Tuesday, August 30, 2011

Checking Our Bearings

Amazing how quickly time goes when you are on holiday isn't it? Also amazing how exhausting a "holiday" can be. Of course returning after a long break involves vast amounts of deck clearing as the x grillion emails and Bloomberg messages need deleting. TMM have long believed in the "composting" method of email management whereby they are all transferred to a "compost heap" folder and left to rot. Those that were important are bound to be followed by urgent chaser reminders which can then be actioned, otherwise if nothing results after 2 weeks the whole lot can happily be cleared out.

As an aside TMM are hugely in support of an idea once floated by AOL suggesting that emails are priced. Just a cent or so each, with the money paid by the sender going to the account of the recipient. For most usual users this should net off pretty flat but it would be enough to make folks think twice about the value of the mail or copying in the whole world. It would put an effective end to spammers and limit most of the crap we receive.

Anyway, back to less mundane issues. The markets.

It feels as though the past 2 weeks have been a rumour-fest with journalistic pieces running the show and markets following. Our long held view that 2011 is a rerun of 2010 with respect to sentiment and topical focus is still on track with the US having overtaken Europe as the focus during August and the expectation of more US QE rife. Our thoughts earlier in the summer were that the difference would be that this time there would be no further stimulus and, though that is looking less likely, we may still escape direct QE as we are now expecting something from Obama on Sept 6th. Having taken on Krueger there may well be some clever micro reform package on the way.

But the sentiment remains very similar to 2010 and that sentiment does seem to still be firmly parked in the bear camp. With equities having put in a potential double bottom and the carry monkeys coming out of their cages again it looks like the credit markets are the current banner being waved by the bears. In fact if we look at equities through SPX and carry through AUDCHF and credit through the European Itraxx Crossover, we can see how the last 2 weeks have seen some massive divergence.

But TMM feel that the credit markets are dominated by CVA desks and spec players with no hedging vehicles to play against in the summer months. In other words, we think that the credit squeeze is the part that is out of line and is just as much a function of a feedback loop in negative sentiment as are some of the effects we are seeing through sentiment driven data such as consumer confidence, Philly Fed, PMIs, ISM etc. So where as this soft data may be just that... soft, the hard data is beating it. Yesterday's consumption data was actually very strong and we think that US GDP forecasts are about to be lifted by about 1%.

Europe is on an edge still but the ECB does appear to be holding back the speculative hordes by forcing shut the BTP-Bund spread through artificial means. But with Jackson Hole behind us and a relative lack of Eurospeak for the last 2 weeks (August beach inspired STFU policy), we can't be far off another Euro tape bomb. However it does feel as though the market is already positioned for renewed strife (EURUSD with the risk reversals still hugely skewed to the downside) so any shock may well not see the calamitous price action many are hoping for. Of course we have month end madness ahead and it would appear that EURUSD selling is the bias for the fixings, so it may be hard to separate noise from news.

As for China, We were surprised at the (unannounced) change to their Reserve Ratio Requirement definitions. IT seems to have knocked onshore A shares but H shares and the Hang Seng have rallied with the rest of the risk-on move into Labor day. TMM can't really work out why. This change in RRR requirements is tantamount to forcing Chinese banks to bring a bunch of off balance sheet stuff onto their balance sheets and then reserve for it. We may be mad, but that does sound like credit tightening and might let the air out some of the letter-of-credit metal financing schemes that have been very fashionable as of late to say nothing of all other forms of sketchy trust (rhymes with SIV) structures. Add to that a whopping CB issue by Sinopec for... Um... Yeah, nothing in particular and TMM feel that anyone looking at Chinese equities as cheap needs to take a closer look.

In fact the move to push this stuff on balance sheet seems to come right out of Fitch's playbook, written by the way-too-smart-to-work-at-a-ratings-agency Charlene Chu. Here is a snap from her outline of how Fitch calculates total credit vs the PBOC. It appears the PBOC has just decided to adopt the Fitch approach now.

To that end TMM are casting their minds back to the last time a bunch of stuff got pulled back on balance sheet and end up find ing it hard to buy the dip here in China. Particularly as companies are doing a pretty solid job of blazing forth their capex in the face of collapsing returns on capital. TMM's Bete noire of the Hang Seng, Chalco and Suntech Power below. When TMM think of what they would say to Chinese corporates facing chronic overcapacity, declining margins and rising interest costs continue to invest, then the line "If you want to get out of a hole, stop digging" comes to mind.

TMM don't deny that hot money flows might keep liquidity loose onshore but that is hardly a good reason to buy their equities - it seems everyone is just hoping for RMB appreciation given that property is being persecuted by the government and companies cannot invest profitably anymore. We are inclined to think that something has to give here - companies have to stop investing thereby slowing growth before they bankrupt themselves and Chinese banks are going to have to raise a shed load of equity soonish. It's hard to love the HSCEI at 1.5x book when a lot of that book value in banks is inflated and the capacity for industrials is likely loss making.

And finally a quick word about the UK. Today's uber-flap is over how the % of ownership of homes has collapsed and how that must be terrible. We would like to point out that SOMEONE must own the houses that people are living in. Now it may be an example of the rich/poor divide getting wider with the rich owning more houses at the expense of the poor, or it may even be a sensible majority choosing to rent over own as house ownership is not the sure fire road to riches it was, or, more ominously, this is the UK selling off its final asset to the foreign investor. Will the UK be a nation of tenants to overseas landlords? If so the dividend flow of rent moving overseas will be a slow blood letting death. Perhaps the UK should introduce laws whereby only permanent residents can purchase or do what Singapore has done leaving the foreigners to fight over a Mickey Mouse condo market. And lets be honest its those inner city one bed flats that need the biggest lift.

God its just so great to be back. Greece, all is forgiven!

10 comments:

Secret--Sauce said...

interesting graf 2, dat. so we can put tmm firmly in the pro-transaction tax camp?

Anonymous said...

Home ownership has dropped simply because mortage financing has frozen the FTB for nearly 4 years hence you will find if you looke deeper that there is a corresponding uplift in the rentla sector that correlates to the weakness in the ownership camp.Broadly excluding London it's nothing to do with overseas ownership.The UK buy to let is alive and well that's all.

Again excluding hotspots FTB affordability ratios are back where they need to be,but lending criteria and confidence issues are still holding down any meaningful rise in activity and until that stops the current balance will stay intact.
Given the low build rates and the year on year build in rental we are probably accruing an explosive situation in property should we reach a point of growth worth talking about.

Yo said...

did you mean "Bete noire"?

Polemic said...

Secret sauce.. no you can t

Anon - thanks for that on uk housing.

Yo - yes we did and as you can see it has magically changed.

Leftback said...

Still not quite correct, mes amis.. LB believes that you actually intended bĂȘte noire...

Welcome back TMM. We had a bit of a gale over this way and Connect-a-Cut Late and Powerless are doing their best to restore power between the hedges.

Charles Butler said...

While you were out...

EZ financials did not go to zero in the wake of the Banning of the Shorts. Apparently all the workings of a serial greater fool.

Welcome home.

Leftback said...

Also while you were out, gold has now retraced about 61.8% of its recent fall. But of course we all know it will never go down again, it's going to the moon. The Anons said so.

ADP tomorrow. This one might be worth taking the under, as the previous number was a fair bit higher than expected, but then look out on Friday as the numbers start to reflect teacher rehiring and other seasonal factors. As usual it's a complete crap shoot, most of these numbers are zero ± a big error bar. We are inclined to be a bit cautious here and then more bullish Thursday and Friday.

Leftback said...

Also while you were out, gold has now retraced about 61.8% of its recent fall. But of course we all know it will never go down again, it's going to the moon. The Anons said so.

ADP tomorrow. This one might be worth taking the under, as the previous number was a fair bit higher than expected, but then look out on Friday as the numbers start to reflect teacher rehiring and other seasonal factors. As usual it's a complete crap shoot, most of these numbers are zero ± a big error bar. We are inclined to be a bit cautious here and then more bullish Thursday and Friday.

abee crombie said...

great to see you back MM. I also noticed the AA - LIBOR spreads was still blowing out. Any idea how one would play the spread comming with just etfs/futures

very interesting post by mpettis.com recently. I urge all to read it.

I am still a bit worried when all the monkey asset managers think this is just a 'financial slowdown' and the real economy is sputtering along. Isnt that what we heard in spring/summer 2008.

Too much HFT and momo players in these markets to make anything a sure bet

Charles Butler said...

-just a 'financial slowdown' and the real economy is sputtering along-

That take reached an excellent level of sublimity when the DAX flashcrash was attributed to the ban on financials shorts.

We'd guess it's chaos theory at work, but it does reveal a bit of a blind spot.