The Toga Party is Over

Date: Thu, 12 May 2011 15:43:58 +0800
Subject: The toga party is over

Our call for a dollar rally last week has been fortuitously timed but the ”pacific peso” is moving not necessarily for the bullish reasons we outlined. Yes, the buck is bucking the downward trend but this is fear buying as the Euro comes under threat again from you-are-the-weakest-link Greece. With tens of thousands protesters rocking the tear-gas choked and tzatziki-smeared streets of Athens, any further budget cutting to fulfill earlier promises goes right out the

Acropolis window. Another bailout is in the works but this just prolongs the agony. Good time Greeks trying to survive inside the tight, humorless eurozone isn’t natural. I like the way the FT put it this morning, “There is no mechanism for leaving the eurozone. But even Alcatraz was not immune to escape.” Either way, the toga party is over. PIIGs yields go up and so does the dollar.


As I wrote two weeks ago, it appears commodities will continue to roll over for a while. The core at Glencore must be getting very nervous as their intended top of the market IPO is looking a tad late. Global commodity funds last week saw their first net outflows in 14 weeks. Recent macro data from China indicating the economy of the world’s largest marginal commodity importer starting to slow pokes another hole in the ever upward commodity price argument. Commodities strategist, Henry Liu, says on the ground credit in China is almost impossible to come by.

Commodities traders can’t raise funds to buy and store bulk commodities so they will be liquidating. Interestingly, GMO’s Jeremy Grantham in his Q2 Letter (attached) embraces Malthus and declares “The world is using up its natural resources at alarming rate and this has caused a permanent shift in their value.” His formally relaxed style is edgier and the narrative peppered with phrases like “no compound growth is sustainable,” “paradigm shift,”and “we will run out of everything and crash,” etc.

Not that I would ever say JG is way off track. He does point out that the industrial revolution got a huge boost from harnessing the power of hydrocarbons instead of wood allowing developed countries to increase their wealth 10 times over the century and that growth is now over. What he doesn’t talk about however, is the next big energy breakthrough that we are on the cusp of witnessing which will defeat all the above arguments. I can’t tell you what it is yet, though… Until then, will commodities come back?


$$$$$$

Tencent (700 HK, Buy) reported strong Q1 numbers and analyst Eric Wen likes what he sees and raises his target price again to $255. The company beat consensus and their game business is ahead of even our bullish expectations. Eric is now calling for 88% annual growth in this segment. Tencent’s entry into video advertising by investing in content is also a positive. Tencent is unique in the China internet industry because they have:

-        THE platform

-        THE users

-        THE resources

The internet scene in China (for all the usual reasons) belongs to those who execute, not innovate. No one else can compete with Tencent and any area they see as attractive they can acquire with their significant financial muscle. Don’t stand in the way. See attached.


$$$$$$$

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

Derek Hillen, CAIA

Mirae Asset Securities: Risk is to the Upside

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