After saying bye to the best September showing in more than 71 years, what is next? One really has to wonder what has caused the market to have such a performance within a month. The 3rd quarter of 2010 has come to an end with a bang, bringing markets back to their highs of the year, in the case of the US markets, close to their highs. Cheer has come back to the market and once again I have been getting smses from close friends on what should they buy to participate in this market. I have never been a really good trader while I still have faith in my stock picking skills. Did anyone see GP Batteries over the past week? Pardon my cockyness.
A good friend of mine told me about how he went out to buy some US dollars in preparation of his trip to the US next year. He felt that the $1.32 rate was so attractive that he could not stop himself from going to the ATM to draw some cash and converted it to USD. Part of me wanted to tell him he was wrong, part of me just let it go. The USD has had a good rebound earlier this year before resuming its inevitable drop over the past month. What does this tell us? A technical rebound can last months at times, but the long term trend will prevail in the end. The long term down trend for the USD is securely intact with our favourite US govt looking to implicitly devalue their money through their printing presses.
Currency is something that has always been fascinating to me but I am no expert in this. However as a trained economist, I can say that common sense is telling me that depreciation or devaluation of the USD is not going to help much. Also labelling the Chinese as currency manipulators is not going to change anything. Jobs are not going to come back because the cost of Chinese labor is still at least 80% cheaper than US labor. Competitive depreciation of currency by all the developed countries will not change the economic background because if everyone is doing the same thing the change will be absolutely nothing. My suspicion on the Europeans exaggerating their sovereign debt crisis to devalue the Euro is still valid. Now the US are also pushing their USD down with their claims of possible quantitative easing. Guess who is left behind? The poor Japanese who are unable to intervene in their Yen markets like the past because they no longer have the financial clout to do so. No matter how much Yen is sold into the market, it is easily absorbed by the ferocious buying of the Chinese.
Why would anyone be buying Japanese Yen when the Japanese Govt Bonds (JGBs) are yielding 0.965% for their 10 year issues? Shouldn't the close to 2.7% of the 10 year US treasuries be more appetitizing? Think about it. Common sense right? Wrong. The the Japanese deflation is running at 1% this year, thus the real yield is 1.965% while the US core CPI stands at 0.9% YOY thus the real rate is? 1.8%. Throw in the overworked printing presses of the US federal reserve, the consumer expectations are for inflation to pick up to 1.2% going into 2011 (I think this is conservative), the real yield on the US treasury is going to fall further.
With all this implicit devaluation, gold has reached another high once again with investors looking for a safe store of value. However investing in gold for Singaporeans have not given them the kind of returns they would have hoped for because of the appreciation of the SGD while gold is being priced in USD. The exchange loss takes a serious haircut off the Singaporean gold investor.
Another interesting development I over the past week is the rise of the oil price, both Nymex and Brent breaking above the $80 dollar mark. This bodes well for the oil related counters plus the alternative energy players. Remember, alternative energy is only feasible if the oil price remains above $60 or so. The higher it goes, the more interest there will be on alternatives. Oil plays have taken a back seat throughout this market rally, this could change should oil continue to show strength.
For stock specific news, I can only say the one announcement that really caught my attention was the investment of Warburg Pincus into 2 of Centraland's projects. I have been watching this counter for the longest time and it has a valuation that will shock most people. Trading at a whopping 400 p/e and 2 times book value. However, the company is really a work in progress. Although in its prospectus, it described itself as a residential and commercial property developer. But over the past 2 years since its IPO in 2008, the stock has become a specialised commercial property developer. It is one of the leading developers in Zhengzhou with a specialisation towards trading hubs. Basically these trading hubs are clusters where wholesalers are located and most retailers look for suppliers there. I personally like this niche as this will give them a more stable income through rental space and also strong demand for their saleable space.
I believe this is what Warburg Pincus has seen in this niche developer to be so willing to invest RMB650 million into the 2 JVs with Centraland and they have indicated the possibility of injecting their own assets in Tianjin and Beijing into the JVs. Also Warburg Pincus will have the option to double up their investment by injecting another RMB650 million within the next 30 months after the first investment is made. This is a lot of money and it will also allow Centraland to ensure that their projects will be completed on time and without any problems with the funding. A strong partner like Warburg Pincus is a testament to the Centraland management and capability. After 3 years, Warburg Pincous has indicated their intention to IPO the JVs and that will deliver further value to all shareholders. I know 3 years is a long time, but I really do think it may be worth the wait.
This is definitely not a company for the present but I do believe it is one for the future. You have to see how far the company has come over the past 2 years. They have secured more trading hub projects and most of them are mega projects that are more than 200,000 square feet of gross floor area. Their landbank is huge with more than 1.5 million square feet of GFA still waiting to be developed. This is going to be a property giant. The current market cap is more than $800 million and is still trading lower than its IPO price of $0.50. Open float is super low at 13.3% and the shares are closely held. So good luck in trying to get a substantial holding on this beauty.
I know this is a long term play but I believe a good investor should have the vision to see the value of this company. So do take a look into this one.
I would have liked to write more but work has been hell and my life is becoming as boring as a librarian's. So have a good week ahead and lets hope the markets continue to hold up as well as it has.
Best,
SVI
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