New Energy Systems: Hidden Gem With Strong Foundations for Growth

As a value investor, I am always looking for companies with great fundamentals and growth potential. By running my daily screen, a long candidate has attracted my eyes.

It is New Energy Systems Group (Amex: NEWN). NEWN is a leading provider of lithium-ion batteries for portable electronic devices in China with headquarters in Shenzhen, Guangdong Province, which is China's first—and arguably one of the most successful—Special Economic Zones. This company has recently been uplisted to Amex from OTCBB and trades in the range of $6-7.

In recent years, the global output of lithium-ion batteries has soared more than 50% annually and the demand is expected to maintain its upward momentum till 2018. At present, the global supply of Li-ion batteries is monopolized by three giants in Asia, i.e. China, Japan and South Korea, and all three have a total market share surpassing 95%.

The first use of lithium batteries was in laptops, but now they are widely used in cell phones, video machines, digital cameras, MP3 players, hybrid cars and other electronic products. The batteries are becoming more environment-friendly with a longer life, smaller size and lighter weight. Chinese Li-ion battery manufacturers are not only seizing market share for Li-ion batteries for portable products like 3G mobiles and laptops from South Korea and Japanese competitors, but also are actively developing the Li-ion battery market for electric cars and E-bicycles.

In China, the fastest-growing auto market in the world, the development of Li-ion batteries has become a core part of the development of hybrid cars. The Chinese government has recently handed out policy incentives to encourage more electric cars on the road and the demand for Li-ion batteries will increase. Investments into companies in the battery business will reward investors generously. In fact, this is already reflected in the Shanghai A-share market. Most Chinese battery companies listed in the A-share market have advanced more than 20% since August 1, 2010, with an incredible 100% net income increase in the first six months of 2010.

Products from NEWN now support iPhones, iPads (AAPL), Blackberrys (RIMM) and all major-brand cell phones, laptops, digital cameras, MP3s, etc. Currently, NEWN only operates at around 50% of manufacturing capacity and has begun to expand internationally. On August 26th, 2010, NEWN announced its plan to launch MeePower™, a new brand of advanced battery backup systems expected to be available to distributors in the U.S. beginning in the fall of 2010. MeePower generates 4–7 times more power than an original OEM battery’s capacity and can recharge the OEM battery more quickly and last longer.

In the past, the company only dealt in the low-margin battery shell & cap and battery-distribution businesses. But acquisitions in 2009 transformed NEWN into a rapidly-growing, high-margin, integrated manufacturer with an established brand name.

The first acquisition was of Anytone, a manufacturer and seller of lithium-ion battery finished products and was acquired by NEWN with both stock shares and cash payments. The acquisition not only enhances NEWN’s ability to rapidly innovate with quick-turn capabilities, over 30 patents and deep R&D capabilities, but also broadens product offering and allows NEWN to touch end-user customers.

Another acquisition was with NewPower, a China-based manufacturer of lithium-ion batteries. NewPower has extensive manufacturing expertise and capabilities. It only operates at 50% of production capacity and can triple its production with minimal additional capital expenditures. Both acquisitions are strategically important to vertical integration and increase profitability of the existing battery distribution business with added margins by internally sourcing lithium-ion batteries.

Although the company’s cash positions are influenced by its payments for the acquisitions, NEWN still shows strong second-quarter earnings. The company’s revenue has increased 335.2% to

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Additional China-Biotics Due Diligence for Your Consideration

I appreciate well reasoned opposing viewpoints, however the recent detractors of CHBT discredit themselves with their reports. I would have been more inclined to take their articles seriously had they not thrown in spurious points in an attempt to bolster their argument. To anyone with an understanding of China-Biotics it is plain to see that these articles are not an honest attempt to present a reasoned bear argument on the stock. Rather, it is merely an attempt to spread fear, uncertainty and doubt.

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China Backpedals on the Yuan

Last week we drew attention to the strange behaviour of Chinese officials, who pushed the yuan downward against the dollar while their trading partners were calling for the Chinese currency's appreciation. This shift occurs as China is clearly trying to diversify its investments, as exemplified by the hike in its allocation in government debt from the zone: Y1.7 trillion in Japan in the first seven months of 2010, up from just Y255.7bn for all of 2005, and $2.11bn in South Korea. At the same time, China has reduced its investments in US debt by $8.95bn to $844bn. (La Chine diversifie ses réserves de change; The Real Drivers of Diversification in China’s FX Reserves). This also surely explains a big part of the yen's strength vis-à-vis the dollar and the euro. On the basis of the latest statistics published in the China Securities Journal, this is the current breakdown of currency reserves: dollar 65%, euro 26%, pound sterling 5%, yen 3%. The main reason (in their eyes) for these changes in currency reserve allocations is the fear, as expressed on numerous occasions since 2008, but more and more clearly in recent weeks, that the dollar will lose its status as the world's reserve currency (too much of the Fed's QE?), leading to a significant decline in its value. PBOC governor, Ms Hu Xiaolian, has made the latest pronouncement in this vein: “My view is that the Yuan doesn’t have a key role to play in rebalancing bilateral trade between the U.S. and China. I don’t think excessive argument and criticism on this issue will help”. (WSJ 1 Sep 2010) "Once a reserve currency's value becomes unstable, there will be quite large depreciation risks for assets. A diversified international currency system will be more conducive to international economic and financial stability.” (China Finance, 6 Sep 2010). In reality, you can already read the same views in Ms Xialian's speech of 15 July before the PBOC: “Three Characteristics of the Managed Floating Exchange Rate Regime.” However, the yuan's recent depreciation vis-à-vis the dollar hardly went unnoticed in the United States where it sparked an immediate reaction from Robert Hormats, under secretary of State for economic, energy and agricultural affairs: ‘U.S. Official Warns of Backlash Against China’. “A lack of action by the Chinese to address U.S. concerns about currency issues and intellectual-property protections could encourage a more protectionist agenda on Capitol Hill.” "We're likely to see some legislation offered that would be adverse to Chinese interests if more steps aren't taken.” All this in an already tense context, as Larry Summers (Director of the National Economic Council) and Thomas Donilan (Deputy National Security Advisor) travel to China to discuss all these highly sensitive issues. They will not only talk about the yuan, but also about China's anger at US involvement in the South China Sea and US concerns about Iran. ‘Bumpy months ahead for U.S. and China’ So surprise, the yuan's controlled depreciation last week has abruptly moved upward, just in time for Mr Summers' visit. Here is an updated graph comparing the yen and the dollar. Yuan and yen vs the US dollar China back-pedals a bit…

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Private Equity Firms Settling Into China

I have been closely following the growth of private equity in China because I believe it is one of the most important and exciting new markets for the industry. As the country opens up more and more to financial institutions by easing typically stringent regulations, the potential for buyout firms operating in China is huge. This is why you see many firms moving into China even though they may not begin doing large deals for a few years still. It's about getting your foot in the door and setting up offices in the country before your competition.

There are still major obstacles to working in China but the prospects are bright and many firms believe it is worth navigating complicated (and sometimes unfair) regulations. The government is working to make the country more receptive to private equity firms, with actions like this week's announcement that China will allow insurers to invest up to 5% of their total assets in private equity. These types of initiatives are key in developing private equity activity in China.

Yuan-Denominated Funds Dominate

Although there have been some promising private equity funds in China, the industry still lacks the credibility that it has gained in other parts of the world. It is encouraging that private equity firms have started opening funds in the Chinese yuan currency. Having a fund denominated in the local currency has helped these buyout firms attract local investors, which is a key step to working in the country successfully.

David Rubenstein told the audience at a WSJ China Financial Markets Conference, "“For any of the large private-equity firms in the West to be a real player in China, you probably should have a

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China Sky One Drops on Trimmed Guidance

China Sky One Medical (NSDQ: CSKI) reduced its guidance for 2010, blaming the shortfall on the loss of several major distributors. The company said the distributors ended their relationship with China Sky One after they discovered their business information was disclosed in SEC filings. This led to increased scrutiny in China, which was enough for them to stop doing business with China Sky One.

In actual numbers, China Sky One now expects revenues to drop from a forecasted $162 million to around $131 million, a decline of 19%. Net income is now predicted to come in 30% below the previous $40 million at about $28 million. Both sets of numbers exclude the impact of derivative warrant liabilities.

China Sky One says it will replace the distributors with new ones, but the process will take time and will increase the company’s Selling and Marketing costs in 2010.

The news sent the price of China Sky One shares lower by 29% to a 52-week low. It was trading at $6.90, down $2.79 in mid-session. The stock has traded in a range between $6.85 and $25.45 over the past 12 months. China Sky One’s market capitalization now stands at $116 million.

Disclosure: none.

About the author: ChinaBio Today

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Geithner's Decision on China

So, the Obama administration is going to toughen up on China, is it? I find this hard to believe. Let’s take a look at the trade picture to figure out the motivations behind this most recent move by the administration. According to the Census Bureau:

Total exports of $153.3 billion and imports of $196.1 billion resulted in a goods and services deficit of $42.8 billion in July, down from $49.8 billion in June, revised.

Also, take into consideration that our trade deficit with China alone decreased only slightly to $25.92 billion in July from $26.15 billion in June. This amounts to basically no change at all. According to the Calculated Risk Blog, there are also some stormy clouds on the trade horizon. This data is from LA Port, which can claim about 40% of the United States’ container port traffic. According to Calculated Risk, loaded inbound traffic increased 24% in August year over year while outbound traffic is down 2.6% over the same time period. Imports have recovered, but exports are still 17% off from two years ago. Exports may have peaked a couple months ago, while imports have continued to rise. This means that the deficit most likely increased in August.

This is the last thing politicians will want to hear heading into the heat of elections. So, with the intervention by Japan yesterday, upcoming elections and the unfortunate current/future state of American exports, it seems like now is the perfect time for Geithner to make a stand. I’ve written about China relations before, and nothing has changed to make me believe Geithner will actually be able to pull off anything more than an empty threat. There are several reasons for this.

Despite the cry of economists across the world (including myself) to garner multilateral support for such a measure, this is still going to be a US versus China issue when Geithner speaks. If China was going to listen to the things we have to say, they would have done so long ago. Mr. Geithner is apparently going to say:

We are concerned, as are many of China’s trading partners, that the pace of appreciation

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Greece: Sounding Very Lehman-ish

If you recall the early stages of the financial crisis there was one glaring trend from the various bank CEO’s and CFO’s – they just couldn’t wait to get on TV with their slogan:

“We are well capitalized.”

Of course, that turned out to be a lie as it’s now clear that most banks in the USA were woefully undercapitalized. Yesterday, Greece’s finance minister was out with similar comments:

Restructuring is not going to happen. There are much broader implications for the eurozone should Greece have to restructure its debt. People fail to see the costs to both Greece and the eurozone of a restructuring: the cost to its citizens, the cost to its access to markets. If Greece restructures, why on earth would people invest in other peripheral economies? It would be a fundamental break to the unity of the eurozone.

In other words, “we are well capitalized”. That’s all well and good, but actions speak louder than words. The truth is that austerity is not working in Greece. They have failed to realize the crucial flaw in the Greek austerity plan: the private sector and public sector can’t save at the same time. They’re essentially hoping that they can get more blood to the heart by cutting off both arms. That’s just not how it works. Cutting off both arms simply exacerbates the problems. Slowly, but surely, you bleed out.

Their continued funding woes are obvious. According to the bailout facility Greece continues to increase their reliance on the ECB. ECB funding now represents 20% of total Greek banking assets. The following two charts from Goldman Sachs show Greece’s (and the entire periphery’s) increasing reliance on the kindness of strangers.

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The Problem With Japan's Fight to Curb Yen's Rise

Japan has "Declared War" on a free market

"We will continue to take decisive action if needed" to curb the yen's rise, Prime Minister Naoto Kan said at a meeting of business leaders. His comments came a day after Japan intervened in the currency market by selling yen and buying dollars for the first time since 2004.

Uh huh. It didn't work in 2004 and it didn't work the other times you tried it either.

Of course the bigger issue is that if it does work, you risk collapsing your bond market.

See, JGBs return nothing. Therefore, the only reason to buy them is to use them as collateral for a carry trade, or to earn your return via currency appreciation rather than coupon.

But both playing the carry and the currency appreciation argument only work if, surprise-surprise, the currency appreciates.

Yes, it is true that most of Japan's debt is held internally. But anyone who thinks that the Japanese firms and individuals aren't playing this the same way has rocks in their head. They most-certainly are.

Wednesday night the Japanese Automakers were bleating that they needed the yen north of 90 (that is, weaker by another 5% or more!) in order to "be profitable." So now we have a focused target for speculative attack - and you can bet that bet will be pressed by international players with plenty of money.

Has anyone figured out the damage if someone who's geared 10:1 or more takes a 5% loss on each leg of their trade?

The fundamental problem is that you can't have a sustainable economy that relies on foreign capital flows - whether it be an import/export imbalance or "hot money" flying around "helping" you. All of these things build in instabilities in the economy.

Japan has been playing this game for more than 15 years, with the outcome being a monstrous accumulated debt, now well north of GDP. They have failed to exit their deflationary depression, having chosen instead to paper over it. But now the birdcage liners are turning into a monstrous problem - if there is any sort of upward move in JGB yields the roll on those bonds will destroy the Japanese federal budget.

They didn't paint themselves into a corner, they bricked themselves into a room with no doors! All choices here are bad ones, and some were foreclosed years ago - like withdrawing the stimulus and forcing those who had hidden losses to eat them. Anything that normalizes yields instantaneously detonates the government's funding model - thus, the increasingly-shrill screaming coming from both idiots like Noda and the Japanese corporate interests - both of which are screaming "I have a bomb! I'll use it! I'll kill you!"

About the author: Karl Denninger

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U.S. / China Trade Imbalance: A Triumph of Hope Over Experience

Between 2005 and 2008 the Chinese yuan appreciated by a bit over 20%. Then when the recession got bad in late 2008, the yuan was (wisely) re-pegged to the dollar. Now Fred Bergsten calls for another round of yuan appreciation:

C. Fred Bergsten, director of the Peterson Institute for International Economics, a leading research organization here, told House lawmakers on Wednesday that a similar increase over the next two to three years would create about 500,000 jobs. He said it would reduce China’s current account surplus by $350 billion to $500 billion, and the American current account deficit by $50 billion to $120 billion.

The United States should seek to mobilize the European Union and countries like Brazil, Russia and India to press China to realign the renminbi, and should seek W.T.O. authorization to impose restrictions on Chinese imports if it does not do so, Mr. Bergsten said.

I’m not opposed to modest yuan appreciation, and indeed I think it will gradually occur over the next three years. But I am opposed to a trade war, which is utter madness in a world struggling to recover from the Great Recession. Here’s what I don’t understand however. Between 2004 and 2008 the Chinese CA surplus rose from about $70 billion to about $430 billion (click on chart to enlarge). Why does Bergsten now expect “a similar

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New 2010 Highs in Aussie Dollar, If They Hold, Are Positive for Both Copper Prices and the Dow Transports

A continuation of recent strength in Aussie Dollar / US Dollar (AUDUSD), above major overhead resistance at its 0.9380 November 2009 benchmark high, would indicate that the Aussie's larger October 2008 major uptrend versus the US currency is resuming. Considering the tight and stable positive correlation between AUDUSD and commodity prices, and more specifically with economically-influential copper prices, continued strength in AUDUSD would indirectly suggest increasing economic demand and the likelihood of a similar rise in the Dow Jones Transportation Index.

In our September 7th Keys To This Week report we said:

"A new bullish shift in near term market momentum, plus the failed bearish chart pattern in the S&P 500, indicate that a near term bottom is in place in the broad market index at the late August lows and clears the way for at least a retest of the 1,129 August highs."

Since that report the S&P 500 has risen by 35 points or 3.2% to as high as 1,127 as of September 14th -- just below important overhead resistance from 1,129 to 1,131. A corresponding resistance level at 1140 is coincidentally being tested in the NASDAQ 100. This represents a near term decision point for the market where it must decide whether the April downtrend is still intact, or or if a retest of the April highs is on the horizon.

In today's report we attempt to answer that question by displaying and discussing what may be an emerging bullish breakout in the Australian Dollar (AUDUSD), and its potential directional implications for both commodity prices and, indirectly, the Dow Jones Transportation Index.

THE AUSTRALIAN DOLLAR'S RELATIONSHIP WITH COMMODITY PRICES

Before we focus on the directional implications of recent price activity in the Australian Dollar, let's first establish its relationship with commodity prices. The Australian Dollar/US Dollar has maintained a tight and stable positive correlation to the CRB Index over the past decade,

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Monetary Policy, The Eurozone, And the Crisis

A common theme among those who de-emphasize the role of monetary policy in the creating the housing boom and ultimate bust is that the story doesn’t apply outside the United States. In other words, how do we explain housing booms in other countries? The policy European Central Bank, for example, is not perceived by some observers to be as loose as that of the Federal Reserve.

On this point, however, I wondered whether this was correct. For example, policy rates for the Eurozone may have different effects on different members. Specifically, regarding Ireland, I wrote:

I have found the Irish experience of the worldwide recession to be one of the most intriguing. From 1990 up until the beginning of the recession, the Irish economy grew over four-fold. However, since the recession began the economy has contracted by almost 20%. Part of my interest in Ireland is due to the fact that with the economy growing as rapidly as it did during its “Celtic Tiger” phase, rising productivity should have put downward pressure on prices. However, Ireland uses the Euro as its currency. As a result, it is possible (likely?) that monetary policy was comparatively loose in Ireland compared to other European Union members. Thus, if monetary policy became tight following a negative aggregate demand shock, this could potentially explain — at least in part — why the contraction was so severe in Ireland as one would expect to see a number of projects financed as a result of loose monetary policy fail.

Thus, the question is whether monetary policy played any role in the downturn.

A tangentially related new working paper by Angela Maddaloni and José-Luis Peydró might provide an answer as to the mechanism through which monetary policy could produce differing effects across countries. The paper focuses on deviations of monetary policy from the Taylor rule across countries in the Euro Area. Here is the abstract:

We analyze the root causes of the current crisis by studying the determinants of bank lending standards in the Euro Area using the answers from the confidential Bank Lending Survey, where national central banks request quarterly information on the lending standards banks apply to customers. We find that low short-term interest rates soften lending standards for both businesses and households and, by exploiting cross- country variation of Taylor-rule implied rates, that rates too low for too long soften standards even further. The softening is over and above the improvement of borrowers’ creditworthiness and all the relevant lending standards are softened, thus implying that banks’ appetite for (loan) risk increases. In addition, high securitization activity and weak banking supervision standards amplify the positive impact of low short-term interest rates on bank risk-taking, even when we instrument securitization. Moreover, short-term rates – directly and in conjunction with securitization activity and supervision standards – have a stronger impact on bank risk-taking than long-term interest rates. These results help shed light on the origins of the current crisis and have important policy implications.

I believe David Beckworth would refer to this as the risk-taking channel of monetary policy.

About the author: Josh Hendrickson

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September Strength Should Continue

Those of you familiar with the game of ice hockey will understand what I mean when I write, “it’s time to check the goalposts”. A good netminder will, with his stick, periodically bang the goalposts behind him in an effort to make sure all the angles are covered. Well, the same theory applies to those seeking to invest successfully. The markets have experienced a nice run in the 1st half of September and it’s now time to check the proverbial goalposts.

The market equivalent for a piece of iron painted red to which I refer can best be described as the relationship between the carry trade (expressed by the AUD/JPY), the NYSE Composite and the credit markets. We used these three factors to check angles back in April with our successful ‘Stalking the Bear’ series. And then again in July with our correct ‘change in trend may be in the offing’ comment. So, without further delay let’s check the posts….

Post 1: Below you will see a weekly chart of the NYSE Composite. This is an update to the chart that first appeared on this blog in the post ‘Stock Market Strategy: Irresistible Force Meets Immovable Object’. Please note that the red ‘immovable object’ of a downtrend has been breached and the black ‘irresistible force’ of an uptrend remains intact. So, for the moment, intervention and liquidity creation trumps economic reality. Score one for the bullish camp and look for a continuation of the September strength…..

click to enlarge images

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China Backpedals on the Yuan

Last week we drew attention to the strange behaviour of Chinese officials, who pushed the yuan downward against the dollar while their trading partners were calling for the Chinese currency's appreciation. This shift occurs as China is clearly trying to diversify its investments, as exemplified by the hike in its allocation in government debt from the zone: Y1.7 trillion in Japan in the first seven months of 2010, up from just Y255.7bn for all of 2005, and $2.11bn in South Korea. At the same time, China has reduced its investments in US debt by $8.95bn to $844bn. (La Chine diversifie ses réserves de change; The Real Drivers of Diversification in China’s FX Reserves). This also surely explains a big part of the yen's strength vis-à-vis the dollar and the euro. On the basis of the latest statistics published in the China Securities Journal, this is the current breakdown of currency reserves: dollar 65%, euro 26%, pound sterling 5%, yen 3%. The main reason (in their eyes) for these changes in currency reserve allocations is the fear, as expressed on numerous occasions since 2008, but more and more clearly in recent weeks, that the dollar will lose its status as the world's reserve currency (too much of the Fed's QE?), leading to a significant decline in its value. PBOC governor, Ms Hu Xiaolian, has made the latest pronouncement in this vein: “My view is that the Yuan doesn’t have a key role to play in rebalancing bilateral trade between the U.S. and China. I don’t think excessive argument and criticism on this issue will help”. (WSJ 1 Sep 2010) "Once a reserve currency's value becomes unstable, there will be quite large depreciation risks for assets. A diversified international currency system will be more conducive to international economic and financial stability.” (China Finance, 6 Sep 2010). In reality, you can already read the same views in Ms Xialian's speech of 15 July before the PBOC: “Three Characteristics of the Managed Floating Exchange Rate Regime.” However, the yuan's recent depreciation vis-à-vis the dollar hardly went unnoticed in the United States where it sparked an immediate reaction from Robert Hormats, under secretary of State for economic, energy and agricultural affairs: ‘U.S. Official Warns of Backlash Against China’. “A lack of action by the Chinese to address U.S. concerns about currency issues and intellectual-property protections could encourage a more protectionist agenda on Capitol Hill.” "We're likely to see some legislation offered that would be adverse to Chinese interests if more steps aren't taken.” All this in an already tense context, as Larry Summers (Director of the National Economic Council) and Thomas Donilan (Deputy National Security Advisor) travel to China to discuss all these highly sensitive issues. They will not only talk about the yuan, but also about China's anger at US involvement in the South China Sea and US concerns about Iran. ‘Bumpy months ahead for U.S. and China’ So surprise, the yuan's controlled depreciation last week has abruptly moved upward, just in time for Mr Summers' visit. Here is an updated graph comparing the yen and the dollar. Yuan and yen vs the US dollar China back-pedals a bit…

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European Woes Continue

Coming back from the Labor Day holiday, US investors have been caught a bit off guard by the reversal of sentiment toward Europe. The euro had rallied in the immediate aftermath of the stronger than expected US jobs data ostensibly on a greater appetite for risk. There was some follow through early yesterday and then only lower.Anecdotal stories include empty shops in Greece and concerns over the lack of government's in Belgium and the Netherlands. French unions are on strike today in Paris. Irish bank solvency has re-emerged as a key issue. Today a European bank took 60 mln dollars from the ECB's Fed swap line. The ECB noted that last one one bank--perhaps the same one as this week--took 40 mln dollars from the swap line at a rate as much as 4-times greater than LIBOR.

The euro high in the North American session has been $1.2772. Chart-based resistance looks to be in the $1.2800-20 area, the high from the European session. Hourly RSI's are over-extended and that leaves the euro caught between poor fundamentals/sentiment and near-term supportive technicals. Range trading is the most likely result near-term.

Disclosure: No positions

About the author: Marc Chandler

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Tuesday FX Interest Rate Monitor

Risk aversion took a step forward following analysis by Wall Street Journal staffers, claiming flaws in the methodology of the July stress-testing process across 91 European banks. The contention is that banks have understated the value of government paper they are holding, which underestimates maximum potential losses in the event that a government defaults. The story unleashed yesterday also claims that certain banks failed to include paper issued by specific nations, which might help explain why so many Eurozone analysts missed the mark at the time. Yields across the globe have claimed back much of last week’s losses as data warmed up especially in the world’s largest economy.

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EUR's Recent Run Lacked Clear Catalysts: Was That Really the Starting Gun?

Nothing that has come out over the last couple of days on Europe is exactly new; it has been festering all summer. However, the speed and ferocity of the renewed EUR splurge, without a really good catalyst, has caught us by surprise. The WSJ article, I mentioned yesterday, is irrelevant, but the market has been fiercely rummaging through their June notes to recycle the obvious.

In euros' defence, the Eurocrats have wheeled out the Clown-in-Chief at the European Central Bank (ECB) - “ECB's Quaden sees no double dip in Europe." Sounds great, but this is from the guy that didn’t even see the single dip coming.

Just after Northern Rock (NHRKF.PK) collapsed, and in the midst of the unfolding blow up in the credit markets, he said (see full speech here):

The latest news from Europe is not bad. 2006 was an excellent year and prospects for this year and next year remain positive.

He followed this speech in October 2007, saying:

As regards the short – and medium - term outlook, I would make a distinction between the main scenario, which is the most likely outcome, and the risk assessment. The most likely scenario remains favourable with growth still close to our potential but it is now surrounded by much more uncertainty than usual. And that applies to other regions of the world.

'Nuff said.

But the worrisome thing is, is that Mangler has spoken. And we know the correlation between Mangler speak and euro fortunes, and they are not positive. The market has grabbed ahold of this story, "Germany won't back Euro rescue fund for ever: Merkel," and is using it as new ammo.

"Forever," of course, is a very long time, but in the short run, Germany doesn't really have much choice unless they want to speed up the introduction of the NeuMark. But the main concern that Team Macro Man has is that she has broken ranks from the STFU policy and spoken out.

So where does this leave us? It still all seems too fast and too soon for euro collapse Part Deux. Also, the 40 point round trip in German 10-year yields over the past week perhaps indicates that the market isn’t quite sure of itself either.

And though we are fully believers of the macro concerns, re Europe, we feel that the timing is wrong. As for Switzerland, unless they manage to rent more space to park all the money flowing their way, they are in danger of doing a Mr Creosote. "One more wafer thiiiin swieees franc, sir?"

Was that really the starting gun to the race we have been in training for all summer? We are hoping we haven't been left behind and it's a false start, and the runners will have to return for a restart in a couple of weeks' time.

Disclosure: No positions

About the author: Macro Man

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Wednesday FX Interest Rate Monitor

Bonds have come back off the boil as investors try to figure out whether or not the European banking system might weigh any further on the global recovery following a recent poke at its methodology. Yields slumped on the news that Europe’s bankers might not have fully reported government debt on its books but as the shock wears off it seems that investors might be willing to return to business as usual. The lack of transparency in the reporting, even if were true, fails to answer the obvious question of whether or not the latest news increases the likelihood of a government default. It is hard to say at this point, however, that markets have brushed aside the report. However, firm action from the Bank of Canada quickly soured sentiment mid-morning reminding bond traders that recovery is out there – somewhere.

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What's Happening in Europe? Watch the Currencies

The value of a currency is “the single most important price in a nation’s economy.” So claims Paul Volcker.

If this is the case then the eurozone continues to have problems.

As information has filtered out that European banks may have more problems than originally thought given recent “stress tests”, the euro has shown continued weakness, almost across the board.

“The euro suffered and haven demand sent the yen and the Swiss franc to record highs amid renewed concerns over the health of the eurozone financial system.

Analysts said nervousness was heightened by news from the German Banking Association, which said the country’s 10 biggest lenders might need another €105bn of additional capital. Hans Redeker, of BNP Paribas, said the outcome of the European bank stress tests were being put in doubt.

He added that there were increasing signs that countries on the periphery of the eurozone, such as Greece and Portugal, were showing a frightening decline of growth momentum with the risk that these economies were moving into a debt spiral.” (See details here.)

This news seemingly resulted in declines in the euro against the dollar (down 1.4%); against the pound (down 1.2%); against the yen (down 1.8%) and to a record low against the Swiss franc (down 1.6%).

With all the weakness the United States dollar has experienced in recent months against other major currencies, the value of the dollar has shown substantial strength against the euro since the problems in the eurozone were exposed earlier this year. The euro reached a near-term high against the dollar in early December 2009, but then fell about 21percent against the dollar into early June 2010 as European nations rallied to stem their joint fiscal crisis. The euro recovered some after a “combined solution” was reached, but its value has declined once again and still rests around 16 percent below the December high.

Furthermore, there still seem to be unknown unknowns surrounding some of the nations in the eurozone (see “EU Probes Hidden Greek Deals as 400% Yield Gap Shows Doubt”) and some of the banks (see “German banking weaknesses come to light”).

Financial markets don’t like surprises.

It appears as if there are still some surprises to surface within the eurozone.

These revelations will continue to apply pressure to the leaders in Europe. It is so hard to form a common union where people want to maintain all the privileges of independence (fiscal and otherwise) yet hope to produce a common good (greater economic strength and unity).

Like any marriage, the partners have to give up some of the things that they cherished as individuals. Furthermore, openness and transparency is a “must” for any such relationship. The road to “unity” may be quite bumpy at times, but the partners must work through these periods and establish common understandings and good habits.

In the case of nations, there is an information market in which people can “bet” on whether or not the marriage will succeed. This market is the foreign exchange market. Right now, the market value of the euro is declining, indicating that the investors are concerned about how the eurozone marriage is working out. This weakness in the euro will continue until the fear of surprises disappears.

Disclosure: None

About the author: John M. Mason

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