Month: March 2014

By WallStreetDaily.com

With the U.S. market full of nosebleed valuations – think Netflix (NFLX), Tesla (TSLA) and Facebook (FB) – stocks in China appear downright delectable.

As Nomura reports, “China remains Asia’s deepest-discounted market.” Shares trade hands for 8.6 times forward earnings versus their long-term average of 12 times. That’s a 28% discount.

Meanwhile, U.S. stocks trade for almost 16 times forward earnings.

Indeed, Chinese stocks appear (cue Robert Palmer) simply irresistible.

Looks can be deceiving, though, which is why I wouldn’t invest a single penny in China right now.

More Expensive Than Meets the Eye

On the surface, Chinese stocks seem cheap. But they’re not.

The average is being skewed by super cheap valuations for financial stocks, which carry a 40% weighting in the index calculations.

According to analysts at HSBC Holdings (HSBC), it turns out that if we exclude banks, Chinese stocks trade right in line with the long-term average.

Plus, if we strip out state-owned enterprises, the valuation picture completely flip-flops.

Privately owned enterprises are trading hands for about 25 times forward earnings – a 57% premium to U.S. stocks.

Clearly, Chinese stocks aren’t cheap. But that’s not the only reason why I wouldn’t buy them today…

Fundamentally Speaking

Beginning in February, I started warning you about weakening fundamental underpinnings in China. From slowing economic growth to a slumping currency to a budding credit crisis…

In a month’s time, things have only gotten notably worse.

While the latest GDP figures checked in at 7.7%, a consensus is forming for even lower growth. Anything below the stated goal of 7.5% would be the slowest rate in almost 25 years.

Mind you, these are only estimates. And reality might end up being better. But I wouldn’t bet on it. Not based on the latest economic data.

Take exports, for example, which represent a major engine of economic growth for China. They unexpectedly fell 18.1% in February, the steepest decline since the global financial crisis.

Meanwhile, key barometers of China’s economy are flashing warning signals, too…

China is the No. 1 consumer of copper and iron ore. And prices for both commodities are getting clobbered. Copper alone is down more than 12% on the year.

That’s doubly bad news. As Steve Scacalossi at TD Securities notes, “Copper and iron ore are heavily used in China as collateral on loans.” As prices weaken, so does the asset base that’s securing China’s runaway lending.

Speaking of which, China could be careening towards a “Lehman Moment” of its own, when a major default sparks dozens more and credit freezes up.

Consider: Last Friday, the country suffered its first-ever corporate bond default when solar company Chaori reneged on its obligations. The second one could be right around the corner, too, as bonds of Baoding Tianwei Baobian Electric Co. were suspended from trading on March 11.

Moreover, lending in China’s shadow banking system in February “evaporated to almost nothing from $160 billion in January,” as the Telegraph’s Ambrose Evans-Pritchard put it.

Obviously, worsening credit conditions promise to hamper economic growth even more.

Jeffrey Gundlach, Founder of DoubleLine Capital, thinks China is “overdue for a significant setback, economically.”

Agreed. By all accounts, it could be materializing as we speak.

So much for that “soft landing” that so many pundits predicted, huh?

Bottom line: At some point, Chinese stocks will represent an undeniable contrarian buying opportunity. But that time is definitely not now, given the recent spate of negative developments, and the fact that the Shanghai Composite Index just traded below its key support at 2,000.

Or, more simply, look out below! And wait for the real bargains to materialize.

Ahead of the tape,

Louis Basenese

The post Frozen Credit Markets Foreshadow Next Lehman Fiasco appeared first on Wall Street Daily.

Article By WallStreetDaily.com

Original Article: Frozen Credit Markets Foreshadow Next Lehman Fiasco

Article by Investazor.com

The European single currency managed to break 1.3900 and is now hesitating under 1.3950. Here it found the mid way to 1.40 and also a rejection of an up channel. I will not be surprised to see a short comeback around 1.39 before continuing to the next important resistance level. The trend remains up, but it is possible for a Rising Wedge to be drawn.
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The post EUR/USD Price Action For March 13 appeared first on investazor.com.

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By MoneyMorning.com.au

The Chinese are coming!

That’s the take away from a new Credit-Suisse report that shows Chinese investment in Australian property is growing.

The report estimates Chinese buyers are snapping up 18% of the new dwelling supply in Sydney, and 14% of the supply in Melbourne.

Over the past seven years, Chinese investors have purchased $24 billion of Australian housing.

The reaction has been hysterical. Though it’s been four decades since the White Australia policy ended, Australian xenophobia is alive and well.

Racism and Chinese investment…We’ve been here before

This isn’t the first time that we’ve heard of the Chinese investor bogyman.

You may recall hysterical reports about Chinese investors buying up Aussie farms, and dire warnings from National Party politicians about Australia losing control of its agri-businesses.

It was a populist line. A Lowy Institute Poll found 81% of respondents were against ‘the Australian Government allowing foreign companies to buy Australian farmland to grow crops or farm livestock’, and 56% felt ‘the Australian Government is allowing too much investment from China’.

But the Chinese hold no more than 3% of Australian agricultural land. The fact is agriculture in this country is in desperate need of capital injection to reach growing Asian markets. Yet the agrarian socialists of the National party and the famers they represent can’t get over their unreformed suspicion of non-Anglos.

That same racism is behind our suspicion of Chinese property investors.

What else could describe our fear Chinese investors are pricing out young, honest, blue eyed, fair haired first home buyers? Or blaming Chinese investors for rising property prices?

You may well worry about the prospects of first-home buyers. After all, they are at their lowest share in decades. But it’s not the fault of the Chinese.

Australian housing policy, not the Chinese, pricing out first home buyers

There are two major factors pushing up property prices in Australia: a lack of supply, and a tax regime that favours existing property owners.

First, the supply issue. There’s simply not enough land being released for development.

Australians pack themselves into capital cities on the continent’s coastal fringes. Because our cities are sprawling and inefficient, governments have attempted to reduce urban sprawl by slowing the release of land.

A solution to this supply problem is embracing greater density, but there’s a big road block in the way: existing property owners in inner suburbs. In the name of protecting the character of their neighbourhoods, they block development while handily ensuring that prices in inner suburbs continue to price new entrants out.

Then there’s the tax regime — specifically, negative gearing. Owning a second property is a massive tax minimisation scheme — you’d be mad not to do it.

Unfortunately this loophole that has created hundreds of thousands of home grown investors, and they have been driving up prices for decades. Good for them, bad for first home buyers.

On top of these unsustainable rises in Australian property prices, first home buyers are faced with the massive hurdle of stamp duty, an inefficient and unfair tax that makes it that much harder for new entrants to join the property market.

None of these things are the fault of Chinese investors, but instead decades of policy tilted in favour of existing property owners.

Still, nothing like blaming foreigners for your problems, eh?

Callum Denness
Contributing Editor, Money Morning
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By MoneyMorning.com.au

By MoneyMorning.com.au

A new price war is brewing, and it will bring consumers cheaper mobile phone calls and data charges.

The first sign of this war was an announcement by Telstra that it would introduce new low-cost plans.

Australia’s biggest telco will now offer customers a budget $55 a month package with extra data, and a range of other cheaper plans.

It has also cut the penalty for customers who go over the data limit.

This is good news for all smartphone users in Australia, as it signals that competition is about to heat up and bring consumers lower mobile phone prices.

Telstra hasn’t had to price their plans aggressively for a number of years — in fact, this is the first time it has cut prices in three years. Outgoing Vodafone CEO Bill Morrow said it was a sign Telstra was ‘panicking’.

The telco giant has never really competed in the budget end of the market, instead going for higher value consumers and business customers.

While Telstra’s strategy of pursuing profitability over market share has worked so far, its latest cut-price plans show pressure from other telcos — like Vodafone — may be forcing Telstra to change tack.

Vodafone getting its mojo back

Vodafone, you may recall, lost millions of customers in 2010. In a lack of foresight that borders on negligence, Vodafone simply didn’t predict the massive uptake of smartphones by Australians, and so didn’t invest in their network.

As take-up of smartphones soared, Vodafone’s outdated network couldn’t handle the extra data. The system crashed, and customers fled: Vodafone’s customer base fell from 7.5 million users in 2010 to 5 million in 2013.

It’s been a slow road back to recovery since then, but finally Vodafone’s fortunes are turning.

It has invested billions in its network to increase 4G coverage, shifted its call centre from India to Tasmania, and cut its total staffing numbers by 40%.

As well, Vodafone has aggressively pursued customers by offering more data than its rivals, and cheaper plans.

And their strategy is working. Last December was the first month Vodafone didn’t lose customers.

What will Optus do?

There is a third player here we haven’t yet mentioned: Optus.

Signs point to Australia’s second largest telco joining the pricing battle — especially since it’s started to lose customers.

Last year Optus reported 57,000 post-paid mobile phone subscribers had left the company in the three months to December 31, and 7000 prepaid.

Over 12 months, Optus lost 134,000 mobile subscribers with total subscribers falling to 9.43 million.

By comparison, Telstra added over 700,000 subscribers over the same period.

Optus has so far committed only to spending more money on marketing and store purchases to arrest this trend.

But with Telstra and Vodafone competing on price and data, expect Optus to do the same. And that means lower prices.

Callum Denness
Contributing Editor, Money Morning
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By MoneyMorning.com.au

By CentralBankNews.info
    South Korea’s central bank held its base rate steady at 2.50 percent, as widely expected, saying inflation should remain low for the time being due to a good agricultural harvest and the economic recovery was continuing in line with the growth trend.
    The Bank of Korea (BOK), which cut its rate by 25 basis points in 2013, said it was paying close attention to external risk factors, such as shifts in major countries’ monetary policies and geopolitical risks in Eastern Europe.
    But the BOK still expects the global economy “will sustain its modest recovery going forward” though it could be affected by changes in financial conditions from the U.S. Federal Reserve’s tapering of quantitative easing and weaker growth in some emerging market countries.
    South Korea’s Gross Domestic Product expanded by 0.9 percent in the fourth quarter of last year from the third quarter for annual growth of 3.9 percent, up from 3.3 percent. In January the BOK forecast Korea’s economy would grow by 3.8 percent this year and 4.0 percent in 2015.
    Inflation eased to 1.0 percent in February from January’s 1.1 percent but the central bank expects it to gradually rise and has forecast average inflation of 2.3 percent this year, up from 2013’s average 1.3 percent, rising further to 2.8 percent in 2015.  The BOK targets inflation in a range of 2.5-3.5 percent.

    Earlier this month, BOK Governor Kim Choong-soo, whose term ends March 31, said he expected inflation of 2.8 percent in the second half of this year. Lee Ju Yeol, a BOK veteran, has been nominated as the governor.
    The BOK said the country’s exports were continuing to rise while domestic demand was sluggish.
    “The Committee expects that the domestic economy will maintain a negative output gap for the time being going forward, although it forecasts that the gap will gradually narrow,” the BOK said, reiterating a statement it has issued in recent months.

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By CentralBankNews.info
    Mozambique’s central bank held its benchmark standing facility rate steady at 8.25 percent, saying monetary policy should be prudent to help ease some of the effects of flooding that has destroyed farmland and infrastructure, impacting the life of thousands.
    The Bank of Mozambique, which cut its rate by 125 basis points in 2013, said it would intervene in interbank markets to ensure that the monetary base does not exceed 44.657 billion meticais in March, down from a 44.994 billion in February, 100 million above the bank’s forecast.
    Mozambique’s inflation rate eased to 2.38 percent in February from 3.16 percent in January, with the bank saying the inflation rate reflected the worsening price level in South Africa, combined with the nominal depreciation of the medical currency against the U.S. dollar and the rand. Other factors affecting inflation were rising tuition and schooling.
    At the end of February, the metical was quoted at 30.64 U.S. dollar, a monthly depreciation of 0.61 percent and an annual depreciation of 2.3 percent, the bank said.
    Mozambique’s international reserves declined by US$ 113 million to $2.792 billion end-February, enough for 4.1 months of imports, with the decline due to net sales of $195 million of foreign exchange by the central bank, including $111 million to pay for liquid fuel imports.
    Mozambique’s Gross Domestic Product expanded by 1.4 percent in the third quarter of 2013 from the second quarter for annual growth of 8.1 percent, down from a rate of 8.4 percent in the second.

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By MoneyMorning.com.au

It seems investors have forgotten what investing is all about.

They seem to think investing involves just buying something and then watching the price go up each day.

These investors like making money, as they should. But they get annoyed when things don’t go to plan…such as when stock prices fall.

It seems they want the reward without the risk. And that’s why stocks are doing some crazy things at the moment…

As we’ve noted before, there’s a trend right now where the mainstream turns every news item into a major event.

It’s a product of the 24-hour news cycle. When a broadcaster sets up a round-the-clock news service they’ve got to fill it with news.

They can’t have announcers saying, ‘Well, there’s nothing going on right now. Check back in an hour and we’ll let you know if anything has cropped up.’

No, there has to be news. And it has to be new news. It can’t just be a rehash of this morning’s news. If nothing else has happened then there has to be an update on the news, even though nothing has changed. Nowhere does this happen more than in the financial media.

The Crash That Has Already Happened

The cable TV business channels like nothing more than wheeling in one faceless, pinstriped, bald headed finance guy after another. (Don’t take offence fellow baldies, your editor is one of the gang.)

And as you’d expect, they can’t just turn up to say things are looking just dandy. They’ve got to throw in a reference to the latest headline-making non-story that has just caused stocks to fall 5%.

And yet as we recently explained, despite the string of supposed disasters unleashed on the market over the past five years, the Aussie stock market has still made a pretty good fist of things. It’s up 71.2% since March 2009.

So just how bad can things be?

Well, if we’ve read the market right, the outlook may not be as bad as the mainstream makes out. In fact, as usual it looks as though the mainstream and most investors are doing what they always do – they’re trading yesterday’s news.

What’s the big subject on the lips of financial market watchers today? That’s right, the potential for slower Chinese growth.

But here’s a newsflash. That subject has been on their lips for the past five years. That’s why China’s CSI 300 index looks like this:

Source: Google Finance
Click to enlarge

Since China’s market rebounded from the 2008 crash it has fallen more than 40%. And it’s down 62% since the 2007 peak. Why? Because of fears about slower growth.

Of course, that doesn’t mean the market can’t fall further, because it could. And as Jason Stevenson wrote in his latest research report published yesterday, quoting Wall Street investing legend Peter Lynch:

‘Trying to catch the bottom on a falling stock is like trying to catch a falling knife.

‘It’s normally a good idea to wait until the knife hits the ground and sticks, then vibrates for a while and settles down before you try to grab it.‘

That’s true. We can’t argue with an investing legend. You shouldn’t try to catch a falling knife. But by the same token, it’s fun trying (if you like that sort of thing). We love to speculate. And that’s why we say investors should buy this market now…while it’s still falling.

The Straws That Haven’t Broken The Camel’s Back

Many investors have forgotten one of the key principles to investing – that you have to take some risks if you want the chance to bag the rewards.

So when the market has a bit of a hiccup, as it has done many times over the past five years, investors run for the exits. The mainstream has trained them to believe that every new finance-related story has the potential to be a repeat of the 2008 crash.

It doesn’t matter what it is – an eastern European territorial dispute, Turkish interest rates, Argentinian debt, or Brazilian riots. Or just last weekend, the analyst at Bank of America-Merrill Lynch who said the bond default by a Chinese solar company was a ‘Bear Stearns moment‘. That was referring to the collapse of the US investment bank in 2008, at which point investors realised things looked bad.

Each of these recent events is apparently the straw that will break the camel’s back.

Except that it isn’t.

So when none of those things break the market, the mainstream reverts to a tried and trusted formula – call for a China market crash.

But look at the chart again. Isn’t it at least reasonable to argue that China has already crashed? Haven’t investors already priced that into the market?

China’s Bull Market Repeat

That’s the bet we’re making today.

The stock market is a forward looking indicator. Stock prices reflect what the market believes will happen in the future. The fact that Chinese stocks have fallen so much proves that. Investors believe there will be slower growth.

If investors thought growth would be better then stocks would rise. It’s that simple. So when we see talk of the bursting of the China bubble we really can’t see what they’re talking about – not in terms of stock prices anyway.

To us this appears to be a classic case of capitulation by the last remaining China bulls. They’re looking at all the current news stories about slower Chinese growth, but forgetting that this is something the market already knew about.

What investors should really be doing is looking to take advantage of these low prices by adding China-related stock positions to their speculative portfolio.

Our view is that in the coming months, China’s growth rate will stabilise, exports will pick up, and so will imports. Sure, a bunch of Chinese companies may go bust and default on their debt – welcome to the world of capitalism. That stuff goes on all the time in western markets.

The key message we’ll give you today is that as an investor you should always look ahead. What’s happening in the market today is actually yesterday’s news. What you want to think about is what will be tomorrow’s news, and then invest accordingly.

We’ve no doubt that a return of a China-led bull market will be a big part of that news.

Cheers,
Kris+

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By MoneyMorning.com.au

By MoneyMorning.com.au

It looks like we’re set for another round of hand-wringing over executive pay. Some in the EU plan to control the ratio of a board’s pay to that of the average worker in the firm. It’s also a highly controversial topic in the US.

In 1965 the typical American CEO earned around twenty times the average worker…today, it’s well over 200 times!

Concern over income inequality is the latest incarnation of the desire to control pay. A few years ago we worried about ‘golden parachutes’ – the provision of big pay-offs for CEOs who had failed. More recently there’s been a desire for vengeance against bankers. Their bonuses have been regulated, specially taxed and in several high-profile cases, voluntarily waived.

If they’re too embarrassed to draw their pay, you know something really isn’t right!

But I don’t think these governance issues get solved by legislation. Running companies well, which includes setting executive pay and incentives, is largely a cultural issue. In fact passing laws can do more harm than good. How then do we get the culture right and find those companies that really run themselves well?

They Don’t Make it Easy For Us

I don’t think we find them just by looking at how well a company complies with all the rules and codes of practice that have sprung up over the years. Open Barclays’ latest annual report and you’ll find a staggering 78 pages on ‘governance’. I started my working life as a banks analyst and I doubt whether the first annual reports I reviewed were this long in their entirety! The Barclays remuneration committee report alone runs to 41 pages.

Compiling these reports and dreaming up convoluted pay schemes has become an industry in itself. As investors, we’re deluged with information. We’re distracted by it and can’t see the forest for the trees. As a result the whole thing can degenerate into a box-ticking exercise. Checking that there’s the requisite number of independent non-execs…or that option schemes have appropriate performance criteria.

It all leaves little time for thinking about qualitative issues, and about what sort of pay is appropriate and sensible.

The Truth about Bankers: They’re Replaceable

But when you try legislating around the problem, some pretty silly things can happen.

For example, restricting the size of a banker’s bonus to 100% of basic pay resulted in salaries being increased to compensate. So more of the pay package is guaranteed and less is variable. Which means the banker will be better off during those tough times when shareholders and the broader economy are suffering. Whatever rules are introduced, you can bet there will be plenty of effort and imagination put into getting around them.

However, none of this addresses the central issue of what’s the right amount to pay people. In the words of Barclays CEO Anthony Jenkins, huge pay packets are necessary to ‘prevent a death spiral‘ of staff leaving.

But are those footloose employees really irreplaceable? Why not try calling their bluff? I just don’t believe that there’s such a tiny pool of specialists uniquely capable of running a bank.

For the man at the top of most very large companies, the job’s mainly about administrative skills and the ability to allocate capital sensibly. Those genuinely rare qualities of creativity, entrepreneurial flair and risk-taking aren’t really that desirable in a big company CEO.

And those star traders and deal makers that Mr Jenkins is frightened of losing aren’t all that rare either. They look good largely because they’re benefiting from the decades of goodwill and capital accumulated by Barclays. The corporate brand name, all those contacts, business flow and huge financial backing are what really delivers the goods. Often those top traders struggle when they move to the unforgiving glare of a hedge fund. Or the great deal maker will find he’s a lot less productive in a boutique bank.

Don’t Invest in a Toxic Culture

What’s needed is a change in the culture. I just wish I knew how to initiate it! Institutional investors must play a bigger role in this. Somehow a broad consensus has to emerge in the business world. Otherwise we can look forward to more half-baked legislation.

In the small company arena that I focus on, these issues are less acute. The resources usually aren’t there to pay outlandish salaries in the way they are in big corporates. On the other hand it can be easier for smaller companies out of the spotlight to coast along without their leaders being put under pressure to perform.

Governments don’t have a good track record on this problem, and neither do shareholders as a group. So what can you do as an individual investor to avoid getting fleeced by management?

I look for:

• Bosses’ salaries that are on the same planet as those paid to the workforce.
• Incentive plans or share option awards that are simple to understand and linked to the long-term performance of the company.
• Directors with a meaningful personal shareholding.
• Most importantly, one or two strong non-executive directors are a great comfort. As well as providing guidance on strategy, I look to them to ensure the business is properly run and to ask the right questions of the CEO.

Ultimately I doubt there’s a single set of rules or a formula for governing companies. It’s about paying directors and workers sensibly; having clear, simple incentives; and looking after your customers really well. It’s about getting the culture right, starting at the top. And if the CEO thinks like an owner who’s in it for the long haul…then you’re well on the way.

David Thornton,
Contributing Editor, Money Morning

Ed note: The above article was originally published in MoneyWeek.

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By MoneyMorning.com.au

Being contained by the lower line of the price channel on 4-hour chart, AUDUSD rebounded from 0.8924, indicating that the fall from 0.9133 is complete. Further rally could be expected and next target would be at 0.9100 area. On the downside, a breakdown below 0.8890 key support will confirm that the longer term uptrend from 0.8660 (Jan 24 low) had completed at 0.9133 already, then the following downward movement could bring price back toward 0.8500.

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