Enzio's Clock

n      Your top trading themes, any thoughts on Eurozone risks ?

 ·         Eurozone risks have two contagion mechanisms.  The first is via the banking system, whereby Asian banks with significant exposure to European banks get sucked into the vortex of European bank defaults. The likelihood of this happening is low given that the European banks will be bailed-out. The second contagion mechanism is via bond defaults, i.e. that European Eurobonds that default infect the global Eurobond markets, leading to an overall bond route.  Hitherto, however, credit markets suggest that the risk of such a “route” happening is low; for instance, German Bunds still seem to be the “safe benchmark” against which others’ credit spreads are measured.

·         One top trading theme has to be that domestic demand is stronger in Asia than it is in Europe and in the U.S.; in the jargon of our Economic Clock®, Asia’s “excess demand for goods” contrasts with the developed West’s “excess supply of goods”.  This would suggest that one can arbitrage domestic demand plays in Asia relative to those in Europe and in the United States. 

·         Another trading theme has to do with currencies. Which Asian currencies are strengthening most against the weak Euro?  Sell the Asian exporters of that currency strengthening most against the Euro, and buy Europe’s exporters, particularly those with a heavy exposure to Asian markets.   \

·         A final trading theme has to do with the policy mix of Asia vs. Europe and America.  In both countries, expect fiscal tightening; however, expect monetary tightening in Asia, while monetary policy will be kept loose in Europe and in America (in order to maintain “growth”).  Thus, the big question has to be whether the profits momentum of Asian companies will be enough to sustain them over the “hump” of relatively tighter monetary policy. 

n      What's your opinion on China and Hong Kong markets? Any opportunities there?

·         Following on from the above policy bifurcation: HK’s & China’s currencies will keep rising in line with the U.S. dollar. So short HK and China exporters, particularly those who are selling price-sensitive goods primarily to Europe.

·         Meanwhile, monetary policy is on a tightening trajectory in China; in the context of China’s Economic Time®, Beijing wants to create an excess demand for money in order to rein in inflationary dangers that already are apparent.

·         If it is true that there is an “excess demand for goods” in China, then domestic plays are to be favoured over export plays in China.

·         Buy Hong Kong’s importers of goods particularly from “cheap” Europe.

·         One theme play that I am personally involved in is Baidu, China’s largest internet search engine now that Google was booted-out. 

n      Investment strategies - anything likes / dislikes?

·         So based on this policy bifurcation noted above,

1.      we LIKE European exporters and thus dislike Asian exporters

2.      We LIKE Asian domestic plays and thus dislike American and European domestic consumption plays

·         There is a good reason to short U.S. housing stocks: real bond yields will rise in line with higher bond yields and low inflation.  Long bond yields will rise very much because of what we currently see in Europe: investors will get nervous about the level of US debt, so they will sell it. Not because they are worried about US inflation, but because they are worried about the health of the US fiscal house. With US inflation staying low, this means that long term “real” bond yields will climb. Thus, expect  real long bond yields to do the job of what the Fed normally would do later on, i.e. to tighten….