Morning Roundup

The Nikkei and Japanese yen were both off to the races this morning (link goes to charts), with the combo up over 3% after the open for dollar investors, but Nikkei gains quickly faded (as of 11 AM 东京).

China Merchants Bank (3968.HK) reported its third consecutive quarter of falling earnings and missed analysts estimates by 20%. From Bloomberg:
Net income fell 41 percent to 4.1 billion yuan ($600 million) in the second quarter, from 6.93 billion yuan a year earlier, based on figures released by the Shenzhen-based company. That fell short of the 5.1 billion yuan average estimate of six analysts in a Bloomberg survey.

President Ma Weihua, who introduced the nation’s first credit card and helped boost profit sevenfold since 2004, faces more challenges during an economic slowdown because of the bank’s focus on loans to home buyers and smaller firms. The profit decline was the steepest among China’s six largest publicly traded banks.

“The profit plunge is mainly due to margin contraction,” said Sheng Nan, analyst at UOB Kayhian Investment Co. in Beijing. “With funding costs expected to decline in the second half, China Merchants’ profitability will improve.”
Financials have underperformed off their 52-week lows and China Merchants climbed just 100% off its bottom. There are a few sub-100% rebounds on my watchlist, but most are in the range of 100%-300%, with a couple of 900% outliers in Comba (2342.HK) and Hildi Industry (1393.HK)

Lehman Brothers fallout continues in Hong Kong:
Six listed banks have made a combined provision of HK$1.1 billion for the first half of this year to cover refunds to investors who bought Lehman minibonds.

But that represents only 17.46 per cent of the total HK$6.3 billion settlement agreed by 16 lenders last month with the Securities and Futures Commission and the Hong Kong Monetary Authority.

Including the provision made last year, the six lenders have paid a total of HK$1.78 billion, representing 28 per cent of the total.

The agreement called for the banks to repay customers at least 60 per cent of their initial investment in the minibonds guaranteed by Lehman. Those who made individual settlements earlier below the threshold will receive a top-up.
Speaking of Lehman Brothers, too bad I didn't add it to the OTB Portfolio. On Friday, LEHMQ.PK was gunned to $0.15 on 73 million shares, a 200% advance. It had traded for $0.04 or $0.05 for the past five months, with a few brief pops up and volume around a few million a day.

Finally, China Southern Airlines reported a 97% drop in first half earnings (ZNH). Other airlines earned a profit from fuel hedges, but China Southern exited its hedges last year.

Have a yen for some yuan?

Plan sees yuan as a world currency
In a recent reshuffle, the State Council announced that Ms Hu, a vice-governor who had been the director general of the State Administration of Foreign Exchange since 2005, was released from the foreign exchange job. It was taken over by Yi Gang, another central bank vice-governor.

The reshuffle was designed to enable Ms Hu to concentrate on the ambitious currency programme.

The new portfolio puts Ms Hu in charge of monetary policy concerning China's push to gain a bigger say in the world's currency system, including a recent pilot scheme to use the yuan for trade settlement with some countries, the economist said.

Yi Xuanrong - a financial expert with the Chinese Academy of Social Sciences - said the leadership had decided the time had come "to establish a task force and research teams on the topic, though it might take time for its realisation".

"The programme will also include measures to help Hong Kong develop as an offshore centre for the yuan, which is desired by both the central government and Hong Kong."

The recession has encouraged Chinese officials to speed up the currency programme. As the downturn erodes US influence, China is losing faith in the dollar and sees the time coming for the yuan to become a major world currency.
Subscription required to read the whole article.

One solution to the heavy money pumping China recently carried out is to export those yuan overseas and use global capital markets as a release valve, the same way the Federal Reserve can flood the world with greenbacks and suffer little inflation at home.

Memes of the Week

1. "Too big to fail" got bigger.
J.P. Morgan Chase, an amalgam of some of Wall Street's most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.
2. Currency crisis with deflation—Project Mayhem lays out the argument for an international currency devaluation coupled with credit deflation. I've made similar arguments of effect when I wrote that interest rates and oil prices driven by inflation expectations, rather than actual inflation, will be deflationary. The method of increase in this case, however, is a devaluation of the U.S. dollar.
Deflation and currency crisis are not mutually exclusive. This is precisely what happened in 2008 in Iceland. While the banking sector in Iceland was in tatters, resulting in bank runs, bankruptcies on a massive scale etc, the Icelandic Krona decreased by more than 50% against the U.S. dollar.

The issuance of any significant amount of credit in yuan, yen, or in PetroState currency is a key source of a possible death blow to the U.S. dollar.
Also came with a cool pic: Read the whole thing.

3. 9/12—Big protest in Washington, D.C. on September 12. FOFOA discusses this picture in No Free Lunch:
You see, the truth of the matter is that there is no free lunch. Yet the US federal government is now funding its fantastical folly at the rate of TRILLIONS per year through the Federal Reserve's printing press, nicknamed POMO. If the dollar doesn't collapse in purchasing power, this could go on FO-EVAH!! Free lunches for everyone (in the United States)!!! We can all work for the government!! Be a G-man! A nation of G-men!! How cool would that be? Look, they make more DOLLARS too...

There is only one way this madness stops. It is not going to stop by Ben Bernanke telling Obama "no more!" It is not going to stop by Congress suddenly slashing its pork-laden budget to sustainable levels. It is not going to stop by the real economy suddenly rising to the occasion. Yet it WILL stop soon. This insanity is sucking the very air out of the global economy like a pyromaniac's fire that extinguishes itself in an airtight space once the air is gone.

It is a truth about inflation and hyperinflation that only the VERY FIRST entity to use the newly created money profits from the exercise while everyone else suffers. This is because newly created money draws in real economic goods and services to the printer at the same rate as they were offered in the open market before that new money was created. And the printer receives this SUBSTANTIAL PORTION of the real economy at precisely ZERO cost when that new money comes via Ben's mouse named POMO. This 'first spender' effect can be seen both in the BOOM TOWN that Washington DC has become in the middle of a damn depression, and in the LAVISH lifestyles lived by Gideon Gono, Robert Mugabe and all of Mugabe's cronies and friends.
Read the whole thing.


Is the U.S. turning Japanese?

ZeroHedge has the beauty up on the site. I'm not sure which is worse, the crash comparison to 1930 or this chart, which compares Japan 1980-today and S&P500 1990-today.

Crash Comparison Update 2009/08/28

Note 2009 is S&P 500 Index, 1930 is Dow Jones Industrial Average. I went with the shorter view today:

OTB Portfolio Update

Up 4.53% led by 7.14% advance in FRE.
Total return since inception on August 26: 15.16%

Mr. Practical's Guide to Fed Policy

Great summary of what is capital, and why the Fed distorts the economic system.Government's Money-Manipulating Wizardry
He starts with a simple explanation of what capital is:
An example of a productive process might be one of specialization. Two farmers grow their own food, make their own clothes and cut down their own firewood. It takes each 15 hours a day to do all this work. They realize one has better land and the other one makes better clothes so they barter to exchange goods. This bartering results in each working only 12 hours a day. One farmer can then take the extra time and sew more clothes and thus barter it with another farmer for more firewood. The extra clothes can be described as “capital” that can be used to raise living standards. Capital can only be created through the production process.
There's a lot that follows from this in his article, which you should read all of. From this example, you can see that the Fed fools the public into believing there is more capital in the economy by creating debt. People build more things, such as homes, than the underlying ability of the economy to support it demands.

The Fed is having a great deal of trouble devaluing the dollar because there is just so much debt out there that needs to be supported: There is not enough income being generated by the economy so it is defaulting. This is why the banks are being force fed profits by an artificially steep yield curve, to subsidize future losses on debt write-downs. And this is why they are not lending out the vast reserves created by profits at taxpayer expense.

I still believe there is something like $8 trillion to $12 trillion in debt to be written down. It’s possibly more if the government continues down the path of supporting moneydebt at bad prices.

When moneydebt is destroyed by forfeitures, the dollar is being destroyed. When the dollar is being destroyed it rises in value. When the dollar rises in value relatively prices go down.

This is exactly what the market wants, for prices to go down. When prices go down, real savings/capital is released as the risk for reward dynamics become more favorable. This is exactly what the government doesn't want. They want to subsidize debtors by keeping prices and collateral values high. It’s a fool’s journey.

This is why I've taken an extended vacation in the US and keeping my capital safe: I am willing to accept a very low return on that capital because if prices come down 40%, I am effectively earning 40% interest on my capital, which is real.

Risk is very high.
Read the whole thing.


Similarities with the Depression?

The RFC reference surfaces again. See my references below.

OTB Portfolio Update

The 26% gain in AIG, 9% Citigroup and 10% lift in Freddie Mac delivered a 10.17% gain to the portfolio. Fannie Mae and Bank of America were muted today.

Current value: $1101.72

China anti-trust

Here's a good article by Nathan Bush covering China's anti-trust law, Limited Lessons from Chinaʼs Merger Rulings. Passive investors won't find it too interesting, but it is solid information for serious investors, and offers a good overview of the failed merger between Coke and Huiyuan.


Crash Comparison Update

OTB Portfolio Launches!

I've created a new portfolio. I call it the OTB portfolio, for Obama/Tim Geithner/Ben Bernanke.

It holds five stocks that represent the OTB Economy: Citigroup, Bank of America, AIG, Fannie Mae and Freddie Mac. GM might count, but these guys love financials and credit is the backbone of the American economy, judging by their comments and actions.

I've made the portfolio value $1,000, so any widow or orphan should be able to scrape together enough food stamps to buy into Hope.

Of course I'm way behind the curve. Had I launched the portfolio on July 31, it would already be up 40% to $1399.12. Nevertheless, today is as good as any and Bernanke was just reappointed because he saved the world from Depression! Lots more gains must be on the way...it's not like this was an optimism driven rally and Bernanke's reappointment represents a top or anything.


Anatole Fekete on Gold Backwardation

Dress Rehearsal For The Last Contango. I've excerpted three paragraphs below, but you really should read the whole thing, it is a brief four pages.
Still, we have to explain the relevance of this to the present credit crisis. It is no secret that the bonds, notes, bills, and other obligations of the United States government, or any other government for that matter, are irredeemable.
That is, they are redeemable in nothing but more of the same. For example, the bonds of the U.S. Treasury are redeemable in Federal Reserve credit, which is itself irredeemable and is ‘backed by’ the self-same bonds of the U.S. Treasury. Why is it, then, that these Treasury obligations are in demand, where one might think that redeemability is a sine-qua-non of issuing them? What makes people participate in this shell-game? How can such a crude check-kiting scheme mesmerize the entire population of our globe? Come to think of it, the sight of this Ponzi scheme would shudder the Founding Fathers of our great Republic.

This is not an easy question to answer. But going through all the alternative explanations one-by-one, we come to the conclusion that the debt of the U.S. government is still redeemable in a sense, however limited or restrictive it may be. The debt of the U.S. government has a liquid market in which it can be exchanged for Federal Reserve credit. In turn, Federal Reserve credit can still be exchanged in liquid markets for physical gold, the ultimate extinguisher of debt, albeit at a variable price. But if you break that final link, when gold is no longer for sale at any price quoted in U.S. dollars, then the rug will have been pulled from underneath this house of cards, and the international monetary system will collapse like the twin towers of the World Trade Center. And this is the situation that we are now confronted with.

Look at it this way. There is a casino where the lucky gamblers can gamble risk-free. Their bets are ‘on the house’. This casino is the U.S. bond market. There is only one catch. The pile of the winning chips in front of each gambler may become irredeemable at the exit when the hairy godfather waves his magic wand.
Contango is when the futures price of a commodity is greater than the spot (current) price, backwardization is when the futures price is lower than the spot price.

As Professor Fekete explains in the beginning of the article, gold has monetary status and therefore the gold futures always experience contango. Over time, however, this premium has been eroding and he believes it could turn negative, such that future gold would be more expensive than current gold. Backwardation has occurred in recent history—a couple of times that lasted for a couple of days—but it has only been traded in a futures market for about 40 years.

Fekete is arguing that gold will be in permanent backwardation, meaning gold is not for sale at any price, or rather the spot price has rocketed. This leads him to conclude that the entire financial system will have collapsed or will collapse in short order. No sellers at any price implies that gold holders do not want to buy anything, an outcome I highly doubt, however, though its possible for financial markets to breakdown.

The Stories Bears Tell

There's no shortage of bearish stories. I briefly mentioned Prechter's take. He sees a multi-year dollar rally and lower prices for just about everything else, including precious metals. His story, and many of the fundamental bear stories, are based on the large debt overhang in the global economy (though this is just a piece of the socionomic argument laid out by Prechter). Anyone predicting lower nominal prices does not expect high inflation in the near term due to debt deflation, but there are bears who expect high inflation to cause nominal price increases, even while causing a loss of value.

Fundamentally based arguments aside, I've come across several technical arguments for a market top. Some of these include a fundamental or socionomic angle.

First up is a David Singer thesis, posted at The Big Picture. He has a chart of the S&P 500 Index along with notes on the number of stocks above their 200-day moving average.
The market continues to go higher and eventually fills the “Lehman gap” up to the high 1100’s, low 1200’s, but that has to be on weakening overall strength and breadth because the market has shot up so insanely already and like I said 457 of 500 are already above their 200 day ma’s. That area is also the neckline that was penetrated long ago and is severe resistance. By that time, the overall rally will be some 85% off the lows and almost everyone will be sure that this is a new bull market. Picture the atmosphere now, but up another 200 points on the S&P. Those 200 points will be the public finally coming back on board as the message that recovery is here gets filtered into everyone’s psyche. As you have noted, the professionals are “all in”. As we move up, the public investor gets in just in time for the market to begin moving lower again in earnest…
See the chart here.

Next up, Tim Knight offers the Arcs of the Covenants. Not as much a thesis as marking a turning point on the chart, to wit:
The head and shoulders pattern we were all obsessed with early in July turned out to be bouncing off arc support as well, yet, as we know, that support was never broken. We are now all the way back to the 50% arc. Given how close we are to my oft-cited 1050 prediction (which I will hasten to add is at the low end of my 1050-1200 range of an ultimate countertrend top), we could be at an interesting inflection point here.

Just for fun, I decided to back far away from the graph and look at the arc extensions. That was just as eye-opening.

At each of the arcs, there's an interesting event. The magenta tint (where the prices cling to the arc fastidiously) shows the kickoff to the secular bull market, which lasted three decades. The arc at the green tint perfectly nails the crash of 1987 (!), and the blue tint kicks off the final parabolic ascent of the tech bubble (the frenetic 1995-2000 period where the angle was sharply higher).
Check out the chart, plus a great "Joe Kennedy Shoeshine Boy" moment.
Joe Saluzzi hits a lot of popular bearish notes in this interview:

Here's a post by someone under the pseudonym "Tyler Durden" on ZeroHedge. (Several contributers use the same pseudonym.) What are the animal spirits saying? Here's the gist:
The current cycle is a complete anomaly relative to past experience. Margin debt balances (current info through June) have increased 8.6% from the lows. But you can see the strength of margin debt growth in prior cycles. Off the charts is the only characterization that fits when comparing this experience to the present. Who knows, maybe margin debt is about to grow parabolically for all we know.

So, the question becomes, when will the true “animal spirits” on Wall Street reveal themselves? It has not happened yet. And that says liquidity and momentum support for the markets is narrow and potentially volatile. Squeezing shorts and running technical stops can work well for a while. But what happens next if animal spirits broadly are not fully engaged? For now, margin debt is telling us animal spirits are very subdued. Very subdued.
(Emphasis mine.)
My interpretation of this last story is that it supports David Singer's theory. Prechter admits he's often early on his calls and there's some corroborating theories here that suggest a possible melt-up before the final meltdown.

Bonus: The original(?) "Tyler Durden" speaking with Pimm Fox of Bloomberg, topic high-frequency trading.


Crash Comparison Divergence

A chart comparing the 1930 Depression rally and the 2009 rally shows a divergence reaching the extremes seen earlier in the chart. Here's a shorter-term chart. Either this has no predictive capability or the market will drop this afternoon or early next week. Note, I've input an intraday number for the S&P 500 Index, 1023.



新的谢国忠到了。 全都很好但是我想摘抄一下:

我们现在看到的,是在全球经济中堆积的纯粹的流动性泡沫。它体现在几个资产类别上,最突出的是大宗商品、股票和政府债券。支撑泡沫的理由是,刺 激将导致经济快速复苏,而且,产出缺口能够保持低通货膨胀率,因而中央银行可以把利率数年内维持在较低水平。根据这个描述,投资者可以同时期待强劲的企业 盈利和较低的利率水平,也就是股市所谓的“金发姑娘”(语出Robert Southey的童话,此处“金发姑娘”形容上世纪90年代中后期的美国经济,即一个“稳步增长,通胀温和”、处于童话般的美好状态,但“三只熊”回来, 一切就结束了)。

  中国二季度和美国三季度发生的事情,似乎可以支持上述观点。我认为,市场被误导了。目前反弹的驱动力量,是库存周期和政府刺激。企业资本支出和 消费的跟进,被结构性挑战严重制约着。这些挑战都源于资源分配不当导致的泡沫。泡沫破裂后,供应和需求之间的不匹配,限制了刺激或泡沫创造需求的效力。
有人认为,如果低利率使房地产市场再度 复苏,美国家庭可能会再次变得愿意借钱消费了。这种情况是可能的,但希望不大。未来,要么会出现经济正常恢复,要么就是由泡沫激发的经济繁荣,结局取决于 美国家庭储蓄率的前景。除非美国家庭部门愿意再次借钱来花,否则,新兴经济体无法重返出口带动增长的模式。
其次,中国可以通过结构性改革,大幅降低储蓄率。在中国储蓄总量中,一半来自公共部门。政府和国有企业应该减少其不断升高的留存收益,并增加投 融资的贷款比例。例如,中国较高的资产价格,就是源于地方政府有增加财政收入以支持投资的需要。如果中国的资产价格削减三分之一,国民储蓄率可能会降低2 个-3个百分点。
我认为他写得很对.去年四季的恐慌很厉害,可是人民有希望.大众以为政府和中央银行很厉害,能控制经济的路径.其实,大众控制经济的路径,是社会从众行为. 而且社会经济有很严肃的不平衡的发展. 总统和央行行长不会做什么,就是让资产价格下降很快和经济调整.


谢国忠 New Bubble Threatens a V-Shaped Rebound

Another great article from Andy Xie. Read the whole thing, but I've excerpted a view good parts.

This bubble will be short lived:
What we are seeing now in the global economy is a pure liquidity bubble. It's been manifested in several asset classes. The most prominent are commodities, stocks and government bonds. The story that supports this bubble is that fiscal stimulus would lead to quick economic recovery, and the output gap could keep inflation down. Hence, central banks can keep interest rates low for a couple more years. And following this story line, investors can look forward to strong corporate earnings and low interest rates at the same time, a sort of a goldilocks scenario for the stock market.

What occurred in China in the second quarter and started happening in the United States in the third quarter seems to lend support to this view. I think the market is being misled. The driving forces for the current bounce are inventory cycle and government stimulus. The follow-through from corporate capex and consumption are severely constrained by structural challenges. These challenges have origins in the bubble that led to a misallocation of resources. After the bubble burst, a mismatch of supply and demand limited the effectiveness of either stimulus or a bubble in creating demand.
Changing patterns of savings and consumption, i.e. socionomic factors:
Some argue that, if low interest rates revive the property market, American households may be willing to borrow and spend again. This scenario is possible but not likely. The United States has not experienced serious property bubbles in the past because land is privately owned and plentiful. A supply overhang from one bubble takes a long time to digest. And American culture tends to swing to frugality after a bubble. One's outlook either for a normal recovery or a bubble-inspired boom depends on the outlook for the U.S. household savings rate. Unless the U.S. household sector is willing to borrow and spend again, emerging economies will not be able to revive the export-led growth model.
Advice for China, in addition to his calls for distributing the shares of publicly owned companies to the citizens (one of the single best strategies since it can reduce the wealth gap as an added bonus):
Second, China can decrease its savings rate substantially through structural reforms. Half of China's gross savings are in the public sector. The government and state-owned enterprises should decrease revenue-raising and increase borrowing to finance investments. For example, China's high property prices are based on the investment-fund revenue needs of local governments. If China's property prices were cut by one-third, the national savings rate could decrease by two to three percentage points.
He thinks the market will fall. China leads the world now, but it popped two weeks ago. He sees a possible 4th quarter drop for the U.S. when people see that consumption and employment are not increasing. The result:
Instead of a V-shaped recovery, we may instead get a W curve. A dip next year, although perhaps not statistically deep, could deliver a profound psychological shock. Financial markets are buoyant now because they believe in the government. The second dip would demonstrate the limits of government power. The second dip could send asset prices down -- and keep them down for a long time.
I don't agree with everything Andy Xie writes, as I still lean towards deflation first. Where he sees high oil in the 4th quarter, I expect much lower prices first before inflation kicks in.

I think the psychological hit from another crash is something to anticipate. A lot of people believe the governments and central banks have power, when in reality it is the people who hold the power. It is the herd behavior of the society that drives the economy, in addition to the reality of massive structural imbalances in the economy. There's nothing any President or central banker could do to accelerate the process. The best strategy would be to allow the process to move as quickly as possible, i.e. allow asset prices to plummet so that they reach a bottom, rather than draw out the decline over the course of several years.

Interested in Lithium?

Many hybrid cars use lithium-ion batteries and this has spawned intense interest in lithium as an investment. Most importantly, China is pushing its automakers to move to electric, a topic I covered back in April. I did some quick research and came up with a few names (symbols from Yahoo Finance).

Chemical & Mining Co. of Chile (SQM)
FMC Corporation (FMC)
Admiralty Resources (ADY.AX)
Canada Lithium (CLQ.V)
Western Lithium Canada (WLC.V)
Lithium One (LI.V)
Rodinia Minerals (RM.V)

It clear that investors are late to this party if they're looking for the easy gains. I haven't dug into this sector, but in pure psychological terms, if I was very bullish on the stock market I would expect this sector to attract a lot of speculative activity, while it would be hard hit during another panic. As an investor I would prefer lower prices, but recent gains are partially due to favorable comparisons due to last year's panic. A longer view shows a less extreme move from pre-crash levels.
Most of the more speculative names have risen to new highs, while the diversified SQM and FMC are still off their highs. Whether current levels are attractive is another question, in addition to the question of whether lithium will prove to be part of any winning technology.

About that Chinese bubble...

I posted on this last month.

Here's a picture of the chart I drew, plus the current chart below it:


Comparing Two Crashes

Starting dates of November 13, 1929 and March 6, 2009. A comparison of the rebounds in the 1930 DJIA and 2009 S&P 500. Similar charts are floating around the net, but I wanted to blow it up to get a day-by-day. If this pattern holds, mid-September will be very...interesting.
Note: I cut this chart off at the end of the next drop, which was June 25, 1930. There's a 50+ day rebound right after, and then DJIA went lower on its way to the bottom. This chart has a total of 154 days, but there's well over 600 days until the final bottom in 1932.


July Performance


July %


S&P 500 TR






上海 Shanghai




Entertain. Trends



Green Dragon



Best of Funds



Pharma & Dogs



China Fund



Software Security



Yield to Me



Catch a Falling Knife



Socionomics Alert!

Hollywood Destroys the World
Most of the storytellers say they are reacting to anxiety over real threats in uncertain times: the terrorist attacks of September 11, 2001, two U.S. wars abroad, multiple pandemics, a global financial crisis and new attention to environmental perils. “The Road” even weaves in footage shot during recent disasters, such as Hurricane Katrina, into its scenes of destruction.

“For me, I feel like I live in an apocalyptic world with global warfare, a recession, and resource scarcity,” says Jesse Alexander, writer and executive producer of NBC’s “Day One.”

Studios have scored with the formula before. In 1981, when fear of nuclear war predominated, the post-holocaust action movie “The Road Warrior” became a hit and made Mel Gibson a star.
The article mentions the disaster movies of the 1970s, a decade long slog for the economy with the stock market finally bottoming in 1982. Halloween, Alien, Friday the 13th and Nightmare on Elm Street all were created during this period.