Weekly Review 10.30.2012

 

This was a record setting week! Literally 

Europe
Eurozone hit a record high debt of 90% from all 17 countries that use the single euro currency.  This is the highest level since 1999 when the EU currency was first implemented.
"The euro area economy remains stuck in a rut" said James Ashley, Sr. European economicst at RBC Capital Markets.
According to the Eurostat, five countries are in recession Greece, Spain, Italy, Portugal and Cyprus.  Many analyst expect the Eurozone to slip back into a recession next month when the official numbers are released. (recession is defined as two downward quarters of negative growth in a row)
Furthermore, PMI remains lowest in three years at 45.8  We can see this with BMW and VW, their exports have taken a hit on YoY basis. 


China
PMI- HSBC report showed Wednesday rising new orders.  3 month upward trend shows that the economy is slowly picking up.  However, this is not sustainable given US potentially falling off the cliff and the meltdown in Europe.  Nonetheless, PMI was 47.9(August)  49.2(September) and 49.8 in October.  This is still below 50 but indicates slow improvement and a moderate rebound of the worlds second largest economy.  Weak external demand and a slack job market are key factors, therefore one should expect more easing policies to secure recovery.

China's yuan reached a 19 year high against the US dollar.  Currency hit 6.2417 yuan per dollar, it has been appreciating since QE3 and the ECB bond buying plan.   HK monetary authority has injected more than $14B to stabilize Curreny.  Could this be the start of a currency war? Last weeks review we talked about Brazil's finance minister publicly scolding the US selfish actions at the IMF conference in Tokyo.   Chinese exports are sure to take a beating. 

Japan
Japan adds $9.4B to stimulus program to bump up growth as bond investors told government they were worried about delays and more spending.  Finance minister said this was necessary because Japan would run out of money if the bill was not passed.  This is only estimated to boost GDP by .1%.  Japan has the highest debt level among developed nations and has experienced 2 lost decades.  According to world renowned economists Rogoff and Reinhart  a Country with debt-to-gdp in excess of 90% is unsustainable.  Japan is at over 200%. (see book "This time is Different")

United States
Fiscal Cliff can be much worst than it is.  Many economist think every dollar of deficit reduction will subtract nearly the same amount from economic growth.  The IMF suggest 1$ could drain as much as $1.70.  With interest rates at near zero the pain will be much worse. Bernanke has acknowledged he would not be able to fully offset the pain if the economy runs into the fiscal cliff.  


The “fiscal cliff” and long-term government deficit issues are weighing heavily on the minds of finance professionals, and they do not expect business conditions to improve regardless of the results of the Nov. 6 presidential election.
Three-fourths of 949 executives who responded to a survey at the annual conference of the Association for Financial Professionals (AFP) this month reported that they believe overall economic conditions will weaken if various tax law provisions expire and mandated government spending cuts go into effect as scheduled in January 2013.
Respondents rated implementing changes to avoid the fiscal cliff as the second-most important issue for federal elected representatives to focus on after the election. The most important issue to respondents was resolving long-term government fiscal and deficit issues, identified by 63% of finance professionals in the survey.

Herman Venegas
 

Weekly Review 10.22.2012

All eyes were on the Second Presidential Debate.

Both Romney and Obama delivered strong punches tackling issues such as unemployment, oil and energy.  All said and done, Mitt Romney is in the lead in the gallop polls 52% to 45%.

Central Bankers and Government officials met up in Tokyo for the annual IMF conference.  (http://www.imf.org/external/am/2012/) The IMF lowered its GDP outlook on the global world economy.  The major theme talked about was fiscal unity among political leaders hinting towards the EU leaders.

Also, Bernanke addressed critics abroad saying stronger growth in the United States bolsters global prospects as well, countering the likes of Brazil's Finance Minister Guido Mantega who has labeled the Fed's latest stimulus effort "selfish".
Critics say the Fed's unorthodox policies weaken the U.S. dollar and boost the currencies of developing countries, hurting their ability to export.

Canada has blocked Malaysian state oil firm Petronas’ C$5.17 billion bid for gas producer Progress Energy Resources in a surprise move that could signal problems for a much larger Chinese deal in the country’s energy sector.
Canada’s announcement late on Friday, minutes before a deadline, was a blow to Petronas whose domestic oil supplies are shrinking and which has been seeking to boost its resources beyond Malaysia and volatile areas such as Sudan.
It also raises doubts over Chinese oil group CNOOC’s C$15.1 billion offer for oil producer Nexen and could weigh on other Canadian firms hoping for foreign investment to tap their vast energy reserves.
Any rejection of the CNOOC bid would likely damage trade ties Canada has been trying to build with China, underlining political sensitivity to Chinese corporate expansion in North America.
http://www.vancouversun.com/business/Canada+blocks+billion+Petronas+Progress+deal+with+video/7422103/story.html#ixzz2A4gWGYes

Google's earnings were released ahead of schedule.  The stock plummeted -$3.12.  Why? according to experts mobile has been a mixed blessing. Smartphones and tablets are bringing in new users — and the advertisers that follow them — but it makes less money on mobile ads than on desktop ads.

For a  list of companies who released earnings this week click here.   http://www.earnings.com/highlight.asp?client=cb

Weekly Review - Sept 8.12

India

McDonald has announced it will launch a Vegetarian Outlet in India sometime June 2013.  This will be the first vegetarian restaurant in the world!  A few other fast food restaurants are fleeing into India in attempt to capture a consumer base of 1.2Billion people.  Can you say "McDonaldization" I mean globalization. 

India released its trade balance on Monday.  Economist forecasted a deficit of -8.8Billion however their estimates were wrong.  Actual number was -15.5Billion!  I think they(economist) need to update their model.  This means Imports outgrew exports by 15.5Billion dollars.  This re-affirms our belief that India is in the process of industrialization and has a lot of growth potential. 

Europe
The dreaded Troika stepped back into Greece this week to impose more restriction.  Austerity is a dirty nine letter word for many Greeks.  The public force (police and military) successfully opposed cuts to their pay checks.  This means the ministry of Finance will look into other areas to cut…. PENSIONS are next! With unemployment almost at Spanish levels of 25% a cut to pensions will be devastating.  Old age pensioners are the bread winners for large number of unemployed.  Hundreds of retirees took to the street their signs and protested this week.





On a Euro wide level,  Purchasing Manufacturing Index (PMI) was less than 50 indicating again another contraction in the economy.  Managers are still bearish.  Here are more gloomy numbers to show that Europe is in a big mess. 
*Retail Sales (MoM) : Down -0.2%
*GDP(QoQ) : -0.2%

USA
Much attention to Congressional speeches this week adverted attention away from the real problem.  Unemployment is still above 8% and wont seem to go down no matter how much stimulus and tax breaks are given.  Plain and Simple, business aren’t hiring new workers.   Unemployment rate came out this week, it still remains above 8% at 8.1%(not seasonally adjusted).   Also, manufacturing index came out showing that levels are below 50 which shows a bearish outlook in business. 

Canada
As expected, interest rate remained unchanged on Wednesday.  Bank of Canada kept rates at 1%.  Furthermore, Purchasing Manufacturing Index is well above 50 at 62.5.
Canadians are doing well!  Carney stated "As long as demand for commodities are strong Canada will do well"  In other words "Expensive oil = happy Canada."

Weekly Review

Gloom and Doom

Certainly this has not been a fun week for most markets around the world.  Many companies came out missing target estimates reaffirming the fact that the economy is far away from a real recovery. The UK shocked the markets when the latest GDP numbers from the Office for National Statistics showed that the economy shrank by 0.7% over the second quarter. 

USA
The US economy expanded at a rate of 1.9% the first quarter.  Numbers just came out today indicating that the economy grew at a slower pace of 1.5% for the second quarter from April to June.  The economy slowed amid weak consumer spending, government cuts and a rise in imports from foreign countries.  Weak confidence in the Euro currency has led to capital flight into the American dollar thereby pushing up its value.  With a stronger US dollar exports have become less attractive which in turn is hurting local manufacturers export their products.
Bush tax cuts are set to expire be the end of 2012 (Fiscal Cliff).  Most economist predict that if all of the 2012 tax and spending cut measures occur under current law, it would reduce the deficit but also drag down GDP by 4% or more and cause a recession next year.

EU

European Central Bank President Mario Draghi pledged on Thursday to do whatever was necessary to protect the euro zone from collapse, sending a strong signal that inflated Spanish and Italian borrowing costs were in his sights.  Spain's 10-year bond yield sank to as low as 6.92%, around 40 basis points lower.  Furthermore, the news reversed the 5 day decline of the Euro/USD.  The Euro made significant gains.

Italy also came into the spotlight as the provincial government association (UPI) warned that schools may not be able to open after the summer holidays due to planned spending cuts and local finances. These comments proceeded prime minister Mario Monti's comments last week announcing that Sicily was on the brink of default and on the same day the press stated that 10 Italian cities faced serious financial difficulties.
  
Citigroup said there’s now a 90 percent chance Greece will leave the euro in the next 12 months to 18 months.



 

China

China National Offshore Oil Corp.(CNOOC) — is a state-owned oil company.
Calgary-based oil and gas firm Nexen Inc. has agreed to be acquired by CNOOC Oil Company in a $15.1 billion US cash deal. It will pay $27.50 per Nexen share. That price makes the deal the largest foreign transaction that Beijing has ever attempted.

The New York senator, a noted opponent of China's international trade policies, told U.S. Treasury Secretary Timothy Geithner that the U.S. should block the takeover of Calgary-based Nexen unless China lives up to its free trade commitment.

With stronger Canadian/Chinese trade relations and uncertainty in middle eastern oil we can expect to see more M&A activity in the Canadian energy markets.

Herman Venegas