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

To: carranza2 who wrote (70598)	1/29/2011 8:27:20 PM
From: TobagoJack	Respond to of 219713

just in in-tray, per greed n fear · The view in Berlin is that an increase in the funding of the European Financial Stability Facility (EFSF) is coming but also that Frau Merkel is in no hurry to announce such a policy. Indeed the more financial markets rally the less incentive there is for the German Chancellor to announce anything, especially with an important state election in Baden-Württemberg due on 27 March. · The assumption in Berlin is that Germany will be forced by circumstance to agree at some stage to a degree of collective fiscal responsibility in Euroland. The German political establishment is committed to trying to preserve Euroland in its present form. While it is widely accepted that kicking out periphery members would create a dangerous precedent as well as leading to potentially dramatic fallout in terms of the exposure of the European banking sector. · The recent rally in Euroland bank stocks has coincided with a decline in the banks’ CDS spreads. This means that another opportunity to short European bank stocks and indeed the euro is presenting itself. This is because no one in Berlin is expecting an imminent “shock and awe” policy announcement which will deal with the solvency issue in the periphery. Rather efforts will be made for now to address the problem via the expansion of the EFSF. · It still makes sense for macro investors to bet on a long term rise in the German CDS. The end game remains German acceptance of collective fiscal responsibility but with a presumed quid pro quo of much greater German policing of the periphery’s fiscal situation going forward. But because of German domestic political considerations, the end game will be delayed leading most likely to an unfortunately greater cost to the German taxpayer than would otherwise have been the case. · The S&P500’s continuing uptrend suggests that the current consensus in global markets will continue to prevail for now. That is increasing bets on developed world equities, with the current focus on an improving US economy, and taking money out of the emerging world because of the continuing inflation concerns. · GREED & fear’s view on the US economy is that the shorter an investor’s time horizon, the more the newsflow is likely to get better. But the longer the point of view taken, the more inevitable the market focus will return to structural issues. · If the near term hope in the US is for an expansion of the present capex cycle beyond tech spending, it is clear that many corporates are more comfortable reverting to pre-financial crisis behaviour by executing more share buybacks. · As the optimism builds in America, GREED & fear thinks the markets are in danger of ignoring two negative realities. That is the ongoing squeeze in local government finances and the growing evidence of a renewed decline in US house prices. · The current year is still going to see a withdrawal of fiscal stimulus in terms of the support that was being provided to state and local governments by the first Obama fiscal stimulus passed in February 2009. While the Republicans have the means, should they want to, to implement their stated policy of rolling back public sector benefits. · There is a growing risk of a double dip in US house prices. If such a double dip occurs it is inevitable that the focus of both Wall Street and Washington will return at some point to the issue of housing. That could lead to a non-market friendly policy response from the politicians, such as mortgage debt relief. The asset class least likely to be positively impacted by QE2 is US house prices. Yet a rise in US house prices is much more likely to lead to consumer releveraging than a rally in the US stock market. · The Asian economy most vulnerable fundamentally to a pick up in inflation remains India. This is both because it does not have China’s excess capacity and also because its economy is domestic demand driven. More rate hikes by the Reserve Bank of India are likely following this week’s 25bps increase. · Faced with the continuing monetary tightening, the likelihood is that the Indian stock market underperforms this quarter as it also did last quarter. Still long term investors should remember the positive point that the RBI is not mercantilist by nature and is, therefore, willing to tighten independently of the US. This means that monetary policy will ultimately be effective in that the cost of borrowing is raised to an appropriate level. · It remains surprising that the US dollar has remained as weak as it has given the growing optimism on the US. This dollar trend matters for those buying Japanese equities since the hoped for catalyst for the Tokyo market is a presumed yen weakening on the back of a recovering American economy. · It is not surprising to see gold bullion correct of late as a result of growing optimism on the US. Clearly, if the US economy really does normalise, and US short-term interest rates normalise as a consequence, that would be bearish for bullion since the opportunity cost of owning bullion would have risen. But that is not GREED & fear’s view. This is why a correction in gold down to, say the 200-day moving average or beyond, would be both healthy and also represent a great buying opportunity. Please consider the 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.