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Market Update 08-10-10

The term “bank stress test” has been floating around in the news quite a bit lately with the Europe testing its banks to rebuild investor confidence. China will now join in the fun and conduct one of its own. Last year, China carried out stress tests with the assumption of home prices dropping by up to 30 percent; this time around, China said it would make the test even more rigorous, testing the ability of its banks to withstand home prices falling as much as 50 to 60 percent in cities where prices have risen the most dramatically. The tough standards of China’s stress test makes Europe’s own stress test look like a farce.

While the move suggests that Chinese policymakers are concerned about the health of the real estate market, it also shows, as usual, the communist government’s pre-emptive and no-nonsense approach in managing its economy. The severity of the adverse scenario (up to 60 percent price decline) to be used in the stress test in the most lucrative real estate markets is more policymakers wanting to make sure its banks can handle the worst case scenario rather than them believing that a 60 percent drop would really happen.Read more...

Market Update 07-20-10

China’s economy grew 10.3 percent (annualized) in the second quarter, down from the 11.9 percent mark in the first quarter but still, at double digits, easily at the front of the pack among major economies. China’s State Information Center reports that in the second half of the year, export growth may slow down to 16.3 percent as a result of slowdown in the global recovery. The press is reporting this as a halving of China’s export growth rate because the year-on-year improvement was 35 percent in the first six months of the year.
 
However, it should be noted that China’s exports improved by approximately 30 percent in the second half of 2009 compared to the first half, so the slower growth rate can partially be attributed to having a tougher comparison benchmark. To put it in a perspective, compared to the first half of this year, Chinese exports will still grow by about 12 percent sequentially even if the forecast for the slowdown in the year-over-year growth is on target, hardly a terrible figure. It’s worth reiterating that for all the talk of China slowing down, it will still remain the fastest growing major economy, and many economists think that a more moderate growth pace is better for the well-being of the country in the long run.
 
Indeed, with growth moderating from overheating pace, the Chinese government will find it easier to take a more supportive stance on its economy.
Read more...

Market Update 07-13-10

The International Monetary Fund, or IMF, has raised its global growth forecast for 2010. On the heels of better than expected growth in the first half of the year, the organization now calls for the world economy to expand 4.6 percent this year, up from its previous 4.2 percent projection in April. The forecast for next year was kept unchanged. The usual suspects of fast growers like China, India, and Brazil are leading the charge (the growth rate forecasts for all three were also upgraded). Not surprisingly, the IMF report reflects the same divergence trend between developed and developing countries we have been discussing in this newsletter.
 
However, even as it issued its more optimistic outlook, the IMF is urging countries to implement plans to lower deficits—further ballooned by stimulus efforts in late 2008 and 2009 to battle the financial crisis and recession—over the next few years, citing financial risks threatening global economic recovery. The report noted that while there is little evidence that the debt crisis in Europe has spilled over, some countries are struggling with high deficits, unemployment, and constrained bank lending, all factors that could derail recovery. As if we needed more proof that the European debt woes are serious, Portugal’s credit rating was cut today by Moody’s.
Read more...

Spring Break comes to the market 05-14-10

Today's outlook reminds us of the old Irish blessing, “May you be in heaven half an hour before the devil knows you're dead.” The good news is that the short-term picture looks considerably brighter. For the next month or two, we expect to enjoy a temporary reprieve from the long-term trends. Too bad it won't last.

This morning the euro hit a new four-year low, which ironically may be a positive event for the European countries. It should benefit European exports, which will boost the European economy. That in turn should help put a floor under the euro. Combined with the nearly $1 trillion bailout package announced last week, this should help stabilize the continent's current drift towards recession.

Of course a cheaper euro may not be such a good thing for U.S. exports. Our dollar is an innocent beneficiary of euro weakness and has risen accordingly. However, the business cycle in the U.S. is in a powerful trend. As my friend at the Economic Cycle Research Institute pointed out to me the other day, the group’s leading indicator shows the business cycle is in our favor. One sign of this is the recent uptrend in employment. We've gained 200,000 jobs recently, a move which will inspire more people to look for work and it implies more spending and growth.

Another near-term positive is the recent decline in commodity prices. Copper, oil, and other industrial materials have corrected sharply, which bodes well for business costs.Read more...

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Where The Growth Is: 04-15-10

Our mission is to help you generate the income you need while also achieving long-term growth. This means focusing on financially strong areas of the markets that offer good price-appreciation potential.

Several reports this week illustrate the merits of this approach for your investment portfolio.

Intel (INTC), a member of our Growth & Income Portfolio, reported impressive results for its first quarter. Intel's broad strength is shown by three sets of numbers. First, revenue soared 44 percent from a year ago to $10.3 billion. Second, quarterly earnings almost quadrupled to $2.4 billion. And Intel's gross profit margin expanded sharply from 45.3 percent to 63.4 percent.

To be sure, the numbers were bound to look good from the deeply depressed year-earlier levels. Even so, the size of the improvement is dramatic, particularly for such a large company that dominates its market. The results indicate strength not only there, but also in the overall technology sector. They also suggest that the global economy is now doing better than previously expected.

Look now to China. Its economy jumped 11.9 percent in the first quarter of this year from a year earlier, the government said Thursday. This is another solid indicator of an accelerating recovery from the global economic crisis.

China's first-quarter growth rate is the highest in three years, and it comes on the heels of the 10.7 percent expansion in 2009's fourth quarter. First-quarter 2009 growth, when the global recession was hitting bottom, came in at 6.2 percent.Read more...

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Market Update 03-31-10

Although the EU and the IMF have promised to serve as safety net for Greece, the troubled country has a long road ahead. By the end of May alone, Greece will need to raise nearly 12 billion euros to cover financial obligations. For the year, it will need to borrow 32 billion euros. Earlier sales of Greek sovereign debt this year proved, not surprisingly, that investors demand a hefty return for risking their money in Greek debt.Read more...

Market Update 03-29-10

Short-Term Key: NegativeRead more...

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Market Update 02-07-10

Short-Term Key: Negative
Long-Term Key: -70 (Neutral-to-Negative)
-------------------------------------
Inside this week's update...
***** Can't read China's poker face?
***** China tells its people to “buy gold.”
***** The two greatest investment opportunities for the next decade.
------------------------------------
China is a hot topic these days, and rightly so. It's the storm cloud gathering over our backyard. And as much as we try to reassure ourselves it will blow over, it's time to move the party indoors - or perhaps start planting seeds.
 
Of course, there are always deniers. Recently, we heard a short seller suggest that China's real estate market was in a bubble on the grounds that the nation was building commercial space equal to 25 square feet for every citizen – as if that was excessive.
 
Of course, that building program won't be completed for another couple of years. More to the point, in the U.S. we have more than 400 square feet of commercial real estate per person. So 25 sq. feet doesn't seem that ambitious for a nation that's fast becoming the world's factory floor.
 
Sure, a few cities in China that could accidentally find themselves with too much space for rent. It happens. But don't think that means the nation as a whole is becoming overbuilt.
 
One thing we know for certain is that China maintains an inscrutable poker face. It's a tough read.
Read more...

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Why China bashers have it wrong 02-08-10

Short-Term Key: Negative
Long-Term Key: -70 (Neutral-to-Negative)
-------------------------------------
Inside this week's update...
Read more...
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Market Update 01-27-10

The main two news items of the last couple of days are seemingly unrelated: China’s monetary tightening and the U.S. continuing its policy of quantitative easing.
 
Today, the Federal Reserve Open Market Committee (FMOC) kept interest rates on hold. The FOMC has also said that, while it’s planning to stop purchasing mortgage-backed securities at the end of the first quarter (as expected), it “will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.” Not wanting to fully commit to ending these purchasing in about two months’ time, the Fed has been careful with its language.
 
China, on the other hand, has been moving ahead with its plans to restrict lending, placing a cap on its banks’ lending for the rest of the month. It has shown that it’s serious about not letting its economy overheat and the markets reacted by sending China’s equities down again. We think that the recent actions of the Chinese government are timely and relatively tame, and that the markets are overreacting to the news. Moreover, China is still likely to present strong demand for resources.
Read more...

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