Data Diary

Disappearing capital in China

Posted on 20 June 2011 | 4 responses

For all those that were thinking it might be safe to get back in the water, Chinese short-dated lending rates have exploded higher today – from Shibor.org:

With interbank rates pushing higher across the curve, the screws are being tightened on debt-fuelled construction.

Now wonder the Shanghai Composite has broken lower – down 0.9% again today – the odds of a test of last July’s lows are shortening…

 

 

Australians buying US property

Posted on 20 June 2011 | 2 responses

Let’s begin with a disclosure – I’ve considered this idea. It has appeal from a number of perspectives – the relatively high value in the Australian dollar, the relatively beaten up valuation of US residential property and perhaps even the relatively interesting lifestyle choice. In the end though, New York ran second to Havana – the jazz and cigars always get me and besides Fidel can’t live forever.

But just because I like vintage cars and weathered facades doesn’t mean it’s not a good idea. After all, on the evidence of this research by Trulia, it looks like there is growing interest in the US residential markets (click on the chart to view the infographic):

 

Apparently, Australia ranks third by this measure – just behind Canada and the UK.

So perhaps it’s not surprising to find a group of retail financial advisors seeking to take advantage of the opportunity. Consider the recent closing of the IPO of a fund that will invest exclusively in US residential property. A quick review of the prospectus (here) and you will find a non-too-subtle structure designed to at least deliver the sponsors a nice return for their efforts.

Plus ca change, plus c’est la meme chose…

 

 

Sotheby’s equity price as an indicator

Posted on 19 June 2011 | 3 responses

Great intuitive chart here – lifted from the chart compendium put together by Damian Cleusix of Global Tactical Asset  Allocation (see here for complete deck):

According to the notes – a signal is given when:

1) The RSI reaches an overbought level (bottom pane – been there and now heading south)

2) The MACD closes below the Green signal line (middle pane – almost there)

3) The monthly close of the stock price is below its 12 month moving average (almost there – it’ll have to rally just under 10% from here to make it back above the MA by the end of June)

Five charts of China’s growth conundrum

Posted on 17 June 2011 | No responses

When you think about it, the imminent spike in mining related investment and its impact on Australian GDP is a pretty fair reflection of what has been going on in China for some time. Martin Wolf recently opined on the sustainability of China’s GDP growth without the government sanctioned infrastructure binge (here). It’s the Jim Chanos view of the world, ease off the building and things don’t just slow, they go into reverse pretty quickly. The following charts hint at what’s at stake:

1) The importance of infrastructure investment (Gross fixed capital formation) in driving China’s GDP growth over the last decade is self-evident:

2) And even more simply stated as a proportion of GDP:

3) So it is clear just how difficult is the task is to migrate the driver of GDP growth from investment to consumption.

4) Still that is why China is forecasting GDP growth closer to 7% for the next 5 years – it’ll be weaning the economy off the debt financed infrastructure spend ever so gradually:

5) But the risk is that the problems have already been conceived – China’s financial system is pregnant with debt that has financed investments that will prove uneconomic if the rate of GDP growth (and the attendant asset price inflation) slows.

Looked at from this perspective, it has remarkable similarities to the debt overhang that persists in the developed world – and the resulting underperformance of financial equities from New York to London and beyond.

Australian fund managers – nervously long?

Posted on 17 June 2011 | No responses

Caught up with a colleague who has just spent two weeks drinking coffee with portfolio managers around Australia – he is an economist by trade, it’s a perk of the profession. He noted that the only time he could remember fund managers being this bearish was in the depths of the GFC.

Now, one of the truest truism’s in financial markets is the saying that not everyone can be right at the same time. The reason is that if everyone has the same opinion, and has entered into the same trade in anticipation of that opinion playing out, then no-one is left to ‘buy’ or ‘sell’ to deliver the outcome that is the expected by the consensus opinion. This is what is meant by the phrase ‘the market has priced it in’.

But just occasionally, this rule is broken – most usually because people have not acted on the strength of their convictions.

The question then is whether the universal pessimism is baked into market prices – and if so, does this prohibit consensus actually unfolding.

Let’s quickly summarise the state of play – it’s pretty easy to paint the bearish picture:

1) Global leading indicators suggest we are heading into a synchronised slowdown in economic growth with possibly a double-dip for emerging economies like Brazil and India, and reasonable odds that the US and Europe will follow. The jury remains out on China – with its property development sector likely to falter and local governments loans being hived off bank balance sheets the signs aren’t great, but it’s a command economy and can put the foot back on the accelerator in short order.

2) Australia is in a difficult position. On the one hand planned capital investment is historically huge and coal and iron ore exports remain very strong – but unless you work in the sector, or own the resource, the benefit of this plunder is questionable. The main way that the Australian economy benefits is through the tax take – and that money has already been spent. So the bulk of the Australian economy by headcount at least is struggling under the weight of excessive debt, high interest rates and rising consumer prices. This is why residential property is turning up its overhyped toes and why retail sales have dried up.

3) With equity markets having enjoyed the global re-rating of risk and now looking weak at the knees, no wonder fund managers are feeling a little queasy about the outlook.

So we get to the crux of the issue. Have portfolio managers acted on their sense of imminent doom? If we had access to some meaty data on portfolio flows, we could have a real stab at answering that (it’s something being worked on). So the simplest proxy to get a feel for the answer is by looking at relative sector performance:

What we are looking at here is the 50 day moving average for indices for Consumer Staples (XSJ), Materials (XMJ) and Financials (XXJ). If fund managers had been rotating out of risk and into defensive stocks then consumer staples would outperform – and perhaps at the margin this has been the case since the most recent wobbles began back in March. But it certainly doesn’t look like a fully fledged exit. (We’ll come back to the performance of the financials in another post.)

Another way to look at this possible sector rotation is in the following charts that look at relative performance in a longer term context:

Notably, the more defensive consumer staples sector has been outperforming both the small cap and discretionary sector since March. So this would seem to confirm the trend. But for mine if we were to really be seeing an exit from the risk trade it would show up in a flight from the resources sector – and to date, this is just not really happening.

Conclusion – while fund managers may be very pessimistic about the outlook, it does not look likely that these opinions have been ‘priced it in’. This’d be consistent with my colleague’s reply when asked, “Are portfolio managers underweight risk then?” …”I don’t think so.”

 

Australian economy update – is the RBA serious about raising rates?

Posted on 16 June 2011 | 6 responses

The latest new motor vehicle sales provide further confirmation that the Australian ex-mining economy is struggling:

Still the RBA has gone to great lengths to express their concern about an Australian economy that is, in their view, operating close to its limits. From Glenn Stevens latest speech (here):

As of today, measures of capacity utilisation are not as high as at the end of 2007, and unemployment is not as low as it was then. Nonetheless, the degree of slack in the economy overall does not seem large in comparison with the apparent size of the expansion in resources sector income and investment now under way.

Most particularly, Glenn Stevens is concerned about incipient wage inflation from a tight labour market:

Re-reading his prepared thoughts, the mining boom casts a long shadow over is thinking.

In short, Stevens infers that the future of Australia is in selling our resources to Asia – he expects resource exports to increase as a percentage of GDP (though he is silent on whether this is via a contraction in real GDP). Secondly, he argues that the multiplier from resource exports is much larger than the bold numbers would suggest. While ‘less than 2%’ of the workforce is employed directly in the resources industry, there are a plethora of suppliers to the sector, we are all investors via our superannuation, and if all that fails there is always what we take in taxes. The trickle down effect to the rest of us is commensurately large.

Even if Stevens concedes that some sectors are doing it tough, it just doesn’t come across as a compelling view for the future of the Australian economy. He suggests that the higher currency is an unavoidable consequence of Asian demand for commodities and the ‘structural’ shift to being a resource exporter at the expense of all other industries is similarly a by-product of being the lucky country.

I don’t get it. It is too simplistic – and bordering on lazy with respect to how Australia could employ its resources to prepare for its future.

But equally, it is an argument that undervalues the sheer weight of money that has been borrowed and then invested in the residential housing sector. This debt burden is real and it is large by global standards.

So if you are of the camp that accepts that house prices, and by extension construction, have been elevated by an expansion of credit – and that this expansion has passed its apex – then anything that weighs on the correspondingly large mortgage pool is simply going to exacerbate an already difficult situation.

While Glenn Stevens is undoubtedly right about the forthcoming bonanza in mining investment, please consider how important housing finance is to the Australian landscape and ask whether this capital boom is really going to save those over-leveraged first home buyers that are a little further from the champagne trickle.

OECD leading indicators point south

Posted on 15 June 2011 | No responses

From the OECD’s latest release of their composite leading indicators:

Composite leading indicators (CLIs)…point to a mild loss of growth momentum in most major economies for April 2011. A notable exception is the United States which continues expanding relative to trend, albeit more moderately than in last month’s assessment. The CLIs point to a stable pace of expansion in Germany and the United Kingdom, clear signs of slowdown in the pace of activity in France and Italy, and a likely moderation of growth towards its long-term trend in Canada. The CLI for China points to a possible moderation in economic activity. Other CLIs indicate a slowdown in Brazil and India and the first sign of a loss of growth momentum in Russia.

Looking to the individual charts – we can see the expansion ‘relative to trend’ in the US, but looking to the rate of change in the indicator, the portents suggest that the expansion has begun to take on water.

While in the Euro Area, the indicator has already peaked. The question now is whether growth will be replaced with an outright contraction – we won’t know the answer to this until the second half but with the ECB raising rates, the outlook is far from bright.

Looking to the bellweather for commodities – China – it is now decelerating at a pace only rivalled by that achieved in the GFC. Given the muddy waters around official statistics, perhaps the best we can say is that the measures to tighten liquidity are slowing things down a touch.

(Note that the OECD has adjusted the amplitude of this data series – making for larger swings in the indicators – still the trends in data remain the same.)

Sharing your digital footprints

Posted on 15 June 2011 | No responses

A couple of thought provoking interviews here by Henry Blodget that look into the Wild West of personal data tracking. The nagging conclusion from all this is that the sooner we are empowered to manage our own data, the better it will be for all.

First up, an interview with the CEO of Media6Degrees – who sketches out how they are trying to take connections between individuals to enhance the value of online advertising. If I’ve understood it correctly, they start with an advertisers existing site and collect data on the online behaviour of individuals that use that site.  They then compare that behaviour with other users of the net. Essentially, they are searching for commonality of interests – for individuals that are not customers of the advertiser but that use sites similar to the advertiser’s existing customers. For example, if the advertiser has a slice of customers that indulge in visits to a radical left wing website, then other non-customer users of that site would be targetted with appropriately badged hammer and sickle advertising. Watch the interview – and see whether you can make sense of it.

And second, an interview with David Pakman on their investments in the next generation of advertisers. It’s interesting that the lightbulb moment for Pakman came when they realised that the solution to data collection will come from the individual themselves. The driver is that it will be easier to leverage an individual’s personal data when it is available from one source – rather than having to solve the difficulties in integrating data from different websites together. The logic that the “One” is the individual themselves is inescapable.

On this basis, Singly.com, and its sponsored open source The Locker Project, are driving towards the right goalposts. The murkiest bit of the interview with Tom Phillips is around how they source their data on individuals. This is not to cast aspersions, just to note that it will be simpler for all concerned when individuals are empowered to make their own decisions about data. (For more thinking on the topic, you can read the World Economic Forum’s “Personal Data: The Emergence of a New Asset Class here. One of their conclusions is that the role of ‘data custodian’ is likely to be pivotal in the development of social data targetting – and may require regulation.)

 

The Sydney Mail 21 January 1888 – Mining booms

Posted on 14 June 2011 | 8 responses

Was reading some back issues of a newspaper or two and was once again reminded of how we remain captive to the cycle of booms and busts that follow our collective mood swings.

From the centennial issue of The Sydney Mail (21Jan1888), we have these front page reflections on the allure of investing in mining…

The last week has been remarkable for one of those sudden and spasmodic developments of speculation in mining shares, of which we have had several specimens in the past, and seem likely to have several more in the future. Mining in the colonies has been marked by sudden gains and wearing losses. If all the losses were put in one scale, and all the gains in another, the latter would not preponderate very largely; but the few great and rapid fortunes hat have been made constitute an irresistible temptation to the adventurous….

As to what the ‘speculation’ was – from the Sydney Morning Herald on Thursday 19 January:

The main and all-pervading topic in mining circles during the part fortnight has been an extraordinary, and almost phenomenal, “boom” in connection with the values of silver stock. The actual cause of the sudden runup of prices was the establishment of the fact that the Central Broken Hill Company had met with…a looked-for and well-defined silver lode.

Now clearly the Broken Hill region was destined for greatness - The Broken Hill Proprietary Company (now the world’s largest miner) was formed in 1885 after a boundary rider dusted off a silver deposit in the region. As Leonard Dodds, a mining agent said at the time, after his ‘thorough, and official, investigation’ of the Broken Hill silver mines, “the Broken Hill mine itself is undoubtedly one of the marvels of the age”.

It’s that greed is so infectious that is interesting. All silver stocks rise on the back of the one great lode. The mal-investment that results is equally contagious and contaminates all resource sectors. It is notable that the late 1880′s were the tailend of a mining boom that began some twenty years before – the depression of the 1890′s was beckoning.

There is little doubt that hidden amongst the current capital spending boom, that is slated to continue for the next 2 to 3 years, there are likely to be the next investment disasters. Mines that are uneconomic at lower metal prices. Shale gas deposits that have questionable environmental impacts. Still it was The Sydney Mail who coined the phrase, ‘resistance if futile…for the adventurous’.

Australian Retail Trade up 1.1% in April 2011 – is that good?

Posted on 2 June 2011 | 4 responses

From the ABS (here):

The latest ABS Retail Trade figures show that Australian retail turnover rose 1.1% in April 2011, seasonally adjusted, following a fall of 0.3% the previous month.

Turnover rose in Food retailing (0.9%), Other retailing (2.0%), Department stores (3.6%), Household goods retailing (0.7%) and Clothing, footwear and personal accessory retailing (1.2%). Turnover fell in Cafes, restaurants and takeaway food services (-0.3%).

Apparently it was surprisingly good news – the Australian dollar leapt enthusiastically on its release.

Now April is a weak spot on the retailing calendar every year, the original data was down 0.5% on a month-on-month basis, hence the seasonal adjustment. But another way to manage the seasonality is to look at the data in a longer term context – for example, consider a ‘CPI-adjusted month-on-same-month last year’ comparison:

Now April does look pretty good here – maybe it’s the start of a new uptrend? But a couple of things to note. One, we are being generous. We do not have the CPI data for the June quarter, so the original data is being deflated using last quarter’s CPI. In other words, we have assumed there has been no inflation. If inflation is running at the same rate as last quarter, then in fact there will be no real increase in retail sales at all. And two, even on the assumption that there has been no inflation, retail sales are running at a rate well below historical trend.  The best we can hope for is that this month’s retail sales are an indication of better things to come.

Well, this is where you better drop me off – cause as we have argued previously – the Australian consumer just doesn’t have the credit limit to propel retail sales to their previous trend growth rate. Consider, CPI adjusted sales on a rolling 12 month basis (to once again strip out the seasonality).

In short, the retail sector remains under siege. At some point, retail sales must start growing again in real terms, if only because our population is still rising. But it doesn’t look like we have reached that point just yet. One suspects that the relief that greeted today’s headline will prove short lived.

 

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