Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Cogito Ergo Sum who wrote (61845)	3/11/2010 5:35:03 PM
From: TobagoJack	Respond to of 217651

just in in tray per GREED and fear, · The Greek bullet has been dodged for a while with a suspiciously easy sale of €5bn worth of 10-year Greek bonds last week. Still GREED & fear is convinced that the last has not been heard of Greece’s fiscal problems or those of the related PIIGS. Investors for now should assume continuing weakness of the euro against the US dollar. · Hopes are rising again for the cyclical prospects for the American economy. But the all important US housing market remains fundamentally weak, most particularly when federal government support actions are taken out of the equation. Policymakers in the Obama administration remain very concerned about the state of housing. · The Obama administration will in early April commence a scheme where the federal government will start paying defaulting homeowners to leave their properties. This marks a departure from the current failing attempts at “mortgage modification” which aim to try and keep defaulting homeowners in their homes. Mortgage modifications have only succeeded in delaying foreclosures rather than preventing them. · The reality is that what is really needed is principal reduction which is clearly politically controversial. It would also be unpopular with the banks. The problem with any programme of reduction in principal owed is the one of severe moral hazard in the sense that such a programme will encourage those currently servicing negative equity mortgages to default. · Fannie Mae and Freddie Mac are putting mortgages back to banks where they can demonstrate that the original mortgages were not processed in the correct manner. This process is being driven by Fannie and Freddie’s desire to reduce their losses. As a result, banks are having to make growing provisions. In GREED & fear’s view it is premature for investors to assume that the problems associated with US housing are yesterday’s story. · One interesting macro point is to what extent Fannie and Freddie can fill the vacuum left by the Federal Reserve’s supposed plan to stop buying agency MBS at the end of March. This planned “exit” from the Fed’s critical role in supporting the mortgage backed securities market is probably the biggest macro risk facing Wall Street correlated world stock markets in the short term. · Fannie and Freddie remain a politically convenient off-balance sheet dumping ground for the detritus of the US housing crisis. Still the constitutional legitimacy of this process where massive red ink is being accumulated is questionable to say the least. It is also questionable for how long the fiction can be maintained that Fannie and Freddie are off the federal government’s balance sheet. · Brazil is a rip off to those not earning reals. The appreciation of the currency is no surprise since Brazil has a floating exchange rate and the country has some of the highest real interest rates in the world. This explains why Brazil is one of the few places in the world where there is not a compelling reason to own gold bullion. It also explains why Brazil’s fixed income securities remain attractive to yield hungry foreign investors. · GREED & fear doubts whether Brazilian interest rates will rise as much as indicated by the current yield curve. The Brazilian economy is now more sensitive to higher interest rates than it was previously since it now has a functioning credit cycle which was not the case during the days of hyperinflation. · If the credit cycle is now a reality in Brazil the bullish point is clearly that there is huge room for it to grow given that consumer debt is still only running at 15% of GDP and mortgage debt only 3% of GDP. The credit boom in Brazil is also being turbo charged by state subsidised consumer lending. · The October presidential election is widely expected to be won by President Lula’s designated candidate Dilma Rousseff. If this is the result expected by investors it is not the one they want to see. Still with Lula enjoying 73% support in the opinion polls and the economy booming, the view is that the victory for Lula’s chosen candidate seems assured. · Lula has reaped the following winds of the structural reforms undertaken during his predecessor Cardoso’s eight-year term in office. Lula has also clearly reaped the benefit of the following wind from the commodity boom and rising exports to China. · There is also the massive deep water oil discovery of Petrobras off the Brazilian coast, a resource commonly referred to in Brazil as “pre-salt”. Apart from highlighting the absurdities of the recently fashionable “peak oil” theory, pre-salt amounts to a massive development undertaking for Petrobras. · The Brazilian government plays a probably too large role in the economy. The reality is that most of the tax revenues are going into growing transfer payments in terms of various forms of social assistance. In this respect Brazil reflects the welfare state tradition of its European colonial heritage, not the American-style entrepreneurial culture of its private sector. That is not so bullish. · The tactical risk facing investors in Brazilian equities is the same facing equity investors in China. This is the timing issue of when the current tightening cycle is discounted. GREED & fear continues to believe that the recent consolidation pattern in emerging equity markets is essentially only a pause to refresh. Still the relative expensiveness of the real exchange rate means that from an equity standpoint Asian equities look somewhat more attractive to GREED & fear. · From a fixed income standpoint, there are few places in the world that can compete with the high real interest rates on offer in Brazil in the context of what for now at least appears to be a fundamentally stable political environment. But those continuing high real rates also mean that domestic institutional investors also continue to have low weightings in equities vis-à-vis bonds. · GREED & fear maintains the long held belief that India remains the most attractive long-term equity market in Asia and emerging markets in terms of the combination it offers of both a macro and a micro story. Banking lending to the infrastructure sector continues to pick up to a far greater extent than to the consumer, while overall bank credit growth also looks increasingly like it has bottomed. 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.