Posts Tagged 'kol'

China: Re-Entering The Atmosphere With A Hard Landing; Earnings Season And The Markets Disconnect; Energy; And Here We Go Again In Europe – But Wait! There Is Value

China is launching a major offensive for headlines with the EU.  Wen’s comments over the weekend were his strongest and most pointed yet as he warned of the possibility for “huge downward pressure” on the economy.  At the same time, inflation was reported at a very modest 2.2% leaving open the possibility of additional near term stimulus.  Additionally, Wen, in separate comments, remained resolute in keeping property prices under control.  As much credit as is inexplicably given to China by way too many strategists for ultimately being able to manage their downturn and draw a line in the sand at nothing less than 7.5 – 8% GDP growth, Wen does not seem as sanguine.  Whether China ultimately experiences a hard landing remains an unimportant conclusion at this point as that is the direction they are moving toward.  The bursting of their property bubble will be much more damaging to their economic future than was to the US when ours fizzled given that so many important Chinese cities have relied upon land sales and borrowing for their out-sized infrastructure spending.  It’s one thing for an individual to be upside down on their mortgage, but quite another for a large portion of a country to be in that position particularly when so much of the world’s economic growth has been dependent on China’s previous voracious appetite for commodities, machinery, etc.

But wait – there’s those trillions in reserves that China is going to shower on the economy much like an NFL defensive back at a “gentleman’s” lounge.  My view is that China, continuing to think long term, would rather see asset values to decline meaningfully so that they can swoop in and acquire them.  It’s not only asset prices that soften, but also political resistance in the targeted countries as the fate of elected leaders is tied to declining personal fortunes of their constituents.

Steel stock rally?  Done before it started.  Angang Steel said it will report a loss of 1.98 billion yuan for the first six months compared to a profit of 220 million yuan last year.  Angang is China’s largest HK traded producer of steel.  Despite this, China keeps adding to its steel capacity and keeps running its plants at capacity, more concerned with employment levels than price realization.  It’s expensive to shut down capacity in steel and it remains the industry with the highest costs of exit.  Sector will bounce around but direction is lower. Take a lesson from coal (PCX bankruptcy filing) and stay away.

And within the backdrop of all this, those optimistic about the market say all the bad news is fully discounted.  After all, once it’s in print, see yesterday’s WSJ’s article on the earnings season – it is immediately old news.  That’s an interesting thought considering that the S&P is up mid-single digits this year while expectations on global growth have been ratcheted much lower.  Seems like a disconnect to me.  I’m not looking for a major sell-off but a slow ebbing of the averages.

Meanwhile, back in Brussels, the framework announced out of the latest – that is the 19th, EU meeting to solve their financial crisis, has hit a predictable speed bump as Hollande offered that a more unified political and banking system will not happen as quickly as thought while Germany remains resolute in requiring government to be the ultimate guarantor for the debts of troubled banks.  Seems that the Europeans don’t yet realize that substance is actually longer lasting than headlines.  Not sure the markets realize this either.

So here we go again. Rather than focusing on current fundamentals, the markets pin their hopes on major fiscal policy moves by China,  the US and, of course, the EU – hoping coordinated easing becomes reality, stimulating spending, credit and investment. Could be but I still don’t see an immediate, significant QE3.  But there is good news: the EU has set the bar very low.

There is value to be found.  I still believe the Euro is overvalued relative to the USD; that higher yielding equities with good fundamentals will continue to offer a good total return (mortgage reits, telco); and certain areas of energy remain attractive longer term such as natural gas and special situations.  TOT has a monstrous yield and HK, a build it and sell it story run by someone who has built it and sold it multiple times before (Petrohawk being the latest), is in a great spot, being able to acquire assets cheaply with financing both available and inexpensive.  I mentioned on CNBC on Thursday that I was starting to rebuild a position in WLP.  This group is also inexpensive, but I would wait for a pullback after yesterday’s action.  Sentiment has been horrendous and MLR’s are likely going higher this quarter, but in an industry with changing fundamentals, the smart players find opportunity.

 

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iPad At The Ready; Is Icahn Greek & Germany’s 4 Day Work Week

Night after night, morning-to-morning, it’s the same routine.  The iPad sits at the ready, less than an arm’s length away on the nightstand, sharing space with an old school Blackberry, an alarm clock separating two generations of technology.  It’s the last thing I look at before I go to sleep and the first item I reach for when I wake.  I’m seeking out news, waiting for the solution.  That’s what I need to get off the sidelines, to put my cash to work. Sure equity valuations are cheap, that is if you believe the global economy is not worsening. Sure Treasuries are overvalued and in a bubble and asset allocation begs for a swap into equities but these factors have been in place for a year.  In the interim, China has markedly slowed and Europe is in an economic near death spiral. Ergo, I need something new: a plan that will work. I am fairly confident that I know what the answers are, I’m just hoping that some variations of it appear in a Reuters or Bloomberg headline:

ECB Lends $2 Trillion to Spain and Italy – Funds Targeted for Banks;

Greece Accepts Receivership: Icahn Reveals That He is Part Greek and Agrees to Head Creditors Committee

I would settle for one out of two, the ECB lending program being my first choice.  The last two days brought scant hope, with Spain’s Budget (a clear oxymoron) Minister asking for other “European Institutions” to “open up and help facilitate” a recapitalization of their banks.   (http://www.bloomberg.com/news/2012-06-05/spanish-minister-urges-eu-aid-for-banks-in-first-plea-for-funds.html).  I guess, a recognition by Spain that they have a problem is the first step toward a solution.  Record outflows of capital and the seizing up of the banking system has a way of offsetting the effects of too many carafes of sangria at three hour lunches more so than afternoon siestas.  However, there is little chance of Germany injecting capital directly into Spanish banks.  And then today, we had the ECB’s Mario Draghi tell us not to worry, capital is not fleeing, hoping to dispel us of the facts.  Nice try, Mario, but this will not help me sleep any better.

Here is how I believe the issue should be resolved in order to restore some semblance of sureness to the market. Actually, this is not really my original thought but rather that of an extremely successful hedge fund manager as we discussed the issues during a game of golf.  However, as a part-time talking head and part-time author, I am in conflict: the former imbues me with little respect for identifying ownership of ideas, claiming all as my own, while the latter avocation imbues me with abhorrence for plagiarism.  Since no one is paying for this advice, I will default to the former and provide what believe would put the market back on firmer footing in response to Europe.  While the ECB is not allowed to buy new issue debt from sovereigns, it can loan money to them.  Spain will ultimately agree to a program and, in return, the ECB will provide a 30 year loan with a nominal coupon to the government, specifically targeted for the banks.  This will not crowd out any other creditors, thus limiting resistance.  As part of this rescue package, and in lieu of using Spiderman towels and English lessons (wouldn’t German be more appropriate?) to lure potential depositors, the banks will offer greater levels of deposit insurance, backstopped by the ECB.   There will be greater, collective EU oversight to large EU banks as a condition to German participation without obligation of further German funding.

Perhaps the above won’t happen so here’s another thought.  It was also reported by Bloomberg that the EU and ECB is at work on a Master Plan (http://www.bloomberg.com/news/2012-06-03/ecb-eu-drawing-up-crisis-master-plan-welt-am-sonntag-says.html) and may have something ready by the end of June.  Well, that would be nice but this would have to be authored and led by someone other than Merkel’s countrymen since Germany’s last Master Plan didn’t work out well for anyone and time has done little to  erase the memory.  The problem is that no other European economy has the economic wherewithal to plug the dyke.  I imagine that Germany does a daily calculation comparing the breakup of the currency and the potential impact on trade with the cost of being the sugar daddy for the rest of the EU, albeit without the typical prurient perks of being so benevolent.  The Germans undoubtedly realize that they would have the world’s strongest currency were the EU to fail, thus crippling their own economy by making the price of their goods uncompetitive.  Here’s a solution: cut off the EU like you would a drug addicted stepchild and allocate those funds to internal spending, thus inflating the D-Mark and maintaining competitiveness in global trade.  Instead of the annual Oktoberfest, have a  Freitagfest and a 4 day workweek, placing them on more even footing with the rest of socialist Europe. That won’t drive the DM to levels on par with the drachma but will get you moving in the right direction.

So as my search for the evidence of a solution forges on, I remain on the sidelines although even the hint of a legit solution (or of an improving US economy) will rally an oversold market.  Oversold rallies, however, such as today’s (June 6), are to be sold, not embraced. Commodities will remain under pressure and steel is still a great place to be short as analysts now begin to look for losses in the upcoming quarter.  Recall that last year, X reported a loss despite a combined 13% volume and price increases.   Their end markets, with a slowing global economy, won’t be so kind this time around.   They didn’t even bother to offer a mid-quarter update at their analyst day today.

One more thing – look for downward revisions to multinationals pick up speed as the dollar retains its strength.


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