September Song

Tue, 2015/09/01 - 12:41pm | Your editor

The September Song so far is only marginally sweeter than the music of late August. There are a few reasons for hope, however. Rather than crashing while most of the northern hemisphere is on vacation, the latest stock drops occur after what the French call la rentrée when some poor children already have returned to school and others are about to hit the books.

Another new factor is that despite panic selling, some stocks are going up, even ones from emerging markets, usually for company-specific reasons. Discrimination means that analysts are sifting through the rubble looking for buy ideas. That is better than the cry to sell anything that moves.


Our India reporter is sounding more bullish than me despite the sinking valuations of shares on the Bombay Stock Exchange. He writes:

Things are set to get better from economic drivers triggered by Modi's governance—if he can stick to his guns. India's central bank is holding a review this week and an interest rate cut is widely expected. ”A Fed cut would also be positive.

The loadoff from China has to go somewhere and in the current market correction, the good long-terms prospects of Indian markets appeals. But for foreign investors, there is risk from a falling rupee.”


While portfolio investors have been exiting India this summer, direct investment from companies aiming to produce there have been rising sharply from a low base. That adds to the need for reform in land use laws. More on this below for paid subscribers.


China's selloff continues after a negative official purchasing managers index number came in for August at 49.7%. Any level below 50% means negative growth. While the official number is mistrusted, it has some link to the real economy. So Shanghai fell 1.23% today. Chinese markets will be closed for the VJ celebration Thursday and Friday. And Monday will see the US feting Labor Day this week and the Jewish New Year next Monday and Tuesday. So market may have problems finding an overall movement.


More for paid subscribers from Switzerland, Ireland, Finland, India, Israel, Britain, Colombia, South Africa, Hong Kong, Panama, and Mexico.

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Our Benitec Advisory

Mon, 2015/08/31 - 3:22pm | Your editor

After its ipo on Nasdaq and a new annual report for FY 2014-5 (to end June), I have updated our special report on Benitec Biopharma, BNTC. It is free to paid subscribers and available for sale to non-subscribers. Visit to get special reports.

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Two Canals for Black Monday II

Mon, 2015/08/31 - 12:29pm | Your editor

Another Black Monday is upon us, and again the trigger appears to have come from China. I can make one fearless forecast. It will not happen again next week as US markets will be shut for Labor Day.

The revelations were published in The Financial Times this morning, but already dispersed via Internet yesterday: China will stop intervening to support its homeland stock markets.

What really is worrying is that the Hu Jinping government will crack down on “rumor-mongers” who allegedly push down shares and destabilize markets. About 200 of these miscreants have been arrested among them a reporter from the local business website Caijin. Shanghai closed August down ~12.5%.

Adding to concern about China, Goldman Sachs this morning revised downwards its forecasts for growth there over the next 3 years: 6.4% this year; 6.1% in 2016; and 5.8% in 2017. Read more »

Back To Updating on Sunday

Sun, 2015/08/30 - 1:07pm | Your editor

Greetings from New York where I am back again. I just updated our tables which (with a few exceptions) show the benefits of diversification by sector and by country or currency. It would have been far worse if I was just into the Dow-Jones Industrial Average or the S&P 500.

That doesn't mean I like Vanguard or SPY trackers for my stock holdings. I think that makes you vulnerable to market panics like we saw last week, and in fact I think it was holders of tracking funds like these which caused the crash a week ago tomorrow.

Moreover I do not think the alternative of actively-managed Exchange-Trade Fund is appealing. In The Journal of Index Investing which just came out, A. Seddik Mesiani calls this variant "a cottage industry" launched the last time the markets overall had the vapours, in 2008. Mesiani notes that because of transparency rules, outside the bond universe, the managed ETFs never took off.


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Flying Off the Shelves

Thu, 2015/08/27 - 10:49am | Your editor

The markets recovered strongly Wednesday as my son had predicted Monday morning. The Teddy Bears' picnic results ere boosted by intimations that the Fed would hold off on a rate hike next month. Then this morning the Chinese finally figured out how to intervene to boost their local stock markets, at least until the next round of selling begins, whenever that will be. Then too US gross domestic product forecasts came in with nice numbers. GDP is what the US economy produces for domestic consumption, excluding exports. Exports have been rotten because of the strong dollar, so this number tends to boost confidence in US growth more than gross national product or GNP.

Also the latest US unemployment numbers look good. While levels were expected to hit 274 mn in fact the unemployment applications came in at 271 mn.

The unfortunate fact that all these metrics are part of our US red, white, and blue economy or the Middle Kingdom's market interventions, have not stopped the rest of the other stock markets in the world from a bout of bullishness today. In fact in Europe and Britain stocks are flying off the shelves.


I am amazed that nobody responded to my screed yesterday defending Hillary Clinton's e-mail security clearance lapses. I guess my insight that her secret sharing was with husband Bill Clinton was widely shared, and everyone knows that the attacks on her are politically motivated rather than having to do with spies.


More for paid subscribers today from Mexico, Brazil, Ireland, The Netherlands, Israel, Denmark, plus a couple of reports although nothing like the Thursday pileups earlier in the summer.

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Teddy Bear Picnic Day

Wed, 2015/08/26 - 9:26am | Your editor

While I am not wildly keen on Candidate Clinton II, I think the focus on her personal e-mail account while she was Secretary of State is a red herring. Hillary Clinton took paperwork home from the office, not in itself a crime, and if some documents were unclearly marked “high security” she may have been unaware or careless. But thinking about her household, it is hard to believe that she shared this stuff with anyone other than ex-President William Jefferson Clinton, her husband, whose security clearance probably was as high as her own.

Ultimately, I think the worst that Hillary can be charged with is failure to act without seeking his counsel in the tough world of foreign affairs, despite his weakness over other affairs in the course of their marriage. Naturally she would prefer to pretend that she is superwoman and acts entirely on her own with no help from anyone, but apart from Donald Trump I don't think any of the candidates from either party pretends to omniscience.

So Hillary should admit that she sought Bill's help and end the whole imbroglio.

Today is the day the teddy bears and big players fly back to work to resolve the US stock market plunge, according to my son the CFA's forecast. In pre-trading there seems to be some upward trending by Wall Street but of course the place has been pretty volatile of late. So I am not forecasting anything.


We always sell too soon. Paddy Power plc, the Irish bookie stock, is on a roll after reporting good earnings (bookie results to some extent depend on whether the races favor the favorites, in which case they earn more than if an outrider hits the winners' circle.) PDYPF is also up because it is buying a rival mostly-Internet bookie firm, Betfair, which it will control.


More for paid subscribers from Israel, The Netherlands, Finland, South Korea, India, Colombia, Britain, France, Australia, Russia, Argentina, and Brazil before I go to the beach for a picnic at the oceanside in the National Park. We are in Eastham which offers 3 ways to swim: bay, beach, or very large calm pond.

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Mon, 2015/08/24 - 10:49am | Your editor

About the only thing worse than the stock market is the weather in our vacation haven, Cape Cod, which is why you are getting a blog right after the opening of the Wall St. horror-show today.

A message to the simplistic among you: the widest spreads at the opening after the Chinese market collapse were not in individual shares, but in exchange-traded funds. They are the simplest way to invest, adopted by people who cannot be bothered to do anything else. But it only works if you don't look at the stock tables.

After worrying about their one-decision single ETF portfolios over the weekend, these investors simply gave sell orders this morning, and their brokers are selling as told, without any limits. The bid-ask spreads on ETFs are vicious, in some cases in triple-digit percentage points.

Just say no. Do not trade.

While of course I am affected by the global price drop, I think I should mention that as of now my largest losses today are in AT&T and GE. That is the stuff our US ETFs are exiting.

The gap will feed further into the prices of individual stocks over the course of the day. Right now, with the usual press-generated focus on the prices of Apple and Alibaba and biotechs, the worst selling has been in techs and biotechs. My secret theory is that the Wall Street watchers just start at the top of the alphabet looking for a subject to scare their audience with, and therefore A's and B's get hit harder than Z's.

In a disordered panic market—like today's—never give an order without a price limit. From AAPL and BABA the selloff has spread to high-yield telcos and from there to utes. From cancer and Alzheimer cures the rot has infected large pharma shares. From oil sands and other pricey non-viable energy sources the panic has hit alternative energy stocks hard.

Panics are dangerous. That also goes for buying. Until the vacationing fund managers and gurus notice the sinkhole that stocks have fallen into and helicopter back from their holiday homes (or set up a secure Internet connection to their yachts), the rout can continue. My son the certified financial analyst, who bicycled over just now from the big house with one of the grandkids, figures it might take till Wednesday before the reversal takes place. Whether it will hold is another matter. But there will be an attempt to support the markets. That's what you do in a panic.

China desperately rushed rules through its bureaucracy over the weekend to allow state pension plans to invest half their money in stocks. It failed to stop the sell-off in Shanghai today, which spread like wildfire around the globe. Other market support measures like new limits on shorting shares and other plunge protection operations failed to keep the rot from spreading.

More for paid subscribers from Australia to Canada, from Taiwan to South Korea, from Brazil west and north in Latin America.

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Sunday Update Delayed

Sun, 2015/08/23 - 9:30am | Your editor

Greetings from rainy, damp, and humid Cape Cod. Little wonder that the Pilgrims moved on from First Encounter Beach, off which I may swim today if the weather clears, and hastened on to Plymouth. But one big piece of good news: our son bicycled off this morning to a local bakery and brought back the best croissants I have eaten since I last visited Paris.

I had hoped that the Tel Aviv stock exchange, which is closed on Fridays but open on Sundays, might be a harbinger of better share prices this week. But its shares fell even more than Wall Street had, affected also by lower growth in Israel last month. The slaughter is likely to continue.

I am not going to update our tables, not because I am hiding the bad news, but because I am using a feeble cable network and links are ssllooww here. Of course in the dead of winter when there are all of 12 people around the Internet is whizzy fast, but this is the Season.

More for paid subscribers below:

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Markets Sinking

Fri, 2015/08/21 - 1:37pm | Your editor

A year ago my check account was hacked and I had to open a new account at the same bank. This required hours of work to transfer automatic debits and payments to the new account. Now despite having filed out the forms required to move my US Treasury bond interest payments the the new account, it turns out that this did not apply to the proceeds of a bond maturing. Only Uncle Sam in its search for more work for hillbillies in West Virginia could have split the payment of interest from the repayment of principal.

So today's blog is late because four US T-bonds matured and I had to get a bank official to sign off on the forms I downloaded. My personal bank whose branch is closing refused to do guarantee the signature and I had to hit Chase, the bank my company uses. Otherwise I would have had to trek to near the NY Public Library where my bank relationship manager has an office.

As I keep saying, I want to go back to the 20th century.

The stock market is being crushed. This is all the fault of China. But I am not sure I agree with analysts like Michael Kurtz (of Nomura) whom I quoted at length yesterday, about why China unpegged its currency from ours. I do not think an experiment in free-market exchange rates or “monetary autonomy” is being imposed by Beijing. Freeing up the financial system is not really possible in a country where the government props up the stock market, and where the state-owned banking system is a mechanism for financing state owned enterprises. Together they make investments without economic sense, but which are required to retain traditional political control for the Communist regime and its satraps, Mandarins, and rent-seekers. That many of these actors are corrupt comes with the territory.

Back in 2005, there were good reasons for China to link its renminbi or yuan to the US$. First of all there was a trade surplus China wants to invest abroad, and it bought US T-bonds just like I did. Then it wanted to stabilize the prices for its necessary imports, notably petroleum, but also metals, which are normally priced in US dollars. Then too it wanted to keep its export businesses humming, which was a lot easier if it could count on steady-Eddie exchange rates.

These justifications have lost their logic since then. China is no longer running the huge surpluses of a decade ago. Its labor costs have risen along with inflation, in part because of the dollar linkage. The prices of raw materials are now responding to Chinese demand (or the lack of it) rather than western country dollar orders. There is more petroleum on the market than buyers can figure out what to do with. China has built out a network of mines and plants in Africa and other emerging markets to get away from the very dollar pricing it sought a decade ago, now proving costly.

And its export prowess is being sapped by Asian competitors which have cheaper currencies than the yuan, in part because they are not handcuffed to the greenback.

A week ago the China Securities Regulatory Authority said while it wants stability in the markets, it also wants them to be markets. Today the Chinese indexes closed a week of drops (except for yesterday) and Chinese share prices are back to their March 2015 level, still doing better than Wall St.

There will be no update on our stock portfolios this weekend from Cape Cod. And blogs next week will be limited by the temptations of beach-combing. I expect to do 3 unless the stock crash gets more serious.

More for paid subscribers from places further away follows with news from Britain, Switzerland, Israel, Denmark, Mexico, Canada.

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Asia Outlook

Thu, 2015/08/20 - 2:08pm | Your editor


After 6 hours of work (6 hours!) I got the new printer up and running and visited my brokerage account yesterday. It was a bad scene. About the only good showing was for that barbaric relic, gold.

Another down day in China with a twist. Because the state-owned banks have tended to march to the market's rescue at the close, today the sellers all gathered at the last hour of Shanghai trading. The result was a drop in the market index from 3755 to 3664 as the market wound down, a drop of 3.4%.

Shenzhen fell 3% in sympathy, also in the final hour.

Our Hong Kong-based macro correspondent Michael Kurtz from Nomura writes on the impact on the Asian currencies exchange rates (FX in his jargon). CNY or RMB are the yuan or renminbi; TWD the Taiwanese $; KRW the South Korean won; SGD the Singapore $; MYR the Malaysian Riyal; and HKD the Hong Kong $. Here are his forecasts:

The principal motivation for China's 11 August FX regime change was not concern over growth (a secondary factor) but the urgent need to accelerate market reform to maintain monetary policy autonomy. China has considerable state control and ample room to ease monetary and fiscal policies to arrest a growth slowdown.

Under this managed float our new base case is for CNY to depreciate steadily vs. US$ (by periodic FX intervention) to 6.60 by end-2015, a ~6% depreciation since the new FX regime (and a further 3% from current levels). We raised our 2016 growth forecast from 6.5% to 6.7%, driven by stronger net exports.

On average, about half of the RMB depreciation will pass through to other Asian currencies. Our Asia ex-China GDP growth forecasts for 2015 and 2016 do not change, as weaker exports to China are offset by the further decline in commodity prices and competitive gains from [low]er effective exchange rates. Our CPI inflation forecasts are generally lower, meaning that in addition to our old forecast of further rate cuts this year in China and Thailand, we now add Taiwan and India to this group. Korea and Indonesia may also cut rates further.
We consider a "what if" risk scenario in which China engineers an orderly CNY depreciation vs. US$ of 3-4% per month, to ~20% by end-2015, then oscillating around 7.45 in 2016. In this risk scenario, China's GDP growth is lowered [0.1%] in 2015 to 6.8% (on weaker domestic demand) but raised for 2016 [from 6.5%] to 7.2% (driven by net exports; domestic demand weakens further).

The impact of RMB depreciation on Asia FX should be most significant for TWD, KRW, SGD, and MYR. There could be increasing focus on the HKD. The impact on Asia ex-China's GDP is modestly more negative than in our new base case (0.1% in 2015 and -0.4% in 2016) but with much larger variation: weaker in 2016 for Hong Kong, Korea, and Taiwan whereas India is barely affected, and stronger for Malaysia and the Philippines because of boosts from even lower commodity prices and/or weaker effective exchange rates and easier monetary policies as inflation falls sharply.

In this risk scenario Asia decouples even more from the Fed hiking cycle in 2016.
Asian equities' 4.5% selloff after the PBoC's initial announcement strikes us as too precipitous, and any future relapses could offer entry opportunities as relatively minor regional growth downside risks and the unhelpful impact of higher FX volatility are offset by positives from reform progress, improved Asian supply-chain competitiveness globally, and the mitigation of a growth/deflation overhang on stocks from previous currency overvaluation.
Our aggregated bottom-up analysis of more than 600 regional stocks shows the effects of our base case to be earnings net-positive for many regional equity markets, including China itself, Korea, Taiwan, Thailand and India - as well as the Tech, Capital Goods, Pharma, Energy, and even Bank sectors whereas negative earnings impacts by country are mostly confined to ASEAN (most detrimentally in Indonesia), and to Utilities, Materials, Media, and Consumer (ex-Chinese Internet commerce).

For Chinese equities in particular, investors are assessing whether RMB depreciation will be growth- and equity-friendly, or trigger capital flight and further aggravate risks already simmering in the system. For many the approach now appears to be timing purchases of now deeply-discounted Hong Kong-listed Chinese equities after further RMB declines.
Top-down, we expect three phases for MSCI China through end-2015: 1) the current tentative phase, 2) possible knee-jerk declines on further deprecation, and 3) a relief rally as macro data show stabilising growth and the medium-term policy outlook is clarified by October's 13th Five-Year Plan.

In our China coverage universe, RMB deprecation has the largest positive impact on Chinese Capital Goods and Tech, and the most negative impact on Utilities and Paper. From a net-debt perspective there is limited positive impact overall, while negative impacts are most pronounced among several leveraged Industrial names.


More for paid subscribers follows with bad news from Israel and Australia, plus better news from Switzerland, Canada, Kazakhstan, Colombia, Brazil, and Britain.

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