Mysterious Sell-Off in Technology. Ukraine Crisis Intensifies

Cartoon via The Economist

Financial journalists are great at explaining at the movement of stock markets.

Take for example: Let assume that the US government releases a job report that is strong and exceed expectations.

If the stock market rises, the headlines will be "Strong job report buoys the stock market!"

If the stock market falls, the headlines will be "Strong job report leads to fears of the US Federal Reserves raising interest rates!"

No matter what happens, they always have an explanation.

There are however, a few exceptions, like the mini technology stock crash during early April. 

The Nasdaq lost almost 10% since the peak reached in March and high profile social media stocks such as Facebook and Twitter, were aggressively sold off. This time, the journalists were at a lost what cause the sell-off. There were neither bad economics news, nor any negative industry news. The only explanation that they could give, was that investors were selling of very overvalued technology stocks. 

This is an eerie repeat of the dot com bubble of during year 2000.

Just to give you some idea how overvalued these stocks are, using their Price Earnings ratios:

Facebook (P/E 78), LinkedIn (P/E 0.00), Twitter (P/E 0.00), Yelp (P/E 0.00), Sina (P/E 72.25), Trencent (P/E 45.47)

(P/E 0.00) means that the company is not making any profits. A P/E over 20 is usually considered as a richly valued stock (meaning expensive).

For example, Twitter IPO price at $26, but the stock jumped to a high of $70 earlier this year, despite almost never making any money. Twitter shares fell to $40 since than. The overheating of the technology stocks seemed to have cooled a bit. However, a fresh flurry of IPOs of social media and internet stocks, including the highly anticipated IPO of Alibaba later this year, which will probably be the largest IPO the world has ever seen, will probably reignite the interest to speculate in these stocks and the bubble may start to inflate once more.

Ukraine: A Game of Cat and Mouse

On 10 April 2014, Ukraine, the United States, Russia and the European Union agreed to a 17 April 2014 quadrilateral meeting in Geneva to try to negotiate an end to the crisis in Ukraine. The meeting produced a document, called the Geneva Statement on Ukraine, which stated that all sides agreed that steps should be taken to "de-escalate" the crisis. The world thought that the Ukraine crisis is finally over and the stock market rallied strongly in rejoice that Russia had finally came to its senses. 

US Secretary of State John Kerry with EU foreign policy chief Catherine Ashton in Geneva

 A few weeks later, the world finally realizes the truth: A piece of paper will not stop Russia from manipulating the strings from behind, while proclaiming its innocence.

The Western allies threaten more economic sanctions, while President Putin feigns ignorance and the global stock markets tremble, as investors race to calculate the potential economic fallout if the Western allies really hold to their words.

So far, the global financial markets are betting that the Western allies will chicken out when it is time to pull the pistol.

A Quiet April for the Portfolio

April has been a quiet month for the global stock markets with major indices squeezing out a slightly positive return. However, the SGD strengthened significantly across all developed and emerging market currencies, giving strong hints that there was some intervention by the Singapore Government to allow the SGD to appreciate, in order to offset inflation. As the result of the strengthening of SGD, the positive returns from the global markets are pushed to a negative return as seen in the global index chart.The USD money market fund lost some ground which resulted in a slightly negative return for the cash portfolio (-0.23%) while the CPF portfolio performed slightly better (+0.17%) as a result of lesser exposure to USD. The global markets look a bit shaky right now, with a bubbly technology sector, a brewing Ukraine crisis and the continued deterioration of the Chinese Economy. A major correction is still a high probability and staying defensive seems like the best thing to do right now.