Thank you, sir!

Date: Thu, 2 Jun 2011 13:57:56 +0800
Subject: Thank you, sir!

“I think animal testing is a terrible idea; they get all nervous and give the wrong answers.”  -  Unkown

Why we should be nervous:

The bond market is rallying and the yield on the US 10-year Treasury just fell below 3% for the first time this year. Treasuries have rallied 1.56% in May – their strongest showing since August. That is curious because with the CPI at 3.2% (nominal, not core, as we live in a nominal world) you now get a negative real yield. The only reason to buy a financial instrument of your own free will for a negative punch in the face is to preserve capital.

Also, QE2 is supposed to end this month thereby removing the largest purchaser of treasuries in the market. Yields should be going up, not down. Maybe the fixed income guys (the smartest in the room) are really betting on QE3. Scary, but it makes sense when we look at the US, Europe and China:


1)       Looking at any macro data in the US shows the economy is slowing down dramatically, housing has just double-dipped, manufacturing is stuttering and employment is retreating.

2)       Moody’s just downgraded Greece from “junk” to “crap.” Greece is more than a few souvlakis short of coming out of their tragicomedy and will get one more bail out before they are asked to stop breaking dishes and just leave the room.

3)       A cabinet minister in Ireland over the weekend admitted for the first time that Ireland will need more cash from the EU….

4)       There is an e coli scare in Germany from infected veggies right now and the “e” stands for “euro.”

5)       PMI figures from China also clearly indicate a slowdown in that economy as well – self-inflicted or not, a slowdown is a slowdown.

6)       Finally, look at the Swiss franc, it has just reached record highs against the Euro and the Dollar. It’s not just about mainlanders buying watches, after rallying 10% against the USD in two months, the CHF has become the only safe haven currency out there.

The bond market is getting ready for something bad while equities float up in a fantasy world of unreality. QE3, if it comes, would push equities higher but not before a massive sell-off as investors realize it is needed because this is more than just a “soft patch” we are staring at. Luck may be running out.


China bank investors


John Wadle and team comment on the latest news from China concerning the new loss-sharing scheme between banks and the gov’t regarding LGFV loans. Apparently, China is considering caving out RMB 2-3 tn in LGFV loans from state banks. Beijing will payoff some of the debt, the big banks will eat some and the rest will be quietly stuffed into a newly created AMC.

Without insulting anyone’s intelligence, this is (more) BAD news for the banks. We estimate an 11-51% hit to 2011 earnings for the H-share banks, depending on the size of the haircuts they would have to accept with a smile. “Thank you, sir! May I have another?” Trading at a 20-30% premium to the A-share listed banks (locals must know something here) and with the sector looking for an additional 20% increase in float in the next 6 months, we remain underweight. Git Out. Note attached.


That’s gotta hurt

For those living in HK, has anyone noticed every single day this week the SCMP has arrived hidden inside a glossy, color printed jacket blaring, “RESOURCEHOUSE GLOBAL OFFERING”? It’s like an underwear sale at K-Mart. This smacks of desperation to me and without looking any further I would ask myself, “Self, if this is such a good deal why are they hounding me for money?” Apparently, Lex in the FT today decided to land a few easy blows as well:

“…with no sales, no physical assets, two employees, two Aussie dollars in receivables and A$18 mn in negative equity… Resourcehouse is not so much a company as a concept.”

Without being unkind, it gets even better:

“Its underwriters (BOCI, HSBC, RBS and UBS – not exactly an A-list of equity franchises…)” !!


You can get our research by typing MASR <Go> on Bloomberg.


Derek Hillen, CAIA

Mirae Asset Securities: Risk is to the Upside

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