MAXIN ADVISORS Weekly Market Review addresses the major issue of the moment, reviews the market moves of the past week and monitors the evolution of the MAXIN GLOBAL FUND
HAPPY YEAR OF THE RABBIT
2023 is a year of the Water Rabbit, starting from January 22nd, 2023, and ending on February 9th, 2024.
The sign of Rabbit is a symbol of longevity, peace, and prosperity in Chinese culture.
Years of the Rabbit include 2023, 2011, 1999, 1987, 1975, 1963, 1951, 1939, 1927…
Rabbits are predicted to be gentle, quiet, elegant, and alert as well as quick, skillful, kind, patient, and very responsible, sometimes reluctant to reveal their minds to others and having a tendency to escape reality, but always faithful to those around them. Rabbits are characterized by always treating people politely, with a gentle smile that makes people feel that they are credible and sincere. When encountering tough difficulties, they are never discouraged but instead remain persistent in their endeavors to find solutions. This means they eventually achieve enviable success.
2023 is expected to be a year of Hope and of new beginnings, and indeed, when looking at the past 6 months, it truly feels as if China has gone down the drains in the summer only to be reborn again sharply in the past three months.
Internationally, China and the US were on the brink of war around Taiwan in August with the largest military drills ever performed by the People’s Liberation Army and an extremely aggressive rhetoric developed by the US. Since then, the Kuo Ming Tang Party won the elections in Taiwan, disavowing the independentist party in Power and the Taiwanese issue has all but disappeared from the narrative.
Politically, the 20th Congress of the Chinese Communist Party was a watershed event where XI Jing Ping’s faction took full control of the Party, even hauling HU Jin Tao out of the Congress publicly, in a strong message to the world and to the party that no dissenting faction would be allowed anymore.
Since then, in a very rare fashion, public demonstrations all across the Nation expressed the dissatisfaction of the People with the Rule of the Party and its stringent COVD zero policies, and the new administration swiftly reversed its tack, lifting restrictions, re-opening China and boosting economic activity through monetary and fiscal policies.
Xi Jing Ping normalised relationships with Joe Biden as well as with the rest of the world, touting cooperation and concentration for a more balanced path of development for the world
From un-investable in 2022, China has become THE BEST investment for 2023 according to most strategists, and global investors are pouring money into Chinese assets relentlessly.
Since the beginning of the year, the HSECI Index of Chinese stocks listed in Hong Kong is Up by 11.7 %, domestic shares by 8 % and the Chinese Yuan is up 7.5 % since its November bottom.
Economists are raising their economic growth forecasts for China into next year following a surprisingly resilient performance in the fourth quarter of 2022.
The world’s second-largest economy is now forecast to expand 5.1% in 2023 and 5% next year, according to the median estimate in a Bloomberg survey of economists. The projections were higher than 4.8% and 4.9%, respectively, in last month’s poll.
China’s abrupt ending of its three year-long Covid Zero policy last month and the peaking of infections in many places over the past few weeks have fueled optimism that the costs of reopening would be restricted to a period of holidays when activity is slow traditionally.
Consumption is widely expected to be the main driver of growth in 2023.
We expect Chinese growth to accelerate to 5.8% in 2023 from 3.0% in 2022.
The swifter end to Covid Zero means more of that boost will fall in 2023 than previously factored in as the Chinese catch up on consumption after the heavy lock downs of the past few years.
Growth is expected to reach 3.1 % in Q1 2023 and to pickup to 6.8% in the April-June quarter, a sharp contrast from the negative trends we see developing in the rest of the world.
Beyond the expected rebound of 2023, and as we have argued many times in the past, we see 2022 as the year where the US dominate of the world is ending and China’s dominance of the world is starting for a cycle that will last between 60 and 80 years ahead.
This will see China becoming the largest economy of the world by 2028 in nominal terms, a sharp re-rating of highly undervalued Chinese assets, through a lasting secular bull market that will see valuations expand to irrational levels ultimately, a sharp appreciation of the Chinese currency that stands to become the main reserve currency of the world with Gold, and replace the US dollar in large chunks of the world commodity trade.
Asia will be the engine of growth of the world in the coming decade and at its center will be China’s growth, propelled by a sharp rise in living standards and GDP per capita, thanks to its much more efficient stakeholder political model, and new generations of Chinese coming at the helm.
Shifts have already started in world allegiances with Europe and non-aligned nations preserving their economic interests over the US agenda over world leadership.
The Year of the Rabbit is indeed a year of Hope and the year of a new beginning, and the momentum of the Chinese economy will accelerate sharply in 2023.
But like all bull markets, they do not unfold in a straight line and there will be numerous trading opportunities for agile managers.
The Many Signs That a Global Economic Contraction is Looming
Last week was an extraordinary week in terms of disconnect between market perception and the number of macroeconomic and corporate news pointing to increasingly difficult conditions ahead.
Since the beginning of the year, equity markets have risen by 4 to 5 % on average, led by Europe, bonds have been buoyed by declining inflation numbers, the US dollar fell sharply and Precious Metals have been making new highs.
We are clearly in a relief rally and a sweet spot between inflation fears fading away before recession trends become prevalent. But like all sweet spots, they tend to disappear fast as well.
December Macro data point to sharp slowdown.
Last week’s string of dismal US economic data delivered a material blow to those still thinking that a soft landing was possible. Retail sales dropped by the most in a year and Manufacturing output fell by nearly 2.5% in the last two months of 2022.
Friday’s sharp rally in technology stocks crowned a week where Microsoft and Google added to the devastation of the technology industry, announcing job cuts of magnitudes not seen since the 2008 downturn, firing thousands of employees by e-mail without notice.
Investors have seen it as positives for the future earnings of these companies, but it may well be signs of how dire business conditions have been in the fourth quarter and CEO’s are rushing to manage investor’s expectations ahead of what could prove to be ugly results.
When looking at the underlying trends, It is difficult to imagine an uglier set of data for the US economy . Consumption (retail sales), output (industrial production), and prices (producer prices) came out all weaker than expected, with downward revisions for the previous month.
Not only did December retail sales fall by 1.1%, but the November series was revised to show a 1% loss instead of a 0.6% decline as initially reported.
Industrial output contracted by 0.7% against a median forecast in Bloomberg’s survey of a 0.1% decline, and November’s 0.2% decline was revised to a 0.6% fall.
Manufacturing production fell by 1.3% after a revised 1.1% drop in November (originally a 0.6% decline).
When putting all those numbers together, It is like the US economy truly fell off a cliff in the last two months of 2022, and the Business Manager surveys we had pointed at earlier had warned of these cracks.
Even the sharp fall in the producer prices Index, which tumbled by 0.5% in December, well more than the 0.1% economists had projected, seen as a positive by the markets when it comes to inflationary pressures is a negative sign when it comes to the underlying economy. Demand is weakening and so are input prices.
US reaches its Public Debt ceiling, potentially triggering a political Crisis
Last week saw the US Public debt reach its statutory limits of 31.54 Trillion on Thursday, forcing Janet Yellen to adopt technical measures to allow the Treasury to pay its dues, measures that will only last until June, quite a remarkable milestone in the history of the Nation. We highlighted last week the quadrupling of the US budget deficit in December on the back of sharply rising interest costs and tax receipts declining by 7 %.
It is not the first time the limit is reached. In August 2011, a temporary default by the US Government led to the first downgrade of the US Credit rating since the Great Depression.
The current explosion of debt comes at a tense political time where the extremist wing of the Republican Party blocked the nomination of the House Speaker for many days and fears are growing in Washington that they could use the US debt limit to exact even more concession from both their own party and from the Democrats.
Joe Biden deployed an intense activity, reaching out to Kevin McCarthy to avert the crisis, and both Janet Yellen and Jamie Dimon sent strong messages to Washington about the dangers of a US default, even if a temporary one.
The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable.
P & G Corporate Results show sharp declines in consumption
P&G is among the first consumer-product giants to report results for the December quarter, with investors looking for clues on the direction of the global economy and households’ ability to continue to spend in the midst of high inflation and rising interest rates.
After lifting prices to new heights, Procter & Gamble reported lower quarterly profit and declining sales volumes as the rising costs of Tide detergent and other staples prompted consumers to cut back on purchases at the end of 2022.
Sales volumes fell 6% at P&G — the biggest quarterly drop in years — with declines at each of the company’s five major business units in the three months ended Dec. 31 compared with a year earlier.
P&G increased prices by 10% in the period, helping the company flat revenues for 2022, but that didn nt prevent the company from seeing its net profits decline by 7 % in the fourth quarter when compared to the same quarter of the previous year.
Executives said the sales volume declines generally reflected some product categories shrinking because of higher prices rather than P&G losing customers to rivals or discount brands.
U.S. inflation, which eased to 6.5% in December from 9.1% in June has been running near its highest levels in decades. P&G, like its rivals and many other companies, raised its prices substantially last year to offset higher costs for fuel, labor and commodities.
At P&G, prices in the quarter ended in December increased by 13% in the division that makes Tide, by 11% in the division that houses Gillette and by 8% in the division that makes Pampers diapers.
Overall, P&G reported net income of $3.93 billion for the quarter, down 7% from a year earlier.
Net sales were $20.8 billion, down 1% from the prior year.
Big Tech lay off staff like never before, What does it really mean ?
In the past week, Microsoft announced that it would lay off 10’000 workers or 5 % of its workforce and Google did the same on Thursday, shedding 12’000 jobs or 6 % of its workforce without notice.
They joined Coinbase, Cisco, Amazon, Salesforce, HP, Roku, Beyond Meat, Meta and Twitter in announcing major layoffs in recent weeks, in a sign that the entire technology industry is going through a sharp down cycle.
More than 55,000 global technology sector employees have been laid off in the first few weeks of 2023 alone, according to data compiled by the website Layoffs.fyi, numbers that are still to appear in the economic data and the economic impact of which will be felt in the coming months.
The downturn of the technology sector has already impacted Silicon Valley significantly with the real estate sector falling off a cliff with a 30 % decline in real estate prices and surging vacancies in office space in San Francisco.
Last week’s job cuts are the companies’ largest ever. Alphabet’s CEO Sundar Pichai, said Alphabet had expanded too rapidly during the pandemic, when demand for digital services boomed, and must now refocus on products and technology core to its future. For Microsoft, it is a sharp about-face for a company that always praised staff loyalty.
Investors have taken the news positively, but the reality is that they are probably indicative of a sharply deteriorating business environment, especially in their growth engines.
Beyond the sharp decline in PC sales ( -28.9 % in Q4 2022 ), in Advertising revenues and in overall retailing sales, that are affecting their core businesses, Microsoft, Google and Amazon, are seeing the prospects of cloud-infrastructure, their main engine of growth of the past few years, deteriorating fast.
As enterprises reduce consumption across most sectors, new ventures are dwindling and corporations are cutting on investments. As a result, cloud services growth seems to be waning at a much faster clip than anticipated.
Amazon Web Services (AWS) sales growth in constant currency could drop 9-11% in 2023 vs 2022 according to analysts that have been revising all their projections down. The decline of about 10 % in growth would be more pronounced on a relative basis than the one experienced at the pandemic’s peak in 2020, when several sectors like hospitality almost came to a standstill. At the time, although certain areas saw a sharp decline in usage during 2020, others such as gaming, productivity (video chat), and online commerce rose sharply and cushioned the blow. This appears unlikely to recur in the current global economic downturn and may explain the decision of these companies to act drastically to reduce costs.
At Microsoft, Azure’s sales growth in constant currency for the next 12 months is still estimated at 35% by the consensus of analysts vs. 46% in the past 12 months. This 24% decrease in the growth rate remains based on assumptions that the US economy will avoid a full fledged recession.
Considering the sharp decline in PC sales – the largest in decades – a significant portion of Microsoft revenues may have been shaved off and could continue to decline ahead, forcing the company to act drastically to reduce costs and lay off staff on a proportion never seen before.
In addition to slowing growth, Amazon, Microsoft and Google will likely experience margin degradation due to increased energy costs for running their data centers.
Whichever one looks at it, the decisions of the tech giants to lay off staff on such a scale denotes a sharp deterioration of business conditions in the whole sector, and of a magnitude that makes CEOs think that the downturn will be lasting.
For now, analysts and investors are still relying on the data published in October for the summer quarter, but the 4th quarter deterioration seems to be decisive strategically. The numbers to be published next week will tell us more about the reality of the situation.
The global real estate crisis is gaining momentum
In August 2022, we called the peak in global real estate prices and warned investors about a sharp downturn, the magnitude of which could dwarf the 2008 real estate crisis. The world economy has never avoided economic contractions when real estate prices declined sharply. The banking system could be affected and distressed debt could spiral into a major financial crisis.
In the US, sales of previously owned US homes fell in December to the slowest pace in over a decade, capping one of the housing market’s worst years on record amid a rapid jump in mortgage rates. Contract closings decreased 1.5% to an annualized pace of 4.02 million last month, the slowest rate since 2010, according to data from the National Association of Realtors published Friday. The median estimate in a Bloomberg survey of economists called for sales to drop to 3.95 million.
The figures wrap a tumultuous year for the housing sector, in which transactions fell for a record 11 straight months. For all of 2022, slightly more than 5 million existing homes were sold — a drop of 17.8% from 2021 and the biggest annual slide since 2008.
The Federal Reserve’s most aggressive tightening campaign in a generation sent mortgage rates soaring in 2022 to the highest level in two decades, sidelining many prospective buyers.
New home construction declined in 2022 for the first time since 2009 while applications to build, a proxy for future construction, also fell in December.
Existing-home sales account for about 90% of US housing and are calculated when a contract closes. New-home sales, which make up the remainder, are based on contract signings, and will be released next week.
Housing and construction are a significant part of any economy, representing anything between 18 to 25 % of GDP depending on economies. The impact of a downturn on global economic activity is felt both through direct job destruction in the sector, and through the negative wealth effect as home prices decline.
US homes prices are declining at the fastest rate since the beginning of the 2008 crisis and with 1.7 million units to be completed in 2023, the downward pressure should continue for a while.
The unfolding crisis is global and not limited to the US.
The slump in the world’s biggest asset classes is spreading fast from the housing market to commercial real estate, threatening to unleash waves of credit turmoil across the economy.
Almost $175 billion of real estate credit is already distressed, according to data compiled by Bloomberg — about four times more than the next biggest industry. As the toll from higher interest rates and the end of easy money mounts, many real estate markets are almost frozen with some lenders telling borrowers to sell assets or risk foreclosure amid demands for additional capital from landlords.
A Brookfield real estate unit warned in November that it may struggle to refinance debt on two downtown Los Angeles towers and raised the prospect of foreclosures, which Barclays Plc analysts called “concerning” for the market.
Distress levels in European real estate are at the highest in a decade, in part because of a decline in liquidity,
according to a study by law firm Weil, Gotshal & Manges. Cheap debt lured European landlords to load up on credit after the 2008 financial crisis, snapping up portfolios where the borrowing cost was lower than the yield.
That’s left real estate as the weakest link in the European junk market, with a default probability over the next two years of almost 8%, according to Bloomberg analysis. Regulators have already warned that lower demand for office space since the pandemic, the higher cost of materials from supply chain delays and rising borrowing costs will make some projects in Europe unviable.
In Sweden, where house prices are in freefall, Samhallsbyggnadsbolaget I Norden AB has already agreed to sell property worth almost $1 billion to pay off debt, a sign that landlords in the country are moving to reduce leverage.
UK commercial property values fell more than 20% in the second half of 2022, MSCI data show.
In the US, the drop was 9%, according to Green Street.
About one in 10 corporate loans in Europe is already underperforming and showing increased credit risk,
according to JLL.
A missed debt payment by the developer of the Legoland Korea theme park triggered a credit crunch in the country, with the central bank forced to act to stabilize markets.
Australia’s Caydon Property Group Ltd. blamed Covid lockdowns and rising interest rates when it fell into receivership.
The crisis is already beginning to rippling through the wider economy.
US homebuilding supplier Builders FirstSource has cut 2,600 jobs, while UK millennial favorite Made.com ended up in insolvency.
Swedish household appliance manufacturer Electrolux AB announced plans to cut as many as 4,000 workers last year, many of them in North America.
Several US banks predict that credit losses will grow this year. In its fourth-quarter results, Bank of America Corp.
flagged an additional $1 billion of office property loans with an elevated risk of default or missed payments, while Wells Fargo & Co. expects more stress to emerge in that market as demand weakens. The decline since the summer has been so swift that some private credit lenders are already struggling with liquidity.
Adam Tooze, a professor at New York’s Colombia University who has written about the 2008 crash, sees reasons to worry again. “Property is a major recession variable,” he said. “It’s the biggest asset class and is the largest component of household’ budgets’s wealth, which means it carries consequences for consumption.” “It’s a large recession risk,” he said.
As was the case in July 2006, when we accurately called the top of the US real estate market. today’s conditions are ones that will lead to a very sharp economic downturn.
But for now, Central Banks, Analysts, Strategists and investors are not yet factoring in the heavy impact of real estate in their economic projections. It will probably take until the second quarter of the year for its impact to be included in the narrative of the markets.
The decline in inflation is showing in the numbers being published and more and more strategists are convinced that inflation will come back to the target levels of Central banks.
The decline in economic activity has not yet shown in the full data and for now, we only have the early indicators pointing to a sharp deceleration ahead.
Investors are in this sweet spot, where they believe that inflation will be tamed WITHOUT the world economies going into recession.
The corporate earnings of Q4 2022 may paint a different picture and it may take until March or April for the global economic data to really worsen.
How long will the sweet spot last is what will determine the course of the markets in the short term.
WEEKLY MARKET REVIEW 21 Jan 2023
US Earnings Calendar for Next Week
INFLATION
BONDS
USA
Long Term With Inflation
Weekly with Corporate High Yields
US 10 – Year Government
US 30 – Year Government
Europe
Asia
CURRENCIES
CRYPTO – CURRENCIES
EQUITIES
World Indexes
USA
Americas
Europe
Japan
China
Asia
COMMODITIES
Energy
Copper
Precious Metals
Soft Commodities
DISCLAIMER Maxin Advisors FZ-LLC or www.maxinadvisors.com, is not a registered investment advisor, nor a capital management firm or broker-dealer and does not purport to tell or suggest which securities customers should buy or sell for themselves. Maxin Advisors FZ-LLC operates as a private advisory and research company where we provide consulting services to pension funds, investments funds and family offices. MAXIN ADVISORS FZ-LLC is one of the General Partners of MAXIN GLOBAL FUND - USD,a Luxembourg Incorporated Hedge Fund. Our analyses and conclusions are ours and they only clarify and highlight the investment rationale behind our own investment decisions. The analysts and employees or affiliates of Company may - and usually do - hold positions in the stocks or industries discussed here. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. You understand and acknowledge that there is a very high degree of risk involved in trading securities. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns. The indicators, strategies, columns, articles and all other features of Company’s products are provided for informational and educational purposes only and should not be construed as investment advice. Examples presented on Company’s website are for educational purposes only. Such examples are not solicitations of any order to buy or sell securities, commodities, investment products or engage into any kind of trading activities. Accordingly, you should not rely solely on the Information provided in making any investment decision. Rather, you should use the Information provided only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment. By navigating on our website or remaining on our subscription lists, you accept our terms and conditions and discharge us irrevocably from all responsibility.
1
