Did not post anything over the weekend as I was being dragged into a wedding as a brother to suffer from humiliating challenges posed by a bunch of young girls looking to have fun. All in all a very interesting weekend but that meant not having the time to write anything on this blog.
Not that there is nothing to write about because we are having some really interesting news coming out from all the major markets and markets have gone into consolidation mode since last Friday. China has fallen 11% since last Friday and here I am licking my lips as stocks get cheaper for me to buy. You must be thinking, I must be nuts to want to buy stocks at this time when Chinese stocks are falling 4 percent per day. Well in my mind, the faster it drops, the faster we get over with it and then we can resume the way up. We have had a good run since September and it is about time to slow down and take a breather before the Capricorn effect takes its place in December and January. What the markets are doing now is just taking a break so that it can move further forward.
So what is causing the current weakness in the market? So many people are pointing the fingers at the Irish debt issue. But what is really new? Is this really going to cause us to go into another correction of the same magnitude of what we saw in May? No chance. Why? Because in May, the Eurozone peripheral countries sovereign debt problem had caught everyone by surprise and the shock of finding out how poorly managed the fiscal balance sheets of Greece were, created a panic in the markets. I do not know about all of you, but by now, I am really sick of reading about how the PIGS countries in Europe are all going bankrupt and getting their debt downgraded. You want to know what I think about this whole issue? I think it is just the Eurozone's way of competitive devaluation of the Euro. In one of my previous posts, I said, Europe was the only one that has not done anything to devalue their currency and now they have moved to action. They have achieved it with the Euro falling more than 3% over the past week. But this is not going to be a big deal, who the hell cares about Irish debt besides the Irish creditors? Please do not waste time reading about this. Pointless.
Next we have worries about the Chinese moving to contain inflation. So much speculation that the Chinese will move to raise interest rates again as early as 19 November. With the inflation number coming in much higher than expected, what do you expect? I remember writing about how Chinese inflation will be here a few months back. By the end of the day, they did raise most manufacturing job wages up by more than 40% on average, consumption is bound to shoot up. Is it surprising to you that food prices went up by more than 10% last month? So how do we contain inflation in food prices? By raising interest rates? No way! Who cares about interest rates when making the decision to buy more pork for dinner. Expect food price curbs from the Chinese government. Personally, I do not know how they are going to do it because this will never work in democratic countries but with a central government this will be much easier to implement. No one except the pricing committee will know the extent of these price curbs so lets just wait and see.
Markets are overreacting to these price curb measures by selling down most of the commodity stocks. The fears over more rate hikes also caused the banks to bear most of the brunt of the sell down. This is a buying opportunity, not a selling one. So hold onto your horses. This is a very healthy correction and it makes me even more optimistic because it shows there is still logic and rationality in the markets. The more linear the move the more fearful I become.
The USD is moving back up again and many people are saying this is the return of risk aversion from fears over the Eurozone problems resurfacing. I choose to disagree with this notion. Many people are not paying enough attention to the treasury yields when they are making such a statement. If there is really risk aversion, shouldn't treasury yields be going down especially since the ? But instead the 10 year treasury yield is at its highest point in months. Since QE2 was announced, there should be more pressure on yields to move down, but instead it has been moving up. If there was so much fear in the market, there should be tons of money flowing into treasuries but there is no such move right now. My view is that the USD is now moving up because of the shorts covering their positions. QE2 was hinted to the market 2 months ago and the shortists have been having a ball of a time making money from shorting USD. So now that the news is out, they are just busy covering their positions. It will not be long before the USD resumes it fall. And when that happens it is our cue to get back into the market.
Since this is just a midweek post, I am going to keep it short and simple. Just buy during this correction. We are going to have a good time over the next few months.
Have a good rest of the week.
Best,
SVI
Wednesday, November 17, 2010
Friday, November 5, 2010
Bernanke loves equities, so should we. Overweight equities all the way!
A few weeks ago, I was as per normal drinking at a watering hole near my office and a very unfortunate incident involving some red wine and a white shirt forced me to end the night early and make my way home. While I was walking to take a cab home, I bumped to an investment banker who was also making his way back. When he saw me, he quickly took the opportunity to get into a discussion on the USD with me. Apparently, he was caught in a dilemma on what to do with his USD. Now let me just say, I have been shocked by the number of people who are holding onto their USD with the hopes of a meaningful rebound. Someone once told me, "the trend is your friend", and the trend is down for the USD. So I think anyone reading this out there, do consider moving out of the USD and put it into something else.
Ok back to my conversation with the investment banker on the USD. One of the ideas I posed to his was to put it into HKD. What! Isn't the HKD pegged to the USD since 1983? So why would that make a difference. Here is how I see it. For a USD holder, there is no downside risk because the value of HKD will never fall against the USD if it remains pegged. However, if they do what I believe they will do, USD holders will get to enjoy at least a 10% one off gain as the HKD gets revalued.
Here is why I think it will happen. Currently, the Hong Kong dollar is tied to the US dollar and trades in a small band between HK$7.75 and HK$7.85. Recently, the Hong Kong currency has been trading at the upper end of that band, which has an impact on those who deal in large sums.
Take for example the Kuwait Investment Authority was committed to buy a HK$7.8bn stake in the listing last month of AIA, the Asian arm of US insurance group AIG. When the time came for the sovereign fund to write a cheque in Hong Kong dollars, it found that the amount of US dollars it had to pay had risen substantially from its original estimate.
The way the Hong Kong dollar has been trading at the top of its band as an indication of the pressure the currency is under to rise, and I really expect the peg to be dropped within the next 3 years.
Analysts say it is usually problematic when a strong economy has a weak currency. Thanks to the peg, Hong Kong is importing its monetary policy from the US. But the American policy of zero interest rates to stimulate a listless economy is hardly appropriate for an economy that is growing at a rate of more than 6 per cent a year, say analysts. And while the US is desperately attempting to boost asset prices, Hong Kong’s property prices are already high and rising. With their largest trading partner being China, importing RMB goods with a weakening HKD is just going to be inflationary for Hong Kong.
If the peg were to disappear tomorrow, many analysts forecast that the Hong Kong dollar would appreciate by a minimum of 10-15 per cent.
Hong Kong is well on its way to becoming a de facto dual currency centre as China continues to take steps to internationalise the renminbi. The increase in Chinese renminbi circulation would give rise to a dual currency system in Hong Kong and over time this could pave the way for an eventual HKD/RMB peg.
In conclusion, there is still hope for USD reference currency holders.
Ok back to the events of the week. Everything went according to plan this week, with the Republicans retaking the house and the Obama going through a humiliating defeat in the midterm elections. The QE2 package was more than expected and for a longer period of time. The market cheered and we had a strong rally which many observers believe the market will continue to rally. The last QE move was 1.6 trillion and the global markets rallied 75% from their lows. So the 15% returns over the past 2 months since the Fed signalled QE2 looks to be a preview of more to come.
Non-farm payrolls came in better than expected with 151k new jobs created. This was very much better than expected and the first positive month of jobs growth since May 2010. Although it is good news, the market did not take it that well because positive economic data means the Fed may choose to do less QE than was declared. One funny point which I feel compelled to state in this post was Bernanke's speech pointing out stock prices were low. We always knew that Greenspan always supported strong stock prices with the "Greenspan Put" but to have a Fed chief state that he wanted stock prices higher, isn't that comforting? Hahaha.
The last time there was so much cheap money, it was the Japanese that led the way, with tons of cheap money through their zero interest rate policy. But compared to the US, the Japanese has been more held back than the US. The difference between the two is the culture. The Japanese corporations have a more prudent attitude towards investing compared to the US corporates. Why? Because they have learnt from their lessons in the past when corporate Japan was busy buying up corporate America. With the introduction of cheap money in Japan came the arbitrage vultures profiting from "carry trades" on the yen. That went on for many many years. With the US getting into this trouble, the yen carry trade has been unwounded (that is on of the key reasons why the yen has been appreciating so quickly). Now the USD carry trade has started and never has the world see so much money flooding the market. It is just scary to think about it. Asset price inflation is all but a sure thing.
Right after the Fed announced their decision, Coca Cola went out and issued 3 year notes to 4.5 billion over 3 years at less than 1 percent. Expect to see more large corporations to go out and raise money at such a cheap rate. This is going to be a trend and what is going to happen is more merger and acquisition action. To me, that is going to be the key driver for the stock market going forward. We will see more market leaders looking to acquire their smaller competitors because it is very easy and cheap for them to raise money due to their size. With interest rates going at less than 1%, almost every acquisition is going to be yield accretive. Also the valuations offered in takeovers can be higher because it is not difficult to attain higher returns over the low cost they have to pay for financing.
What this means is valuations will be richer and many industries may see price earnings re rating over the next few quarters. Although I do not think it is sustainable, but with so much money sloshing around we really do not know when the party will end. So with this outlook, I am going to reiterate my call for an overweight in equities with little downside risks in over the next 6 months and to steer away from bonds. The party has just begun for us and lets enjoy it while it lasts.
Best,
SVI
Ok back to my conversation with the investment banker on the USD. One of the ideas I posed to his was to put it into HKD. What! Isn't the HKD pegged to the USD since 1983? So why would that make a difference. Here is how I see it. For a USD holder, there is no downside risk because the value of HKD will never fall against the USD if it remains pegged. However, if they do what I believe they will do, USD holders will get to enjoy at least a 10% one off gain as the HKD gets revalued.
Here is why I think it will happen. Currently, the Hong Kong dollar is tied to the US dollar and trades in a small band between HK$7.75 and HK$7.85. Recently, the Hong Kong currency has been trading at the upper end of that band, which has an impact on those who deal in large sums.
Take for example the Kuwait Investment Authority was committed to buy a HK$7.8bn stake in the listing last month of AIA, the Asian arm of US insurance group AIG. When the time came for the sovereign fund to write a cheque in Hong Kong dollars, it found that the amount of US dollars it had to pay had risen substantially from its original estimate.
The way the Hong Kong dollar has been trading at the top of its band as an indication of the pressure the currency is under to rise, and I really expect the peg to be dropped within the next 3 years.
Analysts say it is usually problematic when a strong economy has a weak currency. Thanks to the peg, Hong Kong is importing its monetary policy from the US. But the American policy of zero interest rates to stimulate a listless economy is hardly appropriate for an economy that is growing at a rate of more than 6 per cent a year, say analysts. And while the US is desperately attempting to boost asset prices, Hong Kong’s property prices are already high and rising. With their largest trading partner being China, importing RMB goods with a weakening HKD is just going to be inflationary for Hong Kong.
If the peg were to disappear tomorrow, many analysts forecast that the Hong Kong dollar would appreciate by a minimum of 10-15 per cent.
Hong Kong is well on its way to becoming a de facto dual currency centre as China continues to take steps to internationalise the renminbi. The increase in Chinese renminbi circulation would give rise to a dual currency system in Hong Kong and over time this could pave the way for an eventual HKD/RMB peg.
In conclusion, there is still hope for USD reference currency holders.
Ok back to the events of the week. Everything went according to plan this week, with the Republicans retaking the house and the Obama going through a humiliating defeat in the midterm elections. The QE2 package was more than expected and for a longer period of time. The market cheered and we had a strong rally which many observers believe the market will continue to rally. The last QE move was 1.6 trillion and the global markets rallied 75% from their lows. So the 15% returns over the past 2 months since the Fed signalled QE2 looks to be a preview of more to come.
Non-farm payrolls came in better than expected with 151k new jobs created. This was very much better than expected and the first positive month of jobs growth since May 2010. Although it is good news, the market did not take it that well because positive economic data means the Fed may choose to do less QE than was declared. One funny point which I feel compelled to state in this post was Bernanke's speech pointing out stock prices were low. We always knew that Greenspan always supported strong stock prices with the "Greenspan Put" but to have a Fed chief state that he wanted stock prices higher, isn't that comforting? Hahaha.
The last time there was so much cheap money, it was the Japanese that led the way, with tons of cheap money through their zero interest rate policy. But compared to the US, the Japanese has been more held back than the US. The difference between the two is the culture. The Japanese corporations have a more prudent attitude towards investing compared to the US corporates. Why? Because they have learnt from their lessons in the past when corporate Japan was busy buying up corporate America. With the introduction of cheap money in Japan came the arbitrage vultures profiting from "carry trades" on the yen. That went on for many many years. With the US getting into this trouble, the yen carry trade has been unwounded (that is on of the key reasons why the yen has been appreciating so quickly). Now the USD carry trade has started and never has the world see so much money flooding the market. It is just scary to think about it. Asset price inflation is all but a sure thing.
Right after the Fed announced their decision, Coca Cola went out and issued 3 year notes to 4.5 billion over 3 years at less than 1 percent. Expect to see more large corporations to go out and raise money at such a cheap rate. This is going to be a trend and what is going to happen is more merger and acquisition action. To me, that is going to be the key driver for the stock market going forward. We will see more market leaders looking to acquire their smaller competitors because it is very easy and cheap for them to raise money due to their size. With interest rates going at less than 1%, almost every acquisition is going to be yield accretive. Also the valuations offered in takeovers can be higher because it is not difficult to attain higher returns over the low cost they have to pay for financing.
What this means is valuations will be richer and many industries may see price earnings re rating over the next few quarters. Although I do not think it is sustainable, but with so much money sloshing around we really do not know when the party will end. So with this outlook, I am going to reiterate my call for an overweight in equities with little downside risks in over the next 6 months and to steer away from bonds. The party has just begun for us and lets enjoy it while it lasts.
Best,
SVI
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