Chinese Revaluation - What is more likely medium-term?

So the Chinese have decided to allow their currency, the Renminbi, to go back to a quasi float before the G20 meeting. We have economists like Jim O'Neill (of Goldmans) telling us that he expects to see a rise in the currency at open. Great. Thanks for that Jim. He has told us what the knee jerk reaction might be, no guarantees there though.

Here's how I see it. China's largest trading partner is the Euro Zone and we all know what has been happening with the Euro recently. After the massive depreciation of the Euro against the USD, Chinese goods have become a lot more expensive in the Eurozone due to the Renminbi dollar peg. So, what do you think is likely to happen to the Yuan/Renminbi medium-term? My guess is that the Chinese are not going to do the world a favour. They see their economy is about to hit the skids, which means more USD strength so more Yuan strength, if they maintain the peg. Why do they want a stronger currency? It is highly unlikely that they would allow their currency to float other then if they thought that it would weaken over time and that they could restore their position as the worlds producer of cheap goods.

Don't be fooled, a float of the Renminbi is a signal that things are about to get worse, not better, as the popular press are suggesting (and Goldmans of course). Go carefully.

For your reference here is the Jim O'Neill video.

And although I am no fan of the World Bank, here is a story referring to them, from the Telegraph.

Reversal patterns everywhere - Major correction likely in the pipeline

As is detailed in the chart above the S&P 500 has backed off from a region that, should it have broken, would have dented the bear structure present since October 2007. Given the movement in other markets and in particular the currency markets, I am of the belief that we are now set to see a major correction lower, if not an outright return to the larger bear market. It is also my belief that this bear market will not be over until we have seen a sell off in the Government bond markets of the G7. There is a much greater probability then is currently priced into the market that we break the lows of March 2009. China is a massive ticking time bomb as I have detailed before on this blog. The aussie dollar which is priced for perfection to my mind even looks like a sell against the EUR. Now that is saying something. Australia like China is a ticking time bomb. All risk positions should now be treated with extreme caution as there is a high probability of sharp losses on these positions.

Anyone who thinks we started a new bull market in March 2009 should be cautious, as long term bear markets rarely bottom out at such rich p/e ratios. We should see single digit p/e ratios when it is all over. This is not a regular post WWII downturn. It is of course feasible that we get such a p/e ratio without breaking the low of last March.

As for emerging markets, forget it. That mania is set to die a very nasty death. Decoupling! When will people learn. There is no such thing as decoupling.

USDSEK - Monthly volatility breakout implies substantial upside

Greetings all blog followers. I have been waiting for the recent appreciation of the USD for a while now and expect the current move to continue for the medium-term (weeks/months). One currency that looks particularly interesting is USDSEK which has left a weekly diamond bottom as per my prior posting below. This has led to a monthly volatility breakout which according to my proprietary studies should lead to a great deal more upside. I would place stops below 7.0000 now, for anyone who got long. I believe that this is one to ride out for the months ahead.

AUD - So why didn't the RBA go for it!

Well this post comes mainly from another blogger and what a great blogger he is. It is of course Michael Shedlock. I want to take this opportunity to point out what a great thinker Mish is and to state that I think that the industry needs more people who can think independently as he so often does. Here it is. So 20 out of 20 economists got it wrong, there's a surprise!

USDSEK - Further evidence of USD strength to come

Above is a weekly chart of USDSEK. I have detailed what I see as a weekly diamond formation which typically leads to sharp counter moves. With stock markets likley in a corrective phase, this bodes well for further dollar gains over time. Initial targets, as detailed on the chart image are, 7.7390 and then 8.0430. Please note this is a weekly chart so things may take time to evolve, if indeed I am right!

World/emerging ratio - One to watch during a deleveraging period

Above is a chart that I have shown on this blog before. It basically divides the value of the Morgan Stanley World index by the Morgan Stanley Emerging index. This is shown at the top of the chart. Below are the world and emerging indices. Click on image for a larger chart.

It is clear, from what data we have, that during bullish phases in equities the ratio rises, so emerging outperforms. Converely during periods of equity weakness emerging markets underperform their developed world cousins.

Now if you believe that we are in for a new wave of deleveraging then there is a greatly increased probability that the ratio heads south, ie emerging underperforms. There is no such thing as decoupling. At the very best a variation of decoupling may take place over decades where the ratio always peaks at higher levels and forms higher lows at higher levels. It remains to be seen if this is the case.

JALSH - Breaks multi-month rising trend and leaves a false break higher

Quite a nice example of an emerging market that looks like it is set for a larger correction then we have seen of late. As can be seen in the chart above the JALSH has broken both the multi-month rising trend-line and in doing so has left a false break higher. This now warns of the possibility of sharp losses ahead. Similar to the indian stock market, most emerging markets are well overdue a big correction. Just another warning sign.....

Dow Jones Industrial Average - Chart pattern similarities with the 1929 crash

Ok here is one to scare anyone who is still sober on a Friday night. Take a look at the two screen shots of charts above (Click on images for a larger picture). The first one shows the extent of the retrace that took place after the crap out in 1929 (just over 50%) and the second one is what has happened since the peak in 2007. As you can see we have retraced just over 50% again.

I appreciate that the two moves took place over different lengths of time but the patterns are very similar and also relate to two very similar periods of market excess.

For what it's worth I am in the large correction downwards camp and cannot rule out a break of the low. If an industrialised government bond issuer defaults (Japan), anything can happen. Bond yields don't need to rise too far there for the entire tax receipts to be exhausted paying interest on outstanding debt. Scary. I'm sorry to bring it up on a Friday night! In any case it may not even be a top yet but still interesting...

EURGBP - Approaches a great risk reward region for long entry

As can be seen in the chart above, EURGBP has been correcting off the recent .9413 high, as it has appeared that all is not well in the Eurozone. In particular yesterday saw claptrap about Angela Merkel resigning! This was just stop hunting. I have a good idea where this rumour was probably generated. The good part is that it has taken EURGBP back into a great risk reward zone. While above .8705 this pair remains bullish from a structural standpoint.

From a fundamental approach we are all familiar with the trouble in Greece and with Greek government debt. To put it into perspective consider that Greece is responsible for 3% of Eurozone GDP. Spain and Ireland are old news too, with Ireland looking like it is willing to take the appropriate steps to improve its fiscal position. Now contrast this with the article from the FT via Naked Capitalism.

The probability of a sterling crisis, in my opinion, is much higher then is priced into the currency markets. Over the last 18 months private debt has been passed over to the public sector as governments in most industrialised nations (and the UK in particular) have bailed out their bankng sectors and supported other sectors. This is why there is so much emphasis on sovereign default probabilities. What has taken place is that the debt has just moved around from private to public bodies, but it has not really gone down. Deleveraging is alive and well. Don't forget the UK is loaded to the brim with civil servants. The state is one of the largest, if not, the largest employer. So now it is time for austerity when half the nation gets its pay check from the state! To my mind EURGBP back at .9805 or parity makes a lot more sense then back in the old range near .6500.

I would recommend getting long on the approach to .8787 with a stop under .8705. Great risk reward.

Nifty 50 - Market sentiment is always most bullish at the top

Its is said a picture speaks a thousand words, so above I present a picture I have become quite fond of. The nifty is shown in the upper portion of the image with the p/e showing at the bottom.

Now, if there is anyone that can justify to me that there is any value in the Indian stock market then please let me know (seriously, send me an e-mail). The only times that the P/E has been higher then it is today was in the bubbles of the tech boom and the one that was driven by the biggest credit bubble in the history of the world, in 2007. I can only repeat the sentiment from my previous post. If you are a long term investor who likes to sit on value based positions, this is highly unlikely to be the time to invest in Indian equities.

I have read countless articles about the way retail investors are piling into emerging markets and Indian equities in particular. Remember:

1. Market sentiment is almost always most bullish at tops. It must be to get the greedy to buy

2. There is no such thing as decoupling.

Mind how you go....