most excellent run, against the wind, through the mud, faced with pouring rain
the london boyz must be punished, made into refugees, exiled to hong kong, and transformed into more truthful gold traders, and pay me rent :0)
on unrelated matter, just in in-tray
· Investors should continue to give the upside the benefit of the doubt into year end. Still there is a definite end-of-year feel about current stock markets. The impression gained is that many absolute-return investors have achieved results deemed satisfactory for the year and have sought to lock in their gains.
· The record US aggregate corporate cash flows means the corporate sector is far more likely to start borrowing again than still hard pressed American consumers. Still if companies certainly have the means to borrow it is less likely to be for capital spending. Much more likely is a renewed merger and acquisition cycle or the resumption of share buybacks.
· GREED & fear is still of the view that the leveraged nature of the America consumer, combined with the lack of income growth and the still dismal employment market, remain formidable obstacles for a real releveraging cycle to take place in the US.
· There is a stark difference in America between the condition of big companies and those of small companies which appear to be having a much tougher time. The current divergence, in terms of jobs lost, between the two sets of official US employment data suggests that the recent improvement has been concentrated in larger firms only and that smaller businesses remain exceptionally weak.
· The same pressure on the unlisted and micro corporate sector is also suggested by the fact that the improvement in US corporate profitability is heavily skewed towards the government protected, or rather government underwritten, financial sector.
· In GREED & fear’s view the consumption trend will remain highly vulnerable the moment stimulus measures are withdrawn. The longer term risk in the US is that temporary hiring takes off as a secular phenomenon as companies seek to adapt to a more deflationary world where they are reluctant to take on all the related costs associated with full time employees.
· The latest GDP data from Japan has served as a grim reminder of the intensifying deflationary trend there. The level of Japan’s nominal GDP is now below the previous low reached in 1Q03. This explains why the Japanese stock market has been such a horror story. It also explains why the Federal Reserve is so anxious to prevent deflation. Once the deflationary psychology sets in it is hard to climb out of it.
· The best outcome for the Japanese stock market would be if GREED & fear is wrong and America achieves a normal recovery. Then US interest rates would normalise and the dollar would rally sharply against the yen, creating a major buying opportunity in Japanese exporters in an improving cyclical environment. Still that is not the base case here.
· GREED & fear’s own Japan portfolio will continue to be heavily skewed towards emerging market plays. This seems the only sensible strategy given that Asia and emerging markets remain by far the best story globally.
· There remains a lot of nervousness about imminent Chinese tightening measures. GREED & fear’s view remains that such concerns are overdone. It remains unlikely in the extreme that the PRC is really going to tighten aggressively its policy towards the residential property market. For this sector provides the best hope for generating a private sector investment cycle that will allow China to reach its 8% growth target in 2010 without massive reliance on public sector fixed asset investment.
· GREED & fear continues to believe that Asia is set up for an asset bubble centred on China if US monetary stays easy for as long as is anticipated here. But this asset bubble comes later, not now. Long term investors should use pull backs in China stocks caused by current tightening concerns to add to positions. The official drive to get Chinese banks to increase their capital is driven by a desire to ensure the banks have the means to fund loan growth.
· Wednesday’s 5% devaluation of the Vietnamese dong, prompted by the decline in foreign exchange reserves defending the exchange rate peg, may well not be enough given that Vietnam is suffering from the hangover from a credit boom. But there is no risk of currency contagion for the rest of Asia from the Vietnamese dong. Rather most of the region faces the opposite problem, namely hot money inflows and related asset bubble risks.
· Still, to the extent that the dong has now become more competitive from an export standpoint, this will reconfirm existing prejudices among Asian central bankers and policy makers to resist currency appreciation. The longer that policy stance persists, most particularly in China, the more likely becomes an asset bubble in the region!
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