Daily Note – Jumping the Gun

Jumping the gun


US: Verizon see good customer growth,looking to invest in 2014

Australia: CPI surprises to topside – AUD marked up immediately

China: Shanghai Composite Index closes up 2.16%

Eurozone: ZEW investor confidence disappoints for the first time in five months

EZ: Greece wants to move goal posts on bank capital to help fund the gap

Paul Tudor Jones believes US and UK could hike rates sooner than expected. UK unemployment data strong.

Portfolio: Yesterday highlighted positive (and growing) correlation between stocks and USD

Good morning

Imagine you are on top of Jakobshorn, the huge mountain overlooking Davos, where a few years ago, bored by some of the backslapping in the Davos Congress Hall, I went to see an extraordinary snowboarding competition . The boarders are amazing, flying through the air, taking off from massive ramps, twisting turning in the sky at enormous altitude, before landing perfectly.

At this height, you can see the entire town of Davos which is less of a proper town and more of a long main street hugging the river, barracked in on either side by enormous mountains.

Sometimes gaining that bit of altitude is what we need, to disentangle the noise and the din of the daily market.

I notice from the newswires that this year in Davos there is less talk of emerging markets than is usually the case or at least has been the case over the past few years. One of my mates on the ground tells me of former Davos darlings from emerging markets trudging alone up the snow-bound streets, while the frenzy this year turns unambiguously to the tech gizillionaires.

Today let’s spare a thought for the emerging markets, because sometimes the most unloved get to price levels where real bargains emerge. Understanding the cycle also indicated that what is unloved today my well be the Prom queen of tomorrow.

It is now undeniable that the world economy is in the early stage of an upswing led by the US, the UK, Japan and even Germany, which is showing signs of a domestic vitality. After all, the giant current account surplus offers huge domestic spending potential. Indeed, regarding the rich Anglophone world, the major question now is whether they pull the interest rate trigger earlier than expected. Will they jump the gun?

This all means that it is now essential to focus on emerging markets that don’t depend on borrowing US dollars to fund themselves and that will benefit from the rich world’s growth momentum. South Korea comes to mind, at least from a macro perspective. In contrast, because stronger US growth means higher US bond yield, it means bad news for emerging markets with high inflation, high current account countries and short-term external debt. This is problematic for the likes of Brazil and South Africa.

Finally, the developments in China are truly fascinating and have a nasty, near-term feel to them. For those of us who have lived through a banking/credit/property boom to bust roller coaster, the first sign of small defaults are troubling. Like cockroaches in New York City, defaults never come on their own. If you see one, there tends to be many others around, hiding in the dark.

Lets keep our eye on this because there may be a huge opportunity in China, similar to that  which presented itself in the US in late 2008 when the bursting of the credit bubble had run its course.

United States: Verizon see good customer growth and is looking to invest in 2014

US stocks once again finished mixed and rather directionless. That said, and we are only half way through this Q4 earnings reporting week. The mobile phone and broadband provider Verizon caught my eye yesterday. The results were better than expected:

  • Q4 2013 revenues +3.4% to $31.1bn from 2012; EPS $0.66 vs $0.65 exp (adj)
  • Total 2013 rev of $120.6bn +4.1% from 2012; income $32bn +21% after a adjustments to 2012.

Smartphone’s were a big driver behind results as were wireless services but there is good news for investment. The company is looking at between $16-17bn in capex this year – around the same level as 2013 ($16.6bn). It shows that they are willing to carry on investing. This makes a change from some of the cost cutting stories we’ve heard in earnings reports last year.

As regular readers will know, we are expecting a pickup in Capex spending from US corporates this year. Verizon is  possibly an early sign.

Australia: CPI surprises to topside – AUD marked up immediately

Table 1 22 jan

Are we seeing stagflation in Australia? This has been my hunch for a while as rampant credit/housing pushes up domestic inflation at precisely the time when industrial/mining in Australia slows.

This stronger than expected data significantly reduces the chance of further near-term RBA rate cuts. While there may be a good “traditional” case to be made for continued cuts, rising inflation rate is not what the RBA wants. Also the fall in the currency in the recent past is a massive monetary easing in its own right. The most recent fall in the currency (in the past weeks) will further add pressure to inflation.

The most likely response from the RBA at this stage is to leave rates on hold for an extended period of time and watch and wait.

A note from Westpac on CPI numbers contained some interesting points

  • Signs of an impact from the weaker AUD are starting to come through
  • The details revealed a pick-up in the underlying pace in inflation. Remembering that Q4 is normally a softer quarter
  • Significantly, the RBA core measures were much higher than expected
  • For Westpac, the main upside surprises in Q4 came through on the trade side, a 0.7% qtr vs. our forecast for a 0.3%qtr
  • With the local calendar fairly light in the coming days, AUD/USD shorts should be trimmed somewhat, leaving the pair higher, even if bears trim the scope of the rally somewhat. The initial target would be 0.8925/50

Although Wespac are a decent outfit, remember its makes money selling Australia, so any nervousness there should be amplified to those of us with no national patriotism jaundicing our judgements.

We continue to consider longer duration fixed income investments in Australia where short term pick ups in inflation have little impact and where you get a good yield in excess of 4%. We will come back to this for you.

China: Shanghai Composite Index closes up 2.16%

The Shanghai Composite Index (SHCOMP) rallied 2.2 percent to 2,051.75 by the close, the biggest gain since Nov. 18. This bounce  cuts the YTD loss  a little less than 3%.

Money-market rates slid for a second day after the central bank added more than $42 billion to the financial system to meet Lunar New Year money demand. The nation’s markets are closed from Jan. 31 to Feb. 6.

We expect China markets to be volatile ahead of the New Year celebrations, we wait for further clarity before entering any investment. We need to be comfortable when we do enter the investment that we can hold it for a number of months without a high probability of suffering the type of down moves we have seen in recent weeks. China is not for the fainthearted now.

On a separate matter regarding China, I came across a very interesting chart from Reuters yesterday (see below). Have you ever noticed how close the economic data releases are to the “forecast” by economists?  US data with far more predictions and soothsayers is no where near as dependable.

The chart below is the % difference (green line) between reported State GDP number and the combined provincial numbers. This suggests the “big” state reported numbers are off by at least 10% . This seems to suggest the state reported numbers are suspect at least.

Figure 1. Behind a Chinese Wall? 

Chart 1 22 jan

Eurozone: IMF sees 10-20% chance of deflation in the Eurozone, expecting 1% GDP growth in 2014

European growth will hit the lofty heights of 1% in 2014 says the IMF, moving up to 1.4% in 2015.

The Fund contends that any recovery will be uneven and growth will be “more modest” in stressed countries

Individually the major EZ economies are estimated as follows:

Table 2 22 jan

The fund cites low inflation as one of the biggest risks to activity, particularly in Europe. It dares to mention the “D” word, something that won’t go down well at the ECB. It is interesting, since last summer, despite the IMF’s continued involvement in the various agreed bailouts (as part of the Trokia) it is growing further and further from the EZ and its leadership at the ECB/EU.

While the distancing relationship is primarily down to a disagreement regarding how much of a debt write down should be taken by bailout countries, it is interesting that they would make “deflation” such a large proportion of their EZ presentation.

Given the ECB have not dared to use the word, it now elevates deflation on the IMF’s “what are we scared about” scale quite considerably. Remember fears about deflation can turn into actual deflation very quickly. But we have been saying that for a long time. See an early Punk Economics on the general topic from January 2012.

Just finally on the IMF, I am a little bemused with the 90bps growth target for France this year in light of the “austerity” announced last week by Hollande and the poor data over the last few weeks. It seems that maybe the only thing going for France at the moment is the fact that the IMF is run by a French lawyer/manager.

Eurozone: ZEW investor confidence disappoints for the first time in five months

Table 3 22 jan

This is the first sign of some weakness in the “sentiment” numbers for the core Eurozone in some time. Remember ZEW is an survey of “investors” so tends to track stock market performance more than economics. I still think that the outlook in Germany is likely to remain very robust this year.

Eurozone:  Greece wants to move the goal posts on bank capital to help fund the gap

Reuters story out yesterday afternoon (it got very little coverage implying possibly too much market complacency) saying that Greece is in talks with the Troika to agree to a lower capital ratio for its banks in the stress tests.

According to “sources” the funding gap between the capital the Greek banks have and the capital they may be forced to raise could surpass €14bn. It was previously forecast at somewhere between €2-10bn (as we used to say on the floor, that’s a big enough quote to “drive a bus through” and therefore has no real validity).

Currently the capital adequacy ratio (core tier 1) has been set at 9% for Greek banks compared to the 8% for other European banks.

Here’s what the Greeks are saying:

“In a best-case scenario, we want to use the remaining HFSF funds (for the sovereign) and to roll over 4.5 billion euros ($6.10 billion) of bonds given to banks. If we do this, we will minimise or eliminate the funding gap.” a senior finance ministry official told Reuters.

Sources also state that the Eurogroup won’t urge the Troika to ease its stance on Greece because of its fear of “me too” deals for other peripheral banks.

The stress tests are the big event in Europe over the next few months and everything that happens from the monetary policy perspective in the EZ needs to be seen through this fragile bank balance sheet prism.

Paul Tudor Jones believes US and UK could hike rates sooner than expected, Canada could surprise

It’s always interesting to gear what the big players are saying and overnight billionaire macro hedge fund manager Paul Tudor Jones said that 2014 will be a year of major contrasts at central banks. This was in a  note dated Jan 15 obtained by Bloomberg yesterday.

The note written by the fund’s investment management team said the UK and US could hike rates earlier than expected; while the ECB could lower rates this year. The note also says the RBNZ could raise rates in March (which I agree with) and that the BOE could hike as early as in the fourth quarter.

This morning we just got news that, the unemployment rate in Britain fell to 7.1% from 7.3% substantiating this notion that the UK will hike rates early .

Portfolio: Yesterday highlighted positive (and growing) correlation between stocks and USD

While some people think that the work involved in investment management ends at the point where the investment is in place in the portfolio, we take a rather different view.We continue to “worry” about the investment thesis behind each of our ideas till the point they leave the portfolio, hopefully in profit.

Therefore, correlations are important to us. How do each market move relative to others? Are old correlations breaking down? Are new ones forming?

In recent months the traditional correlation between strong USD and weak risk has now reversed. The old risk-on/risk-off pattern is fading. In the past month, the positive correlation between USD/JPY and the S&P 500 has strengthened. The 0.829 daily correlation over the past month, compares to the average of 0.332 in 2013.

What this tells us more than anything, is that by and large being long the USD against the Yen particularly (and also the Euro) is very much a “risk on” investment. This is something investors need to bear in mind if and when the stock market corrects.

Table 4 22 jan

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Global Macro 360 Daily Note- Jumping the Gun





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