I know what you all are thinking. The bull market is back. Technical signs look good for the various indices, especially the Dow and S&P500. This all came on the back of the "comprehensive" plan that was conjured up by Eurozone leaders during last Wednesday's Eurozone summit. One has to wonder why the market rallied that much when the plans that came in were way below expectations and sketchy to say the least. Well what can I say, this is what makes the market interesting. Unpredictable and irrational to say the least. First thing that came to my mind was how right my good pal "Earn Money Online" was when he said that his fengshui indicators showed that October was going to be a positive month. Boy was he on the right track! Never get into any disagreements with Fengshui masters.
Now that the markets have shown its strength, it is time for me to admit that I was wrong about it's short term direction. Do I think that we are back on the right track? I really do not think so. The signs are still ominous in my view and what the Eurozone leaders have done over the past week was once again another kick the can down the road move. This is the 3rd plan conjured up over the past 2 years to solve the sovereign debt crisis and it would be foolish to think its the last. The measures that have been announced do not address the real issues which led us to this situation. The politicians seemed more interested to find ways to appease the financial markets than to think of how to resolve the underlying structural problems.
Why am I so sure that the crisis is not over? Look at the Italian bond auctions on Friday. They did not manage to sell all the debt they put up for sale and throw in the fact that they were selling it at yields that were all time highs since the Eurozone was formed. If the market was so convinced that the sovereign crisis is behind us, why was a 6.06% 10 year Italian bond auction so badly covered? Two days after the Eurozone summit, we have seen Italian and Spanish bond yields rally, it does not truly reflect optimism does it? I do not deny, I had my doubts about whether I was right to continue being bearish on the markets, but the more research I did, the more convinced I was right. So be patient. I am sure that the markets will reach a point which is cheaper than what we saw on Oct 3rd, 2011.
In the mean time, I know it is hard to sit on your hands while the markets rally, but trust me, the rally will stall very soon as we approach the upper boundary of the current trading range.
I am not going to dissect the various measures proposed during the Eurozone summit because they really are not worth speaking about. The amounts were too little and most of the measures defied common sense and logic. All I can say is, if a 50% haircut is considered voluntary and does not trigger a CDS payoff, then who in the world is ever going to pay an arm and a leg to buy CDS protection? Do you know how much was being paid by investors to insure against Greek debt before this deal was done? Desperate times calls for desperate measures, these include totally screwing with the system. Now I will question the validity of checking CDS spreads for risk aversion going forward. Giving the Greeks a haircut of 50% on their debt means that their debt to GDP will be around 120% by year 2020. Does that sound a little high to any of you? 2020 seems like a really long time away.....God knows how many of us will still be around to see that day. Throw in the fact that the whole of Greece is no longer functioning and their economy is shrinking by 5% this year alone, what makes you think they will be able to honor the other 50% of their debt.
Portugal and Ireland will probably need to get haircuts in 2012 as their debt loads look too heavy considering their current turtle like growth rate. What do you think the haircuts will be? Lets not even consider Spain and Italy in the picture, or else it will get too depressing. Looking on the bright side, Portugal at least has the option of selling Christiano Ronaldo to Singapore, to aid us on our goal to finally reach the World Cup finals by 2030. Poor Ireland...no talented footballers to sell to help them cope with their deficits.
Now moving on to the banks. Yes I know what you are thinking, they are going to be recapitalized. That is good news. But considering the fact that companies in Europe are the most dependent on bank financing for their businesses, this is going to kill them. Why? Because the banks are all going to be shrinking their balance sheets to conserve their cash. Every 10 dollars invested in Europe, 8 bucks is borrowed. Do the math, without the banks lending freely, business investments in Europe is pretty much screwed.
Anyway, its now in the middle of the night on Halloween, it is not wise for me to stay up too late. Not going to keep writing too much about how silly the Europeans are, at the risk of me bumping into any supernatural entities. Have a great week ahead!
Best,
SVI
Sunday, October 30, 2011
Friday, October 21, 2011
Owe too much money? Don't worry, leverage up to bail yourself out. That is Europe's suggested solution!
Today is of those days when I decide to take a day off and sit down to look at the market from a personal perspective rather than for work. It is amazing how a day off can help a person regain some perspective about not just the market but also his life. As expected, the markets this week have been rather tepid while waiting for the Euro summit to takE place this Sunday. Expectations of a magic bullet are as high as the discontent amongst the Greeks as rallies turn violent and pictures of protesters are splashed across news channels.
For those of you who loves to watch dramas and movies, I would strongly recommend forgetting about your HBO and tune in to CNBC instead. Last night for example was a great example of how the twists and turns in the news coming out of Europe is just as intriguing as an episode of CSI or 24. If you had watched CNBC last night, you would have seen that the night started off with the EFSF discussion guidelines being leaked out to the press and brought some relief to the market. Following closely after that piece of good news, was the German finance minister commenting that germany and France had come to an agreement of an accord with regards to the new enlarged EFSF. Just when the markets were cheering this piece of news, an newspaper in Germany released the news that Merkel had cancelled her scheduled speech to the parliament with regards to the new EFSF plans. What a damper! Shortly after that, news of then possibility of another euro summit meeting being held next wednesday to finalize all the plans just got the whole market confused. Imagine that! All that in one night! Being very much a couch potato myself, I skipped a couple of my favorite movies on HBO and was glued to CNBC till 2 am.
Jokes aside, this week is ending on a strong note with plenty of investors wading into the market in the hopes of a strong plan being announced by next wednesday. Plenty of short covering happening here too. Speculation in rife with regards to the possible moves that may be implemented and they do sound interesting. But what really worries me is that the summit has been postponed twice already. I am not in the camp of believing that the countries are reaching agreement on what to do to resolve this mess. Even if they are in agreement, it does not mean that the compromised solution will be sufficient to solve it.
Last week, I mentioned that Italian 10 year yields are close to 6% once again and that worried me. This week, we touched 6% once again. The equity markets seem to be pricing in a solution to the Euro crisis but the credit markets are telling me another story. If we are so close to resolving everything, shouldn't the sovereign bonds be reflecting some of that? Well they are obviously not. One reason I can think of is that the participation in bond markets tend to be institutional investors while equity markets have substantial retail presence. That is why I believe that the smart money is still staying in the sidelines and not buying into the resolution story.
It is also interesting to note that Moody’s Investors Service downgraded Spain’s credit rating Tuesday and warned that France’s rating could also be at risk, citing both nations’ vulnerability as Europe struggles to manage it is persistent debt crisis. A hit on the French credit rating would seriously undermine the effectiveness of any bailout backed by AAA debt holders of Europe.
Another important thing to look at the composition of the EFSF to understand where all the money is coming from. It is ironic that Spain and Italy make up 12% and 18% of the contributions to EFSF. If only such a simple solution existed, the underwater U.S. homeowner would have loved to bailout himself. France is also a significant 20% which implies a hit on French credit rating undermines the EFSF. If France gets downgraded, the number of AAA rated countries backing the EFSF will drop to a pathetic number. Credit investors are also acting as if the EFSF is not a AAA rated issuer because its bonds are all trading at close to 100 basis points above that of similar dated German bonds. So if France gets downgraded the EFSF bonds will need to have higher yields to attract investors.
In my opinion even if a solution is announced over the weekend that is received well by the market, it will not be long before we are back to square one and another PIIGS-driven European crisis is front and center once again. Sweeping our problems under the carpet has never solved any problems and this will not be any different.
In conclusion one has to be skeptical about the European bailout plan and one has to keep in mind that we can’t solve a crisis which was caused due to excessive leverage by re-deploying leverage. Using more debt to solve debt issues will never be a solution and this is exactly what European leaders are proposing to do. You would have thought that they would have better sense to know that structural issues are not solved by throwing money at it. Lets hope they will wake up and acknowledge the need to assist these nations to improve structural competitiveness rather that pushing them to go through more austerity measures and thereby causing their economies to contract even further. Sigh....it is worrying to see that the guidelines on the plans being discussed in this Euro Summit does not address the real issues that are underlying this crisis.
Well all the best for the coming week!
Best,
SVI
For those of you who loves to watch dramas and movies, I would strongly recommend forgetting about your HBO and tune in to CNBC instead. Last night for example was a great example of how the twists and turns in the news coming out of Europe is just as intriguing as an episode of CSI or 24. If you had watched CNBC last night, you would have seen that the night started off with the EFSF discussion guidelines being leaked out to the press and brought some relief to the market. Following closely after that piece of good news, was the German finance minister commenting that germany and France had come to an agreement of an accord with regards to the new enlarged EFSF. Just when the markets were cheering this piece of news, an newspaper in Germany released the news that Merkel had cancelled her scheduled speech to the parliament with regards to the new EFSF plans. What a damper! Shortly after that, news of then possibility of another euro summit meeting being held next wednesday to finalize all the plans just got the whole market confused. Imagine that! All that in one night! Being very much a couch potato myself, I skipped a couple of my favorite movies on HBO and was glued to CNBC till 2 am.
Jokes aside, this week is ending on a strong note with plenty of investors wading into the market in the hopes of a strong plan being announced by next wednesday. Plenty of short covering happening here too. Speculation in rife with regards to the possible moves that may be implemented and they do sound interesting. But what really worries me is that the summit has been postponed twice already. I am not in the camp of believing that the countries are reaching agreement on what to do to resolve this mess. Even if they are in agreement, it does not mean that the compromised solution will be sufficient to solve it.
Last week, I mentioned that Italian 10 year yields are close to 6% once again and that worried me. This week, we touched 6% once again. The equity markets seem to be pricing in a solution to the Euro crisis but the credit markets are telling me another story. If we are so close to resolving everything, shouldn't the sovereign bonds be reflecting some of that? Well they are obviously not. One reason I can think of is that the participation in bond markets tend to be institutional investors while equity markets have substantial retail presence. That is why I believe that the smart money is still staying in the sidelines and not buying into the resolution story.
It is also interesting to note that Moody’s Investors Service downgraded Spain’s credit rating Tuesday and warned that France’s rating could also be at risk, citing both nations’ vulnerability as Europe struggles to manage it is persistent debt crisis. A hit on the French credit rating would seriously undermine the effectiveness of any bailout backed by AAA debt holders of Europe.
Another important thing to look at the composition of the EFSF to understand where all the money is coming from. It is ironic that Spain and Italy make up 12% and 18% of the contributions to EFSF. If only such a simple solution existed, the underwater U.S. homeowner would have loved to bailout himself. France is also a significant 20% which implies a hit on French credit rating undermines the EFSF. If France gets downgraded, the number of AAA rated countries backing the EFSF will drop to a pathetic number. Credit investors are also acting as if the EFSF is not a AAA rated issuer because its bonds are all trading at close to 100 basis points above that of similar dated German bonds. So if France gets downgraded the EFSF bonds will need to have higher yields to attract investors.
In my opinion even if a solution is announced over the weekend that is received well by the market, it will not be long before we are back to square one and another PIIGS-driven European crisis is front and center once again. Sweeping our problems under the carpet has never solved any problems and this will not be any different.
In conclusion one has to be skeptical about the European bailout plan and one has to keep in mind that we can’t solve a crisis which was caused due to excessive leverage by re-deploying leverage. Using more debt to solve debt issues will never be a solution and this is exactly what European leaders are proposing to do. You would have thought that they would have better sense to know that structural issues are not solved by throwing money at it. Lets hope they will wake up and acknowledge the need to assist these nations to improve structural competitiveness rather that pushing them to go through more austerity measures and thereby causing their economies to contract even further. Sigh....it is worrying to see that the guidelines on the plans being discussed in this Euro Summit does not address the real issues that are underlying this crisis.
Well all the best for the coming week!
Best,
SVI
Sunday, October 16, 2011
Optimism is great, reality often disappoints. Skeptical on what the Eurozone leaders can deliver.
October....it has always been an interesting month for markets and it looks like this year's October is going the same direction. Markets have brought hope once again with a nice rebound over the last two weeks. Glad to finally see some reprieve and it certainly brings a lot less stress for work. The rally came on the back of optimism that the European leaders finally get it. They have finally gotten their act together and show more urgency with regards to solving the Eurozone crisis. Merkel and Sarkozy claimed that they have come to an agreement on to recapitalize the banks using the EFSF. I don't know whether you guys noticed, but they did not even give any details on what they intend to do. Also bear in mind how different their mindsets were, going into their meeting. Sarkozy was all for recapitalizing the banks while Merkel insisted that the EFSF should only be used as a last resort measure. So I really wonder where they will meet in terms of a compromise of what to do and to what extent.
Things are expected to be thrashed out on the 23rd of October when the Eurozone summit is held. Speculation is that they will be arguing for EFSF guarantees provided to around 25% of new bonds issued by troubled euro-zone governments such as Italy and Spain. The summit was meant to be held over this weekend but the they delayed it because it was obvious that the Eurozone leaders could not hammer out a deal on time. Lets hope they have more to offer given this delay. The G20 group of leaders have put more pressure over this weekend on the Eurozone leaders to do more during this summit so that should generate some positive sentiment tomorrow. There is however a danger of the summit disappointing the market since it has already started to price in plenty of positive news coming out of it.
Personally, I really do not think recapitalizing the banks is the solution to this crisis because this is a sovereign crisis and not a banking one. The only worry is for liquidity to freeze up and bring us to a repeat of 2008. The underlying problem is the sovereigns and this problem is not going to go away. We are facing a structural problem and it is going to take a great deal more to stop it from getting worse. I am glad that they are finally doing something for the banks to prevent any from going under or causing a widespread panic. But should things get any worse for Italy, Spain etc, fear will resurface. I do not know about you but I am getting nervous as Italian yields are pushing higher once again, getting close to 6% once again. This shows that fears are starting to show in the sovereign debt market.
There is also talk of increasing the amount of haircut on the Greek bonds which private investors have to take. This is once again a sore point because in July, there was already a proposal to take an haircut of 21% on the Greek debt holdings. At the beginning, most private investors and banks were pretty receptive towards this proposal but now there are talks of revising the level of haircuts to 60%. Do not think private investors are going to take to that too well. Not that they have any choice on the matter. The biggest issue I have with this development is how the other peripheral countries that have debt issues react to this proposal. If you realize that the bank has just given your friend a discount on his debt, wouldn't that you ask for one yourself? That is my worry. I believe that the deeper the haircut given, the higher the chance of moral hazard and unhappiness amongst the highly indebted countries.
The IMF has also brought up the suggestion that their funds be expanded to deal better with the current economic crisis but the Americans and Germans have rejected this proposal. Not surprising because they have too much problems and obligations on their own. Contributing more money to the IMF is not going to sound too appetizing for them. In my view, bullets are starting to become a rare commodity for these countries and they have to be rationed. This is not a good sign. Now there is talk about expanding the EFSF in terms of size and how they may use it to provide up to 20% insurance on sovereign debt. How much will that mean? Is it possible for the Germans to pump much more into the the EFSF? Especially after the trouble they had in contributing their initial share to the EFSF, what are the chances for them to inject significant amounts into the facility? The German citizens are not going to be too happy about it.
Last year when the stock market advanced after its summer correction various bond spreads began to contract to signal credit risk was easing. Credit risk began to pick up again in the middle of this year just as the stock market was peaking. Please note, however, that while the S&P 500 has been in a trading range since August, each rally we've experienced has not been confirmed by easing credit spreads, leading to a subsequent failure to breakout of the trading range in each case.
Since the S&P 500 peak this summer, we have just witnessed one of the largest uninterrupted rallies, and since we have seen virtually no improvement in credit spreads, I think this rally is highly suspect and investors should remain cautious.In addition to bond market credit spreads not confirming the stock market, neither are bank overnight lending rates which continue to rise even in the face of a sharply rising stock market. Back in June 2010 overnight lending rates peaked as credit risk began to stabilize and then in July and August overnight lending rates plummeted and global financial risks began to subside. This time around overnight lending rates for European and U.S. banks continue to climb and show no sign of stabilization. My inclination is that if the credit and interbank markets do not start following the direction of the stock market rally, I would be highly skeptical of this rally.
Would also like to throw in my view on the Occupy Wall Street movement which hit a new high by the coordinated movement across the world this weekend. This is really the era of the social network. There is no chance this could have happened 10 years ago. I bet the Chinese central govt is glad they barred Facebook access in China. What this movement shows is the growing discontent of the common folk in the street and their resentment towards the powerful and rich. Have you read the demands of the protesters? You should. Interesting read. Do not underestimate the effects of these protests because they could have long reaching consequences, so keep a close eye on it's progress.
Thats all I got for this week, it is going to be an interesting week ahead but do thread carefully as the markets seem to be pricing too much expectation of an European resolution. I seriously doubt it because betting on humans to put aside their self interests for the greater good is something that is not in our nature.
Have a great week ahead.
Best,
SVI
Things are expected to be thrashed out on the 23rd of October when the Eurozone summit is held. Speculation is that they will be arguing for EFSF guarantees provided to around 25% of new bonds issued by troubled euro-zone governments such as Italy and Spain. The summit was meant to be held over this weekend but the they delayed it because it was obvious that the Eurozone leaders could not hammer out a deal on time. Lets hope they have more to offer given this delay. The G20 group of leaders have put more pressure over this weekend on the Eurozone leaders to do more during this summit so that should generate some positive sentiment tomorrow. There is however a danger of the summit disappointing the market since it has already started to price in plenty of positive news coming out of it.
Personally, I really do not think recapitalizing the banks is the solution to this crisis because this is a sovereign crisis and not a banking one. The only worry is for liquidity to freeze up and bring us to a repeat of 2008. The underlying problem is the sovereigns and this problem is not going to go away. We are facing a structural problem and it is going to take a great deal more to stop it from getting worse. I am glad that they are finally doing something for the banks to prevent any from going under or causing a widespread panic. But should things get any worse for Italy, Spain etc, fear will resurface. I do not know about you but I am getting nervous as Italian yields are pushing higher once again, getting close to 6% once again. This shows that fears are starting to show in the sovereign debt market.
There is also talk of increasing the amount of haircut on the Greek bonds which private investors have to take. This is once again a sore point because in July, there was already a proposal to take an haircut of 21% on the Greek debt holdings. At the beginning, most private investors and banks were pretty receptive towards this proposal but now there are talks of revising the level of haircuts to 60%. Do not think private investors are going to take to that too well. Not that they have any choice on the matter. The biggest issue I have with this development is how the other peripheral countries that have debt issues react to this proposal. If you realize that the bank has just given your friend a discount on his debt, wouldn't that you ask for one yourself? That is my worry. I believe that the deeper the haircut given, the higher the chance of moral hazard and unhappiness amongst the highly indebted countries.
The IMF has also brought up the suggestion that their funds be expanded to deal better with the current economic crisis but the Americans and Germans have rejected this proposal. Not surprising because they have too much problems and obligations on their own. Contributing more money to the IMF is not going to sound too appetizing for them. In my view, bullets are starting to become a rare commodity for these countries and they have to be rationed. This is not a good sign. Now there is talk about expanding the EFSF in terms of size and how they may use it to provide up to 20% insurance on sovereign debt. How much will that mean? Is it possible for the Germans to pump much more into the the EFSF? Especially after the trouble they had in contributing their initial share to the EFSF, what are the chances for them to inject significant amounts into the facility? The German citizens are not going to be too happy about it.
Last year when the stock market advanced after its summer correction various bond spreads began to contract to signal credit risk was easing. Credit risk began to pick up again in the middle of this year just as the stock market was peaking. Please note, however, that while the S&P 500 has been in a trading range since August, each rally we've experienced has not been confirmed by easing credit spreads, leading to a subsequent failure to breakout of the trading range in each case.
Since the S&P 500 peak this summer, we have just witnessed one of the largest uninterrupted rallies, and since we have seen virtually no improvement in credit spreads, I think this rally is highly suspect and investors should remain cautious.In addition to bond market credit spreads not confirming the stock market, neither are bank overnight lending rates which continue to rise even in the face of a sharply rising stock market. Back in June 2010 overnight lending rates peaked as credit risk began to stabilize and then in July and August overnight lending rates plummeted and global financial risks began to subside. This time around overnight lending rates for European and U.S. banks continue to climb and show no sign of stabilization. My inclination is that if the credit and interbank markets do not start following the direction of the stock market rally, I would be highly skeptical of this rally.
Would also like to throw in my view on the Occupy Wall Street movement which hit a new high by the coordinated movement across the world this weekend. This is really the era of the social network. There is no chance this could have happened 10 years ago. I bet the Chinese central govt is glad they barred Facebook access in China. What this movement shows is the growing discontent of the common folk in the street and their resentment towards the powerful and rich. Have you read the demands of the protesters? You should. Interesting read. Do not underestimate the effects of these protests because they could have long reaching consequences, so keep a close eye on it's progress.
Thats all I got for this week, it is going to be an interesting week ahead but do thread carefully as the markets seem to be pricing too much expectation of an European resolution. I seriously doubt it because betting on humans to put aside their self interests for the greater good is something that is not in our nature.
Have a great week ahead.
Best,
SVI
Saturday, October 8, 2011
Remembering Steve Jobs and congratulating Heng Long.
Steve Jobs is dead....although it did not come as a surprise, it was still extremely sad when the news finally broke. Many articles have been published on his life over the past few days and I would strongly recommend anyone to read them because it gives us a good insight on how he lived his life. It was one of passion, focus and strong belief that he was making million's of lives better off with his innovative ideas. After reading about him so much over these past few days, it has really made me more reflective about how my work does not make anyone better off. In fact, considering how the markets have gone in 2008 - 2011, we really cannot blame the general public for having such a bad impression of banks.
Really was not in the mood to do anything this weekend nor write anything. Have really been in a more reflective mood. Markets have maintained their volatility this week, with most markets hitting year lows before staging a nice rebound till the later part of the week. Hope some of you managed to profit from it. I cannot deny that stocks do look cheap by valuations after such a steep drop and they have mostly priced in a recession going forward and if the European situation can be stopped, then this is a pretty good level to get back in.
Now it all depends on whether you all think that there is a way to resolve the Euro crisis. This week we saw the ECB do more by extending one year loans and increase their buying of covered bonds. This is to prevent the liquidity crunch in the European banking system. This is not a solution but it should provide some reprieve for funding needs of the banks. We also have witnessed the first European to technically fail. The breaking up of Dexia should be viewed as that because the bank could not operate under normal circumstances and the creation of a good and bad bank out of Dexia just brings back fond memories of 2008 doesn't it?
If you studied finance, you will know risk is one of the core topics for any financial courses. For the longest time, academics have been trying to find means and ways to quantify risks and even categorize them in to systematic, idiosyncratic and systemic risks. Reduction of risks have been the focus for the longest time but what this year has shown is that there are some risks cannot be reduced. In order to reduce risks, risks needs to be quantified, but how does one quantify political incompetence? I am not worried so much about other risks in the market but I am more concerned about the political situation.
As citizens of a country, we tend to look at things from our own nation's perspective and we tend to vote with that in mind. Can you imagine? During our last elections, we had full employment, strong economic growth and growing income but yet we were disgruntled enough to cause the worst ever result for our beloved PAP. Now put yourselves in the shoes of the Germans, French, Italians etc. You will not be thinking of how the Eurozone is going to do, you will be thinking from your own country's perspective. Now put yourselves in the shoes of the politicians. Do you think for your own country or do you think for the whole Eurozone. The problem therein lies in the fact that both are more interlinked than the people think. Having to juggle between your own citizens and the citizens across the whole region is really a big task. That is why I have the feeling that things are going to be tough to solve.
As for stocks in Singapore, I have been looking for companies that have been sold down to ridiculous prices but I still find lots of risks to the downside in terms of earnings. My current criteria before choosing any company is the sustainability of its earnings. During this time, we really need to be forward looking and also the business's ability to weather this coming storm. Take for example, I will not be buying into contract manufacturers or even companies that are very much dependent on volume rather than margins. Have shortlisted a few companies which I would very much like to accumulate during this time but they are definitely not at prices which I feel comfortable with. As for the names, they will be revealed in due course and some will be names which I have mentioned before.
To end off this post, I would like to say I am very proud to see that one of my favourite companies have been offered to be taken private. Not only is it being taken private, it is bought by one of the most admired companies in the world, Louis Vuitton Moet Hennessy. Congrats to those who bought into the stock when I called for it. Pity that we will not be able to benefit from Heng Long's growth going forward. But I do look forward to buying some nice croc products from LV going forward.
In the mean time, let us honor and remember the great Steve Jobs and what he has done to change our lives and his passion is something which we should try to replicate in our own lives. Not the biggest fan of Apple products but I do admire the company that he has built. Like what Steve Jobs said, "Live every day as if it was your last. Stay hungry and foolish." I hope I can do so too.
Best,
SVI
Really was not in the mood to do anything this weekend nor write anything. Have really been in a more reflective mood. Markets have maintained their volatility this week, with most markets hitting year lows before staging a nice rebound till the later part of the week. Hope some of you managed to profit from it. I cannot deny that stocks do look cheap by valuations after such a steep drop and they have mostly priced in a recession going forward and if the European situation can be stopped, then this is a pretty good level to get back in.
Now it all depends on whether you all think that there is a way to resolve the Euro crisis. This week we saw the ECB do more by extending one year loans and increase their buying of covered bonds. This is to prevent the liquidity crunch in the European banking system. This is not a solution but it should provide some reprieve for funding needs of the banks. We also have witnessed the first European to technically fail. The breaking up of Dexia should be viewed as that because the bank could not operate under normal circumstances and the creation of a good and bad bank out of Dexia just brings back fond memories of 2008 doesn't it?
If you studied finance, you will know risk is one of the core topics for any financial courses. For the longest time, academics have been trying to find means and ways to quantify risks and even categorize them in to systematic, idiosyncratic and systemic risks. Reduction of risks have been the focus for the longest time but what this year has shown is that there are some risks cannot be reduced. In order to reduce risks, risks needs to be quantified, but how does one quantify political incompetence? I am not worried so much about other risks in the market but I am more concerned about the political situation.
As citizens of a country, we tend to look at things from our own nation's perspective and we tend to vote with that in mind. Can you imagine? During our last elections, we had full employment, strong economic growth and growing income but yet we were disgruntled enough to cause the worst ever result for our beloved PAP. Now put yourselves in the shoes of the Germans, French, Italians etc. You will not be thinking of how the Eurozone is going to do, you will be thinking from your own country's perspective. Now put yourselves in the shoes of the politicians. Do you think for your own country or do you think for the whole Eurozone. The problem therein lies in the fact that both are more interlinked than the people think. Having to juggle between your own citizens and the citizens across the whole region is really a big task. That is why I have the feeling that things are going to be tough to solve.
As for stocks in Singapore, I have been looking for companies that have been sold down to ridiculous prices but I still find lots of risks to the downside in terms of earnings. My current criteria before choosing any company is the sustainability of its earnings. During this time, we really need to be forward looking and also the business's ability to weather this coming storm. Take for example, I will not be buying into contract manufacturers or even companies that are very much dependent on volume rather than margins. Have shortlisted a few companies which I would very much like to accumulate during this time but they are definitely not at prices which I feel comfortable with. As for the names, they will be revealed in due course and some will be names which I have mentioned before.
To end off this post, I would like to say I am very proud to see that one of my favourite companies have been offered to be taken private. Not only is it being taken private, it is bought by one of the most admired companies in the world, Louis Vuitton Moet Hennessy. Congrats to those who bought into the stock when I called for it. Pity that we will not be able to benefit from Heng Long's growth going forward. But I do look forward to buying some nice croc products from LV going forward.
In the mean time, let us honor and remember the great Steve Jobs and what he has done to change our lives and his passion is something which we should try to replicate in our own lives. Not the biggest fan of Apple products but I do admire the company that he has built. Like what Steve Jobs said, "Live every day as if it was your last. Stay hungry and foolish." I hope I can do so too.
Best,
SVI
Saturday, October 1, 2011
SPV for the EFSF? Leveraging to buy thrash. That spells trouble.
Finally, the 3rd quarter is over. What a quarter it has been. We have seen most major equity markets get hit so badly, leading to many of them trading in bear market territory. Many market watchers were speaking on CNBC last night, on how glad they were in seeing the 3rd quarter come to an end. The question I have is, do you really think that the 4th quarter will be any better?
This week we saw a nice rally in European stocks at the beginning of the week because European leaders promised to do more to solve the sovereign crisis and there were talks on establishing an special purpose vehicle to issue bonds to raise money for purchase of sovereign bonds of the PIIGS countries. There was also a proposal floated around on using the remaining EFSF to recapitalize the banks. Seems like a lot of ideas for what little is left within the EFSF, whether they will work or not, remains to be seen.
Of all the plans, I feel that the SPV idea is the one which the market cheered most on. Taking Tim Geithner's advice to leverage on the EFSF to solve the current debt crisis. At the beginning, European leaders turned down Geithner's idea but now they seem to woken up to the merits of his plan. For those people who know me, will know that I will always rationalise things. Imagine this, if you are left with 1000 dollars in your bank account and you decided to leverage on this money by placing it in a margin account. Lets say you leverage it 10 to 1, and bought into small caps stocks which are running into cashflow problems and may need more money, what do you think will happen? For me, when you are leveraging good money to buy toxic debt, that is always a recipe for trouble.
You really have to give it to the Americans to come out with a plan to use debt to buy bad debt. Haha. Speaking of trying to add oil to fire. Cannot really blame the US for trying to get the Europeans to stabilise everything. The current sovereign crisis in Europe is hurting the US's plan of implicitly devaluing the USD. The USD has rallied against most currencies, this is really not good for the US and its massive debt burden.
There is speculation on the amount to be put into the SPV. Considering the 440 billion Euros in the EFSF is only left with no more than 250 billion. How much do you think they will place into the SPV? From what I see, at least 200 billion has to be used for recapitalization of the banks, how much is left? 40-50 billion? Speculation is that the EFSF has to raise close to 1 trillion to be able to stem this crisis from spiraling all the way to hell. That means that the EFSF will need to leverage 10-20 times to 1. So what kind of credit rating should be assigned to bonds issued by EFSF? AAA? If they are able to rate it as AAA, we will really have to stand up and clap our hands on how the credit rating agencies are able to conjure up such ratings. I have my reservations on the viability of this plan.
There was a client who asked me, what should we look out for, to determine when the market will turnaround. I honestly think that if we end up with a short term myopic plan to stop this crisis, we will face the same problems within the next 12 months. Anything less than a press of the reset button, there is no way we can come out of this crisis. We have gone past the point of no return. Adam Smith's invisible hand is the only way to do it. Let free market forces get rid of the excesses we have built up over the past 20 to 30 years. Interventions are all sugar pills placebos for cancer treatment. Nothing is going to change.
This week is going to be interesting as we start an new quarter. October has never been a good month for the market and throw in the technical charts. I will not be surprised if the US hits a new year low in this month. We shall see won't we? Economic data coming in has been borderline positive but I feel they still do not reflect the effects of the weakness in Europe and the negative wealth effect from the market capitulation, this could tip the economic indicators to negative territory. This coming week's employment numbers should shed some light.
Are there any stocks to look out for in this market? Personally, I have been trying to find any interesting stocks and something to position for the market recovery. Still not time yet. So I am not going to write anything specific at this moment. Thats all I have for today.
Have a great week ahead.
Best,
SVI
This week we saw a nice rally in European stocks at the beginning of the week because European leaders promised to do more to solve the sovereign crisis and there were talks on establishing an special purpose vehicle to issue bonds to raise money for purchase of sovereign bonds of the PIIGS countries. There was also a proposal floated around on using the remaining EFSF to recapitalize the banks. Seems like a lot of ideas for what little is left within the EFSF, whether they will work or not, remains to be seen.
Of all the plans, I feel that the SPV idea is the one which the market cheered most on. Taking Tim Geithner's advice to leverage on the EFSF to solve the current debt crisis. At the beginning, European leaders turned down Geithner's idea but now they seem to woken up to the merits of his plan. For those people who know me, will know that I will always rationalise things. Imagine this, if you are left with 1000 dollars in your bank account and you decided to leverage on this money by placing it in a margin account. Lets say you leverage it 10 to 1, and bought into small caps stocks which are running into cashflow problems and may need more money, what do you think will happen? For me, when you are leveraging good money to buy toxic debt, that is always a recipe for trouble.
You really have to give it to the Americans to come out with a plan to use debt to buy bad debt. Haha. Speaking of trying to add oil to fire. Cannot really blame the US for trying to get the Europeans to stabilise everything. The current sovereign crisis in Europe is hurting the US's plan of implicitly devaluing the USD. The USD has rallied against most currencies, this is really not good for the US and its massive debt burden.
There is speculation on the amount to be put into the SPV. Considering the 440 billion Euros in the EFSF is only left with no more than 250 billion. How much do you think they will place into the SPV? From what I see, at least 200 billion has to be used for recapitalization of the banks, how much is left? 40-50 billion? Speculation is that the EFSF has to raise close to 1 trillion to be able to stem this crisis from spiraling all the way to hell. That means that the EFSF will need to leverage 10-20 times to 1. So what kind of credit rating should be assigned to bonds issued by EFSF? AAA? If they are able to rate it as AAA, we will really have to stand up and clap our hands on how the credit rating agencies are able to conjure up such ratings. I have my reservations on the viability of this plan.
There was a client who asked me, what should we look out for, to determine when the market will turnaround. I honestly think that if we end up with a short term myopic plan to stop this crisis, we will face the same problems within the next 12 months. Anything less than a press of the reset button, there is no way we can come out of this crisis. We have gone past the point of no return. Adam Smith's invisible hand is the only way to do it. Let free market forces get rid of the excesses we have built up over the past 20 to 30 years. Interventions are all sugar pills placebos for cancer treatment. Nothing is going to change.
This week is going to be interesting as we start an new quarter. October has never been a good month for the market and throw in the technical charts. I will not be surprised if the US hits a new year low in this month. We shall see won't we? Economic data coming in has been borderline positive but I feel they still do not reflect the effects of the weakness in Europe and the negative wealth effect from the market capitulation, this could tip the economic indicators to negative territory. This coming week's employment numbers should shed some light.
Are there any stocks to look out for in this market? Personally, I have been trying to find any interesting stocks and something to position for the market recovery. Still not time yet. So I am not going to write anything specific at this moment. Thats all I have for today.
Have a great week ahead.
Best,
SVI
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