Tough times lie ahead for investors and fund managers in an uncertain environment. The US Federal Reserve may ease its emergency bond-buying programme, global economic growth is tepid and markets are volatile.
As a result, investors will have to lower their return expectations and the industry will come under pressure over investment performance and its lack of agility.
So says Mohamed El-Erian, chief executive and co-chief investment officer of Pimco, one of the world’s most influential bond houses, with $2tn in assets under management. Read More
When the latest market squall hit the eurozone last month, the governments of Spain and Italy responded with a time-honoured defence; as panic mounted, they banned the short selling of shares in banks, in a desperate bid to shore up confidence.
One month later, it might seem as if this achieved some respite; eurozone stocks have stabilised, as the European Central Bank has pledged fresh support. But is there any evidence that short-selling bans have any long term effect? Or can they potentially make a bad situation worse?
If a new paper published in a report from the Federal Reserve Bank of New York is correct, the answer is sobering. In recent months, a group of Fed and independent economists have analysed the impact of the short selling ban that was put into place in the US during the financial crisis of 2008, between September 22 and October 8 that year.* Read More
China’s inflation escalated to the highest level in three years amid lingering pressure, with the consumer price index (CPI), the main gauge of inflation, jumping 6.4 percent year-on-year in June, the National Bureau of Statistics (NBS) said Saturday.
The June inflation rate accelerated 0.9 percentage points from May’s 5.5 percent which stood at a 34-month high, both far exceeding the government’s annual inflation control target of 4 percent.
Of the 6.4-percent CPI growth in June, 3.7 percentage points were contributed by the carryover effect of price increases last year, the NBS said in a statement on its website.
“We don’t have to panic about the June CPI figure,” said Zhang Liqun, a macroeconomic analyst with the State Council Development Research Center, China’s top government think-tank.
“A CPI growth above 6 percent doesn’t mean the inflation situation is worsening in China, because 3.7 percentage points of the increase were contributed by the carryover effect,” Zhang said.
He said the carryover effect had peaked in June and new factors that push up prices have been under the government’s control, adding that the supplies of food are improving, except pork, and will help ease inflation pressure. Read More
Most traders have read Alexander Elder’s Trading for a Living, originally published in 1993. Elder has, of course, written other popular books such as Come into My Trading Room (2002) and Entries and Exits (2006). His latest work, The New Sell & Sell Short: How to Take Profits, Cut Losses, and Benefit from Price Declines (Wiley, 2011) is an expanded second edition of his 2008 book. It comes with a built-in study guide: three sets of questions and answers. Although it is a paperback, the charts and graphs are printed in color and the stock is of high quality.
The first part of the book covers Elder’s signature contributions to the trading literature: psychology, risk management, and record-keeping. It is brief because we’ve been there before, but Elder does describe some new ways to keep records—an ongoing project because he believes that “the single most important factor in your success or failure is the quality of your records.” (p. 341)
Part two tackles the all-important question of how to exit a (long) trade. Elder offers three alternative scenarios: sell at a target above the market, be prepared to sell below the market using a protective stop, and “sell before the stock hits either a target or a stop—because market conditions have changed and you no longer want to hold it.” (p. 59)
Elder then moves on to shorting stocks, futures, and forex; he also has a section on writing options. Finally, he points out some lessons of the 2007-2009 bear market.
Now this is what a real stress test should look like. Bloomberg quotes a banking insider that “China’s banking regulator told lenders last month to conduct a new round of stress tests to gauge the impact of residential property prices falling as much as 60 percent in the hardest-hit markets.” And just in case it is unclear what the reality of the situation is, because as Europe demonstrated all too well, nobody would test for something which is not already priced in, China is effectively telegraphing to the world that it is bracing itself for a more than 50% plunge in select real estate values. “Banks were instructed to include worst-case scenarios of prices dropping 50 percent to 60 percent in cities where they have risen excessively, the person said, declining to be identified because the regulator’s requirement hasn’t been publicly announced. Previous stress tests carried out in the past year assumed home-price declines of as much as 30 percent.” The doubling in stress is somewhat to be expected considering the tens of trillions in renminbi pumped into the banking system via whole loans and other CDO products, most of which have gone into building up empty cities, vacant apartment complexes, and unused infrastructure projects. As we noted previously when discussing the recent Fitch report on shadow funding of the real estate bubble, the nearly 50 million in vacant units, the ugly truth about the Chinese bubble is slowly starting to leak out.
The tougher assumption may underscore concern that last year’s record $1.4 trillion of new loans fueled a property bubble that could lead to a surge in delinquent debts. Regulators have tightened real-estate lending and cracked down on speculation since mid-April, after residential real estate prices soared 68 percent in the first quarter from a year earlier, according to estimates from Knight Frank LLP, the London-based property adviser.
A deep slump in China’s property market may further slow the nation’s economy, which grew at a less-than-forecast 10.3 percent pace in the second quarter. China is still the fastest growing major world economy. Concern that Chinese growth may slow due to a real-estate slump erased an early rally in U.S. stocks.
The China Banking Regulatory Commission said in a July 20 statement that banks should “continue to deepen” stress tests on lending to property and related industries, citing a speech by Chairman Liu Mingkang during a meeting attended by regulatory officials and bank heads. The release didn’t give details. Officials at CBRC didn’t return calls seeking comment.
Results from previous stress tests show that the ratio of non-performing real estate loans among Chinese banks would rise by 2.2 percentage points if home prices drop 30 percent and interest rates rise by 108 basis points, the person said. Pretax profits would fall 20 percent under that scenario. A basis point is 0.01 percentage point.
Measures to cool property-price gains included raising minimum mortgage rates and down-payment ratios for second-home purchases, and a suspension of lending for third homes.
Needless to say the “recoupling” that will occur once investors finally peek behind th books of largely insolvent Chinese books, will blow up the economies of Australia and New Zealand, which are nothing than a second derivative on China, and will do miracles to the European export-led Golden Age.