10 Things You Need to Know. That's Right, 10.
What you need to know (and what it means)!
Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Where Were You?
Am I gonna want to know 10 things tomorrow since I missed 5 today?
- Minyan Jeffrey "On the Wings of Love" Osborne
Since I was traveling yesterday, the answer is, yes. You are going to want to know 10 things today. Oh yeah, and this counts as one (1).
The Thailand SET Index, Thailand's benchmark stock index, plunged 15 percent overnight after the country imposed currency controls on international investors, according to Bloomberg.
- Indexes in Hungary, India, Indonesia, Malaysia, Pakistan, Poland and Turkey all lost more than 1 percent as well as the selling spread.
- The MSCI Emerging Markets Index has rallied 33 percent since reaching its low for the year on June 13.
- The move on the Thai Set Index, however, (see chart below) wipes out two full years' worth of gains, taking the index to its lowest level since September 2004.
- Meanwhile, emerging-market bonds snapped two days of gains, with the average spread on a basket of developing-country debt widening two basis points to 179 basis points more than U.S. Treasury notes, according to JPMorgan Chase & Co's EMBI+ Index, Bloomberg said.
That SET Index with S&P 500 comparison in red
3. Going to Bat for the Baht
On Monday Thailand's regulators required banks to lock up 30 percent of new foreign exchange deposits for a year to curb currency speculation.
- Overseas investors buying Thai baht today will only be able to invest 70 percent of what they transfer, and only recoup all of their funds if they keep the money in Thailand for more than a year, a central bank official said.
- The baht had risen about 16 percent this year to a nine- year high.
- Now, why would Thailand's central bank take this step?
- Well, first off the surging currency was crushing exporters. Thai Union Frozen Products Pcl, apparently the world's second-biggest tuna canner according to Bloomberg, last month asked the central bank to stem baht gains, saying the upward pressure on the currency is undermining their competitiveness.
- Second, the move is designed to rein in speculation in that country.
- The pace of net investment inflows had increased to $950 million in the first week of December from $300 million per week in November and a total of $13 billion in the first 10 months of the year, according to the Associated Press.
- The net result has been a one-way bet on the direction of the baht against the dollar.
4. Asian Financial Crisis II?
Financial media outlets this morning noted the ripple effects of the Thai meltdown as markets across Southeast Asia, from Manila, to Jakarta, Singapore and Kuala Lumpur each fell anywhere from 2% to 3%. Asian Financial Crisis II?
- In 1997 the so-called "East Asian Financial Crisis" spread throughout the world affecting markets from Brazil to Russian and the U.S.
- Is this part II?
- According to the Wall Street Journal this morning, the events that triggered the Thailand policy shift were fundamentally different from those surrounding the 1997-98 Asian financial crisis, when countries faced weakening currencies – not strengthening ones.
- However, this ignores the psychological aspects of the two selloffs and the herding behavior surrounding extreme selling (and buying) events.
- Moreover, investors have been trained to downplay the risk of emerging markets in recent years.
5. Retreat!!! Retreat!!! Retreat!!!
You know that stuff we said yesterday about currency controls and locking up 30% of new foreign-currency deposits for a year, Thailand's central banks asked Tuesday? We were kidding about that.
- Thailand has decided to remove currency controls imposed on international investors in the stock market after the benchmark index plunged the most in 16 years today, the head of the country's stock exchange said.
- The government agreed to remove a requirement that banks lock up 30 percent of new foreign-currency deposits for a year, Patareeya Benjapolchai, president of the Stock Exchange of Thailand, told reporters after meeting with Finance Ministry and Bank of Thailand officials, Bloomberg said.
- Barely three hours earlier, XFN-Asia reported that Thailand's Finance Minister said, "The government will not reconsider the policy; let the market take (its) course and it will adjust itself."
- The Finance Minister added that the move would only affect brokers and short-term currency speculators.
- We now return you to your regularly scheduled emerging markets selloff.
6. Carry On, Carry Traders
The Bank of Japan concluded their two-day policy meeting earlier today and the nine members voted unanimously to leave the overnight call rate target at 0.25%, according to XFN-Asia.
- Although the move was widely expected, what was not expected was the downgrade of the economy due to weakness in consumer prices and private consumption.
- In its economic report for December, the central bank stood by its previous overall assessment of the economy but downgraded its view on private consumption.
- As recently as last month the BoJ had said it 'has been on an increasing trend.'
- However, Bank of Japan governor Toshihiko Fukui today said the consumer price index and private consumption have recently been weaker than the central bank had thought a few months earlier, and that is what convinced the BoJ to avoid raising interest rates.
- The report of weaker-than-expected pricing indexes and consumption now put back into play the timing of further interest rate increases by the BoJ.
- Most had expected an additional rate increase in the first quarter of 2007.
- And now? Well, carry on, carry traders.
7. Producer Price Index Spikes: Is This Inflation? No.
The producer price index rose 2% in November, the biggest rise in 32 years, the Labor Department said.
- Excluding food and energy, the so-called core rate rose 1.3 percent last month, the most since July 1980, after falling 0.9 percent last month, Bloomberg reported.
- Wow, surely this must be inflation, right? Let's take a look.
- Putting on our protective data sifting gloves, we find that objects in headlines may be farther away than they appear.
- Much farther away.
- Light trucks prices came in +13.7% over October's prices.
- Cars were up 2.2%.
- But if you strip out the transportation equipment category there was virtually NO producer pricing power last month.
- In fact, the Core Intermediate Price Index actually FELL 0.3% last month. (See highlighted section below.)
- The big problem with producer cost increases is that in order for them to become consumer inflation, the costs must be "passed through."
- OK, so are businesses finally able to pass costs through to customers?
- According to Bloomberg, Steel Dynamics (STLF) last week cut its fourth-quarter profit forecast after a greater-than- expected drop in selling prices for flat-rolled steel and fewer orders.
- Lower prices also led Nucor (NUE) to reduce its profit forecast the same week.
- And then there are the homebuilders.
- Ok, but we're not a manufacturing based economy anymore. Surely service providers are where the real demand-led inflation will show up, right?
- One would think. But according to the BLS, only commercial banking, securities brokerages, savings institutions, and television broadcasting received higher prices in November.
- By contrast, lower prices were paid to the industries for lessors of nonresidential buildings (except miniwarehouses), couriers, investment banking and securities dealing, wired telecommunications carriers, general medical and surgical hospitals, and line-haul railroads.
- Yes, Virginia, there IS stagflation.
- And stagflation is simply the transition we are now living through, a transition from the recent cyclical upturn in inflation back to secular deflation.
Which way is the price index for core intermediate goods trending?
8. Oh, Canada
Federal Finance Minister Jim Flaherty closed the book on the income trust tax debate Monday, saying that lobbyists are wasting their time seeking concessions and declaring the final chapter was written last week when Ottawa released operating rules for the sector, Canada's Globe and Mail reported.
- Investors in Canadian Income Trusts were caught offguard by the Oct. 31 announcement that existing income trusts would be taxed for the first time beginning in 2011 to limit the erosion of tax revenue.
- Trusts avoid most corporate taxes by paying out their cash flow to investors in monthly dividends.
- The trusts have been quite popular among investors searching for income due to relatively low yields elsewhere.
- As well, the oil trusts were popular as a play on the Canadian energy sector.
- The rules do not go as far as industry lobbyists would like in limiting tax consequences, but investors are expected to at least welcome the clarifications.
- Canadian income trusts will be allowed to sell new stock worth as much as 100 percent of their market value before the high-yield securities begin paying tax for the first time in 2011, the government said, according to Bloomberg.
Canada's EnerPlus Resources Fund (ERF) with Minyanville propietary sell signals overlaid in red.
9. Excuse Me, Mr. Mutual Fund Manager, But Is This Your Schadenfreude?
Bill Miller's Legg Mason Value Trust mutual fund will fail to beat the S&P 500 this year for the first time in 15-years.
- Why yes, sonny, that is my schadenfreude.
- I must have dropped it when I learned that Legg Mason's Bill Miller will join the rest of us in the actively managed mutual fund universe in underperforming the S&P 500.
- Were you even possibly aware of the fact that of the 8,000 some odd mutual funds in existence, only 48 have managed to beat the S&P 500 in each of the past seven years?
- That's what the Wall Street Journal says.
- Miller's fund is anticipating 2007 will be a good year for large cap stocks that have underperformed in recent years.
- As well, Miller believes technology is the area most investors are underweight.
A new British study suggests that as a child's IQ rises, his taste for meat in adulthood declines.
- The report, published in the Dec. 15 online edition of the British Medical Journal, found that children's IQ predicts their likelihood of becoming vegetarians as young adults, HealthDay News reported.
- Recent studies suggest that vegetarianism may be associated with lower cholesterol, reduced risk of obesity and heart disease.
- The finding could explain the link between intelligence and better health, the investigators say.
- In the study, Gale's team collected data on nearly 8,200 men and women aged 30, whose IQ had been tested when they were 10 years of age.
- The researchers found that 4.5 percent of participants were vegetarians. Of these, 2.5 percent were vegan, and 33.6 percent said they were vegetarian but also ate fish or chicken.
- There was no difference in IQ score between strict vegetarians and those who said they were vegetarian but who said they ate fish or chicken, the researchers add.
- Well, don't I feel dumb! I just ate a sausage, ham and bacon sandwich on a pepperoni roll with roast beef.
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