Chinese Real Estate -- Is it a Bubble

The Chinese government has created the mother of all bubbles and when it pops, it will be felt around the world. The China miracle is not really a miracle. It is a debt financed bubble. Sound familiar ?

The chart below shows that compared to the real estate bubble in Japan during the late 1980s and the current bubble in China, the US housing bubble looks like a tiny speed bump. The US has 20% to 30% more downside to go. For those looking for a housing recovery, I'd like to point out that Japan's housing market has fallen for 20 years with no recovery. I wonder if the National Association of Realtors will be running an advertisement campaign in 2025 telling us it is the best time to buy.

Take a gander at home prices in China. Since the 2008 financial crisis, the Chinese housing market has skyrocketed 60%. There are now 65 million vacant housing units. The question is no longer whether there is a Chinese housing bubble, but when will it pop. There is one thing that bubbles ALWAYS do. An that is POP!!!

The price of land in and around Beijing has gone up by a factor of 9 in the last few years. Delusion isn't just for Americans anymore. These two charts should be placed next to the word "bubble" in the dictionary. This will surely end in tears for anyone who has bought a house in China in the last two years.

As Mr. Alan Greenspan can attest, bubbles can only form when monetary policy and/or fiscal policy is extremely loose. The bubble king supercharged the US housing bubble with his 1% interest rates in the early 2000s. The Chinese must have hundreds of Paul Krugman disciples running their economic bureaucracy. There can never be enough stimulus to satisfy a Krugmanite. The Chinese leaders feel they must keep their GDP growing at 10%. A slowing of growth to 5% would unleash social chaos among the hundreds of millions of peasants who have come to the cities from the countryside for jobs. The chart below shows that when you control the printing presses and the banks making the loans, you can make stimulus "work". In the U.S., the Federal Reserve has printed, but the banks have hoarded their cash and have not made loans.

The Chinese authorities have printed and instructed the banks to make loans for shopping malls, apartment buildings, office towers, and condo towers. Average citizens have bought as many as five condos. Every Wang, Chang, and Wong knows that real estate only goes up. Their $585 billion stimulus package was used to build entire cities that sit unoccupied. The 2.2 million square foot South China Mall, with room for 2,100 stores, sits completely vacant. The Chinese have taken the concept of "bridges to nowhere" to a new level.

Over a 20-month period, Chinese M2 grew 47%, reflecting the outrageous level of spending by the Chinese authorities. When you hand out $3.5 trillion to developers, they will develop. When a government official, who can have you executed, tells you to lend, obedient bankers lend. The Chinese authorities can hide the truth for a period of time, but the bad debt caused by the Chinese stimulus and malinvested in office buildings, condos, malls, and cities will eventually lead to a monumental collapse in the Chinese real estate market. This will result in a stock market crash and a dramatic slowing in economic growth. The mother of all bubbles will Pop. Only the timing is in doubt. Based on history, the Chinese real estate bubble is in search of a pin.

Source: http://www.marketoracle.co.uk

Is the market set up for a big sell-off

Is the market ignoring the macro pressures on inflation and the micro pressures on profit growth, especially given the premium valuations for equities? Hence, is the market set up for a big sell-off?

Market View: The market has reacted nonchalantly to a tepid earnings season, especially with the larger companies tending to disappoint on earnings. While inflation is a concern, the market seems to hold the view that the pressures will recede, and hence that India’s premium multiples will continue.

MS View: The 99%/1-week VAR (value-at-risk) represents the weekly market move that has a 1% probability – i.e., the tail risk. When the historical VAR falls, it suggests that the market is increasingly complacent about tail risks. The 99%/1-week VAR is at a level which is consistent with a large sell-off. Going back 25 years, there are seven occasions when the VAR was at its current level (of less than 6%). Eventually, when VAR rises from this level, the market sells off 10% on an average in a week (with the seven data points ranging from -5% to -13% – Exhibit 2). Note, though, that the historical VAR can remain at low levels for many weeks before culminating in a sell-off (on an average of 65 weeks!). VAR is a good indicator for impending tail risk, but it is not useful for timing the event. Fundamentally, India’s tail risk emanates from either a sharp world recovery (leading to inflation) or a “double dip” (causing a shortfall in funding for the current account).

Conclusion: While tail risk is in play, the market is not likely to sell off in a big way anytime in the near future. The market is likely to reach higher levels before such a sell-off happens. History tells us that we may have to wait another year or for another 50% rise in index levels before tail risks play out. The market has spent only six weeks so far at the current VAR level, vs. the historical average of 65 weeks (from a range of 13 to 167 weeks ).

Source: Morgan Stanley Research

Dollar -- the mother of all carry trades

Hey, Have a look at these interesting articles on USD/Gold and also my technical view on the same.
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Key Takeaways from Nouriel Roubini’s article on USD – the mother of all carry trades faces an inevitable bust..

The US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fueling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates.

But one day this bubble will burst, leading to the biggest coordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.

This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash.

http://www.rgemonitor.com/roubini-monitor/257912/mother_of_all_carry_trades_faces_an_inevitable_bust

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Indian Government - pretty bad gold investor

If USD is an asset bubble then why Indian government is buying gold in big numbers…
IMF’s recent sale of 200 tons of gold to India has lifted the spirited of Gold bulls and USD bears. But the history of our country is not great as far as Gold trading is concerned. The Goldman analyst believes that Indian Government has been historically a pretty bad gold investor. (Buying at highs and Selling at lows). He sees gold now trading in the $950 - $1,200 range over the next 12-months. Which still isn't that bullish actually relative to many others.
http://www.businessinsider.com/goldman-goes-gaga-for-gold-2009-11

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Technical View Dollar/Gold:

•    Trend line Breakout: The index has given a breakout above its trend line starting from March, 2009. This trend line is very important as the index had intersected the trend line thrice in last 6 months. The index is expected to sustain above this trend line in short term.  

•    Channel Formation: The index is also moving in a downward channel for last 4-5 months. The index is expected to remain under this envelope and bounce back from lower channel.

The dollar index is expected to strengthen above its channel (76.5-77), which would provide early indication of a change in trend.

Since, Gold and dollar move in opposite direction, Gold also has been following same kind of upward channel. The breakout of this channel would confirm the trend reversal

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Technical View - Nifty

Elliot wave Analysis: 5th wave is still pending. · According to Elliot wave analysis, the market is trading in a 4th wave(corrective) of an uptrend (starting from march, 2009) and 5th wave of a bigger wave is still pending. The assumption is supported by Elliot rule; If Wave 2 was a simple corrective sequence (A-B-C) then Wave 4 is likely to be straight/ double bottom/ triangle pattern, which is true in current case with wave 2 as three wave structure and wave 4 as straight leg without retracement. If this theory holds good, then Nifty would not break 4600-4650 level on a weekly basis and bounce back to form one of these complex structures.




4600-4650 – Crucial support for the market on a weekly basis: · 4600-4650 is neckline support of bullish head and shoulder pattern. The market always retrace back to neck line after giving a head and shoulder breakout and then move up again. If the breakout theory holds good, then market should sustain above 4600-4650 on a weekly basis.

• · 4600-4650 is 23.8% Fibonacci correction level of the wave starting from march 2009.
• · 50% Fibonacci retracement level of impulse wave starting from July 13, 2009.

4375-4400 – The next very important support on a daily basis:

• · 61.8% Fibonacci retracement level of impulse wave starting from July 13, 2009.
• · Intermediate low formed in Mid August, 2009.
• · 200 day moving average at 4350-4400.

Bullish Scenario: The market sustains above 4600-4650 on weekly closing basis.
· The market has been following a trend line starting from intermediate top formed on October 20, 2009. The market has to sustain above 4600-4650 on weekly basis, even if its moves near to 4400. The short term trend would change if:
A) The market closes above its previous day high (e.g move above 4729 for today).
B) The market breaks above its trend line.
C) The market moves above its 50 day moving average at 4825-4850.

Either of these would give early indication and all of these would confirm the change of a trend.

Bearish Scenario: The market closes below 4600 on a weekly basis. The medium term correction would continue if:
A) The market breaks below 4400.
B) The market breaks below 200 day moving average at 4350-4400.

CV/Cars Leading Indicator for Equity Market

I have been asking myself “when will market find its final low /when to invest”. This is a difficult task but definitely not impossible. Is it possible to make set of leading indicators which can provide signals of important reversals in the market. I am trying to learn different ways to solve this simple but difficult question.

The simple way followed by many fund managers is to track economic activity using commercial vehicle sales. The other way is to track stock prices of companies in commercial vehicle industry vis a vis market or companies in passenger cars segment.

CV/Cars relationship: Commercial vehicles sales are important because producers and distributors make arrangements for transport of goods at the time of production changes. The commercial vehicles tend to underperform passenger cars during economic downturn and outperform during economic growth phase as CV sales starts picking up with economy revival while consumers start buying new cars after economy sustains and therefore CV stocks moves before Car stocks in an anticipation of economic recovery/downturn.

I have developed an indicator - ratio of commercial vehicles companies like Ashok Leyland to passenger cars companies like Maruti which tends to move in tandem with equity market and makes new highs and lows along with the market.

Early indication of market reversal: CV/Cars made a new high in early 2007 and confirmed a negative divergence in June, 2007 with a new low while Sensex made a new high. The divergence gave an early signal of trend reversal in the market.



Current Status:
Divergence in current market performance: This seems to be a bear rally as CV/cars indicator has shown a negative divergence with a new low in November 2008 while Sensex tested its previous low and bounced back. The market is expected to sustain only if CV/Cars indicator breaks its previous high.

Yield Spread- Leading Indicator for Equities

The yield spread (10 Year Government yield – 3 Months Yield) topped and bottomed out 1-2 years before real economy growth in every economic cycle since 1970. The Yield spread between long term and short term government bonds serves as a good predictor of future economic growth and has a predictive power of 1-2 years in advance.

Yield / Economy Relationship: The argument behind the relationship is that the term spread, being a difference between interest rates of different maturities, incorporates an element of expected changes in rates and is thus indicative of future changes in real activity. The high real interest rate means the low level of investments in current period and lower output in near future and vice versa. The high spreads mean economy slowdown and low spread mean economy recovery in near future.

Yield Spread - Leading Indicator for Economy Growth: (Click on chart)
In 1972, 1977, 1982, 1987, 1992 and 2003, the indicator topped out 1-2 years before GDP growth.

In 1973, 1980, 1989 and 2000, the yield indicator bottomed out 1-2 years before US GDP growth.


Yield Spread – Leading indicator for equities in 1970s(Click on chart): The yield spread bottomed out almost 1 year before equity market and 1.5-2 years before real economy growth in 1970 and 1974.
In 1966, the yield spread bottomed out at the same time but economy failed to go down to zero levels indicating towards an economy slowdown but not recession.

Indicator failed to signal equities direction in 1980s: The yield spread made new highs in 1982 and 1987 followed by GDP negative growth in 1984 and 1988 respectively but the equity market made new highs and continued its long term bull run.

How to Trade the Wedge Pattern

Rising and Falling Wedges are one of the most interesting patterns in technical analysis. What distinguishes them from triangle consolidation patterns is that price forms an upward or downward sloping coil that leads to the price move.

A rising wedge needs at least four ‘touches’ or tests of a trendline to confirm the pattern. Remember, a trendline needs at least two points to confirm it as valid. Generally, upon the fourth touch (or test), we would want to be waiting to enter on a breakdown of the lower trendline and place a stop above the upper trendline.

For a more aggressive method of trading rising wedges, you can enter short inside the consolidation inside the 5th swing in price to try for a better execution price. For falling wedges, you would buy on the 5th swing inside the converging trendlines and place a stop beneath the lower trendline.
Most wedges will break-out of the consolidation range anywhere from 66% to 80% of the way to the apex, though some wedges can wait until price reaches the apex for the actual breakout to occur.

Volume Confirmation
The wedge is a consolidation pattern, and as such, we would expect to see the volume trend decline (reduce) as either the Rising or Falling Wedge pattern develops, and then expand as price breaks outward from the pattern. Your confidence is decreased if we see volume surging during the formation of a suspected wedge.
We would expect volume to increase, or perhaps surge, as price breaks out of the trendline and gathers momentum to the downside (or upside).

Source: http://blog.afraidtotrade.com/trading-rising-and-falling-wedges/