Thursday, December 29, 2005


BDI index not confirming new high in Transports nor is Dow which still lingers below 2005 highs, let alone old 2000 highs. After SEPT peak, action here has been one of shrinking base, not expanding.

INverted yield curve being EXPLAINED away by media wise guys, giving it extra weight.

I will need surgery, I hope it can bring me back to way I was, doing what I can to maintain my site. Hope my loyal readers are hanging in there with me.

UARM flying, no shortage of new bagholders, 37 X book value LOL 70X FORWARD PE. amazing.

What is keeping GM afloat? I think in 2006 some kind of ICEBERG is going to be hit, and like Titanic....


Tuesday, December 20, 2005


Bush didn't even wait for this "rubber stamp" group!


2005 Nearing AN END

Short and sweet, I will be gone week of Dec 21-28th. WIsh all a super holiday and NY.

New lows were double new highs today, this market is sputtering coming into home stretch. Market has been weak last few JAnuary's.

Maybe, it is working OFF overbought condition, with little damage if so for another push PAST 11K, 50/50 chance IMHO.

Bond funds selling off hard that I monitor. OIL may have topped, gold now into hard correction, break of $490 will usher in lower prices, IMHO.

Housing inflation continues, pressure is on FED to keep raising rates, or dollar might fall into black hole.

Easy money been made.


Saturday, December 17, 2005


M3 added only $1.1 B last week.



Given P's bugs.....3 amigo blackout period coming! and I dont bite my nails!!

$1 TRillion to money supply, low rates, hedgies buying etf's, most m & a's since 2000, cash buyback's galore, record bullishness, exploding double digit Spx earnings growth...........

...........stock market that has little to show for it! JAN high of 10,940 still stands!@! Dow running into overhead descending trend line drawn from 2000 high

Leadership harder to find, breadth weakening, Dec rally front run.$compq,uu[w,a]wallyiay[pc200!c400!f][vc60][iut!Ub14!Lh14,3]&pref=G 2000 key area for Naz IMHO.$VIX,uu[w,a]wallyiay[pc52!c10!f][vc60][iut!Ub14!Lh14,3]&pref=G Who needs protection?$SPX:$VIX,uu[w,a]wallyiay[pc52!c10!f][vc60][iut!Ub14!Lh14,3]&pref=G Just observe today between 2000. Higher bullishness, lower prices!!

Good news discounted...........bad news will cause implosion, IMHO


Thursday, December 15, 2005



by Dr. Kurt Richeb├Ącher

Reading so many ecstatic laudations on Fed Chairman Alan Greenspan, "the
greatest of all central bankers," two other names and occurrences came to
mind. The one was John Law and his tremendous wealth creation through
rigorously inflating the share prices of the Mississippi Company. And the
other was former Fed chief Paul Volcker and his recent article in the
Washington Post titled "An Economy On Thin Ice," wherein he expressed his
desperation about the economic and financial development in the United
States. Though he never mentioned his successor's name, it was all about
him and his policies.

Just a few samples from Paul Volcker's assessment:

Under the placid surface, there are disturbing trends: huge imbalances,
disequilibria, risks - call them what you will. Altogether, the
circumstances seem to me as dangerous and intractable as any I can
remember, and I can remember quite a lot. What really concerns me is that
there seems to be so little willingness or capacity to do much about

I don't know whether change will come with a bang or a whimper, whether
sooner or later. But as things stand, it is more likely than not that it
will be financial crises rather than policy foresight that will force the

What, after all, are the great merits of Mr. Greenspan, according to the
conventional laudations? They are, actually, seen in two different fields:
first, in the striking successes of his actual policies; and second, in
notable contributions to both the theory and practice of monetary policy.

His policy successes seem, indeed, all too conspicuous: lower inflation
rates than expected despite strong GDP growth; high gains in job growth;
and low rates of unemployment. And yet only two mild recessions, of which
the second one, in 2001, was so mild that it disappears when quarterly
data are aggregated to a year.

His extraordinary successes are generally attributed to radically new
practices in monetary policy. The Financial Times ran a full-page article
under the big headline "Greenspan's Record: An Activist Unafraid to Depart
From the Rule."

To quote the paper presented by Alan S. Blinder and Ricardo Reis of
Princeton University at the Federal Reserve Bank of Kansas City symposium
on this point: "Federal Reserve policy under his chairmanship has been
characterized by the exercise of pure, period-by-period discretion, with
minimal strategic constraints of any kind, maximal tactical flexibility at
all times and not much in the way of explanations."

It is true Maestro Greenspan disregarded any established rules in central
banking. To escape the consequences of the equity bubble that he created
in the late 1990s, he generated a whole variety of new bubbles that
radically changed the U.S. economy's growth pattern. What he achieved was
the greatest inflation in asset prices in history, which became the
economy's new engine of growth. What about its inevitable aftermath?

If Alan Greenspan jettisoned all inherited rules, he nevertheless chose
one predominant rule, actually, his only rule: a strictly asymmetric
policy pattern. Every central bank has two policy levers at its disposal.
The big lever is changing bank reserves, the banking system's liquidity
base. The little lever consists in altering its short-term interest rate.

Whenever monetary easing appeared opportune, Mr. Greenspan has acted
rigorously with both levers. When it seemed to require some tightening, he
always acted hesitantly and only with his little interest lever. He has
never seriously tightened bank reserves. Though hard to believe, he has
actually been easing the Fed's reserve stance since last May.

This is most probably occurring because the continuous rampant credit
expansion is increasing the banking system's reserve requirements.
Nevertheless, to keep the federal funds rate at its targeted level of 4%,
the Fed has to provide the higher reserves.

What this means should be clear: The Fed is anxious to avoid any true
monetary tightening in the apparent hope that the "measured" rate hikes
will softly do the job over time, causing less pain. Most probably,
though, this implies more rate hikes and more pain - later.

It was, as a matter of fact, precisely the same kind of experience that
induced Volcker to abandon such strict funds rate targeting in October
1979 in favor of targeting bank reserves. It marked the fundamental divide
in U.S. monetary policy from prior persistent monetary looseness and a
strong inflation bias to genuine credit tightening, ushering in a secular
decline in the inflation rates.

The Greenspan Fed has returned to dubious interest targeting, while
explicitly restricting itself to "measured" - in other words, very slow -
rate hikes. The true monetary ease shows in the continuance of the
relentless credit deluge.

When Alan Greenspan took over as Fed chairman in 1987, outstanding U.S.
debts totaled $10.57 trillion. According to the latest available data,
they stand at $37.35 trillion. This is definitely Mr. Greenspan's most
conspicuous achievement.

To escape the aftermath of the equity bubble, the Fed created the housing
and bond bubbles in 2001 and the following years. It is time, we think, to
ponder the aftermath of these two asset and credit bubbles. The inverting
yield curve is primarily threatening the huge existing carry-trade bubble
in bonds. But the big housing bubble and the smaller car bubble too have
plainly peaked. Rising interest rates and poor income growth are
relentlessly taking their toll.

It should be immediately clear that the potential economic and financial
aftermath of a bust of these bubbles will be many times worse than the
potential aftermath of the earlier equity bubble. Spending and debt
excesses have multiplied over the past four to five years to an extent
that threatens the stability of the whole U.S. financial system.

Lately, Mr. Greenspan's public speeches have insinuated that the high
asset prices in the United States in recent years may, ironically, be due
to the extraordinary success of his policies, by leading investors to
demand lower risk premiums. Eventually, however, this reverses and asset
prices fall reflecting "the all-too-evident alternation and infectious
bouts of human euphoria and distress and the instability they engender."

Yet he emphasized that it is "simply not realistic" to expect the Fed to
identify and safely deflate asset bubbles. The right response in his view
is for all policymakers to keep markets as flexible and unregulated as
possible. Flexible markets, he said, helped absorb recent shocks, such as
stock-bubble collapse and the Sept. 11, 2001, terrorist attack.
We are not sure what shocked us more, this senseless, arrogant remark or
the complete silence on the part of American economists. Exuberance, just
by itself, is unable to inflate asset price levels. The indispensable
primary condition is always credit excess, and Mr. Greenspan delivered
that in unprecedented profligacy. By the nature of things, loose money and
credit excess lead, and exuberance follows.

America's reported economic recovery since 2001 has been its weakest by
far in the whole postwar period. For the working population, there never
was a recovery. They speak euphemistically of a shortfall of employment
and income growth. It is better described as a fiasco for both.

Two acute dangers presently lurk in the U.S. economy and its financial
system. One is the inverting yield curve threatening to pull the rug out
from under the huge carry-trade bubble in bonds, and thereby from under
the housing bubble. The other is the slump in consumer spending. Consumer
borrowing is slowing, while employment and labor income growth are
weakening again.

It seems that the carry-trade community is betting on prompt rate cuts by
the Fed if something goes wrong in the economy or the financial system. We
suspect that the Fed, grossly underestimating the enormous vulnerabilities
in both sectors, will stick to its rate hikes. The interest "conundrum" is
pretty much the only thing holding up this house of cards.

"Super-liquid markets" has become the common bullish catchphrase. It
should be realized, however, that the existing liquidity deluge in the
United States and some other countries has its sole source in the
monstrous asset bubbles providing the collateral for virtually limitless
borrowing. It needs a sharp distinction between earned liquidity from
saving and borrowed liquidity accrued from asset bubbles. The latter kind
of liquidity can vanish overnight.

The sharp surge in inflation rates is forcing the Fed to continual rate
hikes. Doing so, it takes enormous risks with the existing bubbles.
Bluntly put, it has lost control.


Dr. Kurt Richeb├Ącher
for The Daily Reckoning

Tuesday, December 13, 2005

QTWW sold at yesterdays close

CAT IN HAT QTWW TA by: duratek (45/M)
12/12/05 04:16 pmMsg: 20491 of 20582,uu[w,a]daclyiay[pd20,2!c50!f][vc60][iut!Lg!Um12]&pref=GAs you can observe, each time ROC did stock far my TA has been pretty good, now below 50 EMA 20 EMA near $2.85 next stop IMHO RSI turn down

**update stock opened weak now near $2.70 (profit near 25% on that trade)



The high, when registered in markets, will likely stand for many years.


Sunday, December 11, 2005

Gold Technicals

My post on RB

SteveZ Ghost of Xmas past?
Gone but not forgotten?
End of 2005 Tax break to repatriate foreign earnings at only 3% gave dollar support as foreign currencies had to be sold, soon to end.
Double US deficits not shrinking, near $1.2 trillion 2005.
Also March could be end to int rate hikes......also $$ supportive......but gold has risen even as $$ has!!
March ends reporting of M3. March begins Iran Euro Oil I wonder as Bernanke steps in with liquidity flair.......that's why I am thinking gold bull wants to shake off as many weak hands before WILD phase begins....good sign if it stays above $50.
We see now steveZ as we were the few that screamed of bear's arrival near 2000........we also should have been screaming about the gold bull's beginning.......lessons of past 5 years worth a lifetime.
Somtime down the road my maybe the Dow has one more gasp to above 11K before table is set yet once again.......few voices see trouble ahead as before....
Housing is INDEED slowing and over 800K jobs at risk.....been the backbone of economy.....not sure what could step in....lowering rates hat trick will have less of an effect and could do double damage to US dollar.....another positive for gold.....and not even a whisper for deflation.....

Thursday, December 08, 2005


My orig buy was $2.55. Stock closed at $3.23 today before earnings. UP on higher volume. Price following volume. A good sign. Near my orig target area, I will monitor reaction to earnings, if true there is HUGE 9M short position,what if they get pressure to cover?



Starting to add up IMHO, TOL warns and lowers 2006 guidance. MSFT in India to hire 3,000 workers and invest $1.5 B there, the SHIFT continues.
GM near the brink. Gold at $520. Housing declining could strip as many as 800,000 jobs. Interest rates near inversion.High energy leads to Recessions. BOJ signals END to zero rate policy sees inflation!!!!! NIKK falls 300 points at 93% bullish sentiment top is in there IMHO


Wednesday, December 07, 2005


This is what I was worried about, real potential for weak XMAS reatil. I don't know, but have we reached the point where not only rubber met the road,but horse won't drink?

FED has flooded crisis amounts of liquidity, debt at historic levels, plenty of reason for pause.

Article saying as many as 800K jobs might be lost if housing slowdown arrives.


Tuesday, December 06, 2005

ROACH looks to 2006

The annual year-end forecasting ritual has begun. For us, it is always sparked by the extension of our forecast horizon to another year -- in this case, our first official glimpse at 2007. We also take an in-depth look at our calls for the year nearly completed (2005) as well as for the 12 months lurking just ahead (2006). It is as close to soul searching as the heartless macro prognosticator ever gets.
Time and experience -- there is a difference -- has taught me not to take the point estimates of our global forecast-extension exercise too seriously. We do our best as a tightly knit group of seasoned forecasters to capture the rhythm of the global business cycle. We agonize over policy assumptions -- monetary and fiscal -- currencies, oil prices, inflation, yield curves, and, yes, even global imbalances as we put the pieces of the global macro outlook together. But in the end, the outcome of this exercise typically suffers from the classic drawbacks of groupthink. The offsetting inputs from our far-flung network of economists around the world often tend to produce a rather boring outcome -- something close to a trendline forecast for the world economy.
Our latest year-end global forecast exercise is no exception. Our first cut at 2007 calls for a 3.8% increase in world GDP growth -- down slightly from an upwardly revised 4.1% increase for 2006 (versus our previous estimate of 3.8%). On the surface, these are pretty impressive numbers for the world economy -- slightly above trend (an average of 3.7% world GDP growth since 1970) and well above the global recession threshold (2.5%). If this forecast comes to pass, it would mark five consecutive years of above-trend growth for the world economy -- the longest stretch of global vigor since the late 1980s. With global inflation expected to remain well contained over this time horizon -- we are forecasting industrial world CPI increases averaging just 2.0% over 2006-07 --- our global baseline is starting to take on the ever-seductive characteristics of Rosy Scenario, that voluptuous handmaiden of yesteryear.
In looking at the major regions of the world, our baseline forecast conveys the impression of “steady as she goes” through 2007. Within the developed world, a slowing in European growth is most pronounced (downshifting from 2.2% in 2006 to 1.8% in 2007), whereas we have penciled in more modest downshifts to trend-like outcomes in the US (from 3.8% in 2006 to 3.5% in 2007) and Japan (from 2.5% in 2006 to 2.3% in 2007). In the developing world, the biggest shift is an upgrade to our 2006 Chinese growth forecast from 6.7% to 7.8%; while this would still represent a significant downshift from average gains of 9.5% over the 2003-05 period, it is certainly not as draconian a slowdown as we had been expecting. Our first cut at 2007 calls for a further moderation in Chinese economic growth to 7.5%. We also look for growth in India to slow somewhat to an average of 6.6% over the 2006-07 interval -- impressive gains by most standards but down from the heady 7%-plus pace of 2003-04 and the 8% annualized increase just recorded in late 2005. Elsewhere in the developing world -- Asia, Latin America, and Emerging Europe -- we see growth in 2006-07 averaging close to the above-trend 2005 pace.
The pitfalls of groupthink have long taught me to focus on the risks to our baseline view of the world. That’s especially the case when we peer into our scratched and cracked crystal balls and stretch the forecast horizon out for another year. Baselines are an important aspect of any macro debate -- be it for an individual economy, a region, or the world as a whole. But, in my view, the baseline should only be viewed as a starting point. Over the course of any year, the unexpected always happens -- namely, oil shocks, natural disasters, wars, or financial market disturbances. Our baseline is the benchmark by which we then measure the impacts of these all-too-frequent “exogenous” disturbances. This is where the rubber meets the road for the macro analyst -- not in discerning the precision of a baseline but in trying to capture the risk factors that are most likely to jar economies off this trend-like path. In that spirit, I present the five risks that I believe will be especially critical in shaping the global macro climate in the year ahead:
Global rebalancing. You’re tired of hearing about this, and I’m equally tired of writing about it. But, in my view, this remains the key risk for a still unbalanced world -- an overarching framework that unifies many of the other risks enumerated below. It is an outgrowth of the excesses of the world’s two main growth engines -- the American consumer on the demand side and the Chinese producer on the supply side. It also reflects the persistence of subpar growth in the rest of the developed world and lack of autonomous support from internal demand in the export-led developing world. And it reflects the increasingly precarious asymmetrical distribution of the world’s external imbalances -- a record US current-account gap that accounts for 70% of the world’s total external deficits juxtaposed against a far more broadly diffused distribution of surpluses. Global imbalances have, of course, been building for years, and the longer they continue to fester without major financial market consequences, the greater the conviction this state of disequilibrium is sustainable. However, with America’s current account deficit likely to widen further over the next year while at the same time the three largest surpluses -- Japan, Germany, and China -- start to shrink, I believe the presumption of sustainability will be drawn into serious question in 2006.
Chinaslowdown. After years of skepticism, the world now treats China as a perma-growth story, capable of sustaining 9%-plus GDP growth in perpetuity. We were wrong on the China slowdown story in 2005 and, as noted above, have responded to this forecast error by raising our growth forecast for 2006. However, based on intelligence gathered during a recent trip to Beijing, I now believe that Chinese bank lending will slow sharply in 2006, as the transition from a policy-directed to a commercial banking system reins in the excesses of open-ended credit growth. Publicly-listed banks, along with those that are about to go public, are now focusing on profitability and shareholder value, unwilling to tolerate a new round of NPLs that a perpetuation of policy lending might otherwise imply. The result is likely to be a surprisingly sharp slowdown in bank-funded fixed asset investment -- a welcome development for an unbalanced Chinese economy that is in danger of letting its investment boom turn into a breeding ground for excess capacity and deflation (see my 2 December dispatch, “China Slowdown -- Early Not Wrong”). Given China’s outsize claim on global resource demand, such an investment slowdown could also lead to surprising drops in oil and other industrial commodity prices.
American consumer. The American consumer has been the mainstay of a decade of US-centric global growth. Like impressions of the all-powerful Chinese producer, most believe that US consumption is now impervious to external shocks. I think that perception will be challenged in 2006. Lacking in normal support from labor income generation, the saving-short, overly-indebted, asset-dependent American consumer could well be squeezed by the twin pressures of a post-bubble housing market and higher energy costs. Contrary to widespread perception, US consumers are now in the process of cutting back discretionary spending in response to the energy shock of 2005; growth in real consumption is tracking an anemic 1.5% pace in 4Q05, down from the nearly 4% trend of the past decade. Moreover, not only should the Fed tightening cycle take its toll on house price inflation -- the sustenance of the Asset Economy -- but it should spur an increase in debt service obligations based on the profusion of floating rate loans that were taken out at below-market “teaser rates” over the last several years. In my view, the days of open-ended US consumption are drawing to a close -- sooner rather than later.
The dollar. A year ago, the dollar bears were strutting. Now it’s the new-paradigm dollar bulls who are exuding confidence (see, for example, Alan Greenspan’s 2 December speech, “International Imbalances”). However, with the Federal Reserve signaling that the end of its tightening cycle is now open to debate, I expect the interest rate differential theme to fade in importance as a driver of currencies. Foreign exchange markets should shift their attention back to an old theme as well as to a new one -- the former being America’s record and still-widening current account deficit and the latter being Japan’s economic recovery. If the Japan story is for real -- and I suspect it is -- there are powerful fundamental reasons why the yen should begin to appreciate. With Japan having the world’s largest current account surplus, that possibility is even more likely. I also look for a rethinking of the “China factor” in currency markets. With the exception of the US dollar, the RMB has appreciated against most major currencies this year. Nor do I expect the Chinese to up the ante on the “symbiosis trade” by raising their overweight in dollar-denominated assets. For China, this is a recipe for excess liquidity creation (brought about by the partial sterilization of Treasury purchases), mounting bilateral trade tensions with the US, and a huge fiscal hit in the event of dollar depreciation. Finally, I am highly suspicious of the consensus view that the dollar will continue to be bailed out by petro-dollar recycling from the Middle East (see my 28 November dispatch, “The Case of the Missing Petro-Dollars”). While a surging dollar could well be supported by a powerful momentum trade for a while longer, my advice is to watch out for a reversal in early 2006.
Central bank credibility. Central banks turned out to be great inflation fighters. Their record is far more tainted in managing the approach toward the hallowed ground of price stability. The Bank of Japan lost the battle against deflation and could well have a surprisingly difficult time in extricating itself from the anti-deflationary policy stance that remains in effect today. The Federal Reserve narrowly escaped the deflationary aftershocks of one asset bubble, but will it be so lucky when the housing bubble pops? As the newest central banker in the world, Ben Bernanke will be lacking support from the confidence factor that Alan Greenspan has long enjoyed -- potentially a serious problem in a US current account adjustment. Transitions to new Fed chairmen have not gone well in the past (see my 7 October dispatch, “Transition Curse”). Is there a compelling reason to believe it will be different this time? And then there’s the case of the ECB -- beginning a process of policy normalization when the Euroland economy remains shaky, at best. I suspect central bank credibility will meet a stern test in 2006 -- typically a tough development for financial markets.
In the end, good macro is not about honing the precision of the baseline forecast. It is more about a risk assessment of unexpected developments on the tails of the probability distribution. As I look to 2006-07, I see the downside risks outweighing those on the upside by a factor of two to one. Specifically, I think there is a much greater chance that world GDP growth could slip back into the 2.5% to 3.0% danger zone rather than cruise at or above our nearly 4% projection. As 2005 draws to a close, ever frothy financial markets are in the process of discounting an increasingly sweet macro scenario that bears a striking resemblance to our baseline view of the world. If my risk assessment is correct, financial markets could be in for a rude awakening.

Roach on China

The die is now cast for a significant slowing of Chinese GDP growth in 2006. At work is likely to be a downturn in China’s all-powerful investment cycle
About six weeks ago, I threw in the towel on the ever-elusive China slowdown call (see my 21 October dispatch, “Wrong on the China Slowdown”). In doing so, however, I cautioned that we simply may have been too early in looking for a downshift in Chinese economic activity. Based on intelligence gathered during a recent visit to Beijing, I am increasingly convinced that is, indeed, the case. In my view, the die is now cast for a significant slowing of Chinese GDP growth in 2006. At work is likely to be a downturn in China’s all-powerful investment cycle, driven by an important and surprising contraction in bank lending.
China’s booming investment cycle is on an unsustainable path. For 2005, we estimate that fixed asset investment is likely to exceed 46% of Chinese GDP -- astonishing by historical standards for China or any other economy. Given China’s special investment needs as a large developing country -- namely, urbanization, industrialization, and infrastructure -- there is every reason to look for an investment-led growth dynamic. But the Chinese investment cycle has gone well beyond what those fundamentals might suggest. Even in the heydays of their own development booms, the investment shares of the Japanese and Korean economies never got much above the low-40% range. I very much agree with Andy Xie who recently argued that China is now at a point where its ever-rising investment share is a recipe for excess capacity and deflation (see Andy’s 22 November dispatch, “China: Toward a Deflationary Landing”).
The consensus view in the markets is that China will sustain its investment boom through the 2008 Beijing Olympics -- that it will simply not accept the potential embarrassment of a growth slowdown until after that momentous event is over. Old China hands also note that the Chinese economy never slows immediately after the unveiling of a new development plan. With the 11th five-year plan covering the 2006-10 interval, this historical tendency also suggests any slowdown could be deferred until after 2007. Consider the implications of that possibility: If China stays the course of its investment-led boom, then the fixed asset investment share of its GDP could well be in the 55-60% range by 2008 -- a recipe for a monstrous overhang of excess capacity. With Chinese inflation already quite low -- the CPI increased at only a 1.2% y-o-y rate in October 2005 -- China is not that far away from outright deflation. Should its capacity overhang continue to build through 2008, a deflationary endgame in China would be more likely than not, in my view.
Nor would this be a great thing for the global economy. Despite its relatively small share in the global economy -- only about 5% of world GDP (at market exchange rates) -- China now spends more on fixed investment than any country in the world. In dollar terms, China’s fixed asset investment was running at an annual rate of close to $1,100 billion in the first three quarters of 2005 (at market exchange rates) -- in excess of annualized 2005 investment totals in the US ($987 billion), Japan ($733 billion), and the Euro-zone ($651 billion). If China’s investment boom remains unchecked and its currency continues to appreciate, its dominance in shaping the global investment cycle will only grow. This underscores the distinct possibility of Chinese-led gluts in worldwide capacity -- not just a problem for China but increasingly a deflationary risk for the global economy. In short, China’s investment-led growth boom is now in the danger zone.
So what stops it? The simple answer is one word -- reforms. Up until now, China’s investment binge has been funded largely by its “policy banks” -- huge organizations that were originally integral parts of the country’s central planning apparatus. China would, in effect, gather a massive reservoir of national saving, and the policy banks would then distribute the proceeds to state-owned enterprises, which employed and paid workers. Bank lending in China has not been a market-based, risk-adjusted credit allocation process. It was, instead, the open-ended state-directed funding of a state-owned economy. Unfortunately, given the precarious conditions of a largely unprofitable state-owned enterprise sector, policy lending was also a recipe for a huge build-up of non-performing bank loans (NPLs). Chinese reforms are bringing this vicious circle to an end. It started with an especially aggressive push toward state-owned enterprise reforms in the early 1990s -- shuttering the worst of the lot and privatizing the survivors (actually “corporatizing” since the state still maintains partial ownership). And now the reform process is moving into the next stage -- changing the funding mechanism by converting policy banks into commercial banks.
This could well be the tipping point for China’s runaway investment boom. The public listing of China’s policy banks changes the very character of the nation’s financing architecture. Charged with delivering profitability and shareholder value, publicly listed banks are bringing the days of open-ended policy lending to a close in China. Credit allocation must now follow the best practices of international commercial lending standards. So far, only one of China’s major policy banks has floated its shares, but two others are expected to follow suit within the next year. Collectively, these three institutions account for about 40% of total bank lending in China. The implications are that policy lending must give way to commercially viable lending. To do otherwise is a recipe for open-ended NPL creation -- an outcome that would represent a major failure for Chinese banking reform.
In my conversations with Chinese banking officials and regulators two weeks ago in Beijing, I got the distinct impression that this change in credit culture is now being put in place. Given the legacy effects of a state-owned economy and state-directed policy lending, this is not something the Chinese come by naturally. But there are two key elements of Chinese banking reform that are facilitating this dramatic transformation -- the first being the establishment of strategic partnerships between China’s policy banks and international commercial banks. Secondly, Chinese banking reform also entails the centralization of huge networks of branch banks. Between them, the three policy banks still have over 46,000 branches offices throughout China. Historically, these branches have had great autonomy -- closely tied to local governments and their local employment imperatives. As publicly listed companies, however, branch autonomy is now giving way to an increasingly centralized system of tight internal controls -- necessary not only for consolidated banking system efficiency but also essential for the efficacy of Chinese monetary policy.
There are signs that this dramatic shift in the Chinese bank lending culture is already working. A turn in the bank lending cycle may now be at hand. After peaking out at close to 5.5 times nominal GDP in 2003, total bank lending in China has since declined to around 5 times nominal GDP in 2005. This compression still has a considerable distance to go on the downside; after all, this same ratio was 4.5 times Chinese GDP as recently as 2000. As newly listed Chinese banks, along with those that are about to become listed, move to put their lending practices on a commercially sound basis, I suspect that the days of open-ended Chinese bank lending will quickly draw to a close. At that point, the excesses of a bank-financed investment boom will then come under increasingly intense pressure. All this points to a prompt and significant deceleration of runaway Chinese investment growth. As a senior Chinese banker put it to me over lunch in Beijing a couple of weeks ago, “Policy lending is out. Profitability and shareholder value are in. As commercial banks, our lending must slow. A big investment slowdown is coming -- sooner rather than later. I worry about Chinese growth in 2006.”
The cynics dispute this claim, arguing that the State won’t allow it. But in the end, the State can’t have it both ways -- drawing on international capital willing to bet on banking reform and holding on to uneconomic, state-directed policy lending practices. China doesn’t need 9%-plus GDP growth to keep the magic alive -- 7-8% will do just fine. A more rational, market-based system of credit allocation could go a long way in restoring sanity to an overheated Chinese investment cycle. The sooner the better, in my view. The alternatives of excess capacity and deflation -- and the hard landing that would then occur -- are unacceptable to Chinese reformers. We were wrong on the China slowdown call in 2005, but my guess is we were only early. In light of what I just learned about the rapidly changing bank lending culture in China, I am quite comfortable with the out-of-consensus possibility that Chinese GDP growth is about to slow into the 7-8% range.

Monday, December 05, 2005


Oil Price To Stay High On Upside Risks Oxford Analytica, 12.05.05, 6:00 AM ET Oil prices have fallen from post-hurricane highs this year. If market oversupply materializes, they will continue to fall. However, risks on the upside are more likely to prevail in 2006. There are two ways the oil market may evolve in 2006: -- Weaker Market. In the aftermath of Hurricanes Katrina and Rita, oil prices fell by around $10 per barrel. Since the hurricanes, Organization for Economic Cooperation and Development (OECD) commercial stocks of crude and products are now at the higher end of the figure during the last five years. Combined with the threat of high oil prices on demand for oil, the market could move into an oversupply situation unless Organization for the Petroleum Exporting Countries (OPEC) takes action soon. -- Tighter Market. However, falling oil prices are a normal market reaction after hurricanes, as happened following Hurricane Ivan in 2004. The anticipation of hurricanes typically pushes prices above that justified by actual supply and demand balances. Market signals are pointing to tighter rather than weaker market conditions. On the demand side, there is so far little sign of any response to high prices, though the International Energy Agency (IEA) and others have been lowering their demand forecasts for both 2005 and 2006. Demand strength has been largely driven by economic growth--forecast at 3% for 2006--which shows few signs of slowing: -- OPEC. OPEC countries are showing exceptionally strong demand for oil, fueled by the sharp increase in oil revenue. -- China. In China, during the first half of the year, the government tried to ration demand. Initially, demand stagnated but, since September, it has picked up again and China may add 500,000 barrels per day (b/d) this year. -- United States. Earlier numbers suggesting lower demand in October appear to have been misleading; unsurprisingly since three-quarters of U.S. consumption consists of light products that are unresponsive to higher prices in the short term. Also, where dual firing capability exists, exceptionally high natural gas prices have helped boost oil demand. Oil demand is also affected by winter weather. If the current forecasts of an exceptionally cold winter in the Northern Hemisphere prove to be correct, this could significantly increase demand. On the supply side, both non-OPEC and OPEC may disappoint in terms of additions to capacity and supply: 1. Non-OPEC. Non-OPEC supply is being revised downward, as anticipated projects face increasing delays due to constrained capacity in the service industry and the aftermath of the hurricanes: OECD. Production is expected to decline by 850, 000 b/d in mature OECD economies this year. Russia. Russia is a cause for concern. Political uncertainty, inflation and rouble appreciation all increase costs and reduce profitability, inhibiting production growth and discouraging further investment. While there are signs of greater resources being invested in upstream activities and the service industry globally, the long lead time on projects means these will not bear fruit for a number of years. 2. OPEC. OPEC countries are currently producing around 30 million b/d, although the official quota is only 28 million b/d: Spare Capacity. The IEA estimates OPEC capacity of 32.1 million b/d at the end of 2005, while the U.S. Energy Information Administration puts the surplus in October at only 1 to 1.5 million b/d. Saudi Arabia has promised to meet shortfalls in crude supply, but refused to discount the price of its heavy sour crude, leading to few takers. It is unlikely that significant extra capacity will emerge outside of Saudi Arabia, though OPEC is expected to increase its natural gas liquids production by some 350, 000 b/d. 2006 Projections. Expectations of increased supply vary between 700,000 b/d and 1 million b/d by the end of 2006. This will largely consist of light sweet crude, which may alleviate some of the constraints facing refineries. Refining Shortage. A shortage of upgrading refinery capacity also remains a problem. This was aggravated by the hurricanes pushing up the price of light sweet crude. Unless gross domestic product growth collapses, the market looks as though it will remain tight throughout 2006. The market is still vulnerable to the threat of losing another major exporter through, for instance, another natural disaster. In such circumstances, a large price spike could be expected. If any market weakness does emerge, OPEC is likely to step in to protect the price. Even if the market weakens, OPEC is well placed to defend the price, while any potential shock to the market will lead to a price spike. Oil markets will probably remain tight during 2006 and prices are likely to continue around their current levels. Risks are on the upside rather than the downside. To read an extended version of this article log on to Oxford Analytica's Web site. Oxford Analytica is an independent strategic consulting firm drawing on a network of more than 1,000 scholar experts at Oxford and other leading universities and research institutions around the world. For more information please visit, and to find out how to subscribe to the firm's Daily Brief Service, click here.

Saturday, December 03, 2005

GREENSPAN going out in style

Broad money supply (M3) surged $42.7 billion (week of November 21) to a record $10.114 Trillion. Over the past 27 weeks, M3 has inflated $489 billion, or 9.8% annualized.

SOB!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! this phantom wealth printing press seems to NEVER STOP!!!!!!!!! in front of surging assets.......since 2000 top there has been and not even since FED began raising FED funds.....ANY real tightening or restraint.

The FEd has engineered the destruction of our economy and monetary value.


Friday, December 02, 2005


I posted I purchased at $2..55 (about 1-2 wks ago) it closed today at $2.76 whoopie! LOL

I am still hoping for a price above $3.00, fell action is contructive to this.My buddy Matt's doing great catching breakouts on BIDU and ECA.

FDG got away from us after posting $32 low now $40. Gold stocks looking for correction. very high bullish %

So for now I'll stick with it, again testing my TA "system" and I'll see how it goes.

Looking for other stocks, not getting too excited in this environment right now, feel correction OVERDUE IMHO


MUST READ and coming to an end

I am afflicted with elbow tendanitus, it is affecting my hands, so unfortunately I must LIMIT my postings, unlike before.

I will attempt to post once a week, either on FRI or SAT, take care One way affair, every correction is followed by more monetary expansion, there seems to be no end in sight. BDI refuses to confirm economic/market rally, this concerns me. You can see it correlated to rise from 2002, how it drooped into 2001.

I can ONLY conclude what we are seeing is a f'ing mirage, another Greenspan ASSET INFLATION.

Near $600 B has been pulled out of home equity to finance consumption.