Saturday 30 May 2009

Hot Hot Hot

Admit it, it’s hot…
It’s hot…hot hot hot..seriously, searingly, blazingly hot. We’re not talking hot like when you burn your tongue on that pizza slice you left for too long in the oven, we’re talking white-man-turning-into-Mediterranean-tanned-looking-lothario in the seconds it takes to cross the road to your car when leaving a restaurant. Official figures have put the temperature at above 50 degrees Celsius in the UAE sun in the last 24 hours. It surpassed 52 degrees on Wednesday in Riyadh – and we’re still in May – the best part?...the real heat doesn’t arrive until the end-of-June.
What’s the heat got to do with the economic situation in the UAE and the region I hear you ask? Well, it’s not so much the heat itself as much the admittance and official recognition of the chart-topping record by the Dubai authorities. This time last year, there were several occasions where it was easily above 50 degrees but the official mercury recorder never seemed to go above 49 degrees. Funny that, considering the law stipulates that all work on construction sites must come to a halt to protect the health (and sanity) of exhausted labourers working outside in the steaming elements.

Thing is, quite a lot was different this time last year within the UAE. Abu Dhabi had not come in and bailed-out much of Dubai’s credit-starved entities and projects. Construction sites were heaving with workers day-and-night, 24/7 and the pace of development was still deemed an absolute necessity to the future growth prospects of the emirate. Indeed, the belief that when the cranes stopped the economy would falter was still tightly held to, and the cranes were moving even as the rest of the world started to reel under the financial mess created in the US – in some famously portentous words, some Dubai officials declared that “they would remain immune to the global-crisis”. Heat and its measurement were shrouded in controversy, and when the rest-of-the-city could barely move without dripping in sweat, the cranes continued. Along with excuses such as “it’s not above 50 degrees in the shade”, the mercury stubbornly remained at 49 degrees far too often.

So the official recognition in the last 48hrs is significant for one of two reasons – depending on how cynical and conspiratorial you like to be (i.e. how much of Michael Moore’s movies do you believe?). One might view it as another example of Abu Dhabi’s influence across all corridors of power within Dubai, ensuring the way the emirate does business and conducts itself in the eyes-of-the-world is deemed fair and responsible –something Abu Dhabi has consistently touted as one of its major aims, not so much Dubai in the past. This would be in keeping with the recent “Federalisation” of the UAE as a whole – Abu Dhabi reigning back-in some of the more questionable tactics employed by its neighbour at the height of the giddy-days. Stopping work to protect the labourers (and the UAE’s reputation) would be a good reflection of this.

The other angle is the dramatic change in strategy amongst Dubai’s real-estate developers, with a current noticeable trend in delaying projects and payments as much as possible. This is to help Dubai get through the most difficult period of the global crisis and help preserve the precious funds it is receiving for entities such as Nakheel and Emaar. One might surmise that any excuse to stop-work on a construction site is now extremely welcome and desirable – how things change. Workers’ and architects’ wages can be pushed back, citing a “delay in delivery”. Admittedly, a rather cynical outlook as mentioned above, but still one that falls nicely into the immediate needs of Dubai’s stricken developers.

Either way, and whatever the sudden admission of the sun’s power, God help you if you are wearing shorts and place your bare flesh on that leather-car seat that’s been baking in the sun for too long.

10-yr Treasury yields are causing some consternation – the rapid increase in yields this week has caught some observers by surprise. How could it have? There have been increasing rumbles of discontent with the continued spending by the US administration for at least a month now, with some warning signs having rippled through when China started talking about “concern” over the future of the US$ as a reserve currency. The US$ is on its way to end the month weaker, dramatically so vs Euro (a little less vs the very-much-in-trouble itself GBP).
Oil and Gold have both continued to rise, with oil now resuming the rise towards $70/brl (above $65/brl right now). As for Gold, it continues to display both its inflation/deflation hedge properties – making its way slowly back towards the psychologically important $1,000/oz barrier. As per yesterday’s message though, could we be witnessing the formation of a number of false-dawn factors that will only end in tears when the economic macro-environment (continued rising unemployment for example) does not play-ball in September?

The main reason for the selling-off of Treasuries appears attributed to increased risk-appetite, especially for returns in those “decoupling v2” economies of Asia and other emerging markets. Just take a look at how even Japan’s Nikkei has appreciated almost 12% since the end of April, shrugging off the news that the economy was contracting faster than ever last week, and now this week buoyed by the highest industrial production increase in 56years (+5.2% from March – albeit from a very low base). Every major index in Asia (ex Japan) is now returning more than +25% YTD. China, Taiwan, India are north of +50%. Middle Eastern markets have had an (oil story backed of course) return-to-form, with Abu Dhabi now returning 11% for ’09 but having come back 26% since its low in early January. Dubai is also up 27% from its low in mid-Jan. Latin American markets are all rocking, with Argentina and Brazil both up 40% YTD. Peru, the world’s best-performing market, is riding extremely high at +84%! These are all signs that investors are parking capital in higher-yielding assets. This requires a move away from the safety of the US$.
Return-starved, cash-rich pension fund managers and other players that feel they have missed out on the last 3-mth rally are all scrambling to get into the laggards and touch upon a bit of the magic return themselves – let’s hope this doesn’t all come crashing to a sudden halt when the realisation is that the fundamental floor beneath a lot of this renewed desire to branch-out and deploy overly-static capital was never there.

Thursday 28 May 2009


Oil and sustainability. They seem to be the key words for today, tomorrow and next week. Oil has been the talk of investment circles for the last few days, as it spiked back to $60/brl even faster than it takes most hedge-fund managers’ to fill their tanks at the local petrol station. OPEC has today confirmed it will maintain production targets (for the second meeting in a row) as they anticipate demand to continue to push the future delivery price of their prized commodity higher in the near-term. Saudi’s Al-Naimi seemed keen to maintain the price appreciation that Crude has enjoyed since its low back in December ’08. Oh, and one more thing, please don’t talk about OPEC being a “cartel” – they seem quite sensitive about this label and are concerned the public are provided with a negative image of the 12-member “organisation” - Note to OPEC marketing manager – you have a tough job ahead of you if your remit is to get people thinking highly of you.

Sustainability is the other watch-word. Focusing on the market rally and its longer-than-anticipated performance – catching more and more people by surprise but now inducing too great a sensation of the old “I-feel-like-I’m-missing-out” effect
Here are some key moments we’ve experienced in the last three months: 10 year yields have risen 109 basis points since the low posted on 18th March. This low came on the back of the Fed’s quantitative easing announcement (i.e. printing A LOT of money). Crude Oil has rallied 89% since the February low. The low to high move in the S&P so far, between March and May, has been 62 days and 39%. In addition the 200 day moving average stands at 934. We had a very similar situation back in May 2008 where signs of a swift market recovery after the rumblings of late 2007 appeared to be well and truly on their way to full development – and look what happened there, yep, September-Nov 2008, and then Jan-March 2009.
Important to remember that although this rally has been very welcome, most of it is a direct result of the TARP funds being re-distributed through the US financial system. The funds the banks were provided as a life-line have invariably found their way into the capital markets – an effect exactly in line with what the US, and other global administrations, wanted to engineer. While a 39% rally is great, let us not forget that it is still 42% off the 2007 highs – a figure which makes it one of the worst bear markets in history.

Passport Control – a hint at what lies beyond?
Having traveled a little this week, I couldn’t help but wonder how much one might be able to forecast on the back of a few simple observations at a country’s passport control border.
Much of a traveler’s first real interaction with the culture and “local-workings” of a new country they are visiting, is initiated on the very first moment they walk through the (quite varied) airport arrivals hall and eagerly shuffle their way up to the “will-they-or-won’t-they” let me in point of entry. Most points-of-entry occur at a country’s international airport – there are of course sea-ports, railway stations and other border crossings etc, but I’d like to focus on several varying airport passport control desks for now.

A traveler to London’s Heathrow will understand that they are about to enter one of the most monitored-populations in the world, as they are confronted by an extremely cold-and-ferocious-looking gaggle of border crossing agents, sat behind misleadingly open and informal desks. What most do not notice are the barrage of closed-circuit television cameras that are pointing at every angle as passengers shuffle through the snaking lines, while their faces are captured, processed and analysed by sophisticated software capable of detecting abnormal levels of body-heat, pupil-dilation and other tell-tale signs of a nervous demeanour – taken here to mean a potential illegal immigrant/terrorist or other unwelcome character.
The first few advertisements a traveler encounters after coming off the plane (and noticing the dismal weather) are busy pushing the usual temporary mobile phone packages, tourism attractions and ubiquitous banking brands (yep, still in this environment) – but a distinct lack of real-estate offers. London has experienced a severe downturn in this economic environment, but the passport control process prepares you for an open, multi-cultured (most of the agents are clearly not of British origin) developed and relatively tolerant society. The only confusing moment for some simple-English-speaking visitors will be the use of a term to denote gratitude that they would normally associate with clinking beer glasses – cheers.

Miami provides a rather different experience. First, you are surrounded by beautiful people all around the arrivals hall, dressed in shorts and t-shirts and lounging around in a very relaxed manner with no clear signage to help you through – strikingly different to the arrival halls of any Asian airport. The heavily-armed and extremely short-on-conversation “homeland”-security guards will speak with you in a terse-like professional tone, with a Latin American twist to the accent. If you are unlucky enough to have any Middle Eastern stamps in your passport you will notice the officer hit a little red-button on his control panel which brings out several of his friends to escort you to the waiting area. There you are quite thoroughly searched and questioned as to why exactly it is you are visiting Miami (no jokes about drugs is advised at this moment). Once they have established you are there to party in the sunshine, and nothing more, they greet you with open arms. Advertisements push the latest sea-front real-estate offers as well as the latest club and restaurant openings.
In the economic downturn, the US has of course suffered immensely. Miami in particular has seen a real-estate-market-fall that shocks even those living in Dubai and Moscow, but the city is still vibrant, relaxed, full-of-flavour and an example of the very assorted environments to be found in the US.

Hong Kong is clinical. Clinical and efficient. In fact, so efficient is the airport arrival process that you cannot help but wonder whether the remainder of your visit will be as problem-free. Apart from only Tokyo, no other city has such a smooth-running mass rail transport system and collection of well-thought-out, designed and executed business and entertainment areas. The city mixes a hectic (and smelly) environment with a fiercely efficacious infrastructure. The hoard of signs and speaker announcements that greet you on arrival at the airport, not to mention the very swift passport-stamping procedure where you must declare yourself “fit-and-disease-free”, make for a great indication of the society awaiting beyond.

Some of the most fun is had in the Middle East. The passport desk is staffed by purely local (and sometimes clueless) young and bored-looking staff. They are not interested in making eye-contact with you at anytime. They will not attempt to speak your language or listen to your protests as they twist and bend your passport relentlessly. There is no real organised queuing system or a care for the world that you have been standing in line for over an hour, fellow travelers literally stuck to your back as you all shuffle one-agonising-step-at-a-time nearing your destination. Everyone is trying to search for that fast-moving line, always one eye on what might look like the smartest guard capable of processing your visa the swiftest – unfortunately for countries like Saudi and other parts of the developing Middle-East, this distinct lack of consideration for other’s time and schedules often continues right through to all other aspects of daily life and business. One of the most worrying indicators that you might be in for a long wait are the many groups of visitors that have taken to setting-up-camp in the long-lines, opening up a mini-picnic for themselves and their families. Not the best sign of a speedy process.

The best example of what is left to come – a friend traveling to somewhere in mainland Africa one recalled a story where after landing in the middle of what looked like a dirt-track, an old pick-up truck came around to collect the baggage from the propeller-powered plane. As the border guard, a large and frightening figure smoking a large cigarette that held more than just tobacco in its contents, flicked through the passport (upside-down) the truck bundled the bags belonging to the passenger onto the back and then proceeded to drive towards what looked like the arrivals hall – a shed essentially. The passenger watched in vain as the truck first drove towards the “hall”, and then right passed it, continuing to drive off into the (apparently beautifully picturesque) distance beyond. Conclusions as to what the raw-continent of Africa has to offer beyond immigration, I’ll leave to you.

Tuesday 26 May 2009

Financial Targets - Tuesday 26th May

We’ve had a slight-sell off across markets today. More talk of “Decoupling v.2” on the media in the last 24 hours. Certainly a theme that is gaining more and more ground - when it’s in the mainstream, much of the early arbitrage opportunity has already passed us by though. A great example of some of the emerging market innovation and ingenuity on display recited below. As for markets, Asia wobbled as more reaction was considered following North Korea’s nuclear test, with most of the majors across the region there posting losses between -0.7% and -2%, one of the only bright sparks amidst the losers being Australia (+2%) riding higher on commodity prices (Rio Tinto cutting prices less than expected on iron-ore), and Vietnam managing to make a slight gain (+0.4%) as it continues its “frontier-market” run. European indices all down (avg -1.4%) as investors take a break and look around to determine whether the landscape does indeed provide any cause for further investment following the rapid increase in P/E ratios. Once again, it is less a question of whether or not investors believe in an economic recovery, but more the timing and pace. As mentioned before, any further attempts by markets to climb higher would be an indication that stronger corporate earnings in the medium-term are expected despite still being in the middle of some very difficult business and trading conditions.
With oil and gold slipping in the last few hours of trade (Oil has dipped back below $60/brl), US futures not faring too well at the moment, with DJIA -32pts and S&P -4.2pts.

Focus on Dubai’s property market again today. In the past, being top-of-the-list was always a goal to strive for in this part of the world – tallest, most expensive, most luxurious etc. – the old marketing tricks have been widely recited and repeated. This latest list however, puts often unfairly targeted Dubai’s woes splashed across the front of a widely-followed and quoted report on world property prices from Knight Frank - Dubai firmly in the spotlight (poor city hasn’t really been out of it recently) as they estimate property prices fell 32% in the last year (following a 48% appreciation the year earlier), ahead of Latvia and Singapore.
Throwing salt on the open wounds of the UAE’s second-largest city with a description of Dubai being in a "mess" and citing a dependency on developers simply hanging on before getting into “fire-sale territory” a little harsh if you consider some of the latest developments and up-tick in sentiment through various UAE efforts. Some aren’t too sure about this Knight Frank. Seems they have been playing catch-up with what many have known and pointed out for some time.
Of course, the property situation is not rosy. As discussed in past commentaries, the growth expected for the UAE is much dependent on ex-pats from some of the lower income countries of the world. The large number of flats and villas coming onto the market are certainly exchanging hands at marked-down prices, and anyone that does not believe that a number of these properties will be subjected to a serious fall in price are mostly likely asking for too much from the optimistic-camp. Nevertheless, there have been some signs (and other reports have pointed out) that a bottom is near – the pace of decline has fallen and price corrections have enabled those previously unable to seek-out a decent property to come into the market. Unfortunately, the latest Residency Visa changes (where property owners are not automatically provided full residency, rather they must renew their residency visas every 6mths!) has dampened any opportunity for international bargain hunters to come in and snap-up a number of locations in dire need of support. A bewildering decision given the timing (market crashing) and the need to placate international investors (frightened at the best of times). Whilst the new rules may be construed to prevent money-laundering etc, and place an emphasis on wanting to attract only those that truly want to make the UAE their home and bring with them a certain level of income, it still remains an incredibly bad move at an incredibly desperate time for the country.

Municipality Munch Crunch…
With the lack of revenue from property developers and the real-estate crash itself, it seems Dubai is seeking to increase its coffers by other means. The belief that the UAE is widely a tax-free environment is very well-known but Municipal taxes are creeping up all over the place. Apart from the obvious indirect taxes (over-priced alcohol etc) there is now also a growing trend of taxes tacked onto existing rental agreements. The most surprising, and irritating, aspect of this seemingly arbitrarily charged “housing fee” that it kicks in whenever the municipal authority feels like it. The cost is calculated (for residential properties) at 5% of the annual rent on a property over 12 months. Imagine the surprise of a Dubai renting resident who has become accustomed to paying a relatively fair price for electricity and water every month who is then confronted with an extra charge, at many times the accustomed charges, in the guise of a “housing fee”. A small gripe – but what is municipal tax doing in a supposedly “tax-free” environment?
There have been many signs that alterations to the way Dubai conducts its business are necessary, and this appears to be one of many trends to lock-in some extra revenue when most required.

Emerging Entrepreneurs
In a very telling sign of innovation and dedication to business that the emerging economies of Latin America (if slightly beyond the boundaries of the law). Police have foiled a plan by incarcerated criminals in Brazil to keep in touch with their counterparts through the use of mobile phones. Now, this doesn’t sound too exciting on its own, but when you factor in the attempt to smuggle into the prison their mobile phones by high-tech model helicopter, controlled by a couple of well-paid students enamoured with the criminal underworld, it becomes a clear testament to the (although misplaced) work ethic and dedication to business. Crime and corruption have been strife throughout these regions, and continue to pose serious threats to attempts by the more law-abiding business communities to increase trust and strength of reputation, but taken with a light-minded attitude, in a world-starved of fresh and bright ideas, one can take heart that at least one type of community is making the most out of technology to further their business interests.
The students were offered a “bonus” for landing the helicopter within the desired spot across the prison’s fence. Western financial firms could learn from this incentive offer of a reward for hitting a firm target!

Monday 25 May 2009

Not So Central Bank - Monday 25th May

Those that thought this Monday may be a relatively news-light day were awoken to the rumbling of an apparent North Korean nuclear test – so far, the reverberations have proven quite muted across the region’s markets and beyond. Apart from the latest political machinations of one of the last pariah states the US has seemed unable to relate to, it has felt very quiet out there, with the absence of any immediate financial catastrophes. Much of the investment management community is off today, with public holidays across the UK and US. The weekend press was focused on talk of “decoupling v.2” – as Asian economies continue to recover with great strength and the China story starts taking on a different, demand-driven chapter. However, there is also a lot of caution surrounding the emerging market strength we have seen with the turn of oil (still trading above $60) pushing Middle Eastern markets in particular higher. Asia and the Middle East, as well as Latin America, are clearly capable of moving away from the financial mess that the US has sneezed upon them, but are still very susceptible to the continued de-leveraging process that has taken hold of the western consumer. Furthermore, any significant changes in China must be tempered with the “dose-of-salt” manipulation of official GDP figures and other releases.

Asia fared well today despite a distinct lack of liquidity and international flow. Japan has shrugged off shock at its -4% GDP QoQ contraction announced last week as investors take heart from improved manufacturing numbers (first increase since September 2008) and put faith in the-worst-is-over theory. Hong Kong and China both only slightly up (+.4%, +0.3%) as North Korea concern is replaced with gains from commodity plays. An impressive performance from Vietnam has not gone unnoticed by some of the more adventurous investors out there (on good news surrounding inflation coming under control and a link with Japan on treasuries) – the market there now returning close to +34% YTD.
With no US markets today there is little direction for Europe to latch-onto, with those majors that are trading posting losses avg -1%.

Oil and Gold maintain their commodity resurgence, with Oil still above $60/brl and Gold doing well above $952/oz – the commodity story is behind much of the rally in the last few day across those emerging markets skewed to the supply side. Also some article this past weekend suggesting we are in the midst of another timely oil-price-spike, leaning on some quotations by Al-Naimi that after every significant fall in price investment and research and development fall to levels that leave suppliers unprepared for the inevitable return of demand.

One observation over the weekend – the criticism of the UAE’s u-turn over the GCC central bank and monetary policy debacle as scrutinised in the foreign press seemed to understand clearly the point that the UAE felt slightly undone by the show of force by Saudi – but it has been long known that the likes of Qatar and Dubai are hoping to become the region’s major financial centre. What some don’t understand is why the UAE is making such a fuss when clearly the region’s financial hub is not always where a region’s central bank is – the ECB is not Europe’s major financial hub now is it? London has continued to provide the most attractive location for international fund managers and the like, so why would it be assumed immediately that Riyadh would take the mantle? – smacks of an excuse to simply delay even further a monetary association that has never looked particularly likely anyway.

Friday 22 May 2009

F1 Finance - Friday 22nd May

This week has certainly been mixed – as markets started to lose steam and the rich and glamorous gather in Monaco (see below), greater speculation over what might transpire after the summer holidays has picked up. Obama has announced he wants to return suspected terrorists to US mainland prisons at the same time (coincidentally) US authorities foiled and then captured four individuals involved in an alleged terrorist plot against several New York locations. European and Russian diplomats are meeting to discuss important issues such as security, trade, the financial crisis and…are we forgetting something..oh yes, Russia’s energy supplies. Medvedev here using all his oil-and-gas-based-leverage, to voice concern over what he sees as threatening agreements between the EU and former Soviet countries. In Egypt, a wealthy and previously all-powerful tycoon has been sentenced to death for ordering the murder of his ex-girlfriend – surprising in a part of the world where wealth and politics are inextricably linked – and protect one another. In the greater context of a renewed push across the Middle East by the US administration, Biden is visiting Beirut – this will cause some problems just ahead of the elections in Lebanon – US support for the pro-western government and (so far) very well behaved and professional Lebanese army has been a counterbalance to the (predicted growing) power of Hizbullah in the small country - will cause some waves and possibly open some sensitive issues – let’s hope the show of support from Biden doesn’t back-fire – in this part of the world, the tiniest spark can have disastrous consequences.
On a serious note, Michael Jackson has had to deny rumours of skin cancer for the postponement of the first few dates of his (certainly final) set of concerts in London – has no-one reminded him that the concerts are during London’s “summer” – skin cancer or not, he’s got nothing to worry about if he believes he’s going to be exposed to any sunshine!
The smartest move by “investors” this week – the couple in New Zealand who received a rather attractive transfer in error from their bank ($8m instead of $8,000) decided NOT to do the right thing and took the money and ran – with all that is going on in the world and the backlash against “greedy” banks, who could blame them for simply holding true to the bank’s (deliciously fitting!) moto – “making the most of life”.

After the S&P warned that the UK (and now the US) may lose its AAA rating, the UK government today announced it would not be revealing the results of its own stress-inducing-stress-tests. This is causing havoc on the currency markets (more below). There was also talk China may soon be facing its own financial crisis.
Markets are all coming off as the holidays start to kick-in, US holiday on Monday and across the UK – means 90% of the world’s hedge-fund managers are out of action. This might explain some of the unwinding of positions across European and US markets yesterday – Europeans were on public holiday but the markets which were still open all ended up losing around 2.5% with the US shedding 1.7% avg. In Asia, despite Japan announcing they believe the worst of their economic contraction is over, markets are in invariably lower there (-1% avg). Europe today trading slightly higher but on low volume so far (+0.4%) despite BA announcing first loss since 2002. US futures are cautiously higher ahead of the market holiday so far – DJIA +33pts, S&P +3.7pts.
Oil has kept its head well above $60/brl and looks set to close the week above $61/brl – good for Middle East markets no doubt. Gold has also continued to shine, on course to close above $950/oz for the week.

Currency Chaos…China Concern?
Interesting to see Sterling bounce back strongly on intra-day trade yesterday and post its highest level vs US$ since November – 1.58 right now. Certainly seems like an over-bought play right now and you would expect a slight pull-back in the short-term, but when coupled with Euro’s strength (1.39 vs US$) this is the first attempt at a sell-off in the US$ as more investors understand the long-term implications of the Treasury’s incessant spending. After the credit-rating agencies focusing their spotlight on the UK and China yesterday, it is now the US’s turn – as speculation they too may lose their AAA rating. It really is becoming a case of who’s in worse shape – after all, if all the major economies are downgraded a notch, we’ll be left with a level playing field again,
Another interesting angle that some were discussing this morning is China’s growing realisation (read: admittance) of a potential domestic financial crisis of its own. China’s banks have been well cushioned since the onset of the global crisis, but it won’t be long before the huge non-performing loan portfolio losses that some of them must be experiencing (just think of all those factories closing and the 5% contribution to GDP growth disappearing) leads China to carry-out one of two courses of actions: 1) Sell some if its $2trn piggy-bank US Treasuries 2) Issue domestic debt to international investors for the first time. Either way, this would bring extra downwards pressure upon the dollar.

Screaming Engines, Scrambling Systems
Glitz, glamour and more glitz. This time last year, as the first shots across the bows of the credit-crisis were still being considered in correlation with the booming and reverberation of the world’s most advanced racing machines screaming around the hills of normally sleepy (and rich) Monaco, the first signs of a backlash against ostentatious displays of wealth were just beginning to creep in. What a difference a year can make. In an almost self-projecting admission of a sense of guilt, Formula 1 this year is in a total mess as it visits once more the foremost tax-haven in the world.
Teams are at each other’s throats, cheating is rife amidst arguments over technical delicacies such as the “angle-of-refraction-of-the-underside-downforce-deflecting wing”. However, a more serious matter is also threatening the future of the richest sport in the world, and a serious question very much in keeping with the time is being asked – is there too much money involved?
Ferrari and other large teams (the rich) are screaming almost as loud as their engines in response to a potential decision to limit the astronomical technology budgets to ensure a fair and level playing field - the similarities with the collapse of the “survival of the fittest” model so successful in the western world in the last few decades is palatable. Where before the fastest, richest and best sponsored teams were literally blazing ahead of the field, it is now the most innovative and economically efficient teams that appear to be streaks ahead of the rest – witness Jenson Button’s recent success with the upstart Brawn team. Ferrari, Renault and the other big teams in recent years are not faring so well with this new playing field – much like those that had all the natural benefits of wealth at their disposal in the financial markets, when asked to tighten their belts and carry-out their business in a leaner environment, they have lost pace to the more entrepreneurial and hungrier players out there.
The rules and regulations from the powers that be - the F1 association for the sport, the financial regulators and governments for the banks - are hurting those that became used to winning (admittedly with some excellent technological advances in some areas) on the back of their spending power alone.
The rich and beautiful gathering to show off their wares around one of sport’s most unashamedly money-loving events, in one of the world’s most unapologetically wealthy destinations, will provide the usual dose of escapism for some. Others will sit back and watch the truly-rich (the number of yachts owned by hedge-fund managers has reportedly fallen 60%), continue to remain blissfully unaware of their surroundings – the race included.

Thursday 21 May 2009

Payback - Thursday 21st May

Markets have decided to take a breather in the last 48hrs, just as more and more articles were being written about the longevity of the rally – must be true what they say about the new online world we live in these days, if it’s in the papers, well it’s already too late. This coincides with an admission by Fed officials (released through the minutes of their last meeting) that they do not believe the stabilisation measures they have put into place in the last few months will persist, and that some major US banks are still at risk of creating “major shock” to the economy. The major US banks (Morgan Stanley, Goldman Sachs, JP and now also Bank of America) are still trying to get out of some of the more stringent measures imposed upon them by the TARP programme. Bank of America seems to think it will be in a position to pay back $45bn the year-end. Why are they all in such a hurry? I wonder. It seems strange that the US govt isn’t slightly concerned by the ultimate desire of the major financials to be able to continue to pay themselves huge amounts in bonuses by the beginning of 2010. Would it not be more prudent to first ensure we are well and truly out of this crisis and that balance sheets and the general financial system has been resuscitated satisfactorily (which it clearly is not yet) before the TARP money is thrown back in the government’s face?

On the markets, the general return of caution and a slight slowdown in the build-up of what was dangerously becoming a “did-I–miss-the-rally-I-need-to-get-in-before-it’s-too-late” herding mentality, has resulted in muted performance across the major markets, with Asia coming off a little on the back of a lacklustre close in the US overnight (S&P -0.51%, DJIA -0.62%). Some of the strongest market rallies we’ve had in the last two months came from the Asian economies, so it is no surprise that a slight touching of the brakes has now taken place, especially in HK and China (-1.6%, -.2% respectively). Europe has fared worse, with the majors down an average of 2%. The news that the UK may lose its S&P AAA rating as its finances worsen has brought a sharp fall in the FTSE, but the real reason for the decline across the rest of Europe has been those gloomy minutes of the Fed meeting again. US futures are pointing to an equally downbeat trading session (DJIA -55pts, S&P -6.7pts).

Dollar Dive, or Sterling Slash?
The US$ sell-off is having its first shot. All the major currency rates are seeing a marked depreciation as investors possibly finally begin to understand the huge burden of the financial guarantees and packages that the US has now committed itself to and will continue to do so for many more years to come. Cable has seen a significant appreciation in the last few days especially (+8.5% in the last 30days, 3% in the last 5days) even with talk of a worsening situation in the UK – an example of the “lesser of two evils” in this case simply which leveraged economy is worse off? The US or the UK? Cable actually crashed almost 1.8% a few hours ago when the news of the possible S&P downgrade came through, but with increased talk on the extra pumping of US$s at the same time, we are now in a position where the markets and traders will have to decide which way to send the world’s (flailing) currencies. The Yen, after holding steady at around 95 as Japan’s economy continues to contract (-4% for the last quarter), has now fallen to an eight-week low but the Euro has strengthened.

Split right down the Central Bank?
Some disappointing developments on what had appeared to be a done deal for Saudi Arabia as the location of the GCC Central Bank as well as the general surrounding monetary policy and closer cooperation between the constituent nations. The UAE Central Bank came out yesterday and announced that it would be maintaining the peg to the US$ and essentially withdrawn from the GCC monetary plan. This is in addition to Kuwait having de-pegged some time ago and Oman refusing to play-ball with the single-currency plans. Whist this will not come as much of a surprise to observers painfully aware of the ongoing politics across the region, it will not do much to instil confidence amongst international investors hoping that region has matured beyond petty politics. Even more confusing, the UAE Federal National Council is to question the UAE (their own!) central bank and ministry of finance on why the UAE made these decisions? Are the phone lines here not working or have the authorities run out of credit on their pay-as-you-go-lines? How can they not be talking to one another before handing Saudi such a public slap in the face? Incredible, but more importantly, incredibly bad for the region’s reputation.

Wednesday 20 May 2009

Population Pampering

Dubai Drama…
Picture this: A burgeoning tourist economy, fully dependent on the attraction of its beaches, shopping malls, sun and fun-loving reputation, ravaged by the credit-crisis. Negative news reports about the deterioration of the city’s beaches, tourism service and quality of even food ingredients at restaurants continually appearing across international papers. A distinct sense of Schadenfreude on the part of those living in cramped, overcast and cold cities around the world, or a bursting of an obvious bubble? Whatever your take on Dubai and the UAE in general, there is no doubting the incredible efforts made by a city that only twenty years ago was dominated by one naturally occurring commodity – sand.

Whilst those sands have now been turned into glistening beaches (sometimes they glisten for the wrong, chemical, reason) and even the unforgiving landscape and environment of the desert craftily transformed into a tourist attraction in its own dune-buggying right, there are some fundamental issues playing against the growing city. The property bubble has been exposed for all to see and the story of boom and bust now well known and recited. The abundant credit that fuelled much of the incredible growth (an estimated 5.5% average GDP growth rate over the last ten years) and the eye-dazzling projects that marketed Dubai’s map placing strategy, dried up as fast as a sunbather drying in the blistering heat by the pool. The only problem for Dubai was that it could not dip back into its credit-pool to cool down, as the water had all but been drained in a reversal of appetite by international providers. What happened? Well, the same when anyone spends too much time scorching in the sun – it got burnt.

Rumours normally do very little to help markets. Dubai’s markets have suffered disproportionately at the behest of other’s viewpoints. What sometimes frustrates, even more than trying to explain you want the dressing on the SIDE of your salad in a Dubai eatery, is the strange desire by some UAE figureheads to want to add to the oblique nature of policy-making decisions. Just witness the sudden removal of the well-liked (by international investors it appears at least) Director General of Dubai’s Department of Finance. Nasser Al Shaikh had just returned from a weekend discussing Dubai’s re-financing strategy with international peers at the World Economic Forum on the Middle East in Jordan, but did not manage to make it back to his office at the Finance Department after touching down in Dubai. No one knows for sure what happened, and whether he simply rubbed-someone-up-the-wrong-way during the discussions, but markets in the region are refreshingly ignoring the lack of facts for now and focusing on the higher commodity prices and general re-allocation of capital to emerging markets. Still, uncertainty like this is an unwelcome reminder that significant issues are still to be resolved.

Statistics, or just static instinct?
With all the well-recited and negative anecdotal evidence since the worst of the crisis hit in January, it would seem incredible to expect anything but a fall in the population numbers dwelling in Dubai (and the UAE for that matter). However, in a surprise release (this is a far kinder reactive description than others would recite) of an official figure by the UAE Ministry of Economy, it appears that for all the talk of individuals packing up and leaving the city, the number of cars found abandoned at the airport terminals, and the clearing of traffic clogging up the streets in an almost synchronised effort, the UAE’s population has grown by an impressive (and conveniently in-line-with-trend-over-the-last-ten-years) 6.3%, with an above trend increase of 7.8% in Dubai alone.

Now, whilst the initial (and preferred) reaction by many pundits, international observers and others that-take-joy-out-of-others’-misery would be to choke on their “all-natural” Pret-A-Manger sandwich sitting in the office corridors of empty Canary-Wharf and devastated downtown New-York, a little reflection in a moment of pause (a rare event when discussing emotive Dubai) may enable one to understand just how such a seemingly preposterous statistic could even be considered plausible by the UAE authorities. With all indicators to the contrary, the fact is was a UAE release, and not just Dubai’s, is also a double-edged sword. Depending on your view, it may be that Abu Dhabi’s ministry officials have been inflicted with a version of the swine-flu and gone hot-in-the-head, or that the figure is in fact genuine, well researched and documented. Going on instinct, it would seem that such a statistic would not be released in such sensitive times without some element of truth.

Regardless of the difficulty in obtaining hard-facts, what we do know still speaks for itself. Property purchases (as deemed by Emaar up until May 2008) have been heavily skewed by UAE, Indian, Iranian and Pakistani residents in Dubai (24%, 15%, 15% and 12% respectively). Many of these end up as landlords and may well have been hit-hard by the sudden crash in prices and the abundant escape of western ex-pats to their (cold) homelands, especially with the largest growing ex-pat population almost disappearing back into the pubs of Manchester in one fell swoop – (didn’t they only came and sit in pubs here anyway?). Even with that exodus, it is still a very small section of Dubai’s predominantly sub-continental population - Asian ex-pats make up 65% of the current population, “others” only 4%.

Growth through good men…
Anyone reading this from the west may have difficulty understanding the extremely strong family-bond that underlies middle and far eastern cultures, but an Indian bachelor living in a barely-affordable one bedroom apartment just a year ago, with his family back home, may well be a happier person now. Why? Well, the once too-expensive-to-even-dream-about two bedroom luxury apartment that had been marketed to the flush-with-ex-pat-package-cash has now become a truly attainable place of abode for our lonely bachelor. The first thing he does (disappointingly for some, he does not throw a huge house party and invite a whole bunch of beautiful people over) – he sends for his family. Good man. If we extrapolate from this that the majority of lonely bachelors in Dubai are in fact good men, then the figures for population growth may actually start to stack-up. The UAE has always insisted it will depend on immigration in numbers from the likes of India and Pakistan and this currently seems the most logical explanation to help us believe the official statistical release.

A quick drive around Dubai during the working week paints a very different picture to the one witnessed by visitors over the weekend. Malls are empty, streets are quiet. However, despite a number of articles and rumours to the contrary, villa developments and other new “affordable luxury” residences are still filling-up. There are undoubtedly far too many buildings to prevent a continued fall in property prices – but some would argue that this is only a natural consequence of the overly-inflated “easy-days”. Furthermore, lower housing prices play into the hands of the lower-income generating Dubai resident. There is no hard and fast solution for some of the woes Dubai is experiencing, and although many will not agree with the tone of the city nor enjoy what is has created to offer to its residents, it would take a brave investor to totally write-it-off without feeling they may be missing out on a rapid return to form once all the pieces of the population puzzle fall into place.

The sands are not about to become the only attraction in the UAE just yet.

Monday 18 May 2009

Wooden Woes - 18th May

Week ahead…
After a relatively quiet weekend with very little news to cause excessive levels of acid in the stomachs of investment managers around the world, it’s a little too early to start projecting where we are headed this week, with a lot of uncertainty surrounding the major markets in early trading. So far, Asia has provided a mixed picture to anyone looking for a bit of clarity: Japan was off ahead of some of the busiest reporting days in the year, as full-year results continues to come in thick and fast – Panasonic and Aozora Bank two of the larger names this morning providing some food-for-negative-thought on future guidance. Everyone is fully aware of Japan’s export woes, but it seems the reminder of just how bad the situation is an excuse to cause a (let’s hope brief) re-lapse into depression. Other markets in Asia doing better, with China, Hong Kong and Taiwan rising confidently, but nothing when compared to the limit-up day on the Sensex in India (+17% today, now +46% YTD!) – India’s market jumped as previous indications to the 3-way spit proved inaccurate and the ruling Congress party-led alliance came in with an emphatic victory – who said exit polls were accurate (ehhm, and apologies for the misinformation last week that the conclusion was a 3-way split). For those still not confident on Asia recovering faster and then performing better than any other area, check out even Vietnam’s stellar performance +24% YTD.

Mid East markets are all trading higher as the return of oil towards $60/brl takes place and some opportune investments are made by those that have recently learnt more about the region and the various industries that exist within. Iraq (whilst not part of the GCC) even announcing a $66bn investment plan (albeit post-paid) that has had some positive repercussion on surrounding markets – remains to be seen whether all the contracts for infrastructure etc are simply awarded to US firms as in the past.

In Europe, markets have opened quite muted with no large news over the weekend to shape investors’ thoughts. The majors are all holding on to some modest gains though. Most interesting piece of news that Porsche and VW have brought the long-running family-saga to a premature end as the VW Chairman flexes his muscles and puts down his counterpart (also his cousin) in a rather public and brutal manner.

Gold had a strong run last week, up four days out of five, but is currently trading very slightly off, -0.04%, Interestingly, there was a lot of talk of renewed inflows into the Gold ETFs, as investors apparently have been positioning for the next qtr and not expecting much excitement. The gold price across consumer markets is still holding steady though (as attested to by a visiting tourist to Dubai’s empty Gold Souks last weekend) - demand for actual gold jewellery continues to languish at low levels without any sign of an imminent return to strength. Of course, our favourite leading indicator, the Baltic Dry Index continues to rise (12 days in a row now, +33%) – without getting too excited it is mostly a sign that inventory levels were so low for so long that shippers and traders are expecting at least some pick-up in the major trade routes as shelves are replenished with the goods consumers still want to (and most likely have to) buy.
On currencies, we’ve had a lot of talk in the last few days concerning Sterling’s perceived uncalled-for weakness – probably worth watching cable to be on the look-out for some short-term technical breaks. The Yen has come off a little this morning after strengthening all of last week vs US$ - Japan’s Finance Minister was warning against “excessive moves” in the currency.

Economic Releases this week: a relatively light schedule
US: Housing Starts (520k cons), Building Permits (530k cons), ABC Consumer Confidence (-42), MBA Mortgage Applications, and later in the week, Initial Jobless Claims (625k cons), Continuing Claims, Leading Indicators (+0.8%)
Europe: Euro-Zone Trade Balance (0.4b vs -0.3bn cons, Construction Output, PMI Manufacturing (38.3 cons)

Many missed this on Friday…for those not addicted to their troublesome and devilish little tech accessories, here you go…

Wooden Woes…
On returning from a recent trip to the US, an astute, and often correct investor pointed out that there are a vast number of very attractive and well appointed houses on sale on the west coast for roughly one third of their value just a year ago – but are there any buyers? Nope. And why not? Well, it’s not because mortgages aren’t available – they are, and in abundance, and it’s not because the wealth isn’t there – those living in San Francisco have some of the highest GDP per capita in the country.
The reason then? Most US homes are built using timber and other woods, meaning that even if some US investors decided to “go-for-it” and buy into a nest-egg home at must-buy prices, they would still have to pay a number of utility bills (heating for example) to prevent the house from suffering through damp and other wear-and-tear.
This results in two indicators: the first being that even the wealthier inhabitants of the wealthier parts of the US are worried about being able to make future payments on their utility bills for fear of losing their jobs within the next 12mths. The second, a great number of homes on the US west coast are likely to deteriorate (damp breeds termites), as they sit uninhabited, and may require demolition – leading to a squeeze on supply probably around the same time demand creeps back in, pushing prices higher and helping the many industries involved in house building!
It seems the termites may turn out to be the US’s saviour – if you can afford the house, and the termite exterminator bills for the next few years, go buy that dream home in San Diego.

Friday 15 May 2009

Raven Markets - 15th May

Raven markets…
*It’s been a tough week for markets. Doomsayers have had to sit quietly in the corner for the last month or so as global investors shed their negative thoughts and delved into stocks to bring P/E ratios back to levels in line with the pre-Lehman collapse last year – but the none-believers, like a bunch of swirling, waiting, hungry ravens (Nouriel Roubini wears a lot of black), are looking for their next opportunity to swoop in and unleash a “we told you so” torrent of abuse on the pool of return-hungry-and-cash-rich-money-managers.

*This week, we’ve had Chrysler shut out its creditors and provide a dangerous precedent. One of the world’s most respected and held-in-awe companies, Toyota, announce the replacement of its management team - and this for a company in a country where life-employment is still the norm, and the recipe for making noodles has not changed one bit in 1,000 years. India held its elections, one-month long, 1 billion people or so voting, and the winner is? – a split decision three ways – that can’t be good. Even our man Obama has disappointed slightly by reversing a decision not to ban photos of alleged abuse by US soldiers – no one is perfect, but he’s still pretty close. The Brits have let us down with the banality of revelations of excess unwarranted member of parliament spending on expenses over the last four years – at least here in the UAE a Sheikh really knows how to shock, by torturing and running over a man that he isn’t too fond of – the Brits really are too reserved I guess!

*On the markets, we’ve seen them stutter, stumble, recover and then stutter again – that twilight zone theory holding steady and proving a haven for some short-term week-on-week trading. Asia has essentially ended the week flat, with a couple of days of trading where gains across the board were an avg. of +3%, but equally there were days where losses balanced things out. Europe has been a mixed bag but the majors mostly off small amounts for the week so far. The US has seen the S&P fall three days in a row, but futures so far (S&P +1.5pts, DJIA +23pts) pointing to Friday continuing Thursday’s gains.

As aforementioned, stocks appear correctly priced now, avg. 15x (far higher than the lows of avg. 8x in November). Long-term managers have to question whether having future earnings estimates quite as low as they are, makes for a rational bet to outguess the timing and strength of the market recovery – a bet now on the markets is not a declaration of faith in a company and its management, but an eyes-wide-shut view of the macro world ahead of us. Continuing to invest in stocks when technicals indicate fair-value, is an optimistic outlook on the speed of the economic recovery. With a number of potential blow-up factors still lurking in the shadows (mono-line insurers) it would be a brave soul to push for greater exposure to US and European markets right now. Asia is a different story though, and even the Economist this week has published a report on how the “crouching” Tiger economies will be the greatest examples of strong, sharp recoveries.

Sell in May and go away – but will you ever come back?
*Anecdotally, from conversation held with money managers across the continents, no one seems to really believe that we are out of the worst of the crisis – but few also believe that there are many negative shocks to send markets hurtling lower once again. On the more insightful discussions though, there is a sense that the huge amounts of cash that many had been sitting on were being put to good use for the time being in the knowledge that certain markets, the Asian economies again, are well on their way to re-shaping their financial growth models away from trade and export dependent industries to a more focused domestic consumption environment. Basically, Asian economies really will start to trade with another for the benefit of a local end-of-the-line consumer, China. The days where record levels of inter-Asian-nation trade simply led to 85% of the end-product being re-exported out to the US are over.

*So what will happen over the summer? Where will the still vast amounts of cash be deployed? Were the last couple of months the final hurrah by those seeking to plant their seeds and hope the crops come in before the thaw returns? Summer will provide a lot of time for investors to reflect and consider just how deep and structural this crisis really is. The longer-term minded will begin to read the many books currently being penned and awaiting final touches before summer publishing schedules – all waxing lyrical about the end of capitalism and how the western banking model destroyed the rest-of-the-world. The period of reflection and thought that normally follows a knee-jerk reaction to a crisis (the sell off between November and February) and then the first tentative steps at recovery (March till now) are the most crucial in any period of uncertainty. It may prove to be a case of too much time on people’s hands leads to too much time to contemplate the difficulties still ahead for the western world’s current financial system. Will they return to the markets when they return to their desks?

Here in the Middle East, they have the right idea come summer time. Normally, entire departments shut-down as the heat sets-in and those fortunate enough to be able to fly to the Mediterranean do so – and stay there, for a long time. This year however, Middle Easterners have the double whammy of a longer (in terms of number of hours of sunlight) earlier, and hotter, than previous years, Ramadan. With the start date firmly in the middle of the summer-holiday calendar of mid-August - investment banking movers and shakers will have their work cut-out for them if any financial institution is thinking of possibly blowing-itself up and requiring the deep-pockets of a white-knight - the sovereign wealth funds will be more than happy to leave it to western governments to deal with it as they lay by the pool in Cannes.

Thursday 14 May 2009

Consumers - Made In China

Most consumers are familiar with the "Made in China" stigma - goods from toys to kitchenware, and now even cars, often derided as low-quality and often inferior copies of a far superior Japanese product. This is not likely to last though. If you were to ask anyone over the age of 60 if they recall jokes about goods "Made in Japan" during their days, they would be able to recite a raft of ridiculing, quick one-liners - a sign of how countries can re-invent themselves and continue to improve with determination and direction. The Japanese association with quality and success is now well-documented history, and anything produced from that country is looked at with respect and often awe - from their cars to their food. In another ten to fifteen years, China will likely have re-invented itself as well.

For the last thirty years, China has been the world's factory. This factory has produced goods for primarily one consumer, the now-infamous US Consumer. What if someone was to tell you, however, that your target audience would no longer exist in ten years, or at least would no longer be able to afford to buy half as many goods as they used to in two years? China has already questioned this issue and is beginning to alter their model and adapting their ideology from making things for everyone else, to making things for themselves and everyone else.

Hong Kong has long been a rather different place to the rest of China, much like even Shanghai and Beijing are vastly different as two cities within one vast country. HK of course is historically different largely due to the UK’s influence which only ended back in 1997. On a recent visit to HK and Asia’s answer to Las Vegas, Macau, the clearest expression (some would call it experiment) of the potential power and might of the "Made in China Consumer" was on very “in-your-face” display.

Hong Kong has always been a showy city, building bigger and better towers a favourite pastime - sorry Dubai, but HK got there long before you and not only perfected the “suspension of economics” model to last for many more years, but ended up with far more iconic buildings. Designer brands are a dime-a-dozen, and the fashionable parts of town heave with an overpopulated (7.5m est) people sporting the latest clothing and other accessories. It is very much a conspicuous consumption island, and it is on display for all to see at every opportunity. For a territory with fewer roads than one-sixth of New York, there are an impressive number of luxury cars - a common sight being children driven to kindergarten in their daddy’s Rolls Royce, even as the crowds surrounding them are offering their wares on street stalls trying to make ends meet by taking precious HK$s off the thronging tourists. Top-class restaurants, with top-class prices, nestle amidst local eateries where a full meal sets you back what it costs to buy an apple in Dubai, and luxury hotels and apartments spring into the air, leaving in their shadows sprawling, overcrowded “affordable” housing.

Even as a city of contrasts, the desire and very apparent “joie de vivre” of HK’s inhabitants is manifest - none more so than when the sun drops. As day turns into night and the haze of the harbour overlooking Kowloon subsides, HK’s revellers come-out-to-play. Unlike in other ex-pat cities though, HK’s biggest revellers are the Chinese themselves. They are found propping up against all the best bars and occupying all the best tables in the top clubs. In one of the most prestigious clubs frequented by what can only be described as the tastiest of the dim-sum on offer, I found myself one of only a handful of fortunate “gwailo” (foreigners) in a room swarming with at least five hundred. When enquiring whether I had stumbled upon a certain themed evening, I was told “the gwailo can’t really afford to party in here” – wow, it was an eye-opener to a city that for so many years had been run by foreigners but had now become a true power-centre for the immensely rich and powerful Chinese.

A cursory visit to Macau will make a convert out of anyone that does not believe the Chinese are big spenders. Revenues in Macau out-generate those of Vegas, and when you walk into one of the brand-new gleaming Wynn, MGM or Venetian Casinos, you’ll immediately understand why. Although the game of choice is Baccarat rather than (the much more exciting and rewarding, I think) Black Jack, the amounts bet on each hand are impressive. Where many of the “whales” in Vegas are traditionally from abroad (Japanese, Arabs and Russians) all the high-rollers in Macau are from the Chinese mainland. The real surprise comes from watching the winners (or even the losers for that matter!) spending huge sums of money in the many boutiques across the shopping malls craftily connected to the gaming floors. When the Chinese spend, they are as voracious in their appetites to purchase, as they are efficient in the art of mass production.

So there is no doubting that as China begins to shift into a higher gear of domestic consumption, which is for all intensive purposes running at pitiful levels, the world will be shocked by just how much money they have. What some may doubt though, is just how important a city like HK and even Shanghai may be to the rest of the world. Well, in an article today in the FT, it was discussed which city may prove to be the world's next global financial hub. Apart from a lack of mention of Dubai, or any other Middle Eastern city for that matter, was the premonition that Shanghai, and on top of that even Beijing, may take on the mantle that has so far been loftily held by either London or New York.
China’s State Council recently endorsed a plan to turn Shanghai into a global financial centre by 2020. This need not be at the expense of Hong Kong and Singapore. Shanghai may complement HK just as Boston, Miami and San Francisco do New York.

A prominent HK resident, late on a Sunday afternoon as he was heading back home after an afternoon spent at the Macau tables, pointed out the new buildings being constructed on the mainland side of HK, Kowloon – “this is all being built by China” he said, “we don’t need anyone else to come and lend us money, give us advice, or even provide labour to help construct the cities. What we need is people to quickly understand that they need us more than we need them”.

The "Made in China" label is well on its way to becoming known for a totally different product - the Chinese consumer. If you believe what many do after they return from a trip to China’s demonstration cities, the world needs them sooner rather than later.

Thursday 7 May 2009

Saudi Shifting - 7th May

*Not wanting to beat a dead horse, we’ll keep it shorter than normal today on the international markets so that we can sit and analyse all the fun of the stress-test results when the rumours have subsided and the boring reality of the facts are known. US futures currently reacting well to news that the results will be “re-assuring”: DJIA +51pts, S&P +4.6pts.
*There are no banks in a position of possible insolvency it now appears, but Bank Of America must be stressed to its eyeballs with Merrill Lynch as it certainly seems the brunt of its capital raising requirements are a direct result of their new purchase’s past purchases – an absence of a pre-nup in that marriage truly coming back to haunt BofA…which was the wife I wonder?
*We’ve had a lot of buying in cyclicals in the last few days and although some commentators believe this should end soon, there is a growing disagreement between the need to get back into the defensives and the continuation of the trade switch. Clearly we are still in the midst of an uncertain market, where the optimists seeing the good in even the bad (the second derivative being a prime example) outweigh negative sentiment and talk of more looming doom and gloom. The roster of disappointing corporate results is behind us for now, and investors are starting to feel for the ledge with their feet to determine whether there is another level on these markets to propel themselves to, or will they all slip and fall? No clear answer for now, more time needed.

*Looks like the ECB will be reducing rates to 1% in a short while (Bank of England maintained rates unchanged at 0.5%) – the reaction at the moment in Europe very positive. Majors are all trading up, with a good +2% avg. gain.
*Asia had a good day across the range, with Japan playing catch-up as it hurtled to a 4.5% rise. Hong Kong rising well again on belief US consumers are coming back soon and will facilitate trade in the medium-term – take a look at the Baltic Dry Index in the last three days – we were up 8.2% yesterday, the largest one day appreciation since early February this year – could it be we are really about to see some of the leading indicators take a turn or are we just kidding ourselves into an exceedingly disappointing realisation when the tide turns in a few weeks – no one seems sure at the moment, so it remains a great time to trade in and out.
*In keeping with this, Middle East markets are moving higher as the price of Oil seemingly recovers – we are in touching distance of $60/brl now in what has been a strong and quick break-out from the $50/brl range we seemed stuck in for several weeks. Gold continues to play as an inflation/deflation boom/bust hedge (it’s everything!) and itself has broken out of the 50day moving average and trading above $920, if it closes there would be first time since early last month.

Saudi shifts a little more…
Just following on from yesterday, a couple of points that had some people thinking on the back of the announcement that the GCC Central Bank will be located in Riyadh, Saudi Arabia: it has long been an extremely difficult place and many travellers have often been shocked at the temerity with which officials at the airport deal with the smallest errors on the visa application. Too many times to be simply a coincidence, passengers getting off planes from other parts of the GCC have had to return because their “papers were not in order”. That was a few years back though. In the last 5 years, and with King Abdullah at the helm, the growing ease with which business visas are obtained has been very noticeable. The importance of the religious police has slightly (only very slightly, but enough to make an impression) lessened. The latest move, and what must have been a concerted effort by Saudi to ensure it had its way with the GCC Central Bank, will only make things easier for those wanting to travel to the capital and throughout the nation.
Already “tourist visas” are possible – not as easily as many would want, but still a quicker and relatively easier route than the traditional visa process. With the Central Bank being an highly public and visible entity that will undoubtedly require a great deal of attention from local and international investment bankers, service providers, relationship managers and others involved in the financial world, the ease with which it can be visited will have to addressed even further.
At the moment, even for a business visa it can still take 3-5days to obtain clearance to visit the Kingdom. I do not see many urgent meetings the Central Bank will indubitably bring about, being able to wait 3-5days for clearance – it can be argued that this is just another step in the gradual opening up process of the Kingdom. All a part of the master plan that King Abdullah has been manoeuvring into place since his ascension to the throne in 2005.
Furthermore, for all that the likes of Abu Dhabi, Dubai, Bahrain and Qatar have (very admirably) done to create an open and attractive living environment, the truth of the matter is that Saudi’s reserves and their continued oil producing dominance make a strong and rational case for the Central Bank to be located in the Kingdom. However, the ease with which Western ex-pat families and workers are able to acclimatise their lifestyles to the “Middle-East” as a result of a relaxed approach to living (read: drinking and walking around in Western clothing) in those cities will leave Riyadh and the rest of Saudi in a seismic-shifting position of choice, sooner rather than later. With all the new economic cities that are being built across the Kingdom, it will become more and more self-evident that some changes to the traditionally strict Saudi way of life all are made to lead will have to change. The Central Bank may be just another small step in the very slow yet purposeful trek across the desert of increased freedom that the current Saudi King is intent on completing.

Radio blues…
On just a light note, what’s up with all the radio stations in the UAE possessing some sort of inexplicable obsession with American Idol and Hollywood gossip? When I wake up in the morning, like most others, I assume, I want to listen to a little music followed by some news – all we ever seem to get on Dubai radio stations (apart from Akon and Britney Spears) is talk about the latest comings and goings of Simon Cowell and the hopeful singers in the talent show across the Pond, as well as whether or not Paris Hilton really is pregnant. At times of great stress and in this current financial crisis it is always advisable to take a break from reality and focus on some entertaining issues in life, but totally absorbing oneself in the (meaningless) lives of others cannot be good for the soul. For a while Dubai was creating its own character and learning from a serious dosage of humility as it grappled with an uncertain future and a very visible reduction in lavish lifestyles, but with this trend on the city’s radio stations, it is a worrying sign that the backlash against decency and a raising of the intellect may have begun. Britney must be happy, but with questions like “What is 10% of 400Dhs” on the daily “quiz” show (for adults!), someone pleeeeaaase hit the radio producer one more time.

Monday 4 May 2009

Monthly Mirth - 4th May

Monthly mirth…
The pandemic had subsided temporarily over the weekend as fewer cases were reported, but the spread across the US confirmed this morning has encouraged authorities to ensure all remain aware of the potential dangers. The great US stress-test debacle has once more been pushed back to Thursday amidst rumours Citi and BofA will need to raise capital in the near future ($10bn in total is reported figure). As if Wall Street hasn’t experienced enough turbulent times in recent months, reports today seek to confirm New York was once hit by a massive tsunami (in 300BC) flowing over from the eastern Atlantic, and may be open to a repeat performance – another soaking for bankers. Fiat succeeds in both its endeavours for Chrysler and GM Europe. Funny that, as one charming Italian manages to woo not one but two new partners, his countryman’s president, Berlusconi, managed to make a total mess of his marriage – his wife has declared she “must” divorce him to get away from his constant “flirtations” with other women – really…Berlusconi not a faithful character? – shocking revelation.

*Great start to the month for markets as Asia returns from a long weekend holiday to push markets high and far – seems the holiday break had all the right ingredients for many people and the positive outlook on the economy they had been fumbling with over the last few weeks now taking hold – but for how long? Japan is still closed until Thursday, but all other markets were buoyed by the consensus reached by the Asian economies to create and finance a $120bn currency reserve fund (almost ¾ from Japan), better than expected manufacturing numbers out of China, Chinalco’s continued pursuit of Rio Tinto, as well as the China/Taiwan agreement. A number of upgrades across the region by international brokers also helped matters, such as China Mobile (+10% today). Some short-covering has certainly been noted, but volume has kept up well, and in the absence of a number of players via the UK bank holiday, it is a good sign of interest returning to the region.

*In fact, Hong Kong opened higher and just kept going, matching pace with Taiwan and Korea (+5.5%, +5.6%, +2.1% respectively). All the ASEAN nations participated in today’s strong market sentiment, with even Vietnam +4.7%, in a real sign of a return of some investor risk appetite. A cursory look at any financial screen will show a significantly different picture to the start of ’09, with many +ve YTD returns now prevailing. Several markets are touching 7mth highs – where markets go from here is a crucial case of whether we have real long-term confidence or have simply enjoyed short/medium term opportunistic trading.

*So far, Europe has reacted slightly more demurely after their long-weekend break (UK closed today), with some decent gains on decent volume, but nowhere as bullish or widespread as further East. News that Euro area GDP will shrink by about 4% this year (double earlier predictions) bringing some down-to-earth but not enough to eradicate all positive outlooks. It seems the ECB will hold a meeting later this week to revisit some additional measures to facilitate the member economies – talk of a floor having at least been created seemingly helping markets remain positive for now .The risk of further capitulation selling now looking more distant than just 6 weeks ago. Realistically though, whilst we are in the midst of what our global strategy team terms “the twilight zone” markets will continue to oscillate between periods of significant gain, followed by further disposals for several months at least as more of a clearer picture continues to emerge. Government efforts have helped with this first oscillation upwards, combined with some welcome respite from any major negative financial “blow-ups”. We are certainly at the very beginning of this period though, and it will take time till consensus and level-heads prevail.
*Just back on the Fiat story – it is slightly ironic that the most capitalist indication of Darwinian “survival of the fittest” is embodied in the charismatic Marchionne who is admiringly looking to seek a great advantage on the back of the current industry woe’s – creating a European supergroup that will surely enjoy some great returns once markets and consumers return – if they do.
*Some releases to look out for: Euro-Zone PPI (-2.9% YoY cons, -0.6% MoM cons), Retail Sales (0.1% March cons), ECB Rate Announcement on Thursday. In the US: Construction spending later today (-1.7% March cons), Non-farm productivity on Thursday as well as Initial jobless claims and the all important change in Non-Farm Payrolls on Friday (Apr -606k cons).

*If Buffet is to be believed, he is cautiously optimistic for US corporate strength in 2010 but does not see much reason to take views over 2009. He is of course a heavily invested long-term player and the coupon payments he is enjoying on some of his larger stakes (Goldman Sachs comes to mind) are serving him well as he sits back and awaits the inevitable capital accumulation. A few risk indicators are turning positive as we have higher Oil, Gold and CDS spreads continue to narrow.

*US futures looking good a couple of hours ahead of the open: DJIA +49pts, S&P +5.5pts. What might helps markets this week are a number of risk indicators turning positive as mentioned above. AUD play and similar trades are all gaining, and the Baltic Dry Index is up again and is experiencing its own “twilight zone” period as shipping companies are probably trying to digest all the latest global macro-data to determine what demand may exist through global trade requirements.
*Currencies have seen cable remain firmly at 1.49 over the last several days as traders contemplate the next phase.

Friday 1 May 2009

Trailer-Park Deserts - 1st May

Trailer-park deserts…never!
*With so much of the world either in or about to enter a brief yet much needed Labour-day holiday period (really nothing more than a long-weekend across Europe and US, slightly longer for those living in Asia) it’s interesting to reflect on the choices offered for the purpose of the all-important job of winding-down – with very little money seemingly available in personal coffers these days and a prevailing sense of saving every penny “just-in-case”, it doesn’t seem right anymore to book one’s family into an expensive and luxurious resort for some pampering. Not only that, but with pig-flu flying around the urge to jump on a plane and explore abroad has suddenly dissipated. Why travel to a place where you will encounter infuriating communication problems by virtue of not understanding the language, and where disappointment will invariably arise from the level of service received for the price paid. Travel now also poses a possible threat to your future well-being thanks to the swines!

So what choice does one have? Well, there’s a reason the entertainment industry that provides endless hours of fun on DVD and other forms of media are flourishing – many are choosing to sit at home. What if you’ve been sitting at home for the last few months though? Many have resorted to doing something they normally would have considered beneath themselves – discovering their own backyard and travelling around the very country they reside in. In the US, cross-country holidays are the norm, but in recent months record-sales of caravans and other multi-purpose vehicles have been recorded across Europe and Asia. That is all well and good, but it doesn’t really work for the Middle East I’m afraid. Any self-respecting local family (or many ex-pat families for that matter) would rather be declared bankrupt than caught driving their family around in a big-camper. On top, the joy of driving from terrain to terrain as one might expect in Europe as you move from the flowing fields of rural France to the mountainous magnificence of Switzerland, or the ease with which borders can be crossed with multi-nation agreements, doesn’t translate so well in the GCC. Moving from one vast sand dune landscape to another, wait, yes another sand dune landscape, is really not that thrilling – trust me. Ever (I doubt it very much) wanted to drive from Dubai to Doha? Well – you can’t. Saudi has taken care of that. You have to pass Saudi controlled land once leaving the UAE before you can then enter Qatar. Difficult enough when you are alone in a car, I can’t expect much more luck when the border-crossing guards spot you driving up in your family-camper singing road-trip songs.

Could this be the reason GCC states are experiencing a strong recent period of credit-crunch resilience? Even with all of Dubai’s property woes and endless discussions in the international press about just how deep the crisis has destroyed the joie-de-vivre and lavish lifestyles many strived for, a distinct desire to continue enjoying life-to-its-fullest has once more taken hold. As with many crisis-hit cities, the initial two/three month aftermath was quite dire. Anyone visiting the GCC will definitely have noticed just how hard the proverbial had hit the fan in Dubai and spread across the entire region back in December. It seemed depression was all around. Of course, the press and silly media reports focusing on nothing but the negatives did not help matters, but the truth was plain for all to see as many packed-up and left either out of choice or unfortunate necessity. Without wanting to re-hash those darkest of times, it was certainly a heavy-period.

Group therapy…
In what will prove to be a great study of human-socio-psychology in later years, Dubai in particular has expressed a most bizarre reaction to the darkest days of the crisis. Despite prices not having adjusted yet (yes, you Zuma) in many parts of the economy outside of property, there was a sudden and almost herd-like acceptance of the situation many had found themselves in, and then an almost telepathic agreement to get out and frequent restaurants, clubs and bars. Call it denial, call it simply not giving-in or even the best expression of human optimism, but the buzz of life returned to Dubai in one fell swoop (funnily enough it was around the same time UAE’s Central Bank, aka Abu Dhabi, came in to support a $10bn Dubai bond issue). Now, this has happened to many other cities as well in past weeks, as seen in recent reporting from London for example, and will continue as the overriding emotion to enjoy oneself takes hold, but it is the magnified manner in which Dubai expressed such a sudden seismic shift in attitudes that is notable.

One weekend, parts of the city were apparent ghost-towns. Literally a week later, you were unable to reserve a table or step into an establishment without having to plead with the host to allow you to squeeze in – it was as if a mass text-message had been sent out by UAE authorities ordering all residents to get-out and have fun. In such a small city with such limited areas to choose from, it was a real eye-opener to just how easily influenced individuals can be when played into groups. The traditional “I don’t’ want to be left out” insecurity of many that reside in cities like Dubai certainly had a part to play, but it is more simply that attitudes had adjusted and there is certainly a new appreciation for value-for-money. Whilst many bars and clubs are indeed full to the brim, any cursory conversations with management will reveal a marked decrease in volume of trade – people are ordering less, and hence paying less. So whilst on the surface of things it looks as though cities like Dubai and others have returned to form, the only thing that has really returned is the undeniable need for people to take pleasure in life.

Markets – hit upwards but not out of the ball-park
This human toughness has certainly had its repercussion on the markets. It’s actually been a big week for markets – as we saw yesterday, all the majors were strong across the globe. The problem is that the US opened higher by 1.5% only to shed all of the gains over the course of the trading day and even ended off -0.22% at the close. The reason? Many actually…from a realisation that the recent markets moves were extremely welcome but still nothing more than a much needed re-allocation of vast piles of cash that money-managers had been sitting on for too long.
At some point, the people trusting you to invest their hard-earned savings will start questioning why they continue to pay 2% annual management charges for apparently little more than maintaining the fund’s plush offices.

*Much of Asia is closed for the traditional May holiday today– Tokyo is going into its holiday period next week but traded today along with Australasia and Indonesia (all slightly up). There was also confirmation that in Japan that SMFG will buy all of Citigroup’s Japanese brokerage businesses for $5.5bn – should help Citi shore up its capital base ahead of the stress-test results the Treasury will be releasing early next week.
*On the stress-tests, seems the Treasury has realised what a mess of the entire process they have made that rather than releasing nothing more than a summary of the results they will provide a full detailed analysis for all to see.

*All of Europe is shut except the UK (poor things – but they get Monday off) where the FTSE has traded quite flat ahead of the US open – where futures are currently indicating a decent opening: DJIA +27pts and S&P 3.6pts.
*Gold and oil have both slightly slipped today, but crude is still above the all-important $50/brl. We’ve seen a close return to USD/Yen of 100 which is a good sign for future moves in Japan’s industry-exporting dominated markets and possibly a future indicator for trade.