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
Saturday, October 1, 2011
Sunday, September 25, 2011
Come on baby, lets do the twist! Is it going to work? Doubt it. While Europe is still sleeping on its problem.
Seems like a long time since I last posted? Where did I go? Ran to the mountains to stay away from the market? Nope. Was doing something important for my career and lets hope things turn out well. Lets get back to where we left off shall we? The market as we speak is at its year lows and in my view, it will get worse. Cannot help but feel a little sense of deja vu of 2007 before everything became critical and banks started to fail in 2008. I had some bad comments from a reader in my last blog but I hope that the movements of the market has vindicated my views and trust me, if my views could move the markets like he said, I would not be even bothered to write any more, too much money to be made elsewhere.
Lets start from the beginning. Like I said in the last post, Europe is the big problem. It is still the problem and I do not see it going off any time soon. Funny thing that came into my head the other day. What happens when you are in a marriage where a party makes all the money and the other party spends all of it? Obviously, one side will be a little happier than the other. But the good thing about marriages these days is that you can get a divorce easily. In fact, divorces are so common these days that it will soon be unfashionable not to be a divorcee. That shall be left for a totally different conversation altogether. Why was this used as an analogy? Its because right now, Europe is divided between the bread makers and the dough takers, I really like these terms I just thought up. Germany, France, Holland etc vs PIIGS. Sometimes one would wonder why in life there are so many coincidences. PIIGS? If that is not the ultimate irony of things, I really do not know what is.
The Euro Zone is clearly a marriage that is turning ugly, if you thought Donald Trump's divorce was tough, this is going to be the mother of all divorces if it happens. How unhappy would you be if you realised that you are in a marriage that cannot be dissolved? This is exactly what is stated in the Maastrict Treaty in signed in 1992. No one can be kicked out of the Euro Zone, only if the member opts to leave. If you are the party in a marriage that is taking all the money and spending it, why would you ever want a divorce? What about those guys who are making all the money? They would love to leave but even if they did, it will not make a difference because the consequences would still be severe in a different way. If I had to write on more detail of what can happen if Germany decides to leave the Euro Zone, it will take a month or two and possibly publishing a book.
The markets are currently moving up 1 to 2 percent on up days but plunging 3 to 4 percent on down days. This is the classic consolidation pattern awaiting the next leg down. Things are still not close to reaching the point of pandemonium that is why I would quote the great Capenters song ;"It's only just begun" seems rather apt in this case. The way the Euro Zone politicians and central bankers are dragging this issue further down the road, the future sure does look bleak.
What really scares me more today than in 2008 is the fact that we could identify the crisis of 2008 as a banking crisis, this time round it will be a challenge for anyone to try to differentiate between it being a banking or sovereign related crisis.
Speaking about deja vu, in Sept 2008, we had Dick Fuld, CEO of Lehman going on CNBC to tell the world that Lehman was well capitalised and there was nothing to worry about. This time, when I saw Frederic Oudea, CEO of Societe Generale on CNBC saying the same thing, that really got me worried. Have you seen the price of Soc Gen's stock? It is depressing. That is pretty much the same for Commerzbank, Unicredit, RBC Dexia and all other European banks to maybe just a lower extent. Will there be another bank failure? Depends on how you define a bank failure. Bankruptcy or Nationalisation? Hahaha.
Things are moving too slowly in Europe and Greece is just the first chip to fall. 2 year Greek bonds are currently trading close to 60% yields and just last week, they were trading at 80% yields. What that means is that the market is pricing a more than 90% chance of a Greek default in the next 2 years. I think it will not take so long, we could see it come as soon as March 2012. I am not worried about the Greek default, I am more concerned with the Italian yields creeping up to close to 6% once again. Currently, the equity markets are pricing in a recession in Europe plus a Greek default. But things are not looking good with Italy too and that has always been my fear because there is no way the Euro Zone will be able to bail Italy out. With Berlusconi and company so indecisive on their austerity measures, investors are getting increasingly worried about things. Throw in the fact that borrowing costs are rising, the increased burden is not going to do well for a country whose growth is already stalling.
When Greece defaults eventually, the market will rally and it will cheer the end of this uncertainty that hangs over all investors heads but whether it will be sustained or shortlived will depend a lot on whether the situation in Italy and Spain gets better or deteriorates. By the looks of it right now, it looks like it will be a long drawn out affair. So lets cross our fingers and hope for the best.
Moving on to the US, the banks there are not doing much better too. Goldman below $100, Bank of America moving ever closer to a bankruptcy protection on its Country wide unit (stock hitting close to $6), Wells Fargo getting downgraded....things are not looking good. Double dip recession? I think it is only common sense that the market is pricing in a good chance of one. I know what people are saying that stocks are looking cheap but is it really? Earnings can disappear really quickly and P/E ratios will become infinity. So do not be deceived by the talks about valuations. Unemployment numbers are coming in at zero. Zero! When did that last happen? Not negative nor positive, but zero. Recent economic data coming in looks bad, sentiment bad, Federal Reserve outlook....bad. The US market has held up very well in September because of the hopes of a QE3 and when the news of the Fed's operation twist came about, the market dropped a whopping 5% in 2 days. Talk about an anticlimax.
For those who love history, would know that the Federal Open Market Committee action known as Operation Twist was done in 1961 when the Twist was really popular. Their intention was to flatten the yield curve in order to promote capital inflows and strengthen the dollar. The Fed utilized open market operations to shorten the maturity of public debt in the open market. It performs the 'twist' by selling some of the short term debt it purchased as part of the quantitative easing policy back into the market and using the money received from this to buy longer term government debt. In many economists view, the twist was a failure in the 1960s and for the the Fed to resort to it now, that really does not give anyone much confidence. I personally think that the Fed is running out of ideas on what to do to help boost the US economy, even though good ole Ben keeps stressing that he still have plenty of tools to help the economy. Resorting to the twist looks like a sign of increasing desperateness. How will this turn out? Don't look great at this moment. Things could get worse if the troubles in Europe spills over to the US, then things will get even worse.
In Singapore, the STI has hit fresh intraday year lows on Friday and rebounded off them. Be prepared for further weakness because the path of least resistance is down. We are seeing plenty of weakness in commodity related counters and many stocks have hit fresh year lows too. Not a pretty picture at all. 2500 points look like a very possible target in the short term. Hong Kong looks even worse. Breaking the 18000 point marks with ease and slicing through 17000 with ease. The low for the Hang Seng in 2009 was the mid 15000 points. That is just an illustration to let you see how close we actually are.
Technically, all equity markets look awful, as they keep making lower highs and lower lows. The 2nd wave of the sell down has started. Good news is that the 2nd waves are not the worst, they tend to be a little milder than the first wave. Gold has taken a big move down after hitting record highs, this is mainly due to the raising of the margin requirements by the CME. Still believe that this is a temporary move backwards. Overall, confidence in currencies are going down the drain and I think that the CME is doing its part to try to prevent too many people from moving away from currencies into Gold. For the longest time, central bankers have been against gold as a store of value and they have been pushing people into believing that currencies are better because there is an yield on them. The tables are turning now because interest rates are so low therefore the yield is negligible and thus gold becomes attractive once again. The last thing politicians want is for the world to stop believing in the paper notes they hold and start loving that yellow metal once again. Why are they so worried about speculation in gold? It has always been a store of value, why would you worry about the prices going up? Have you ever heard of margins being raised on currencies? Conspiracy theory?
This is my first post in a very long time. I will be updating it on a consistent basis going forward as my projects have ended for the time being. So stay tuned as I try to find a way to maneuver in this market condition.
Best,
SVI
Lets start from the beginning. Like I said in the last post, Europe is the big problem. It is still the problem and I do not see it going off any time soon. Funny thing that came into my head the other day. What happens when you are in a marriage where a party makes all the money and the other party spends all of it? Obviously, one side will be a little happier than the other. But the good thing about marriages these days is that you can get a divorce easily. In fact, divorces are so common these days that it will soon be unfashionable not to be a divorcee. That shall be left for a totally different conversation altogether. Why was this used as an analogy? Its because right now, Europe is divided between the bread makers and the dough takers, I really like these terms I just thought up. Germany, France, Holland etc vs PIIGS. Sometimes one would wonder why in life there are so many coincidences. PIIGS? If that is not the ultimate irony of things, I really do not know what is.
The Euro Zone is clearly a marriage that is turning ugly, if you thought Donald Trump's divorce was tough, this is going to be the mother of all divorces if it happens. How unhappy would you be if you realised that you are in a marriage that cannot be dissolved? This is exactly what is stated in the Maastrict Treaty in signed in 1992. No one can be kicked out of the Euro Zone, only if the member opts to leave. If you are the party in a marriage that is taking all the money and spending it, why would you ever want a divorce? What about those guys who are making all the money? They would love to leave but even if they did, it will not make a difference because the consequences would still be severe in a different way. If I had to write on more detail of what can happen if Germany decides to leave the Euro Zone, it will take a month or two and possibly publishing a book.
The markets are currently moving up 1 to 2 percent on up days but plunging 3 to 4 percent on down days. This is the classic consolidation pattern awaiting the next leg down. Things are still not close to reaching the point of pandemonium that is why I would quote the great Capenters song ;"It's only just begun" seems rather apt in this case. The way the Euro Zone politicians and central bankers are dragging this issue further down the road, the future sure does look bleak.
What really scares me more today than in 2008 is the fact that we could identify the crisis of 2008 as a banking crisis, this time round it will be a challenge for anyone to try to differentiate between it being a banking or sovereign related crisis.
Speaking about deja vu, in Sept 2008, we had Dick Fuld, CEO of Lehman going on CNBC to tell the world that Lehman was well capitalised and there was nothing to worry about. This time, when I saw Frederic Oudea, CEO of Societe Generale on CNBC saying the same thing, that really got me worried. Have you seen the price of Soc Gen's stock? It is depressing. That is pretty much the same for Commerzbank, Unicredit, RBC Dexia and all other European banks to maybe just a lower extent. Will there be another bank failure? Depends on how you define a bank failure. Bankruptcy or Nationalisation? Hahaha.
Things are moving too slowly in Europe and Greece is just the first chip to fall. 2 year Greek bonds are currently trading close to 60% yields and just last week, they were trading at 80% yields. What that means is that the market is pricing a more than 90% chance of a Greek default in the next 2 years. I think it will not take so long, we could see it come as soon as March 2012. I am not worried about the Greek default, I am more concerned with the Italian yields creeping up to close to 6% once again. Currently, the equity markets are pricing in a recession in Europe plus a Greek default. But things are not looking good with Italy too and that has always been my fear because there is no way the Euro Zone will be able to bail Italy out. With Berlusconi and company so indecisive on their austerity measures, investors are getting increasingly worried about things. Throw in the fact that borrowing costs are rising, the increased burden is not going to do well for a country whose growth is already stalling.
When Greece defaults eventually, the market will rally and it will cheer the end of this uncertainty that hangs over all investors heads but whether it will be sustained or shortlived will depend a lot on whether the situation in Italy and Spain gets better or deteriorates. By the looks of it right now, it looks like it will be a long drawn out affair. So lets cross our fingers and hope for the best.
Moving on to the US, the banks there are not doing much better too. Goldman below $100, Bank of America moving ever closer to a bankruptcy protection on its Country wide unit (stock hitting close to $6), Wells Fargo getting downgraded....things are not looking good. Double dip recession? I think it is only common sense that the market is pricing in a good chance of one. I know what people are saying that stocks are looking cheap but is it really? Earnings can disappear really quickly and P/E ratios will become infinity. So do not be deceived by the talks about valuations. Unemployment numbers are coming in at zero. Zero! When did that last happen? Not negative nor positive, but zero. Recent economic data coming in looks bad, sentiment bad, Federal Reserve outlook....bad. The US market has held up very well in September because of the hopes of a QE3 and when the news of the Fed's operation twist came about, the market dropped a whopping 5% in 2 days. Talk about an anticlimax.
For those who love history, would know that the Federal Open Market Committee action known as Operation Twist was done in 1961 when the Twist was really popular. Their intention was to flatten the yield curve in order to promote capital inflows and strengthen the dollar. The Fed utilized open market operations to shorten the maturity of public debt in the open market. It performs the 'twist' by selling some of the short term debt it purchased as part of the quantitative easing policy back into the market and using the money received from this to buy longer term government debt. In many economists view, the twist was a failure in the 1960s and for the the Fed to resort to it now, that really does not give anyone much confidence. I personally think that the Fed is running out of ideas on what to do to help boost the US economy, even though good ole Ben keeps stressing that he still have plenty of tools to help the economy. Resorting to the twist looks like a sign of increasing desperateness. How will this turn out? Don't look great at this moment. Things could get worse if the troubles in Europe spills over to the US, then things will get even worse.
In Singapore, the STI has hit fresh intraday year lows on Friday and rebounded off them. Be prepared for further weakness because the path of least resistance is down. We are seeing plenty of weakness in commodity related counters and many stocks have hit fresh year lows too. Not a pretty picture at all. 2500 points look like a very possible target in the short term. Hong Kong looks even worse. Breaking the 18000 point marks with ease and slicing through 17000 with ease. The low for the Hang Seng in 2009 was the mid 15000 points. That is just an illustration to let you see how close we actually are.
Technically, all equity markets look awful, as they keep making lower highs and lower lows. The 2nd wave of the sell down has started. Good news is that the 2nd waves are not the worst, they tend to be a little milder than the first wave. Gold has taken a big move down after hitting record highs, this is mainly due to the raising of the margin requirements by the CME. Still believe that this is a temporary move backwards. Overall, confidence in currencies are going down the drain and I think that the CME is doing its part to try to prevent too many people from moving away from currencies into Gold. For the longest time, central bankers have been against gold as a store of value and they have been pushing people into believing that currencies are better because there is an yield on them. The tables are turning now because interest rates are so low therefore the yield is negligible and thus gold becomes attractive once again. The last thing politicians want is for the world to stop believing in the paper notes they hold and start loving that yellow metal once again. Why are they so worried about speculation in gold? It has always been a store of value, why would you worry about the prices going up? Have you ever heard of margins being raised on currencies? Conspiracy theory?
This is my first post in a very long time. I will be updating it on a consistent basis going forward as my projects have ended for the time being. So stay tuned as I try to find a way to maneuver in this market condition.
Best,
SVI
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