Fed is the stock market's new best friend

It is F1 weekend once again. As the third F1 race in Singapore currently gets underway, i sit here reminiscing on my free flow red wine and champagne on the sky suite overlooking the pit during qualifying yesterday. Don't get me wrong, it is not that I desire this kind of life style. It just gives me an even clearer feeling of the 2 tier society which we live in. While people are queuing to buy their $100 souvenirs at the Ferrari booths at each gate, there are people who are only able to afford a $3 plate of chicken rice for themselves and their children. What a wonderful world we live in.

While I was sitting at a table at the Nassim suites last night having dinner, I was totally not paying attention the the F1 practices, Ferrari drive bys and F1 qualifying. I was instead having a good conversation with the CIO of a hedge fund company, discussing our views on the market. The good news is, both of us are in the view that the equity markets are going to go higher while bonds are getting increasingly expensive and irrational.

Funny thing was his view on gold. He said that the investors in gold were placing the wrong bets because there is absolutely no inflation in the market. I could not say I agreed with him. After all he is from Europe and deflation is the key concern over there while we just saw our latest CPI reading come in at 3.3%. But he did say that I was right that the European fears of peripheral defaults were way over blown. (Told you all so). Looks like SVI is right again on the market.

It has been a good week, especially for the smaller cap stocks. A few interesting rumors, especially with Olam being a possible target for the great Loui Dreyfus. Funny isn't it. Olam being one of the companies which I have placed on my "avoid" list of stocks, it came as a shock to me when such an established commodities trading company would show interest in it.

SIA also did something rather interesting, raising money through their bond issue, offering investors a whopping 2.15% coupon for the next 5 years. If our inflation expectations in Singapore is 2-3%, investors are going to be short changed. But guess what? Irrationality is the order of the day. Bonds are just the in thing. IBM and Microsoft are also issuing bonds offering ultra low yields and using the proceeds to buy back their shares. I wonder what a person who has common sense would think of such a move. Bonds are overvalued and Equities are cheap? What do you think?

I have decided to dwell on the FOMC meeting last Tuesday in today's post. The market initially did not know what to interpret from the meeting, with the market dropping slightly for 3 days in a row and after which Friday turned into the inflection point for the market.

Further rally appears likely as the Fed has put a floor under markets, which in turn anticipate another liquidity-fed rally like that of 2009 that may continue despite stagnant fundamentals as cash seeking a home flows in to equities. The implied further debasement of the USD feeds the demand for hard assets, particularly traditional currency hedges like gold and silver. Crude oil also broke through multi-week resistance despite the highest ever recorded US inventories. Such was the effect of the FOMC’s implication of new QE in the coming months. This same implied future devaluation of the USD, which is part of over 80% of all forex trading volume, drove the USD index to its lowest level in months, with predictable results. The USD was the week’s weakest currency while the EUR was the strongest, despite news of deteriorating PIIGS bond prices and EU growth which together at other times could have put the EUR at the bottom of the weekly forex pile.

The USD weakness is coming from the worries that the Fed will implement more quantitative easing going forward. In their statement, the Fed stated that inflation was still below the levels which they felt would interfere with price stability. Going forward in the next few months, I expect inflation to pick up slightly due to the current USD weakness, importing inflation from the likes of Japan and China. The next time the Fed meets will be in Nov and by then, things could be a little different. However, Obama faces a big challenge come mid-term elections, should he lose seats in the congress, he will be pressurized to introduce even more stimulus measures. I am still leaning towards further measures being introduced and this is one of the main reasons to my bullishness. As long as USD continues to be weak, expect the market to remain strong.

Personally, I like what I see in the markets, even though the indices look a little over bought and slight weakness may be seen in Oct but the trend is still firmly on the positive side. So do make sure you accumulate during the next dip. Got a little cold today so will keep it a little short. I promise, I will have a stock pick for next week because I have been doing a little background studies on some interesting companies.

Ironically, my top pick Sarin has not moved at all, however it is important for us to be patient because true value normally shines through. It is almost impossible to time the market, but it is possible to find good companies and sit on them till the market realises their value.

Ok I am getting a little sleepy now, will try to write more when my head gets clearer.

Have a good week ahead.

Best,

SVI