Commodities Post Biggest Loss in 5 Months to Trail Stocks – Bloomberg 10-31-12

Salient to Investors:

The global economy grew at the slowest pace since the 2009 recession. China reported the seventh straight quarter of slowing growth. Services and manufacturing in the 17-nation euro area last month contracted more than economists forecast.

John Stephenson at First Asset Investment Mgmt said Europe is a complete disaster and unsolved, China is slowing, and investors have very little optimism.

Commodities are headed for a second consecutive annual loss, for the first time since 1998.

Peter Sorrentino at Huntington Asset Advisors said the party is effectively over for investors in industrial materials or commodities – the growth in demand is not going to be there.

Andy Lipow at Lipow Oil Associates expects fuel prices to continue to fall through the winter – supplies are improving as we enter the weaker demand season.

Tom Pawlicki at EOXLive said the oil market is coming to grips with the possibility that we may have too much supply.

325 S&P 500 companies have reported earnings that have risen 0.4 percent, while sales missed analysts’ estimates at 60 percent of the SS&P 500  companies.

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Gold Set to Drop as China Manufacturing Boosts Economic Outlook – Bloomberg 10-31-12

Salient to Investors:

China’s manufacturing expanded for the first time since July, signaling that the slowdown is easing and curbing the need for additional stimulus.

Alexandra Knight at National Australia Bank said investors probably were a bit too optimistic to central bank announcements for further stimulus we’re starting to see an unwinding of that.

Holdings in gold-backed exchange-traded products expanded to a record yesterday.

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Emerging Markets Undervalued, Goldman Sachs Says – Bloomberg 10-31-12

Salient to Investors:

Anna Stupnytska at Goldman Sachs Asset Mgmt said:

  • The growth market and the emerging market should be the main focus. Emerging markets are undervalued because investors are focused too much on the developed world. Investors are undervaluing the BRIC story which is still valid long-term.
  • The rise of the consumer is the biggest investment story in emerging markets
  • The growth cycle is picking up in many countries including China, Brazil, while the global cycle is turning – most of the growth will be driven by the global market.
  • On a cyclically adjusted P/E ratio, Russia is over 50% undervalued, and consumer related sectors have been outpacing the commodity related sectors. Russia is one of the largest consumer and manufacturing markets and fast growing. Commodities is no longer driving Russia growth
  •  China, Brazil, Turkey are extremely undervalued.
  • No longer expect a hard landing in China. Excited by quality of growth in China, faster growing retail sales shows consumers are taking a bigger role in the economy.  Expect 7-8% growth going forward, driven by consumers. Chinese real estate is stabilizing and policies are controlling the bubble.
  • Brazil inflation is a big issue but policies are in place to manage it
  • India growth is impressive and more proactive than reactive.
  • Emerging markets are well placed to tackle the bubble resulting from Quantative Easing.
  • Better to buy sectors than indexes because the consumer sectors will benefit the most and because the rise in middle classes is not played out yet – one billion people will join the global middle class by 2025.  Better to buy a combo of domestic companies and developed country exporters.

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Korea Best in Asia on Investor Confidence in Economy – Bloomberg 10-31-12

Salient to Investors:

South Korean growth in 2012 will beat Asia’s other wealthy nations.  The IMF forecasts South Korea’s economy will grow 2.7 percent in 2012 versus 2.2 percent in Japan, 1.8 percent in Hong Kong and 2.1 percent in Singapore.

Samsung, whose annual sales are equivalent to 13 percent of GDP, makes almost a quarter of the world’s mobile phones, and its Galaxy smartphones ended Nokia’s 14-year reign as the biggest maker of mobile phones. Hyundai Motor and Kia Motors are the most profitable of the six biggest global automakers – Hyundai’s Elantra was voted North American car of the year at the Detroit Motor Show.

Jim O’Neill at Goldman Sachs Asset Mgmt expects South Korea to grow 4.8 percent over the next decade.

Investors held 88.3 trillion won of local currency debt at the end of last month, double the amount in 2009.

Eric Stein at Eaton Vance Mgmt said the won is structurally undervalued and slowly but surely continue to appreciate.

S&P, Moody’s and Fitch Ratings boosted South Korea’s rating between late August and September on strong fiscal fundamentals and room to respond to external shocks.

Alaistair Chan at Moody’s Analytics Australia said Korea has a number of advantages including a large domestic market and economies of scale that will help the tech sector and the rest of the economy grow. Chan said Korea is quite well placed in the near to medium term to weather slow global growth.

Kim Nyeon Jae at Korea Investment & Securities said the IMF crisis in 1997-1998 changed everything – the slump is still locally referred to as “the IMF crisis”.

The Programme for International Student Assessment ranks Korea 2nd in the world in reading, 4th in mathematics, and 6th in science. Korea has the world’s highest average Internet connection speeds.

South Korea’s richest 20 percent earned 7.86 times more than the bottom 20 percent in 2011.

Royal Bank of Scotland says South Korea has one of the world’s fastest aging societies, whose working-age population will begin to contract by 2016, curbing growth by as much as 1.7 percent to 2.5 percent by 2050.

The Korea Institute of Public Finance said a merger with North Korea would drag down South Korea’s GDP by as much as 6.6 percent a year for a decade.

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India Data Dearth Roils Investors as RBI Gathers Own Figures – Bloomberg 10-31-12

Salient to Investors:

Official inflation data is often incomplete or months out of date.

Jahangir Aziz at JPMorgan Chase said that to a large extent, the Reserve Bank of India is essentially making decisions in the dark – India lacks a solid, good measure of inflation with much broader coverage of services, and it’s almost unthinkable for RBI to make policies without knowing unemployment. Economies from Indonesia to the EU and the US include services such as education in inflation measures.

The most recent jobless estimate is at least four months old, while the official unemployment-rate is based on a sample of about 0.05 percent of Indian households.

Rupa Rege Nitsure at Bank of Baroda said if the true extent of inflation was known to the central bank, they probably wouldn’t have been as aggressive.

Revisions to economic figures buffet Indian investments. Ganti Murthy at Peerless Funds Mgmt said huge data revisions lead to improper asset allocation by investors and cause unnecessary market volatility.

The IMF says India’s economic data is adequate for surveillance, but weaknesses remain in the timeliness and coverage of certain statistical series. The IMF predicts the Indian economy will expand 4.9 percent in 2012, the slowest pace in a decade.

Rahul Bajoria at Barclays said India’s data falls short on many benchmarks as compared to other nations in the region.

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.Shanghai, Beijing Lure Investors as 2nd-Tier Cities Sour – Bloomberg 10-31-12

Salient to Investors:

Real estate investors and developers are abandoning a two-year foray into China’s provincial cities and switching back to Shanghai and Beijing, where prime offices are close to full occupancy and rents are on par with New York and Sydney, and home prices are stabilizing.

Home prices have risen 155 percent nationwide since China privatised housing in 1998.

Daan Van Aert at APG Investment Asia sees less visibility on price and growth in the second-tier cities – returns don’t justify the risks for institutional investors.

Jinsong Du at Credit Suisse said developers always wanted land in major cities, but supply is limited, so they were forced to expand to smaller cities in order to grow.

Kenny Wu at JI-Asia Research said building in small and medium-sized cities shouldn’t be a long-term strategy because the internal demand is smaller than in big ones.

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Low Rates Lure Yield Seekers Onto Thin Ice – Bloomberg 10-31-12

Salient to Investors:

Gary Shilling at A. Gary Shilling & Co writes:

Investors’ zeal for yield has:

  • Depressed yields and spreads of below-investment-grade debt versus Treasuries so much that it now takes real skill to default. The global recession will hype defaults even though many low-rated companies have a cushion of safety from prefunded debt.
  • Decreased returns on junk munis to just 3.15 percent more than investment-grade issues, the narrowest gap in two years.
  • Private-equity firms, helped by Wall Street banks, unloading fracking sand, gas stations and coal mines into master limited partnerships and attracting investors with mouthwatering yields. The market value of MLPs has jumped to more than $350 billion from $65 billion in 2005.
  • Narrowed the yield spread between commercial mortgage-backed securities and their benchmark to below that when real estate was still booming and risks were ignored. Credit-rating companies are warning that the loan quality of such mortgage-backed paper is weakening.
  • Encouraged the stampede into emerging-market bonds and stocks, even though those economies are largely driven by exports to Europe, in recession, and a faltering US, while Chinese export growth and the Shanghai stock index slide.
  • Not slowed investors moving into the sovereign debt of small countries in eastern Europe and elsewhere

Decoupling, like a free lunch, doesn’t exist. Export-led developing countries simply can’t grow independently of Europe and the US, which directly and indirectly buy most of their exports. Evidence emerging-market stocks, which have underperformed the S&P 500 Index in the past year.

Commodities are a speculation, not an asset class with a strong upward price trend. It is commonly believed that commodity prices must go up in the long run since there is limited supply and demand grows as the world demand grows. However, human ingenuity and substitutes have always overcome shortages quickly, viz:

  • New mineral extracting techniques
  • New mining shovels that lift 120 tons and 135 tons.
  • Increased agricultural productivity from better seeds and fertilizers.
  • Improved breeding and veterinarian care in meat production
  • Plentiful natural gas from shale which has collapsed US prices and new crude oil finds have shattered the theory of a near-peak in global energy output.

For the past 150 years, real commodity prices have been in a declining trend, quickly overcoming temporary imbalances caused by the American Civil War, World War I and World War II, the oil shocks in the 1970s.

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Euro-Area Unemployment Rate Rises to Record: Economy – Bloomberg 10-31-12

Salient to Investors:

Unemployment in the 17-nation euro region rose to 11.6 percent from 11.5 percent in August, the highest since data started in 1995. Youth unemployment is at 23.3 percent.

Christoph Weil at Commerzbank is now more pessimistic, saying the euro-area economy will only return to growth in Q2 2013 and the jobless rate will increase to 12 percent.

Professor Joseph Stiglitz at Columbia is very pessimistic about the prospects of a European recovery because their austerity packages will almost inevitably weaken the economy – nothing is in place that will promote economic growth.

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Asian Currencies Rise for Fifth Month on Recovery Optimism – Bloomberg 10-31-12

Salient to Investors:

Asian currencies strengthened for a fifth month on signs of a pickup in China, where industrial output, retail sales and fixed-asset investment gathered pace in September.

Tsutomu Soma at Rakuten Securities said funds are flowing into Asia.

EPFR Global said emerging-market bond funds attracted $44.2 billion this year through Oct. 24 versus $15.9 billion in all of 2011.

Economists expect China’s manufacturing expanded in October for the first time in three months.

Kim Dong Young at Industrial Bank of Korea said there’s not really anywhere money can flow into apart from Asian currencies, and China’s Purchasing Managers Index will show the country is headed for a soft landing.

Bruce Yam at Sun Hung Kai Financial said there have been strong bets that China’s economy is rebounding.

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Geithner-Draghi No Show Risk Turning Mexican G-20 Into Flop – Bloomberg 10-31-12

Salient to Investors:

Athanasios Vamvakidis at Bank of America said that despite many risks to the global economy, the G-20 has weakened substantially, which makes all countries worse off.

Daniel Price at Rock Creek Global Advisors said the G-20 absences say more about the exigencies of domestic economic issues than it does about the future of the G-20.

Walter Russell Mead at Bard College said there aren’t many incentives for cooperation in international economic policy at the moment. Mead said central banks in the US and the EU are bent on a course that makes problems for many emerging markets, but domestic forces supporting those policies are so strong that little will change.

Jacob Kirkegaard at the Peterson Institute for International Economics said  Mexican politics played a role in undermining this weekend’s meeting – there is no real agenda for the G-20 right now, with no urgency for the hosts to present something the leaders can deliver on. Kirkegaard said it’s up to Putin to find a new agenda to reverse the decline of the G-20 – until then, there is sense of fatigue at too many meetings with too few results.

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