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RBC IQ/ChangeWave Technology Panel – RBC Global Disruptive Technology Survey data were polled during June 2009 from a group of more than 700 individuals, randomly selected from a proprietary global panel of 11,000 leading-edge IT adopters / buyers within 7,500 companies – with a focus on emerging, disruptive technologies or trends with advance indication (three to six months ahead) of traction in the market and implications for emerging and incumbent vendors.

Summary of Findings
Technology spending for Q3/09 remains soft, with no signs yet of a recovery as concerns on the economy continues to hold back spending plans.

Highlights
• Hardware/Software Spending Stabilized – But Didn’t Improve. Respondents planning to decrease software/hardware purchases next 90 days declined, mostly in Security and Customer Relationship Management (CRM) software, PC’s and Servers.
• Spending Deferred. Respondents considering deferring hardware/software spending ‘to the future’ and unwilling to spending next 90 days rose to 28% (from 23% prior). Approximately 30% of respondents continue to expect hardware/software spending to recover no earlier than 1HCY10.
• Laptops Flat. Laptop spending intentions remained flat to Q2 (16% plan to increase spending next 90 days vs 15% Q2) while desktops declined to 10% (down from 14% prior).
• Smartphone Deployments Resilient. 90-day spending intentions showed a modest improvement for Smartphones led by RIM and Apple.
• SaaS Spending: Modest Improvement. Respondents indicating a “green light” on SaaS (Software-as-a-Service) spending improved to 15% (vs 13% prior).
• Managed Hosting Services, IP/Bandwidth Improve. While third-party co-location services was stable, spending intentions improved on IP/bandwidth, managed hosting.
• Network Budgets Rise. 14% of respondents see 2H09 network budgets increasing vs 11% Q1/09 and 5% Q4/08.
• Continued Stabilization in Ad Spending. Stable to Q2, 27% plan to increase ad spending this quarter, while 17% plan to decrease spending (down from 24% prior).
• Online Advertising: Signs of Optimism. 33% plan to increase online ad spending next 90 days (from 28% prior), favoring Google.

David Rosenberg, chief strategist at Gluskin Sheff, offers the following analysis of the sustainability of any recovery in the absence of a decisive turnaround in the labour market:

Let’s examine the historical record back to 1950:
1. The S&P; 500 bottomed before employment bottomed 100% of the time. It is imperative, therefore, to have a forecast for a bottoming in employment in conjunction with a forecast for the stock market.
2. On average (median too), the S&P; 500 bottomed six months before employment hit bottom. The range is between four and 11 months.
3. On average (again, the median too), the S&P; 500 rallies 20% from the time it bottoms to the time that employment hits its trough.
4. Another way to look at it, in that six month interval between the bottom in the market and the trough in employment, 60% of the bear market is reversed on average; 45% in terms of the median. In periods when the bear market was during an asset and credit cycle as opposed to a manufacturing inventory cycle, the reversal was 35% of the prior bear phase.
5. On average, if you decide to wait until employment bottoms to go long equities, for a ‘confirmation’ that the lows have been turned in, you only missed 20% of the total bull market; there was still 80% left to go. Missing that first 20% isn’t the end of the world as long as you are putting cash to work prudently. For example, investment-grade corporate bonds typically generated a total return of nearly 10% (and 5% for Treasuries) during that interval between the equity market bottoming and employment finally doing likewise. Keep in mind that it is always nice to use perfect hindsight — there is more than one occurrence when the market thinks that employment is set to hit bottom … and gets it wrong. That is why it pays to wait just to make 100% sure that the employment backdrop does improve, at the cost of missing one-fifth of the bull market. What you get in return is a piece of mind that the rally has legs, and you still have 80% of the run left to go!

Let’s examine all the above in the current context:
1. The analysis would be consistent with the view that the March 2009 low will hold even upon retest, if employment manages to bottom this quarter (that is an important caveat).
2. The S&P; 500 bottomed in March, which was 4 months ago. It would be unusual but not unprecedented to have employment go down beyond another two months from here. But if employment is not recovering by the fourth quarter, it would probably put the equity rally at great risk.
3. The S&P; 500 has already rallied 45% from the lows, which is unprecedented in the context of sustained job loss, at least in the post-WWII era. The most the stock market ever rallied during a period of declining payrolls was 28%; so far, the rally has been double what is normal, even assuming that the jobs downturn is in its last stages (based on percent increases off the low, the S&P; 500 would have hit a wall at 810 based on past performance — this shows how overextended the current rally has become).
4. Of course, from a bear market reversal standpoint, we have already hit the 35% mark so far this time around, which is the average of what is normal in asset and credit cycles. In other words, the market is already more than fully priced for the end of the employment downturn.
5. From our lens, it pays to wait for confirmation. The cost of being early and wrong as was the case in 2002 is too high, especially when corporate bonds offer better return potential for the risk and volatility involved. While Baa spreads have finally broken below the peak of the last recession (currently at 335bps), and while they are likely not going back to historical expansion norms of 150-200bps and may have just 50-75bps of spread narrowing left (ie, three-quarters of the spread compression or the “low hanging fruit” is over), the sector is still priced for flat-to-slightly-negative GDP growth and as such still has protection against any possible economic setbacks. At current valuation levels, however, the equity market, which is now operating on a massive momentum tailwind, offers no such insurance policy if the third quarter inventory bounce proves to be nothing more than a one-quarter wonder and the employment recovery is delayed into next year.

The House of Representatives on Friday quickly approved legislation that would add $2 billion to the government’s "cash-for-clunkers" program after demand threatened to bankrupt the program.

The plan, formally called the Car Allowance Rebate System (CARS), provides credits of as much as $4,500 for a new car when turning in an older vehicle.

The program, which was opposed by some GOP lawmakers, proved so popular that the initial $950 million set aside for it is running out. The money was expected to last until November.(…)

Economists believe that the cash-for-clunkers program would be a significant boost to auto production in the third quarter. This could be a big factor in turning growth positive in July-September after a record four straight quarterly declines in gross domestic product. Read more about the latest GDP data.

Even fiscally conservative Blue-Dog Democrats said they expected Congress to find additional funds for the program. They expect the funds to be found from other government programs and be deficit-neutral.

Full MarketWatch article

Real GDP was reported down 1% in Q2, a significant improvement from declines of more than 5% registered in each of the two previous
quarters. It is worth noting that the drop in Q2 was concentrated in inventories. As today’s Hot Chart shows, final sales – GDP less inventories – were virtually unchanged in Q2 (a small decline of -0.2% at an annualized rate), the best showing in a year.

Looking ahead, we expect inventories to add to growth in the coming months as is normally the case in the initial phase of an economic recovery. The level of private inventories was down to a three-year low in Q2. As a ratio of final sales, stocks are now at their lowest level since 2005 (chart). In our opinion, conditions are now ripe for the start of an inventory rebuilding cycle.

Inventories have declined further in July based on the Chicago Purchasing Managers Survey:

David Rosenberg writes:

While it is tempting to strip out the inventory withdrawal and look at the fact that outside of that, real GDP contracted at a mere 0.2% annual rate, misses the point. While inventories will undoubtedly add to current quarter growth, we doubt that we’ll see another quarter of 13.3% growth in defense spending either. This added to GDP growth in 2Q by almost the same amount that inventories subtracted. Not only that, but the sharp improvement in the foreign trade sector, which added 1.4 percentage points to GDP growth in 2Q, is unlikely to be repeated either. The overwhelming consensus is that real GDP will be positive in3Q; but the key for how 4Q will shape up will rest in how real final domestic demand performs, which sagged at a 1.5% annual rate in 2Q, and -3.3% for private sector demand.

Bulk buyers have purchased nearly 600 new condo units in South Florida in the last year, shelling out about $125 million in cash for more than 630,000 square feet of livable space, according to a new report from Condo Vultures® LLC.  

Since July 2008, nine bulk purchases  – including four deals in the last month – have been recorded in South Florida at an average price of $198 per square foot.

The bulk deal with the highest price paid is $246 per square foot for 146 units in 50 Biscayne condominium in Downtown Miami back in July 2008. The lowest price paid is $63 per square foot for 51 condo-hotel units in the One Bal Harbour project that just closed within the last month.  It is worth noting that the One Bal Harbour deal was contingent upon the buyer also acquiring the common areas and land of the condo-hotel tower from the seller for $12 million in a separate transaction recorded by a different entity.    

"The common denominator present in every one of these transactions – has been the buyers’ focus on overall quality. Every deal has occurred in a project that is well designed and/or located."

The latest deal to close involved a South Beach investor who purchased 15 units for $4.2 million in the Marina Blue condominium tower on Biscayne Boulevard in Greater Downtown Miami across from the American Airlines Arena, according to the Condo Vultures® Bulk Deals Database.  Maurizio Cavalieri paid an average of $207 per square foot for 20,293 square feet of saleable space. Cavalieri’s acquisition consists of 13 two-bedroom units and two one-bedroom units at Marina Blue.
The seller was Lendco Florida LLC with Harvey L. Armstrong which provided a $30.5 million mezzanine loan to the Marina Blue developer in February 2008. A year later in March 2009, Lendco Florida’s mortgage was satisfied after the California-based lender acquired 54 units with 70,300 square feet in Marina Blue for $15 million, or $213 per square foot, according to Condo Vultures® research using Miami-Dade County records. 

At the end of the second quarter, developers were still in possession of about 9,400 of the 23,000 new units constructed in Greater Downtown Miami. Developers constructed 83 new projects in a 60-block stretch of Greater Downtown Miami, which is defined as an area stretching from the Rickenbacker Causeway north to the Julia Tuttle Causeway, Interstate-95 east to Biscayne Bay.

Still only “less bad” overall. Production and New Orders are up but Order Backlogs declined.

The July CHICAGO BUSINESS BAROMETER™ gained three+ points, for the highest reading since September 2008. (…) Since this is not working out to be an average recession, a more conservative rule would draw an analogy to the 1981-82 recession. Using such a rule, the end of this recession would be projected to be nine months after the lowest value of the CHICAGO BUSINESS BAROMETER. With March 2009 as our best current estimate of that minimum, the recession can be projected to end in December 2009.

INVENTORIES handily showed the greatest shrinkage since mid-1949.

The rate of decline in the EMPLOYMENT index continued to moderate, after having rebounded from May’s historic low.

Support for an impending end to the current recession was found in the increase in the PRODUCTION index (after its low in January), followed by three consecutive months’ increase in the NEW ORDERS index. The net the month-to-month, resulted in a shortterm trend in the CHICAGO BUSINESS BAROMETER moving it toward neutral after its low in March 2009.

Full press release

Right after posting Andy Rothman’s arguments against a Chinese bubble (CHINA WATCH: BUBBLE WATCH), I saw this interesting post in FT Alphaville:

This is Guangqu Road in Beijing.

And this, courtesy of the analysts at Mitsibushi UFG, is the sale price of a circa 280,000 square-metre plot of land on the road:

A plot of land at No. 15 Guangqu Road in Beijing sold for RMB4.06bn in mid-June, far above the RMB1.67bn reserve (minimum bid) price. This has driven up the price of surrounding real estate, while the start of auctions to buy government-held land in other major cities has also forced inflated prices, creating numerous new property “landmarks”. Many of the buyers are reportedly state enterprises. It appears that the Chinese government has engineered a bottoming of land prices.

Now, the Guangqu plot is a bit idiosyncratic — it’s apparently the last piece of unused land inside Beijing’s second Ring Road and is close to the city’s central business district — but it is a good example of what appears to be another nascent Chinese housing bubble.

According to MUFG, the auction means that a square metre of unused land now costs more than the same space in nearby existing condominiums. As a result, the price of those condominiums is also rising rapidly: the average price per square metre has climbed an average 5 – 10 per cent, according to the bank, from RMB15,000 – 20,000 before the auction of the No. 15 plot to RMB16,000 – 22,000 since.

And these sorts of ‘landmark’ deals resulting from government-held land auctions are occurring across China’s urban centres, MUFG says. Here’s a sample:

You can see from the table that the majority of buyers in such landmark deals have been large state-owned enterprises or their affiliates. The buyer of the No. 15 plot, for instance, was Franshion Properties, a member of the Sinochem group — the state-owned conglomerate. According to MUFG:

The cause of the dominance of the large state enterprises has been their ability to obtain huge levels of finance from the banks, which they have passed onto the real estate companies in their groups. Private companies remain at a major disadvantage to state enterprises in terms of access to funding.

It could be argued that the Chinese government has made higher land prices a policy goal. It may have done so because the slide in land prices (the average land price in major cities nationwide fell from a peak of RMB1,751/m2 in Oct-Dec 2007 to RMB1,084/m2 in August 2008) led to a major increase in non-performing loans among commercial banks. This prompted concern of a credit crunch as commercial banks became unable to lend. The Chinese government appears to have responded by engineering a rebound in land prices, achieved by resuming auctions of government-held land in May 2009, encouraging banks to expand their lending to state enterprises, and driving up land prices.

Private real estate developers have been forced to buy land at increasingly expensive prices because the amount of land for development held by a developer is one qualification for obtaining a development permit from the government.

If MUFG’s argument is true, it would somewhat contradict the idea put out by the Chinese central bank on Monday that it is acting to curb Chinese bank lending that might be fuelling speculative bubbles in stocks and property. We note that last Friday the Ministry of Housing and Urban-Rural Development apparently said it would be maintaining its own policy on property for the foreseeable future, though it was mindful of the risk of a real estate bubble.

China might have good reason to want to keep property prices and land deals reasonably high, however. Land sales make up a rather significant part of China’sFixed Asset Investment data, which feeds into its GDP stats, and are also an important source of local funding.

Here’s MUFG’s commentary:

The Land Resources Ministry, a state organization that manages government-held land and property, has argued that the new landmarks generated by the high-priced sales of government land are an exception rather than a market-wide phenomenon. However, private developers and other participants in the real estate market have found it difficult to accept such an abnormal rise in land prices. They identify the following reasons for the government’s wish to see land prices rise.
(1) The proceeds from sales of land are an important source of revenue for local governments, which pay 5% to central government but retain the other 95% as unbudgeted, non-tax income. While no official data exist, the authorities admit that income from land sales makes up 20-50% of total local government revenues.
(2) The central government needs to actively encourage investment in fixed assets, which accounts for nearly half China’s GDP, if it is to achieve its target of 8% GDP growth. A manageable real estate bubble would be a major condition of meeting the goal because it would boost corporate sentiment and expand investment in fixed assets. The lowering of the capital requirement for fixed asset investment, announced on May 27, is another key initiative designed to boost property buying.

CLSA’s Andy Rothman on bubbling China.

In our view, we are only in the early stages of what will be a
big asset-price inflation cycle, still far from a bubble or from a point where Beijing will feel compelled to intervene dramatically. Expect economic policy fine-tuning and withdrawal of stimulus, but nothing that qualifies as serious tightening in the coming quarters.

Early stages of asset-price inflation
China’s economic recovery is clearly underway, but is in its early stages. A new cycle of asset-price inflation has also begun, and this is likely to be the biggest round of asset-price inflation China has experienced since the command economy was dismantled. This will help pull the economy out of the downturn, and will provide interesting opportunities for investors.

Property hot, but not bubbly
While asset prices are rising rapidly, an irrational, speculative bubble remains quite far down the road. In the residential property market, for example, prices are just starting to pick back up after a long (albeit shallow) decline. According to CLSA’s research, YoY price growth slowed throughout 2008 and was negative from November through June. As of June, average selling prices at the 126 developments we track in 42 cities across the country were still down almost 2% YoY. Prices at high-end projects were up 1% YoY, while mid-level prices were down 4% and low-end prices were down 2% YoY.

On a MoM basis, price increases have been accelerating, with the overall residential market up 2.5% MoM in June, compared to down 0.6% in February.

But we expect the MoM price rise rate to cool off soon. A huge amount of pent-up demand for new homes was released at the start of the year, when Beijing ended its policy of suppressing the market. The recent policy change led to a burst of buying, and in March overall home sales volume rose 30% MoM, with high-end sales up 39% and mid-level up 35% MoM. With that pent-up demand now gone, sales have slowed to a more sustainable (but still fairly fast) level driven by long-term fundamental demand for a better place to live. In June, overall
sales rose 5% MoM, with high-end up 12%, mid-level up 8% and low-end down 3% MoM.

We do not yet have July data for the 126 residential projects we track, but we do have official data for fourteen major cities, and this shows that average sales volumes peaked at 57% MoM in March before falling to -4% MoM in July.

China’s residential property market is hot, but it is not close to the end-stage bubble. Yet. This asset-price inflation will turn into a bubble and the government will intervene, as it did in late 2007, but we think that point is at least four quarters down the road.

A-shares also hot, but far from the last peak
Turning to China’s other asset-price inflation story, the Shanghai composite index has rebounded sharply, up 82% from the start of the year. But at Thursday’s close, the index was still 45% below the October 2007 peak. Hardly an irrational bubble . . . yet.

This too will eventually end in tears, but this end game is also a good way down the road. And we note that one lesson Beijing must have drawn from the last A-share crash was that it had no impact on social and political stability, and minimal impact on the real economy.

Recent statements by top Party and government officials make clear that they also do not believe a dangerous bubble exists. The Party chief, Premier and senior central bankers have all said they will maintain accommodative monetary and fiscal policies, and they have emphasized that the economic recovery is in its early stages.

Those statements re-enforce our view that Beijing will not take tightening steps in the coming quarters, and certainly not before the October 1 national day holiday, which will mark the 60th anniversary of the founding of the PRC.

Fine-tuning
Beijing will not be sitting idle, however, and over the next few quarters we expect to see a lot of economic policy fine-tuning. But we do not anticipate any steps that will qualify as ‘tightening,’ as there will be no need to apply the brakes to an economy which has just entered the recovery stage.

A good example of fine-tuning was the recent move to force banks in some cities to more strictly enforce the ‘second mortgage rule,’ which raises the cost of a mortgage for people who sell their home and then take out a new mortgage to buy a bigger, better living space. This was done in Hangzhou, and there was an immediate cooling impact on transaction volumes, which were down 48% MoM in July after rising 57% MoM in May. On a YoY basis, transaction volumes also cooled
off but remain strong: up 169% YoY in July compared to 274% in May.

This is a very pro-homeownership government, which must balance
concerns about a bubble with a desire to see strong sales. Property is an important source of jobs (construction) and a key driver of consumption as new home-owners also buy furniture, appliances and, if they’re moving out to the suburbs, cars.

Additionally, most urban Chinese now own their own home (given to them by their former state work unit a decade ago), so they benefit from rising property prices. In the A-share market, the government has a wide range of fine-tuning tools, including approval of a large number of IPOs, which should cool off the market without crashing it.

Stimulus withdrawal
In addition to fine tuning, we also expect Beijing to soon begin a gradual withdrawal of the stimulus that worked so well in the first half of this year and is no longer necessary on such a large scale.

Cutting credit growth is a good example. 1H09 lending rose at a pace which is clearly unsustainable, but it was so fast that Beijing has plenty of room to make steep cuts without choking off growth. If average monthly lending in 1H09 is cut in half for 2H09, that would still be 50% above the average for 2H08 lending.

New lending growth of 50% YoY in 2H09 certainly does not qualify as tight, but it will bring down liquidity levels, which should have a mild cooling effect on both the equity and property markets. Again, good for investors as it should keep the asset price inflation cycle running longer. But, again, not tightening. There will continue to be plenty of liquidity in the system, and with few domestic alternatives and a closed capital account blocking most overseas opportunities, apartments and A shares will continue to benefit.

Related posts:

• I’ve been an optimist on China. But I’m starting to worry
• China and Commodities: Less Bullish, More Neutral, Definitely Not Bearish

Japan set a new record for core consumer price deflation in June, while unemployment hit a six-year high, data released on Friday showed.

The 1.7 per cent year-on-year fall in consumer prices excluding fresh food and the 5.4 per cent jobless rate highlight the continuing troubles of the world’s second largest economy, despite a sharp rebound in industrial output over the last four months.

While the falling energy prices that have been the main driver behind the decline in the consumer price index are no bad thing for resource-poor Japan, analysts increasingly worry that deepening deflation fuelled by job insecurity and massive manufacturing over-capacity could undermine economic recovery.

The fall in "core-core" consumer prices, which exclude food and energy, accelerated to 0.7 per cent in June. More recent July price data for urban areas of Tokyo showed a fall of 1.1 per cent.

Although there has been record growth in industrial production over the last quarter – including a 2.4 per cent month-on-month rise in June – output is still down by more than one fifth since last year, leaving large excess capacity sure to put pressure on prices.(…)

Japanese consumer sentiment is likely to remain vulnerable to the continued rise in unemployment, which is already at a level last seen in June 2003, and is expected to climb past the 5.5 per cent record rate set that year.(…)

The Organisation for Economic Co-operation and Development has called for the Bank of Japan to "fight deflation through a strong commitment to implement effective quantitative measures".(…)

In a speech last week, Hirohide Yamaguchi, central bank deputy governor, said "large short-term" price changes could not be avoided after a shock of the scale suffered recently by Japan, but that the BoJ expected deflation to moderate in the six months to March 2010 as the economy recovers.

"The bank therefore thinks it unlikely at present that prices will continue to decline and thereby lead Japan’s economy into a deflationary spiral," Mr Yamaguchi said.

Full FT article

President Barack Obama’s nominee to head the agency that regulates the railroad industry said he would be "proactive" in addressing shippers’ allegations of pricing abuses by freight-rail companies, and indicated that a law that deregulated the industry is outdated.

The comments by Daniel R. Elliott III came as a House Judiciary subcommittee approved a bill Thursday that would eliminate exemptions from antitrust law for commercial railroad companies.(…)

Patti Reilly, a spokeswoman for the Association of American Railroads, a trade group representing CSX Corp., Union Pacific Corp., Burlington Northern Santa Fe Corp. and Norfolk Southern Corp., said Mr. Kohl’s earlier bill was "overreaching" and would saddle railroads with "onerous" regulations.(…)

Companies that rely on railroads to transport their goods have long accused railroads of charging exorbitant prices, accusations that railroads deny.

During his confirmation hearing Wednesday, Mr. Elliott said his work as associate general counsel for the United Transportation Union, the largest railroad union, enables him to be sensitive to the concerns of railroads and shippers alike and that he would be fair in overseeing disputes. (…)

Mr. Elliott said shippers’ concerns that the law has eroded competition and given railroads too much pricing power have been heard "loud and clear."

Full WSJ article