Starting a post these days is getting tougher and tougher. Juggling between work, studying and stock picking is just a little overwhelming. Did you guys like Genting Hong Kong? It has done well since the last post, but so did the rest of the market. The most common question posed to me these days is "why is the market so bullish when nothing has changed?". Bad news is still in the market but investors are just choosing to ignore everything. On the positive side of things, we have seen Bernanke doing his best to boost markets by increasing transparency on his policies. There was also the Long Term Refinancing Operations done by the ECB, that has really been the real reason to why the market has come back so strongly.
Remember my first post of the year? I did say, we have to keep an open mind this year as this will be the year of unusual uncertainty. I bet most people did not expect the year to start off with such a bang. Corporate earnings season has not been great at all. Plenty of profit warnings have been issued and revenue growth for many large corporations have disappointed. This should not come as a surprise as the global economy has indeed slowed down and demand for many products have slowed down. How long is this rally going to last? I would say that the market is technically overbought at this moment and a short term correction may come soon. However with all the talk about QE3 and interest rates being held at this ultra low level till late 2014, the ECB out to do another LTRO by the end of Feb, the market should hold up pretty nicely.
Fact of the matter is, the rally is purely liquidity driven and it has nothing to do with fundamentals. Valuations are cheap no doubt, but earnings can be expected to moderate over the next couple of quarters. What we are witnessing here is once again distortion in the markets due to unprecedented amount of liquidity being pumped into the markets. I commented to one of my colleagues the other day, that we should just throw all our finance textbooks out of the window as the normal relationships between asset classes are no longer applicable. Distortions from these actions from policy makers and central bankers are going to cause new books to be written on economics and finance as new lessons will be learnt from these actions. Honestly, I personally am worried about what the world will become once the dust settles.
Giving an educated guess is all I can do and what I want to say is that the growing divide between the rich and the poor is going to be even larger by the time this debacle is over. Why? Asset inflation is going to be the key words to remember. Consider this....are you really getting richer because of the asset price increase or are you only keeping up with inflation as the money supply is doubled, tripled, quadrupled etc. When our grand parents bought their flats over 30 years ago, they paid 20-50k for their flats. Now those same flats are going at more than 500k. Is it because they were astute and made the right decisions to invest in property or is the price of the property just a clear reflection of inflationary pressures and destruction of our purchasing power? Just because your net worth doubled over the past 10 years does not mean that you are richer, it just means that the money supply has doubled and your asset has inflated. Now lets just think about what is happening at this time. I honestly think that asset inflation is only going to make the wealthy richer as they have the means and ability to invest their money but for those who only earn enough to save a menial sum, things are going to get worse. They will not be able to invest their money in those assets as prices just get overly exorbitant and their savings will only keep losing their value. That is why I believe the divide will get even more obvious.
So you may ask, why I think the LTRO has worked in calming the markets when Greece is probably still going to default. The fact of the matter is, no one expects Greece to not default. The question is whether it is a disorderly or an orderly one. The default is something that has been pretty much priced into the markets and even if it defaults, the market is still going to be fine. The worry is how the rest of the problematic countries like Portugal, Spain or Italy going to be affected by this. Does a Greek default signal the possibility of other Eurozone countries defaulting? What we are seeing in the European sovereign debt markets is that yields are falling. That is a good sign but there is no guarantee that is it sustainable. Why are the yields falling? That is because the LTRO has allowed the European banking system to attain refinancing which would have not been available and some of the cash injected in the system is going back into the sovereign markets. Throw in the fact that this move has removed the worries over the banking system and significantly lowers the risk of a systemic meltdown in the banking system in the short term. The market is currently relieved that the banking system is safe for now.
I do not deny that a systemic meltdown has been averted but risks still remain as this is just another kick of the can down the road. Nothing has been solved. The question is whether to join in the market cheering or to sit on the sidelines. This is really the million dollar question. Is it too costly to really just sit back and watch everything unfold? As I mentioned earlier, asset inflation is happening now and if you do not get in, will you be left behind? This is really a "catch 22" situation.
Personally, I have been very cautious while at the same time taking opportunistic bets on the market. I am a momentum trader and my broker commented that I seem to like buying at day highs for the counters I trade in. Momentum trading has helped my returns over the 4 weeks. But I am seeing the momentum slow down for the time being. The fact that I am involved in the market every day is very helpful for my own portfolio as I can actively monitor and adjust my positions but for those of you who are not staring at the monitor 24/7 like me, it is a lot harder. My advise is still to go for the companies which you believe are cheap, trading at a good level, sustainable in terms of earnings and you are willing to hold over the next few years. I know plenty of people are bearish on the property counters right now, but I feel the property counters have pretty much priced in the possibility of a property market slowdown, but plenty of them have strong balance sheets and trade at a good discount from the NAV and RNAV. Capitaland is one of these companies. Wheelock is also another. Buy and accumulate these counters slowly and you will be rewarded over the next few years. I am pretty sure.
Just wanted to put some of my thoughts into writing for this week. Nothing much more to say. Will post more regularly after I finish with my exams. Have a great week ahead and Happy CNY to all of you!
Best,
SVI
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I cannot imagine what will happen to the united states if china and all the countries and all investors the world over shun the dollar. Interest rates would rise and the the central bank or the federal reserve would be forced to buy bonds from the treasury to fund the government and pay interest on all of the governments bills notes and bonds. When the buyers for united states debt obligations disappears the whole system will come crashing down. This is the type of thing that peter shiff has been warning everyone about when the ability of the united states to pay its debts becomes clearly in doubt all the buyers for united states debt securities disappears overnight.
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