Friday, March 23, 2012

Weekend links

1--Record China Bank Profits to Be Overshadowed by Bad Loans, Bloomberg

Excerpt: China’s biggest banks, set to post record profits for a fifth year, may report 2011 results marred by an increase in bad loans as an economic slowdown and faltering property market trigger defaults by borrowers. ...

China’s efforts to bolster banks’ risk buffers and curb inflation following a two-year, $2.7 trillion credit boom have pushed up funding costs, slowed the economy and triggered defaults, prompting Standard & Poor’s to warn March 12 that a jump in bad loans may curb profitability. Fresh evidence of mounting defaults may clip the average 42 percent rally in shares of the banks in Hong Kong over the past five months.

“It’s time to take profits off the table,” said May Yan, a Hong Kong-based analyst at Barclays Capital Inc., who cut her rating on the industry to “neutral” last month, citing weakness in the economy and banking sector. “The rebound of NPLs is not temporary. It’s the beginning of a worrisome trend.”...

The earnings have been driven by accelerated loan growth after China’s government unveiled a 4 trillion-yuan stimulus package to bolster the economy following a slump in global equity and credit markets in 2008. That triggered an explosion in credit to local governments and property developers, and a surge in investments in infrastructure such as roads and bridges.

A year after the boom ended in 2010, defaults began to climb. Bad loans at China’s five largest banks rose to 299.6 billion yuan as of Dec. 31, from 287.9 billion yuan at the end of September, according to data from the regulator in February. The non-performing loan ratio remained at 1.1 percent, it said.

The actual increase in defaults is probably higher than the official data because lenders write off the worst assets at the end of the year, China International Capital Corp. analysts Mao Junhua and Luo Jing wrote in a note last month.

2-- The supercycle is so over, iron ore edition, The Big Picture

Excerpt: The country can’t keep building airports, railway lines and apartment buildings at its recent run rate, forever. Even the Communist Party has openly acknowledged that the economy is imbalanced, with too high a proportion of capital investment versus consumption. Party leaders may even become pro-active about changing that in the new five-year plan, but either way, eventually things will change…So, about this supercycle. Credit Suisse’s analysts published a view of their internal debates over the China outlook, after Dong Tao, their chief regional economist for Asia ex-Japan, came out with a rather bearish take on the China outlook, stating that the commodities supercycle is over.

3--A technical recession in the eurozone?, FT Alphaville

Excerpt: On Thursday morning, a flash estimate for March’s purchasing manager’s index suggested that the eurozone is in recession. The composite output index was 48.7, down from 49.3 in February, and is the sixth decline in business activity over the last seven months. The weakness was primarily in manufacturing, which saw its eurozone index fall from 49.0 to 47.7, rather than in services.

The PMI figures tend to lead GDP changes and are released significantly in advance (hence why they are valuable). If the relationship holds, the GDP figures will reveal two consecutive quarters of falling output.

4--Is Draghi's LTRO working?, FT Alphaville

Excerpt:...In February, European banks lapped up €530bn of funding from the ECB, for a three-year term. In November, they’d taken €489bn. ECB president Mario Draghi called the operations an “unquestionable success”.* That’s nice.

But how can we objectively measure the success or failure of this unprecedented support by the central bank of so many diverse nations?

Elwin de Groot of Rabobank starts with the theory of what the Long-Term Refinancing Operation (LTRO) was meant to do. Which is to say, what things would have to happen for the operations to successfully aid the restoration of the transmission mechanism of monetary policy

The effectiveness of the LTROs, and other extraordinary operations of the ECB, can at the moment be judged by some metrics (and general sentiment) positively. However, it seems a bit rash to call them an “unquestionable” success until the liquidity is actually shown to improve bank funding markets, and ultimately land in the real economy.

But what if… it doesn’t work? Back over to de Groot (emphasis ours):

…if such an improvement does not materialise, the ECB may get under renewed criticism for having addressed a solvency problem with a liquidity solution. Indeed, it may actually reduce the chances of a third LTRO, forcing the ECB to rethink its unconventional policy strategy.

5--Third Consecutive False Dawn for Stocks & Economy, Trim Tabs

Excerpt: The stock market is up over 11% so far this year benefiting from the Fed printing press, this time called Operation Twist.... Meanwhile the big year to date move in stock prices apparently has almost everyone else convinced that the US economy has to be growing much faster then it really is, or else stock prices would not be up so much.

If only that were the truth. There is only one reason the stock market is rising and that is that the Federal Reserve has given away so much free money that the public companies are using their balance sheet cash to buy back many more shares than they and the public are selling.

Remember in both 2010 and 2011 the stock market was up over 10% and believe it or not the consensus among Wall Street professionals and the financial media was that the US economy was on the road to a sustainable recovery at the beginning of both 2010 and 2011. In neither case was the US economy in a sustainable recovery and that mistaken belief is what is again happening this year.

Last year, at the start of 2011, the stock market was boosted by the impact of QE2, and after rising just over 10% year to date by the end of April, two months before QE2 ended, the stock market started to sell off eventually dropping more than 20%. Two years ago in 2010, after a similar seemingly healthy 10%+ gain to start the year, stock market also started to sell off by the end of April, also plunging by more than 20%.

How quickly we forget the past. This year, the bulls are hoping that this time the US is in a real recovery. Unfortunately it is not. The job market is growing, by about 100 to 150,000 new jobs per month, but no where near the 250,000 bogus jobs reported by the Bureau of Labor Statistics. Similarly wages and salaries so far this year are growing by about 3% year over year, a rate of gain roughly equal to inflation, but no where near the 5% nonsense number estimated by the Bureau of Economic Analysis.

Finally the housing market is also reportedly improving numbers based upon seasonally adjusted numbers boosted by an exceptionally warm January and February. The reality, as I have previously reported on my video blog, is that the housing market is still at least a year away from a bottom, let alone a recovery.

To repeat, the only source of new money with which to buy stock is coming from companies buying back many more shares then they are selling. However, that could be changing.

While companies are continuing to buyback shares, which is why we are still bullish, there are some reasons to worry about that trend. First of all insider selling is surging. The rate of insider selling to buying went from a 5 to 1 ratio in January to a 14 to 1 ratio of insider selling to buying in February to 35 to 1 starting the second week of March.

Similar, there have been none, zero, new cash takeovers announced so far this month compared to monthly rate of $15 billion last year, and the pipeline of companies wanting to sell new shares is ramping up big time. To me that says that while lots of buybacks are still happening now, that trend could be ending sometime soon, particularly now that Operation Twist is approaching its end.

6--Student-Loan Debt Reaches Record $1 Trillion, Report Says, Bloomberg

Excerpt: U.S. student-loan debt reached the $1 trillion mark, as young borrowers struggle to keep up with soaring tuition costs, according to the initial findings of a government study.

The figure, which is higher than the country’s credit-card debt, was probably reached “several months ago,” Rohit Chopra of the Consumer Financial Protection Bureau, said in a posting yesterday, excerpted from a speech he made at the Consumer Bankers Association meeting in Austin, Texas.

“Young consumers are shouldering much of the punishment in the form of substantial student-loan bills for doing exactly what they were told would be the key to a better life,” Chopra, the bureau’s student-loan ombudsman, said in the posting.

More students are taking out loans to pay for college as tuition increases. Undergraduates are limited by the amount they can borrow in federally backed loans. Students also take out private loans, which lack the income-based repayment and deferment options of federal ones, Chopra said.

Excessive student debt could slow the recovery of the housing market, as young people repay money for their education rather than buying homes, said Chopra, who called the results “sobering.”

‘So Many Borrowers’

“Federal student-loan debt isn’t growing just with new originations,” he said. “With so many borrowers unable to keep up with interest payments, debt is growing even for many who have left school.”

7--As Portugal and China remind us, the crisis is far from over, IFR

Excerpt: Today’s strike action in Portugal reminds us that the European debt crisis is far from over and the Flash PMI figure from China – the reading was at 48.1 – also reminds us that the economy there is slowing.

So the main driver of the world economy is no longer driving quite so hard and some of this is down to the continuing problems in the eurozone.

The leadership in Beijing has made it clear that it is aiming to facilitate a soft landing but that it is not in the mood to inject stimulus just for the sake of it. We have been watching their real estate bubble for several years with both fear and awe, but as it begins to deflate we are pinning huge hopes on the Chinese government being able to manage it down in a controlled fashion.

To do so, it must (and will) resist the temptation to ease monetary conditions and to simply effect the construction and completion of ever more empty buildings. However, soft landings are a fairly rare event although Beijing’s response to the post-2007 crisis in the West was exemplary and I guess most markets are expecting them to be able to pull the trick off again.

The Portugal situation is also supported by the markets’ belief that with the European authorities having pulled the rabbit out of the hat in the case of preventing Greece from dragging the eurozone into the abyss, that they will be able to do the same again for Portugal and, if needed, Ireland and Spain as well.

These are all round big asks but markets are bored with hating themselves and they won’t let a few details like a slowing China or a struggling eurozone periphery spoil the fun. There is little doubt that the early signs of economic recovery in the West have taken root although one should be cautious in expecting a straightforward and linear recovery. The path ahead remains crooked and stony.

Lessons from Japan

Nevertheless, as fancy as the recovery might look in terms of quarterly GDP figures and falling unemployment, much of it is still feeding on the benefits of quantitative easing and near-zero interest rates. Central bankers are very gently and very carefully beginning to let loose the first warnings of incipient inflation risks although I must say that personally I am still pretty sanguine on that front. The lesson from Japan in the 90s is that it is hugely dangerous to tighten monetary policy too early and some economists argue quite convincingly that the lost decade was as much due to the BoJ jumping the gun as it was to the busted banking system and the struggling real estate sector. My thinking is that barking policy setters don’t bite.

Alas, I regard the pull-back which we have seen in risk assets in the past few days as nothing of significance and reckon that one should be buying the dips here. I would also feel tempted to re-weight away from emerging markets and back into core developed markets. Is that derisking or adding risk in the new global environment? I wonder…

8--IFR Comment: UK retail sales plunge, QE back on BoE agenda?, IFR

Excerpt: Whatever way one wants to look at the UK retail sales data they were weak. This might provide the first indication that households squeezed to the limit and are now cutting back further on their spending.

Spending power has been hit by high inflation and wage growth that has failed to keep track as well as fuel prices that have dampened discretionary purchasing power.

For February, total retail sales volumes were down 0.8% compared to -0.4% expected by the market with Jan revised to +0.3% from +0.9% in the initial estimate. When we strip out the impact of fuel the picture is just as bleak with sales down 0.8% m/m for Feb with Jan revised lower form +1.2% m/m to +0.6%.

The revisions made the headline news that much worse especially as the revisions were as a result of taking into account smaller stores where earlier estimates were certainly more optimistic.

The fall in February showed a large drop in non-food items and thus supports the view that beyond the basics of feeding oneself and paying for fuel there is little left in the pot to make discretionary purchases.

At the margin the odds of QE in May have increased but still remain below 50%. Having already fired an additional £125bn we would need to see more in the way of downside risks to see BoE opt to provide further QE in May.

9--IFR Comment: A wakeup call from global growth risks, IFR

Excerpt: The economic outlook was supposed to be getting better, wasn’t it? We would reiterate that what we have seen with risk markets and bond yields of late is a post-Greek world where tail risk was being priced out. That is, it was not that things were going to get better, but that the risks of more messy outcomes has been severely reduced.

The price action of higher bond/t-bill yields and a risk market that was moving higher had the potential to force players form safety/liquidity into risk and was something that we saw the potential to happen. Such a shift can still occur with the markets currently taking on corrective tone after some spectacular gains over the last few sessions. What we need to keep an eye on is where we go from here and how the market reacts to the correction that is currently in progress.

The Chinese flash PMI or even the French/German PMI weakness serve to highlight that the downside risks to global growth remain. The focus on the type of landing for China (hard or soft) and a Eurozone walking toward a fiscal austerity based recession.

For the Eurozone the potential for downside surprises on growth especially for Spain and Portugal places them at the forefront of the crisis now that Greece is no longer injecting the same sort of volatility. The correction higher on Portugal yields after LTRO2 and the continued widening of the 10-year Spain/Italy spread point to a market that is increasingly cognisant of the risks.

Growth risks remain to the downside and the PMI data are only reinforcing the importance of the growth outlook for a market that had got carried away with some rosy lagging/coincident economic numbers.

10--Two Charts On Why The LTRO Is A 'Real' Failure, zero hedge

Excerpt: While financial and sovereign spreads in the most optically sensitive entities has rallied magnificently for the last few months – helped and extended by LTRO 1 and LTRO 2 – the weakness of the last week or so in both of these critical systemic risk indicators (Sovereign spreads in Spain and Italy and the LTRO Stigma that we noted earlier) should be worrisome for many of the leaders who are using market action as a corollary for their actions. What is most worrisome however is the absolute and utter lack of impact to the ‘real economy’ of Europe as PMIs have continued to slip and sentiment stumbles – nowhere is this more evident than in charts of Corporate Credit Demand and Corporate Credit Availability, which as Morgan Stanley notes today, suggest the deleveraging balance sheet recessionary impacts felt in Japan and the US are now writ large in European minds as minimizing debt dominates maximizing profits (or living standards). Demand for credit is sliding for both large and small firms and bank lending standards continue to tighten aggressively for both large and small firms. As austerity continues and credit contracts, it seems apparent that the much-hoped for shallow recession in Europe will be deeper and longer than most currently believe.

Demand from small firms for credit - just as we saw in the US - is lagging notably now. Large firms also are showing falling demand but at a shallower rate but with jobless rates so high already and the smaller firms (as in the US) as the engine of job creation, it seems problems are playing out in a similar path to the other deleveraging regions of the world...

And lending standards have only become tighter even as banks have supposedly been flodded with encumbered cash...

11--11 out of 13 economic indicators "miss", zero hedge

Excerpt: From David Rosenberg:

It is truly amazing how many people out there believe the economy is improving just because the S&P 500 managed to get to 1,400 this past week. The market doesn't always get it right.

But a look at the data flow suggests that beauty is in the eyes of the beholder.

Much emphasis is being put on the employment data. Outside of that, only auto sales really managed to surpass expectations regarding the U.S. data flow that has been released since the start of the month.

Meanwhile, personal income, consumer spending, ISM, net trade, NFIB, IBD/TIPP economic optimism, industrial production, NAHB, housing starts, University of Michigan consumer sentiment, and now, existing home sales, all came in below consensus estimates. So 11 indicators have missed, just 2 have beat, and supposedly we have some sort of nifty growth spurt going on. Incredible....

Speaking of the "auto sales recovery", we have previously demonstrated that this is purely on the back of yet another record month of channel stuffing by GM. Alas, just as the AOL coasters, pardon AOL OnLine activation CDs, channel stuffing always ends up in catastrophic failure. And this time around we doubt that the US population will have the stomach for yet another bailout of the insolvent automotive company whose crowning post reorganization moment has been the retraction of the Chevy Volt.

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