Updates for April 2010

Hi to all,

March was a pretty flat week with little happenings and April looks set to beat March on that.
After the market rallying for a few weeks in a row, today it is taking a break.
I cannot and do not market time as my track record is embarrassing and I do not wish to catch a falling knife. I will still continue to buy things on a cheap, albeit at a slower pace.
However I do note the following,

• Markets is still flush with liquidity, no major tightening...yet, except for 
• China on tightening concerns (Andy Xie wrote a good piece HERE)
• Housing 
• China just up the minimum down payment for mortgage
• First house from 20 to 30% 
• Second house from 40 to 50% ,rates at 110% of PBOC's lending rate
• Govt clammed down on land hoarding real estate firms 
• Mortgage/GDP of 15% vs 80-110% for developed nations prior to the crash
• But China is GDP driven - using fixed investments)
• Property price to income is on average 20+x (I.e 20 years to payoff mortgage)
• Yields are rock bottom at 2-3% (I.e takes 33-50 years to recoup property costs)
• Banking 
• Bank reserve ratio was hiked 50bps to 16% previously 
• We can probably expect more in future as a way to control individual regions lending practices 
• Economy 
• China inflation now is at a 16 month high 
• Shut off loans to areas excess capacity since 2009, ex cement, steel, property
• China consume/invest to hit GDP# not vice versa
• Exports are still weak, especially with the recent trade deficit (See below)
• I do not think the property frenzy will end. Why? 
• Huge transfer of wealth from Govt to people in terms of resettlement cost
• Govt borrows and pays off residents (big time!)
• Residents have no roof over head + high inflation ...they buy houses, if not stock market 
• Do you think yields and down payment matters to residents?
• Govt needs to not only tighten fiscally and monetarily but also structurally, if not the middle class will suffer the most
• China recorded their first ever trade deficit of US 7.2 bil since 2004
• Compare this to US trade deficit of US 37 bil (Jan 2010)
• China spent 10% of their 2009 GDP to buy USD / sell RMB, 28% of goods services sold
• Revaluation of the RMB will cause thin margin exporters to suffer (Think textiles)
• This is xpected since exports were facing negative growth since 2008 and with Chinese being such large consumers, we cant expect them to be the worlds OEM plant forever without some form of improved or higher quality consumption
• Greece bailout 
• USD 41 bil by Euro counterparts, 3 year loan at 5%,wow!
• Induced buying for Greek 10 year bond, reducing yields 7.5% to 6.65% 
• Greece recorded 12.7% budget deficit on GDP
• Spain had 11.2% and Ireland 12% 
• They need to follow Germany to build a more efficient economy (Mindset shift needed)
• Blackrock bought 4% yield US notes while PIMCO shunned it 
• Classic case of inflation vs deflation bet 
• Personally theres a good reason why PIMCO may be right ....
• High fiscal deficit + high debt levels = likely rise in real interest rate and inflation 
• Higher rates lead to loss in bond value and inflation erodes the price of bonds
• Chasing the 4% is akin to short term bullish cyclical view wrapped in a secular depression
• Bill Gross (Pimco) said a country can issue more debt to escape a debt crisis only if: 
1. Country can issue own currency and is accepted in global commerce? 
2. Initial conditions moderate (Debt, deficits, demographics and growth)?
3. Can it issue future public debt as a substitute for private credit? 
4. Central bank can reflate via low/negative rates without creating a currency crisis?

• Performance checklist wise 
• Greece failed
• UK slightly better but
• Likely issuing more debt = inflationary pressures and bringing Pound down 
• US passes but 
• Doesn't mean US bonds are good investments
• est. US 46 tril (4x out.debt currently) of unfunded social medicare insurance.
• Position bond portfolios on 
1. Short end of curve- nations with successful reflation (Rates stay low)
2. Far end of curve - debt deflation resilient nations (Germany and Core Europe)
3. Each unit of quality credit spread will do better than a unit of duration
• SUMMARY 
• We are in for one big ride!
• Emerging / developing nations  are catching up fast
• China has an increasingly structural issue
• Seems like hubris taking effect with all the social problems kicking in 
• Starting to undersave and overspent - a cycle starting once again
• This gives rise to likely dips in the next few weeks
• By ensuring one buys good quality business with favorable pricing power, one is essentially hedging against inflation. That will be my guiding principle for 2010.
China, Greece, China property, Bill Gross, GDP, Andy Xie, inflation, deflation, debt