The other day, a remisier friend of mine pointed out to me that the Singapore stock market volumes have fallen since the casinos opened their doors for business. He was trying to get the point across to me that Singaporean punters have turned to Baccarat tables to try their luck instead of playing contra in the market. After much thinking, I came to the conclusion that contra players were actually smarter to try their luck in gambling than trying to trade stocks in and out of the market within 5 days. The reason to why I think that way is that if you were gambling you would be playing on your luck and if you played Baccarat (in my opinion is the fairest game in the casino even though its still not a 50/50 game) it would give you a better chance of winning money than contra trading. Why? Because contra trading is much more than just luck, its also the psyche of the market participants and many other external factors that may cause your trade to turn sour. No matter how good you are, the odds are stacked against you. You are much better off investing consistently using the buy and hold strategy to build your wealth.
Of course, I personally have the weakness of looking for thrills in the market and end up losing money trading. Overall, my record is still a positive one but honestly too much time has been spent trading for me to do other more concrete things like...work. I do have a resolution to trade less going forward and perhaps channeling more energy towards studying, reading, working and gambling.
Before I start on the topic of the day, I would like to correct myself in the previous post where I mentioned that the yield curve has a good record of predicting recessions. It is true that it has good predictive ability but the fact that the shorter end of the curve is near to zero, that could mean that it has lost its predictive ability as the yield curve has absolutely no chance of inverting. Short term rates will never go negative in nominal terms and thus there is no chance of yield curve inversion no matter how flat the yield curve goes. So I do apologise for that. I was not thinking too clearly on that.
Today I just want to write a post that is more general and relaxing, letting my mind flow to whatever comes into it and "go with the flow" in every sense. My fellow peers in the investment industry have been raving about how well bonds have done and telling me how they were bearish and that equities are going to have a tough time going forward. They are all advising whoever is willing to listen to go into "safer" assets like bonds and senior loans. While good ol' chump like me continues to argue for equities as the place to be in. So in order to convince myself that I am right to be bullish, I have decided to list down the reasons to why I am.
Here are some reasons to why I am bullish.
1) Merger and acquisitions are picking up
The bidding war on 3 PAR is really a joke because the company that specialises in data storage that is still in the red is being bid up all the way from the initial offer of 1.16 billion to 2 billion. Two computer giants rushing to get into the data storage business, totally getting into a tug and pull war.
What about BHP's bid for Potash, now that was one mega deal. 36 billion and still being turned down. Who says there is not enough liquidity in the market? Merger and acquisitions happen only when corporations are optimistic about the economic situation and their future going forward.
Just because they are not willing to employ, does not mean that the companies are doing badly. They are just making sure they squeeze as much productivity out of their existing resources and are looking to expand through acquisitions than through organically growing their companies. That is why the employment situation is still looking dire.
We need to start to acknowledge that the new economy will be a less labour intensive one as technology continues to deliver new breakthroughs in productivity and companies take on the leaner and meaner model.
2) Dividend yields are now higher than the 10 year treasury bill and should be higher
Dividends have not caught up with the earnings growth. They were cut during the market downturn but they have not recovered as earnings have. With the ten year treasury moving down back to crisis like levels of 2.5% and so much liquidity looking for yields, the dividends are going to look mighty attractive backed by robust earnings.
3) Earnings are still robust
Earnings on the S&P500 have improved 43% YOY and are expected to show resilience as productivity continues to be strong. Earnings expectations are currently being revised downwards as fears over the economic recovery continue to hog the headlines. This gives me even more impetus to try to pick companies to buy. I love it when there is no expectations. Like I always tell my friends, when there is no expectations there is no disappointment. What that means is, there is only upside no downside.
4) Penultimate years before elections tend to be good years for equities
How time flies and as Obama's time as president enters its 3rd year in 2011, he will need to do lots of things to aid the economy before going into election year 2012. In history, pre-election years tend to be good years for the market. Remember 2007? Markets hit a new high before sub prime came along. 2003 was the turn of the market after the tech bubble. So I believe 2011 will be no different, a another good year for equities.
5) Deflation is not likely
3 years ago during an investment conference which I was speaking in, there was a fund manager who came up to me and asked me whether I thought the bond traders or equity traders were better readers of the economy. At that time, bonds were rallying and yields were falling off the cliff while at the same time equities were also rallying to new highs. Both were telling contrasting stories on the economy. At the time, the bond traders were risk adverse while the equity bulls were strong at work. I told him, it was probably the bond traders because the valuations were ridiculous for equities. Now I would say the bond traders are wrong, so are the equity traders. So end of the day, equity traders seem to be wrong all the time. Haha.
The notion of deflation has become something of a widely discussed possibility. For me, I believe it is really quite impossible for that to happen because CPI numbers are still very much in the positive territory, be it in developed markets or emerging markets. There is no chance in this living world when there is so much money being printed and prices go negative. If Bernanke fails to keep deflation our of the US, he would have wasted his decades of academic study and I feel sorry for him and his parents.
6) Chinese hard landing is close to impossible
There was a very prominent economist that told me that I should never worry about Chinese data disappointing the market. I would like to say that he is really a super nice person for such a prominent and well known person. Why he made that statement was because he felt that the numbers from China cannot be trusted and they are just manipulated to give the market what it wants. So if the numbers are doctored, how is it possible to have a hard landing?
There are tons of talk about how Chinese properties are tumbling down in prices but I just has a meeting with a CEO of a property management company and he told me that 2nd tier cities are still seeing higher prices. In fact, the government is trying to boost the property markets in the 2nd and 3rd tier markets. They are only targeting to cool the coastal and 1st tier cities property markets rather than the whole of China.
Many an experts are talking about how the banks will suffer as the property mania is China cools down, but so much has been discounted on the prices of Chinese banks that they look like the ones that got hit by sub prime. Financials in China really do look cheap now.
7) There is no where else to park your money
With property prices in emerging markets looking frothy, deposit rates close to nothing, bond prices at sky high and commodity markets seeing only pockets of strength, where else can anyone with excess cash park their money? Maybe they should go to Marina Bay Sands for a nice night of entertainment or maybe Resort World Singapore to try their luck. For those not really into gambling, there is no harm parking your money in a good dividend paying stock right?
8) Stocks are trading at 12.7 times p/e for 2010 and 11 times for 2011, still below long term averages.
Valuations are still cheap. I really do not need to talk about it too much. It is a fact. There is even a company in Singapore that is trading at 5 times p/e with a 7% dividend yield and 30% earnings growth. Now that is ridiculously cheap. The father of value investment, Benjamin Graham once said, "a company that has no earnings growth should not trade more than 8 times p/e." Well when you are growing at 20-30%, you definitely should not be trading at 5 times.
After a long week, I am very proud to find myself finding the energy to write this post but as a disciplined person I told myself, I need to put my thoughts into writing and also to hold back any urge of going to a midnight baccarat session.
Well all the best for the week coming ahead. Non-farm payrolls once again this Friday, man I am getting old with every month flashing by.
Best,
SVI
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