Bill,
I believe some pretty important developments are occurring in China right now. I'm sure you've heard of some of them but I'll try to reorganize the events and add a bit of my commentary.
China does appear to be shifting to a tighter monetary policy. Last year, around Christmas, China enacted certain policies attempting to cool the real estate market.
Jan. 8 to Slow Growth, China Raises an Interest Rate (http://www.nytimes.com/2010/01/08/business/global/08chinaecon.html?ref=b...) Referring to Chinese central bank raising rates on its 3 month central bank notes. A further increase last week.
Raising the reserve requirement ratio by 0.5% on Jan12. (http://news.xinhuanet.com/english/2010-01/12/content_12797931.htm)
I suppose this may signal a shift towards a tightening monetary policy, which is quite timely I believe. Out of over 1600 stocks traded on the Shanghai and Shenzhen exchanges, only around 70 have a P/E under 20, barely 200 under 30, and around 600 under 50. While it may be logical to put a premium on growth stocks, many of these stocks do not fit in such a category. It is imperative for many of them to see sizable discounts in their price sooner or later.
However, so far the official attitude has basically been ambivalent. They probably do not want the markets to collapse immediately; instead they will try to let the air out of the balloon slowly, which will probably mean more volatility in the future, as there is bad news on one day and good news the next.
Shanghai Stock Index will probably fall less and slower due to the fact that many large caps listed on the Shanghai Stock Exchange are trading at low valuations and probably won't crash. For example, Industrial Commercial Bank of China, which has a market capitalization near $180 billion, has a P/E of around 12. Assuming that its bad debts are fairly limited in size, it does not appear to be much overvalued.
Concerning the issue of whether there is a bubble in Chinese property markets, I believe that a bubble does exist in real estate in many large cities in China. However, I believe the impact of a large fall (say 30%) in real estate prices in Shanghai, Shenzhen, etc, will not be apocalyptic as so many here say. Economic growth will likely slow without real estate driving up demand for all sorts of other goods, but this will likely be good for the long term, as such growth will be more sustainable.
Last year, about 2 trillion yuan worth of new loans entered the real estate market. This estimate may somewhat discount reality as some non-real estate firms may have borrowed money and then plowed it into speculation on properties. But nevertheless, only 900 billion of that were individual mortgages. Most of these mortgages were probably taken on by middle class families. Assuming a 50% drop in price, and a 20% default rate, the banks will probably lose no more than 100-200 billion yuan from the mortgage loans made in 2009. The bubble in real estate has mostly been in motion in the past 5 or 6 years, and thus the worst case scenario for mortgage defaults does not appear to be that bad. There will probably be many personal bankruptcies and stories of tragedy when the real estate market does turn; however, this situation in itself is unlikely to cause a crisis.
Many of the leading housing construction firms have borrowed large amounts to fund expansion in their production. Some of them had negative cash-flow even during 2007 when the market was excessively rosy. They may be seriously impacted by a downturn in the property market. It is probable that the housing construction firms will reach some sort of pact with the authorities and be allowed to earn their way back, which is possible due to good growth prospects for demand for housing in China.. Widespread bankruptcies across the industry will be damaging to the banks and to employment and will probably not occur.
It is more likely that a slowdown in the property market may cause a shift in the general sentiment and a slowdown in the economy in general. This is likely to happen in the future; it is just too hard to time it, but in any case I strongly doubt that a "collapse" will take place.
To sum up, what we do know now is that:
1) Real estate prices in large cities in China are probably overvalued
2) Stock prices are probably overvalued
3) China is probably shifting to a more tightening stance
4) There is probably going to be some shifts and changes and we'll see which economies are swimming without bathing suits as the tide of money recedes.
By the way, FYI China has agreed to allow stock index futures to be traded, and the actual trading is expected to begin this year. Margin trading is on the agenda as well. Some believe this may act as a check on future bubbles with short selling. We shall see.
Sincerely,
/Shanghai Fly
[The Cara Community eyes and ears in China is a university student who writes when he can, and as long as gmail is available. He may not be Goldman Sachs or Morgan Stanley, but he is intellectually curious, independent and honest, which is precisely what the world needs today. Thank you SF.]
Comments
University Students
The smartest analyst I ever hired was an MBA grad from Texas Christian U.
Thanks Fly. I appreciate your objectivity and curiousity. You will go far...
NEW YORK TIMES
Banks May Get Help to Escape Risk Limits
By LOUISE STORY and ERIC DASH
Published: January 22, 2010
Only a year after the government stepped in to aid Goldman Sachs and Morgan Stanley by granting them access to the federal safety net, policy makers are developing an exit path that would allow them and others to escape limits on banks being proposed by the Obama administration.
President Obama wants to limit the scope of risk-taking by barring banks with federally insured deposits from trading securities for their own accounts and from owning hedge funds and private equity funds. The plan, policy makers said on Friday, would effectively require bank holding companies — which Goldman and Morgan became at the height of the financial crisis — to divest themselves of these lucrative operations.
But Treasury Department officials are also seeking to give banks that do not like the proposed rules the option of dropping their status as holding companies to keep their trading and other investment businesses.
The move is likely to turn the spotlight on Goldman, which could be one of the biggest potential beneficiaries because it makes sizable profits from proprietary trading and runs many private equity and hedge funds. Goldman traders are known for taking large trading positions, even as they manage trades for clients.
It is less clear that Morgan Stanley would consider such a step, because it has aggressively raised deposits and reduced trading operations since its big losses during the crisis.
Officials from each bank declined to comment on Friday.
Allowing Goldman, or other institutions, to abandon their bank charters carries risks. Such a plan could create a two-tier system, where Goldman could pursue business activities different from its bailed-out peers like JPMorgan Chase. Goldman would lose access to the Federal Reserve’s overnight lending program, which provides emergency financing. But investors may still assume that the government would bail out Goldman if it had trouble, elevating the risk of moral hazard.
Simon Johnson, a former chief economist at the International Monetary Fund, said allowing either bank to revert to a securities firm would do little to address the underlying problem. They are so large and interconnected that a collapse would imperil the global financial system, he said.
“You can call them an investment bank, a hedge fund, or a banana, but they are still too big to fail,” Mr. Johnson said.
Andrew Williams, a Treasury spokesman, confirmed that the proposal would allow the banks to reverse their decision to become bank holding companies. But he said the Fed would still closely regulate companies like Goldman because they would still be systemically important.
“There is no escape hatch,” he said. “There is nowhere to hide. Large, interconnected, highly leveraged financial firms must be regulated on a comprehensive, consolidated basis, the same as those for big firms who run banks.”
While bank holding company status is generally permanent, investors have speculated for months that Goldman might seek a way to unshackle itself from some of the additional government regulation that goes with it.
Goldman officials have said privately it would like to shed its holding company status, although they have stated publicly that they do not plan to change the company’s charter. On Thursday, David A. Viniar, the bank’s chief financial officer, said the topic was not under discussion.
“I just think it’s unrealistic,” Mr. Viniar said in a call with reporters. “I think we’re living in a world where basically every major financial institution is going to be regulated by the Fed.”
But Goldman could change its tune if the Treasury created guidelines for banks to shed their holding company status.
The first step for Goldman would be to dispose of its debt, which is backed by the government, or wait until it expires in about two years, the person with knowledge of the plan said.
In addition to the federal bailout, the government agreed that the Federal Deposit Insurance Corporation would back some bank debt issued when the markets were frozen and banks could not otherwise raise money. Goldman has issued $21 billion of the debt.
The Treasury will include the exit strategy in the legislative proposal it is preparing to send to Congress, Mr. Williams said. Lawmakers could make significant changes to the proposal.
The plan does not now clarify what proprietary trading activities would be limited. Officials said banks would not be permitted to use their own capital for “trading unrelated to serving customers.” They also said that the rules would require banks that own hedge funds and private equity funds to dispose of them over several years.
Mr. Obama called the ban on trading “the Volcker Rule,” in recognition of the former Fed chairman, Paul A. Volcker, who has championed the proposal to prohibit bank holding companies from owning, investing in or sponsoring hedge funds or private equity funds and from engaging in proprietary trading. Big losses by banks in the trading of financial securities helped fuel the credit crisis in 2008.
1st stop following a China tightening - Australian GDP
Doing my usual wandering around the net after reading Shanghai Fly - from noted Australian economist Steve Keen:
"On another note, I have written a feature for the April issue of Dissent (Number 32, Autumn 2010), discussing the usual vexed issue of Australian house prices. As part of it I gave my perspective on why Australia has to date come through the GFC so well, and one aspect of that was being on the receiving end of largess from China’s stimulus.
I noted however that China’s largess may be coming to an end:
China’s stimulus included a lending frenzy that only China could have inspired, since while finance in The West is largely an independent force to which governments kowtow, China is still fundamentally a command society: the best guarantee against criticism when things go wrong is to be able to prove that you carried out instructions to the letter and beyond.
I well remember a tour of China I organized for Australian journalists in 1979, just after the fall of the Gang of Four. An anomalous pair of statistics had turned up just before the tour began: Chinese light industry output had risen 17%, but heavy industry had fallen by 7%: how could these two contradictory things happen, our party of largely economic journalists wondered?
We got our answer from a meeting with the Mayor of Shanghai and an official whose title was the “Economic Boss” of Shanghai: the Central Committee of the Communist Party of China had issued a directive to “promote light industry”. So what did they do?
“We stripped heavy industry factories and turned them into light industry”.
In China, if a communist party official tells a bank to lend, it lends. Chinese lending rose 95% in 2009 over 2008 levels, boosting its money supply by over 27%. That has undoubtedly caused unintended consequences that the Chinese government may well now seek to reverse—and its recent decision to increase the reserve ratio is a sign that this reversal may already be in train. If so, our Chinese largess could dry up just as suddenly as it began.
And today we learn that China has instructed its banks to stop lending…"
http://www.debtdeflation.com/blogs/
If you click on the third video under Keen's "Talk@Google" segment of his blog he provides a rational for deflation that I've personally become interested in getting a handle on as our min. lock up period on our variable mortgage finishes in October. He suggests deflation because the 1 trillion added to the money supply is not enough to pay interest on the debt accrued - 25 trillion is what is needed to stoke inflation but would be suicide to any pretense of economic credibility. Google folk are asking the right questions, you may enjoy hearing the discussion in full.
Re: 1st stop following a China tightening - Australian GDP
Les,
"China is still fundamentally a command society..."
“We stripped heavy industry factories and turned them into light industry”.
Looks like in the US we are seeing a "Command Society" — With a few title (GS is a bank)and rule changes here and there (FASB moratorium) banks become "profitable" (toxic assets have full value) the Fed is "making profit for us" and "the recession is over".
Now, everyone just shut up and be happy!
Riiiight :-(
Bigwad 1, Les,
Bigwad 1, Les,
Interesting connection between your two posts.
----------------
“You can call them an investment bank, a hedge fund, or a banana, but they are still too big to fail,” Mr. Johnson said.
“We stripped heavy industry factories and turned them into light industry”.
----------------
BS by any other name will smell as bad.
AT&T and the Bell System were broken up. With real commitment the same could be done to Goldman and the other "Too-Bigs".
I doubt we will get more than an Obama-boosting-sound-bite out of this latest pledge.
Re: Bigwad 1, Les,
grym,
I agree. The most important sentence in the article is: "But investors may still assume that the government would bail out Goldman if it had trouble, elevating the risk of moral hazard." In other words, there is no reform. It sounds to me like this is a scheme that was sent to Goldman Sachs for approval before it was made public, or perhaps Goldman is the author of the scheme.
Looking at a very simple chart, and comparing volumes,
and money flow, Buffett and Goldman had it right at $ 115/pps... I don't see why it can't retrace back toward $ 118 - $ 127 over the next year.. http://finance.yahoo.com/echarts?s=GS#chart1:symbo...
Conference notes
Back from the conference, some first comments - by no means full, there is much more to say about the people, content and organization.
To those who attended - it was great to meet you all. Just as at the first conference, it was amazing how people immediately bonded and felt quite at home. It was also great to see a few familiar faces from the last year. Team was fantastic as always, and it was good to meet some of those who couldn't attend last time. Too bad Pascal didn't make it this year though.
To those who couldn't come this year, hope you make it next time. It's really a great experience. I started posting some shots at http://www.realitytrader.com/photography/, just to give an idea of what the surrounding looked like. Will add more later on, and a slideshow will give much fuller idea.
One of the most interesting moments for me personally was live trading day on Wed. It's always a challenge - for 2 reasons mostly. One is pure technological limitation, necessity to operate with one monitor instead of four - so have to squeeze a scanner, newsfeed and trading software in one screen and cut trading software down in capability to a single open position at a time. Another is, there is always a danger to run into boring day when nothing happens - imagine sitting for hours doing nothing while audience looks on!
So it went like this. Morning started with three winning trades in a quick succession. First was a short on CAT, which happened so quickly that I had to pause, get back and show what just occurred. Then we went long CYTX, closed it for profit, re-shorted CAT and covered for a profit as well. In between those trades we identified two more setups, defined their structure (trigger, stops and target) but missed actual executions on them while being busy with other trades developing (limitation of a single screen). Both of those worked like charm as well. Then as day progressed, activity all but ceased. I really didn't want to sit for hours doing nothing so, considering that main purpose of the trading session was to demonstrate the principles, strategies and setups discussed the day before, I warned that the next few trades were to be the ones that normally I wouldn't be taking. Their purpose was to show how to place a stop, how to manage a trade as it develops, how to trail stop, how to partial etc. With couple of those we returned some of earlier profits into the market, applying stops in a disciplined orderly fashion.
I have to say, it was a great fun. On a theory day you show all the ideas and setups that create your trading system - and then you have this chance to show how you apply them in reality. While market was not at its most active (too much of the move was in the gap), it still gave quite enough opportunities to show practical applications. It's so neat to see how those same chart formations and methods of using them that we discussed a day before shape up real time and turn into actual trades. I hope all in attendance enjoyed it and found it useful. Oh, and we had a chance to talk to our screens, trying to tell our open positions what to do. Good thing no psychiatrists were present.
Attached photo is taken premarket while we were surfing over the active stocks; MS is on the screen.
The big player...?
I think China is being pretty sensible. Actually it seems to be one of the few countries that has been acting responsible in these harsh economic times. All across the board. Their currency policy is sound too. It will be interesting to see how all this will effect the global economy in the long term.
Re: Conference notes
Glad everyone is safely back... Everything looked and sounds so very, very nice.. wanted to come, but had a few issues... hope to make the next one.. Missed everyone's input... Thanks for everything that all of you guys do for the community and its spirit.
Re: Conference notes
Love the pre-market pic :)
the projector is propped on top of a Graham Beck wine box. And the box is probably empty at the time of this photo.
Re: Conference notes
"Probably"??
As if there was really any room for doubts (Grin)
Sector ETFs chart
Not that it adds much to Bill's WIR, which I look forward to reading each week, sometimes I like to graph some of the information provided in the WIR. Great WIR by the way--always an education to read.
In this case, I was curious about which sectors were performing better or worse since the January top around 8 Jan to 10 Jan, so I ran a Stockcharts performance graph (this is easily read from the two-week column of the sector ETF summary in the WIR). I realized all the squiggly lines in the Stockcharts default performance chart were not doing much for me so I switched to a bar chart. Consumer and Healthcare were the least effected by the downturn, Telcom, Tech, Energy, and Financial the worst. So if we do have a crash, I'm guessing these would fall the hardest.
By the way, if you look at Stockcharts performance charts, they offer quite a well rounded selection, including such things as biotechs and solars. I don't find their market carpets very helpful, but I would love to see market carpets for the various ETFs in the WIR, whether they be foreign or domestic. I don't see that Stockcharts offers self-selected market carpets, however.
Welcome back to all those who made it to the Bahamas--I'm green with envy!
2009 was one of the warmer years on record
An aspect of global warming I didn't fully comprehend was brought to my attention. That is that the United States gets water dumped all over it, especially the drier spots we are witnessing now in California. Australia just dries up and given that El Nino returned in 2009, wheat could be an interesting long on any pullback in commodities. The appropriate ETF would be DBA, if I remember correctly. Whether the heat persists into planting season is obviously pertinent to outcomes.
http://www.noaanews.noaa.gov/stories2010/20100121_...
http://www.noaanews.noaa.gov/stories2009/20090709_...
Sentiment Indicator at the extreme end of spectrum
http://www.sentimentrader.com/
futures looking to a bounce today.
European vehicle manufacturer Fiat showing how depressed business spending is in Europe. Scrapping incentives boosted retail sales but it wasn't sufficient to keep the group in the green.
http://finance.yahoo.com/news/Fiat-reports-4Q-loss...
consumer price deflation, come on dooown!
Fear factor.... Bernanke to big to fail.....
that's the agenda being pushed by the zombies on CNBC now... " who's going to replace him " they ask... How about ANYONE not connected with Goldman.. that's a damn good start..
Cara 100 Ratings Changes
Good morning.
SLB - Upgraded to Overweight @ FBR. PT Raised from $85 to $96
SLB - Downgraded to Sell @ Argus
Re: Fear factor.... Bernanke to big to fail.....
How about Elizabeth Warren??!! She has been on target as far as the dealings have been concerned. I don't think she is connected with HB&B and my only issue is she is a professor at Harvard, Larry Summers old school.
Class Warfare
Banksters against the diminishing middle class...Bernanke argues that Social Security a problem...but bailouts are not. The most powerful forces align to try to rescue him.
Re: Fear factor.... Bernanke to big to fail.....
Warren is good.... but I am thinking total abolishment of the Fed... why dick around... The policy of " baby steps " does no good for anyone that is truly being affected ( middle-class and lower )... Instead of the " To Big to Fail ", how about " No Pain No Gain "....
Some trial results and FDA decisions coming up 1 st/ Qt.
on a few smaller Bio's....
Freeport
I just finished reading WIR and Vad's comments. It was great to meet the bloggers like Bill, Vad, kaimu who we get to know here, and those who aren't so known like traders Geoff and Options specialist Patrick, and Chris Start. Patrick's presentation was lucid and informative for those who wanted to learn more about options. Chris Start is valuable as a mining analyst, given 20+ years working on mining processes on and in the ground, he is a cut above your everyday suited analyst; He is currently working on constructikon of the boddington mine in Aus, a $3B project of NEM. The way he presented his stock picks was comprehensive and easily understandable. The trading in real time with Vad was amazing and future conferences will do more of this.
Add to all of this the great people who showed up, all who read and benefit from the blog. It was great to get to know, be with you all in sessions, and over meals. You all had something to contribute. Thanks all for showing up and making it a great week for me. I hope you will all add to the reservoir of what was learned, by posting your reflections here. Thanks Bill, it was a huge effort on your part and to see that you are grounded by a great family and outlaws around you is inspiring.
Cara 100 Update (Final)
AAPL - Hapoalim Initiates with an Outperform
BA - estimate boosted at Barclays. BA 2009 EPS estimate raised to $1.35 from $1.20, 2010 maintained at $4.40. Reiterate Overweight rating and $65 price target.
BMY - estimates changed at Barclays. Barclays 2009 EPS estimate reduced to $1.79 from $2.03, 2010 raised to $2.21 from $2.19. Reiterate Overweight rating and $26 price target.
MCD - target, estimates higher at BofA/Merrill. MCD price target increased to $70 from $67. 2010 and 2011 EPS estimate raised to $4.40 and $4.87, respectively. Buy rating
MCD - estimates, target increased at Government Sachs. MCD estimates were boosted through 2011. Company is seeing better comps sales and margins. Buy rating and new $73 price target
SAP - upgraded at BofA/Merrill to Buy from Neutral on a recovery in corporate IT spending. Price target raised to $40 from $38.
SLB - estimates, target raised at UBS. Shares of SLB now seen reaching $90. Estimates also boosted, to reflect strong oilfield reserve results. Buy rating.
Re: Fear factor.... Bernanke to big to fail.....
Bigmother, Baz22,
Orin Hatch says he's afraid of who might replace Bernanke — the devil you know approach?
My view who could be any worse and how?
Get rid of the Fed is still the best answer. If the markets tank, so be it. Whatever it takes to get real is fine with me.
As for Obama's recent comments or whatever he may say in the State of the Union, forgeddaboutit! This guy has no concept of truth, only what sounds good at the moment. He is a pure Chicago political product and no more respectable than those associates he conveniently forgets he ever knew when their usefulness is done.
He would throw his grandma under the bus if it helped his career.
The Banks
Should this segregation of banks and hedge fund activities take hold, I would think GS would do fine, BAC will have problems, and C should do better than BAC on a relative basis.
IMMR
looking to get back in after a 10% drop. Near term support is at the 50 DMA...just below the current price.
Re: The Banks
team
There are no guarantees that C is going to stay C, in my opinion.
Unfortunately with HB&B accounting rules thrown out the window and no SEC to enforce any type of accounting corruption...You can personally thank hank paulson for limiting regulation on corrupt accounting.
Mr Obama can give all the speeches he wants and nothing is going to change the gates that are in place on the working peoples 401k's giving control back to the owners of the 401k's, instead of the firm grip of HB&B.
What's to keep C independent of a complete take over by the Fed? The people already own 32% of C through preferred equity, and the people are now owned by the FED.
Those banksters that were to "diverse to fail", should have failed last year. The worst case scenario we would of had a one class society instead of the three class society that we have now. Most of the upper class would have starved to death because they wouldn't have enough money to under pay someone to cook for them, and the middle and lower class would have carried on just like nothing happened.
Instead, Paulson slithered into the treasury and stole money from the working people and bailed out the banks, now we'll end up with a two class society....the middle working class will soon join the poor class, and the upper class will still be to "diverse to fail."
Hope everyone adjusts to their new identity, I'm sure the upper class will party on with out a moments pause!
What's left in your 401k? HA
AAPL about to resume trading
looking at QQQQ after hours and intel, the aapl accounting/revenue recognition changes dont seem to be welcomed.
Cara Conference
Thank you to Bill and all of the Cara associates for a successful conference in the Bahamas last week.
There was something for everyone at the event. The time consuming task of scheduling and preparing interesting topics , classes and events was evident. The facilities and activities were very nice and the company was outstanding.
I will definitely try and attend the next conference.