Monday, January 25, 2010
File Under "The Same Mistake"
Investors should seek out “rough gems” among Asian junk bonds including Agile Property Holdings Ltd. and Evergrande Real Estate Group, which will hold value as credit spreads widen, according to BCP Securities Asia Ltd.I guess desirable locations means "not building empty cities in deserts".
To lock in “slightly softening but still high yields,” investors should buy “better quality names” in defensive industries such as retail and utilities, as well as Chinese property companies with good management and projects in desirable locations, she said.
Technically, you could argue that the call to buy the junk bonds is correct, since you could technically argue for a gain on spreads. On the other hand, it is lot like arguing that one should buy subprime US mortgage bonds for the higher yields in say, late 2005 or early 2006, because the Fed WAS tightening:
There are (snort) limits (gasp) to gains (choke) from sheer technical trading. When the cash flow fails it fails. LMAO. That's where this post's title comes from - later on I will descend into sobriety.
A little perspective from Snarky Mark, and we must not forget one of my favorite blogs, Immobilienblasen (real estate bubbles auf Deutsch), which provides us some perspective here and here.
Crude oil: WTI Cushing spot was trading below $94 this morning, and dated Brent spot below $93, and that is after the morning bounce. Because here in the US we don't know what's left to buy.... Both heating oil and gasoline were still hanging below $2.00/gallon after the bounce. More moderate weather combined with a failure to bling, I think. Anyway, the other side of this is weakness in the Canadian dollar, probably because people are winding down USD/oil hedges.
And if you really want a reality check, how about Chinese oil consumption? This is why the oil play is played out. If the US imports and usage (2009 down more than 4%) are dropping so significantly (the US still seems to be consuming more than 20% of the world's oil supply) and China, which hasn't made it to consuming 10% of the world's oil supply yet, is growing by a lesser percentage (plus 1.4% in 2009 according to China), you can bet that the next BP oil report is going to have some baaad news for oil bugs.
Yes, recovery should boost oil consumption in some countries, but if oil prices are a hard constraint on the US economy and US consumption trends, then they will certainly be a hard constraint on the world economy.
So we rock back on our heels and contemplate January:
- The dizzying drop in US T-bill 2 and 3 year yields, with pricing gains solid all the way through 20 years.
- Drops in stocks largely combined with drops in blingier commodities.
- Hard fundamentals (a very good WTRG writeup) in the oil industry that appear to indicate substantial current supply margins. Look at the workover rig graph, US consumption graph, and these two representing OPEC and non-OPEC production:
I think we are moving back into less hopeful and more fundamental valuations, which I view as a sign of some world recovery. But it's not going to be brilliant; oil prices will constrain that. I am not going to get into the quarrel over world oil reserves, but it's a hard constraint that some countries with great reserves have political blocks preventing effective exploitation, and also it's a hard constraint that oil development is very capital intensive and dictates a rise in prices. It is also a hard constraint that China is predicting domestic oversupply in 2010.
Overall it is difficult not to see these trends as a mark of pricing negotiation and a return to much more rigid pricing standards. This is an environment which is unfavorable to bubbles. Bubbles evolve and survive in atmospheres in which pricing is conducted on recent price trends, but not in environments in which pricing is conducted on place-in-economy trends.
Warehouse stocks of industrial metals are boosting and more money is shifting into industrial metals. But it is not really justified over the 5 year range - there is some overshoot. All in all it is not really an inflationary picture; if you adjust industrial metals with energy prices, it looks like a slow recovery and an internationally subdued picture with some forward buying on price expectations. Hedging with supplies instead of financial instruments is usually not a sign of explosive growth, and it is aligned with the US January increase in non-financial commercial paper.
I do not agree with the take that announcement of the "Volcker rule" by the US induced a sudden sell-off. It seems to me that everything here is the continuation of the same trends prevailing over the last few months. Foreign direct investment is going to be light through 2010, and although hopes for both China and India are running high, concerns over a Chinese bubble are gaining, and the pressures on India are sufficient to induce some rationalization in India's byzantine FDI regulatory schemes. Perhaps I am wrong, but I have always figured some of India's interesting rules to be pure protectionism, and some to be a ministerial revenue-enhancement scheme. Few things that directly enhance the direct incomes of government officials are ever found to be unworthy of continuance.
And even if we were going to start lopping off heads over bank fraud it seems to me we should start a little higher on the totem pole, surely? It's true Serin committed multiple frauds, but the bankers who created the situation in which it paid to commit otherwise ridiculous crimes are certainly more guilty. On the other hand, I don't think we should be lending the Serins of this world any more money.
The people who just got fooled into paying twice as much for their first home as it was worth are the ones whose fate causes me to lie awake at night.
The nights can get very long when you're thinking about some poor couple who took five years of savings, put a down payment on a home, and now have lost everything plus. No matter how we HAMP or Humpty-Dumpty them, they'll never break even. If they struggle along for another seven years trying to pay the mortgage, they'll still likely end up losing the home when they can't borrow money to fix the roof or whatever.
Effectively, that couple has lost years of their earning and working lives - even if they walk away now. They'll never get their savings or those years back. For many, their futures have been irrevocably changed.
Now that's a crime. No matter how much I try to avoid it, I think HAMP etc is often aimed at fooling these types of honest people into tossing another few years of their earning lives away. Those are the people who have been victimized - not most of the bankers, but those people.
It does make you wonder what in the heck is gonna happen in China, though. There isn't that much of a resale market currently, so when this ends it ends.
M_O_M, I think that the "Volcker rule" is partly to blame for the timing of this down leg in the market--although the market was vulnerable here anyway.
The thesis propelling the market recovery of the last 9 months has been that the USG has the capacity and the will to borrow and stimulate for the forseeable future, and that the financial system would be the first and foremost beneficiary of that stimulus. Wall Street, after all, has most of the seats at the Administration's table. This had nominally positive implications for the markets (especially financials) and precious metals, and negative implications for the dollar.
The twin events of "Senator Brown from Massachusetts" and President Obama's sudden anti-bank populism destroyed this thesis in a matter of hours. First, it appears the public is not willing to allow a decade-long series of serial stimulus packages, especially if Wall Street always gets the first cut. Second, Wall Street learned that they may be too big to fail, but they're never too big to go under the bus--that's some new information, there. The Obama Administration didn't stay bought.
You might get a kick out of this exchange I recently had on Yahoo's message board for TIP. I was heckling the idea that a billion Chinese would soon be driving cars if gasoline stays at $3 per gallon. I got back...
You are making a critical assumption. Suppose their cars get 60 miles per gallon...
60 miles per gallon does nothing to change my opinion. If we think gasoline is expensive right now then just imagine what the Chinese are feeling. Roughly one-third of the Chinese population would have to work at least three days to afford just one gallon of $3 gasoline.
Poverty gap expands in China
Based on the definition issued by UN, he who earns less than 1 dollar per day falls into the category of extremely poor. A third of China people belongs to this group.
I posted this article in my defense three days ago and the debate just sort of ended right there. Go figure.
I continue to think that $80 oil is plenty high enough to cause all sorts of economic pain in developing countries.
I also think that the single biggest factor in saving me money heading into our credit crisis was was the ability to empathize with the poor. Income inequality matters and very little of it shows up in the Fed's Flow of Funds reports.
If some people have all the money and some people have all the debt then problems can be much, much bigger than the averages show.
Payday loan stores flood our strip malls. It is one of the biggest growth industries in America. Those that don't understand the implications of that may continue to lose money chasing prosperity and "sure things" brought on what only appears to be easy money.
P.S. In hindsight, "Snarky Mark" would have been a better name than Stagflationary Mark. I've been an awful stagflationist. I just have such a hard time sticking to the party line. $80 oil? I'll pass.
I still see deflation in the stores. Not for imported goods, but for all but the most necessary items. Everything's segmented now, right down to cookies and coffee at Starbucks.
Snarky Mark - I appreciate your ability to view the situation with some humor, so the designation is a compliment. And in a way stagflationary is right. Hard constraints prevent the cost of production for a lot of items from coming down much, average incomes are declining, so the balance comes out of fringe industries and thus expansion.
The only way to create inflation in the US is to print money and start sending hunks of it to each household - but since we import so much in the way of consumer goods, the effect wouldn't last long. If we corrected our trade imbalances we could inflate, but we are not near to doing that.
Yeah, it's a bit like stagflation-lite.
It will be interesting to see what we call the next round. I get the feeling we're in the eye of the hurricane. How long we can stay here is anyone's guess. I'd love to stay here permanently but something tells me we just won't be that fortunate.
As for humor in these trying times, check out this from one of my favorite sites.
When cruelty and holidays collide, the weak-willed find solace in self-pity and comfort foods. And now, Despair Inc. is pleased to announce that we've combined BOTH into a radical new offering.
Introducing Bittersweets® - The Valentine's Candy for the Rest of Us.
Oil was priced from 1946-1972 from dollar to a high of $7 in 1972. According to the BLS inflation calculator that $7 barrel in 1972 would be the same as $31 today. Clearly we are suffering the impact of this throughout the economy.
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