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
Saturday, October 8, 2011
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
Subscribe to:
Posts (Atom)
Posts
