Highlights of the Week of April 13, 2015.

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 April 13, 2015:

• On Wednesday, the US-Treasury Department said that Japan overtook China in February as the top foreign holder of U.S. Treasury Securities.
• The Dow-Jones Industrial triple digit lost on Friday, April 17 and is flat Year-to-Date.

JAPAN SURPASSED CHINA AS BIGGEST HOLDER OF US TREASURIES IN FEBRUARY:
According to data from the USA Treasury Department, released on Wednesday, April 15, Japan surpassed China in February as the largest foreign holder of U.S. Treasuries for the first time since August 2008 as can be seen from below chart.

As can be seen from below chart, Japanese holdings of Treasuries actually declined in February by US$14.2 billion or 1.1 percent to US$1,224.4 billion from US$1,238.6 billion in January, while China’s holdings declined in February by US$15.4 billion or 1,2 percent to US$1,223.7 billion. On a year-over-year basis, Japan’s holdings increased US$13.6 billion, while China’s declined US$49.2 billion.

It is also worth-mentioning that foreign central banks sold US$11.1 billion in Treasuries in February,
shedding U.S. government debt for a fifth straight month.

All over holdings by foreign holders of US Treasuries declined with US$56.6 billion in February, to US$6,162.8 billion, from US$6,219.4 billion, in the previous month as can be seen from below table.

DOW JONES INDUSTRIAL FLAT YEAR-TO-DATE:
The Dow Jones industrial average declined on Friday, April 17, with 279.47 points or 1.54% and is now flat for 2015 as can be seen from below chart.

American Express (NYSE: AXP) fell 4.4 percent to its lowest level since 2013 after quarterly revenue missed estimates. Travelers Cos. (NYSE: TRV), 3M Co. (NYSE: MMM) and United Health Group Inc (NYSE: UNH). dropped more than 2.3 percent to pace declines in the Dow Jones Industrial Average as all 30 of its components slid.

• The Standard & Poor’s 500 Index fell 1.1 percent to 2,081.11, on Friday and is now below its average price for the past 50 days.
• The Nasdaq composite finished down 1.5% and the S&P 500 closed 1.1% lower.

PGM CAPITAL COMMENTS:

Japan overtakes China as Biggest Holder of USA Debt.
The US Federal Reserve remains the single biggest holder of Treasuries, after snapping up US$2.5 trillion through its quantitative easing program. The bond-buying has since ended, but repayments and coupons are being reinvested in the market, keeping the Fed’s holdings steady.

However, Japan and China are by some distance the biggest foreign holders of Treasuries and account for about two-fifths of all foreign ownership of US-Treasuries.

As can be seen from below chart, Chinese ownership of U.S. government debt has been generally declining since it peaked in November 2013 at US$1,316.70 billion, while Japanese ownership of U.S. government debt hit its most recent peak in November 2014, when it hit US$1,241.50 billion.

In a paper published last month, the Congressional Research Service (CSR) said:

“China’s purchases of U.S. government debt help keep U.S. interest rates low.”

However, over the past few years, Chinese officials have expressed concern over the ‘safety’ of their large holdings of U.S. debt. They worry that growing U.S. government debt and expansive monetary policies will eventually spark inflation in the United States, resulting in a sharp depreciation of the dollar. This would diminish the value of China’s dollar asset holdings, for which reason they are diversifying their reserves out of the US-Dollar.

The Chinese aren’t the only one selling US-Treasuries, overall international investors like overseas central banks, hedge funds, insurers, asset managers and pension funds decreased their holding of US government debt to US$ 6.16 trillion at the end of February, compared to US$ 6.21 trillion in January.

Dow-Jones Industrial flat Year-To-Date.
Friday April 17, recorded the worst drop for the Dow-Jones Industrial this year since March 25. The Dow has struggled since reaching a record high on March 2 of this year and is now back where it started the year.

Investors have been bracing themselves for a disappointing earnings season. Analysts expect companies in the S&P 500 are expected to report earnings per share fell 2.6 percent from a year earlier.

While the US markets are flat for the year, the markets in Asia, mainly the Hong Kong – Hang Seng Index – and the Chinese – CSI-300 – have risen double digit year-to-date, as can be seen from below chart.

Up to now, Q1-2014 earnings-season, has showed slowing to declining earnings growth in the USA. On top of this with a Shiller P/E ratio of the S&P-500 of above 27,  we can consider the USA markets to be overvalued.

 

On the other hand we can consider the Hong Kong, “Hang Seng Index”, – which contains most of the Chinese Big Caps – , with an P/E ratio of 10.50, as extremely undervalued.

Below chart shows the historical P/E ratio of the Hong Kong, Hang Seng Index (HSI).

Due to the above we believe that based on their P/E ratio and fundamentals, we can expect the Hang Seng Index to soar this year and for the USA Index to perform sideways or to go into a correction this year.

Last but not least, take into considerations that markets can stay irrational longer than you can stay solvent and before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that markets of emerging markets can be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Eric Panneflek