Surprise Shocks for US Earnings Mean Trouble for Asia

 |  Includes: EWJ, FXI, PGJ
by: Enzio von Pfeil

Excerpts from Dr. Enzio von Pfeil's appearance on CNBC Asia:

  1. Comments on US earnings with Intel (NASDAQ:INTC) and Johnson & Johnson (NYSE:JNJ) - what do US earnings signal for Asian corporates?
    • We have warned for some time that "surprise shocks" will rattle markets. There are two things that US earnings signal for Asian corporates:
      • The "real economy" links - e.g. if US retail earnings fall, Asian exporters' earnings fall, and
      • the far more important psychological links: if the US market falls, so do most others - and that meltdown, in turn, affects consumer psychology. Indeed, since the American market top of October 9, 2007, only Russia and Brazil have risen!
      • But, with the domestic, internal demand in China and India remaining strong, there is plenty of muscle left in Asian growth.
  2. Delta (NYSE:DAL) and Northwest (NWA) merger - is it a start to the consolidation phase in the global airline industry?
    • No comment, as I am not an airlines specialist.
  3. Financial markets - how far to the bottom, and where on from there?
    • Much further to go: the sub-prime mess has not played itself out:
      • Accounting. All firms now have to report losses on a quarter-by-quarter basis, so they cannot "bunch" all losses into the first quarter of the year and thereby lead investors to believe that "the worst is over."
      • Transparency. Just because American banks have been forced under the spotlight does not make them any worse than those non-American banks that have not been forced to reveal all. My hunch is that there are plenty of large, non-American banks sitting on toxic mountains.
    • If we use history as a guide, the German and Japanese markets fell by 40% while their banks were cleaning-up their own balance sheets. Since the last market peak on 9th October 2007, the S&P 500 has fallen by about 15%, so there is another 25% or so to go. Assuming that financials are twice as volatile, my guess is that they will will fall another 40%-50% over the next two years.
  4. Asset allocation - is cash still king? What are some investment opportunities during these volatile times?
    • Cash, non-US dollar currencies and commodities are king.
    • Just don't keep your money as a time deposit in a wobbly bank: when the bank fries, the time deposit dies...
    • Short-term bills are also fine.
  5. What sectors do you like, and what are the reasons behind them?
    • I am not a stock market fan.
    • The only attractive market is Taiwan due to the election results. China, the "growth miracle," has underperformed old-age-home Japan since the market peak of last October!
    • Hence, my "sectors" are commodity-related: food, oil, base metals and the like.
  6. Any other topics you like to discuss?
    • When I suggested that one buys short-term bills, some may wonder about bonds.
    • I have very low bond exposure because we are careening into a US stagflation: you don't want to own long bonds when inflation is rising.
    • Inflation is maddening, and is of cost-push nature: the weaker dollar is fanning imported inflation in America, commodity prices keep rising, and productivity is waning (so unit labour costs are rising). Central banks cannot control costs; they only can control demand.