Market Driven by the News

It was another "blah" day on the overnight markets. If you think markets are event-driven (the news drives the market) this makes sense. Events are inconclusive. Consumer confidence here in Australia is up. But backward looking corporate earnings are not going to be so flash. The market doesn't know what to think.

Of course the market doesn't actually "think" anything. It's the expression of the aggregate actions of millions of buyers and sellers, each of whom has a brain, some personal experience, and a unique appetite for risk. And right now, the market shows that it's basically a range-bound standoff between buyers and sellers.

How about we focus on bigger trends, then? Here's one: China is now the world's biggest car market-at least for the first half of the year. As GM emerges from bankruptcy, the China Association of Automobile Manufacturers said that June car sales were up 36.5% from the same time last year. Car sales hit 1.14 million for the month.

Sales for the first half of the year were up 17.7% to 6.1 million cars. In the U.S. sales fell to 4.8 million cars in the first half. Not that we're putting these numbers up here to recycle the old argument that if you could just capture a small percentage of the Chinese market, any producer of anything would be rich.

In fact, in consumption terms, it's still going to take some time for the Chinese economy to catch up with the U.S. And in some sense, it may never reach the same consumer-driven heights. U.S. wages and asset prices over the last 50 years have been driven by America's privileged position in the post-war world as the last industrial giant standing.

What we're seeing now is a great global leveling of wages in Western industrialised countries with wages in the developing world. The whole McMasnion/SUV lifestyle will probably not go global. It would be a huge waste of resources.

However, what DOES interest us about China's growing car culture is that it may be electron based and not oil-based. That is, Chinese manufactures of electric motors and hybrid motors (both petrol and electric) are emerging as a global force. It's not something we were aware of until we researched the subject for a recent issue of Diggers and Drillers.

There are still some big challenges to the entire electric and hybrid car industries. But from a resource perspective, there are a few key elements you need to make the whole thing possible. One of them is lithium. And that's all we'll say on the matter for now, except that the engine of Aussie portfolio growth may not be Chinese consumption, but Chinese production.

It's going to be harder for banks to pay dividends in the coming years, we said earlier this week. And now more evidence that Aussie banks may have to provision their capital larders to make up for loan losses. "ANZ has already taken a $114 million provision to cover problem exposures in its private equity arm, but sources have told Business Daily that further substantial provisioning will be required before the end of September," reports yesterday's Age.

ANZ has at least $500 million of direct equity and loans at risk with more than 40 businesses it supported through the private equity arm, according the article. Ouch.

You didn't have to be a subprime lender to suffer from the credit bubble. ANZ got into margin lending, private equity, and of course, residential real estate. When money was cheap, setting up businesses to profit seemed like a good idea. Now, not so much.

Michael Lewis has written another ripper of a piece on how far a business can stray from its original plan. The story is on AIG's Financial Products unit-and how it became the engine room of the mortgage securitisation boom in America. If you have some time this weekend, you should definitely read it. You can find it here.

"THE end of the Government's first-home buyers grant boost and various state-funded benefits could force down lower-end house prices by up to 10 per cent," reports yesterday's Australian. "The warning from CB Richard Ellis coincided with Australian Bureau of Statistics figures issued yesterday that show the number of dwellings bought by owner-occupiers in May was 29 per cent higher than in October, when the federal boost was introduced."

The end of the first home buyer's grant is near (later this year). But then what? CBRE's manager of residential research Erin Rolandsen says, "The fact that first-home buyers have been driving this boom leaves the sub-$500,000 market particularly vulnerable once the boost is reduced from September, 2009...We expect falls could reach 10 per cent ."

And finally, on a comedic note, Federal Reserve Vice Chairman Donald Kohn has told the U.S. Congress-with a totally straight face-not to regulate the Fed or audit its balance sheet. He said it would reduce the Fed's independence and that, "Any substantial erosion of the Federal Reserve's monetary independence likely would lead to higher long-term interest rates as investors begin to fear future inflation."Or maybe an audit would show the Fed has made trillions in commitments via its loan facilities and that the only way for it to keep U.S short-term interest rates from rising is to print more money to buy more bonds-which itself doesn't exactly boost confidence in the Fed's policy or the U.S. dollar. Kohn might as well have said, "Don't audit us because if people find out what we're really up to gold will go to $5,000."

Dan Denning
for The Daily Reckoning Australia

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