Monthly Archives: May 2011

GDP Gain Just 1.8%

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No actual evidence, but my point remains that if the executive branch can cut spending they don’t like simply by not spending what’s authorized by Congress, they can take the pressure off demands for other spending cuts.

Also, again conjecture on my part, the QE and zero rate ‘tax’ (reduced interest income) may be what’s keeping a lid on growth here much like what’s happened to Japan for nearly 20 years.

As previously discussed, with 0 rates seems to me taxes can be quite a bit lower for any given size govt (larger deficit) without being ‘inflationary’. Unfortunately our fearless leaders are all going the other way.

Economic Growth Disappoints as GDP Gain Just 1.8%

May 26 (Reuters) — Surging gasoline prices and sharp cutbacks in government spending caused the economy to grow only weakly in the first three months of the year. Consumer spending slowed even more than previously estimated.

The Commerce Department says the overall economy grew at an annual rate of 1.8 percent in the January-March quarter.

That was the same as the government’s first estimate a month ago. Consumer spending grew at just half the rate of the previous quarter. And a surge in imports widened the U.S. trade deficit.

Many economists believe the economy is growing only slightly better in the current April-June quarter. Consumers remain squeezed by gas prices near $4 a gallon and renewed threats from Europe’s debt crisis.

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CH News

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China is traditionally a first half/second half story, with h2 notably slower than h1 as fiscal and lending initiatives have generally been front loaded.

So watch for a very weak h2:

China Stocks Drop for 6th Day on Slowing Growth, Tighter Credit

May 26 (Bloomberg) — China’s stocks slid for a sixth day, driving the benchmark index to the longest stretch of losses in 11 months, on concern tightening measures are slowing the economy and making it harder for small companies to borrow money.

Huaxin Cement Co., an affiliate of Holcim Ltd., dropped 2.9 percent after Shanghai Securities News reported China’s industrial output may slow. A gauge of small-capitalization stocks fell to the lowest close in four months as Citigroup Inc. said smaller companies are being squeezed by tighter credit. Kangmei Pharmaceutical Co. led declines for drugmakers on speculation the government will further lower drug prices.

“Sentiment is weak and we haven’t seen anything positive that can support stocks,” said Dai Ming, fund manager at Shanghai Kingsun Investment Management & Consulting Co. “Slowing growth, high inflation and tight lending will continue to weigh on the market in the near future.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, fell 5.23 points, or 0.2 percent, to 2,736.53 at the 3 p.m. close, erasing a gain in the last half hour of trading. The six-day decline is the longest since July 1. The CSI 300 Index lost 0.4 percent to 2,978.38, while the CSI Smallcap 500 Index retreated 1 percent.

The Shanghai gauge has slumped 2.5 percent this year as the central bank raised the reserve-requirement ratio for banks 11 times and boosted interest rates four times since the start of 2010 to cool inflation, which exceeded the government target each month this year. China’s preliminary manufacturing index
fell to its lowest level in 10 months, according to a report from HSBC Holdings Plc and Markit Economics this week.

Huaxin Cement slid 2.9 percent to 22.19 yuan. Offshore Oil Engineering Co. lost 4.9 percent to 6.42 yuan, the lowest close since Aug. 27. SAIC Motor Corp., China’s largest carmaker, fell 1.4 percent to 15.96 yuan.

Slowing Industrial Output

China’s industrial output growth is expected to slow in coming months as companies continue to destock and power shortages restrain production, Xu Ce, a researcher with the State Information Center, wrote in a commentary published in Shanghai Securities News. Government efforts to cut capacity in some industries will also restrain output growth, Xu wrote.

Sanan Optoelectronics Co., China’s biggest producer of light-emitting diode chips, led declines for smaller companies, slumping 3.7 percent to 16.71 yuan. Haining China Leather Market Co. plunged 5.6 percent to 21.53 yuan.

China’s small- and medium-sized companies are being squeezed by credit rationing and rising costs, Minggao Shen, an analyst at Citigroup, said in a report after meeting clients.

Bank Funding

The seven-day repurchase rate, which measures funding availability between banks, has averaged 3.48 percent so far this month, compared with 2.83 percent in April and 2.39 percent in March. The seven-day repo rate was at 5.08 percent as of 11:31 a.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. It touched 5.50 percent yesterday, the highest level since Feb. 23.

Kangmei fell 8.5 percent to 11.90 yuan, the biggest decline in almost 21 months. Nanjing Pharmaceutical Co. slid 6.9 percent to 12.44 yuan. Northeast Pharmaceutical Group Co. lost 6.3 percent to 16.37 yuan.

“Institutions are selling drugmaker shares because there’s still a lot of uncertainty about the next round of drug price cuts by the government,” said Li Ying, analyst at Capital Securities Corp.

Chinese stocks are “getting close to the market bottom” after recent declines and may gain as much as 20 percent this year, according to Steven Sun, Hong Kong-based head of China equity strategy at HSBC Holdings Plc.

The nation’s equities may rally in the second half of 2011, as easing inflation from June onward allows the central bank to hold off on its policy tightening campaign, Sun said in an interview with Bloomberg Television yesterday.

“We are getting close to the market bottom,” he said. “We are talking about a 15 to 20 percent upside by the end of this year.”

China Steel Reduces Prices as Industrial Output Slows

May 25 (Bloomberg) — China Steel Corp., Taiwan’s largest producer, will cut prices for domestic customers after the island’s industrial output slowed.

Prices will fall by an average 4.2 percent for July and August contracts, the Kaohsiung-based company said in an e-mailed statement today. Hot-rolled coil, a benchmark product, will fall by an average NT$1,754 ($61) a metric ton, while cold- rolled steel will be cut by an average NT$1,419 a ton.

Steel demand may decline after industrial production increased at the slowest pace in 19 months in April. Vehicle and auto part output fell 0.35 percent last month from a year earlier, the Ministry of Economic Affairs said May 23.

China Steel dropped 0.4 percent to close at NT$34.25 in Taipei before the announcement. The stock has climbed 2.2 percent this year, compared with the 2 percent decline in the benchmark Taiex index.

Electro-galvanized sheet prices will be cut by NT$1,500 a ton, electrical sheets by NT$2,600, and hot-dipped zinc-galvanized sheets by NT$1,613, China Steel said. Prices of plates, bars and wire rods will be left unchanged, the steelmaker said, without giving specific percentage changes for the products.

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GS MACRO FORECAST CHANGES

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As suspected Q2 forecasts being revised down most everywhere, and now 2012 estimates being trimmed as well

GS MACRO FORECAST CHANGES:

-> 2011 US GDP now 2.6% from 3.1%. 2012 now 3.2% from 3.8%.
-> We have lowered Global GDP forecast to 4.3% from 4.8%, modestly raised our inflation forecasts & extended monetary tightening cycle in several EM economies. Also extended forecasts of USD weakness. “Revisions outlined here reflect impacts of two major shocks the global economy absorbed over last six months: tightening of the oil supply, and effects of the disaster in Japan”
-> EM ’11 GDP Growth now at 7.1% from 7.5% and ’12 at 7% from 7.2%.
-> World ’11 Inflation at 4.3% from 3.5% and ’12 at 3.2% from 3.1%. Emerging Markets ’11 Inflation at 6.1% from 5.8% and 4.7% from 5.2%.

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Saudi price setting

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Yes, they use the specs for cover and get away with it

They announce their posted prices will be a spread off of ‘market prices’
And then raise their posted prices lock step with higher prices from specs.

If instead the simply left their posted prices alone the price would quickly come back to their posted prices.

It seems to me impossible they don’t know this and are playing us for complete fools

WikiLeaks: Saudis often warned U.S. about oil speculators

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dollar short squeeze update

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Looks like it’s happening as suggested if might just as crude started breaking down after the Ben Laden assassination.

And the Saudi investor prince’s proclamation that the Saudis thought $70-80 for crude was their target might at least indicate that they aren’t in price hiking mode.

Another point up in the dollar index might bring the beginning of short covering by trend followers.

But still looks to me like it’s only the beginning of what should trigger the end of the looming inflation that never was and a return to deflationary psychology in general.

The fallout of the dollar reversal will continue to be lower term rates, weaker stocks, weaker commodities, and in general a reversal of the ‘the fed’s printing money’ hysteria. And I also suspect Congress and the President will come through with a deficit reduction package that will further exacerbate the dollar shortage and add a bit of drag to the world economy.

Nor is any of this is good for the euro zone which continues to fight the fact that the only way it all works is if the ECB writes the check, provided, of course, they all recognize capital requirements for the ECB are nothing more than a self imposed constraint.
(And yes, I know that’s asking a lot.)

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Commodities, China and 2012

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From Art Patten, Symmetry Capital Management, LLC

A brief overview of our current thinking on the financial market and economic outlook—please see important disclosures at the bottom of this email:


Yesterday’s rally provided a reprieve from strong selling pressures, but was low-conviction judging by trading volumes and bond market behavior. I suspect it will prove temporary and that the current trend will remain negative. Normally we could ascribe that to seasonal dynamics—for example, the old “sell in May and go away” adage—but there are some really strange forces at work, and almost all of them are bearish. They may not cause much damage in the coming quarters, but at some point they will. Our current guess is 2012, but it could start earlier.

  • Recent commodity market volatility indicates to us that the trade is highly levered on the bullish side, and thus increasingly fragile. As long as there’s real demand, the investment (speculative!?) demand from developed world investors can do OK (and then some, in recent quarters). But there are now rumors of commodity supplies being used in China in much the same way that houses were used in some western countries 2005-2007, tech stocks 1998-2000, and so on here), and monetary and credit indicators from China do not bode well for commodity prices right now.
  • There are similarly fragile dynamics in Europe, where continental banks levered up on the debt of countries that now can’t pay their bills, as they surrendered monetary autonomy to join a union with no fiscal authority (and a real anti-fiscal fetish, as embodied in the Maastricht Treaty). Money and credit indicators out of Europe look absolutely horrific at the moment.
  • Either of those fragile equilibria could break hard in 2011, with the usual contagion to financial markets and asset prices. If they are not managed proactively (a serious possibility given (1) the zero-bound on central banks’ interest rate targets and (2) the prevailing deficit and debt phobias around the world) it will spread to the global economy yet again, against a backdrop of already-high unemployment and painful relative price shocks from food and fuel.
  • On a relative basis, the U.S. looks attractive. However, in 2011-2012, the proportion of young adults in the U.S. economy turns negative here), something that is strongly associated with recessions.
  • Fiscal austerity will only worsen things. In fact, we’re not surprised by the softness in U.S. leading indicators, given announcements that federal tax receipts were better than expected. Remember—today, the federal budget deficit is what gold mines were in the 19th century. In an over-levered economy slowly recovering from recession, it would have been very hard to produce too much new gold (money) back then, and the last thing you would have done is re-bury whatever gold was produced. But ‘fiscal discipline’ today amounts to the very same thing! Granted, it’s rational to worry that larger deficits will mean higher tax rates, as few politicians—and far too few economists!—grasp the reality of our monetary system and how it interacts with fiscal policy.
  • The current trajectory of the debt ceiling negotiations is depressing. The GOP believes that government spending crowds out private investment, as though money comes from somewhere ‘out there’ or is still dug out of the ground. The Dems can’t get over their beloved ‘Clinton surpluses,’ ignoring the fact that they, like every other significant federal budget surplus, were followed by a recession. For the last few weeks, a few members of the GOP have been pointing out (correctly) that the U.S. will not default. It will direct revenues to Treasury debt holders first, and be forced to make severe spending cuts elsewhere. This will further undermine an already anemic level of overall demand. In fact, fiscal authorities in most parts of the world are doing all they can to undermine global aggregate demand. The U.S. Congress is just now joining the party.
  • U.S. equity markets aren’t indicating an imminent recession, but keep in mind that they were more of a coincident than a leading indicator when the last one started in December 2007. I expect a similar dynamic this time around, with a sideways trend eventually giving way to one or more financial shocks and the eventual realization that we’ve driven ourselves into the ditch yet again.
  • Longer-term, we’re heading into an environment in which the relative impotence of monetary policy will become a new meme, a 180-degree turn from the last four or five decades. And it will probably take at least a decade for macro policy to adjust (Japan’s policymakers still haven’t, over 20 years later). More lost decades ahead? We’re starting to think it’s a wise bet.
  • The only factors that look benign at the moment are in U.S. credit markets. They imply that the employment picture should continue to improve and that the U.S. economy is not nearing recession. If we had to guess, we’d predict one or two financial market shocks ahead, but depending on their timing, there could be something of an equity market rally after the usual summer doldrums. But it might involve significant sector rotation, and our outlook for 2012 is rather pessimistic at the moment.

Finally, here’s a chart that the NYT ran in January that makes a compelling case that a 1970s-style inflation is off the table. If time allows, I’ll pen an Idle Speculator piece this summer on why that is. In the meantime:

Symmetry Capital Management, LLC (SCM) is a Pennsylvania-registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, nor is it a recommendation to engage in any investment strategy. This material does not take into account your personal investment objectives, financial situation and needs, or personal tolerance for risk. Thus, any investment strategies or securities discussed herein may not be suitable for you. You should be aware of the real risk of loss that accompanies any investment activity, and it is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any investment strategy or security. SCM does not guarantee any specific outcome from any strategy or security discussed herein. The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such.

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Beware of ‘Debt Bomb’ and $70-$80 crude : Prince Alwaleed

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So how would the fact that even the world’s largest investors don’t even begin to understand the monetary system
fit into the various theories about markets efficiently allocating capital, etc?

And note that he also did just say on CNBC the Saudi’s objective is $70-80 for crude.
So even though he’s probably not the decision maker, seems he does understand how a monopolist sets price.

Raise Ceiling but Beware of ‘Debt Bomb’: Prince Alwaleed

By Jeff Cox

May 20 (CNBC) &#8212 Saudi Prince Alwaleed bin Talal called on US lawmakers to raise the debt ceiling, while also warning that steps must be taken to control government spending.

The renowned investor and philanthropist, and nephew of King Abdullah, also rejected the notion that the US could delay payments on its bonds for several days as has been suggested by Rep. Paul Ryan and hedge fund manager Stanley Druckenmiller.

“We in the outside world, outside the United States, believe the United States is not giving much care and attention to this time bomb that you have right now here,” bin Talal said in a CNBC interview.

“You need some structural changes in the United States,” he added. “You can’t go forever with $1 trillion in arrears. That’s the thing.”

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Yuan Gains by Most in Three Weeks as Zhou Says Inflation High

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This is an unsustainable paradigm but interesting while it lasts.
Actual inflation works to weaken a currency (it buys less in general, by definition). Under those circumstances, acting to keep your currency strong first causes the trade flows reverse, and then to continue to keep it strong market forces tend to eat up your fx reserves. All of them. And then some. To the point where the local currency can no longer be supported short of additional fiscal tightening sufficient to reduce ‘real’ wages vs your trading partners.

Yuan Gains by Most in Three Weeks as Zhou Says Inflation High

By Brian Parkin

May 20 (Bloomberg) &#8212 China’s yuan rose by the most in three weeks after People’s Bank of China Governor Zhou Xiaochuan said inflation remains “high,” fueling speculation further gains will be tolerated.

China needs to strike a balance between economic growth and consumer prices, Zhou said at the Lujiazui Forum in Shanghai today. Asia’s largest economy is “cautiously” promoting cross- border use of the yuan in financial transactions in addition to trade and investment, he said, adding that the onvertibility of the yuan should be a gradual, orderly, mid-to-long-term process.

“The official commentary has been leaning towards expounding the benefits of yuan flexibility,” said Emmanuel Ng, a currency strategist at Oversea-Chinese Banking Corp. in Singapore. “It has been mentioned as a bit of an inflation tool.”

The yuan rose 0.17 percent to 6.4926 per dollar as of 4:30 p.m. in Shanghai, resulting in a weekly gain of 0.08 percent, according to the China Foreign Exchange Trade System. The currency isn’t allowed to move more than 0.5 percent either side of the central bank’s daily fixing, which was raised 0.10 percent today to 6.4983. In Hong Kong’s offshore market, the yuan strengthened 0.08 percent to 6.4915.

Twelve-month non-deliverable forwards gained 0.05 percent to 6.3645 per dollar from yesterday, a 2 percent premium to the onshore spot rate, according to data compiled by Bloomberg. The contracts were little changed from last week.

A stronger currency helps tame inflation by reducing the cost of imports. Consumer prices rose 5.3 percent in April from a year earlier following a 5.4 percent increase in March that was the biggest since July 2008. The government aims to limit inflation to 4 percent this year.

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Germany- falling deficit and slowing growth

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I agree, without private sector credit expansion (falling nominal savings rate) or rising exports these two go together over time:

German Economic Growth Will Likely Slow, Finance Ministry Says

By Brian Parkin

May 19 (Bloomberg) &#8212 The pace of Germany’s economic growth will probably slow by mid-year after jumping 1.5 percent in the first quarter, the Finance Ministry said in its monthly report. Economic growth “may be somewhat slower during the rest of the year,” the ministry said. While business confidence has declined, “it remains at a high level” and unemployment, at a 19-year low last month, will continue to profit from growing domestic demand, the ministry said. Germany’s Economy Ministry sees growth of 2.6 percent this year. Tax revenue for the federal government and states jumped 8.9 percent in the first quarter compared with last year, led by sales tax, the ministry said. Federal and state tax revenue in April grew 3.4 percent compared with a year ago, it said.

Bundesbank Says German Deficit May Fall Below 2% This Year

Brian Parkin and Jana Randow

May 20 (Bloomberg) &#8212 Tax revenue growth and spending cuts will probably help German Chancellor Angela Merkel’s government push down the budget deficit, setting an example for fiscal discipline in Europe, the Bundesbank said.

Germany’s budget shortfall could drop below 2 percent of gross domestic product this year, the Frankfurt-based central bank said in its monthly report published today.

“This notably mirrors a clear structural improvement, although the ongoing cyclical recovery is also making an important contribution,” the Bundesbank said.

The German government may be able to cut its spending gap to some 30 billion euros ($43 billion) from the 48 billion euros in the budget, the Bundesbank said. New tax forecasts that show revenue soaring over earlier estimates through 2014 may further help to push down the federal deficit beyond 2011, it said.

“A federal deficit of 30 billion euros seems achievable” this year, the Bundesbank said. “In subsequent years, this improved situation will be perpetuated,” boosting the chances of the government adhering to its target of balancing the federal budget by 2015, it said.

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