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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: energyplay who wrote (60220)	1/21/2010 5:44:31 PM
From: TobagoJack	Read Replies (2) \| Respond to of 217691

just in in-tray, per GREED n fear · It remains a pro cyclical market in the sense that investors want to believe in a normal recovery in the West. So long as this is the case Japan can continue to outperform China and Asia ex-Japan as it has done since late November in what amounts to a classic mean reversion trade helped by a by now much anticipated weakening of the yen. · GREED & fear’s guess remains that this trade can continue for a while longer with the target still set at 1200 for the S&P500, and that the trade is likely to culminate in a classic “head fake” monetary tightening/inflation scare. But for now there is room for US cyclical hopes to grow since federal fund futures are still only discounting 50bps of tightening by the end of this year. · Treasuries remain tactically vulnerable in the context of the coming surge of issuance and the likelihood of strong nominal GDP growth in the US in 1H10. Still in GREED & fear’s view the US government bond market will become a big buy once it becomes clear to the market that the recovery is not “normal” and that the US is still in a deleveraging cycle. · A shorter term challenge to the continuing hopes of a normal recovery in the US will be the scheduled termination of Fed purchases of US mortgage-backed securities at the end of March. This planned exit is likely to put upward pressure on mortgage rates. · The real motive behind the Treasury decision on 24 December to remove the previously imposed Congressional constraints on Fannie’s and Freddie’s ability to lose money appears to be to allow the mortgage agencies willingly to participate in continuing federal government efforts to encourage so called “mortgage modification”. · The implicit federal government guarantee has become over the past two years ever more explicit which means that Fannie and Freddie obligations should really be counted as part of Federal Government debt with the only difference being that Fannie and Freddie debt is higher yielding. · Efforts to encourage mortgage modification continue to fail because they do not address the fundamental problem of negative equity and the resulting need for a reduction in principal owed. GREED & fear continues to believe that the growing hopes that the US housing market has made a definitive bottom will prove to be premature. · The critical point for GREED & fear is that the likely lack of a healthy recovery in the US housing market, and the resulting likelihood of ever escalating federal government involvement in housing, will lead to further financial obligations for the US taxpayer, be it on budget or off budget. Therein lies the path to the still anticipated end, sooner or later, of the US dollar paper standard. · In GREED & fear’s view a failure to extend the Bush tax cuts would further increase the risk of a growth scare in America once the fiscal stimulus and the inventory rebuild pass through the system. The effect would be even more negative if there are additional politically driven efforts to “tax the rich”. · Recent days have seen a further escalation of the Chinese monetary tightening scare which has been pre-occupying investors since the start of the year. GREED & fear views this continuing negative sentiment as a fundamental opportunity for long-term investors to add to positions in China. · In GREED & fear’s view the crackdown on Chinese bank lending is nothing like as severe as stated. What the China Banking Regulatory Commission is trying to do is, sensibly, to control the tendency for Chinese banks to do all their lending at the start of the year. Rather they want to try to smooth out the lending process. · The sharp rise in the price index for industrial inputs in China reinforces concerns about a margin squeeze for manufacturing firms which will find it hard to pass the higher input prices on. This is also why CPI should not be too much of a concern. The latest Chinese macro data also shows that China remains a great consumption story. · The Chinese government still plans for the gap left by the deceleration in SOE infrastructure investment to be filled by the residential property sector’s development of land banks. This is why the Chinese government is not going to kill the property market, despite continuing market concerns, even if the regulators will want to control asset price rises via the likes of the second mortgage policy. · While market sentiment on China can certainly remain nervous for longer, as the China “tightening” proceeds, it all amounts to a buying opportunity. The China H share universe is looking increasingly cheap in the regional context, most particularly the bank and property stocks which are in the eye of the storm as they are viewed as the most directly exposed to the “tightening” policy risk. Investors who have views that extend beyond the next two months, if such people exist, should buy these stocks now. · The present China tightening scare is probably a forerunner of similar scares to hit other stock markets sooner or later if cyclical hopes in the West continue to grow. Investors need to understand that emerging markets can handle tightening because they remain fundamentally healthy stories. Tightening scares represent only speed bumps in what remains a healthy bull market. · The next big macro shock to the West remains more likely to come from Europe than the US. Germany does not want to bail out Greece since it would set too dangerous a precedent as relates to the other fiscal problem areas of Euroland. This suggests a crisis is coming unless Greece surprises everyone and imposes real austerity. · For now these concerns, combined with the rising cyclical hopes for the US, mean the dollar is likely to continue to gain ground on the euro. The test of the political will of the Euroland political elite to hold the currency union together is coming. The response will determine the long-term fate of the euro as a currency. CLSA CLEAN & GREEN: Please consider our environment before printing this email. The content of this communication is subject to CLSA Legal and Regulatory Notices These can be viewed at clsa.com or sent to you upon request.