Goldman Sachs Goes Against Consensus in Dollar Call – Bloomberg 12-13-13

Salient to Investors:

Thomas Stolper at Goldman Sachs said:

  • The US dollar will weaken through 2014 to $1.40 per euro for the first time since October 2011 and there will be only marginal support from interest rates.”
  • Fed tapering is already priced in and will be offset by the Fed keeping its benchmark interest rates around zero even as it reduces bond purchases.
  • All major central banks are on hold until at least late 2015 so there is no immediate catalyst for further gains in the dollar.
  • The persistent deficit in the current account hurts demand for the dollar. The euro area had a current-account surplus in September for the 8th consecutive month.
  • Capital is flowing out of the US and international investors would need to see a convincing growth story to commit more capital to the US, necessary for a breakthrough in the dollar.

The mean estimate of 46 polled analysts calls for a 7 percent dollar rally to $1.28 per euro: 42  expect the dollar to gain against the euro in 2014 as rising Treasury yields lure international investors from lower returning currencies. 10-yr Treasury notes yield 1.04 percent more than comparable German bunds.

BNP Paribas, Barclays, Morgan Stanley and others say a strengthening US economy will allow the Fed to taper.

Jose Wynne at Barclays said the dollar may rest for a while as the Fed gets away with the story that inflation is nowhere to be seen; but this may change in half2 2014 when inflation turns around. Barclays forecast the dollar will rally to $1.27 against the euro by the end of 2014.

Hans Redeker et al at Morgan Stanley said better relative economic growth in the US will be key in supporting the dollar, and the US private sector has de-levered more than the rest of developed markets.

Economists expect the US to grow 2.6 percent in 2014, versus 1 percent for the euro-region and 2.4 percent for the UK.

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Goldman Says Buy H-Shares Amid Growth: China Overnight – Bloomberg 12-02-13

Salient to Investors:

Noah Weisberger at Goldman Sachs said:

  • The Hang Seng China Enterprises Index will rise 18 percent to 13,600 by the end of 2014, the biggest gain since a rise of 62 percent in 2009, on prospects the economy will stabilize.
  • Commodities will lag the rally in equities.
  • Buying Chinese stocks and selling copper futures may generate a combined return of 25 percent next year.  Stability in China’s growth is insufficient to lift demand for copper as a supply glut weighs on the market as economic growth is driven by the developed market.
  • Equities are Goldman’s favorite asset class in an environment where growth is moderate but not overheating, while policy makers remain accommodating.

The median economist predicts China’s GDP to grow 7.5 percent in 2014.

The Hang Seng China Enterprises Index is at 19 percent below its average valuation of the last 5 years.

Allan Conway at Schroder Investment Mgmt has been positive for China for some time and is overweight Chinese stocks with 22 percent of his portfolio.

Goldman recommends buying S&P 500 futures while selling the Australian dollar; betting European interest rate swaps will decline while 5-year Treasury yields will rise; and selling the Canadian dollar.

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Race to Bottom Resumes as Central Bankers Ease Anew: Currencies – Bloomberg 11-11-13

Salient to Investors:

Axel Merk at Merk Investments said it is a very real concern of countries to keep their currencies weak, and Draghi has persistently been trying to talk down the euro since earlier this year.

Neil Mellor at Bank of New York Mellon sees a new era of currency wars, and sees a change in tone from South Korea, Australia and New Zealand.

Alan Ruskin at Deutsche Bank cites some economies that are generally weak and whose inflation is already low, and said Japan was in that mix for over 20 years and nobody wants to go there. Ruskin said Draghi is taking the disinflation story very seriously, while the Czech Republic is the same story.

Adam Cole at Royal Bank of Canada said the idea that central banks are setting policies to weaken their currencies has always been overstated: in most cases they are happy to see their currencies fall, but they are not targeting weakness.

Lane Newman at ING said the euro-zone central bank wanted to engage in a currency war because they cut rates knowing it was going to put the euro on the back foot.

The Australian Dollar is 27 percent overvalued versus the US Dollar according to a gauge of purchasing-power parity compiled by OECD.

Analysts predict the Fed will delay tapering until March.

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Fed Leaves Hedge Fund Bears Waiting on Emerging-Markets Bet – Bloomberg 09-19-13

Salient to Investors:

Ray Bakhramov at Forum Global Opportunities Fund said:

  • What we have seen so far is just a preview as a bottoming in any asset class typically takes 4 years.
  • The combination of slower growth and Fed tapering will accelerate redemptions, triggering a slump for stocks, debt and currencies.
  • The jump in interest rates prompted by Bernanke just talking about tapering shows that preventing a further rout in emerging markets may be beyond central banks’ control, especially if developing nations and companies start struggling to fund themselves.
  • He is betting against the Chinese yuan
  • The September rally shows that people are still complacent that the Fed will take care of every problem, and people are mistakenly in seeing emerging markets as an issue, but not a big issue.

Barclays and JPMorgan Chase say the worst of the emerging-market sell-off may have already passed.

Anthony Lawler at GAM said hedge-fund managers have been looking for something to break, and central banks have been trying very hard to not let anything break. Lawler said the rupee and rupiah, which fell the most after Bernanke first hinted at tapering, have not led to windfalls for hedge funds because they are not liquid enough to bet against in a meaningful way.

Hedge Fund Research said hedge funds focused on emerging markets account for $155 billion of the industry’s $2.4 trillion of assets under management. HFRI said hedge funds broadly gained 3.9 percent through August versus a loss of 12% for the MSCI Emerging Markets Index and gain of 15% for the S&P 500, while the hedge-fund industry had an average annual gain of 4.2 percent from the start of 2007 through the end of 2010.

Stephen Jen at SLJ Macro Partners has been warning that slowing growth and the reversal of capital flows will crush currencies and the worst is yet to come. Jen said only 10 percent of the IMF estimate of $7.7 trillion pumped into emerging markets over the past decade has been pulled, and the Fed has not even started tapering. Jen said sell-side analysts have been too bullish on emerging markets based on the demographic trends, oblivious to the emerging-twin deficits: overextended credit cycles and extreme valuation of both currencies and the underlying assets.

Alper Ince at Pacific Alternative Asset Mgmt says to avoid hedge-fund managers wedded to either bullish or bearish views on emerging markets until there’s more clarity about the effects of Fed tapering and Syria. Ince said emerging-markets underperformance is overdone since May, but it is too early to buy because of so much uncertainty.

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Global equity funds attracted the largest inflows since at least 2005 in the week ended Sept. 18 as investors piled into stocks before the Federal Reserve’s decision to maintain monetary stimulus.

The funds lured a net $25.9 billion in the period, Wei Liang Chang, a foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. (ANZ), said by phone from Singapore today, citing data from EPFR Global. Developed markets posted $24.3 billion of inflows, while emerging-nation funds drew $1.6 billion, according to Chang.

The MSCI All-Country World Index climbed to the highest level since 2008 on Sept. 16 after Lawrence Summers withdrew his bid to become the next Fed chairman, easing concerns that he would curtail monetary stimulus. The gauge extended gains after the U.S. central bank unexpectedly maintained its $85 billion monthly bond-purchase program two days later.

“People will find some space to breathe at this point,” Wellian Wiranto, an investment strategist at the wealth-management unit of Barclays Plc, which oversees about $217 billion worldwide, said from Singapore today. “In the coming week, we see further inflows given appetite has stabilized quite significantly and tapering was postponed.”

Taper Timing

Fed Chairman Ben S. Bernanke first signaled on May 22 that policy makers could reduce the bond purchases, triggering capital outflows from emerging markets and a month-long selloff in global equities. More than $50 billion left global funds investing in developing-nation bonds and stocks, according to EPFR Global.

Bernanke said Sept. 18 that a decision on slowing the pace of asset purchases would depend on economic data, and that the Fed has no set timetable.

“It’s hard to see the Fed start to taper at the next meeting in October,” said Wiranto. “If they really want confirmation of a recovery, one or two data points won’t do it for them.”

The MSCI All-Country World Index slipped 0.1 percent to 389.77 at 4:58 p.m. Hong Kong time, paring a third straight weekly gain to 2.6 percent. The measure has added 15 percent this year and trades at about 14 times projected 12-month earnings, the highest level on a weekly basis since April 2010.

The MSCI Emerging Markets Index also lost 0.1 percent, trimming this week’s advance to 3.5 percent. The gauge has declined 3.3 percent this year and is valued at 11 times forecast profits, the highest level since March, according to data compiled by Bloomberg.

Hedge-Fund Manager 36 South Doubles Bets on Securities Swings – Bloomberg 09-12-13

Salient to Investors:

Jerry Haworth at 36 South Capital Advisors LLP said:

  • He has increased volatility investments to 90 percent of assets from 50 percent at the beginning of the year fluctuations in markets including currencies, commodities and equities.
  • Central banks have flooded the world with liquidity, which confuses the pricing mechanism, so the longer that it carries on, the subsequent volatility will be greater.
  • Volatility is particularly undervalued in the currency and commodity markets, while equity options are emerging as attractive bets.
  • Unintended consequences of unprecedented central bank intervention in the last 4 years could be significant, while the level of credit and debt globally is a “gray swan” that keeps the financial system complex and fragile.
  • Redemptions indicate it is probably the last thing that happens before it turns.

The median economist expects the Fed to taper this month.


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36 South Capital Advisors LLP, whose Black Swan Fund returned 204 percent in 2008, has doubled bets this year on greater fluctuations in markets including currencies, commodities and equities.

The manager overseeing $626 million has increased volatility investments to 90 percent of assets from 50 percent at the beginning of the year, Chief Executive Officer and Head of Investments Jerry Haworth of the London-based company said in a telephone interview yesterday.

Central bank intervention, including asset purchases globally in the wake of the 2008 global financial crisis, have calmed investor jitters and suppressed price gyrations, making protection against bigger security price swings cheaper to obtain for funds such as 36 South.

The hedge-fund manager’s own Global Implied Volatility Overall Index, which tracks volatility implied by prices for options on currencies, commodities, interest-rate securities and stocks, stood about 10 percent below its average since the end of 2006 and was approaching the pre-crisis level in 2007.

“The central banks have been flooding the world with liquidity, which in a way confuses the pricing mechanism,” Haworth said. “We got the feeling that the longer that it carries on, the subsequent volatility that will happen afterwards will be greater.”

Black Swan

36 South runs funds that profit from increases in volatility. Its flagship Kohinoor series of funds, which account for 94 percent of assets, returned 73 percent in 2008, according to a presentation seen by Bloomberg News. They lost 2 percent in the first seven months this year. When volatility is expensive, the funds raise their cash and government bond holdings.

It also oversees funds that benefit from rare events that have a heavy impact on markets such as the global financial crisis. The Black Swan Fund and its successor the Black Eyrar Fund refer to a theory developed by New York University risk engineering professor Nassim Nicholas Taleb, in which highly improbable events wreak havoc on markets.

The Chicago Board Options Exchange Volatility Index, the cost measure of using options to protect against falls in the Standard & Poor’s 500 Index better known as VIX (VIX), is 39 percent below its average since the start of 2007.

Subdued volatility led to investment losses and closure of managers whose funds sought to benefit from increases in price swings. Two Hong Kong-based managers — Sharp Peak Capital Management Ltd. and Protege Partners LP-backed Expedition Advisors Ltd. — shut down in the last two years.

‘Cheap Ticket’

People should be reminded that this is probably a better time to buy volatility than sell it, Haworth said.

“You buy a ticket to a life raft well before everyone else is clambering to get on,” he said. “When you have an opportunity to get a cheap ticket, you should buy it.”

Volatility is particularly undervalued in the currency and commodity markets, Haworth said. Equity options are also emerging as attractive bets, he added.

The U.S. stimulus program has funneled more than $2.6 trillion into the financial system since September 2008. Federal Reserve ChairmanBen S. Bernanke told Congress on May 22 that the central bank could scale back the pace of its $85 billion of mortgage bond and Treasuries purchases if the U.S. economy showed sustained improvement.

The Fed this month will taper its monthly bond purchases to $75 billion from the current $85 billion pace, according to the median estimate of 34 economists surveyed on Sept. 6 by Bloomberg News.

‘Gray Swan’

The unintended consequences for the financial system of the unprecedented central bank intervention in the last four years could be significant, Haworth said. He also described the level of credit and debt globally as a “gray swan” that keeps the financial system complex and fragile. Gray Swan refers to a predictable event with a potentially very high impact.

36 South’s assets have steadily grown from about $250 million in March 2011, as asset managers, pension funds and wealthy individuals have sought to increase protection and investment returns that don’t move in tandem with traditional assets, Haworth said. Last month, it saw a small redemption.

“In a way, I’ve been looking forward to redemptions because they tell me that it’s probably the last thing that happens before it turns,” he said, without providing details on the withdrawn amount.

Russia to Brazil Intervention Adds to U.S. Debt Distress – Bloomberg 09-09-13

Salient to Investors:

Scotiabank and Bank of America said India, Brazil, Russia and Indonesia have intervened in foreign-exchange markets, and dollar sales mean liquidating Treasuries. Ali Jalai at Scotiabank said there is a lack of buyers in the Treasury market, while selling by central banks to back up their currencies exacerbates the situation.

Developing country currencies are tumbling amid capital flight from their equity and bond markets because the Fed plans to taper. The JPMorgan Emerging Markets Currency Index’s 4-month drop through August has not been exceeded since a 10-month losing streak in 2001.

Sean Callow at Westpac Banking said that countries like a weaker currency so long as it is not generating much inflation and undermining confidence in their currency. Callow said for nations like India and Indonesia, a weaker currency will only amplify their inflation concerns, but Korea would like a slightly weaker currency.

EPFR Global says over $47 billion has left funds investing in emerging markets since May, and 2013’s net outflow stands at $7.5 billion.

Foreign reserves of the 12 biggest emerging markets, excluding China and countries with currencies whose values don’t change freely, have fallen 2 percent in 2013, the most since the 11 percent slump after the collapse of Lehman 5 years ago.

Foreign ownership of Treasuries fell 0.6% in half1, 2013 and is set for the first full-year decline in data going back to 2000 and versus 10 percent annual gains seen since 2006.  The Fed surpassed China to become the biggest owner of Treasuries in 2011, Fed holdings of Treasuries totaled a record $2.03 trillion last week versus China’s holdings of $1.28 trillion and Japan’s holdings of $1.1 trillion.

Bin Gao at Bank of America said a large proportion of central bank reserves go to the fixed-income markets, so when FX reserves drop, they need to sell some of their bonds – it is hurting Treasuries already.

Stephen Jen at SLJ Macro Partners said emerging-market central banks will be under intense pressures to defend their currencies by selling their underlying Treasury holdings, possibly triggering a negative spiral between pressures on emerging markets and US Treasuries, through the emerging-market central banks’ reserves.

G-20 countries said a shift in Fed policy may prove damaging to global markets.

The median analysts forecasts yields on 10-yr Treasuries will be 3% by mid-2014 and 3.2% by the end of 2014, and versus the 3.54% average over the past decade.

Hideo Shimomura at Mitsubishi UFJ Asset Mgmt said currency reserves globally have risen 3 percent this year, and the increase will blunt the effects of dollar sales. Shimomura said some countries will have to sell Treasuries, but it has not had a big impact on the market so far.

The BIS said the US dollar is dominant and was on one side of 87 percent of all foreign-exchange trades in April.

The median economist expects the Fed to taper its monthly purchases of Treasuries and mortgage bonds by $10 billion at its September meeting.

Kit Juckes at Societe Generale said buyers of American Treasuries will be American private-sector investors going forward to a greater degree, and tapering is an exercise now in price discovery when the biggest buyers are walking away.

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Fed’s Messages Raise Volatility in Threat to Profits: Currencies – Bloomberg 07-18-13

Salient to Investors:

The Fed’s mixed messages on monetary policy are stoking volatility in the currency market, raising the odds that companies will have a harder time setting up exchange-rate hedges designed to protect overseas earnings.

Ulrich Leuchtmann at Commerzbank said if a high-volatility environment were permanent it would cause problems when people have to roll their hedge positions.

Chris Turner at ING said stop-go monetary policy communication among some of the world’s most powerful central banks is leading to much volatility. Turner said most agree that the dollar is set for quite a decent rally.

The dollar’s strength is contributing to a projected 1.5 percent decline in Q2 earnings for non-financial companies in the S&P 500 Index. Analysts expect at least three more quarters of weakening for the yen and euro, cutting the dollar value of goods sold overseas.

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P&G to Apple Hurt by Strong Dollar Keep S&P 500 Profits in Check – Bloomberg 07-09-13

Salient to Investors:

US companies are poised to post some of their weakest quarterly earnings reports in 4 years, in part due to a stronger dollar.

The IMF cut its forecast for global growth in 2013 to 3.1 percent, and for the US to 1.7 percent.

Analysts who reduced earnings forecasts in recent weeks have boosted price targets on the S&P 500 companies, convinced the economy is growing fast enough to lure investors.

Howard Silverblatt said selling in Japan will be hard for retailers because of the weakening yen, though currency risks give a handy cover if Q2 results fall short of estimates.

Options traders are betting than 29 of 31 major currencies will fall in 2013 versus the dollar.

Walter “Bucky” Hellwig at BB&T said to offset Fed tapering, we need strong employment numbers domestically because Europe is in recession and growth in China is slowing.

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Did Bernanke Signal Return of Risk-Off Market? – Bloomberg 06-27-13

Salient to Investors:

A. Gary Shilling at A. Gary Shilling & Co. writes:

Short stocks and commodities, go long the dollar and Treasuries – if stocks continue to decline, the safety of Treasuries and investment-grade bonds will outweigh concerns about the end of QE.

World economies are growing slowly at best and hold no interest for equity investors, whose entire focus has been on QE.

Investors are facing two shocks: the end of QE and a hard landing in China.

China’s growth is slowed by huge excess capacity and declining numbers of labor force entrants. Official growth data are vastly overstated. and is closer to the 5 percent to 6 percent hard-landing level. China’s total domestic credit from banks et al was 207 percent of GDP in 2012 versus 145 percent in 2008, with much of the increase coming from shadow banking. Short-term interest rates rose to 25 percent last week.

Ultralow interest rates have pushed investors into the highest-yielding assets they could find, regardless of risk, including junk bonds, leveraged loans that finance private-equity buyouts, developing country bonds, investor-owned single-family rentals, and high-dividend stocks such as utilities and consumer staples.

Investors are dumping emerging-market assets and junk bonds. High dividend stocks which outperformed in Q1 underperformed in the recent sell-off. Pension funds have moved into private equity, developing-country stocks and bonds, hedge funds and even commodities.

The average closed-end bond fund has fallen 10.7 percent in the past month versus a 3.4 percent decline in open-end bond funds.

Developed country stocks have much further to drop. The sluggish US economic recovery has produced minimal sales volume growth and no increased pricing power as inflation rates fell to zero, resulting in companies cutting costs, pushing corporate profits’ share of national income to an all-time high.

Robert Shiller’s cyclically adjusted P/E indicates the S&P 500 is 30 percent above its long-term trend.

Slower Chinese growth in manufacturing undermines the rationale for the commodity bubble of the early 2000s. Higher interest rates are eliminating the incentive to store crude oil for sale in the futures market at higher prices.

Gold buyers who thought QE would promote instant hyperinflation are finding instead inflation rates dropping to zero and higher interest carrying costs.

The dollar should continue to gain as a haven, especially as protection from the euro. The strong dollar makes many commodities more expensive for businesses that operate in weakening currencies.

The yen will continue to drop against the dollar as Abe tries to turn deflation into 2 percent annual inflation and force the BoJ to double its purchases of securities.

Commodity currencies such as the Australian dollar, the Brazilian real and the Russian ruble remain vulnerable as exports and prices continue to fall.

Currency devaluations in Japan and elsewhere will be matched by competitive devaluations worldwide. No country wins in competitive devaluations as foreign trade is disrupted. In the end, most will end up devaluing against the US dollar.

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Jim Rogers optimistic on Malaysia and asia – Jim Rogers Blog 06-24-13

Salient to Investors:

Jim Rogers writes:

  • Malaysia is making positive dramatic changes. All Asean countries are going in the right direction.
  • When the huge currency turmoil comes, bet with the creditors and not the debtors. There is no such thing as a sound currency and no country will escape unscathed, but positives changes in Asia will enable it to rebound quicker and emerge stronger.

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