China Close To "Disowning" North Korea

The one over-riding cloud hanging over the markets is North Korea's belligerence and stupidity. Even if you have Obama or the United Nations voicing concerns and admonishments. The dog will only listen to its master, and by master we all know its China. China has finally lost its cool with North Korea, it has suspended all government exchanges with North Korea - now Kim knows that he has pissed off everybody royally, even his only friend. North Korea still have Russia, but Russia is nowhere as important as China. North Korea's relationship with China is highly critical to North Korea. North Korea is like a bully who has a very mighty big brother tacitly "supporting" North Korea even when the rest of the world places an embargo or sanctions. Now that is gone - which is to say, North Korea will have to toe the line or face the consequences as China is close to disowning this bastard of a nation (I should really say its the leader who is at fault, and not the people of North Korea). Its another cloud being lifted from the bull runs around world exchanges.

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June 1 (Bloomberg) -- China suspended government exchanges with North Korea after Kim Jong Il's regime last week tested a nuclear device and fired short-range missiles, Yonhap News said.

China has halted plans to send officials to North Korea and won’t accept visits from there either, Yonhap said today, citing unidentified diplomatic sources in Beijing. China’s foreign ministry didn’t respond to a faxed request for comment. South Korean government spokesman Lim Jung Taek said he couldn’t confirm or deny the report.

The move, if confirmed, would be the strongest reaction yet to North Korea’s actions by its biggest ally and trading partner. China accounts for almost three-fourths of North Korea’s foreign trade, and can cut off shipments to the impoverished country of food, fuel and luxury goods.

China has said it “resolutely opposes” North Korea’s nuclear test, and agreed last week with the U.S., Japan and Russia to work toward a United Nations Security Council resolution censuring the regime. U.S. Defense Secretary Robert Gates, who is in Asia for a week-long tour, said on May 29 that “based on what the Chinese government has said publicly, they’re clearly pretty unhappy.”

Dependence on China

China accounted for 73 percent of North Korea’s global trade last year, up from less than a third in 2003, according to the Seoul-based Korea Trade & Investment Promotion Agency. It supplies 90 percent of North Korea’s oil, 80 percent of consumer goods and 45 percent of its food, according to Dong Yong Seung, a researcher on North Korean issues at the Samsung Economic Research Institute in Seoul.

North Korea’s economic output was about $26 billion in 2007, according to the World Bank, less than 3 percent of South Korea’s $970 billion economy.

South Korea responded to the atomic explosion by joining a U.S.-led initiative to halt shipments of weapons of mass destruction. The North then warned that any move to seize its ships would be met with military retaliation, and also fired six short-range missiles in a show of defiance.

Gates said May 30 that the communist regime would be held “fully accountable” for the consequences of transferring nuclear weapons or material to “states or non-state entities.”

‘Never Tolerate’

“The Republic of Korea will never tolerate North Korea undertaking military threats and provocation and ignoring the way to peace and dialogue,” South Korean President Lee Myung Ba said in a bi-weekly radio speech today.

North Korea’s military ordered ships in the Yellow Sea and units guarding the country’s coast to double their ammunition stockpiles, Yonhap News reported today, citing a South Korean government official it didn’t identify. The North is also planning to launch a long-distance ballistic missile as early as this month, Yonhap said over the weekend.

The U.S. and Japan are seeking a UN Security Council resolution that cuts North Korea’s international financial ties as well as China’s help in persuading it to abandon its nuclear ambitions.

p/s photo: Maki Nishiyama

Revisiting The Yen Dollar Rate

The yen dollar rate is about to break through the 100 barrier. As crude as the rate is as a one dimensional factor in looking at risk, it has served my purposes well. My views stayed the same on the yen dollar rate. A revisit to my two previous postings on the yen dollar rate:


March 11, 2009 posting - Readers will be familiar with my views on the yen. Yes, its an indicator of risk aversion although many more seem to regard the present yen's correction from 89 to 98 as more a reflection on the economic slump within Japan. Prior surge in the yen was driven by carry trade unwinding, a substantial shrinkage in US-Japan rate differentials, as well as the explosion in U.S. money supply versus static money supply growth in Japan. Beyond the unwinding of the carry trade, the yen’s fall also reflects worsening conditions in Japan’s export-driven economy and fears that the Bank of Japan will start flooding the market with funds to ward off deflation. It is very clear that Japan cannot operate lower than 90 yen to the dollar as most of their exporters have budgeted around 102-104 for 2009-2010.

It appears that Japan's finance mandarins still expect the strong yen phase, which as far as analysts can determine was caused mainly by a massive JPY20 trillion reversal of the yen carry trade. The yen has been a low-yielding currency ripe for funding carry trade positions in other higher-yielding assets. Some might say that the yen is falling because carry trade unwinding seems to have come to an end, not because the world is a safer place. That is a bit unfair to think that the yen's movements is mainly dictated by the carry trade. There was plenty of opportunity to unwind the carry trade, and which did happened, when the yen was moving around 110-115. The sharp gains which propelled the yen to 90 was a reflection of a flight to safe havens rather than a dramatic unwinding of yen carry trades.

Judging from the very low rates globally, the yen carry trade might not be the only popular transaction going forward. The USD carry trade or Euro carry trade might be the way to go. Plus both currencies have a bigger propensity to be largely weaker further down the road - a required recipe for a solid carry trade.

Figures from the Tokyo Financial Exchange (TFX) revealed that as of February 6, leveraged Japanese retail investors are now net long of the yen, meaning there are more buyers than sellers, for the first time since July 2006, when the TFX started posting positioning data. With the JPY’s status as a safe haven seemingly at an end – at least for the time being – it remains to be seen just how far it can fall. However, USD/JPY’s recent completion of a double-bottom technical pattern points to a near-term target of JPY 102-105. It can spike lower in times of extreme risk aversion, it cannot stay below 100 for long due to Japan's declining financial home bias; 110 for USD/JPY makes more sense than 90 over the medium-term. JPY/USD may fall below 100 in event of a dollar crisis, but won't stay there in the long-term due to:
1) economic decline from demographic shift,
2) large interest rate gap
3) yen failing to become key reserve currency
4) declining home bias of baby boomers



January 16,2009 posting - The Japanese yen was rising as aversion to risk took hold, with the U.S. dollar dropping to ¥88.87, from ¥89.04 late in New York. When markets were rising for the first few days of January 2009, the yen rose steadily from 90 to 94. Have to say again that the yen dollar rate is the best indicator to follow.

The posting on following the yen rate:

Cheap valuations are a reflection of risk aversion, the rush to US Treasuries is a sure sign of risk aversion, the rush to USD and yen are a sign of definite risk aversion.

Gem #1: Markets will only start a genuine recovery when risk aversion subsides

Gem#2: Risk aversion reduction will be immediately reflected in weaker USD and yen

The fall in USD over the last two days is more due to the zero interest rate regime enacted by Federal Reserve, so that should not be a sign of risk aversion reduction.

The best guide for locating current markets' bottom: WHEN USD and YEN BOTH STARTS TO FALL IN VALUE in a sustained pattern. When these two currencies fall, it show a willingness to move exposure into other currencies or assets, be it stock or bonds. Before they are reflected in the prices, the signal will be most apparent in the currencies.

However, even then we cannot really ascertain a buying trigger. So, my advice would be to break up you investing funds into 3 portions, get ready your list of stocks to buy.

Catalyst #1: When yen/usd rate moves back to 94, plonk down 1/3 of your funds

Catalyst #2: When the rate moves to 97, move the second portion

Catalyst #3: When the rate breaks 100, move the rest in

A point not missed here is that if yen weakens against the USD, the latter would be gaining in strength. However, I am using the yen/usd rate as a guide, as I believe when the yen starts to weaken, the USD would also weaken, but not by as much - i.e. the USD would gain ground against yen but at the same time lose ground against the euros and other major currencies. I use the yen/usd rate because that is most widely followed. The yen is used as the determinant because it was the most popular currency for carry trades, the unbelievable strength now is due to risk aversion as the Japanese exporters are basically losing money and cannot compete below 90.

p/s photo: Maki Nishiyama

Debunking Modern Portfolio Theory

Jasonred79 said...

Those who were shorting financial stocks are UP by 30%, easily... so being -30% is not such a great achievement... Though I don't know if those rules allow that.

Anyhow, I'm pretty sure you're out of the running to win this thing... the leaderboard are definitely all showing strong gains.

9:18 PM

Salvatore_Dali said...

jason,

i am not running the fund as a hedge thing... i am trying to be near fully invested and still beat the S&P500...

yes, you may notch gains of 20% or even 30% when the index is down 40% but that would have involved huge stock or sector bets, e.g. shorting financials ETF etc... thats one way to run a fund

i am using the fund to match wits with the S&P500, not looking at absolute returns per se... if I was, I would be all cashed up from August till now... 0% would have beaten the mkts by 41% but that would have been senseless.

9:44 PM

ikanair said...

Muahahahahahahahahahahha
It's this what it have become of?
To lose less is to be considered good?

No wait.... wait...

The (un)holy trinity (subprime, us consumer and china) is playing out right.

Then maybe you will just lose 80% and S&P lose 90%, and you are still good. any may they give you a million dollar fund manager job.

hoocoodanode?

10:45 PM

Salvatore_Dali said...

ikan,

u can laugh but thats portfolio mgmt... ask any fund manager... u just have to beat the index, u r judged by being fully invested... i told u its quirky but thats the way the dice rolls...

if the index is down 10%, for you to make +40%, you would have to shy away completely from a balanced portfolio... you would have had to make huge sector or stock bets, e.g. put 70% in KNM...

I am not saying that is wrong, that is a genuine stock picker model, if u can do that well, go be a hedge fund guy... but if you r managing a proper portfolio using modern portfolio theory, you basically aim to beat the index, based on the premise that:

over the long run stocks offer superior returns (we now know how silly that assumption is)

hence if you consistently beat the index, over the long run, you should have superior returns (we also know that is not entirely true)

we can laugh at modern portfolio theory n ask them to chuck the textbooks... thats like telling you son not to get business degrees cos they teach u shit... but you still send yr kids to college cause thats the way things are done...

So, guys, I agree with what you are saying but you have to appreciate modern portfolio theory. Yes, many assumptions may have been proven to be shaky at best but we do not have much of an alternative. Yes, you can be a pure stock picker/sector allocator, but by doing that your "risk profile" will be raised enormously to such an extent that no funds will be given to you to manage. Even though people will say they look at absolute performance, but these pension funds will cite terms like your alphas, betas and more importantly your R2 - all having to do with your risk profile, your risk taking to generate your returns. So, we all can laugh at why a -30% return is better than -40%, but it will put you in better framework when you appreciate the overall interacting factors.

p/s photos: Maki Nishiyama