Wednesday, November 30, 2011
Perhaps the market has just had TOO much time to think and plan and surmise and guess what will or will not happen with Europe, as it felt to us yesterday that there were few folks left with the patience to play and those that were, were just punting the headlines. Take the Euro for example, which did about 120 pts up, then down again on little more than a BTP auction and headlines. Which means +/-120pts is the slack in the market before you get to any reasonable old fashioned interests.
On the "will they, won't they?" front, TMM reckon Dec 9th is inching its way to a Schengen-shaped fiscal union leading to allowances (read: bailouts/rescue/aid/support) being extended to the debt-laden, with the ECB via the IMF the preferred mechanism ( if we are to follow the trail of German leaks) . A Schengen grouping would slice off the protestations of Finland and Ireland but it would be interesting to see how Schengen could use the ECB without total Euro-Zone involvement. And, of course, it is not obvious that the ECB are ready to play their part (though the latest MNI headlines suggest that opposition to a larger role by the ECB is falling).
Trying to talk to anyone about any good news out there (the US consumer confidence print yesterday, perhaps) and there seems to be a morbid gloom in response , as in "what's the point in talking about that when everything is going to be killed by the Euro implosion". Well what if, just if, we do wake up from this Euro-nightmare, or at least have a period of remission long enough to look at whats else has been going on in the rest of the World? For whilst some may argue that if German data is only just seeing impacts from Euro-chaos, then the US is back of the queue and we ain't seen nothing yet, TMM would prefer to think that the US is about to see its own resurgence and rather than being dragged down by Europe will end up helping to lift Europe up. In particular, TMM note that the Jobs Hard to Get measure from yesterday's number suggests that the US unemployment rate is likely to resume its downward march:
But still, Dec 9th is going to be D-Day though we do think the mood is remarkably similar to the end of September at the moment. Our no-commentsometer is definitely bleeping and flashing a turn and we hear that the Church of Doom is crammed with believers looking for salvation in each other. Dec 5th would make a befitting take-off day for markets in general (Equity-led), but it may strain at the leashes before that. The pattern of the past year has been a hope-driven rally into Europlan announcements, followed by the (inevitable?) post-plan sell-off. TMM see no reason for this pattern to be broken, especially upon the backdrop of an accelerating US economy (that appears to be driven, counter-intuitively, by the consumer - more on that in an upcoming post) and a positive seasonal (Santa Claus rally).
But let's be honest, end of month? Noise deafening? We are revving our engine at the lights but as for direction, we are heading East...
TMM managed to catch the bounce in Chinese H-Shares reasonably well in October as the deafening sound of the ongoing Chinese property market falls and potential banking crisis went Tabloid. Though they were spooked out of the trade when the Squideroos recommended going long vs. SPX a few weeks ago. Since then, H-Shares have underperformed the S&P500 by about 10%, stopping them out. Now, TMM certainly do not want to poke fun - we all have cold periods, and TMM have had some very cold periods at times over the years - but we reckon that now is the time to get back in.
TMM note that sequential inflation (TMM's model reckons November's CPI comes in around 4.2/4.3%, for what it's worth) in the key problem categories - food and particularly pork has been trending down for a few months now. Not only that but Li Keqiang and related entities (CBRC, PBOC) seem have done more than shown cold steel the the real estate developers - they've whipped it out, said "I'm gonna cap this guy right here" and sprayed Dalian Rightway's brains all over the room. Cue massive price cuts. Depending on who you talk to cuts have been in the order of 30% from last offer in month of September for various Vanke developments particularly in Shanghai - TMM don't see this slowing down until sales pick up - which they are not. If a 20% drop in prices is what they wanted they are well on their way with the attendant cost in rent-equivalent cost of shelter.
Despite this, recent rate cuts at more SME centric banks (China Merchants & their ilk) indicate that while the government is going to continue terrifying developers unemployment is a no-no and TMM expect loosening to continue with this recent rate cut. China's confidence with inflation is always given away when they stop suppressing power prices which were lifted today.
Of course, the noise overnight has been that a particular advisor to the PBoC - Xia Bin - stated that selective easing does not mean broad-based reserve ratio cuts etc. Coupled with rumours of tonight's PMI coming out as low as 47.5, this sent Chinese equities down. Now, TMM run their own Chinese PMI model, which is pointing to something closer to 50.5 (vs. the consensus 49.8), and while the difference there is not particularly large, the psychological function of the (essentially, arbitrary) 50-level means that there is potential for something of a sentiment turn-around. So, at the risk of (once more) looking stupid, TMM dipped their toes back in overnight.
Now, TMM are certainly not arguing that China is without problems, as the property sector stress and associated knock on effects to the banking sector are nothing to sneeze at. But TMM will point out, that when you borrow in the same currency as you lend in, nominal GDP running at 10% (even in the event of a so-called hard-landing) can help cover up a lot of poor lending decisions. TMM's approach here is to try and fade the sentiment extremes as the whole "China thing" appears to something of a semi-religious debate between the two Jims (O'Neill & Chanos). China may have a ton of deleveraging to do and the developers may be public enemy no 1 but the rest of the economy is catching a break for now.
UPDATE: Just as we finished writing this, the news hit the wires that China have indeed cut the RRR, so TMM guess folks won't be reading Xia Bin's blog again...! And to some extent, this could be seen as validating the weak PMI rumours and thus TMM's PMI model is probably wrong.------------------------------------------------------------------------------------
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