Charting around Asia

Burma - The Forgotten Country

by John Needham, The Daniel Code Report | Published: May 6, 2008. Updated: May 7, 2008

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May 6 (Bloomberg) -- The death toll from the tropical cyclone that slammed into Myanmar three days ago rose to at least 10,000, according to the junta, making the storm Southeast Asia's deadliest natural disaster since the 2004 tsunami. 

Sadly today’s news of the dreadful devastation that has struck Myanmar, previously Burma, is testimony once again to the dislocation between rich and poor. Whilst we worry about such peripheral issues as markets, it is wise to remember that millions if not billions of people on this planet are worrying about far more important issues; literally life and death. I spent some years as a boy living in Rangoon, the capital of Burma after the war and it was a wonderful place. The Burmese and Shan people are gentle, industrious and kind. It is hard to imagine any people less deserving of the repressive regime imposed on Burma by its military junta. 

This is the south gate to the fabulous Shwedagon Pagoda in Rangoon, now renamed Yangon. The pagoda dates back about 2500 years and was built to house the eight sacred hairs of the Buddha. The central structure is 107m high and is covered with 60 tonnes of gold leaf. 

The Shwedagon Pagoda, a majestic and historic temple, revered by the Burmese Buddhists is said to contain the relics of all four Enlightened Buddhas. I well remember local people pressing gold leaf onto the pagoda to aid their prayers. Truly Burma is a forgotten nation. My thoughts today are with the Burmese people.

In the rest of Asia, markets continue to rally in variable degrees. The issues of food scarcity and price are pressing arguments for concern in these areas where for all their sophistication, wealth and unhappily, westernization, many are on a survival tightrope.

Rice, the staple food of Asia finally put in some sort of a top just 4 ticks from its Daniel target at 2478 and has pulled back to the first Daniel number retracement at 2074. 

The ascent of Rice from its normal trading range to the dizzying heights around 2500 has all the appearances of a classic blowoff move. If so we can expect its collapse to be equally spectacular. Conventional logic has it that it is impossible to chart or estimate the extent of blow off markets. That the frenzied blowoff in Rice has continued to observe its Daniel number levels with precision is another successful milestone for this unique market definer. 

This month we will have a look at some other markets that are particularly important to Asia as well as reviewing the major Asian indices and trying to make sense of the market’s behavior.

In previous articles for Financial Sense’s Asia page I have maintained that markets generally in the areas I cover have held up very well. The sense of doom and gloom that has surrounded US and UK credit markets in particular has not manifested itself in Asian indices, but due to the global linkage of international markets we need to have a sense of what has actually happened to glean the likely path for markets going forward. 

Asian Commodities

Rice has put in some sort of top having topped out at 2482, just 4 points from its nearest DC number. The pullback so far to the first DC retracement at 2074 is normal and unexceptional. Nothing in this chart tells us that the bull market is over. We need some further price action before making that call. 

The drought in Australia is reported to be a contributing factor to current rice shortages. The Australian Rice Board counters this argument by saying that Australia is a niche player and not involved in the long grain rice trade which is the dominant variety. In any event, recent drought breaking rains in Queensland are reportedly not having a material affect on river flows in the Murray-Darling system so unless there are significant May rains down under, the chances of an enhanced irrigation allocation for Australian rice growers this season are poor. 

Interestingly a two standard deviation of regression analysis on rice returns a much higher value than I would have supposed.

Soybeans have mimicked the drive to record highs seen in other foodstuffs, and although well off its March highs, pricing pressure remains extreme.

Wheat is sporting the same pattern but has arguably a more extreme blowoff against its long term price base. The retracement in this market is significant. 

Indices

The argument for the immediate future of stock market indices centers around the discretionary buying power of the US consumer. The headline arguments are based on the lax lending practices that led to the biggest housing bubble in history and the ancillary use of credit. As US, Australian and UK savings rates went negative years ago, sources of discretionary spending are limited to wage increases in excess of cost of living adjustments and credit. With the slow oozing of hot air out of the US, UK and European housing bubbles, the impact on banks and major investment houses has been dramatic. The chart below is the S&P bank index which shows the impact of impaired credit and derivatives on this sector:

Is this a big deal? Actually no. The retracement to the 62.5% Danielcode ratio is not of itself disastrous. The actions taken by US Fed, UK Bank of England and Europe’s ECB to extend unprecedented levels of credit to banks and other financial intermediaries is however a big deal. The Bear Sterns bailout in US and Northern Rock in UK show that the old rules of consequences are gone. Likely the growth in derivatives have so tightly bound all financial institutions that central banks fear knock on effects from the failure of any significant player. The effective warehousing by central banks of impaired credits via ever extended repos both in asset class and duration means that the western credit problems play out one of two ways. Either the hoped for recovery in risk appetite materialises or the bad debts are transferred to taxpayers. Asia, although even more opaque in its banking system than western countries will follow the same path.

Right now, international markets including Asia think that any problems from the mortgage fallout will be inoculated by central bank actions and have little input to other market sectors. Bear in mind that there have been huge differences between countries in the financial “innovation” that has lead to the mess particularly in US, and there are great variances also in the economic cycles at play in different parts of the world. Yesterday’s housing figures for Australia show a 4.2% increase in Melbourne house prices with marginal reductions only, in other capital cities. The property boom is alive and well down under.

This is the International Markets’ Index. From its November 2007 high it corrected a little more than 62.5% a Daniel sequence ratio and has now recovered 62.5% of those losses. All markets love matching the DC ratios. You should always be aware of them.

Japan

From Times Online: April 21, 2008. Peter Mandelson, the EU External Trade Commissioner, has condemned Japan’s hostility towards foreign investors as a “globalisation paradox” that could lead to companies turning their backs on the world’s second-biggest economy. In a speech in Tokyo today, Mr Mandelson described Japan as the most closed developed market in the world and that imbalances of investment between the EU and Japan were “truly staggering”. His remarks come as many funds and corporate investors have either dramatically curbed their ambitions in Japan or decided to close their positions there altogether. Many of them cite growing despair that Japan will ever embrace the principles of shareholder capitalism, or drop its scepticism of foreign investors. 

Given the chaos that accompanies almost everything that EU tries to do, the reserve of Japanese legislators is looking truly Delphic! For “globalisation” read “exploitation” and you get somewhere near the real meaning of this continuing farce.

Japan’s Nikkei is matching its counterparts in a sustained rally but this is not the strongest market in Asia.

China

Hong Kong’s Hang Seng index has retraced its losses to the 50% price level. 

Whilst the Shanghai Composite reflecting mainland stocks has struggled to turn the corner and has barely made it back to its first DC retracement. If the “US consumer is tapped out” argument holds, this is the market in which it will be reflected most. 

Korea

In previous editions of this column I have pointed out that the Korean KOSPI was the strongest of the Asian indices probably due to its special access arrangements in US and a relatively more sophisticated manufacturing sector. In any event the strength in Korean stock markets continues to be evident in the KOSPI chart below. From its November high it retraced just over 60% of its major swing and has now recovered almost 60% of those losses. There are still plenty of animal spirits in this index. 

India

India has two major Stock Exchanges, the Bombay Stock Exchange at Bombay, now renamed Mumbai and the National Stock Exchange also in Mumbai. The BSE is claimed to be the oldest organised market in Asia and since the major indices from these exchanges, the SENSEX and the NIFTY move in lockstep, we will observe tradition and adopt the BSE version for this column. This is the SENSEX index:

It topped in November 2007, dropped dramatically to its 50% retracement of the major swing in 11 weeks and has now reclaimed almost 50% of that loss in 6 weeks. A minor correction is overdue. 

Australia

The Australian SPI has clawed itself back to the DC retracement at 5780 and all is happiness and light down under. Melbourne house prices increased 4.2% last quarter as the great property boom continues and banks continue to package and market 2nd level debt with apparent ease. This today:

 (Reuters) - A unit of Macquarie Group plans to meet with Australian and international debt investors next week ahead of a potential auto-backed loan issue, an investor said on Tuesday. The planned offer is backed by prime auto and equipment receivables and is arranged by Macquarie Bank. It would be the third asset-backed issue sold in Australia this year. The two other issues were also auto-loan backed. St. George Bank and Bank of Queensland raised A$341 million and A$628 million respectively in auto-backed loan issues earlier in 2008. 

Perhaps the law of consequences has been repealed after all!
6 May 2008 

Copyright © 2008 John Needham
Asia Editorial Archive

I invite you to visit the Danielcode Online where all the Asia/Pacific index charts in this column are free. Due to the interest these charts are generating, they will now be updated for you on a weekly basis. 

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John Needham is a Sydney Lawyer and Financial Consultant. He publishes The Danielcode Report and writes occasionally on other markets. He lives with his family in Australia and New Zealand.

“The fox knows many things, but the hedgehog knows one big thing. A Hedgehog Concept is not a goal, intention or strategy to be the best. It is an understanding of what you can be best at. The distinction is absolutely crucial”. ~ Isaiah Berlin, The Hedgehog and the Fox

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