just in in-tray, per GREED n fear, that the almighty intends to reward money rock hong kong for babysitting freedom mountain kowloon, care for liberty isle lantau, sustain hedonistic macao, and teach communist china, for a job more than well done, and so further enhancing pricing of freedom, liberty, hedonism, and communism.
bravo.
· Wall Street, in the form of the stock market, is still looking for reasons to go up rather than down. Investors should continue to give the benefit of the doubt to the upside. Still, the latest information flow does not provide convincing evidence to GREED & fear that either consumption or employment in America are really recovering.
· Since profits are a discretionary item and the consequence of late of either cost cutting or accounting sleights of hand and since the overall macro risk in America remains deflation and a liquidity trap, the US stock market should be focused on any evidence of a resumption in top line growth in the third quarter earnings results.
· GREED & fear is still in something of a tactical quandary in the sense that the short term prospects for US equities still look a lot better than the medium to longer term. For now the odds increasingly favour the previously mentioned Wall Street-correlated “melt up” in global equities into year-end towards the 1,200 level on the S&P500.
· The base effect is going to be incredibly benign this quarter since the world economy collapsed in 4Q08. Still in GREED & fear’s view the fundamentals continue to provide growing evidence that the US could be in a liquidity trap, which would be a plain long-term negative for investors in US equities.
· The more disappointing the data reported the more likely the US authorities are likely to extend stimulus programmes, which would be interpreted by investors as positive. In GREED & fear’s view policy in America has now become the key variable for Wall Street since the US, like China, is now an increasingly command-driven economy where government initiatives are driving such growth as exists.
· The housing market has been a prime area of government influence in America. Investors should be suspicious about premature celebrations that housing has bottomed. Nothing is likely to be done to improve FHA mortgage lending standards since the political emphasis remains on preventing a further collapse in housing. And clearly the FHA is right now playing a critical role in this regard.
· There is a remarkable lack of inflows so far into US domestic equity mutual funds this year. In GREED & fear’s view that mutual fund investors are still not really chasing the equity rally is evidence of a fundamental change of psychology in America in terms of an increase in risk aversion because of a growing focus on capital preservation.
· The healthy inflows into US bond funds reflect a wholly natural desire in a deflationary environment to lock in yield. Investors need to understand that in a deflationary world income, not capital gains, becomes critical. The demand for bonds from both American households and commercial banks has huge potential to grow.
· It will be increasingly important in coming months to monitor not only employment trends but also income trends in the US. This is because America is likely to follow the path of Japan, in terms of employers both increasingly implementing wage cuts as well as using a growing amount of temporary labour.
· There is some clear short-term risk for the US government bond market. This is because of the base effect on CPI inflation given the collapse in commodity prices that happened late last year. Still, GREED & fear is convinced that Ben Bernanke will continue to resist calls for tightening.
· Any such inflation scare and related bond sell off, if it happens, will represent another chance to buy government bonds in the West unless there is clear evidence that monetary easing is getting traction in terms of a revival in broader credit and monetary aggregates.
· As banks gradually recapitalise themselves via the means of borrowing for next to nothing and investing in longer term government bonds, the issue will be whether demand for credit grows as the supply of it becomes less constrained.
· The tactical concerns in Asia will increasingly be about a return of “inflation” given the base effect. This will bring renewed focus on how pre-emptive Asia will be in terms of tightening ahead of the US. But GREED & fear still senses that any such tightening moves in Asia will be highly incremental.
· The reality is that monetary policy is already way too easy in Asia since it is being driven by Western central banks worried legitimately about liquidity traps. This is why the most plausible outcome, based on a two to five year view, is still an Asian asset bubble with China at its epicentre.
· The one tactical risk in China will be market focus on declining loan growth. Still the September loan data was a positive surprise. GREED & fear would still own the China banks based on the CLSA view that net interest margins will have bottomed in 3Q09.
· One percentage point will be added again to Korea in the Asia Pacific ex-Japan relative-return portfolio with the money shaved from Malaysia. The underweight in Australia will also be reduced by shaving the overweight in India by 2ppts and reducing Hong Kong by 1ppt to neutral.
· The motive to reduce the underweight in Australia is that oil appears to have broken out again. GREED & fear still does not like Australian financials structurally because of the high household debt levels, the high loan to deposit ratios and the banks’ vulnerability to capital raisings.
· But with Australia increasingly trading as a China proxy, there is a risk that on a two to five year view domestic Australia is geared into a China centred asset bubble in which case the Australian household sector is going to become incredibly leveraged. If so, the key issue will then become whether the Reserve bank of Australia chooses to fight this asset bubble threat pro-actively.
· Japan’s transport minister Maehara’s plan to turn Haneda airport into a 24-hour international hub airport could serve as an interesting test case of whether the new DPJ government is really able to take on the bureaucrats and implement change. Any significant increase in international flights for Haneda can only be a positive for Japan Airport Terminal and for the hopeful message it sends about Japan in general.
· One percentage point will be added to the weightings in partial China plays Asahi Breweries and Fast Retailing in the Japanese thematic portfolio, while the investments in gas suppliers Osaka Gas and Tokyo Gas will be removed. The existing weighting in Mitsubishi Corp will be increased by 4ppts to 10% while a four percentage point weighting will also be re-initiated in Inpex.
· In the Asia ex-Japan thematic portfolio 2ppts will be added to the existing weighting in Baidu and 1ppt to Shandong Weigao. This will be paid for by removing the investment in Bharti Airtel.
· Supply constrained Hong Kong residential property, particularly the high end, has the potential to go absolutely bonkers in GREED & fear’s postulated Asian asset bubble.
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