When the Yuan goes up, Yu-an I have to pay higher prices...

So China finally allowed their currency to appreciate versus the dollar. They didn't let it float freely, or it would have levitated away like a birthday balloon overfilled with helium!! But any move in the right direction bodes well for the currently imbalanced status of world trade. By imbalanced I mean that US and European consumers buy alot more goods from China than China buys from us. If you haven't noticed the 'Made In China' labels on everything in your household then you probably have your head in the sand in the direction of...well, China.

You're probably wondering what a stronger Yuan means to you, the average consumer. Well, when a company like Wal-Mart buys goods from China they pay for them not in dollars but in Yuan. In order to do so they have to exchange dollars for Yuan. Let's say that I can exchange one dollar for 7 Yuans. If an item costs 7 Yuans then it costs me 1 dollar. If the Yuan strengthens however, I might need to exchange $1.25 for each Yuan because now the Yuan is more expensive (i.e. stronger relative to the dollar). Now if I want to buy the same item that still costs 7 Yuans (notice the price in Yuans hasn't changed), it will cost me $1.25 because that's how much I have to pay for 7 Yuans. Going back to the Wal-Mart example, with the new exchange rate Wal-Mart and other importers of Chinese goods have to pay slightly more for the same items. They can leave their retail prices the same, absorb the extra costs, and reduce their profits. Or, they can increase the price that consumers pay to make up the difference in cost. While some retailers will choose the former, quite a few others will be forced to raise prices.

But it's not all bad news. For companies based in the US that export to China, a strongerYuan/weaker dollar makes their products more affordable to Chinese buyers and the expectation is that sales to China would increase. After all, if something goes on sale, wouldn't you buy more of it? Alcoa, for example, a large producer of aluminum, is seen to be a beneficiary of a stronger Yuan. They export aluminum to Chinese manufacturers in the automotive, aircraft, building and construction, and other industries. With a stronger Yuan, that aluminum is cheaper for Chinese customers but the price in dollar terms doesn't necessarily have to change. It could potentially be a huge win for Alcoa and the market thought so too, driving up Alcoa's share price after the Yuan announcement. There are other beneficiaries too. Just look for companies that export to those countries whose currency is linked to the Chinese Yuan.

Generally speaking the currency move is seen as positive for the global economy. After all, we have been buying cheap goods from China for many years and borrowing money from China by issuing more and more debt at increasingly lower rates. And although lower rates are good, we don’t have to look any further than the US housing market to confirm that too much or too low of a good thing could come back to bite us.

Super Bowl Impact to Host City? Traffic!!

Now that the Super Bowl is gone and New Orleans continues to celebrate well past Mardi Gras, South Florida can count the income generated by the increase in economic activity brought by the event. But will we need a calculator or can we figure it out with our fingers?

Well, it really depends on who you ask. The National Football League, Super Bowl Host Committees, and the third party consultants they hire to estimate the economic impact to the host city will say that the benefit can be $400 million to $500 million. But ask an unbiased third party, the likes of which are academics or economists, and the estimated economic benefit to the host city differs dramatically, and can be negative in some cases. In an article written by Craig Depken and Dennis Wilson, as well as a study conducted by Professors Robert Baade and Victor Matheson, they point to a few well argued reasons why the estimates are exaggerated.

Practitioner Bias – as I mentioned in the opening paragraph, it depends on who you ask. There are stakeholders who benefit as the economic impact increases for the host city. Politicians, restaurant owners, local hotel owners, the NFL, and businesses that will directly benefit from the increase in awareness and cash inflows during the week leading up to the Super Bowl. But as I will mention in the following paragraphs, the benefit to the economy, and the individual taxpayers, are much lower than ‘official’ estimates claim. Particularly when you factor in the NFL’s requirement to either build new facilities or renovate existing ones in order to be considered a host city. Not complying with the NFL’s request risks losing the Super Bowl in future years, as is currently the case in Miami, where the NFL has threatened to eliminate Miami as a future host to the Super Bowl unless the stadium gets a $250 million makeover. When you consider the estimates of actual economic benefit discussed below, it would take 4-5 Super Bowls for that investment to break even. That’s the equivalent of 12-15 years if the Super Bowl is held in Miami every 3 years.

Measurement Methodologies – The NFL sources estimate the economic impact by adding up the gross impact of higher hotel rates and occupancies, higher turnover at restaurants, increase demand for transportation (rental cars, charter buses, etc.), but the unbiased economists point out that this assumes initial economic activity of zero. In a city like Miami, where tourism is already high in January and February, the proper way to calculate the economic impact of the Super Bowl would be to determine the difference between what the economic activities would have been if the Super Bowl were not played there, and subtract it from the gross economic activity of having the Super Bowl. The $400-$500 million estimates fail to do this. In fact, in order to get an accurate measure of non-Super Bowl expected economic activity, we would have to know how many tourists intentionally avoided the host city during Super Bowl week and either went somewhere else altogether or planned their trip before or after Super Bowl week. It would be impossible to calculate that metric, which obviously would make the net economic impact of the Super Bowl even lower still. And there are additional metrics that are practically impossible to measure but are certainly not in the hundreds of millions. The estimates of economic impact according to several studies is actually 10%-25% of the NFL estimates. That's only $40 million to $100 million.

Leakage – We can agree that cash flows into the host city can be substantially large. And if we assume that the host city receives over 100,000 high income visitors (average income: $144,500) each spending approximately $400/day, they would generate $280 million dollars in spending if they were to stay for seven days. Besides the fact that the average tourist to South Florida spends $150/day, making the net impact only $175 million, we can also look at where that cash is spent and who benefits: Marriott Hotels (Bethesda, MD), Hyatt (Chicago, IL), Coca Cola (Atlanta, GA), and Anheuser Busch (St Louis, MO), to name a few. So really, the beneficiaries are the shareholders of those corporations, whose profits don’t necessarily stay in South Florida, even though some of them may hire temporary employees for a week.

I was one of those individuals who assumed that the economic impact to my home town was as magnificent as the NFL stated. But the economic studies make a great argument and one which I think is hard to refute. The estimates are overstated, sometimes dramatically, and for ulterior motives. If the host city were a place where tourism was low in the middle of winter, such as Minnesota, Detroit, Chicago, Philadelphia, and several others, perhaps the economic impact would be higher and well worth building a new stadium or spending hundreds of millions of dollars in taxpayer money to renovate old ones. But in cities like Los Angeles, Miami, and New Orleans, the benefit is questionable, at best.

The Tail May Begin to Wag the Dog

After the jobs report today showed better than expected results in both initial claims and continuing claims, the labor tail may finally be wagging the stock market dog. It’s common knowledge that the labor market data is a lagging indicator, typically showing improvement only after 9-12 months AFTER the economy starts to grow. And there is no doubt that we need much higher job growth to keep the unemployment rate down, or even reduce it. But today’s news was good news and I for one will celebrate, at least for one night.

The Emergence of China

This week, Germany released economic data that confirmed what many thought was inevitable, but which no one knew exactly when it would happen. China is now the world's largest exporter, surpassing Germany with $1.2 trillion for 2009. Although it was lower than the $1.4 trillion exported in 2008, Germany's export decline was dramatic enough to catapult China into the top spot.

It's no wonder China is throwing their weight around and elbowing their way onto the scene once reserved for the world's powerhouses. Their recent spats with the U.S. are not uncommon, but China’s economic emergence seems to have given them more confidence in their dealings with the U.S. and others.

Part of the reason for the growth in exports is the intentional manipulation of the Chinese renminbi in order to make Chinese goods cheaper abroad. But doing so for a prolonged period of time has implications for inflation, foreign reserves, and not to mention political pressures from their trading partners. Their largest trading partner, the U.S., has been calling for a free-floating currency for quite awhile. And although China has allowed their currency to appreciate somewhat, the consensus, outside of China, is that it is extremely undervalued.

China will continue to grow and their exports will continue to expand. But surprisingly, their domestic consumption has increased and muted the decline in worldwide demand. While the world was in a recession, China kept growing. And although currency appreciation will make their goods more expensive eventually, global demand will reach a point where it is strong enough to drive continued growth in their exports.

What is the point of all this? The Hang Seng Index was one of the best performing indexes over the last 5 years, and if one can withstand the volatility, it may very well be one of the best performing indexes over the next 3 to 5 years, particularly in U.S. dollar terms.

The Fed as Giant Counterfeiter

This is a great article that explains the FED's monetary policy mechanism.

http://mises.org/daily/4029

This Correction May be Coming to a Temporary End

Yes, I know there is plenty of ambiguity in the title of this discussion. What I mean is that the uncertainty surrounding several issues mentioned in these discussions before have, at least for now, been resolved. Bernanke was reconfirmed, and whether he has done a good job or bad job, at least the market knows WHO will be heading the FED. The uncertainty of his confirmation, I believe, had plenty of investors sitting and waiting. The market had a nice run at the beginning of the month and then dropped considerably in the last two weeks. I think investors can now apply their asset allocations with slightly more comfort and we will see a reversal very soon. I mentioned that the correction may have come to a 'temporary' end because even though I think the market will recover in the immediate short-term, it's possible that it will go through yet another correction in the coming months. It's just too sensitive to bad news and the inevitable truth is that even in a recovery, we will receive economic data that disappoints and we will have periods of uncertainty that will cause investors to pause. Over the last year, I have been using the 3X leveraged ETF's and invested a bit more nimble than I have in my entire career. I was able to capture a substantial multiple of up months and minimize losses when the markets declined. Using options, I was also able to protect my portfolio during sudden and dramatic drops. I don't recommend this strategy for everyone. I'm still a proponent of asset allocation! But in this environment, nimbleness can generate alpha.

"Cautious" is the Word of the Week

With plenty of doubt on whether Bernanke will be reconfirmed and Donald Kohn coming under fire for his role in the AIG bailout, we might be left with a leader-less FED. If so, how will the markets react? I say, NOT GOOD! On the other hand, if Bernanke does get reconfirmed, despite opposition and a questionable ability to be in that position, the markets may actually pop higher. So if you're like me and you don't really want to speculate on how Congress will vote, be cautious! Be vewwy vewwy cautious. Personally, I think he will get confirmed, but I won't bet my retirement account on it.

Fear versus Greed

Alas, the fight is not over yet! Throughout 2009, the markets went on a torrid pace, recovering 50% or more from the March 2009 lows. The greedy smiled and claimed victory as economic data began to improve, or rather, deteriorate less. But this last week showed that Fear is still alive and kicking!! With Bernanke’s second term in doubt and China pressing ever so lightly on the brakes of economic growth, investors reacted as they would while driving in a light drizzle….cautious and at a much slower speed.

What happened? Well, fear is driven by risk and risk is driven by uncertainty. The Republican victory in Massachusetts was a surprise to many and the passing of the Healthcare bill is now a major challenge for the Obama Administration. It’s not like they had a clear path to success in the first place but now, the task looks daunting.

As for China, if they slow down from their 10%+ growth and they are the main driver of global demand at the moment, what will be the impact on other economies and their equity and fixed income markets?

Your guess is as good as mine! Hence the uncertainty that increases risk, generates fear, and causes investors to flock to safety. We were due for a pullback! Now what?

Book Review - The Great Money Binge

A call for the return to supply side economics!!
http://online.wsj.com/article/SB20001424052748703699204575017193368492212.html#mod=todays_us_opinion