World Cup & Rosy Glitter

Okay sports fans. You get your wish. Frida Ghitis reports on the Dutch reaction to being finalists in the World Cup. Colombian-born Frida’s first language was Spanish, so I am surprised she is not supporting Spain. She writes:

Americans may pay scant attention to the World Cup but my friends in the Netherlands are nothing short of euphoric. The Oranje team will play in the finals against Spain on Sunday and the Dutch, in keeping with their focus on economics and global trade, are counting their Guilders (ok, euros) in advance of what 77% of them are sure will be a Dutch victory.

Economics reporters in the Netherlands, having surveyed the matter, conclude that winning the World Cup will boost Dutch economic growth by 0.1 to 0.5%. This, they explain, is because a euphoric country experiences a surge of economic confidence, which in turn spurs spending, which can boost GDP.

It’s hard to imagine the cautious Dutch going on a national shopping binge. On the other hand, beer sales are already visibly – and audibly — up. (Drinking beer is a requirement under FIFA rules.)

Houseboat owners plan to build barricades to keep revellers off their boat tops during Tuesday’s victory parade, to happen whether the Dutch win or lose. When the Dutch team won the European Cup in 1988, houseboats sank in the party. Maybe that was good for the houseboat salvage industry.

Your editor last night went to a dinner hosted by Marta from Sevilha and Chris from Munich who are married to each other. Luckily Germany is out of the World Cup race, or there might have been an Andalucian-style Blood Wedding in Brooklyn. Your USA editor and her English husband observed scrupulous neutrality.

AutoNavi Holdings Ltd , a Chinese developer of photogrammetry (digital maps, and navigation and location software), last week became the 145th Chinese co. to list on Nasdaq with an ipo of 10 mn ADRs are $12.50/sh. AMAP is the 22nd new Chinese listing and the 8th on Q in 2010.

There are two drivers of gains on the stock market. One is corporate earnings and results. The other is liquidity. With newly-listed Chinese stocks, liquidity is in short supply despite the general and Asian market boomlets. Shanghai peaked on Oct. 16, 2007. While I know nothing about AMAP I am sure that the huge AgBank capital raising exercise occurred on Beijing’s orders, to forestall the need for govt. money.

With a weekend looming and stocks up sharply over the past three days, Wall Street can fall today. There will be profit-taking. Maybe it will be offset by money coming in from the sidelines helping support prices. There is a lot of liquidity in the hands of investors still shell-shocked out of stocks.

According to EPFR of Cambridge Mass, which tracks fund flows reported on last week’s moves which seem to have reversed:

Going into the second week of July global equity markets were staging a modest recovery as investors shrugged off fears of a double-dip recession and went bargain hunting. But flow data for EPFR Global-tracked funds reflected the uncertainty of the preceding weeks, with Money Market and US Bond Funds seeing big inflows as most equity fund groups struggled to attract significant amounts of fresh money.

Greece’s Socialist government voted to cut government pension rights and overall job protection to try to force down government debt despite tradition and a general strike yesterday. The strikes were moderate and peaceful after an earlier round left three bank employees dead.

The tradition means that many of the measures to be struck down (details still to come) were put in place by earlier Papandreou family governments, current Premier George P.’s grandfather with the same name, and his father Andreas P. The first time I visited Athens, as a student, I recall demonstrators against the Colonels shouting “eena, eena, tessera” after the article in the Greek Constitution violated by their coup against George I. Andreas went into exile and spent some years as an American academic. The younger George was born in the USA.

Learn from these Euro-American Greeks. A suggestion. How about US states running deficits (often illegal) doing like the Greeks. We should be prepared to cut abusively manipulted state pension rights too. US manipulation typically involves older workers piling up overtime to boost their pensions which are based on take-home pay rather than formal wages.

South Korea has raised its interest rates 25 basis points to 2.25% to control inflationary tendencies. It joins Norway, Australia, Israel, and India in this elite group of fast-growing countires.

Nudged by your editor, reader PS managed to get the interest rate on his margin account with TD Ameritrade cut to a still-high 3.5%. Bargain with your broker in the current low-interest rate environment. We can save you money with fees and commissions to help cover the cost of a fully paid subscription.

Taking to the Hills

Just as some Elliott or Kondratieff wave theorists predicted the Dow would fall to 1000 and we should to take to the hills with gold coins and machine guns, the bearish gloom-mongers were caught by good news.

The International Monetary Fund late yesterday increased its 2010 world growth outlook to 4.6% reflecting a stronger-than-expected H1. Its earler estimate was for 4.2% growth, made in April. That would be the biggest rise in 3 years. Growth in 2011 is projected to be 4.3%, the same as the April forecast.

Then today the U.S. Dept. of Labor data showed that 21,000 fewer Americans applied for jobless benefits last week (to July 3). That is still 454,000 unemployed people.

European banks are up on an assumption they will pass their not-very-demanding “stress” tests. And perhaps because shareholders are happy that new rules will cut instant bonuses by 70-80%, alligning executives’ interests more closely with theirs. Even the embattled euro is up, to $1.27.

German figures showed that imports had risen by a whopping 14.8% sequentially in May, while exports only grew 9.2%. The German trade surpluse narrowed to a mere 10.6 bn euros for the month, well below forecasts.

And as for gold, it now turns out that rather than being a beneficiacy from the printing press at central banks, the yellow metal also was a support for their profligacy. CB swaps with the central banks’ central bank, the Basel-based Bank for International Settlements (reported in its latest annual report to end Mar.) helped them monetarise their gold hoards. The BIS acted as a pawnshop, although so far there have been no revelations that it actually sold any of the 346 metric tonnes of gold placed with it.

Lewis Turning Point…

It would be nice to have stock market gains in triple digits and Fahrenheit temperatures in double ones rather than the reverse. My computer gave trouble all weekend and this morning a technician replaced the modem and things are running smoothly again. We still await the new air conditioner unit for the (yech hot) master bedroom.

If there is no such thing as beta, as reported yesterday in an EDHEC study from France, then there is probably no such thing as alpha either. That’s a shame because today I got a Seeking Alpha article headlined “Lewis Turning Point in PRC.”

It was not about me. It was about William Arthur Lewis, the Nobel Prize economist who posited that at some point an emerging market will run out of cheap labor. The Seeking Alpha article was by Aoyu Bai, a Canadian. Lewis was from Saint Lucia and no relative of my husband’s family more of which is reported for paid subscribers below.

Hon Hai, the Taiwanese company first hit by a wave of suicides in Shenzhen, employs 400,000 workers in that city alone.

Here is the latest from Adam Carr of ICAP, the brokers in Australia whose overnight ponderings are often timely and precise:

The key take out of price action last night, more than anything, is that markets are confused. Following a very strong lead out of Europe (major indices up 2.2-2.9%) US equities were bid up shortly after the open. Gains were slashed in subsequent trading and the index fell 2.3%. The last hour was remarkable. The index bounced in and out of positive territory quite sharply. In the end, the S&P500 was up 0.5%, but it could just as easily have finished lower. Confusion. The bizarre thing is that analysts are apparently raising earnings forecasts at the fastest pace since 2004. A survey of 8000 analysts suggests earnings will rise 34% in 2010 compared to estimates of 27% in March.

The problem comes from the interpretation, or rather the misinterpretation of recent data. Much of this stems from the tendency bears have to use the words ‘slowing’ and ‘double dip’ interchangeably. Consequently they view the slowing in the ISM surveys as proof that the US economy is going to roll over. This is blatantly incorrect. Data is volatile, it bounces around and seeing the non-manufacturing ISM fall to 53.8 in June from 55.4 is consistent with usual patterns of volatility– especially for an economy that only recently has come out of a recession.

Note how rapidly the bearish focus is changing. Recent financial market turmoil began with concerns over sovereign debt in Europe.

The US was a safe haven. Fast forward a few weeks and that issue seems to have died down. In the end, Greece didn’t default and countries like Spain are having no trouble raising money. Indeed they tapped the market for an additional €6bn last night and received €13bn in bids (in addition to strong interest from non-residents). So now we’ve seen concerns over European debt morph into fear of a US double dip. As a result, the Dollar no longer seems to be enjoying safe-haven status and Greenbacks have been sold off. There was a time that was viewed as a bullish signal.

The economic landscape just doesn’t change that rapidly. Only sentiment does. So the trick for investors is to determine the true underlying economic trend – the trend behind these violent swings in sentiment. Unfortunately, given these extreme swings in pricing and sentiment, markets aren’t providing much of a guide now.

I was credited by John Thomas of The Mad Hedge Fund Trader with tipping Thailand and Poland on its pages. Merci. I also warned that gold was going to retreat. TMHFT is great fun and free but its portfolio advice is tough to act on. I also misspelled the name of the new Polish president yesterday. I corrected on the site but the email was wrong. Apologies to all the Polonian-Americans out there. (The term was invented by my old boss, Sen. Clifford P. Case, R.-NJ after he got into trouble for using the Shakespearean word from Hamlet, Pollacks.)

Red Rooster Falters

We’ve had (according to Barry Ritholz) what technicials call a death cross. This tech specialists think means more trouble. There was not much here or in Europe to justify the fall. Sure the bank reform bill is in trouble. And consumer confidence is lagging.

But China had the real bad news. Shanghai fell on revised numbers for GNP growth from the Conference Board . That body corrected a leading index of Chinese growth of 1.7% calculated in April right down to a mere 0.3% now.

But in fact the Chinese market had slumping before this. The bears then escaped all over Asia, and hurriedly released their fellows in Europe and later in the US, where there was nothing particularly awful happening.

But if the Red Rooster is not a strong enough locomotive to pull the world economy out of its malaise, we are in trouble. Instead of watching the stock market sink I attended an alternative energy conference.

A new fund that may be of interest came out from Bank of New York-Mellon’s Dreyfun Corp. whose chief economist I have been quoting lately. Dreyfus Global Real Return Fund will invest globally in pursuit of absolute return. It will be managed by Newton Capital Mgm Ltd, a London boutique which already manages similar multi-asset absolute return funds for non-US investors. Newton is known for its thematic investment approach seeking total return (both capital appreciation and income) using a multi-asset strategy to get real returns with less volatility. The aim is to work over a market cycle (typically 5 years.) It does not use benchmarks or indexes and the goal is to get returns that do not depend on the movement of markets (or beta.) . Jeams Harries is the primary portfolio manager at Newton.

Meanwhile investors in Invesco Powershares ETFs discovered today that its managers have shifted indexes for their funds which keep the same ticker symbols. You no longer own what you thought you bought with this ETF family.

A trio of global funds are affected. Power Shares Autonomic Growth (PTO) will track Ibbotson Alternative Completion IndexTM in place of a New Frontier index; PowerShares Autonomic Balanced Growth (PAO) will drop New Frontier for RiverFront Tactical Balanced Growth Portfolio, and PowerShares Growth and Income (PCA) will drop New Frontier for a different RiverFront Index. Also affected are two Power Shars US portfolios linked to Value Line Timeliness and Rotation which are being linked to Morningstar indexes instead.

The renewable conference lobbied for the US to extend or replace cleaner energy programs which were part of the stimulus bills. They are slated to sink into the sunset by the end of 2010 unless what one delegate called “the Pearl Harbor” impact of the BP Deepwater Horizon gets Washington to change tack.

The American Council On Renewable Energy and the US Partnership for Renewable Energy Finance worried about potential deceleration and loss of jobs as green for green runs out. To say nothing of money for their members. In a joint press conference they called for extension of 1603 Renewable Energy Treasury Grants (AKA Grants in Lieu of Investment Tax Credit) to run out at the end of this year at a time of continued financial crisis and capital scarcity. Conferees, many of them lawyers and financial pros, clamoured for the1603 cash grants program to be renewed and for other loan guarantees and manufacturing incentives. Continued uncertainty and disorder in the US tax equity and credit markets are constraining financing for solar, wind, and other renewables, they say.

If BP is the best argument for money, the worst was the presence of so many foreign investors coming to feed at the trough: engineers, banks, utes, manufcturers of solar and wind equipment, pernsion plans. Even a Spanish Caixa turned up, from Madrid, presumably not in distress and about to be merged into the super-Caixa.

Antonio Garcia Mendez, CFA, of Santander Investment Securities (a US firm), cited the zeal shown by Europe’s “government-intervened banks” for more environmental deals. I had assumed European renewables would find funding hard to get now but he claims “inactive banks are active again” in Europe, and that liquidity, down in 2009, is on the rise along with “a higher risk appetite.” Against that, he noted that despite a strong pipeline of deals, “there are regulatory uncertainties in Spain and Italy.” To say nothing of the US.

Another European, the British-educated German, Gisela Kroess (of UniCredit, an Italian bank) warned that European banks face higher funding costs because of what she called “the Greek crisis” and the resulting lower euro. She thinks the time has come for longer-tenure financing involving mixes of loans, grants and equity. She wants to see a standardized system of funding and protection (maybe called collaterized debt obligations?)

She noted that so far this year there have been 10 US deals with a total funding of $3.4 bn in the USA vs 20 deals with a total funding of only $4.3 bn last year. (Of course this may only be because the funding will soon run out.)

Your editor was interested in how other countries encourage renewables without direct grants. Canada and many Euro countries make local utilities contract long-term to buy green energy and fold it into electricity sold, at a fixed price higher than non-renewables get. Sometimes utes finance the green plant. According to Daniel Soper, CFO of Carbonfree Technology (of Toronto) such pass-through pricing has less impact for example on German retail electricity prices than the bill for upgrading transmission sytems. So it can slip into your electric bill without your noticing.

But he warned that a weak economy makes it harder to contract for passthrough rate payment for renewables because politicians fear supporting it. A tax is a tax when it is contracted for even if it later is hidden.

The industry is frustrated mainly by lack of volume. Canada for example produces zero mW of solar vs 400mW or so in the USA, said Soper. The price of clean rooms and solar panels and cells has fallen sharply as the silicon industry finally woke up to new opportunities from solar. But solar prices are still too high for unaided investment.

Another thought: Consumers could cut their household electricity use by 2-12% and save up to $35 bn over the next 20 years if U.S.utes use smart meters and a range of energy-use feedback tools to educate us to use less energy.This according the nonprofit American Council for an Energy-Efficient Economy .We need at-home or on-line displays to inform and motivate us to cut down on juice consumptiom. ACEEE likes enhanced billing daily or weekly feedback,on- or off-line. But these programs are rare with no US ute providing the full gamut. Most have barely learned about smart meters.

Matters of subsidy and taxation are complicated in the main thing to take away from the above. Simplistic rants against government programs or taxes make no sense. In a period of shrinking investment somebody has to take the initative and right now the designated driver is government.

Stay the course. This is buy time not sell time.

Meeting the Challenge

From Adam Carr of ICAP, the Australian brokerage, some views on where monetary policy is going:

“The Bank of International Settlements always seems to know what’s what. While the G20 meeting may have yielded a flimsy ‘do as you wish’, there was no confusion from the BIS. The Bank is worried about a new crisis developing, but the rhetoric is far from what we’ve become used to. In contrast, the BIS are more worried about heading to the exit too late, which as regular readers know, is my concern also.

“The BIS acknowledged the difficulty policy makers had, especially as the banking system was fragile in some cases. ‘But the longer that policy rates in the major advanced economies remain low, the larger will be the distortions they create, both domestically and internationally.’ The BIS argued that extremely low real rates altered investment decisions, postponed the recognition of losses, increased risk-taking in the search for yield and encouraged high levels of borrowing. There was also the problem that central bankers would underestimate inflation risks given the crisis may have lowered potential growth rates.

“The UK illustrates this view perfectly. Rates are historically low, the economy is recovering, the land registry is reporting house price growth of 8.2%y/y to May (consistent with other house price measures) and inflation is well above target. All the while the governor of the Bank of England insists there is no problem.”
The US is not in the same situation on inflation and house prices. Challenged by a reader on what I would want to see from the Obama Administration now I made a little list, which he called “Porkulus Spending”. TM thinsk any measures would increase the size and reach of governmetn and add new bureaucrats and new regulations which would hamper future economic growth.

This is a challenge, But the US is not in the same boat over inflation and housing prices as Britain. Challenged by a reader to tell what I want the Obama Administration to do, I created a list, which TM thinks is nothing but “porkulus spending. Any measures he fears will add to the size and reach of governments and add new bureaucracy and regulations that hamper future economic growth prospects. But I do not agree.

I think our country is in a crisis because of a lack of liquidity and a lack of what Lord Keynes called “animal spirits” leading to extremely risk-averse investment in no-yielt Treasury bills and keeping corporate cash undewr the mattress rather than investing it. Because there is no way for the consumer to take up the cudgels and invest in this climate, because of American household’s probems with underwater housing mortgages and unemployment, I want the government to act, preferably in ways that stimulate employment, and require the private sector to join in.

The cheap funds are there. I did not create the lack of animal spirits in the bond market or the unwillingness of corporate America to spend the money it has rather than hiding it under a mattress. household oversaving is the likeliest to stop when my proposals are in place but they will also encourage capex by gun-shy corporate America.

Just for the heck of it, here is my list which I think will put people to work and pay them.

We can borrow to invest in the future of America. for my 5 grandkids without burdening them with debt. Here’s how:

We extend unemployment insurance payouts so people can continue to eat while they look for work.We get businesses to come on board with training programs and internships or apprenticeships.

We figure out a way to refinance home loans. I am far too stupid to know how but I do not like families living on the street.

We improve education by cutting down the vacations and extending the school day. Teachers then can continue to get the high pay they collect regardless and produce something in return.

We don’t stop healthcare reform with the first incomplete round and try to avoid taxing elderly Medicare folks at the highest incremental tax rate in the USA.

We invest the borrowed money to replace bridges which are falling down and build toll roads. These will pay for themselves with tolls but meanwhile will put unemployed Las Vegas condo construction workers to work building them. WPA for today.

We beam everyone up to the internet. We reopen closed libraries and offer web access and e-books..I hear America learning.

We build a high-speed railway running from LA to San Francisco (and maybe further north to TM’s area). Another line down the Florida coast to Key West. Maybe even one from NYC to Boston or Washington DC or both. Again we charge fares to repay. And meanwhile people get jobs doing useful things for th country.

We restore breakfasts in school for hungry children so they can learn without their grumbling stomachs getting all their attention. Corporate America can help.

We resume bus service to take people from poor neighborhoods to their jobs, get kids to school without mama-chauffeurs, and get old codgers out of the house. The auto industry can build the buses.

We build nuclear power plants and wind and solar plants. Maybe even hydroelectric dams.

We finish the job in Afghanistan.

We finance the SEC and the new bank lending overseers properly.

We start out by doing a real investigation of the Flash Crash to figure out what happened, what the role of arbitrageurs and electronic was. (That’s the one for us.)

The government is no bigger today than under Ronald Reagan as a part of GNP. US debt is falling without any need for rigorous cutbacks in spending.

The goal is not to grow the government or its reach. the goal is to gorw the economy. Rright now relying on private spending is not working. the cost of borrowing money for even sound and stable companies is way too high. firms which have cash are not spending it out of funk and fear. We have to let the government act as the counter-cyclical force because there ain’t no other. It would be better if there was capex and a functioning bond market. There isn’t one. so I am crying uncle (or Uncle Sam) .

The cheap funds are there. I did not create the lack of animal spirits in the bond market or the unwillingness of corporate America to spend the money it has rather than hiding it under a mattress. household oversaving is the likeliest to stop when my proposals are in place but they will also encourage capex by gun-shy corporate America.

A 17.5% Return … For a Week? Are you kdding me?

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