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Markets With Renewed Risk Appetites Rethink China

Jun 22nd, 2010
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Are you full? You know, appetite wise? Probably not, for most of you read the Pfennig in the morning, with a cup o’ Joe… The renewed appetite for risk that the markets were displaying yesterday disappeared yesterday afternoon. The markets were full of risk, I guess… For the selling was swift and damaging to the levels that the currencies, commodities, and stocks had gained overnight on the news that China would allow more flexibility in the renminbi (CNY).

See how fickle these markets/traders are? Very! You had a day that everyone was looking forward to, China allowing the renminbi to gain versus the dollar again, and just threw it to the roadside… UGH!

Yes… The China news was good for about 12 hours, and then it was back to fretting about the debt crisis in the Eurozone… The euro (EUR), which had traded above 1.24 for most of the morning yesterday, not only lost the 1.24 handle, but the 1.23 handle too! UGH! The Aussie dollar (AUD) lost about a cent, as did the New Zealand dollar/kiwi (NZD). So did the Canadian dollar (CAD)… The Lone Ranger of “gained ground not given up” was the Swiss franc (CHF), which remained well bid at 90-cents.

This morning, German Business Confidence as measured by the think tank, IFO, posted an unexpected rise to a two-year high this month. Here’s the skinny, folks… With the weakened euro, businesses are eyeing a return to export glory… So, they pushed the confidence survey to a high since May of 2008! Imagine what these guys would be saying if they had known about China’s decision before they were surveyed! For you see… If the renminbi DOES GET (question mark) stronger versus the dollar, and other currencies, it could slow their exports, and Germany could take back the crown of “export king”!

OK… I had one more thought on China’s announcement yesterday, after I had time to think more about it… And you know me… Mr. Conspiracy, right? Well… What if the Chinese just said that about more flexibility to appease the G-20 members that will meet this weekend? What if the Chinese don’t have any intention of carrying out a more flexible renminbi? Wouldn’t it be just like them to give us a rug to stand on while entering the room, and then pull it out from under us? Yes, it would…

A reader sent me this snippet from today’s issue of The International Herald Tribune, distributed in China, which put me on the conspiracy path regarding China:

“The Chinese central bank announced Sunday afternoon that any changes in the value of its currency, the renminbi, would be gradual, in a clear attempt to reassure the Chinese people that a move Saturday evening toward a more flexible currency would not result in a sharp or disruptive change.”

And if the markets have a conspiracy bone in them, they have probably snuffed this out already, and thus the sell-off… But then that’s giving the markets a great deal of credit that they don’t deserve!

Well… There’s a story on the Bloomie this morning titled, “Central Banks show euro losing reserve currency status with loonie gaining”… Hmmm…

According to the writer, “The Australian and Canadian dollars are becoming reserve currencies for central bankers seeking alternatives to deteriorating government credit quality in Europe, the US and Japan.”

Well… That’s right… But let’s put this in perspective… The debt problems of the US and Japan far outweigh those in the Eurozone… So, let’s not be so quick to lump them together, eh?  Bank of America/Merrill Lynch believes that the markets have “overreacted to the debt crisis in Europe” and expects a 10% gain in the region’s stocks by the end of this year… Hmmm…

I guess this is a follow up from the story I told you about last week regarding the thought that Russia would be adding Canadian dollar/loonies to their reserves…

But, let me tell you the most important part of all this… Central banks are seeing the need to diversify… WOW! Just like you and me!

I had someone send me a note regarding my interview with MarketWatch last week, and said I was wrong, that fiat currencies do not give your investment portfolio diversification… Hmmm… On what planet does that not take? If your investment portfolio is denominated in one currency, let’s say dollars, then you have no diversification… And yes… Metals like gold, silver, and platinum also diversify your portfolio… I never said they didn’t!

So… Why wouldn’t an investor look to add currencies from countries that show good fundamental economic growth, and feature an interest rate differential? Like the Aussie dollar? Check out this most recent data print from Australia… Overall earnings of Australia’s commodity exports are set to gain as much as 23% in the fiscal year of 2010 to 2011, led by a 28.5% increase in profit from mineral and coal exports, according to the Bureau of Agricultural and Resource Economics. Fundamentally sound…

Speaking of debt, the US has plenty of it… Like the .6 trillion budget deficit that will be posted this year… There are rumors that the US Budget Director, Peter Orszag, will resign soon… Like BEFORE he has to put his name on another budget that shows another .6 trillion deficit! That’s just my guess, folks… But who could do that year after year? I couldn’t… But then, debt to me is like kryptonite to Superman… You have to avoid it!

Today… The data cupboard yields the Existing Home Sales data from May… This number will still be a component of two things…. 1. Government assistance, and 2. Much lower Home Prices.

My friend, David Galland, had a good thought about the Canadian dollar in a roundabout way, yesterday… David said that, “with the US set to spend $ 15 billion on offshore drilling” and with “the Gulf shut down”… “The destination of those funds are probably going to head to the tar sands of Canada.”

Well… Gold got caught in the cross winds of the China news and the end of the risk taking euphoria yesterday… At one point, gold was down … I had told our metals trader, Jen, that I wanted to buy more gold the next time it dipped… And she reminded me of that yesterday, like a good sales/trader would do!

Silver also backed off, as you would expect, given the loss in the gold price yesterday.

Yesterday I made a Big Deal out of Canada’s CPI report that would print this morning… I was half hoping that it was greater than expected, so that the Bank of Canada (BOC) would have no other choice but to raise rates again at their next meeting next month. That’s kind of a strange thought pattern, eh? Oh well… Canadian CPI for May fell to 1.4% from April’s 1.8%…

So… That news will probably knock some of the stuffing out of the loonie today… Because interest rates are not going higher in Canada with inflation data like that! And here’s my strange thought pattern working again… That’s a good thing for those that want to buy loonies… A cheaper price…

Then there was this… For years now, I’ve told you about the cartel that calls themselves the Fed Reserve… I’ve told you about how it was created, and who threw the Constitution in the trash to create it (Woodrow Wilson)… I’ve also stated on several occasions how we, as a country would be better off without the Fed. It were supposedly created to even out the economic peaks and valleys and stop recessions… They were also supposed to protect the dollar… Well… If I did my job as badly as the Fed has, I would have been fired decades ago! And so… They should also be fired… This is not just me on the soapbox, folks… Anyway… A guy names James Cobb wrote and performs a song about ending the Fed… It’s here, should you want to hear it…

To recap… The strong risk appetite on display yesterday morning, disappeared in the afternoon hours, and the euphoria over the China announcement to allow more flexibility in the renminbi was thrown overboard! The Swiss franc was the only currency that had risen the night before, to hold on to most of its gains, as most others lost at least 1-cent. There are questions about what China meant in its announcement, and therefore, the focus returned to the debt crisis in the Eurozone.

Chuck Butler
for The Daily Reckoning

Markets With Renewed Risk Appetites Rethink China originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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China to Put Renminbi in a Currency Basket

Jun 21st, 2010
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Things heated up in the currencies this weekend… Yes, while everyone was wiping the milk from their mouths from their cereal they ate for breakfast on Saturday morning, the Chinese made a BIG announcement… Rather than tell you in my own words… Here is the official statement from the People’s Bank of China (PBOC)…

“In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People’s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.” (They say RMB for renminbi.)

So… After many months of having the renminbi pegged to the dollar (although it was not an official peg, it was a de-facto hedge), the PBOC will resume the ascent of the renminbi (CNY) versus the dollar that took place for three years after the “official peg” was dropped in July of 2005… But, the financial meltdown of August 2008 put a governor on the renminbi that has now been removed, per the statement from the PBOC.

The PBOC also said that the “new currency regime” would be to value the renminbi versus a basket of currencies (that’s how they did it 2005-2008), but this time they mentioned that they would allow the markets some say in the movement of the currency. Now… Please pay attention to what I’m about to say… There are a lot of people that believe that this will mean a HUGE one-way street for renminbi versus the dollar… I’m not one of those! While I think at the moment renminbi should move higher versus the dollar, there’s no “guarantee” that it will always move higher versus the dollar! The renminbi is now “flexible”!

So… How did the Asian and European markets react to the news when they opened overnight and this morning? Well… They like it! Especially the Aussie (AUD) and New Zealand dollars (NZD)…

OK… So… Remember when I said that I just didn’t believe that China’s economy was going to collapse like many so-called “experts” were saying? Listen… China would not have done this if their economy were on the edge of collapse! So… That sent a signal that it was “back to business” for these two South Pacific currencies.

The euro (EUR) traded all the way up to 1.2490 when the markets opened in Asia last night. But that euphoria faded and the euro is back to attempting to move past 1.24! The single unit tried three times last week, and was “shot down” April Wine style… But with this newly acquired appetite for risk that the markets now have, we just might see the single unit move past 1.24 and remain there for more than a couple of hours!

The Swiss franc (CHF) has returned to the 90-cent club, and the Canadian dollar/loonie (CAD) is pushing the envelope of parity once again!

There is a lot of “event risk” in the markets this week… By that I mean, we’ve got a Fed FOMC meeting, a Norges Bank (Norway) meeting, the UK will announce an emergency budget, and a G-20 meeting at the end of the week… Speaking of G-20… They won’t be able to point fingers at China this time!

There is some data to print this week… Home Sales data dominates here in the US. In Germany, there will be an IFO confidence printing, and in Canada, we’ll see CPI (consumer inflation)… This Canadian CPI report, I think, has the potential to be the straw that stirs the drink for the loonie… The Bank of Canada (BOC) next meets on July 20, and there won’t be any inflation data between this week and that meeting. So… A higher than expected CPI could lead the markets to believe the BOC would hike rates on July 20… And vice versa should the CPI be lower than expected…

Even if Canadian CPI is strong, I don’t believe it will be enough to move the BOC to hike rates. The BOC made it quite clear after becoming the first G-7 country to raise rates, that it was not going to be an aggressive rate hike cycle… But… Just because I believe that, doesn’t mean the markets will follow… I still think they will get all juiced up on a strong CPI.

Well… China’s announcement HAS to be a shot across the bows of US Treasuries… A stronger renminbi, means less currency reserves, which means less money that the Chinese will have to buy Treasuries… And the rot on the Treasuries’ vine is being exposed already, with the long bond down over 1 point overnight… And the 10-year? Well, last Friday it traded with a yield of 3.17%, today… It’s 3.28%…

Remember when I told every US Treasury Secretary and lawmaker that went to China and demanded that they allow more flexibility in their currency, that they should be careful what they wished for? Unintended consequences… And US Treasuries are going to see those unintended consequences up close and personal.

And gold… The price of gold is ,260 this morning… WOW! I was told last week that there were quite a few trades at ,255 to sell, a line of resistance, if you will… Looks like gold didn’t care too much about that line of resistance… There are some funny thoughts I had go through my mind about historic weak resistance lines, but those are better kept in my head!

With the renewed appetite for risk… The Japanese yen (JPY) doesn’t look so perky any longer. And in my mind, that’s exactly how it should be! Japan and the US are the two largest debtor nations on the planet…

And… With the renewed appetite for risk… The Brazilian real (BRL) is back in the driver’s seat… Sniff-N-The Tears style! The real has gained over 2% in the past 5 days, which nearly brings the real back to the same level it began as we turned the calendar on the year! And with the HUGE interest rate differential real enjoys, that’s manna from heaven for some investors!

Then there was this… (From the NY Times – which I despise – but that’s where the story was…

“Many states are acknowledging this year that they have promised pensions they cannot afford and are cutting once-sacrosanct benefits, to appease taxpayers and attack budget deficits.

“Illinois raised its retirement age to 67, the highest of any state, and capped public pensions at 6,800 a year. Arizona, New York, Missouri and Mississippi will make people work more years to earn pensions. Virginia is requiring employees to pay into the state pension fund for the first time. New Jersey will not give anyone pension credit unless they work at least 32 hours a week.”

But get this… “Nearly all of the cuts so far apply only to workers not yet hired. Though heralded as breakthrough reforms by state officials, the cuts phase in so slowly they are unlikely to save the weakest funds and keep them from running out of money.”

Hey! I don’t make this stuff up!

To recap… China made a HUGE announcement on Saturday, saying they would return to allowing the renminbi to be moved by the markets (to a degree) using a basket of currencies as their guide. This announcement has fired up the risk takers, and almost all currencies, save dollar and yen, are gaining ground this morning.

Chuck Butler
for The Daily Reckoning

China to Put Renminbi in a Currency Basket originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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How Vietnam Consumes 10x More Gold Than China

Jun 18th, 2010
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Many Asian countries have strong affinity for gold, with Vietnam apparently at the top of the list. On a per-capita-income basis, Vietnam consumes twice as much gold as India and 10 times that of China.

Vietnam’s gold market has blossomed in response to a lack of confidence in the country’s currency, according to a story in yesterday’s Financial Times. Since the beginning of 2009, the Vietnamese dong has lost 11 percent of its official value, while gold has risen roughly 42 percent in U.S. dollar terms.

This has spurred many Vietnamese banks to seek out more gold. Last year, as the world climbed out of a crisis, Vietnamese banks paid 3 percentage points more in interest to those making deposits in gold than deposits in dollars.

A key quote from the story: “Demand [for gold] is still growing because people don’t believe in any other channel of investment.”

Vietnam (population 86 million) has seen rapid economic growth in recent years. Its per-capita income of ,050 last year was nearly fivefold higher than it was in the mid 1990s, and in Hanoi, the income level is closing in on ,000 per person, according to government figures.

Net retail gold investment in Vietnam reached 14.1 metric tons (543,000 ounces) during the first quarter of 2010, up 36 percent year over year, according to the World Gold Council. Add to that a 20 percent increase in gold jewelry demand, and you see a steadily growing gold market.

Those figures don’t reflect the amount of gold that isn’t tracked or deposited in banks. A Vietnam-based economist estimates that some billion worth of “street gold”—almost a third of the country’s GDP—is held outside of the banking system.

In absolute terms, the Vietnamese gold market may pale in comparison to China and India, but its strong cultural connection and history with gold should keep the country’s gold market an active one regardless of price.

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. You can visit my blog, Frank Talk, for more daily commentary.

[Editor's Note: Frank Holmes will be offering insight like the above, and more, at July's Agora Financial Investment Symposium, along with Marc Faber, Bill Bonner, and Doug Casey and many others. You can register for the event here.]

How Vietnam Consumes 10x More Gold Than China originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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Investing in China Gets Contrarian

Jun 15th, 2010
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An investment quiz to begin today’s note. Two-part question:

1) Which country has more money to spend than any other?
2) Which nation currently represents the least-attractive investment environment? In other words, where is the one place a true contrarian would love – where no one wants to invest?

The answers lie in our favorite headline of the day: China has agreed to invest billions in Greece’s port system.

After some lousy pre-crash investments in Blackstone, Morgan Stanley and Visa, Chinese state money is finally wising up. Today, China announced 14 separate deals with the Greek government, tourism industry, telecoms, shipping companies and shipbuilders – all designed to give the Chinese virtual control of Piraeus, a mega-port outside of Athens.

Coupled with previous deals, China will now have a huge presence in the vital shipping channel between the Mediterranean and the Balkans. And they’ll likely be getting it all on the cheap… Just this morning, Fitch became the last ratings agency to downgrade Greek debt to “junk” levels, leaving Greece with very few – if any – bargaining chips for negotiations with the Chinese.

Vice Premier Zhang Dejiang is in Greece as we write, striking the deal, which is estimated to be worth billions. Greeks need cash so badly, there’re rumors floating around that a hefty chunk of the national railway is up for sale, too.

“Given China’s consumption of raw materials, the spending binge is not likely to stop,” writes Rich Lee, the latest addition to our squad of analysts (he’ll be helping Rob Parenteau devise investment strategies for The Richebächer Letter).

“Beijing has already secured access to raw materials, metals and crude oil. The next step will be in the areas of real estate and commodity deposits – massive oil fields in Africa, or property laden with copper in Chile and Turkey. One thing is for sure: The Chinese will continue to target components closely tied to the economy.”

But – the ultimate question – will Chinese consumption, both domestic and international, eventually collapse under its own heft? Japan went on a similar global shopping spree in the ’80s…and soon after fell into a bear market that’s still raging today.

“Bubbles are a part of the weather patterns of markets,” writes Chris Mayer. “They appear every so often, like cloudy days. So what about China? In the big cities, apartment prices have doubled or tripled in the last three-five years. Bank lending is up fourfold since 2008, and the government stimulus package means a lot of temporary activity in construction.

“I put the bubble question to nearly everyone we met when we visited China last month: money managers, economists, entrepreneurs, etc. It’s the pressing question everyone wants to know. And I’ve talked about the issue in my weekly e-mails to Capital & Crisis and Special Situations subscribers, so I don’t want to rehash it all here. I could write the whole issue on this question.

“The bottom line about investing in China: There is surely a property bubble in China, though smaller and less leveraged than the US vintage. But it doesn’t change the long-term picture of what’s happening in China. As one hedge fund manager put it to me, ‘China is many mini-economies.’ He is sure there is a bubble too, but I note he’s still investing in basic areas like food and water, which are less connected to the property market.”

For specific investment advice, we’ve got quite an opportunity coming up. Addison, Chris, the hedge fund manager Chris just mentioned and another of our favorite Chinese contacts will be gathering for a conference call this Thursday after the market closes. They will tackle the “China: Boom, Bubble or Bust” debate head-on, and you’ll have a chance to sign up. For more info, check out this short video presentation:

At least half a dozen specific investment ideas will be hashed out on the call, including some of the best opportunities Chris discovered while in China last month. If you want in on this call, you have to let us know…right here. But hurry… Space is very limited.

Ian Mathias
for The Daily Reckoning

Investing in China Gets Contrarian originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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Is China Undervalued Right Now?

Jun 14th, 2010
by admin.
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During the past few years, China has become an increasingly compelling destination for investment capital. But with the recent weakness in the Chinese stock market – and serious cracks showing in the façade of China’s economy – does it make sense to invest in China right now?

One money manager I know thinks so. In fact, he thinks that some of China’s US-listed stocks are trading at low enough valuations to triple in 2010 regardless of how the economic situation unfolds… I’ll introduce him to you in a minute.

There are two parts of the macro backdrop that are important to understand about China. First, there has been a tremendous increase in bank lending since the end of 2008 – it’s up something like fourfold. And we know from experience that when banks grow that fast, bad things tend to happen later. What happens when banks grow that fast is that they slide down the credit-quality spectrum. In short, they make tomorrow’s bad loans.

Secondly, we know that the Chinese government has put in place a huge stimulus plan. And again, we know from experience that when governments invest money, you inevitably wind up with “bridges to nowhere” and all kinds of boondoggles. The money doesn’t flow to its best economic uses, but to political ends.

In Beijing, you can see some tangible effects of this. I recently visited, for instance, the largest mall in Asia. It was built six years ago by state-run enterprises. They put it on the western edge of the city, about 40 minutes from Tiananmen. Real estate people thought it was a bad idea. It was too far away…and too big.

Well, the pros turned out to be right. And today, the place is virtually empty. It was almost eerie walking through there. There were lines of bright shops with neatly dressed attendants and shelves full of the latest products from the world’s best brands. But there were no customers.

This place has over 10,000 free parking spaces. There is over 1.8 million square feet of retail space here – over 167,225 square meters. That’s about three times the base of the Great Pyramid at Giza.

It makes you wonder. Why did this place ever get built? And boy, are they losing their shirts. But then you wonder about the shops themselves. Why do they stay? How can they possibly make money here? It’s all very strange.

But then you go 30 minutes into town and visit another big mall packed with people. The parking lot is so full you have to wait to get in. When one car leaves, they let one in.

The residential property market also feels bubbly – a lot of construction going on despite widespread tales of empty apartment buildings. One rationale we heard from people here is that the Chinese view property as a store of wealth. We heard stories of how people buy brand-new apartments and don’t even attempt to rent them out. They just hold onto them.

Interestingly, besides property, the Chinese also like gold as a store of wealth. China is the world’s largest consumer of gold (and its largest producer), only recently passing India. So if there is a property burst, gold should be a winner. In fact, while I was here, CCTV News – China’s big television network – reported that China is seeing a surge in gold buying recently as people here start to get nervous about a potential property bubble.

As you can see, China’s economic picture is complex – as it is everywhere, really. The US economic picture is equally murky and uncertain.

However, in some ways, you don’t have to figure it all out. I met with a money manager here – a low-key guy whom I cannot name. Yet his fund is up over 1,000% in 10 years. He knows the China market as well as anyone. He was short the market – that is, he was betting it would fall – as late as January, but he is now buying again.

As he told us, there are some Chinese stocks that are also listed in the US that trade at very low multiples of earnings. Some of them, when you net out the cash, trade for as little as 3 times earnings. As he says, you don’t really need to have a positive view on China to buy these.

When asked about the China bubble, he told me. “I don’t really care. I know I can buy some stocks that could well double in six months, regardless.”

Though even here, the market is tricky. You really have to know what you are doing. There are bad auditors and shady accounting practices here, as in the US. And there can be big gaps in quality between certain names. It’s a market for which it helps to know people on the ground who know the quality of the management teams.

Chris Mayer
for The Daily Reckoning

Is China Undervalued Right Now? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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