Some useful thoughts from me. 17th Oct 2010

Another week, another dollar. This week went by so quickly that I do not have any impression of what happened. When one gets bogged down with work, time becomes like an illusion. It feels as though it does not exist. Today, I just felt like writing whatever comes to mind because I do not have time to be so structured and think of exactly what to write.

China has really been on fire since reopening after their golden week holidays. They really delivered a golden week for investors. It has rallied more than 10% within 6 days. That is one hell of a move. But is it excessive? You are going to read lots about how the chinese market is overheated and how a pullback is coming. This week, it will be testing the psychologically important level of 3,000 points. If it breaks through, we are going to have a good ride all the way for another 200 points at least. I have been privileged enough to witness the parabolic move of the Shanghai Composite in 2006-07. There is no such thing as resistance in China when the bull market gets going over there.

Tomorrow we will have the largest IPO since Singtel hit the STI back during a time before I could really appreciate the sheer size of the offering. Global Logistics Properties (GLP), this is a name that has haunted me every morning over the past week when I turn on the radio to listen to the news. I have never heard an ipo promoted to this extent. Fund managers will be rushing to buy this stock tomorrow because it will DEFINITELY be included in the FTSE STI index and for those managers that are benchmarked against the index, they will need to have a certain holding in this company.

Is it cheap? I was asked this question on Friday, while I was having drinks with a few bankers. The last thing I want to think about is stocks when I am busy having my diet coke and fighting the temptation to start drinking alcohol. This is the answer I gave them. Peter Lim bought, what do you think? They rebutted with, he wanted to buy Liverpool too, so do you really think he is really that good an investor? Haha. Ok enough about Liverpool, especially because I am a pool fan...

Well back to GLP. This is one that I have mixed feelings about. I personally never liked big floats because it takes forever to move the stock up. But I do think this is an interesting ipo because I feel the assets here are possibly undervalued because they were bought at really cheap prices in the past. Especially their Japanese assets. The part where I am not too comfortable with is the fact that it is a loss making outfit currently. My call for this stock is that it will be a good investment for the long term. I am pretty sure of that. From what I know, they initially wanted to price it at $2.30 so that would be my short term target for the stock. It may even hit it when it opens tomorrow.

For the rest of the month, we will have 3 more ipos, that is pretty impressive because that would mean 5 ipos in October. As per my previous post, I have already said, the ipo fever is on! The USD has continued to fall and the market has been on a tear. STI is at 3,204 now and from my charts, I can only see 3300 before a very meaningful pull back.

I have investment strategists telling me that the USD is going to be on a free fall all the way to $1.26 against the SGD. Now that is bad news, but I would like to point out some risks before we get ahead of ourselves. One of the books which I have read over the past year (called Animal Spirits by the great Akerlof and Shiller), did point out that we should never underestimate the power of animal spirits. There is no such thing as a one way trade, at least not one that is so overly predictable. The key risk to this is for QE2 to disappoint in November. Bernanke did say in his speech on Friday, he is definitely going to go ahead with it but the question is...how much?

There is a rumor that the Chinese and Americans have decided to come to a compromise. The Chinese will allow faster appreciation on their yuan while the US lower their quota on QE2. If this is true, we will see the USD rebound and the markets will start to correct downwards. With the strength in the markets, I am just concerned that the expectations on the quantum of QE2 are a little excessive.

One thing that gave me great confidence that QE2 will definitely be implemented was the inflation number that came out on Friday and also the jobless claims number on Thursday. It gives Bernanke more room to maneuver because the data is backing his claim on the need for QE2. But in my view, QE2 will not work because it is only going to create wealth for the rich but not the common folk. We are clearly in a liquidity trap and a more targeted approach will be needed if Bernanke does not want to throw money down the drain.

I was also asked by my favorite protege on whether the current debacle on foreclosures in the US is going to hurt the market. Well here is my answer. This is really not a big enough problem to justify the 10% drop in the larger US bank stocks. I view this as a buying opportunity for those investors who have been looking at an appropriate time to buy into US financials.

One stock that I have been a little amazed by is Apple. The stock his US$315 on Friday and cementing its place as the 2nd largest company in the world, right behind Exxon Mobil. I love Apple as a company but I am just concerned that investors have fallen too deeply in love with this stock to see that the stock price is reflecting a little too much optimism. If I am not wrong, the company now makes up more than 7.9% of the Nasdaq's market cap and that is just mind blowing. So if you are an Apple stock holder, its important to pay close attention to their earnings growth going forward. With its ability to innovate and make people fall in love with their products, it will not surprise me if it continues to move upwards, but I like to make it a point to review my holdings when large milestones are achieved.

I continue to maintain my overweight position in equities and I am very bullish on Japan. I know, you think I am mad. I think I am right. We shall see.

Ok time for me to take some time off thinking about stocks and the economy.

Have a good week ahead!

Best,

SVI