GMO Mutual Funds With $104 Billion in Assets Puts Out a Report Warning of ‘Acute Fragility’ In China’s Financial System

“China has passed many reforms aimed at easing capital controls. But these are being rolled out slowly.

A meager deposit interest rate has forced people to turn to wealth management products and other risky investments.  And the recent credit crunch forced many into the unregulated shadow banking system.

In a new report, GMO’s Edward Chancellor and Mike Monnelly warn of “acute fragility” in China’s financial system, and write, “the public appearance is of a banking system with negligible levels of bad debts, ample liquidity, and low leverage. The reality, on closer inspection, looks rather different”.

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“Biogen Idec Inc.’s BIIB -0.14% fourth-quarter net profit fell 2.7% as the biotechnology company’s efforts to bulk up its product pipeline masked its revenue growth.

The company also forecast 2013 adjusted earnings of between $7.15 and $7.25 a share on about 10% revenue growth. Analysts surveyed by Thomson Reuters expect $7.27 a share on a 9% rise in revenue to $5.98 billion.

Biogen on Thursday said a new version of its blockbuster multiple-sclerosis drug Avonex was successful in a late-stage trial, strengthening the company’s stable of drugs for the degenerative nerve disease. However, the overall market for such injectable drugs is expected to decline sharply amid a growing market for oral-pill-based drugs. Biogen’s own BG-12 pill could be approved and launched in the U.S. as soon as March.

Biogen has been beefing up its sales force and readying its manufacturing supply chain as some drugs in its late-stage product pipeline have been drawing closer to entering the market….”

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On the durable goods data

“Approximately 95 percent of world trade occurs by sea.  However, little is known about the world’s shippers because only a fraction are traded publicly.

In her new book Dynasties Of The Sea, CNBC’s Lori Ann LaRocco profiles 21 of the biggest players of the notoriously secretive shipping industry.

LaRocco also got the priceless insight of these players who are intimately familiar with what’s going on in the world economy.

“One of the biggest themes that came out of this book is how these shipping titans are worried about the health of the global economy and the bloated balance sheets of the United States and Europe,” LaRocco says.

From the book, we pulled some key quotes from the biggest players of the shipping industry.

“MINNEAPOLIS (AP) — Caterpillar’s fourth-quarter net income fell by half after it took a big charge for a deal in China that went bad, and because of slower growth in China and economic uncertainty in the U.S. and Europe.

Still, its adjusted profit and revenue were better than analysts expected. And while cautious about the global economic outlook, Caterpillar does expect conditions to pick up later in the year, outside of Europe. Shares rose 2.4 percent in premarket trading.

Caterpillar Inc. makes construction and mining equipment as well as power generators, so its growth rises and falls with the world’s economy.

For the fourth quarter, Caterpillar earned $697 million, or $1.04 per share. That was down from a profit of $1.55 billion, or $2.32 per share a year earlier.

Revenue fell 7 percent to $16.08 billion as dealers reduced inventory.

The most recent quarter included a non-cash charge of 87 cents per share to write down the purchase of Zhengzhou Siwei. Not counting that, analysts surveyed by FactSet had been expecting a profit of $1.70 per share.

Caterpillar’s purchase of Siwei last year gave it a new business — roofing supports for mines — in a country where mining is growing quickly. But on Jan. 18, Caterpillar said it had found “deliberate, multi-year, coordinated accounting misconduct” in the accounting at Siwei, and said it will write down its investment in the company by $580 million. It also said it dismissed several senior managers at the company….”

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Mitigating risk or raising dome capital….?

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“Hedge funds increased bullish commodity bets by the most in six months as accelerating growth from China to the U.S. boosted prices for a seventh week.

Speculators raised net-long positions across 18 U.S. futures and options by 11 percent to 758,048 contracts in the week ended Jan. 22, the biggest gain since July 3, U.S. Commodity Futures Trading Commission data show. Bullish crude- oil bets reached a four-month high, while those for soybeans climbed by the most since March. Investors are the most bullish on cotton since February 2011.

More than $2.2 trillion was added to the value of global equities this month as the Standard & Poor’s 500 Index posted the first eight-session rally since 2004. Manufacturing in China is expanding at the fastest rate in two years, and an index of U.S. leading indicators rose the most in three months in December, private reports showed Jan. 24. Germany’s economy, Europe’s largest, has started to show signs of recovery, the Bundesbank said Jan. 21.

“There has been definitive signs of reacceleration of global growth,” said Chad Morganlander, a Florham Park, New Jersey-based fund manager at Stifel Nicolaus & Co., which has about $130 billion of assets. “Investor sentiment will continue to shift to a more bullish stance towards commodities.”

January Returns

The S&P GSCI Spot Index of 24 commodities rose 2.4 percent since the start of January, heading for the biggest monthly gain since August. The MSCI All-Country World Index of equities climbed 4.4 percent, while the dollar was little changed against a basket of six trading partners. Treasuries lost 0.9 percent, a Bank of America Corp. index shows….”

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“Three of the five largest U.S. money-market fund managers, signaling they can’t stop a second attempt by regulators to overhaul rules for the $2.7 trillion industry, are fighting instead to limit the scope of any changes.

Fidelity Investments, Vanguard Group Inc. and Charles Schwab Corp. (SCHW) are urging regulators to exempt retail-oriented funds and focus on those that cater to institutional clients and buy corporate debt, a category that absorbed the bulk of an investor run in 2008. Known as prime institutional funds, they hold $987 billion, or 37 percent of U.S. money-market mutual- fund assets, according to research firm iMoneyNet……..

Fidelity last week drew regulators’ attention to data showing funds that cater to small investors, and those that invest solely in municipal or U.S. government-backed debt, were more stable than institutional prime funds. In the four weeks after the bankruptcy of Lehman Brothers Holdings Inc., retail funds had $41 billion in withdrawals compared with $453 billion from institutional funds, according to the letter.

“If, based on findings from its study, the SEC determines that further reform is necessary, then such reform should be narrowly tailored, so as to minimize disruption to short-term markets and lessen adverse impacts on long-term economic activity,” Fidelity, the largest U.S. money fund manager, wrote in a Jan. 24 letter to the SEC….”

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“The global financial elite don’t want to be fooled again.

Scarred by the worst banking crisis since the Great Depression (INDU) and the hubris that preceded it, bankers, investors and policy makers who gathered in Davos, Switzerland, last week gave a guarded welcome to signs of recovery in the world economy and the endurance of the euro region.

“Optimism, but with a sober tone,” was how Bank of America Corp. (BAC) Chief Executive Officer Brian T. Moynihancharacterized the mood pervading the World Economic Forum’s annual meeting, even as investors were lifting the Standard & Poor’s 500 Index above 1,500 for the first time since 2007.

The mood in Davos was “totally different” when stocks last reached that peak, said Harvard University economics professor Kenneth Rogoff, 59. This year, executives fromDeutsche Bank AG (DBK) and Goldman Sachs Group Inc. (GS) were quick to couple upbeat assessments with warnings that economies remain fragile and prone to policy error. Some bankers fretted that credit bubbles may be forming as central banks pump out cash.

“The crisis gave them a bit of an inoculation psychologically because they can see what can go wrong,” Rogoff, a former International Monetary Fund chief economist, said after a Jan. 26 private session with IMF Managing Director Christine Lagarde and Deutsche Bank co-Chief Executive Officer Anshu Jain. “They’re not as euphoric as they’d usually be when the stock market went up as much as it has.”

Credit Crisis

Such humility was rare in Davos on the eve of the credit crisis that engulfed markets in 2008…”

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“The risk of owning sovereign bonds has fallen to a two-year low, setting the stage for more gains by the riskiest government securities as the investors look to a healing world economy.

The amount of risk priced into government issues is the least since 2011, lifting the average implied ratings for more than 80 debt markets to Baa2 from Baa3, or one step above junk, according to Moody’s Analytics. Credit-default swaps show the securities to be safer after more than $5 trillion in stimulus by the world’s central banks since 2009, according to data compiled by Bloomberg and Bianco Research LLC.

Even after returning 18.5 percent last year, bonds of Portugal, Ireland, Italy, Greece and Spain may produce more gains for investors. Their debt yields average 2.57 percentage points more than Treasuries, double the average gap of 1.26 percentage points of the past 10 years, according to Bank of America Merrill Lynch indexes. Investors from Brandywine Global Investment Management LLC to Prudential Financial Inc. are turning to government securities.

“There is still risk out there, but the wave of accommodation has set the stage for the reflation of the global economy,” Jack McIntyre, who manages $44.5 billion in assets for Brandywine, said by phone from Philadelphia on Jan. 22. He is buying debt in Brazil, Portugal, Italy and Ireland.

Divining Line

Concern that major economies will default has all but disappeared….”

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Ex- transportation: 1.3%

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“Oil traded close to the highest level in four months in New York after posting the longest run of weekly gains since April 2009, lifted by speculation that a global economic recovery will boost fuel demand.

West Texas Intermediate crude was little changed after climbing for a seventh week. Chinese industrial companies’ profits rose for a fourth month in December, the National Bureau of Statistics in Beijing said yesterday. U.S. government reports today may show durable goodsorders and pending homes sales rose last month, according to Bloomberg News surveys. The market is well supplied, Abdalla El-Badri, secretary-general of the Organization of Petroleum Exporting Countries, said today.

“Prices have been moving upwards from continued better economic data from the world’s two largest consumers, U.S. and China,” said Ole Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen. “Continued improved data is required to sustain these higher levels as there remains enough uncertainty within the euro zone for prices to fall.”

Crude for March delivery gained 21 cents to $96.09 a barrel in electronic trading on the New York Mercantile Exchange at 12:50 p.m. London time. The volume of all futures traded was 41 percent below the 100-day average. WTI advanced 0.3 percent last week and closed at $96.24 a barrel on Jan. 22, the highest since Sept. 17.

Brent for March settlement dropped 4 cents at $113.24 a barrel on the London-based ICE Futures Europe exchange. The volume of all futures traded was 26 percent below the 100-day average. The European benchmark contract was at a premium of $17.11 to WTI. The gap was $17.40 on Jan. 25.

‘Looking Up’ ..”

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“China’s foreign-exchange regulator urged Group of 20 nations to improve collaboration to avoid any so-called currency wars while signaling he’s comfortable with the value of the yuan.

On a global level, there needs to be “better communication and coordination” on foreign exchange among the G-20, Yi Gang, who is also a deputy governor of China’s central bank, said in an interview at the World Economic Forum’s annual meeting in Davos, Switzerland, on Jan. 26. “Right now, it is pretty much close to the equilibrium level,” he said, referring to the Chinese currency’s exchange rate.

Japanese Economy Minister Akira Amari said in Davos that his nation is trying to defeat deflation rather than weaken the yen, after Prime Minister Shinzo Abe’s push for laxer monetary policy sparked a slide in the currency. His comments on Jan. 26 followed a week in which German and Canadian policy makers joined a worldwide chorus highlighting a recent plunge in the yen as a worry.

“A currency war, a series of tit-for-tat competitive devaluations, would trigger trade protection measures that would damage global trade and therefore growth globally,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Plc in Hong Kong, who previously worked for the World Bank. “That would not be good for any country with a stake in the global economy.”

Criticism Abated….”

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“China’s stocks rose, driving the benchmark index to the highest level in seven months, after industrial profits climbed for a fourth month in December.

Sany Heavy Industry Co. led a rally for heavy machinery stocks after a report showed industrial companies’ net income increased 17.3 percent last month. Citic Securities Co. advanced to the highest level since April 2011 after regulators expanded the number of stocks allowed for margin trading and short selling. Kweichow Moutai Co., the biggest maker of baijiu liquor, dropped the most in seven weeks after Credit Suisse Group AG cut the stock to neutral.

The Shanghai Composite Index (SHCOMP) rose 2.4 percent to 2,346.51, the highest close since June 1. The CSI 300 Index (SHSZ300) climbed 3.1 percent to 2,651.86. The Shanghaiindex has risen 19.7 percent since approaching a near four-year low on Dec. 3 amid signs of an economic recovery. The CSI 300 rallied 26 percent.

“Industrial company profits are fueling gains for the index,” Huang Cendong, an analyst at Tebon Securities Co., said from Shanghai by phone today. “In the longer term, we expect Chinese stocks to rally as company earnings in general will be better this year.”

The Hang Seng China Enterprises Index (HSCEI) added 0.7 percent. The Bloomberg China-US 55 Index (CH55BN) lost 0.9 percent in New York on Jan. 25. Average trading volumes in the Shanghai index were 3.9 percent higher than the 30-day average. The 30-day volatility was at 20.6 on Jan. 25, compared with last year’s average of 17.1. The index trades at 10.1 times estimated earnings, compared with 10.9 for the MSCI Emerging Markets Index.

Industrial Profit…”

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“Japan plans to sell its first inflation-lined bonds in almost five years after it stopped offering the securities amid a lack of demand.

The Ministry of Finance will seek to sell several hundred billion yen of inflation-linked debt in the fiscal year starting in April, according to two government officials speaking on condition of anonymity due to the government’s policy.

A majority of institutional investors said they aren’t considering buying the so-called linkers, ministry officials told reporters in Tokyo on Jan. 22 after a meeting with bond dealers. Some primary dealers, those obliged to bid at the government auctions, suggested the resumption of sales should be delayed until the second half of the fiscal year.

Barclays Capital analyst Chotaro Morita said in note today that he anticipates that the ministry will sell the debt as early as July-to-September this year.”

“Twelve analysts covering Toyota Motor Corp. (7203), Japan’s largest manufacturer, have raised their earnings estimates for next fiscal year as the yen dropped against all major currencies in the past month. By contrast, shares of Hyundai Motor Co. (005380) and Samsung Electronics Co. (005930) fell after the South Korean exporters voiced concerns about the rising won….”

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“The yen strengthened, while European stocks and U.S. equity-index futures were little changed before a report on durable goods. The pound weakened after Mark Carney, who becomes Bank of England governor in July, said there’s room for more stimulus.

Japan’s currency appreciated against 15 of its 16 major peers, gaining 0.2 percent versus the euro at 7:40 a.m. in New York. The pound dropped to its lowest level against the euro since December 2011. German 10-year bund yields climbed to the highest level in four months. The Stoxx Europe 600 Index swung between gains and losses and Standard & Poor’s 500 Index futures advanced 0.1 percent. The Shanghai Composite Index jumped to a seven-month high after Chinese industrial companies’ profits gained for a fourth month…”

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The Nikkei Falls Back