret missing your presentation. KRS1 does represent the East for all the heads, Krishna One!
As I am doing two trades a ten minutes shuffling between beatdowns in eur/jpy and gbp/usd, I am left wondering, is the ipmprovement in stg trade deficit a sign of booming manufacturing exports, or just the implosing of felicitous and happy shappers? Thanks for the screenprints and the points, MM.

H(oratio) said...
10:52 AM  

MM you're so wise. What don;t you know? Who killed Biggie and 2pac? It appears you can do anything from your bbg terminal...

Arte said...
11:04 AM  

Anon, my money was well spent on Amazon.

More an east asian studies / econ / math guy by training but this is what I'm going to be using for my playbook out here.

Nemo Incognito said...
11:04 AM

H(oratio) said...
11:06 AM  

Horation, funny you should mention the Blastmaster. I was kickin' "By All Means necessary" on the ipod in the way into work this morning....what a record.

Arte, don't mistake age for wisdom. I've been around long enough to remember when the big rap rivalry was not East Coast versus West Coast, but LL versus Kool Moe Dee. (Oh, and to address your question....look who benefitted most from their removal, and there's your answer.)

Macro Man said...
12:07 PM  

Diddy dun it.

Nemo Incognito said...
12:09 PM  

Nemo, I believe he was still "Puffy" back then.

As to your analogue query...I am not sure if I totally buy Brazil as a roadmap. While there are a lot of similarities, there are some important differences too...namely the external financing issues....China is a huge net creditor, rather than a net debtor as Brazil was.

SO I wonder if a useful parallel isn't something like the railroad boom in 19th century Britain, which was largely self-financed and led to a huge overcapacity/misallocation of resources. Hey, you've even got the parallel of an export model based on extracting hard money out of a customer base hooked on opiates (literal, in the case of Uk exports to China, and monetary, in the case of Chinese capital inflows into the US.)

Macro Man said...
12:16 PM  

So you are a philosopher?

H(oratio) said...
12:18 PM

H(oratio) said...
12:21 PM  

I think very deeply.....

Macro Man said...
12:22 PM  

OFF TOPIC.. sorry

does anyone think there is something behind the fact that

1.Goldman is so desperately bullish (just got the latest Propaganda piece from their chief econ.)

2. MM u mentioned a few days ago when S&P was near 900, that they were the bid in the futures the whole day

3. GS programme trading's share of total trading has become rather significant

4. GS suddenly very worried about their programme trading getting stolen

am i being DanBrown'ish here, or could there be something behind the scenes ?

spagetti said...
12:53 PM  


I made a deal with Goldman..

I gave them my Challenge numbers and cards, my Outlook contacts as well as as the stop limits and margin credit of anyone I have ever traded for. I also gave them my wife and my graduation rings.. but they let me keep my children.

H(oratio) said...
1:06 PM  

spagetti - Goldman's new business model is to be the market manipulation arm of the US Treasury. Since the Treasury wants a high/stable stock market, Goldman does. I wouldn't read too much into their bullishness. They'll be bullish indefinitely.

Anonymous said...
1:36 PM  

what if goldman fails ..?

last year lehman, this year goldman?
or they cant fail..

anyway, i never believed a iota of their stuff starting from the decoupling story in 2006-07

spagetti said...
1:49 PM  

Thanks MM, good point about the key difference with Brazil as well and the example of the 19th Century Railroad boom.. Nonetheless, there is some useful points from the Brazilian experience... Indeed, in some ways past emerging market crises may be a useful road map for the US. The key difference, of course, is the USD as a reserve currency.

Anonymous said...
2:52 PM  

Playing devil's advocate against my own and our host's L-bottom view, initial claims were improved. Those numbers are skewed by seasonal adjustments this week, though. Look here for a good read on the effect, to be posted in five minutes. What can I say, I dig that one the most these days.

wcw said...
2:55 PM

Just thought you'd appreciate the link d00dz. JL

Anonymous said...
3:44 PM  

the opiate model was backed by military supremacy and absence of morality, i dont think the chinese analogy fits

TulsaGuy said...
3:59 PM  

Alcoa has a smaller loss because the cost of closing old plants "doesn't count" toward earnings...

The reason our economy isn't working is because we are WAY too willing to lie to ourselves, and WAY too willing to believe our own lies

Almost every business is profitable once you exclude all the expenses and losses

Too many so-called analysts / traders are still buying into this accounting fraud, so there is no way the markets have bottomed yet.

Greg said...
4:10 PM  

I tend to think that the ultra bears now were the same lemmings buying oil at $140 per barrel. In the long term view, commodities look cheap to me. Particularly considering that the U.S. and Europe can't seem to see the world outside of themselves. And, with even a modest improvement in the life of the average Chinese you have substantial pressure on the world's natural resources. The credit crisis may have caused the emerging world to wake up and realize that they need push consumerism in their own country in order to be financially stable. The reallocation of savings to domestic spending plans in emerging markets and foreign creditors is very bullish for commodities and commodity currencies.

4:31 PM  

"Alcoa lost $142 ... which has somehow been magically wiped from the headline EPS figure... If only Macro Man could wipe the losses from closed, unprofitable trades from his headline P/L, this job would be a helluva lot easier....)"

this one is classical!

Sckeptical said...
4:57 PM  

Former US Assistant Secretary Of The Treasaury "Geithner Works For Goldman"

Max Keiser: "Does the US Secretary of the Treasury work for the people or does he work for the banking system on Wall Street?"

Dr. Paul Craig Reports: "He works for Goldman Sachs."


Professional Gringo said...
4:58 PM  

Jeffrey Benson -- so do your comments imply that you think China et al can emerge from the recession "decoupled" (or at least less coupled) to western economies?

Are they going to emerge first?

Greg said...
5:01 PM  

about China today x Brazil 70's, there's some similarities, but the diference lies not only de net creditor/debtor ratio, is also the huge importance one has in the world concerning , economic, political, military aspects wich the other one had not. this brings totally diferent perspectives.

Sckeptical said...
5:25 PM  


Too many bulls, frankly too much bull.

China is an export machine; the majority of increase in living standards has been driven by that so why (where!) is there suddenly this internal demand taking over? For sure conjecture says that it might be self sustaining (pushing consumerism) at some point but frankly if "western" consumers have changed their time preference regarding consumption then HTF does China, commod ccys, and commod exporters avoid the pain?

How do you push consumerism anyway? It is a consumer attitude. Sure you make banks lend but ultimately what are Chinese borrowers doing with it? Oh yeah - lets invest in a new factory, aggregate demand is so high externally, and all of my countrymen want to take up the slack! There is not a light switch to change their main markets from external to internal. That takes time - years.

Anonymous said...
5:42 PM  

commodities look cheap, well, I recall end of 2007 and beginning of 2008 that bank stocks were cheap. And CMBS. And RMBS.

Look at the grains - sitting near the lows again and this was a good market to invest in (because it was cheap)

People need to eat! Well, people eat less. Less meat, so less corn blah blah all the usual feedback loops. In fact, people can get away with using less of everything quite easily. And that marginal drop in demand can easily hose commodities. Easily.

Anonymous said...
5:48 PM  

China built the largest mall in the world (I think), and last reports I heard the place was empty save for the western TV crew doing a story on the lack of shoppers

But not far away, markets of mom & pop stalls were flourishing.

Westerners have no issue with doing business with a giant faceless conglomerate.

The chinese have long preferred face to face transactions. There is far more value placed on knowing the counterparty.

My former employer could never get a contract with a Chinese company -- they were idiots and assumed they could simply send in a lower bid and the chinese company would switch

In China, if you want to do business, it is important to be introduced

So when I read a western news media source saying there is no Chinese consumerism, I have to dismiss the story mostly if not entirely. Chinese consumerism, to whatever extent it is or isn't happening, will not look familiar to the west.

We "need" a Starbucks on every corner. The Chinese prefer to buy dim sum from the same old street cart that their parents bought from.

Chinese consumerism, defined according to Chinese standards, has been growing much faster then the Starbucks crowd will ever understand

Marco Polo said...
5:53 PM  

I think the decoupling story has more legs now that the reserve currency saga has grown public and the crisis response was domestic stimulus plans across the globe. Financial crisis spells protectionism. And let's not forget that china has 1/6 of the world's population. Make them only slightly depended on ipods,the internet, and cars and you've got demand. I don't think any of this will happen over night, but long term, the age of the western advance economy is declining. The decline of nearly all major states in human history was financially motivated, typically because of over indebtedness. Main stream just tends to forget history.

6:16 PM  

What about Chinese policy now and how it compares with the mad rush policy which Japan implemented post 1987 -so while everyone expected US to suffer a lot then (and similar arguments were made - we have too large of deficits, we exported our factories, pete petersons commments, etc), and everyone at first imagined Japan would suffer as the exporter too...
but no, Japanese markets not only recovered , went on to make new highs as well eventually, they made their top 4-5 banks to make out a lot of loans just like the Chinese today, and it all worked until the party came to and end.
Even back then the calls were the same, better teach your kids Japanese as they will rule the world, they are hard working people unlike lazy americans, yen will be the reserve currency, "not now, but in 10-15 years.."

similarities are striking

Interesting note from Thomas Mayer from DB recently, he speaks about shift from export model to domestic consumption model, which ultimately leads to more income disparity as well as a ca deficit etc etc.
how germany after BW system breakup in 70's wanted to shift to domestic consumption, realized export model inherently volatile, etc etc.
but never did, because politically infeasible,
could China have the same conundrum

Anonymous said...
6:16 PM  

What's the lowdown on the dollar today? Anyone got any colour?

Anonymous said...
6:29 PM  

Chris, well, equities aren't selling off today, which under the current regime means that the dollar going down forever crowd flex their muscles. Don't think there's a massive flow so much as an utter lack of interest amongst many participants.

Anon @ 6.16 I have also though of the Japanese parallel. I suppose one key difference is that while Japan manufactured high-end consumer goods, China's a bit lower down the value chain. Well, that and the fact that Japan had an open capital account (ostensibly) and a free-floating exchange rate (ostensibly.)

I tend to think that there is no exact precursor to today's China; rather, it is an amalgam of various other historical situations, such as some of those mentioned above.

The one thing that just about all of them have in common is that it all goes horribly wrong before the end.

Macro Man said...
6:41 PM  

in all seriousness, if someone could explain eurchf to me i'd be forever in their debt...there is literally no fundamental reason that the chf should have rallied as it has of late. I work on an exotics desk and i know there is 0 flow here....the economic fundamentals are dreadful, the country is entering a deflationary spiral...there are huge outflows from the banking industry (1 trn chf from end 07 to start 09 according to bbg..though i guess the deposits could have been entirely in foreign ccy)...and a central bank commited to weakening the franc.... all i can think is that by talking about weakening the franc and being so horrendously unreliable about doing so the market has decided to attack the snb and those that got long eurchf when it said it was going to weaken the franc... but seriously...any explanation would be really really welcome...because i am at a loss

Anonymous said...
7:18 PM  

You're trying to apply logic to CHF when logic doesn't apply. USD/CHF is the worst chart in the history of FX right now.

Looks like MM got his <$60 a barrel answer eh? And they want a cheap dollar so beware.

And the media will not disturb their narrative wherein Dick Cheney crept out of the National Observatory at night to dose AIG's water-coolers with LSD so that they'd make financial derivatives out of hallucinatory fantasias.

All I know is that trading the European FX session from California is effing up my golf game dammit.

Professional Gringo said...
8:00 PM  

i think one of the best research pieces you will read at the moment is Jim Reid's H2 outlook for equities and credit. He is the DB strategist and has a credit background. He makes very sensible and well rounded recommendations given his background. He is short term indifferent, slightly cautious and long term very cautious. The thing that should keep equity participants awake at night is not equities per se but developments in the treasury market. the most extreme positioning in the world currently in my view is not long equities, it is long treasuries. the day that inflation or a chinese asset shift spells trouble for the treasury market is the day to be concerned. in the mean time, with risk free yields at very low level and 2010 S&P earnings at $70 to $80 its hard to make the case for equities being very overvalued. the recent rally in treasuries affords as a higher multiple for unexciting earnings regardless of the timeless debate on quality/manipulation of earnings. lets see where that 2010 figure trends to in coming weeks. if anything i still lean towards a trading orientated range bound summer. the ongoing negativity from the macro community if anything presents upside risks in the near term, however i still view that as an outside chance. 25% S&P >950, 50% 850 to 1000, 25% <850 would be my view over the next 3 months.

Anonymous said...
9:01 PM  

typo: 25% S&P >950, 50% 850 to 950, 25% <850 would be my view over the next 3 months.

Anonymous said...
9:03 PM  

I would suggest that the skepticism from the macro community largely centers around the fact the SPX earnings of $70-80 next year is a fantasy. How many "one offs" do you need to see before reported earnings finally lose credibility?

Macro Man said...
10:01 PM  

Anon @ 9:01 PM
Can you send the DB piece?


Tyler said...
10:36 PM  

2007 China decoupled
2008 China recoupled
2009 China re-decoupled
2010 China will ...

Everybody, fill in the blank.

Anonymous said...
4:00 AM  

Yes, SPX earnings more like $20 through the depression/deleveraging and $40 in the (unleveraged) "recovered" economy are more like it. We'll never see 2007 earnings again, not on a real basis.

Anonymous said...
4:21 AM  

Anon at 7:18

I suppose part of the reason for CHF strength is the deflation; similar strength was observed in JPY in the early 90s and the USD last year.

Anonymous said...
9:47 AM  

the amount of complaining about Alcoa from macro community is understandable.... the CEO comments re China irritate given the temporary stock piling is just that. his comments re autos are understable as inventory in the supply chain has supposedly been heavily depleted. this is only temporary upside risk i can see. however, dealing with temporary one-offs and all that bollix is daily life for bottom up stock pickers. it wouldn't even make it into top 100 of earnings distortions i've seen in my time. what is crazy is that the CEO was commenting on his company's performance 2 days before on Bloomberg TV. what happened to quiet period before earnings?! now that is something to complain about. everyone just p1ssed off it came out after the close on the day S&P broke its neckline and was meant to go to 840. i thought it was game on i hear you shout!!! welcome to the frustration of markets at moment.

Anonymous said...
5:32 PM  

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