Author: Vincent Fernando, CFA

Don’t listen to people saying the market isn’t reacting to news that Greece will formally ask the IMF for help. The Euro may not look like it has done much over the last 24 hours…

But… Greek 10-year bonds are rallying hard. They had hit 8.80% last night, they were 8.15% just 30 minutes ago, and now they have broken down below 8% according to Bloomberg. Greek bond traders are clearly loving even the latest confirmation. Yields have now gone from 8.80% yesterday now below 8%:

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According to Bloomberg Radio, Greece Prime Minister George Papandreou has confirmed that he’ll formally ask for the latest $45 billion aid package from the IMF and Europe later today.

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ATHENS, Greece (AP) — Greek Prime Minister George Papandreou has called for the activation of a joint eurozone-International Monetary Fund financial rescue to pull his country out of a major debt crisis.

Papandreou, speaking from the remote Aegean island of Kastelorizo, said he had asked Finance Minister George Papaconstantinou to make a formal request for the plan’s activation.

The prime minsiter says the markets have not responded positively to Greece’s austerity measures, and that it is now a “national and pressing necessity” to call for the aid.

The rescue package will provide Greece with loans from other eurozone countries to the tune of euro30 billion ($40 billion) at interest rates of about 5 percent, and about euro10 billion from the IMF.

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Food prices are volatile, but this move can’t be ignored given its historical significance:

Econompic:

Excluding often-volatile food and energy prices, the core PPI increased 0.1% in March and is up 0.9% compared with a year earlier. The big story in the March PPI was wholesale food prices, which rose 2.4%, matching the biggest gain in 26 years. Prices of fresh and dried vegetables soared 49.3%, the most in 16 years.

The PPI breakdown courtesy of Econompic below.

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According to credit rating data form Fitch Research, the outlook for corporate bonds has been improving. Thus corporate creditworthiness is trending in the exact opposite direction of many sovereign nations. The falling red bars, from mid-2009, reflect fewer downgrades. Meanwhile, the rising blue bars represent rising credit upgrades.

Here’s a close-up of the recent improvement for both Industrials and Financials:

High yield default rates remain high, but they are already lower than experienced during 2001 and 2002. Creditworthiness appears to be improving in this space as well. Even high-yield ‘junk bonds’ are moving in the opposite direction of nations like Greece:

(Via Fitch Research, 2010 Credit Markets Symposium, 15 April 2010)

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Morgan Stanley shows how U.S. inflation has fallen no matter who you look at the data. They expect core inflation to continue falling, to about 1%. At some point it will start rising again, but we’re not quite there yet.

Morgan Stanley’s Richard Berner:

Will the real core inflation measure please stand up? Core inflation has declined over the past year. Depending on the metric, however, the deceleration in rents has accounted for most – or more than all – of the decline. Differences in inflation measures have triggered a debate about how to measure core inflation that has obscured the real controversy about the inflation outlook. In our view, the factors influencing this outlook are what really matters.

Two lessons from the measurement debate: First, investors should look to a variety of core inflation measures to judge short-term inflation trends, rather than relying exclusively on any one gauge. While the Fed must pick one metric to communicate its forecast and implied inflation target, officials are well aware of the pitfalls of measurement. Second, sharp data revisions have in the past affected the Fed’s preferred price index, the personal consumption price index. These revisions can significantly affect perceptions about inflation risks, so it is important to assess the variation in the PCEPI in comparison with other measures.

(Via Morgan Stanley, US: Don’t Be Sidetracked By The Inflation Measurement Debate, Richard Berner, 21 April 2010)

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Hong Kong’s government has warned that their clamp-down on property speculation isn’t over yet, despite a recent April 1st hike in the tamp duty for property worth over $20 million Hong Kong dollars.

The Standard:

The stamp duty on flats valued at up to HK$20 million may be raised if the risk of an asset bubble is boosted by excessive speculation in the property market, Financial Secretary John Tsang warned yesterday.

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Tsang said the government is committed to combating speculative activities, to reduce the risk of a property bubble. More than 13,000 cases of suspected speculation had been identified by the Inland Revenue Department in the fiscal year of 2008-09, with more than 4,000 requiring follow-up action after a review. The authorities will continue to actively track property transactions involving speculation and levy profits tax, he added.

Hong Kong property stocks slumped today on the news despite the fact that the recent stamp duty increase only applied to higher-end property which comprises just 1.5% of the market.

Some brokers, perhaps predictably, believe fears are unfounded:

Bloomberg:

Hong Kong’s property market will see “no significant implications” from the government’s plans to curtail the risk of a bubble in the sector, Taifook Securities Group Ltd. said in a report.

“We see no significant implications for them from the new government requirements,” Mak wrote. “Property prices will in the longer-term be dictated by the strength of the economy and the levels of interest rates.”

The Hang Seng property index fell 1.6% compared to just a 0.3% drop for the Hang Seng.

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Greece’s ten-year bond yield has hit 8.13%, the highest level since 1998, after it was learned that the country’s budget deficit was even worse last year than originally thought.

Bloomberg:

The EU’s statistics office said today Greece’s deficit was 13.6 percent last year, higher than the government’s April 7 forecast of 12.9 percent. The EU forecast a shortfall of 12.7 percent in November. Ireland overtook Greece as the EU nation with the largest deficit, with its deficit revised up to 14.3 percent, the Luxembourg-based Eurostat said.

Read more here >

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Texas’s economy fared far better than most of the U.S. during the downturn, and it’s rebounding strong as well. The state has been already adding jobs since the fall for 2009 according to The Big Money (TBM).

What gives? Is it all oil? Nope.

1) It’s due to better housing regulation, which helped keep the state’s mortgage delinquency rate below the national average:

TBM:

That’s partly because relaxed zoning codes and abundant land kept both price appreciation and speculation down. “House prices didn’t experience a bubble in the same way as the rest of the nation,” said Anil Kumar, senior economist at the Federal Reserve Bank of Dallas. But it’s also because of two attributes not commonly associated with the Longhorn State: financial restraint and comparatively strong regulation.

2) The state also has a larger amount of non-oil-related exports than many people realize:

Manufactured goods like electronics, chemicals, and machinery account for a bigger chunk of Texas’ exports than petroleum does. In the first two months of 2010, exports of stuff made in Texas rose 24.3 percent, to $29 billion, from 2009. That’s about 10 percent of the nation’s total exports.

3)  And as far as energy industry growth is concerned, natural gas and wind are growing while oil is in decline.

In November 2009, Texas [oil] wells produced 1.08 million barrels per day, about half as much as they did in the late 1980s. In recent years, natural gas has been undergoing a renaissance. The state’s production rose about 35 percent between 2004 and 2008. And Texas has received a big boost from a different, renewable source of energy: wind.

In this area, Texas’ size and history of independence has enabled it to jump-start a new industry. The state has its own electricity grid, which is not connected to neighboring states. That has allowed it to move swiftly and decisively in deregulating power markets, building new transmission lines, and pursuing alternative sources. “We can build transmission lines without federal jurisdiction and without consulting other states,” said Paul Sadler, executive director of the Austin-based Wind Coalition.

So it’s not the state your father knew, which people closely familiar with it are probably well aware of. For the rest of us, it’s worth investigating what exactly is going so right.

Continue reading at The Big Money here >

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A chart caught our eye from Goldman’s Noah Weisberger — Goldman’s basket of consumer stocks, the ‘Wavefront US Consumer Growth Basket’ appears to have fallen behind the sharp rebound in U.S. consumer data as of late.

Goldman:

However, as we look at how consumer bits of the US equity market stack up against the economic data, it still seems that the market response has been quite restrained (see Exhibit 2 and 3). And even though we see the near term risks as about balanced, we still see plenty of “macro” value in consumer stocks, be it via our Wavefront Basket, via the broader consumer discretionary sector (say the XLY), or even via some more narrowly focused retail baskets (like the RTH, with the MVRX the clear exception to this). Moreover, we continue to have a fairly constructive outlook in terms of the near-term balance between better growth news, still moderating US inflation, and the resulting monetary policy response (or lack of one).

For those without access to Goldman’s basket, the Consumer Discretionary Select Sector SPDR (XLY) ETF, mentioned in the excerpt above, might be a proxy. Another idea is to look at strong consumer-driven companies that may have underperformed the overall market, such as Best Buy or Walmart. If Goldman’s Consumer basket rises with the rebound in consumer data shown above, most consumer names will probably be rising as well.

(Via Goldman Sachs, Tradewinds: Flat tactical equity risk, Noah Weisberger, 20 April 2010)

Note: The author does not personally own Walmart (WMT), Best Buy (BBY), or XLY shares, but investors he speaks with may. Everyone should perform their own complete due diligence with any stock mentioned.

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We couldn’t help but notice Marc Faber’s particularly bullish stance on the yuan, as voiced on Bloomberg T.V.:

“It’s good for China to have a strong currency, but I don’t think it will be good for the property and stock markets, because in the short term, China is less competitive,”

“The yuan should be twice the current level, it should appreciate by 100 percent over the next 10 years.”

Given that the yuan seems to be almost unanimously seen as under-valued against the dollar right now, might Marc Faber be helping to fuel the world’s latest one-way bet sure thing? Does anybody think the yuan is over-valued, except maybe Andy Xie? (who seems to be more on the fence, but has warned that it could be).

See more Faber quotes from the Bloomberg interview here >

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Despite stricter restrictions on mortgage lending recently enacted by the Chinese government, emerging markets perma-bull Mark Mobius thinks Chinese demand for housing will remain strong.

Bloomberg:

“We don’t see fundamentals of the property industry will change much because of these new policies,” Mobius, executive chairman at Templeton, said in response to questions sent by e- mail. “We are in general still light on Chinese developers and if this correction brings valuations to more attractive levels, it would be a good opportunity for us to step up our positions.”

“Recent policy changes on property and mortgages were introduced with the purpose of curbing speculation, but not hurting real demand,” Mobius said.

This view stands in stark contrast to Goldman’s recent view that Chinese property prices could take it on the chin as a result of new mortgage rules. Yet we’d highlight that both Goldman and Mobius are recommending/looking to buy Chinese property shares on any dips. Thus both are still long-term bullish even if they disagree on the short-term property market’s reaction.

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Talk about getting comfortable with the multi-year commodities super-spike we’ve had…

Saudi Arabia’s National Commercial Bank has disclosed that its government requires $60 just to break even on its budget these days.

Yet they’re actually aiming for $75 oil in 2010, which will provide them with a healthy $24.3 billion budget surplus.

Upstream Online:

The kingdom may end up spending 12% above the 540 billion riyals it budgeted for this year and get revenues 48% above the planned 385 billion riyals, Reuters quoted Said al-Shaikh, chief economist at National Commercial Bank (NCB), as saying.

“Crude oil prices, based on a modest recovery in global demand, are expected to average $75 (per barrel) with Saudi production rising to 8.3 million barrels per day,” Shaikh told a conference.

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After declining by almost 8% in 2009, net foreign assets held by the Saudi central bank are set to rise by almost 10% this year to $445.2 billion, surpassing their lifetime record of 2008, Shaikh said, based on assumptions of daily production of 8.3 million bpd and a $75 average price for oil.

So they’re budgeting for $60 oil (where the budget breaks even) while wondering what to do in their likely expected scenario whereby oil remains around $75.

Which means $60 per barrel is the new cheap oil, since Saudi Arabia runs a deficit at any price lower.

Note OPEC has been pretty adamant recently about defending the $70 – 80 oil band, and at a recent oil conference even forecast that oil could remain between $70 – 80 per barrel for ten years.

Luckily for the rest of the world, OPEC’s control over the global oil market is clearly dying. So it might not be up to them anymore, really.

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A March survey from Pew shows just how broad the unemployment pain has been felt. When you hear of 10% unemployment, you might imagine 1/10th of Americans experiencing extreme financial stress from the recent recession.

Yet given the unemployment rate’s odd methodology whereby it drops people who stop looking for work out of the data, and the fact that American households usually have more than one person, the real ‘pain’ number is 54% — over half of American households felt the direct impact of job losses:

Pew Research:

A majority now says that someone in their household has been without a job or looking for work (54%); just 39% said this in February 2009. Only a quarter reports receiving a pay raise or a better job in the past year (24%), while almost an equal number say they have been laid off or lost a job (21%).

Basically, if your household didn’t experience un- or under-employment, then you are in the minority. Moreover, as shown above, fully 70% of American households experienced one of the serious financial problems above. Basically, the vast majority of American households was hit extremely hard.

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Palladium prices are on fire as the metal encounters a perfect storm of growing industrial and investment demand.

Auto industry demand is growing mostly thanks to China:

AG Metal Miner:

Certainly Palladium’s rise has been dramatic this first quarter of 2010, from starting the year at about $420/ounce the London Fix has risen to over $540/ounce this week, a near 30% increase.

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There have been a number of factors in palladium’s favor driving up the price. First, the fundamentals have been sound, due to its much lower cost than platinum the metal has been partially substituted for platinum in the mix of PGM’s used in automotive catalytic converters, particularly in diesel engines. In a recent note to investors, Standard Bank advised global auto sales are still on the rise, and China remains in the lead.

But more importantly, new ETF’s have created a whole new source of investment demand, which has caught the market off-guard especially since 80% of the world’s palladium right now comes from just two sources, South Africa & Russia.

The most popular form of investment are Electronic Traded Funds such as the new ETF Securities physically backed palladium ETF launched earlier this year. The Telegraph article quotes RBS in saying the inflow of money into palladium ETFs worldwide was equivalent to 28% of estimated palladium consumption in the first quarter of the year. The launch of the new US fund has resulted in the amount of palladium held as an investment to rise 48% over the quarter.

So here’s a profitable investment strategy. Invest in a rare commodity that doesn’t have an ETF yet, then create the ETF. It worked with gold, whose rapid rise has tracked growth in ETF-driven demand, and it now seems to be working with Palladium. What’s next? Uranium? We don’t know of any pure uranium ETFs yet (though there is a nuclear ETF (NLR) that invests in nuclear power related companies).

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An economist from the Chinese Academy of Social Sciences (CASS) believes that speculative capital inflows into China have intensified most recently.

The prospect of an imminent upwards yuan adjustment could be trumping efforts to cool the Chinese economy and temper liquidity growth in the financial system:

China Daily:

“Calculations show that in March, such capital inflows expanded dramatically compared with the previous two months,” Zhang Ming, an economist at the Institute of World Economics and Politics at CASS, told China Daily. “It could be a new trend.”

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“The relatively higher domestic interest rate and moderately rising expectations of yuan appreciation will lead to the scaling up of cross-border carry trade,” SAFE said in a report on its international balance of payments.

Zhang said that unexplainable capital inflows into China in the first three months amounted to $5.6 billion, $5.7 billion and $20.5 billion respectively.

The calculation was conducted through subtracting the country’s monthly foreign exchange reserves by its trade surplus, foreign direct investment, valuation effects caused by currency exchange rate changes and investment returns, which is believed to be a quite comprehensive methodology.

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“In the coming six months, short-term international capital may continue to flow into China, which would put more sterilization pressure on the central bank and push up domestic consumer goods and real estate prices,” he said.

Read more here >

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Ernst & Young reminds us in a recent global infrastructure report that the U.S. is expected to add 30 million people to its economy, each decade, right through 2050.

At first this seems terrifying. It means the U.S. will have to generate 30 million net new jobs per decade just to break-even on its employment rate.

Yet while this population growth is a challenge, it’s much more likely to be a huge and highly dependable economic driver for the U.S. going forward.

Particularly, it will be a constant economic tail wind for companies, investors, and workers in the U.S. who align themselves with infrastructure needs. 

One strong example of this is rail, as shown below. The U.S. remains horrendously underinvested in rail, even after recent stimulus plans, thus we should expect substantial spending increases in this transportation space over time as economic pressure on the U.S. transportation system builds.

Another long-term no-brainer area for business growth based on demographics is water. Ernst & Young shows how the Western U.S. could face serious water supply challenges by 2025, and remains one of the world’s least efficient water hogs. Expect substantially more U.S. investment here as well whether on the public or private side:

Energy and other transport are another obvious contenders for profiting from future U.S. demographics, and the list goes on.

The point is that there will be a powerful demographic driver for the U.S. economy regardless of where everything else in the world goes, and substantial profits will be available to those who can find and solve the pain points caused by population growth. So good hunting.

You can find the complete infrastructure report here.

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Most U.S. stimulus spending hasn’t even hit the economy yet, as shown in the Morgan Stanley Chart below. Only about 40% has been paid out, and about 30% hasn’t even been allocated yet.

Moreover, the stimulus spending that we’re still waiting for is more geared towards U.S. industrials, and thus we believe is the kind that could deliver more bang for the buck when it comes to stimulating U.S. capital equipment spending and manufacturing activity. The peak effect of stimulus spending hasn’t even happened yet.

(Via Morgan Stanley, Industrials, Scott Davis & Robert Wertheimer, 19 April 2010)

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A new survey by Coller Capital and the Emerging Markets Private Equity Association (EMPEA) has found that 57% of private equity investors are planning to increase their focus on emerging market companies over the next two years.

This is especially good news for the stocks of companies with relatively stable businesses and low amounts of debt (the perfect targets for leveraged buy-outs).

Reuters:

“Investors are clearly drawn to markets with strong underlying growth, which trumps leverage in driving returns,” said EMPEA President and Chief Executive Sarah Alexander.

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Many investors see emerging market investments outperforming European and U.S. markets. Over three quarters expect emerging market net returns to exceed 16 percent over a three- to five-year period, compared with 29 percent seeing similar returns from their global portfolio, the survey found.

“In a number of these markets, particularly China, India and Brazil, the environment has changed; there’s more stability, there’s better governance, there are more factors allowing for those returns to be generated,” said Coller partner Erwin Roex.

More stability and better governance? Not only have investors started to see emerging market bonds as less risky than some developed nation ones, but they’ve begun to see emerging market companies in a similar light.

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The IMF’s Dominique Strauss-Kahn expects his institution to raise global growth forecasts to 4% for 2010.  This is a pretty huge change from the 3.1% expected not too long ago.

Reuters:

South America and Africa are also clearly recovering, but private demand in the United States, Japan and Europe remains weak, IMF Managing Director Dominique Strauss-Kahn said in an interview with the Nikkei.

Strauss-Kahn also quoted as saying he expects China to move on currency policy at some point, as the yuan is undervalued and allowing the currency to rise would benefit China.

The IMF sharply raised its estimates in January, predicting that the world economy would expand by 3.9 percent in 2010, much higher than the 3.1 percent it projected last October, with the pace picking up to 4.3 percent next year.

4% global growth is actually very strong growth relative to the world’s historical growth rates. It’s as fast as the world has grown at any time in the last decade:

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Stocks in Europe and Asia followed American markets’ Friday performance.

The FTSE 100, France’s CAC, and the German DAX are all down from 1.4 – 8%.

Japan’s NIKKEI, Hong Kong’s Hang Seng, and China’s CSI 300 are down from 1.8 – 2.2%. Commodities are taking it on the chin with oil down 1.8% to 81.76.

On a sector basis, financials and materials are being hit hardest. For example, the CSI 300 financials index is down 3.6% right now, exacerbated by further Chinese government restrictions on banks’ mortgage lending.

Meanwhile, the dollar index is rallying slightly. Gold’s holding roughly steady at $1,136

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