Tuesday, June 30, 2009

"Chinese Credit Growth" - July 2, 2009

"Chinese equities may well be being fueled by excessive domestic credit growth" -Phil Suttle

Here is an interesting quote I took from a market commentary by Phil Suttle head of Global Marco Analysis at the IIF (The International Institute of Finance).

I question the validity for such a line of thought. Recently I have been creating an emerging bank database. Yesterday I covered the top 4-5 largest banks in China ( ICBC, China Construction Bank, China Agricultural Bank, and Bank of China; some of the largest banks in the world as well)

Most of these banks only started publicly being traded Mid 2008, but from what I remember, I believe most of their assets were deposits and that the loan to deposit ratio is relatively small. With much more deposits to loans, "explosive" credit lending may be more sustainable.

Having a discussion with Suttle this morning, he pointed out to me that much of these increases in money supply are from monetary injections, though on a whole deposit still make up a significant amount. High credit growth in China according to a Monetary Authority statement may be "worrisome."

Though one can counter and point out that high credit growth is quite normal in emerging markets. I could attest to this as I experienced such an environment when working in HSBC Vietnam during the summer 2008. There was massive amounts of high inflation (in the high teens and 20's), near currency crises issues (exporter hoarding dollars, lack of dollar liquidity), extreme interest rates(in the high teens), along with explosive credit growth. I would also like to note that there were barriers on foreign banking institutions at the time (e.g. foreign banks were still waiting to be incorporated locally; one can imagine the hypothetical credit growth with foreign banks allowed to incorporate locally).

My point is that high credit growth is a natural phenomenon seen in industrializing nations when there is high exuberance in investment and investment return sentiment. What is truly important is if the Monetary Authorities are aware of the exponential credit growth and reign in expectations and at the same time implement corrective monetary controls to make credit growth sustainable (I was actually quite pleasantly surprised with the Vietnamese Authority's ability to handle their economic situation last summer).

With these points in mind, as I mentioned before, loan to deposit ratios may make the Chinese credit growth more sustainable, and it seems that the Chinese Monetary Authorities are aware of the growing credit situation. Though, these two latter points tend to be contradicting with China's trade policy. Considering 40% of China's GDP is exports, this recession has severely reduced GDP growth as US consumption has dropped significantly (a drop in Chinese exports, an increase in US savings rates, and increase in US domestic retail recently reported). Chinese authorities are stubbornly and quite possibly dangerously suppressing their currency further in order to strain the economy for 8% GDP growth.

Currently, I would say that credit growth is sustainable, though if Chinese Authorities try to keep pushing for higher GDP growth in this recessionary environment, there is a chance they may allow credit growth to get out of control (e.g. more lending for corporates to grow business vs organic growth).

In consideration of China as a whole, outside the highly modernized cities, most of China requires huge infrastructure developments. That the amount of room for pure organic/commercial/extensive growth has HUGE potentials for commercial banking, once the right infrastructure is in place. For the Authorities to allow loan led economic growth would be ridiculous given the amount of room for extensive growth. Excessive credit growth in this view would only be sensible if credit growth was allowed only for infrastructure developments, which in turn would allow for FDI and Business loans to be dispersed into the economy.

Taking a more obtuse view of things, this current world recession is a positive occurrence for emerging markets. Long term prospects of emerging markets have not been blown away by this recession. Currently, developing nations are dealing with their own problems, which makes investing abroad secondary at the moment. This is great for emerging markets, since over the last few years emerging market growth has been explosive. When the United States fell, soon followed the rest of the world. As so, this gives investment exuberance a chance cool down and restart at a more reasonable pace (double digit growth in GDP is not sustainable for prolonged periods as history has shown us; e.g. look at the so called "Japanese miracle," Singapore, Thailand, and more recently Vietnam etc...). This recession allows for less chance of investor expectations being failed which could have lead to capital flights out of the country, severely damaging long term growth (something reminiscent of the Asian currency crisis).

One can view this recession as a period for emerging markets to cool off and take a break before resuming on its path of industrialization. Another implication from this recession is that, since emerging markets are only on a "break", it maybe the emerging markets that lead this way out of the recession followed by their more developed counter parts.

Furthermore, if the Chinese Authorities or other export oriented nations are smart they may try to diversify away from exporting to the US (this move has been seen as China trying to politically push for a new reserve currency: check this article out found by my colleague Pat China and Argentina in currency swap; I will say one thing about a new reserve currency, this maybe impossible for China to get off the dollar even if there was a new reserve currency considering the amount of US debt they hold; further more I'm sure the US would use their political muscle to prevent these scenarios from happening). Ideally, if China can diversify their export partners, this recession may not take such a strong toll on their growth.

An even better idea would be for China to take this "cooling off" period and focus on infrastructure development to foster domestic and intensive growth vs. export oriented growth (look where exported growth led Japan...).

With this being said, at least as of now the credit markets in China may not be as bubbly analyst are speculating. Though the commodity markets may be, but that is a different story...

I actually do not know much about Chinese economic development so hopefully I can take the course at the LSE next year about the "LONG economic history of China." I will certainly be looking forward to that.


Sunday, June 28, 2009

S&P500 Weekly Market Commentary, June 28, 2009

As you can all see my blog turned into a trader groups blog that is being currently formed. All the content is the same however we will start publishing group blogs on OIL, Currencies, and sometimes Gold. Also we will report on equities related to such markets.

In the mean time I still remain short term bull on the S&P500. No analysis this week; this weekend was to crazy with meetings and organization of the group. Within two weeks time we should all be trading together as a group and having analysis reports from then on. I will continue with my personal post on the Group Blog as well. Just check who authored each entry.

Getting back to the S&P500 as long as the 877 is being fought around and held I remain short term bull. Unfortunately Im making this call blind and not looking at charts. Hopefully I will have more time this week, although its looking real busy.


Monday, June 22, 2009

S&P500 Day Brief June 22, 2009

Wow, talk about being totally wrong on Sunday.

A huge 3%+ move down today. Not only that, prices closed under the 200 SMA. I don't think today's price action alone is significant enough to warrant a full out bearish move. Though accordingly, I totally ignored some indicators I usually look at on Sundays.

The RSI and the MACD were showing downward pressure, and looking at today's chart it seems prices can still go further down. If the price movement can slow down there is a chance 877 support can still hold.

Briefly looking at volume, I don't see levels that warrant a full turn around to be full out bear.

However, today surely knocked me outta my socks. I'm sure if I was trading this environment I would have been stopped out for sure!

Sunday, June 21, 2009

S&P500 Weekly Commentary June 21, 2009

**skip to summary for shortened version.

Finally! I am settled in Washington DC. I start my Internship at the International Institute of Finance tomorrow.

The IIF <-- click here

It seems short term moves on the S&P500 have gone against my short term Bullish Stance.

June 12 I was preparing to go back to the United States. The S&P500 was at 946. Which started to Drop on June 15th (Monday) all the way to 910 June 17 (Wednesday) , about a 4% drop approximately. For all you bulls, I definitely would say this is a reasonable correction for the time frame in which the S&P500 dropped. One can argue that price levels bounced of 910 support developed all the way back from early may.

Tonight's analysis will be short again unfortunately, I will be working on my currency update through this week and more indepth analysis and more precise calls on the S&P500.

though, taking a look at some charts Id have to say I would be increasing my short term bull to:

Short term: bull
Med term: bull
Long term: bear

Short term being bullish over the next few weeks. Mid term bull being bullish for the 3rd quarter, though I will have to re-evaluate this as I analyze more.


The 200 SMA is still under prices despite the past weeks 4% correct. The end of the week ended up strong.

We are possibly seeing critical support changes from 877 to 910.

Back in early January 2009, one could have argued resistence at a 943 high. However, June 1st the S&P500 blew right threw this price level. Though prices are trading approximately 4% below this level, a higher low has been made and price levels climbing above the 940's range should be no problem, considering no major shocks.


Fundamentally, Id say consumer groups wouldn't be doing much better which can be arguably reflected in poor economic conditions.

Though we have seen improvements in the financial sector, we are no where near full recovery.

Energy, arguable should be doing better as reflected by oil prices (bad for airlines). However, considering a weak consumer I would expect less travel and less driving this summer so this definitely can be a drag on the economy/s&p500. (I haven't checked data on this, so I would appreciate anyone who is fundamentally oriented to check if this scenario is true or not).

Job markets have not improved and can continue to worsen.


On a more interesting note, sentiment seems to be more bullish than back in the early months of this rally.

perhaps this is reason to start considering timing for short positions. though right now I maintain a bullish stance (see my bullish arguments)



I was discussing some interesting ideas the other day and the significance of 200 SMA's. It would seem that the 200 SMA does have significance in that many quant/technical funds have defaults set on this average and can exert considerable amounts of volume and pressure on the prices which is why we could have been seeing a nice short rally June 1st to June 12 when the 200 SMA crossed under prices. (Im not exactly sure if this exactly how it works, but that is what I got out of the conversation, so if Im wrong please do correct me by all means!)



I maintain short term and mid term bullish stance with evidence shown in my bullish section. the Bearish evidence arguably matters in the longer run as this short term bullish rally will lead to a return to fundamentals in the long run.

Price Target:

Arguably with 943 resistance already broken through from early June, I am certain we will be seeing 1000 on the S&P500 before the year is out.

When should one go short if they are long term bear? Well, ill certainly have to entertain this thought for my next few blogs.

Support/Resistance Levels:

I definitely will be looking to 1000+ as resistance levels, and between 877 and 910 for support levels. So obviously this means I will be watching prices if they continue to dip lower for this up coming week.


Wednesday, June 17, 2009

Socialization in the making?

Obama to propose strict new regulation of financial industry - Los Angeles Times

Posted using ShareThis
^-- click here for article

Well I've been harping on this probably before 2008. The "financial crises" will result in starkly contrasted changes of the financial landscape as we know it...

This historic legislation maybe just be the first step.

Financial policy coming from political powers that be, will have far reaching implications on the political, economic, financial and regulatory institutions, systems and structures...

It is in this Macro context that the Supply side should choose their careers carefully, and the demand side choose their strategy for long term growth carefully ...

Monday, June 15, 2009

Monday, June 8, 2009

Currency Brief June 7th, 2009

I'm not to happy that I don't have time to do my second quarter currency review (because of finals). I definitely had a good second quarter with being bearish on the dollar.

Its unfortunate that I will have to go back home soon, considering the time lost and how fast the dollar may move in this time frame. Interestingly I see no fundamental reason why the dollar should be rising as we recently seen in the past week, unless we are again seeing relative weakness in other economic regions (perhaps a convergence to fundamentals?)

Hopefully, I will be able to get my currency review and forecast for the last two months of Quarter 3 in by the end of June. I'll be sure to include in my analysis commentary on the recent dollar rallies and if these moves are sustainable through quarter 3, and hopefully I will be taking a real position on the dollar this quarter.

By then I should be settled in Washington DC for the summer.

Until then...


S&P500 Weekly commentary June 7th 2009

No specific comments for this week, I still maintain short term bullish stance. Next week ill be re-analyzing new suppport/resistence levels. Its quite possible that we will see 1000+ on the S&P500 if we get continued long term support. It may also be worthwhile examining psychological effects of the 200SMA cross under very early in last week.

Also, I was also very happy with my call last week as the markets did experience a 1.3% (as i predicted a 1 - 1.5% drop before any bullish moves could continue). Indeed I will have to say such a move was quite bullish for short term support.

Ill just be on the sidelines watching this week no forecast or strategy calls.


Last final exam this thursday!
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