PGM Capital – Blog

Highlights of the Week of March 16, 2015

By Eric Panneflek

Dear PGM Capital Blog readers,

In this weekend's blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of March 16, 2015:

  • China's Stocks on 7-year High.
  • EU losing patience with Greece.

As can be seen from below chart, China stocks powered higher on Friday, posting their biggest weekly gain in three months and hitting a fresh seven-year high.

The Shanghai Composite Index CSI-300 advanced 1.38 percent on Friday March 20th, to close the week at 3,892.57, its highest level since April 2008 as can be seen from below chart.

  • Air China Ltd. and China Southern Airlines Co. rallied by the 10 percent daily limit. Carriers surged on speculation that falling oil prices will boost earnings.
  • China Railway Construction Corp. and China Railway Group gained at least 5 percent after the China Economic Weekly reported the government is studying a merger.

Below chart shows that the CSI-300 Index has risen 85.32 percent during the past 12 months.

Trading volume, which touched two-month high last week, continued to expand, as investors regained confidence after Chinese Premier Li Keqiang vowed on Sunday to support the economy.

Based on Friday, March 20 closing value, the Shanghai stock index is trading at 13 times estimated earnings for the next 12 months, versus a multiple of 19.90 for the Standard & Poor’s 500 Index.

The Chinese market’s US$5.8 trillion value makes it the second-largest worldwide after the U.S., which has a market capitalization of US$24.5 trillion.

On Thursday, March 19, Euro zone leaders told Greece, that time and patience are running out for its leftist-led government to implement agreed reforms to avert a looming cash crunch that could force it out of the single currency.

Greece has been kept from bankruptcy by two international bailouts but now risks running out of money within weeks if it does not receive more funds. Greek banks reported the largest deposit withdrawals in a month, a sign savers are worried about the outlook for the country’s finances and institutions.

Greece prime minister, Alexis Tsipras is meeting with European Union leaders to end a stand-off over extending financial aid for the country, a situation that Kazimir likened to a “Cold War environment.”

Greece Bond yields jumped to their highest in almost two years after the European Central Bank granted Greek officials only part of their request for more emergency funding. The country could run out of money this month as debt payments and monthly salaries and pensions come due.


Although the Chinese Index has appreciated with more than 85 percent it still has a valuation of 13 times earnings which makes it much cheaper than the USA broader markets which are currently trading at a multiple of 20 times of next year earnings.

Besides that most Chinese big caps are currently trading at valuations below 10 times next year earning and are paying a very healthy dividend with yields over 4 percents.

When we compare the performance of the CSI-300 with the DOW-30 over the last 10 years we see that the Chinese CSI-300 has outperformed the USA DOW-30 with more than 4 times as can be seen from below chart, in which the blue line shows the 10-year chart of the CSI-300 and the red line the one of the DOW-30.

CSI-300 versus DOW-30 10-year chart

Considering the fact that during the last 10 years the Chinese Yuan has appreciated against the US-Dollar, the performance of the CSI-300 -which is measured in CNY -, compared with the DOW-30 - which is measured on US$- is even more robust.

Below 10-year chart shows the appreciation of the Chinese Yuan versus the US-Dollar over that period.

CNY - USD 10-year chart

Below 10-year chart shows the performance of the Chinese CSI-300 versus the German DAX-40 Index

CSI-300 versus DAX-40 10-year chart

When we take into consideration that the EURO has depreciated with approx. 30 percent during the last 10 years, against the Chinese Yuan, as can be seen from below chart, we can draw the conclusion that the performance of the CSI-300 -which is measured in CNY -, compared with the one of the DAX-40 - which is measured in EURO - has been over 400 percent.

Euro versus Chinese Yuan 10-year chart


Euro-region finance ministers are urging the Greek government to draw up a rigorous plan to fix their economy so the bloc’s taxpayers won’t balk at further support.

It is also word mentioning that, the following two taboos about Greece's future as a member of the Euro club were broken last week:

  1. The German finance minister,Wolfgang Schaeuble all but invited Greece to return to the drachma.
  2. The Dutch finance minister, who heads the group of euro area finance ministers floated a temporary ban on Greeks' taking their money out of the country.

An opinion poll of German TV station showed on Tuesday, March 17, that a majority of Germans – 52 percent – would like Greece to leave the euro zone, up from 41 per cent in February of this year.

This is a message German canceller Angela Merkel understands. She has never acted against opinion polls in the past--but she also wants to keep the Euro zone intact.

The bond vigilantes are giving Greece a huge vote of no confidence, doubling the country's 10-year yield in the past six months and driving its three-year borrowing cost to a frankly unsustainable 23 percent, as can be seen from below chart.

At that level, investors are signaling genuine concern that the country won't be able to pay its debts and can't retain its membership in the single-currency club.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek


Highlights of the Week of March 9, 2015

By Eric Panneflek

Dear PGM Capital Blog readers,

In this weekend's blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of March 9, 2015:

  • The rising Dollar and importing deflation in the USA.
  • US-Markets drop for third week in a row.

The Labor Department said on Thursday, March 11 that import prices gained 0.4 percent after a revised 3.1 percent plunge in January, after seven months of declines.

On a year-over-year basis, import prices tanked 9.4 percent in February. That’s the biggest drop since September 2009.

Crude Oil prices were a big factor in the decline of import prices. The cost of imported crude plunged 43 percent from a year earlier. But ex-petroleum prices sank 0.4 percent on the month and 1.8 percent from a year earlier.

A separate report on producer prices showed they sank 0.5 percent in February after dropping 0.8 percent a month earlier. That was much worse than the 0.3 percent rise that economists expected. The year-over-year wholesale inflation rate sank to negative-0.6 percent, the lowest since records began in 2009.

Again, it wasn’t all oil. The “core” PPI that strips out food and energy dropped 0.5 percent as well, compared with the expected 0.1 percent rise.

The rising dollar is importing deflation,which causes all those foreign imports to get cheaper in dollar terms and as the dollar goes up, the price of contra-dollar assets like commodities goes down in order to match value.

Simultaneously, the already fragile USA exports become more expensive on a relative basis versus those sold by foreign competitors based in countries with falling currencies.

Bottom line is that, the current surge, which is the biggest, fastest increase in more than three decades of record-keeping is creating an inherently unstable situation. It’s destabilizing emerging market economies.

Traders, based on expectation of a FED rate increase this year, continue to push the US-Dollar higher, as consequence of which the U.S. Dollar Index rose above 100 for the first time since March 2003 as can be seen from below chart.

US-Dollar Index Chart from January 1973

The grey areas in above charts show the USA recessions since January 1973.

The USA stock market was hit hard on Friday, capping a third week of declines as investors reacted to a steep drop in oil prices and a jump in the value of the dollar.

The sell-off came at the end of a volatile week, utilities, major exporters and companies that make basic materials like steel had the biggest declines.

On Friday, March 13, the Dow Jones industrial average fell 145.91 points, or 0.8 percent, to 17,749.31. The Standard & Poor’s 500-stock index lost 12.55 points, or 0.6 percent, to 2,053.40, and the Nasdaq lost 21.53 points, or 0.4 percent, to 4,871.76.

As can be seen from below chart, the Dow Jones Industrial as well as the S&P-500 are are now down for the year.

The rising US-Dollar, which has soared to a twelve year high against the euro, has sent US stock indices plunging as investors expect leaner corporate earnings, tighter credit, and weaker exports in the year ahead.

The stronger US-Dollar is also wreaking havoc on emerging markets that are on the hook for US$5.7 trillion in dollar-backed liabilities. While most of this debt is held by the private sector in the form of corporate bonds, the stronger dollar means that debt servicing will increase, defaults will spike, and capital flight will accelerate.

Vast amounts of capital are already leaving some of these countries, and the secondary market for emerging bonds is beginning to dry up. A rise in US interest rates would only add oil to the fire.

Emerging market currencies were hit hard on Tuesday, March 10:

  • The euro fell to a 12-year low versus the U.S. dollar, on rising expectations for a U.S. interest rate rise this year.
  • The Turkish Lira has fallen so far 13 percent against the US-Dollar this year, and closes on Friday, March 13 at is lowest level since January 1st 2005 as can be seen from below chart.
  • The South African rand fell as much as 1.5 percent to a 13-year low at around 12.2700 per dollar.
  • The Brazilian real fell over one percent to its lowest level in over a decade. It was last trading at about 3.1547 to the dollar.

The above mentioned once more proves, that the easy money policies of of the USA FED, have touched off a financial cyclone that has reversed capital flows and put foreign markets in a downward death spiral.  As a consequence this might lead to a crash of the emerging markets this year, leaving behind a trail of bankrupt industries, soaring inflation and decimated economies.

The blow back from the catastrophe is bound to push global GDP into negative territory which will intensify the currency war as nations aggressively compete for a larger share of dwindling demand.

At the end this story will prove the Exter's pyramide.

John Exter (a former Fed official, ironically) thought of the post Bretton Woods financial system as an inverted pyramid resting on its apex, emphasizing its inherent instability compared with a pyramid resting on its base. Within the pyramid are layers representing different asset classes, from the most risky at the top down to the least risky at the bottom.

We think that Exter’s Pyramid went “live” in in late-may 2014 when the US-Dollar index began to strengthen as can be seen from below chart.

U.S. Dollar Index (DXY) -January 1, 2013 - March 13, 2015

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek


Highlights of the week of March 2, 2015

By Eric Panneflek

Dear PGM Capital Blog readers,

In this weekend's blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of March 2, 2015:

  • Apple to join the DOW Jones Industrial on March 18, 2015.
  • US Jobs report of March 6, 2015
  • US-Dollar Index at 11.5-year high

On Friday, March 6, the news hit the wire that, tech giant Apple (NASDAQ: AAPL) is joining the Dow Jones Industrial Average, after the market close on March 18.

The change will be effective with the opening of trading on Thursday, March 19.

Apple will replace telecommunication giant AT&T Inc. (NYSE: T), according to S&P Dow Jones Indices, the unit of McGraw Hill Financial Inc. that owns the Dow.

Apple has a market capitalization of about US$736 billion, making it the largest publicly traded company in the world. AT&T has a market value of nearly US$175 billion.

The US Labor Department reported on Friday, March 6th, that employers added 295,000 workers in February.

The unemployment rate fell to 5.5 percent, its lowest since mid-2008, down from 5.7 percent in January. Last month, wages rose just 0.1 percent, according to the Labor Department, a disappointment coming off an increase of 0.5 percent in January.

Job growth last month came particularly from the service sector, with leisure and hospitality adding 66,000 jobs, as well as an expansion of 54,000 jobs in education and health. Construction added 29,000 jobs in February, while manufacturing increased by just 8,000.

On the other hand, the labor force participation rate hovered between 62.9 percent and 62.7 percent in the eleven months from April 2014 through February, as can be seen from below chart of the US Bureau of Labor Statistics.



As can be seen from below chart, the US-Dollar jumped on Friday to an 11.5-year high against a basket of currencies as news of robust U.S. employment growth bolstered market sentiment that the Federal Reserve was closer to raising interest rates.

As can be seen from above chart, the dollar index, which values the greenback against six other major currencies, appreciated with US$ 1.38 or about 1.38 percent, to close the week at 97.72, its highest level since September 2003.

The Euro on the other hand fell 1.60 percent on Friday, March 6, to close the week at US$ 1.0843, its lowest value against the US-Dollar in almost 12 years, as can be seen from below chart.



Joining the prestigious DOW-30 index, can be seen as the latest milestone for Apple, which has emerged in recent years as the standard-bearer for a resurgent U.S. technology sector.

Based on soaring sales of iPhones, the Cupertino, California, company reported a Q4-2014 net income of US$18 billion, the largest quarterly profit on record.

Apple’s addition caps the ascendancy of tech in the Dow Jones Industrial Index, which started in 1999 when software giant Microsoft Corp. (NASDAQ: MSFT)Corp. and semiconductor maker Intel Corp. (NASDAQ: INTC) joined the world most prestigious stock market index.

One consistently dark patch in the recovery has been the sluggish growth of wages. Average hourly wages for private-sector workers have been rising slowly, at around 2 percent annually, for the last few years.

Slow wage growth suggests that the economy is still far from returning to its potential and is a big factor behind the feeling of many Americans that the recovery has left them behind.

When we look further under the hood of the employment report, we see that the number of people not in the labor force rose by 354,000 in February, rising to a record 92,898,000 number of Americans not in the labor force.

Without wanting to mingle with internal US politics, it is worth mentioning that in January 2009, when President Obama took office, there were 80,529,000 Americans who were not participating in the office, which means that since then, 12,369,000 Americans have left the workforce.

End result: the labor force participation rate dropped once more, declining to only 62.8%, which as the chart below shows is just off the lowest print recorded since March 1978, as can be seen from below chart.

It is also worth mentioning that Zero Hedge reports that the decline in the oil price has resulted in almost 40,000 laid off workers during January and February, but the payroll jobs report only finds 2,900 lost jobs in oil for the two months.


The dollar also rose 0.66 percent against the Japanese yen after the jobs data to close the day at 120.83 yen as can be seen from below chart.


The British pound also fell sharply against the dollar on Friday, dropping to a four-week low, and it's on track for a drop of some 2.3 percent over the week—its biggest weekly loss since late 2011. The Sterling was down about 1 percent at U$1.505 against the greenback.

The stronger dollar also weighed on oil prices on Friday as Brent oil was down about nearly 1 percent at $60.00 a barrel, while U.S. crude fell 2.26 percent to US$ 49.78 a barrel.

Gold and Silver prices suffered also on Friday, for which the Gold price declined with 2.45 percent to close the week at US$ 1,168.70 an ounce.

As can be seen from below chart, based on rate hike fears, investors dumped the US 10-year note sending its yield to 2.24% its highest level since December 23, 2014.


The fact that all US-Index fell sharply on Friday can be seen as a sign that the market isn't that impressed with either the US-Job report or the surge of the US-Dollar-Index.

The S&P 500 fell 1.4 percent, the most since January 5, to 2,071.26 at 4 p.m. in New York. The equity gauge lost 1.6 percent for the week. The Dow retreated 278.94 points, or 1.5 percent, to 17,856.78 for its worst drop in five weeks. The Nasdaq Composite Index slipped 1.1 percent. More than 7.4 billion shares changed hands on U.S. exchanges, 7.2 percent above the 30-day average.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek