There’s a danger of only looking at the front page of the FT

A large number of people are highly sceptical as to by my recent Long equity call – closed all my shorts, as you know. I understand the scepticism, but I remain (indeed increasingly) more positive of my bullish view.
Read the attached note re China, which I believe is right. I have been thinking about precisely this for the whole weekend, and the attached note just helped to confirm my conclusion. As you know, I have been bearish of China for 3 odd years – however, I think, at the moment, you cannot be short China (or its derivatives, especially the miners – my normal way of playing China – indeed, as you know, I recently closed my mining shorts). Remember, the Chinese will have a major (7 out of 9 members will be replaced) change in the State Council later this year and the Chinese Communist Party will want stability.
I have closed my A$/US$ short and bought BHP today (+ topped up other positions) – it’s got an energy position, as well, which I like – generally like the energy sector. Will keep short Euro/Rupee, both against the US$.
At present, I am 35% long – will increase to around 40% and then consider.
I am not at all sure of the view expressed re Greece. Indeed, I disagree. I believe that many in the EZ would welcome Grexit and such a move will force the EZ/ECB to act (to avoid contagion) which will prove positive. Whilst I don’t believe that Syriza will win on the 17th June as I have reported before – this weekend’s polls suggest that New Democracy is in the lead – I remain of the view that Greece will have to exit at some stage.
It will be disorderly and will force the ECB to, at the very least;
—  reduce interest rates;and
—  buy peripheral bonds – Spanish 10 years are at 6.5% today – ECB intervention nearer 7.0%?.
A serious run on banks in Greece (followed by Spain, Portugal and possibly even Italy, others?…) will focus the minds of politicians. Due to ELA/Target 2 imbalances, the risks to the core (due to counter party risks) of the EZ is increasing as every day goes by. If bank runs happen, (certainly a 50% chance at least), it’s likely before the 17th June Greek elections and the ECB/EZ will be forced to act (bullish). If it does not happen, there will be a further period of indecision etc (bearish).
In respect of banks, shareholders/bondholders will take the 1st hits this time around on any recaps by the way, so watch out. There is no alternative – governments do not have money and politically it is impossible to do otherwise.
EZ countries will be forced to allow the EFSF/ESM to recap banks (Spanish banks and others) – you just cannot have an economic recovery in the EZ with bust banks, which continue to deleverage. I also (increasingly) believe that the ESM will be given a banking licence, as the fund just does not enough firepower (bullish) – Germany will have no choice, but to agree. In addition, politically, Merkel is facing a tougher time at home. The opposition is becoming increasingly emboldened.
At the end of the day, higher inflation is the way this is going in the EZ, with a weaker Euro.
Just a few thoughts.
Grateful for your views. I will be writing a fuller note on these issues – tied up today.
Kiron
~~~
in response to:

Its hard to disagree with what I’m hearing over the last few weeks….there is are no trends, no volume, correlation strategies have all broken down, its an environment that nobody want to buy anything and until Greece gets sorted out I’m sitting on the sidelines….
Bankia appealing for a €19bn bailout from the Spanish government is much larger that the amount that the Finance Minister suggested that the entire Spanish banking industry might need as recently as two weeks ago.
Meanwhile:
Oil is down 13% from its highs , there is massive risk off over the last few weeks..3 weeks ago GSK & DGE raised 5 year money at 1.5% & 10 yr money at 2.8% and last week  Bhp Billiton raised 6 year money at 2.1% and 10 yr money at  at 3% a pe of 33x on the debt and just 8x on the equity…these guys have started the asset allocation

Check out the following charts on Bloomberg
US Homebuilders (S5HOME Index +42% ytd)
SHPROP Index, Shanghai Stock Exchange Property Index +25% YTD

Over the weekend five Greek opinion polls show New Democracy in the lead, with margins ranging from 0.5% to almost 6%

William Porter says it’s a fantasy to assume an orderly Greek exit and its  overwhelmingly likely you get common ground between Greece and Core so its all eyes on  Germany, the more accommodative the German’s become the lower the risk of a Greek exit, and the greater the likelihood of a sharp unwinding of recent market moves.

CHINA – Important change of view from Dong Tao, our Chief NJA Economist.  Dong and Trina Chen (materials analyst) have been more accurate in predicting China’s growth and policy path in recent quarters than most internally, and central to their thinking has been the view that expectations of pre-emptive stimulus measures being put in place would be sorely disappointed.  That view is changing.  Dong notes a significant shift in the program approval process at the NDRC, which stemmed from a State Council meeting on May 23rd, in which the Premier stated the need for a “greater emphasis on growth”.  In short, he thinks the government has started a new round of fiscal stimulus, as local governments were asked to bring forward pending infrastructure projects last week.  How big could it be?  Clearly significantly smaller than in 2009, when the initial investment campaign was RMB 4 trillion; our initial projection is that it could be between RMB 1 trillion – RMB 2 trillion.  This could rightly be viewed as a regressive step, as it is clearly at odds with the idea of rebalancing growth from investment to consumption.  Nonetheless it would appear to be a decisive reaction to a deteriorating external growth environment, and may be accompanied by a 25bp cut in the policy lending rate in the coming months, as well as RRR cuts of 50bps per quarter for the rest of the year.   The question one has to ask oneself is how many times in the last 10 years it has paid to bet against China’s ability to manage itself out of trouble. It may be the case that with one more roll of the policy dice, they can prevent 2012 being the year in which the China story finally unravels.

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