Is New Japanese Ambassador To China Sinking Your 401k?

Japan just named its new ambassador to China without much notice in the States.  But do you own Japanese companies’ stocks?  How much does China affect Japanese manufacturers who have factories in China?  Current ambassador Uichirou Niwa (丹羽宇一郎) will be replaced by Masato Kitera (木寺昌人).  Shortly after the announcement of the appointment, Euro started appreciating against Japanese Yen from 102 to 102.50 similar to US’ appreciation against Yen from 74.40 to 74.85 in 30 minutes. Although US’s currency strength maybe explained by the better than expected unemployment data.  However, USD was actually depreciating against EUR at the same time when JPY was depreciating against all currencies.

So, if Kitera’s appointment has anything to do with the JPY depreciation, what was the rationale in the market at the time?

Kitera has no diplomatic experience in China.  Neither can he speak the language.  It is certainly not an advantage for a diplomat.  However, this is also a reverse to the earlier policy of Japanese Prime Minister Noda (野田 佳彦) to use civilian (current ambassador Niwa is not a civil servant) instead of foreign ministry’s bureaucrats for Japan’s ambassador to China.  Is this a signal interpreted by the market that Prime Minister Noda influence is waning?

Kitera’s career has been mainly related to international organizations, such as foreign aid (Grant Aid Division of Foreign Ministry), Minister to UN and WTO etc.  What does say about the intent of Japan in its relations to China amid the recent controversies over the island dispute?

His skills of cooperation with many different entities are certainly valuable.  Are there no suitable candidates who have host country knowledge and diplomatic skills to smoothen the relationship?  Is this appointment part of the upcoming lower house election calculation? 

If former, then it may show some distrust of the political elite over the close relationship between the bureaucrats with China.  If latter, then this is a clear signal that Japan may become more aggressive against China over the island dispute, despite the US public announcements toward a more peaceful environment during the US election season.  As a stretch, this appointment may enlarge the diplomatic battle field since Kitera may be able to draw his knowledge in the international institution areas.

If Japan actually cannot feel confident about the diplomatic abilities among the China experienced bureaucrats, then this appointment further shows the talent shortage of Japan, now reaching a higher level of the civil servants than previously thought. 

Since 1995, Japan ambassador to China has been around 60 years old, compared to US to China around 57 and China to Japan around 54.  Japan’s labor force has aged tremendously over the two decades without back fill.  The death of Nishimiya (西宮 伸一), the Japan to China ambassador to be, certainly was an accident, although indicative of Japan’s talent pool.  This appointment may serve as an additional indication that Japan is running out of candidates to manage its complicated affairs against a rising power.

This may further affect its trading strength in its future trade negotiation against China in the China, Korea and Japan trilateral relationships.  Export heavy companies in Japan will be further negatively impact, such as auto manufacturers.

How Long Can You Wait For A GM Bailout?

GM (NYSE: GM), Chrsyler and Ford (NYSE: F) are asking for a nagging for an auto industry bailout.  This is what should have been expected once the $700B bailout flood gate is open.  After the auto industry will be the steel industry, the building industry.  If you bailed one, you need to bail all. 

 

Obama said the auto industry is important.  That may be an electoral language.  It may be too early to tell if he will deliver or break the promise.  However, one thing is certain: he should focus more on transition than governing.  For that reason, he is likely to remain mute on this issue.  

 

What about Bush?  Bush already said he will not bail out.  Some think Bush is using that to bait Senate to rectify trade treaties.  It is more likely Bush is being a prudent and a responsible out going president – do nothing.  This is best described by Treasury Secretary Paulson’s article on NYTimes.  During a transition period, the stunt show could have been to advocate for McCain (“who else can steer us through this mess?” Not that it worked).  Once the election is (or was) out of the equation, the job (Paulson’s job) is make sure the ammunition is available for Obama and hope that Paulson does (did) not have to use the ammunition or use all the ammunition.  Here is why: Paulson’s reputation will be the first for crucifixion under the Obama administration when Obama is up for a recovery failure.   The best Paulson can offer is to recommend the best talent he can find.  

 

The starting point to any bailout is the House.  Will House give the money?  Even if Pelosi wants it, she is unlikely to get the ammunition to push it through, given the controversy of the $700B and the margin that vote had.  Suppose it passes, it does not have enough votes to override Bush.  

 

Will Obama ask for it?  Who will take credit for the bailout?  Or the blame?  Who will have to be accountable to the execution of the bailout, if the money actually goes through?  Obama administration or Bush administration?  Obama wants no ambiguity.  Bush is unlikely to want to create another potential mess for a Democrat to manipulate against him.  The $700B stunt show is already enough for both Bush and Obama.  

 

So, the story is then: forget about trading auto stocks based on political news or even the hearing.  No matter how appeal the hearing will turn out to be, the earliest possible actionable news is after Obama’s cabinet becomes clear, if not after inauguration.  

The Common Interests of BP and Georgia, And Your Money

Ever since the Russia-Georgia conflict became the hot news item, the share prices of British Petro moves as CNN news stories are read.  BP almost became the barometer of this crisis.  Why BP?  They got their pipelines there.  BP is also having a power struggle from Russian government which wishes to take more control of BP’s operation in Russia.  Therefore, if Russia will occupy the land where BP’s pipelines are, it will carry more political risk to BP.   

 

Therefore, any news of resolution will help BP’s price.  The closing price of BP on 08.08 F is US$60.86 at LSX.  The closing price on Monday is 58.7701 down 3.4%.  The good news on Tuesday brought up the price to $59.32.  Just now, Bush’s announcement helped bring up the price to US$59.60.

 

BP is not traded in the US.

 

However, all US oil companies are going up, exactly because they are away from the conflict area, consistent with the argument from Friday’s post: political risk of this conflict was already being priced in the currency market.

 

So in the short run, Chevron, Exxon, Petro Canada, Marathon and ConocoPhillips are all going up.  Of these 5 companies, 4 are US and 1 is Canada.  The other oil company that is falling is of course Shell which is much closer to the conflict area.

 

Is the cease fire going hold?  First of all, here is the six point agreement:

1)       Negotiate the status of the 2 separatists provinces

2)       Non violence

3)       Ultimately stops military actions

4)       No interruption against humanitarian aids

5)       Georgian forces returned to permanent positions

6)       Russia returns to pre conflict positions

 

Now, Russia’s intent is on regime change because the sitting Georgian president is pro West and took Georgia to NATO.  Nothing here actually addresses the core issue.  If there is more information to what is public available, then a cease fire will actually take place.  Else, this is to buy time.  Aljazeera confirms (in addition to US/UK media) Russian troops are still moving.  Therefore, EU or France actually got a worse deal than staying silent.  A broken deal just proves than EU/France is an irrelevant and ineffective broker.  

Obama And Stock Expectation

Economy is the top concern for voters.  In theory, Democrat contender should have an easy win.  However, poll shows Obama has only a small margin.  Is race really the open question?  Since this race is about Obama vs. anti-Obama, let’s check if Obama’s fiscal policy is giving any hint about his performance.

 

Considering seniors constitute the biggest voting block, attention should be placed around this block’s interests. 

 

The flagship item of Obama’s fiscal policy toward seniors is the elimination of income tax among seniors of income less than $50,000.  However, a good portion of seniors’ income, in addition to Social Security, originates from pension funds, individual investment or through downsizing their real estate since most of them generate very little income tax. 

 

Obama, at the same time, wants to increase capital gain tax from 15% to 28%.  This impacts seniors’ income.  How will this off set Obama’s first $50,000 tax free income for seniors?  No one has the figures yet.  However, let’s see how much hard that will make for the seniors’ stocks (pension plan, IRA, 401k…). 

 

If the stock is expected to generate 10% after tax growth with 15% capital gain, the stock value has to grow 11.76%.  This is computed by 10% / (1 – 15%).  If the capital gain tax rate is raised to 28%, then the stocks have to grow at 13.89%.  Don’t think the difference is only 2.23%.  Think how much harder the companies have to work in order to generate this 2.23% extra growth:  (13.89% – 11.76%) / 11.76% = 18.06%!  Companies have to work 18% harder to find the growth investors (in this case, seniors) are expecting / dependent on. 

 

If the seniors are not checking these numbers, fund managers certainly are.  This bit of information probably does not change every voter’s mind.  It certain would help prioritize which stock sits in the parking lot for a while and which queues in the drop list.

What about the bank insolvencies?

No, not a bank insolvency but bank insolvencies.  It is not just Indymac, but also Freddie and Fannie.  

 

Taking over will also create more national debt, by 1/3.  This will make USD fall even further; gas goes higher; imports more expensive.  Euro is getting lower.  TSE is also falling.  This latest hit in the US may start a domino effect (finally) of global correction.

 

It is likely 2009 will see more government involvement, possibly through tax dollars.

 

With the collapse of Indymac, this may make the legislature get into the speed of passing the appropriate housing bill.  The sign is that house republicans are likely to pass anything democrats ask for to save their seats, although bush wants to have advantages for banks and investors, rather than retail consumers and mortgagors.  However, the house democrats may want to drag it longer for the presidential election. 

 

Frank-Dodd bill is looking at a higher likelihood of passage into law. The bill would provide a federal guarantee for refinanced mortgages where the principal had been written down below the value of the underlying property.

 

If the question is if there will be mortgage relief bill, then the answer rests with House Speaker Nancy Pelosi.  The only way to see that a good bill passed ASAP is the house democrats see the urgency of showing their homework to voters.  News on Monday is that Pelosi wants to get this done.  If indeed the case, then this should be done in weeks.  This cannot get drawn into the election.  Else, this legislation will get too much volatility into the race, and thus more tubulence int he market as well.  The draw will be the effect on the next administration.  Which fix will be considered handicapping the next President?  Is the neighbourhood item too fiscally expensive for a Republican president?  Or too “Democratic” to provoke more right wing votes?  Will the item of bank’s consent to write down as too Republican?  It will become too difficult for any candidate to get a grip on this issue. 

 

Where should money go? 

Consumer is down.  Financials are also down.  Manufacturers are getting beaten up by Chinese manufacturers who are also closing down due to the down turn in the US.  That leads back to the necessities: commodities. 

 

If the question is if the economy will get over soon, then the answer is the same as stated before in this blog, not yet.  Will more banks close?  Treasury does not want to bail any one any more.  He would rather see insolvencies than bail.  His famous line is going to be this one: “For market discipline to effectively constrain risk, financial institutions must be allowed to fail.”  Well, read his press release here.  There are many reasons banks will close, but there will be very few reasons this year, since the government regulator is unlikely to force more closures by anything other than insolvency.

China Earthquake And Your Money

CNN continues to report the newest death toll caused by China’s earthquake.  What stocks are affected by this earthquake?  This natural disaster in China is a lot closer to America than Myanmar’s simply because China is a lot more involved in the global economy.

 

More than 2 dozens of Chinese public traded companies can be found in the States either as stocks or as ADR.  The PetroChina (NYSE: PTR) is the first one to be affected because it has fields in Sichuan, the province where the quake occurred.  Those oil wells are now shut.  This company is the largest oil company in China.  Nippon Oil (TSE only) has a joint venture with PetroChina.  

 

China Telecom (NYSE: CHA) may get the worst hit since it has 10% of all land lines in the region.

Sinopec (NYSE: SNP), which is developing a field in Sichuan may see decrease in revenue.  Damage to this gas field is unknown.

 

China Life (NYSE: LFC) is also dropping since it is expected to have a lot more life insurance claims.  This life insurance company is the largest in China.  The selling pressure is short term since the life insurance penetration in that area is low.  In fact, the price has come back up after the initial drop.  This selling pressure only lasted for 1 day.

 

PICC Property & Casualty (other-otc: PPCCF) may actually get a bigger hit than the life insurance companies.

 

Negative impact on HSBC will be minimal since this bank has very exposure to this geographic area.

 

Qingling Motors (OTC: QGLHF) will get negative impact.  This area has some exposure to auto factories and circuit design.  However, the foreign trade is not concentrated here. 

 

Huaxin Cement’s price is going up already, in anticipation of more infrastructure projects.  Huaxin is traded in Shanghai only.  Lafarge SA (OTC: LFRGY), of France, is the parent company of Huaxin.  Cement company Anhui Cement is other-otc: AHCHF.

 

Construction equipment companies that have a presence in China will do well.  Check Caterpillar’s (NYSE CAT) exposure in China or Hong Kong.  Its competitors are Deere, Gehl.  Astec builds road construction equipements and components (NASDAQ ASTE).  Check its exposure in China or Hong Kong.  A strong exposure will be a good sign.   

All medical supplies companies are going up in China and Hong Kong.

 

Foreign companies such as IBM, Intel, Wipro (NYSE: WIT) have sites here.  Japanese Toyota and Hitachit also have sites here. 

This earthquake will drive up inflation in China.  Given the tourism brought by Olympics, Chinese yuan is expected to appreciate until the end of the games.

 

If your desired company cannot be found in the States, find a proxy company in Hong Kong stock exchange, or ADR in the states.  If you are interested at funds, then get an Asian (or Far East) fund that has a heavier emphasis of infrastructure and medical supplies industries, a heavier emphasis in Hong Kong.  A lot of companies in China may get suspended if it has a big swing in price.  Hong Kong does not have such restriction.  This gives your mutual fund manager a greater flexibility.

India Still Has Potential

India held its last election in 2004 and due for another one in 2009 or earlier.  The party in power is Congress and they won primarily for their agenda for the lower castes and/or the poor.  India has been having great economic performance as well.  India still has potential to be exploited.  This potential can be achieved when the social integration of the untouchable is successful.  And investments in that area require a tacit knowledge. 

 

CNN made a mistake in using the word class.  It could have been a typo if class were used consistently through out its content.  However, class and caste are used inter-changeably in the content.  That seems to suggest the difference between caste and class is misunderstood.  Class can be ascribed, as Plato suggests.  Caste is innate.  

 

Prior to Congress’ victory, many foreigner investors considered the previous government led by BJP as more investor friendly.  This is to argue otherwise.  

 

BJP’s core value was Hindutva.  That was to ask: who is Indian?  That came as polarizing as Bush was to the States.  Yes the poor were ignored and that constituted as a block of votes for Congress.  However, investors need this much needed Congress for political stability is the first requirement for any investor into long term investment cycle.

 

Violence in the rural areas can be instigated by religion as well as by caste differences.  This is only one case that gets to the media.  

 

Labour upgrade is difficult because education is not as accessible to the lower castes as the upper castes, not necessarily just the untouchables.  Jobs, lending practices are sometimes not favourable to the untouchables in some areas.  

 

Although the federal government has strong affirmative action laws for the lower castes since the first legislature, social inequality continues.  And sometimes it can turn violent with great organizational support.  

 

Differences in religion can be just as problematic.  And with the separatist movement at the far corners, although calming down in recent years (or decades now), managing such a diversity requires great political skill.  

 

Having investments in that area requires all this local knowledge.  The current Congress is just as pro-economic growth as BJP.  In fact the current government is much better equipped than anyone else to manage growth in India.  They have a good finance minister from a major seaport of India.  They have a long history of governance.  In a country where they have strong regulation and a lot of oligopolies, this is an important asset.  The current government is also the party that can unite different castes, religion, promote peace in the region and continue its relationship building effort with its greatest perceived threat of China at the same time.  

 

Why Congress Delay Can Be Prudent

There are reasons for both house and senate not to do anything with Bush in regard to recession (or anything else, like treaty ratification) for their personal and political gains.  However, such a delay may not be a bad thing for the country.  

A new president will be mandated by November, almost down to 6 months now.  A new administration will start operation by next January, 9 months away.  So, the good reason for not doing anything with Bush is: if legislations are passed now, then it will be the new administration that has to execute them, what if these legislations will completely contradict to the new administration’s mandate?  Is this legislative prescribing “solutions” that are going to be doomed? Or even worse sour the relationship with the new president?  

And if these legislations turned out to be successful, guess what, the outgoing president will definitely claim to be his credit years from now in his memoir just as the same time the new president will claim to be his credit.  Will any new president like such a trap?  How can any well intended legislator purposefully set such a political trap up for the new president to step on?  

We know there is no solution that would be “the only” solution.  Creating grand standing solutions right now requires an unquestionable monolithic ideological conviction that says this is the only solution to the problem.  The worse is this conviction can be misinterpreted as: arrogance. 

How can the legislators trust the new administration to execute these solutions faithfully when they just push them down the new administration’s throat?  Therefore, the delay tactic is not only for the gain of the legislature as a whole as well as individuals, but also prudent for the nation.  

 

From Zimbabwe, Kenya, To Madagascar Oil, China and India

Zimbabwe got a new twist.  CNN reports Mugabe decides not to atten the submit to be held in Zambia, its neighbour.  However, the opposition (Tsvangirai) is attending.  This will give the Tsvangiraia great opportunity to sell his plan of stabilization and strengthens Tsvangirai’s edge both internationally as well as domestically. 

The instability in Zimbabwe affects copper’s prices.  However, the copper price has been receding from its historical high.  This Zimbabwe episode will provide a support price level to copper.  So, this price will probably slow down.

Further down, Sino Union Petro & Chemical secured an oil field with Madagascar, expected to be worth 2B barrels.  China will own 50% of the venture. 

Chinese oil exploration firms have been trying to secure sites overseas with little success.  This is a firt major break not only for them, but also to Madagascar as well.  Madagascar has not produced oil for 60 years, reports Reuters! 

This company is not traded in LSE nor NY.  It is traded in HK only. 

This will also strench India’s resources as well.  Although India is not in as an urgent need as China in terms of resources.  Over the years, China is slowly moving in East Africa (more so than Africa in general), the traditinoally perceived sphere of influence by India.  Not that India has navy bases all over the place, but it has a lot of migrants and control a big portion of trade in East Africa.  It will only be a matter of time for India to express its security concern not only about the Himalaya border and Parkistan, but also about pan India Ocean security issues with China.  These oil exploration companies will have to learn that getting listed in London and NY helps them mitigate political risks.

For India, issues such as Kenya and Zimbabwe will have to become the leverage points for it to enter the stage.  It is probably too late for this episode.  But next time.

Kenya, Zimbabwe and Your $$

Wall Street reports (print version) that Zambia President and SADC Chairman Levy Mwanawasa invited 15 South African countries for a submit on the Zimbabwean crisis.  How does Zimbabwe affect your $$?  Kenya is having their problems too.  Zimbabwe itself does not cause that much of a problem.  When the political instability gets Zimbabwe’s neighbour Zambia nervous, then it will affect your $$.  And how does Kenya play into this?  Well, most of the copper from central Africa are mined from land locked countries.  And they, just happen so, export through Kenya.

 

http://edition.cnn.com/2008/WORLD/africa/04/10/zimbabwe.election/index.html

 

 

Zambia and Zimbabwe shares a long border.  Zambia and Kenya also share a long border.  Zambia would get nervous because it sees a refugee crisis down the road.  And that is where the problem begins.  Zambia is still a major producer of copper.  This Zimbabwean political instability may create political instability in Zambia as well.  This will drive up the prices of copper.  Kenya may not create a refugee problem.  However, the seaports may not be working and we will get a real back log on copper.  That can be the same story as oil having its backlog created by Katrina, just a copper version of it.  And from there goes into your alloy producers, manufacturing, construction tools, …

 

 

Copper prices have been falling lately (as in days).  However, copper is around the historical highs (2008.04.09’s LMX cash ~8650/MT vs. 2006.05’s LMX cash ~8800/MT).

 

 

Who is the biggest buyer of copper right now? You got it right: China and India.  And they are importing for their infrastructure needs.

 

 

In addition, this Zimbabwe will increase pressure to push up inflation.  And the inflation effect may not be a cascading effect by imports.  If the Chicago market recognizes this risk quickly, the price level may get worked into it fairly quickly.  That affects the bonds market right away.  And any movement in bonds affects stocks of FIs.  

 

 

This may lead people to think about the exchange rate of US dollars.  The exchange rate of US is not affected much by this crisis.  The US exchange may be experiencing some psychological sell off due to US’ recent fall against Chinese Yuan.  US has fallen across the psychological barrier of 1US vs. 7Yuan, read Forbes’ story here.