Merrill over Matter

Monday, May 10, 2010

We're from the IMF and we are here to help you.

Before the PIIGS (Portugal, Italy, Ireland, Greece, Spain) of Europe breathe a deep sigh of relief as their funding problems are 'fixed' there's a few items to mention:

Assuming the money arrives you still have to deal with the IMF which has a usual gameplan of:

Devalue the currency
Raise taxes
Cut government spending

Item 1 is out the door as countries use the Euro
Raising taxes and cutting government spending is not a mix that encourages GDP growth. Consider that when making your investments. Don't forget that during this period of IMF induced austerity debt / GDP levels will continue to rise. This is the mother of all 'kicking the cans down the road'.

The wad of money (nearly a $US Trillion!) will be used to allow countries to roll their debts, not stimulus. The French banks are breathing a deep sigh of relief right now. Everyone else should rethink what this all means.

Here's a video with my favorite hedge fund agitator explaining the situation. This interview occured before the announcement but it still holds true.

(ht Zerohedge)

Thursday, May 6, 2010

Well that was exciting. What's next?

I'm certain you already know by now but the markets took a serious hammering today. While some are claiming a trade error took us down nearly 1000 points on the Dow before recovering the proximal causes of this recent selloff are still with us:

Greece is on a slow downward spiral towards default or a very severe recession / depression. After the most recent bailout announcement the markets calmed down for one day before continuing to de-risk. The contagion has spread and now Spain, Portugal and Italy are possibly next. Who and when is next I don't know.

China continues tightening and is determined to stamp out rising property prices. I have some more information that I intended to post on this but I've been a bit busy. Fortunately I was finishing up de-risking a few portfolios yesterday.

The Fed's purchase of mortgage backed securities ended March 31 so from now on the money supply will start to contract. The Fed is effectively tightening right now.

The home buyer tax credit deadline ended a few days ago so the housing bounce is over with.

Bank lending continues to contract for both households and small companies.

I've gone over these items before but the Greek situation started the ball rolling downhill. Until several of the above items are resolved what happened today was not a 'one time event'.

Friday, April 30, 2010

Some more China property news -- Speculation at a turning point?

I'm not talking about Greece for now as the situation is so fluid and even if they get IMF/Euroland funding it is going to still be a nasty long haul for the Greeks . . . . On to China.

A good article regarding property speculation occurring in the 'boonies' of China, not only the main cities. From Chovanec:

I’ve heard experts insist that it’s purely a top-tier phenomenon, but the evidence of my eyes and ears tells me that similar market dynamics have taking hold all across China . . .
Note several familiar trends I’ve been mentioning all along: people buying multiple apartments they have no intention of occupying; up-front cash purchases; funds channeled into real estate due to lack of investment alternatives; a property market that far outstrips the local economy in size and energy; reliance on construction as a job-generator; and buyer psychology approaching obsession.

The recent clampdown on property speculation appears to have already tamped down prices and reduced the enthusiasm of some buyers. From Chinadaily:

As new policies released by the Chinese government are effectively cooling down the real estate market, a rush to return purchased properties are emerging in many major cities, mainly led by speculators, the National Business Daily reported on Thursday.

Finally something that is a bit more opaque but possibly as powerful. The state's rhetoric against property hoarding and speculation by officials (corruption) appears to be heating up. This is much harder to determine as I'm not an expert China watcher. As such I don't know how important this is but reading the tea leaves it may be part of a larger strategy. From BusinessInsider:

In the commentary, entitled “To Solve The Populace’s Housing Difficulties We Must Root Out Self-Enrichment By The Powerful”, the author attacks corruption as the root cause of the failure to provide enough affordable, subsidized housing. And without a massive increase in the supply of affordable, subsidized housing, the government will not succeed in cooling down housing-related tensions that now threaten social stability. . .
The central government has staked a huge amount of credibility on cooling the real estate market and resolving housing difficulties for the masses. Skeptics will rightly say that Beijing has tried this before, several times, and never successfully reined in the web of interests and corruption that distort China’s real estate market. This time I think will be different, as the central government likely believes that housing related issues are the biggest threat to social stability in China.

If China decides to institute an annual property tax, like we have in America, the rush to the exits will be massive. Until then it will be hard to precisely determine if / when the top is in.

Thursday, April 29, 2010

Chinese property prices already falling?

I've previously mentioned the new restrictions on property purchases in China. It appears they are already deflating prices.

From China Daily

The average price of second-hand houses in Beijing's Tongzhou district has dropped from 21,500 to 18,500 yuan per square meter, a decrease of 13.4 percent since the government issued stricter rules to curb speculation, the Beijing Times reported Wednesday.

Prices of some projects even plunged 25 percent, the report said.
Beijing Centaline Property predicted that housing prices in Tongzhou district will continue the downward trend and fall below 16,500 yuan per square meter by May.

It's only one bit of data but interesting nonetheless . . .

Monday, April 26, 2010

China getting smacked tonight

At the end of Shanghai's morning session the main index is down 2.1+%

Shanghai 300

It appears the recent rules designed to curb property price speculation have bitten hard, from ChinaDaily:

According to real estate research institute China Index Academy, among the 35 cities it monitors, 21 experienced a fall in transactions last week, with Hangzhou suffering the biggest drop of 72.6 percent. Property sales in Beijing, Shanghai and Shenzhen fell 45.5 percent, 32.9 percent and 63.9 percent respectively over the previous week.

It will be interesting to note if this is just a pause that refreshes or if the Chinese consumer realizes the gov't will keep twisting the screws tighter until they get home prices to calm down.

The Shanghai property index can be a useful indicator to watch. If you notice it lead (or coincided with) all the previous major up and down trends from the last 3 years.

[edit: now down 3+% and breached low of Feb 3, 2010. This is not a good technical sign ]

Greece -- The government subprime bomb continues smoldering

Bond yields continuing blowing out in Greece. The question becomes what will trigger the explosion or defuse this situation??? Here's a synopsis from the articles mentioned below. I suggest you read both.

German Chancellor Angela Merkel is trying to wait on any decision until after the May 9 regional elections. If the elections go poorly this could make it worse for Greece.

There are court challenges prepared for the bailout from Germany to Greece readied and it appears there may be a ruling from the German constitutional court in early May as well.

While I haven't found any news reports, I wonder how the Italians, Portuguese, and Irish think about bailing out the Greeks? Their economies are a total mess as well and any resistance from these countries will also fan the fires.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7632366/Maastricht-madhouse-fuels-EMU-wide-contagion-from-Greece.html

http://www.ft.com/cms/s/0/47b429f4-5091-11df-bc86-00144feab49a.html

As I mentioned on the comment bar to the right, the official declaration for aid by Greece only helped their bond market for one day.