Dear Friends,
As you may have noticed by now, I have done up a transaction for you recently for your investment. I will attempt to explain my rationale in the following email.
Firstly, is the consideration whether the market will continue to move up or it will soon correct. A correction is a matter of time, but the problem is when, how deep and how high will the current market continue to run before a correction. The issue is, everything is pretty uncertain these days. We have bad reports coming in about potential crisis points, like commercial real estate problem in US, credit cards implosion, withdrawal of stimulus too sharp and too early resulting in a sharp double dip “W” recession, rising inflation. On the other hand, we are getting good and sometimes mixed data from the economy. Nevermind mixed: Having mixed is better than worse. So at this moment in time, let’s see what could happen:
1) The market may continue to run with a consistent stream of good info. However, the upside is running into strong headwinds with the market being trending upwards with care, unlike the explosive run we saw from March to June. There could still be money to be made but the danger gets greater everyday without a good correction.
2) A steep correction will occur sooner or later but the question is, how deep will it be? How long? My guess is that, the correction will be short and sharp averaging 10-15%. I dun think it will hit March low again unless an implosion of Lehman magnitude occurs. One big reason is because fund managers, along with yours truly, has been waiting for a good, low risk, entry point for the clients. So far, there is none yet. Therefore, any sharp drop will result in fund managers piling in and the market will snap back in a hurry with a pretty shallow bottom.
3) Corporate ratings will continue to recover from the historical low as confidence starts to creep back. The issue with subprime at one moment in time, is that banks are so fearful of each other that they are not buying the bonds from each other and the rating companies did not help by downgrading masses in a hurry in order to compensate for their mistakes in Lehman, AIG and citi. A sharp correction in the equity market may not necessary impact the corporate bond market that much as compared to the Lehman days.
So the trick is to position the portfolio in a way that they can still capture any rise in the market if the market continues its climb and at the same time, be prepared for any sharp drop and take the opportunity to enter the market. I have basically identify 3 assets, that prob will still do okie when the market climbs and will not get hit too much shld a market correction does take place.
Asset 1: China
I was mentioning that the global equity market generally lacked an entry point. The only exception is the china market which has correction close to 20%. http://finance.yahoo.com/q/bc?s=000001.SS As I mention in previous articles, China could well be an indicator of things to come. With a nice correction and a compelling growth story, China is prob the most attractive market to enter right now. I prefer Schroder BRIC in this case it provides some diversification and the fund does invest in a huge chunk into china. With a correction already in place, any sharp correction in the global stock market may not affect it that much. CPF doesn’t allow BRIC so I used a pure china fund instead.
Asset 2: Gold
Every girls’ 2nd favorite metal, after platinum. Gold had a pretty boring year in 2009. It started the year $900, it is still hovering at $900 despite peaking above $1000 in the last few week. The good news for gold is that the USD has fallen quite drastically, and is expected to drop further back to the pre lehman days. Inflation is slowing creeping back into the market again and this may force the hand of the fed and government to reduce the stimulus faster than they would like to. With its defensive property and the weakening USD, it looks like a sure bet no matter where the market goes. As for oil, I am not as optimistic after its run from $35 to $75. There are a couple of factor working against it, like falling demand and high supply. So, that’s why I swap gold for oil this time round. For CPF, we are not allowed to invest in gold (Quite silly! They allow tech and china that dropped up to 80% but don’t allow gold??) so I swapped in a general resource fund instead with good exposure to miners.
Asset 3: Corporate and Developed countries bond
Bonds was like a toxic waste right after the crash of Lehman bro. Nothing was safe except for the safest: US Treasuries. The bond market had a pretty bad year last year. With the corporate ratings and confidence improving by day, the bonds that are deemed to be potential toxic are becoming attractive again. The bond market had a pretty good run along with the equity market and will still continue to do so as confidence returns. The corporate bonds are also give attractive yield right now. Other bonds which are interesting are bonds of developed countries like Korea, Sweden that are offering pretty good yield and probably will be pretty safe for now. So whether the stock market corrects of not, the bond market will still continue to do well: Not as spectacular as equities but still decent 8-10% return a year. They will also act as ammunition once the market corrects where we will enter more aggressive.
So in short, what I trying to do is to create portfolio that can generate decent recent and probably be able to withstand what ever correction comes along. This is a pretty delicate period. If we move everything in and the market do double dip which our government keep warning us about, we will be caught and stuck for another year or 2. If we don’t invest, the stream of good news may continue and there goes the market, without us in it. So, the best thing to do now, is to try to get the best of both worlds!
Friday, September 25, 2009
Monday, September 21, 2009
Will US repeat mistakes of 1937?
I like this article quite a lot. Good read!
Will US repeat mistakes of 1937?
Seven decades ago, efforts to balance the federal budget thrust a recovering economy into a giant tailspin. Are policymakers headed in the wrong direction again?
[Related content: stocks, stock market, recession, Federal Reserve, Jim Jubak]
By Jim Jubak
MSN Money
The specter of 1937 hangs over the economy and the stock market.
More on FDR's economic policies
That's the year when overconfidence that the Roosevelt administration had whipped the Great Depression and that it was time to balance the federal budget led to another deep recession that wiped out three years of growth and sent the economy reeling back to the Depression depths of 1934.
The Dow Jones Industrial Average ($INDU), which had climbed 127% from a low of 85.51 in July 1934 to a high of 194.40 in March 1937, fell 49% to 98.95 by the end of March 1938 -- not far above its '34 low. (Remember, it takes only a 50% loss to wipe out a 100% gain.)
After that collapse and another one in 1942, stocks didn't match that 1937 peak until 1945.
I wrote on my blog a few days ago that "most of the time," after big rallies like the one going on now, the stock market has remained higher a year later.
Almost always. The one big exception, the one that delivered a loss big enough to wipe out portfolios, came in 1937.
A self-inflicted swoon
It's that "almost" that gives me pause as I look not so much at the stock market but at the economy and at what passes for our national discussion of economic policy these days.
The comforting thing about looking back at that economic and investment disaster of 1937 is that we did it to ourselves. Bad policy decisions, not accident or fate, led us over the cliff. So all we have to do to avoid a repeat of the results is to avoid the policy mistakes, right? Disturbingly, there are plenty of signs that we might well be prepared to do it to ourselves all over again. Let's look at what happened in 1937 and why we could repeat that year's mistakes on our way out of the Great Recession.
1937 was the year, students of the Great Depression know, that everyone from the president on down got so confident that the bad times were over that they tipped the country back from recovery to depression.
Video: When will the economy feel stronger?
Unemployment, which had marched down from its Depression high of 25% to a low of 14.3% in 1937, climbed again, hitting 19% in 1938. Personal income dropped 15% from its 1937 peak. And manufacturing output fell 40% from its 1937 peak, all the way back to the levels of 1934.
In other words, 1937 was the year that the V-shaped recovery from the depths of the Depression turned into a W-shaped one. The economic growth of 1934 (17%), 1935 (11%), 1936 (14%) and 1937 (10%) that had succeeded the economic collapse of 1930-33 came to a grinding halt. In 1938, the U.S. economy actually returned to negative growth, shrinking 6.2%.
What happened? Buoyed by the economic numbers and a landslide in the 1936 election -- Franklin D. Roosevelt had defeated Republican Alf Landon of Kansas by an Electoral College vote of 523 to 8 -- the Roosevelt administration declared victory over the Great Depression.
The declaration was a bit premature. Yes, unemployment was down from the horrifying 25% levels of the worst of the Depression, but it was still horrendous at more than 14%. The economy had begun to grow again, but 1937's gross domestic product of $88 billion was still lower than it had been in 1930 ($97 billion).
The emergency seemed to be over, however, and many in the New Deal, including Roosevelt's Treasury secretary, Henry Morgenthau, were deeply uncomfortable with the idea of running what looked very much like a permanent budget deficit. The annual deficit had peaked at $5.9 billion (yes, I know how quaint these numbers are in the days of trillion-dollar deficits), but it was still a shockingly high $5.5 billion in 1936.
You have to do a bit of number crunching to realize exactly how high a $5.5 billion annual deficit seemed then. It represented 7.7% of GDP and a huge 110% of the federal government's total annual revenue.
Erasing the deficit -- and the recovery
In 1937, the Roosevelt administration and the Federal Reserve moved to reverse many of the extraordinary measures they'd taken to fight the Depression. In 1937, the federal deficit was cut to $2.5 billion from the previous year's $5.5 billion as Roosevelt and Congress slashed spending by 18%. In 1938, spending dropped still further, 10% down from the level of 1937.
And the annual deficit just about vanished. The government ran an almost-balanced budget that year with a deficit of a mere $100 million.
The Federal Reserve moved in the same direction. After pursuing policies that had resulted in an average 11% annual increase in the money supply in the previous four years, the Fed reversed course at the beginning of 1937 and began to contract the money supply, raising reserve requirements twice, the second time in the spring.
Continued: Could it happen again?
The result was the disaster I've described above. The economy, which had been growing strongly, stalled. GDP, which was $89 billion in 1938, grew to just $89.1 billion in 1939.
And the damage wasn't worse only because Roosevelt forced a change in course so quickly. By April 1938, he had pushed new large-scale spending programs, totaling $3.75 billion, through Congress. Legislators later added $1.5 billion to the pot. The Fed, under Chairman Marriner Eccles, reversed course again and started to expand the money supply.
The annual deficit soared to $3.2 billion in 1939. That represented 45% of the government's revenue that year.
Couldn't possibly happen again, though, could it? In 1936, Roosevelt and his team didn't even have an economic theory to justify deficit spending in an economic emergency. John Maynard Keynes' "The General Theory of Employment, Interest and Money" wasn't published until that year. We've now got a Fed chairman who has written and lectured extensively on the mistakes made by his predecessors. And unemployment is still rising. We certainly wouldn't try to cut the deficit or balance the budget while the ship is still taking on water, right? Right?
I wish I were more certain.
Not your average recession
A July CBS News/New York Times poll found that 58% of those Americans surveyed said the government should focus on reducing the budget deficit rather than on spending to stimulate the economy. Granted, that number is probably inaccurate to the high side because of the way the question was phrased (How about this instead: Do you think the government should focus on reducing the budget deficit or making sure that you have a job tomorrow?) -- but it is still remarkably consistent with earlier polling. In May, the same poll found that a majority of Americans thought that the Obama administration should shift from fighting the Great Recession to reducing the government deficit.
Listen to all the voices -- not just here but even more stridently in Europe -- calling for a need to restore fiscal discipline. Listen to congressional speeches calling for the Federal Reserve and the Treasury to exit the "free market" before it's too late to save even the bones of U.S.-style capitalism and before the Obama administration sells us into, gasp, socialism. (I just wish someone, sometime making this charge would be specific about what kind of socialism he or she is talking about. Are we afraid that this administration wants this country to be Sweden or that it has a hankering for Stalin-era gulags and collective farms, where we all start the day singing to the glory of our tractors? There's a big difference. Maybe the speakers could wear hats or talk in funny accents to make their definitions clear.)
Video: When will the economy feel stronger?
The economists and policy wonks and wonkettes at the New America Foundation symposium I wrote about on Friday actually believe there's a chance we could do it again. Not by Congress cutting off the funding for the first stimulus package still flowing through the pipes, but by the House and Senate refusing to even consider a second stimulus if the economy looks like it needs one in 2011.
The year of the Big Test will be 2011. By that year, the money from the first stimulus will have been spent, and the economy will either be in the midst of a sustainable recovery or not.
I think anybody who tells you they can predict now whether we'll have a sustainable recovery under way in 2011 is either out to fool you or is fooling himself.
This isn't your average recession. This is a great big global recession coupled with a great big global financial crisis.
This Great Recession is therefore much more subject to fits and starts and reversals than the average recession, because every time the economy starts to run smoothly, the banking system stands ready to throw another wrench into the works.
I'm not predicting the return of 1937 in 2011. I don't think I've got the kind of super-X-ray economic vision to call that one right either. But I would like us not to get carried away by the 57% rally in the stock market (as of the close Sept. 18) and become convinced that everything is fixed.
More on FDR's economic policies
I'd like to keep all the available tools on the table until, well, until we see unemployment halved to 5% or so (or whatever passes for normal these days), until we see truly functioning financial markets, until we see mortgage foreclosures going down, until we see credit card defaults back to pre-crisis levels and until we see some significant inflation in the economy.
Until then, I'm hopeful, but I'll be damned if I'm going to get overconfident.
I'd like the 1937 recession to stay buried in the history books where it belongs.
Jim Jubak has been writing Jubak's Journal and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, "The Jubak Picks," and writer of the Jubak Picks blog. He's also the senior markets editor at MoneyShow.com.
Will US repeat mistakes of 1937?
Seven decades ago, efforts to balance the federal budget thrust a recovering economy into a giant tailspin. Are policymakers headed in the wrong direction again?
[Related content: stocks, stock market, recession, Federal Reserve, Jim Jubak]
By Jim Jubak
MSN Money
The specter of 1937 hangs over the economy and the stock market.
More on FDR's economic policies
That's the year when overconfidence that the Roosevelt administration had whipped the Great Depression and that it was time to balance the federal budget led to another deep recession that wiped out three years of growth and sent the economy reeling back to the Depression depths of 1934.
The Dow Jones Industrial Average ($INDU), which had climbed 127% from a low of 85.51 in July 1934 to a high of 194.40 in March 1937, fell 49% to 98.95 by the end of March 1938 -- not far above its '34 low. (Remember, it takes only a 50% loss to wipe out a 100% gain.)
After that collapse and another one in 1942, stocks didn't match that 1937 peak until 1945.
I wrote on my blog a few days ago that "most of the time," after big rallies like the one going on now, the stock market has remained higher a year later.
Almost always. The one big exception, the one that delivered a loss big enough to wipe out portfolios, came in 1937.
A self-inflicted swoon
It's that "almost" that gives me pause as I look not so much at the stock market but at the economy and at what passes for our national discussion of economic policy these days.
The comforting thing about looking back at that economic and investment disaster of 1937 is that we did it to ourselves. Bad policy decisions, not accident or fate, led us over the cliff. So all we have to do to avoid a repeat of the results is to avoid the policy mistakes, right? Disturbingly, there are plenty of signs that we might well be prepared to do it to ourselves all over again. Let's look at what happened in 1937 and why we could repeat that year's mistakes on our way out of the Great Recession.
1937 was the year, students of the Great Depression know, that everyone from the president on down got so confident that the bad times were over that they tipped the country back from recovery to depression.
Video: When will the economy feel stronger?
Unemployment, which had marched down from its Depression high of 25% to a low of 14.3% in 1937, climbed again, hitting 19% in 1938. Personal income dropped 15% from its 1937 peak. And manufacturing output fell 40% from its 1937 peak, all the way back to the levels of 1934.
In other words, 1937 was the year that the V-shaped recovery from the depths of the Depression turned into a W-shaped one. The economic growth of 1934 (17%), 1935 (11%), 1936 (14%) and 1937 (10%) that had succeeded the economic collapse of 1930-33 came to a grinding halt. In 1938, the U.S. economy actually returned to negative growth, shrinking 6.2%.
What happened? Buoyed by the economic numbers and a landslide in the 1936 election -- Franklin D. Roosevelt had defeated Republican Alf Landon of Kansas by an Electoral College vote of 523 to 8 -- the Roosevelt administration declared victory over the Great Depression.
The declaration was a bit premature. Yes, unemployment was down from the horrifying 25% levels of the worst of the Depression, but it was still horrendous at more than 14%. The economy had begun to grow again, but 1937's gross domestic product of $88 billion was still lower than it had been in 1930 ($97 billion).
The emergency seemed to be over, however, and many in the New Deal, including Roosevelt's Treasury secretary, Henry Morgenthau, were deeply uncomfortable with the idea of running what looked very much like a permanent budget deficit. The annual deficit had peaked at $5.9 billion (yes, I know how quaint these numbers are in the days of trillion-dollar deficits), but it was still a shockingly high $5.5 billion in 1936.
You have to do a bit of number crunching to realize exactly how high a $5.5 billion annual deficit seemed then. It represented 7.7% of GDP and a huge 110% of the federal government's total annual revenue.
Erasing the deficit -- and the recovery
In 1937, the Roosevelt administration and the Federal Reserve moved to reverse many of the extraordinary measures they'd taken to fight the Depression. In 1937, the federal deficit was cut to $2.5 billion from the previous year's $5.5 billion as Roosevelt and Congress slashed spending by 18%. In 1938, spending dropped still further, 10% down from the level of 1937.
And the annual deficit just about vanished. The government ran an almost-balanced budget that year with a deficit of a mere $100 million.
The Federal Reserve moved in the same direction. After pursuing policies that had resulted in an average 11% annual increase in the money supply in the previous four years, the Fed reversed course at the beginning of 1937 and began to contract the money supply, raising reserve requirements twice, the second time in the spring.
Continued: Could it happen again?
The result was the disaster I've described above. The economy, which had been growing strongly, stalled. GDP, which was $89 billion in 1938, grew to just $89.1 billion in 1939.
And the damage wasn't worse only because Roosevelt forced a change in course so quickly. By April 1938, he had pushed new large-scale spending programs, totaling $3.75 billion, through Congress. Legislators later added $1.5 billion to the pot. The Fed, under Chairman Marriner Eccles, reversed course again and started to expand the money supply.
The annual deficit soared to $3.2 billion in 1939. That represented 45% of the government's revenue that year.
Couldn't possibly happen again, though, could it? In 1936, Roosevelt and his team didn't even have an economic theory to justify deficit spending in an economic emergency. John Maynard Keynes' "The General Theory of Employment, Interest and Money" wasn't published until that year. We've now got a Fed chairman who has written and lectured extensively on the mistakes made by his predecessors. And unemployment is still rising. We certainly wouldn't try to cut the deficit or balance the budget while the ship is still taking on water, right? Right?
I wish I were more certain.
Not your average recession
A July CBS News/New York Times poll found that 58% of those Americans surveyed said the government should focus on reducing the budget deficit rather than on spending to stimulate the economy. Granted, that number is probably inaccurate to the high side because of the way the question was phrased (How about this instead: Do you think the government should focus on reducing the budget deficit or making sure that you have a job tomorrow?) -- but it is still remarkably consistent with earlier polling. In May, the same poll found that a majority of Americans thought that the Obama administration should shift from fighting the Great Recession to reducing the government deficit.
Listen to all the voices -- not just here but even more stridently in Europe -- calling for a need to restore fiscal discipline. Listen to congressional speeches calling for the Federal Reserve and the Treasury to exit the "free market" before it's too late to save even the bones of U.S.-style capitalism and before the Obama administration sells us into, gasp, socialism. (I just wish someone, sometime making this charge would be specific about what kind of socialism he or she is talking about. Are we afraid that this administration wants this country to be Sweden or that it has a hankering for Stalin-era gulags and collective farms, where we all start the day singing to the glory of our tractors? There's a big difference. Maybe the speakers could wear hats or talk in funny accents to make their definitions clear.)
Video: When will the economy feel stronger?
The economists and policy wonks and wonkettes at the New America Foundation symposium I wrote about on Friday actually believe there's a chance we could do it again. Not by Congress cutting off the funding for the first stimulus package still flowing through the pipes, but by the House and Senate refusing to even consider a second stimulus if the economy looks like it needs one in 2011.
The year of the Big Test will be 2011. By that year, the money from the first stimulus will have been spent, and the economy will either be in the midst of a sustainable recovery or not.
I think anybody who tells you they can predict now whether we'll have a sustainable recovery under way in 2011 is either out to fool you or is fooling himself.
This isn't your average recession. This is a great big global recession coupled with a great big global financial crisis.
This Great Recession is therefore much more subject to fits and starts and reversals than the average recession, because every time the economy starts to run smoothly, the banking system stands ready to throw another wrench into the works.
I'm not predicting the return of 1937 in 2011. I don't think I've got the kind of super-X-ray economic vision to call that one right either. But I would like us not to get carried away by the 57% rally in the stock market (as of the close Sept. 18) and become convinced that everything is fixed.
More on FDR's economic policies
I'd like to keep all the available tools on the table until, well, until we see unemployment halved to 5% or so (or whatever passes for normal these days), until we see truly functioning financial markets, until we see mortgage foreclosures going down, until we see credit card defaults back to pre-crisis levels and until we see some significant inflation in the economy.
Until then, I'm hopeful, but I'll be damned if I'm going to get overconfident.
I'd like the 1937 recession to stay buried in the history books where it belongs.
Jim Jubak has been writing Jubak's Journal and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, "The Jubak Picks," and writer of the Jubak Picks blog. He's also the senior markets editor at MoneyShow.com.
Wednesday, July 29, 2009
China Market Crashed up to 8% yesterday. Signs of Disaster coming?
The China stock market had a mini crash yesterday falling up to 8% at one point of time and recovered to -5% at the end of the day. The reason for the fall is based on the rumor that the central bank of China may be tightening their money policy, soaking up the excess cash in the system. Hold on! This sounds familiar! It has happened before during 2007 and that sparked the final showdown between the bulls and bears with the bears winning and the bulls bleeding. 
Interestingly, it also marks the start of the US bear market. If you recall, the subprime issue is still considered to be a manageable issue in the world at that point of time and the growth in US remains good. The China market started their plunge and bottomed at the point when Lehman and Bear Stearns went down and the worse stock market crash in history of US. 6 months later the Dow reached its bottom, and China started their run till yesterday. Looking at the chart, there is one strong possibility here: That the China market may be a good forward indicator on where the global markets may go next in the coming months. One of the key reason for such a response is probably China draw for hot money. Currently, the China stock market is still a restricted and illiquid exchange where only residents and big financial institutions can invest in it. With a good growth story, investors around the world pumped money into China via major financial institutions. And most of these capital are not here to stay. They are speculative in nature and tends to bail out on the first signs of trouble. Hot money is also forward looking and tend to move faster than the average capital. Since China is the forefront receipent of hot money, it could create a predictive nature which will tell us if the big boys are moving their money out to someplace safer.
If the China stock market starts a serious correction, it may indicate of things to come for the markets around the world. Well, this is a personal observation and no proven facts that the SSEC do lead in terms of trend of the stock market. however, if it does come true, it do give another strong argument to the possible W shape recovery of the global equities market. It could also signal trouble to the commodity markets and stocks. Check out the oil chart and overlap it with the SSEC. The story gets more exciting everyday, stay tuned!
If the China stock market starts a serious correction, it may indicate of things to come for the markets around the world. Well, this is a personal observation and no proven facts that the SSEC do lead in terms of trend of the stock market. however, if it does come true, it do give another strong argument to the possible W shape recovery of the global equities market. It could also signal trouble to the commodity markets and stocks. Check out the oil chart and overlap it with the SSEC. The story gets more exciting everyday, stay tuned! Monday, July 27, 2009
The Psychology of Markets?
This Cartoon basically explains how the stock market work. One of the classic cartoon in stock market psychology.
To Buy or Not To Buy - That's the Scary Question
The Market Run Continues, And It is getting Scary Out There
Firstly, let's talk about what is driving this rally. The most obvious of the reason is that the decay of the economy has taper off and the damage is generally repairing itself slowly. Many S&P 500 companies announces earnings for the 1st and 2nd quarter and they generally beat expectations. This is remarkably similar to those of 2001 - 2002 days when the economy is recovering from one of the worse recession the world has ever seen. At that time, it is the dot-com bubble. Today, we have the property bubble and derivative implosion, unquestionable worse compared to the dot come. Of course the government took much more drastic measures and that is how we are able to stabilize the global economy. Interestingly, the market has another drop even with a recovering economy.
One of the main reason I am still holding back is that I am still fearful of such a scenario. the stock market recovery we had started in March 2009. Till today, the rally lasted 4 months. Based on the other 2 possible scenarios, the dot com and great depression, there is still a remarkable chance that we can go for another dip even though the economy is on the mend. Check out the GDP recovery from 2002 to 2003 and the performance of the stock market. GDP recovering yet stock market is falling.
Here is the chart of STI and the total time the first super bear rally lasted. A grand total of 6 months and a 37% jump within 6 months. The Dow took 3 months during the 1930s great depression and rallied a whooping 70% jump before tumbling 50% to another low. Now that we are extremely close to our 3-6 months target, what is worrisome is that if investors move in, they may hit a sucker rally and whatever position taken will potentially lose 20-50%. On the other hand, if the rally is real and is the start of the bull run, investors will lose out of the big initial run. The only way to decide is to assess what happened during these 2 periods and the reasons for the second crash after the initial rally.
The Common Denominator
Here are some of the common denominator of past recessions that lead to the second drop and a continuation of the bear market.
1) Collapse of a major corporation. We had Enron 2002. The biggest risk we have now is CIT bank in US, the potential 4th largest bankruptcy after Lehman and Bear Stearns.
2) Stock market ran ahead of fundamentals with hot money pouring him to chase the rally.
3) Readjustment of risk appetite after the following company quarter results are announced and did not meet higher expectation set by the market.
4) Risk of war and terrorism. We have post WWI tensions in the 1930s and the Second gulf war in 2003. Today, some of the possible flare points are Afghanistan and Korea though risk is low at the moment.
My current fear is with point 1 and 3. Let's talk about point 3 first. Most of the S&P 500 has announced their 2nd quarter results and generally, they beat expectations. The market rallied another 10% on those pieces of news since 3 weeks ago. Now that expectations are higher, companies will have a tougher time to meet the targets in 3rd quarter. The main reason for the current performance in earnings is due to cost slashing, and not due to increased sales. You can only slash that much cost and you will need increasing revenue in order to fuel future earnings growth. Right now with record high unemployment around the globe and falling consumption, sales may hard to come by and it is not hard to judge whether these companies can continue to grow their profits. When that happens, the stock market will fall.
Therefore, the following scenario may take place:
1) The market after a hard run for 2 weeks, may rest for a while. It may be flat or continue to rally until October.
2) Between now and Oct, if some major corporation collapse and during the 3rd quarter earnings remains stagnant or depreciate, the market will probably have another correction, with more seriousness. Other concerns still remains: The implosion of commercial & personal loans.
The Response to The Uncertainty
This is my greatest challenge. To move in or not to move in. My recommendation is to observe key resistance level in the Dow and S&P500.
We are currently forming a very bullish inverse head & shoulder formation for the Dow and is nearing the breakthrough or knock down phrase. Check out the details in Wikipedia . In other words, if the Dow continues to goes up above 9500, it can run another 20%, else, it may go the other way: down. Therefore, this is an extremely difficult period to bet with the market at the turning point.
The Bull run is back! Singapore GDP recovered 40%, MNC are announcing profits that are blowing away expectations, leading indicators are on a mend. Or is there another side we may not understand? Many investor are asking the million dollars question: Are we back on a bull run? Should we jump in in case we miss the boat? Are we having a second dip? Let us examine some figures that I have dug out.
Firstly, let's talk about what is driving this rally. The most obvious of the reason is that the decay of the economy has taper off and the damage is generally repairing itself slowly. Many S&P 500 companies announces earnings for the 1st and 2nd quarter and they generally beat expectations. This is remarkably similar to those of 2001 - 2002 days when the economy is recovering from one of the worse recession the world has ever seen. At that time, it is the dot-com bubble. Today, we have the property bubble and derivative implosion, unquestionable worse compared to the dot come. Of course the government took much more drastic measures and that is how we are able to stabilize the global economy. Interestingly, the market has another drop even with a recovering economy.
One of the main reason I am still holding back is that I am still fearful of such a scenario. the stock market recovery we had started in March 2009. Till today, the rally lasted 4 months. Based on the other 2 possible scenarios, the dot com and great depression, there is still a remarkable chance that we can go for another dip even though the economy is on the mend. Check out the GDP recovery from 2002 to 2003 and the performance of the stock market. GDP recovering yet stock market is falling.
Here is the chart of STI and the total time the first super bear rally lasted. A grand total of 6 months and a 37% jump within 6 months. The Dow took 3 months during the 1930s great depression and rallied a whooping 70% jump before tumbling 50% to another low. Now that we are extremely close to our 3-6 months target, what is worrisome is that if investors move in, they may hit a sucker rally and whatever position taken will potentially lose 20-50%. On the other hand, if the rally is real and is the start of the bull run, investors will lose out of the big initial run. The only way to decide is to assess what happened during these 2 periods and the reasons for the second crash after the initial rally.
The Common Denominator
Here are some of the common denominator of past recessions that lead to the second drop and a continuation of the bear market.
1) Collapse of a major corporation. We had Enron 2002. The biggest risk we have now is CIT bank in US, the potential 4th largest bankruptcy after Lehman and Bear Stearns.
2) Stock market ran ahead of fundamentals with hot money pouring him to chase the rally.
3) Readjustment of risk appetite after the following company quarter results are announced and did not meet higher expectation set by the market.
4) Risk of war and terrorism. We have post WWI tensions in the 1930s and the Second gulf war in 2003. Today, some of the possible flare points are Afghanistan and Korea though risk is low at the moment.
My current fear is with point 1 and 3. Let's talk about point 3 first. Most of the S&P 500 has announced their 2nd quarter results and generally, they beat expectations. The market rallied another 10% on those pieces of news since 3 weeks ago. Now that expectations are higher, companies will have a tougher time to meet the targets in 3rd quarter. The main reason for the current performance in earnings is due to cost slashing, and not due to increased sales. You can only slash that much cost and you will need increasing revenue in order to fuel future earnings growth. Right now with record high unemployment around the globe and falling consumption, sales may hard to come by and it is not hard to judge whether these companies can continue to grow their profits. When that happens, the stock market will fall.
Therefore, the following scenario may take place:
1) The market after a hard run for 2 weeks, may rest for a while. It may be flat or continue to rally until October.
2) Between now and Oct, if some major corporation collapse and during the 3rd quarter earnings remains stagnant or depreciate, the market will probably have another correction, with more seriousness. Other concerns still remains: The implosion of commercial & personal loans.
The Response to The Uncertainty
This is my greatest challenge. To move in or not to move in. My recommendation is to observe key resistance level in the Dow and S&P500.
We are currently forming a very bullish inverse head & shoulder formation for the Dow and is nearing the breakthrough or knock down phrase. Check out the details in Wikipedia . In other words, if the Dow continues to goes up above 9500, it can run another 20%, else, it may go the other way: down. Therefore, this is an extremely difficult period to bet with the market at the turning point.
My action plan is as follows:
- If Dow goes above 9500, I will move into a 60 equity 40 bond portfolio. The 40% bonds is to prepare for any uncertainty that will occur in this period. We will watch like a hawk for the October period. Take some profits off the table.
- If Dow hits down, we watch the show and hopefully, catch the bottom before it goes up again. The first Target will be at Dow 8000
-For CPF, with the lack of available funds and the possibility of an overheated China stock market, I prefer Aberdeen Pacific. For Cash, a combination of Aberdeen and BRIC will be a good strategy.
Monday, June 08, 2009
Correction Imminent? Charts Says 50/50
We are at near a turning point. No doubt about it. The forum are abuzz and the analysts are giving confusing and conflicting advice. What about the chart? I often use Hong Kong (HSI) as I feel that the market is a good proxy for the Asia market. According to the chart, the upward trend is still intend for Hong Kong in this case. However, there are signs that the rally is exhausting or exhausted with volume drying up and unknown 3rd tier stocks are in play in the SGX. A serious correction will probably see HSI at 15000 which is an approximately 15% drop. If it goes beyong 15000, than we are in for a clear double bottom which I have been talking about some time back. For now, we can take some profits off the table and watch in glee if the market drops. So my conclusion, the market will move sideways for a week or so before the buyers give up and the bear takes over.
Tuesday, June 02, 2009
Emerging Markets Most Costly Since ‘07 on Fund Flood by Bloomberg
I believe that this article sums up my view I have on the market. Interesting perception on funds flow.
Emerging Markets Most Costly Since ‘07 on Fund Flood (Update2)
By Patricia Lui and Michael Patterson
June 2 (Bloomberg) -- The four-week flood of money into developing-nation stock funds that drove the MSCI Emerging Markets Index to an eight-month high is sending the strongest sell signal since equities peaked in October 2007.
Inflows totaled $12 billion, or 3.5 percent of developing- nation fund assets, the most since the 22-country benchmark hit its record high 19 months ago, said EPFR Global, which tracks $10 trillion in investments worldwide. The only other time since 2001 that funds attracted as much cash, in February 2006, the MSCI gauge lost 8.4 percent in four months.
The pattern signals an “imminent” drop after the MSCI index’s 3.8 percent rally yesterday pushed its advance since February to a record 61 percent, according to Michael Hartnett, a Bank of America-Merrill Lynch strategist who predicted this year’s gains in Chinese, Brazilian and Russian shares. A slower- than-estimated economic recovery in China, the largest emerging market, may spark a retreat, said RBC Capital Markets.
“Fund flows at their extremes are contrary indicators,” Leo Grohowski, who helps oversee about $132 billion as the New York-based chief investment officer at BNY Mellon Wealth Management, said in an interview. “We’re looking for some consolidation.”
BlackRock Inc., the biggest publicly traded asset manager in the U.S., and Aberdeen Asset Management Plc, Scotland’s largest independent money manager, also are forecasting a downturn after the MSCI index’s price-to-earnings ratio almost doubled this year. The gauge trades for 15.2 times reported profits, the most expensive level since December 2007, according to weekly data compiled by Bloomberg.
Doubting the Rally
The MSCI index slid 1.3 percent to 791.82 at 8:48 a.m. in London, the steepest decline since May 21.
“Investors are starting to doubt the sustainability of how much longer this very sharp rally can continue without a pullback,” said Brad Durham, the co-founder and managing director at Cambridge, Massachusetts-based EPFR Global. “Valuations are not as attractive.”
The MSCI measure dropped 48 percent in the second half of 2008, while emerging-market bonds lost 18 percent and every major currency except China’s yuan retreated against the dollar. Treasuries returned 11 percent in the same period as investors sought the highest-rated assets, according to Merrill Lynch’s U.S. Treasury Master Index.
2009 Rebound
More than $12 trillion pledged by the U.S. government to ease the global recession, along with $1 trillion of aid from international organizations to bolster developing economies, prompted investors to reverse their trades this year. The MSCI emerging-market index’s rally the past three months was the biggest since its inception in December 1987 and beat the 29 percent rise in the MSCI World Index of developed-nation shares.
The dollar lost 2.7 percent against a basket of six major currencies this year, while U.S. government securities dropped 4.3 percent through last week in their worst annual start since Merrill began tracking returns in 1978.
HSBC Private Bank’s Arjuna Mahendran said the surge in emerging-market equities may last another six months as faster economic growth in developing countries prompts investors to keep shifting out of lower-yielding assets.
Developing nations will grow 1.6 percent as a group in 2009 and 4 percent next year, according to the Washington-based International Monetary Fund, which was formed after World War II to help stabilize member countries’ economies. That compares with IMF estimates for a 3.8 percent contraction in developed economies this year and no growth in 2010.
Money-Market Funds
Yesterday’s rally in emerging-market stocks was sparked by a report showing Chinese manufacturing grew for a third month in May, fueling speculation the world’s third-largest economy is recovering.
Bullish money managers say that emerging-market stocks will keep gaining as investors shift some of the $3.8 trillion in money-market funds into equities. The funds, which aim to preserve capital without targeting high returns, hold about 60 percent more assets than the average this decade, according to the Washington-based Investment Company Institute.
“There’s a lot of money looking for decent returns and that’s going to continue driving emerging markets,” said Mahendran, the Singapore-based chief investment strategist for Asia at HSBC Private Bank, which oversaw $352 billion as of the end of last year. “They are the only place on earth where any growth is taking place.”
‘Bubble-Like’ Rush
Merrill’s Hartnett said the long-term outlook for gains in developing-nation economies and equities may not warrant the “bubble-like” rush into emerging-market stocks the past few months. For Jonathan Garner, a Morgan Stanley strategist, the surge in fund flows shows a “euphoria” among investors seen before previous market peaks.
Investors poured $19 billion into emerging-market stock funds in the four weeks to Oct. 17, 2007, EPFR data show. The MSCI gauge began tumbling from a record 1,338.49 two weeks later, losing as much as 22 percent during the next four months.
Garner, Morgan Stanley’s London-based head of Asian and emerging-market strategy, is advising clients to reduce holdings of stocks from developing countries to buy later at lower prices.
Even though developing-nation economies are expanding, earnings at companies in the MSCI emerging-markets gauge trailed analysts’ estimates by an average of 41 percent in the first quarter, a wider miss than the 6.7 percent average in MSCI’s developed markets gauge, Bloomberg data show.
Stalled Recovery
Analysts predict shares in the emerging index will fall 2.9 percent in the next 12 months on average, compared with a 3.4 percent gain for developed markets, according to estimates compiled by Bloomberg.
China’s economic recovery began to stall in the second half of April and slowed further in May, raising concern that the rebound won’t be as “strong as many recently have hoped,” Dong Tao, Credit Suisse Group AG’s Hong Kong-based economist, wrote in a report last month. He cited weaker electronics and retail industries and a slump in power consumption.
While the expansion in China’s manufacturing suggests an economic rebound in the second half of this year, investors shouldn’t expect a “straight-line” recovery, said Nick Chamie, the global head of emerging markets research at RBC in Toronto. Lower exports and a delayed increase in Chinese consumer spending may spur “mixed” economic data in the coming months and cause declines in emerging-market assets, he said.
China stock funds attracted the most money among the biggest emerging markets this year, taking in $3.6 billion. That compares with the $2.8 billion added into Brazilian funds, $483 million into India and $410 million into Russia, the three other biggest developing-nation economies, the EPFR data show.
China Stimulus
Investors lured to China by the government’s 4 trillion yuan ($586 billion) stimulus package spurred a 49 percent rally in the benchmark Shanghai Composite Index this year. The gauge trades for 21 times analysts’ estimates for 2009 earnings, the second-highest among major emerging markets worldwide after Taiwan, according to Bloomberg data.
BlackRock, which oversees about $1.3 trillion, pared holdings in China and Taiwan this year on concern prices rose too fast, said Bob Doll, the New York-based money manager’s vice chairman and global chief investment officer of equities. Emerging markets may lead a “correction,” or decline of about 10 percent, in stocks worldwide before recovering later this year, he said.
Aberdeen Managing Director Hugh Young is selling some financial stocks and buying “defensive” shares including Jakarta-based tobacco company PT BAT Indonesia on expectations companies with stable revenue will outperform during a selloff.
“Stock markets have rallied too strongly,” said Young, who helps oversee about $35 billion of Asian assets for Aberdeen in Singapore. “We are far from being out of the woods.”
To contact the reporters on this story: Patricia Lui in Singapore at plui4@bloomberg.net; Michael Patterson in London at mpatterson10@bloomberg.net.
Last Updated: June 2, 2009 04:19 EDT
Emerging Markets Most Costly Since ‘07 on Fund Flood (Update2)
By Patricia Lui and Michael Patterson
June 2 (Bloomberg) -- The four-week flood of money into developing-nation stock funds that drove the MSCI Emerging Markets Index to an eight-month high is sending the strongest sell signal since equities peaked in October 2007.
Inflows totaled $12 billion, or 3.5 percent of developing- nation fund assets, the most since the 22-country benchmark hit its record high 19 months ago, said EPFR Global, which tracks $10 trillion in investments worldwide. The only other time since 2001 that funds attracted as much cash, in February 2006, the MSCI gauge lost 8.4 percent in four months.
The pattern signals an “imminent” drop after the MSCI index’s 3.8 percent rally yesterday pushed its advance since February to a record 61 percent, according to Michael Hartnett, a Bank of America-Merrill Lynch strategist who predicted this year’s gains in Chinese, Brazilian and Russian shares. A slower- than-estimated economic recovery in China, the largest emerging market, may spark a retreat, said RBC Capital Markets.
“Fund flows at their extremes are contrary indicators,” Leo Grohowski, who helps oversee about $132 billion as the New York-based chief investment officer at BNY Mellon Wealth Management, said in an interview. “We’re looking for some consolidation.”
BlackRock Inc., the biggest publicly traded asset manager in the U.S., and Aberdeen Asset Management Plc, Scotland’s largest independent money manager, also are forecasting a downturn after the MSCI index’s price-to-earnings ratio almost doubled this year. The gauge trades for 15.2 times reported profits, the most expensive level since December 2007, according to weekly data compiled by Bloomberg.
Doubting the Rally
The MSCI index slid 1.3 percent to 791.82 at 8:48 a.m. in London, the steepest decline since May 21.
“Investors are starting to doubt the sustainability of how much longer this very sharp rally can continue without a pullback,” said Brad Durham, the co-founder and managing director at Cambridge, Massachusetts-based EPFR Global. “Valuations are not as attractive.”
The MSCI measure dropped 48 percent in the second half of 2008, while emerging-market bonds lost 18 percent and every major currency except China’s yuan retreated against the dollar. Treasuries returned 11 percent in the same period as investors sought the highest-rated assets, according to Merrill Lynch’s U.S. Treasury Master Index.
2009 Rebound
More than $12 trillion pledged by the U.S. government to ease the global recession, along with $1 trillion of aid from international organizations to bolster developing economies, prompted investors to reverse their trades this year. The MSCI emerging-market index’s rally the past three months was the biggest since its inception in December 1987 and beat the 29 percent rise in the MSCI World Index of developed-nation shares.
The dollar lost 2.7 percent against a basket of six major currencies this year, while U.S. government securities dropped 4.3 percent through last week in their worst annual start since Merrill began tracking returns in 1978.
HSBC Private Bank’s Arjuna Mahendran said the surge in emerging-market equities may last another six months as faster economic growth in developing countries prompts investors to keep shifting out of lower-yielding assets.
Developing nations will grow 1.6 percent as a group in 2009 and 4 percent next year, according to the Washington-based International Monetary Fund, which was formed after World War II to help stabilize member countries’ economies. That compares with IMF estimates for a 3.8 percent contraction in developed economies this year and no growth in 2010.
Money-Market Funds
Yesterday’s rally in emerging-market stocks was sparked by a report showing Chinese manufacturing grew for a third month in May, fueling speculation the world’s third-largest economy is recovering.
Bullish money managers say that emerging-market stocks will keep gaining as investors shift some of the $3.8 trillion in money-market funds into equities. The funds, which aim to preserve capital without targeting high returns, hold about 60 percent more assets than the average this decade, according to the Washington-based Investment Company Institute.
“There’s a lot of money looking for decent returns and that’s going to continue driving emerging markets,” said Mahendran, the Singapore-based chief investment strategist for Asia at HSBC Private Bank, which oversaw $352 billion as of the end of last year. “They are the only place on earth where any growth is taking place.”
‘Bubble-Like’ Rush
Merrill’s Hartnett said the long-term outlook for gains in developing-nation economies and equities may not warrant the “bubble-like” rush into emerging-market stocks the past few months. For Jonathan Garner, a Morgan Stanley strategist, the surge in fund flows shows a “euphoria” among investors seen before previous market peaks.
Investors poured $19 billion into emerging-market stock funds in the four weeks to Oct. 17, 2007, EPFR data show. The MSCI gauge began tumbling from a record 1,338.49 two weeks later, losing as much as 22 percent during the next four months.
Garner, Morgan Stanley’s London-based head of Asian and emerging-market strategy, is advising clients to reduce holdings of stocks from developing countries to buy later at lower prices.
Even though developing-nation economies are expanding, earnings at companies in the MSCI emerging-markets gauge trailed analysts’ estimates by an average of 41 percent in the first quarter, a wider miss than the 6.7 percent average in MSCI’s developed markets gauge, Bloomberg data show.
Stalled Recovery
Analysts predict shares in the emerging index will fall 2.9 percent in the next 12 months on average, compared with a 3.4 percent gain for developed markets, according to estimates compiled by Bloomberg.
China’s economic recovery began to stall in the second half of April and slowed further in May, raising concern that the rebound won’t be as “strong as many recently have hoped,” Dong Tao, Credit Suisse Group AG’s Hong Kong-based economist, wrote in a report last month. He cited weaker electronics and retail industries and a slump in power consumption.
While the expansion in China’s manufacturing suggests an economic rebound in the second half of this year, investors shouldn’t expect a “straight-line” recovery, said Nick Chamie, the global head of emerging markets research at RBC in Toronto. Lower exports and a delayed increase in Chinese consumer spending may spur “mixed” economic data in the coming months and cause declines in emerging-market assets, he said.
China stock funds attracted the most money among the biggest emerging markets this year, taking in $3.6 billion. That compares with the $2.8 billion added into Brazilian funds, $483 million into India and $410 million into Russia, the three other biggest developing-nation economies, the EPFR data show.
China Stimulus
Investors lured to China by the government’s 4 trillion yuan ($586 billion) stimulus package spurred a 49 percent rally in the benchmark Shanghai Composite Index this year. The gauge trades for 21 times analysts’ estimates for 2009 earnings, the second-highest among major emerging markets worldwide after Taiwan, according to Bloomberg data.
BlackRock, which oversees about $1.3 trillion, pared holdings in China and Taiwan this year on concern prices rose too fast, said Bob Doll, the New York-based money manager’s vice chairman and global chief investment officer of equities. Emerging markets may lead a “correction,” or decline of about 10 percent, in stocks worldwide before recovering later this year, he said.
Aberdeen Managing Director Hugh Young is selling some financial stocks and buying “defensive” shares including Jakarta-based tobacco company PT BAT Indonesia on expectations companies with stable revenue will outperform during a selloff.
“Stock markets have rallied too strongly,” said Young, who helps oversee about $35 billion of Asian assets for Aberdeen in Singapore. “We are far from being out of the woods.”
To contact the reporters on this story: Patricia Lui in Singapore at plui4@bloomberg.net; Michael Patterson in London at mpatterson10@bloomberg.net.
Last Updated: June 2, 2009 04:19 EDT
Monday, June 01, 2009
The New Flushing Toilet Automobile
With one of the world's iconic automaker in the world going bust on 1st of June 2009, we are ushered into a new era. A new era of clean, comfortable of toilet bowls on wheels!
The Big Rally! Sustainable or a Fluke
Hopes are High and Doubts are Gone? From Despair to Hope - All in 3 Months
First, a round of apologies for being late with this issue. I discovered that spending three weeks in an army camp really dull your mind and wits. In fact, I already feel my IQ dropping as soon as I put on my uniform. A few days of recovery is needed to reach full capacity and intelligence to write a good article.
The world has changed somewhat since I last wrote. The swine flu is still spreading quickly but the mortality and threat seems low at the moment. The stress test came and went and it is practically a non event. North Korea threatened to fire a couple of nukes at her neighbors but so far, the market largely ignored the threats. Many people are asking, what is causing the rally? Recently, I polled a group of my friends and clients who are business analysts, directors and professionals. Their feedback to me is that, most of the company outlook remains bleak and fundamental remains horrible for the second quarter. One a closer look, we will realize that main driver is a combination fear, a fear for missing out what may be known as one of the biggest opportunity of the century.
The Rally Unsustainable? - All About Economics!
This is probably one of the most confusing period of the generation. Many people are asking me: Should I jump in now? Will I miss the bull market? Oh No, I better get in before I missed it. I am equally confused a week ago, given my quarantine while serving my time in an army barrack. On a closer examination a week later, I am alarmed by the jump in the stock market and other indicators. Before I go deeper, we have to first understand what is the cause.
Popular belief that the market is running because the market is recovering. Well, that fact is still being contested by many prominent economists. The best reason I can come up with is the need to seek higher yield in this zero interest economy. First we must understand the fact that the "safest" investment in the world is in US Treasuries (Government Bonds). When the market is crashing, investors around the world liquidate their investments and moved their money into US dollar, snapping up US Treasuries. With the sudden influx of foreign money, USD/SGD strengthened suddenly to $1.55 and bond prices simply shot up. As you may have remembered from Economics 101, that when bond prices move up, the interest (yield) will drop. That is good for the world as our companies now make more profit from currency exchange as we export to US. A low yield rate for the US treasuries will ensure cheap loans to companies and home owners, whom the economy relies heavily on to get the nation back on it's feet.
With some confidence restored back into the economy, investors withdrew money from US treasuries in mass exodus and parked the money in, our part of the world, namely China and Asia for higher gains. USD/SGD fell to 1.45 in 3 months. For the export nations of the East, it is a disaster as 10% of your profits are wiped out in one quarter due to currency exchange. Also, when investors sell treasuries, bond yield shot up too fast too quick, adding 100 basis points or 1.0% in a couple of weeks. Imagine how much more mortgage you need to pay with a 1% increase. With the real estate market in US dangling on a thread, it's not hard to see how this unexpected jump may derail the whole recovery process again.
A Page from History
Taking a page from history, it is remarkable to note that sharp spikes in bond yields do lead to sharp drops in the equity markets. The inverse is also true. Sharp drop in yield will lead to big rallies. 
Lets take a look at what we have today. 
The disturbing news is that the yield has spiked tremendously, a magnitude not seen since the troubling times of 1970s and 1980s. With a falling export profit due to a weakening USD in Asia and Europe,a sharp spike in lending rates and exploding oil prices, one wonders how much more the market can run.
A Gradual Rise is Preferred
For a sustainable stock market bull market to occur, things must happen in moderation. Yields and USD will fall inevitably when the market recovers. However, a too quick a drop or rise will create a lot of uncertainty in the market. The one thing markets love is certainty. If the pattern do hold and the global markets correct, US and Europe will be hit the worst, Asian markets will probably not as badly effected, given the optimism we are seeing in this part of the world. Meanwhile, I will continue to move a tiny portion into Asia as part of the tranching in strategy.
Wednesday, April 29, 2009
Revenge of the Swine
This recession is getting eerily similar to the Dot Com Bust we went through from 2000-2003. The economy is on its way to recover in late 2002 when the bird flu came along. To make things perfect, we just need another war to serve as dessert before recovery takes place. Afghanistan looks like a hot spot with the Taliban regrouping and President Obama putting emphasis on that part of the world. North Korea looks like another potential candidate too.
The Illusions of Recovery?
The Green Shoots are Turning Brown Even Before They can Grow. Or is There in the First Place
The market has a major recovery since it's March lows and is current stagnant, the major players trying to decide where the economy is actually going. Is this the start of the recovery? Or is there still hidden skeletons in the closets. Why is it that recent bank results from Citibank, JP Morgan, Bank of America were positives with the banks turning in a profit for the first time since last year and yet the market behaves as if it never happened. Why is the US government going through great effect that the stress test results are actually positive, with a few bad factors of course, when things could be worse. This issue, we will explore the facts, myth and conspiracies that will determine when we will recover.
The Recovery of Banks? Truth or False
The verdicts are out. Some of the biggest banks in US are earning around 1 billion dollars of profit for the first quarter of 2009. It is the first profit seen since the start of the subprime crisis. The market rallied 29% on news from an internal memo that Citibank is making money for the first 2 months. The rest of the banking giants came along and reassure the investors that they are making money. The market recovery should be in place with banks now making profits, but the rally simply fizzled right after the banks announced their results.
International Monetary Fund (IMF ) adjusted their assessment of the extent of the toxic subprime from 1 trillion dollars in 2008 to 4 trillion dollars in 2009. That means the banks should be reporting losses given that the write downs should worsen instead of making a profit. One of the key factor is the change of the accounting rules for the toxic assets. Citigroup recorded revenue of $2.5 billion from a decline in the value of its own bonds. A 2007 change in accounting rules allowed the company to gain from its investors' loss because the company conceivably could buy back the debt at the lower value, paying less than it originally expected. Earlier this year, accounting rule-makers also loosened the rules that determine when a company must recognize a decline in an asset's value as a permanent loss. Citigroup said that change added about another $600 million to its bottom line. Goldman Sachs last reported earnings through the end of November. It reported a profit for the first three months of 2009, then separately reported a large loss during the orphaned month of December. The company switched its reporting periods as a consequence of its decision to become a bank.
With all these manipulation going on, it is not surprising that most of the banks record a good profit for the quarter. The real test comes after the second quarter. If the banks still continue to report such stellar profits, than we are indeed in a recovery stage. Any sharp profit drops will remind the world what creative accounting can actually do: That is to help the balance sheets of a company.
The US Banks Stress Test
A stress test is conducted on 19 of the largest financial institutions in US to examine the survivability of these banks in the face of a worsening toxin environment and how many of them can withstand any other shocks similar to the collapse of Lehman Brothers and the unwinding of even more leveraged products. The interesting observation is that President Obama is initially reluctant to release the results of the stress test. However, under great pressure from the public, it is announced that stress test results will be announced on 6 May 2009. Other observations includes VIP coming out and declaring that US banks are "well capitalized" with a few "exceptions" and the banks are "recovering" and most will not "need more help" with a few "exceptions". It seems that the government are on a public relations spree to assure the world that the banks are generally in good shape. What's strange is the initial reaction to withhold the results and the excessive propaganda about the "fine banks" make all this a bit suspicious. Are they trying to smooth over the fact that the results are "fine" when in actual fact, many of the banks may be in risk of liquidation and collapse? Are they trying to reinforce the confidence setting a new benchmark such that a bad bank years ago can be considered as a "fine" bank in today's context. Well, 6 May will tell us the answers. If the government delivered what they declared without any creative accounting, the banks may be true and well. If the darker prediction of the stress test results comes true, the market will be in for another dive.
Practical Singapore
One interesting observation was made by a fellow respected Singaporean, our Minister Mentor Lee Kuan Yew, says, ".. if you believe what Bernanke and Geithner say, there are 'green shoots'; American banks are beginning to show a little bit of profit. But that may be because they've changed their method of reckoning, per quarter instead of December which counts from January."
"So I have my doubts. But anyway, it's good to be optimistic. The Americans are always optimistic, which is good."
Minister Mentor Lee effectively downplayed the impact of the recent optimism and also predicted that the subprime will last till 2011. Being a small country, we have no room for rosy prediction and positive thinking. Given, that we are in the worst recession since the founding of modern Singapore. We have to be practical about the extend of the crisis and react accordingly to the severity of the recession. It seems the US government is trying all means to turn the economy around, including positive propaganda that things are getting better. After all, we are in a confidence led crisis. It is the lack of confidence on the banking system that lead us to this mess, from a small subprime problem. Positive thinking may help US but not for us. Perhaps, our leaders have a more realistic outlook on when this crisis may really end.
Strategy For Now
I mentioned in the last article that we are probably in for a minimal "W" shape recovery before we commit all our capital into more aggressive funds. We are currently at the brink of turning back down, all eyes on the bank stress test results. Meanwhile, latest economic data remain mixed. Some are worse, some are getting better. Getting better means these results are falling less. Falling less still means falling. It also means that things are worsening at a slower pace, that's all. Most major traders and investors also believed that a "W" shape recovery is "suitable" in this market. With self fulfilling prophecy at work, it is not hard to follow the crowd and go along with the belief of a "W" shape recovery. Of course, measures are in place, just in case it is not a "W" but a "V" or even a "L"
Tuesday, March 24, 2009
Oil Breaks Out!
We have some good news here! We had a breakout in oil prices. A good breakout from the $35 - $50 range. The next potential price wikll be at $65. I will be initiating a move to energy related funds with immediate effect.
Thursday, March 19, 2009
Examinations of Past Recessions
What are the Signs before the Great Bull? Learning from the Past
In the last few weeks, there are quite a number of good news coming from the market. The banks are scrambling to announce that they are making money at last! After losing trillions since Oct 2007. The US real estate seems to have a slight recovery with an increase in new houses built. Commodities prices are up too with oil prices hitting $49, seeming to indicate that factories around the world are starting to put their engines into action. Looks like we are close to a recovery of the market. However, what are some of the signs before the big recovery takes place? Let's take a page from history
The Recession Next to the Great Depression
In the US history, there has been 3 major bear market which were declared as the worse recession since the Great Depression by the press. There are a total of 8 recessions since the end of WWII. To make our comparison fair, we examine 4 of the worst stock market drops in the 20th century and their charts.
With a grand loss of 51%, it is the worst bear market since Great Depression. The problem with serious recessions is that fundamental data cease to work and economic data continues to be depressing way after the stock market starts to recover. The only way for now is to examine the psychology of the investors which means, looking at charts.
Based on what we see, the recent rally seems to be a fluke rally. There will be another bottom either of the same level as the last bottom we see at Dow 6600 or anywhere between 6600 to 8000. Therefore, the range for now should be a good time to enter. Based on the past bear markets, the period between the 2 lows is between 2 to 8 months. Since our recession is somewhat in between the worst and best, the market may take another 3 to 5 months to hit the next bottom, which us between June to August.
Strategy For Now
My stand on China and commodities especially energy related commodities still stands. These 2 sectors remains some of the best performing sectors for 2009. One of my minor recommendations, financial stocks, are making a big comeback of 25% in 2 weeks. Citibank jumped from $1 to $3 in 2 weeks. Financial stocks are still pretty risky in my opinion with big swings of up to 50% within a month. Buy financial only if you can stomach the risk. An interesting sector that has been doing well recently is Taiwan, due to the boost in the economic relationship with China. However, with their economy still mainly dependent on exports, both Taiwan and Singapore will probably be the least potential markets within the emerging markets sphere.
Cartoon Quips of the Month
Should us, Asians, be outraged with the $165 millions bonus paid to the AIG trading and derivatives team? After all, the US government are printing money to rescue them and we are the ones buying up their US treasuries to fund all the bailouts. And where do our government get the money to do that? Our CPF? Our tax?
Monday, March 02, 2009
News Alert - STI breeched support level. 1350 - 1450 bottom expected
The STI index just breeched a new low. Next expected level potentially will be between 1350 to 1450. Hold off all those temptation to buy STI blue chips in the short term as they have a high chance to get cheaper. DBS is expected to bottom at around $5-$6. Hong Kong stocks on the other hand has been holding on well, thanks to the China factors. Gold bounced off $1,000 and is now consolidating between $900 to $1000. Analyst and commodities experts believed that gold is overvalued compared to other commodities such as oil and agriculture and is expected not to have too much growth.
Tuesday, February 24, 2009
Gold gold gold. Breakout imminent
Gold had a good run since Nov 2008. However, the recovery is fragile until the last one week when it broke strong support at 950. Once it breech $1000, the market rally will continue and the expected price will be $1,600 - 1,800 by the end of 2 years. it may correct at the $1000 market before penetrating the $1000 point. accumulate at this point. A potential inverse head and shoulder will be formed. Market Volume is dismayal so any investors can push the price up and down. It seems that investors are anticipating the US dollar is going to fall soon so flight to gold is the first clue. Start offloading any US dollar deposits and bonds.
Monday, February 23, 2009
Market Alert! New lows reached by the Dow and SnP500. More losses expected
The US just hit the 1997s low and the Asia market are being hit badly as I typed this email. The US market for Dow is expected to hit 6,500 to 7,000 before stablizing. That's good news as this indicate that the upturn will come earlier than expected, as I have been expected this drop maybe in april but it has happened now.
The asia emerging market, best represented by hong kong, it nearing the breeching point to go lower. It will depend on today performance. However, even China influence, probably HSI will hit the old low before rebounding again. 
For now, we can move some capital into the market to capitalize on the new lows. The frequency of movement probably has to be hastened as the market recovery may be nearer than I thought. Commodities and BRIC economies are still the best sectors to position themselves for the recovery. Banking stocks and high yield bonds will have extremely high potential given their extremely depressed level. These are our secondary candidates for higher returns once the market starts to recover.
Warmest Regards,
The asia emerging market, best represented by hong kong, it nearing the breeching point to go lower. It will depend on today performance. However, even China influence, probably HSI will hit the old low before rebounding again. For now, we can move some capital into the market to capitalize on the new lows. The frequency of movement probably has to be hastened as the market recovery may be nearer than I thought. Commodities and BRIC economies are still the best sectors to position themselves for the recovery. Banking stocks and high yield bonds will have extremely high potential given their extremely depressed level. These are our secondary candidates for higher returns once the market starts to recover.Warmest Regards,
Wednesday, February 18, 2009
Contributor to the Financial Crisis?
Ever wondered how did the world get into such trouble? Maybe the below illustration will give us a clue..
Signs of Recovery? Hints and Clues
Trying to find the End of the Rainbow. Where is that Pot of Gold?!?
The market has been quiet for the past few months despite horrible data originating from all corners of the world. We have US falling into deflation for the first time in 50 years. We have Japan falling into serious recession not seen since end of the world war. We have Europe and UK admitting their fallacy of not acting faster during 2008 and believe that the economy is plunging into deep recession. Governments around the world try to get their act together to stimulate the economy out of the recession. Despite all the Doom and Gloom, there is a ray of light around the corner.
The Things to Look Out for: Baltic Dry Index (BDI)
The Baltic Dry Index provides "an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a time charter and voyage basis, the index covers dry bulk carriers carrying a range of commodities including coal, iron ore and grain." Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as an efficient economic indicator of future economic growth and production. Other leading economic indicators — which serve as the foundation of important political and economic decisions - are often massaged to serve narrow interests, and subjected to adjustments or revisions. Payroll or employment numbers are often estimates; consumer confidence appears to measure nothing more than sentiment, often with no link to actual consumer behavior; gross national product figures are consistently revised, and so forth.
The BDI during May 2008 marks the peak of the commodity markets and the start of the slow down of world economic growth, along with one of the most dramatic market crash to occur in Oct 08. The maritime industry is hurt badly by the sudden fall in shipping rates. One interesting thing to note, the rates has jumped in the past few weeks. Industrial metals such as copper and iron has seen an improvement in prices. Precious metals is also one of the best performing sectors in the market in 2009. All this ties down to one thing: Factories are taking orders again and growth is starting to kick back in. February definitely is an improvement compared to the bleak months from Nov to Jan.
Best Sectors of 2009 - And the Strategy
The best sectors so far belongs to the commodities - precious metals category. Another gleaming beacon is the China market which has been up 20% so far this year. BRIC funds also performed relatively well. The worst performers are the real estate and financial funds. Based on the current situation, it seems that commodities and BRIC funds will be the first beneficiary of the recovery. Extremely undervalued property and finance will probably take a while longer to recover compared to the rest. However, their recovery will be steep and powerful. A portfolio made up of commodities, BRIC and a good 20-30% of the portfolio in financial will be well positioned to take on the recovery. Now that there are hints of recovery, the pace of moving from defensive cash and bonds has to be hastened. The general market will probably trend down and hit new lows before any recovery takes place. However the world is not as gloomy as it is 2 months ago as a few beam of sunlight penetrate the darkness globally.
The market has been quiet for the past few months despite horrible data originating from all corners of the world. We have US falling into deflation for the first time in 50 years. We have Japan falling into serious recession not seen since end of the world war. We have Europe and UK admitting their fallacy of not acting faster during 2008 and believe that the economy is plunging into deep recession. Governments around the world try to get their act together to stimulate the economy out of the recession. Despite all the Doom and Gloom, there is a ray of light around the corner.
The Things to Look Out for: Baltic Dry Index (BDI)
The Baltic Dry Index provides "an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a time charter and voyage basis, the index covers dry bulk carriers carrying a range of commodities including coal, iron ore and grain." Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as an efficient economic indicator of future economic growth and production. Other leading economic indicators — which serve as the foundation of important political and economic decisions - are often massaged to serve narrow interests, and subjected to adjustments or revisions. Payroll or employment numbers are often estimates; consumer confidence appears to measure nothing more than sentiment, often with no link to actual consumer behavior; gross national product figures are consistently revised, and so forth.
The BDI during May 2008 marks the peak of the commodity markets and the start of the slow down of world economic growth, along with one of the most dramatic market crash to occur in Oct 08. The maritime industry is hurt badly by the sudden fall in shipping rates. One interesting thing to note, the rates has jumped in the past few weeks. Industrial metals such as copper and iron has seen an improvement in prices. Precious metals is also one of the best performing sectors in the market in 2009. All this ties down to one thing: Factories are taking orders again and growth is starting to kick back in. February definitely is an improvement compared to the bleak months from Nov to Jan.
Best Sectors of 2009 - And the Strategy
The best sectors so far belongs to the commodities - precious metals category. Another gleaming beacon is the China market which has been up 20% so far this year. BRIC funds also performed relatively well. The worst performers are the real estate and financial funds. Based on the current situation, it seems that commodities and BRIC funds will be the first beneficiary of the recovery. Extremely undervalued property and finance will probably take a while longer to recover compared to the rest. However, their recovery will be steep and powerful. A portfolio made up of commodities, BRIC and a good 20-30% of the portfolio in financial will be well positioned to take on the recovery. Now that there are hints of recovery, the pace of moving from defensive cash and bonds has to be hastened. The general market will probably trend down and hit new lows before any recovery takes place. However the world is not as gloomy as it is 2 months ago as a few beam of sunlight penetrate the darkness globally.
Tuesday, February 17, 2009
Technical Analysis of US Market
The last few months after the Lehman Brother crisis has been pretty violently peaceful. The market is trading in a range between 800 to 900. However, the trend is getting weaker with a descending triangle formed. There is a high chance the 800 point will be breeched and we will visit the lows seen in Nov. If a bounced occurs, it means that the market has found it's bottom and 750 should be the absolute bottom. If not, prepare your funds, it's time to buy as this will probably be the last wave down.
Thursday, December 18, 2008
Friday, December 12, 2008
Moving in A Little By Little
Now seems like a good time to move into Energy funds and BRIC Funds by now. Let me elaborate a bit further on the basis of my decision.
1) The initial strategy is to move 10% of the portfolio into Equities each time the market dips to a new low. That's what we are doing now. Some of you may be asking that the stock market is soaring right now. Why are we going in? The reason is simple: The soar we have been seeing is a bear market rally. The fundamental hasn't improved dramatically since the market began to rally 3 weeks ago. Therefore, it will fall back to a low sooner or later. The market is in the process of correcting downwards as I write this email as the bailout for auto makers in US is shot down by the US senate.
2) Why energy and BRIC. First thing is that Oil prices has tumbled from $147 to $40 range. At one point of time, it tumbled below $40. One of the key trends that we will observe after the entire financial debacle is over will be the result of a global inflation. The world government pumped in billions, if not, trillions to rescue banks and now, potentially, other industries. If US is technically bankrupted, where do they get the trillions to rescue the banks? The answer lies with the issuing the US treasuries to the rich Asian countries. This wanton printing of money will result in a massive devaluation of the US dollar in the future once the economy recovers. With that, Industrial commodities, Gold and countries producing these commodities will be the direct beneficary of the booming commodities market. For the cash investors, we can directly invest into stocks of energy companies like Esso Mobile, Shell and BP where else, there are multiple restrictions on the type of funds available for CPF-OA investors. Therefore, BRIC with Brazil and Russia as key commodities producers for the world will benefit. Of course, let's not forget the rising economic powers of India and China. These countries stock market has been hit the worst as the commodities and manufacturing collapse. These countries will be the first benificiary once risk appetites returns.
3) All in all, there are silver linings along with all the horrible news we have been hearing. The US real estate market has stablized a little, the world governments (except Singapore. No GST Cuts, No Tax Cuts, No ERP Cuts) are throwing everything they got to combat the financial crisis. It seems like government interventions do bring some stablization to the stock market in general so the government will continue to find innovative solution to solve the present crisis. For clients who still wish to invest now, do not throw in every, save some for reserves. For those who can afford it, Hedge Funds are still returning the best returns of all the asset class for now, with an average return of 15-20%. If not, energy and BRIC are an attractive alternative with these market already lost more than 70% of their value and the downside will be limited unless something disastrous of the scale of Lehman Brothers occurs again. Maybe, this time will be the Auto makers? Maybe not.
1) The initial strategy is to move 10% of the portfolio into Equities each time the market dips to a new low. That's what we are doing now. Some of you may be asking that the stock market is soaring right now. Why are we going in? The reason is simple: The soar we have been seeing is a bear market rally. The fundamental hasn't improved dramatically since the market began to rally 3 weeks ago. Therefore, it will fall back to a low sooner or later. The market is in the process of correcting downwards as I write this email as the bailout for auto makers in US is shot down by the US senate.
2) Why energy and BRIC. First thing is that Oil prices has tumbled from $147 to $40 range. At one point of time, it tumbled below $40. One of the key trends that we will observe after the entire financial debacle is over will be the result of a global inflation. The world government pumped in billions, if not, trillions to rescue banks and now, potentially, other industries. If US is technically bankrupted, where do they get the trillions to rescue the banks? The answer lies with the issuing the US treasuries to the rich Asian countries. This wanton printing of money will result in a massive devaluation of the US dollar in the future once the economy recovers. With that, Industrial commodities, Gold and countries producing these commodities will be the direct beneficary of the booming commodities market. For the cash investors, we can directly invest into stocks of energy companies like Esso Mobile, Shell and BP where else, there are multiple restrictions on the type of funds available for CPF-OA investors. Therefore, BRIC with Brazil and Russia as key commodities producers for the world will benefit. Of course, let's not forget the rising economic powers of India and China. These countries stock market has been hit the worst as the commodities and manufacturing collapse. These countries will be the first benificiary once risk appetites returns.
3) All in all, there are silver linings along with all the horrible news we have been hearing. The US real estate market has stablized a little, the world governments (except Singapore. No GST Cuts, No Tax Cuts, No ERP Cuts) are throwing everything they got to combat the financial crisis. It seems like government interventions do bring some stablization to the stock market in general so the government will continue to find innovative solution to solve the present crisis. For clients who still wish to invest now, do not throw in every, save some for reserves. For those who can afford it, Hedge Funds are still returning the best returns of all the asset class for now, with an average return of 15-20%. If not, energy and BRIC are an attractive alternative with these market already lost more than 70% of their value and the downside will be limited unless something disastrous of the scale of Lehman Brothers occurs again. Maybe, this time will be the Auto makers? Maybe not.
Tuesday, October 14, 2008
The Unfolding of The Financial Armageddon
Are We At The Market Bottom Yet? The Next 6 Months Will Tell
It seems that it is not only the recent Olympics that we have seen many new records broken, the financial market has broken a couple of records too. The steepest one week drop in history when the Dow lost 20% in a week. The greatest one day jump of 11% in 75 years. So, are we at the bottom at last?
Praying For A Bottom
So, with the 11% jump and a reversal of global stock market, people are asking: Are we finally at a turning point yet. There is no real answer. Share prices is bound to rally spectacularly after such a steep drop, but by no means we are at the clearly at the turning point of another bull run. We have been cautiously bearish until Friday's approval of the bailout and the resultant market reaction. Prior to 3 months ago, we were still positive about emerging market equities given the limited exposure to sub prime. Now, we change my view from avoid all risk except Asia to avoid all risk. Some of the factors that point to the worsening of the impact of the credit crunch includes a contraction of consumer spending, the first since the Great Depression and the highest unemployment rate since 2003. Small and big businesses in US is unable to access to their credit lines to manage their cash flow due to the reluctance of banks to lend and we are seeing small and medium companies: the backbone of the economy turning belly up.
Previously, the sub prime is only limited to banks and financial institutions. The poison is spreading faster and further than thought possible. So far, we have only heard of big financial institutions getting into trouble. But now, we are seeing non financial related industries being adversely impacted. A benchmark of the market not falling below 10,000 points for the Dow, will probably lead to a mild recession. With Dow below 10,000, we are looking at a potential drop of another 30% drop to 6,000.
Praying For A Bottom
So, with the 11% jump and a reversal of global stock market, people are asking: Are we finally at a turning point yet. There is no real answer. Share prices is bound to rally spectacularly after such a steep drop, but by no means we are at the clearly at the turning point of another bull run. We have been cautiously bearish until Friday's approval of the bailout and the resultant market reaction. Prior to 3 months ago, we were still positive about emerging market equities given the limited exposure to sub prime. Now, we change my view from avoid all risk except Asia to avoid all risk. Some of the factors that point to the worsening of the impact of the credit crunch includes a contraction of consumer spending, the first since the Great Depression and the highest unemployment rate since 2003. Small and big businesses in US is unable to access to their credit lines to manage their cash flow due to the reluctance of banks to lend and we are seeing small and medium companies: the backbone of the economy turning belly up.
Previously, the sub prime is only limited to banks and financial institutions. The poison is spreading faster and further than thought possible. So far, we have only heard of big financial institutions getting into trouble. But now, we are seeing non financial related industries being adversely impacted. A benchmark of the market not falling below 10,000 points for the Dow, will probably lead to a mild recession. With Dow below 10,000, we are looking at a potential drop of another 30% drop to 6,000.
Scenario 1: At The Bottom
The best case scenario. The market is at the bottom, stabilizes between Dow 7,000 to 10,000 points. By no means the market will have a V shape recovery judging that the toxin has spread to non-financial institution. Even with the freeing of credit, the market will take at least another 2 more quarters to get back into shape again. The 11% rally will just be part of a bear market rally. Reason: because there are still sellers who are waiting to get out but are trapped in the 20% plunge last week. They will attempt to cut loss and sell into any rally. This process will go on for at least 2 quarters until the sellers are all exhausted. Than a base for the bull market can be formed.The strategy for this process is simple. Every time the dow hits between 7500 and 8500, we will move 10-20% of the funds back in from cash to banking and emerging market stock.
Scenario 2: The Worst Recession Since The Great Depression
The worse case scenario. Many believed that this recession is definitely more serious than that during the dot com bubble days. The greatest fear is that we are only at the edge of the iceberg. By all means, if the potential recession is worse than that of dot com, the market has a high probability of dropping below that of the previous bottom. In that case, Dow 5,000 to 6,000 is a possibility.The Rationale of Holding Cash
Simply put, the market will either stabilize or get worse. Therefore, holding cash and sovereign bonds will be the best strategy for now. During the great depression, blue chip stocks lost 90% of their value. That is the kind of benchmark we should take note should the market really turn for the worse. On the positive side, the current environment is no way like the Great Depression days. During the Great Depression: GDP fell 30%, unemployment exceeded 20%, inflation dropped 33%. Therefore, there is a need to be on the caution side rather than being too optimistic or pessimistic.
Simply put, the market will either stabilize or get worse. Therefore, holding cash and sovereign bonds will be the best strategy for now. During the great depression, blue chip stocks lost 90% of their value. That is the kind of benchmark we should take note should the market really turn for the worse. On the positive side, the current environment is no way like the Great Depression days. During the Great Depression: GDP fell 30%, unemployment exceeded 20%, inflation dropped 33%. Therefore, there is a need to be on the caution side rather than being too optimistic or pessimistic.
Monday, September 22, 2008
Financial Triple Whammy - The Eye of the Hurricane
After the most chaotic week in the financial market, it's now a good time to take charge and see where the market will go from here. A few more interesting development:
-The Thursday and Friday is the biggest 2 days rally since 1929
-Goldman and Morgan Stanley have been granted the approval to convert from investment banks to commercial banks. So, we will soon see Goldman and MS ATM machines around
- Democrats want to add provision to help the man on the streets rather than the big banks and their executive who got rich making mistakes. The 700 billion proposed bailout may be diluted from a total bank bailout to more of a country wide bailout
Now, there is a lot of mixed message in the market. There are analyst who herald the last 2 days development at the end of the bear market and the start of the bull market. There are of course skeptics. So now, the environment has changed from total pessimism to that of cautious optimism. Of course both sides of the argument make sense. Now, the only thing is to figure out who is actually right. That's the greatest challenge. For now, the momentum of the market should still be on the upward trending side.
I would suggest investor to ride the upward trend till the end of the week and from there, we see what is the development.
-The Thursday and Friday is the biggest 2 days rally since 1929
-Goldman and Morgan Stanley have been granted the approval to convert from investment banks to commercial banks. So, we will soon see Goldman and MS ATM machines around
- Democrats want to add provision to help the man on the streets rather than the big banks and their executive who got rich making mistakes. The 700 billion proposed bailout may be diluted from a total bank bailout to more of a country wide bailout
Now, there is a lot of mixed message in the market. There are analyst who herald the last 2 days development at the end of the bear market and the start of the bull market. There are of course skeptics. So now, the environment has changed from total pessimism to that of cautious optimism. Of course both sides of the argument make sense. Now, the only thing is to figure out who is actually right. That's the greatest challenge. For now, the momentum of the market should still be on the upward trending side.
I would suggest investor to ride the upward trend till the end of the week and from there, we see what is the development.
Friday, September 19, 2008
Financial Triple Whammy:Day 5 Evening: Technical Rebound and Recovery
Today is an interesting day as the World's financial markets rebound strongly. Stronger than what I expected actually. Here is a break down of the recovery:
China: 9.46%
Hong Kong: 9.61%
India: 5.16%
Singapore: 5.78%
Russia: 22.1% at this moment.
UK: 7.86%
What spurred the market? They are just as what I described in the morning. Setting up of a global liquidity fund with other central banks, Creating an organization to help US firms to sell off the bad debts. the latest news to add to the good news is that China abolish their share purchase tax and the government is buying back the shares of the largest China stocks. Barring any negative news from a new bank or mortgage company, this feel good rally will last a week or so.
However, the rally will not last as long as the fundamental problem is not solved. The stablization of the US property market. What happens after this rally, we will lay back and take a look.
I may start implementing the cut-backing, bottom fishing strategy in a within these few days when the market is still favorable.
China: 9.46%
Hong Kong: 9.61%
India: 5.16%
Singapore: 5.78%
Russia: 22.1% at this moment.
UK: 7.86%
What spurred the market? They are just as what I described in the morning. Setting up of a global liquidity fund with other central banks, Creating an organization to help US firms to sell off the bad debts. the latest news to add to the good news is that China abolish their share purchase tax and the government is buying back the shares of the largest China stocks. Barring any negative news from a new bank or mortgage company, this feel good rally will last a week or so.
However, the rally will not last as long as the fundamental problem is not solved. The stablization of the US property market. What happens after this rally, we will lay back and take a look.
I may start implementing the cut-backing, bottom fishing strategy in a within these few days when the market is still favorable.
Financial Triple Whammy Crisis: Day 5 - Startling developments and Reversal
There are new developments in the US market last night. The market advanced around 4% last night due to these developments:
1) The FSA, UK independent financial regulator placed a ban on short selling on all financial stocks. The SEC, US stock exchange regulator tightened rules on short selling and may consider an all out ban on short selling.
Implications - Shortselling is to sell a stock at a higher price and to buy back at a lower price, thereby, profiting when the market goes down. The wild swings in the market and irrational selling has been blamed on shortselling. By banning shortselling, the market will have less pressure going down unless investors really sells the stock that they are holding. In the world of investing, there are long term investor, short term investor and the shorters. With the shorters gone and the short term investor probably have exited frrom the market by now, the market should reach a resemblance of stablization. The people that will be affected will be the hedge funds and the insitutional investor.
2) There is rumor that the US treasury is setting up a Resolution Trust Corporation type arrangement that solved the savings and loans crisis in the US during the 1980s. This will help to resolve the bad debts associated with Fannie and Freddie as well as AIG. The implication is that this will stablize the market allowing better liquidity of the market and restore some investor confidence - Which has been in short demand in recent days.
Final implication
This is in technical analysis what we call a key reversal day, when the stock market started low and closed high at an astonishing volume. Normally, a key reversal day signals a change in trend and here is where the technical rebound will probably start. So is the bottom reached? There is no clear answer yet as we are still in a clear downtrend. Until the the Dow reaches 11800 and above than we are safely out of the crisis zone. Thats another 8% upwards to go. For now, we should be in a clear zone from the drabbing for another week or so, until something blows up.
Other good news is that we are in the traditionally weak september months. The december effect of stocks rising during winter period will probably help the market along. Again, we have to look to the housing market to stablize for the whole crisis to resolve itself. Else, we will continue our financial abyass.
1) The FSA, UK independent financial regulator placed a ban on short selling on all financial stocks. The SEC, US stock exchange regulator tightened rules on short selling and may consider an all out ban on short selling.
Implications - Shortselling is to sell a stock at a higher price and to buy back at a lower price, thereby, profiting when the market goes down. The wild swings in the market and irrational selling has been blamed on shortselling. By banning shortselling, the market will have less pressure going down unless investors really sells the stock that they are holding. In the world of investing, there are long term investor, short term investor and the shorters. With the shorters gone and the short term investor probably have exited frrom the market by now, the market should reach a resemblance of stablization. The people that will be affected will be the hedge funds and the insitutional investor.
2) There is rumor that the US treasury is setting up a Resolution Trust Corporation type arrangement that solved the savings and loans crisis in the US during the 1980s. This will help to resolve the bad debts associated with Fannie and Freddie as well as AIG. The implication is that this will stablize the market allowing better liquidity of the market and restore some investor confidence - Which has been in short demand in recent days.
Final implication
This is in technical analysis what we call a key reversal day, when the stock market started low and closed high at an astonishing volume. Normally, a key reversal day signals a change in trend and here is where the technical rebound will probably start. So is the bottom reached? There is no clear answer yet as we are still in a clear downtrend. Until the the Dow reaches 11800 and above than we are safely out of the crisis zone. Thats another 8% upwards to go. For now, we should be in a clear zone from the drabbing for another week or so, until something blows up.
Other good news is that we are in the traditionally weak september months. The december effect of stocks rising during winter period will probably help the market along. Again, we have to look to the housing market to stablize for the whole crisis to resolve itself. Else, we will continue our financial abyass.
Thursday, September 18, 2008
Financial Triple Whammy: Day 4 Evening
An update to the latest situation:
1) Asia Markets recovered remarkably in the afternoon with Singapore recovered from -4% to +1% at one point of time. Hongkong recovered from -7% to near to 1% at one point of time. Both markets closed at par. Other Financial markets recovered between 1%- 3% to close better in the evening.
2) G7 Central banks around the world are coordinating a relief effort to calm the fears for the market
3) Loylds Bank is buying over HBOS (UK largest mortgage lender)
4) Barclays bank is up 4.64% on the news that they are aquiring Lehman operation at a significant discount and this will boost their future earnings.
The market seems to be stablizing after the irrational selling that took place for the last 2 days. The US Futures us up about 0.8% for now. So, we can probably see some stablization tomorrow as long as no extremely adverse news hits the market. After the dust settles, bargain hunters will start looking for cheap and fundamentally good stocks to buy. We will probably see a small rebound than.
Warmest Regards
1) Asia Markets recovered remarkably in the afternoon with Singapore recovered from -4% to +1% at one point of time. Hongkong recovered from -7% to near to 1% at one point of time. Both markets closed at par. Other Financial markets recovered between 1%- 3% to close better in the evening.
2) G7 Central banks around the world are coordinating a relief effort to calm the fears for the market
3) Loylds Bank is buying over HBOS (UK largest mortgage lender)
4) Barclays bank is up 4.64% on the news that they are aquiring Lehman operation at a significant discount and this will boost their future earnings.
The market seems to be stablizing after the irrational selling that took place for the last 2 days. The US Futures us up about 0.8% for now. So, we can probably see some stablization tomorrow as long as no extremely adverse news hits the market. After the dust settles, bargain hunters will start looking for cheap and fundamentally good stocks to buy. We will probably see a small rebound than.
Warmest Regards
Tuesday, September 16, 2008
The Financial Triple Whammy - It's ain't that bad
Following up on the email i sent yesterday, here is an update of what is happening:
1)Oil prices dropped to $91. inflation in US dropped for the first time in two years - Very positive news
2)Barclays is in talk to acquire Lehman brothers assets in part or in whole. Hope still there to avoid total bankruptcy - Netural news
3)The Fed and the Treasury decided to bail out AIG for 85 billion. AIG
safe for the moment - Very positive news
4)The Fed held the US interest rates steady. They recognize that there is now more stress on the financial market but not bad enough for them to lower rates. This shows that the Fed is confident that the economy is strong enough to resist the current shocks. His statement brings more confidence to the market. - Slight positive news
5)3rd Quarter results came out. Both Goldman and Morgan Stanley topped estimates. The 2 major remaining investment banks remain profitable despite trying environment. - Very positive news
6)China Government decided to lower interest rates and decrease banks reserve requirement. This means that the China government has changed its stance from combating inflation to stimulating growth - Positive news
Overall, yesterday has been a positive day for the battered market. The US stock market recovered 1.3% - 1.7% in general. I expect Asia market to recover today.
1)Oil prices dropped to $91. inflation in US dropped for the first time in two years - Very positive news
2)Barclays is in talk to acquire Lehman brothers assets in part or in whole. Hope still there to avoid total bankruptcy - Netural news
3)The Fed and the Treasury decided to bail out AIG for 85 billion. AIG
safe for the moment - Very positive news4)The Fed held the US interest rates steady. They recognize that there is now more stress on the financial market but not bad enough for them to lower rates. This shows that the Fed is confident that the economy is strong enough to resist the current shocks. His statement brings more confidence to the market. - Slight positive news
5)3rd Quarter results came out. Both Goldman and Morgan Stanley topped estimates. The 2 major remaining investment banks remain profitable despite trying environment. - Very positive news
6)China Government decided to lower interest rates and decrease banks reserve requirement. This means that the China government has changed its stance from combating inflation to stimulating growth - Positive news
Overall, yesterday has been a positive day for the battered market. The US stock market recovered 1.3% - 1.7% in general. I expect Asia market to recover today.
The Triple Whammy of the US Financial Markets
You might have heard of the triple whammy on the US Financial market on Monday and the losses in the stock market. Here are the good and the bad of the out-come:
Good
Oil prices dropped to $93
- This will elevate the stress on inflation, allowing the FED and the US government to focus on combating the failing economy instead of trying to juggle both economy and inflation
Bank of America bought over Merrill Lynch
- The merger will create a powerful synergy between US largest depositor bank and stock 
broker. Merrill Lynch will have less problems with it's credit problems with Bank of America backing it up
10 banks created a common fund of $70 billion
- This will create another layer of insurance on top of what the central bank and treasuries are offering. This can help banks smooth over any credit liquidity
Bad
Lehman brothers filing for bankruptcy
- Banks and financial institutions around the world who are have dealings with Lehman may be implicated and a chain effect may occur leading to the collapse of other financial institution. However, this is not very probable as the treasury department made it clear that it will not bail out lehman as they believe that it will not create a systematic collapse of the US financial system. There is still a small hope that a buyer may appear to bail lehman out.
AIG seeking more fundings and their ratings have been downgraded by SnP
- AIG invested too much of their funds into property and mortgage backed securities. With the declining prices of the real estate market, the value of these assets just keep falling. The treasury also indicated that they will not bail out AIG. The silver lining is that AIG still holds many profitable divisions and business which they use it as collaterals to raise up to 20 billion. Another possibility is the interest that soveriegn funds may take an interest in it given the strong pressence of AIG in many of these countries.
Bank of America bought over Merrill Lynch
- Bank of America may not be too healthy in the future themselves as consumers credit cards and personal loans start to fail. They are still digesting their purchase of country wide, a mortgage financial company a few months ago. So with the purchase of Merill, they may expose themselves to more trouble in the future
The Strategy for Now
The market is grossly over sold. It is due for a technical rebound. Potential good news along the week is that the Fed may cut interest rates below 2% and provide more instruments to help banks cope with the crisis. Secondly, Goldman and Morgan Stanley, the only 2 survivors of the 5 investment banks, is due to report their 3Q report this week. If their report is positive, there may be hope that the Merrill and Lehman disaster are isolated cases due to bad investment decision made by them.
I will suggest that investor wait for the technical rebound and liquidate up to 50% of their holdings into cash. Most of the holdings are 30-50% in stable cash and bonds. I will move a portion into the equity everytime the market reaches a new low. Essentially, by the time the whole crisis is over, we will be able to average down quite a bit using this strategy. In this case, we can still maintain our long term strategy for our UT portfolio and at the same time, actively investing into the bottoms of the market.
Lastly, I like to share this article on Investor's Business Daily on why this is not the end of the world.
Investor's Business Daily
This Too Will PassMonday September 15, 6:53 pm ET Ibd
Wall Street: Old timers will recall F.I. DuPont or Goodbody & Co. Not-so-old timers remember E.F. Hutton and Kidder Peabody. Now we can add Bear Stearns and Lehman Bros. to the storied names that have fallen.
We drop these names (and we could have mentioned a hundred more) for two reasons: (1) to remind readers that this isn't the first time an investment bank or brokerage has gone under, and (2) to point out that the country has always survived and grown.
In fact, what's happening now is quite normal in a financial system characterized by booms that lead to excesses that then require corrections before any renewal takes place. We'd be hard-pressed to remember a bear market when one or more financial firms didn't go out of business.
In the oil crisis of the 1970s, for example, major financial companies such as Penn Central and Franklin National went bust. The booming '80s saw hundreds of banks go belly up due to bad loans made to the farm sector and the Third World, and, later, S&L loans to U.S. homeowners.
The '90s? Remember the Long-Term Capital Management debacle in '98, following the Asia Crisis in '95 and coinciding with Russia's ruble meltdown? Then, too, we heard predictions that the world as we knew it was ending. It wasn't.
Yes, the problems to be worked out this time seem scarier than most. And watching institutions like Bear and Lehman fail, and Merrill Lynch taken over just like that, doesn't inspire confidence.
But they're no different from other investment firms of the past that have paid the price for making too many bad decisions or taking too many risks in what is already a high-risk business.
How long all this will last is anyone's guess. But this a big country, with a highly liquid market and a still-strong economy. We'll get through it.
We also see something of a silver lining in the decentralization of financial power. That power has always resided in New York City, where a herd mentality too often prevails. The piling of Wall Street firms into exotic mortgage investments is only the latest example.
New York is also full of brokers and analysts schooled in the investment theories of college professors, many of whom have never invested successfully.
Much of the nation's investment talent, however, can be found elsewhere -- not only in Boston, with its exemplary mutual-fund organizations, but also in places like Chicago, Dallas, Atlanta, Denver, San Francisco and Los Angeles.
In fact, some of the best money managers we know use Wall Street as a contrary indicator: Whatever it's doing, they do the opposite.
It's worth noting that Bank of America, the company that was called upon to bail out the troubled New York firms in this situation, is headquartered in Charlotte, N.C.
It's long been our contention that too much thinking is done for the country out of New York and Washington. (The same is true of the media business, which because of agenda-driven, East Coast biases no longer seems able to report what's really going on.)
Fortunately, America continues to be driven by inventors, innovators and entrepreneurs who will go on creating the products and services that keep the economy growing and people at work.
We trust that this reality -- along with the stewardship of experienced leaders such as Treasury Secretary Paulson and Fed chief Bernanke -- will in time lead to stabilization and recovery.
Monday, September 08, 2008
Interview with Soros
This is an interview done with world famous investor, George Soros, during May 2008. Below is an extract of the interview:
Question: In your 50 years in finance you've seen any number of crises. Why is this so bad?
Answer: Because two bubbles are deflating at once. There's the
collapse of housing prices, of course. On top of that there's the end of what I call the super boom of credit expansion that has been going on for 25 years. That was made possible by a stable global financial system in which the dollar was the world's primary currency. Now, for many reasons, the system is in question and nothing has taken its place. That has created great uncertainty.
Q. And for us regular people it means...?
A. The days of rapid financial wealth creation are over. We're now in a period of wealth destruction. It is going to be very hard to preserve your wealth in these circumstances.
Q. Where is your money now?
A. Mostly in my endowment fund, a good portion of which I had farmed out to other money managers. When I saw what I considered the most serious financial crisis of my lifetime, I came out of retirement and set up an account to hedge their positions.
Q. How?
A. I went short [bet against] the dollar, U.S. and European stocks and Treasury bonds. I went long [invested in] emerging markets. That worked last year, but this year bonds kept going up and emerging markets down. So I'm about even.
Interview by Eric Schurenberg, Money Magazine managing editor
No Stimulant for a Faltering Economy?
The Fed has cut rates. Oil Prices have come down. Why is the Stock Market Still Down?
August remains a volatile month with the stock market still trying to find a direction. The main focus of the month is on the olympics really. With Michael Phelps breaking world records after world records and Guo Jing Jing entrancing the world with her beauty and graceful twists and somersaults, it is no wonder that the traders are
distracted from their work. The main events during August are the Russia-Georgian conflict and news from the Euro-zone that France
, Germany and Italy have posted negative growth for the 2Q of 2008.
No Improvement Yet?!?.
Oil prices have tumbled again from $125 from the end of July to a low of $105 at the end of august. That is a 29% drop from the peak. Well, that's pretty good news considering that your petrol cost will fall by more than 25% in a couple of months. The US federal bank has cut the interest rates to a low of 2% and has implemented emergency lending measures in an attempt to stabilize the banks and the housing markets. However, the banks are still reporting problems after problems and the economy is still in a dump. Why is there still waves and waves of bad news and the market still refuses to perfo
rm.
The Last Factor: The US Housing Slum
The root of all problems still lies in the US market.
The sub prime which is the cause of the banking crisis is as the result of home owners unable to finance their mortgage payment. As long as the US housing market does not stabilize and continues to free fall, the cause of the global fl
u will not be resolved. In theory, the lower interest rates should fix a large chunk of the mortgage repayment problem. However, the
medicine did not reach the intended recipients.
We have to first understand the the Federal Bank interest rates is the rates which the central bank lent to the banks. However, this is not necessary the mortgage rates which the bank will lend to the consumers. The banks, which has been hurting from the sub prime crisis, is cleaning up their act by tightening their credit requirements. That means previous home owners, who has taken a loan before, may now be rejected as a customer. They will continue to hurt from the high 5-7% interest rates that they have taken previously. Major US banks also did not translate the cost savings from borrowing from the central banks to the consumers. This means that they are still keeping their mortgage interest rate at a high. Simply put, the economy has still have to wait for a while longer for the financial chaos to smooth over and let the positive effect spill-over to the larger economy.
The Power of the Press
The second real quarter growth of the US economy is reported to be at an annual r
ate of 3.3%, higher than the expected 0%-2% growth predicted by economists. The Dooms Day Economists, who consistently try to predict a dooms day scenario of zero or negative growth, and who has been consistently to be proven wrong, once again declared the data to be a flux. They believe that the next quarter will deliver the weakness, that will finally prove their theory to be correct. Well, they have been predicting this since last year.
The press naturally tend to report those that gives the most dramatic and extreme prediction. Happy endings as well as Doom and Gloom sells papers, not boring slow growth which the reality is reporting. The reality is that the real GDP of US may be between 2.5% to as high as 4%. The high commodities prices have created an adverse impact on the 2nd quarter GDP. So with the commodity prices coming down, the GDP for the 3rd quarter has a pretty good chance to improve.
The problem is that with the word "recession" splashing on the headlines of the papers everyday, it is hard for the world not to indulge in self fulfilling prophecy and swing towards extreme pessimism. When the oil prices are up, the press reported conflicted reports that the oil crisis is the result of demand and supply and not due to speculations. After a big drop of $40, we now know that it is indeed due to speculation! Today, as both stocks and oil prices fall, the press attempt to explain the phenomenon that the investors are fearful of falling oil prices because this explain that the economy is indeed slowing down! This, is a classic case of economics. Nobody in the world really knows what is happening.
The Waiting Game
The only tested and true economics the is fact that the markets go through boom and bust and will continue to prosper and grow after the sub prime crisis. Now, the only thing is to wait for the housing market in US to clean up. Invest in trenches and wait for signs of the improvements from the US housing markets. When will that be? It can happen tomorrow, or 2 years later. When it comes to economics, no one can really tell.
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