Don't get me wrong... I'm no bear. In fact that is the scary bit - I changed my view about the sustainability of the current rally in October, when I saw how weak the market corrects at each down move.
To put things into perspective, other than the corrective" rally from mid March to April 2009, which practically most people missed, including professional investors, the rally could be described as 2 powerful burst of activity - one in early May and another in mid July.
In between them, there were plenty of time for bearishness. But instead of a sell-off, market simply traded sideways, choosing to "time correct" rather than "price correct". In fact, the current sideway "time correction" is already 3.5 months old and brokers and professionals must be getting restless (sideway, low volatility markets bad for business).
So why so "scary"? Well, there is a saying in the market: That the market tops, when the last Bear turns. Hopefully, I'm not the last bear.
Thursday, November 12, 2009
Saturday, October 17, 2009
Psychology - Is there Fairness?
Taking a break away from Charlie Munger and his Misjudgment of the Human Behavior, I thought it would be a refreshing change to touch on something simpler. Something most of us can identify with... something to do with a beer. Still, this has to do with my pet topic on financial pyschology. Let me elaborate.
You are at the Beach. The sun is hot and it is a great day. But you are now so thirsty and dying for a cold beer. Your friend volunteered to go to the nearby Hotel resort to buy a beer for you but wanted to know what would be the maximum price that you would pay for the beer. He will not buy the beer if the price is higher than your price (maximum). What will be your maximum price?
Now, in another scenario, supposing you are at the beach, and still dying for a beer etc but your friend now volunteers to buy the same beer at the nearby convenience store, our friendly neighbourhood store. What is your maximum price?
Are the 2 prices different? Why? By pure economic theory, the two prices should be the same, as the ultility derive ie. the joy of the quenched thirst is the same. There should be no difference as we have assumed it to be the same beer. Or is it? Did the fact that one was purchased at the Hotel and the other at the neighbourhood store affect our decision making? Why did it affect our decision?
From this simple exercise, Behaviorists began to postulate that the old classical theories may be inadequate. Fairness, in this case, has changed the outcome. The sense of fairness, is also applicable in employment and other macro situations. In short, decision making is more complex than originally thought... Emotions play a role.
Are there other emotions that play a role? There certainly are many others... Can you name some?
You are at the Beach. The sun is hot and it is a great day. But you are now so thirsty and dying for a cold beer. Your friend volunteered to go to the nearby Hotel resort to buy a beer for you but wanted to know what would be the maximum price that you would pay for the beer. He will not buy the beer if the price is higher than your price (maximum). What will be your maximum price?
Now, in another scenario, supposing you are at the beach, and still dying for a beer etc but your friend now volunteers to buy the same beer at the nearby convenience store, our friendly neighbourhood store. What is your maximum price?
Are the 2 prices different? Why? By pure economic theory, the two prices should be the same, as the ultility derive ie. the joy of the quenched thirst is the same. There should be no difference as we have assumed it to be the same beer. Or is it? Did the fact that one was purchased at the Hotel and the other at the neighbourhood store affect our decision making? Why did it affect our decision?
From this simple exercise, Behaviorists began to postulate that the old classical theories may be inadequate. Fairness, in this case, has changed the outcome. The sense of fairness, is also applicable in employment and other macro situations. In short, decision making is more complex than originally thought... Emotions play a role.
Are there other emotions that play a role? There certainly are many others... Can you name some?
Wednesday, October 7, 2009
The Human Misjudgment (2)
Below is the continuation of Charlie Munger's 24 causes of misjudment.
Fourthly, the bias from consistency and commitment tendency. For example, after a hard-won conclusion, our human minds shut off. Similarly, being so resistant to change, the laws of physics were never changed until the old guards have mostly passed on. In behavioral Finance, this is called Conservatism.
Fifthly, we often misconstrue past correlation as a reliable basis for decision making. Charlie Minger referred to this as the "Pavlovian" effect, where our minds works on association. For example, Coca Cola is often assocated with heroics at the Olympics, but never a funeral. Similarly, in Accounting, sloppy accounting allowed Institutions to book profits, and because nothing "bad" happened, theaccounting gets sloppier untl the bad behavior spreads.
Sixthly, there is bias from reciprocation tendency. This is a powerful phenomenon. Essentially, the human mind can be manipulated. Often we get better results, when we "ask for a lot, then back off" approach, because the human mind is influenced by the way how it thinks other people expects of you.
Seventhly, there is the Lollapalooza effect, the bias caused from over-influence by social proof. In other words, the conclusion of others (often of higher hierachy) having an impact on you. In Finance, there are stories of a large oil company buying fertilizer plants, which in turn influenced other oil companies into buying fertilizer plants too, without exactly knowing why (which were a disaster). To Charlie, the markets are living examples of bias from social proof as prices reflect what others think, and in turn affecting how we think... recipes for bubbles? Behaviorists have called this herd instinct, mania, positive extrapolitive thinking etc.
Wow. This is really Charlie Munger, the Psychologist. Explicitly, he acknowledged that markets are driven by psychology and in fact, he has rejected the Efficient Market Hypothesis Theory. But can Investors replicate the sort of discipline required by Charlie? Well another 17 points to go... Happy reading !
Fourthly, the bias from consistency and commitment tendency. For example, after a hard-won conclusion, our human minds shut off. Similarly, being so resistant to change, the laws of physics were never changed until the old guards have mostly passed on. In behavioral Finance, this is called Conservatism.
Fifthly, we often misconstrue past correlation as a reliable basis for decision making. Charlie Minger referred to this as the "Pavlovian" effect, where our minds works on association. For example, Coca Cola is often assocated with heroics at the Olympics, but never a funeral. Similarly, in Accounting, sloppy accounting allowed Institutions to book profits, and because nothing "bad" happened, theaccounting gets sloppier untl the bad behavior spreads.
Sixthly, there is bias from reciprocation tendency. This is a powerful phenomenon. Essentially, the human mind can be manipulated. Often we get better results, when we "ask for a lot, then back off" approach, because the human mind is influenced by the way how it thinks other people expects of you.
Seventhly, there is the Lollapalooza effect, the bias caused from over-influence by social proof. In other words, the conclusion of others (often of higher hierachy) having an impact on you. In Finance, there are stories of a large oil company buying fertilizer plants, which in turn influenced other oil companies into buying fertilizer plants too, without exactly knowing why (which were a disaster). To Charlie, the markets are living examples of bias from social proof as prices reflect what others think, and in turn affecting how we think... recipes for bubbles? Behaviorists have called this herd instinct, mania, positive extrapolitive thinking etc.
Wow. This is really Charlie Munger, the Psychologist. Explicitly, he acknowledged that markets are driven by psychology and in fact, he has rejected the Efficient Market Hypothesis Theory. But can Investors replicate the sort of discipline required by Charlie? Well another 17 points to go... Happy reading !
Sunday, September 27, 2009
The Human Misjudgment (1)
Firstly, I like to thank many readers that have written to me in support of the blog. Not being a natural writer, it is so easy to succumb to lethargy and ill-discipline and stop the blogging altogether. In fact, I observed that of late, I have been updating the blog rather infrequently.
But your recent support has made a difference. And I re-commit and promise to keep the blog updated. Not daily but certainly weekly. Thank you again.
This week, I gave a presentation on the "Psychology behind Investment and Trading Decisions". This is essentially a repeat of the same presentation I did a year ago. Again, time constraints did not allow me to elaborate on cetain issues. Hence, I've decided to put them on the blog.
I will start with the 24 Standard Causes of Human Misjudgment, cited by Charlie Munger in a 1995 speech. But to ensure "bite-size" blog entries, I shall at each time, tackle 3-5 Human Misjudgment.
Firstly, the under-recognition of "reinforcement" and incentives. In particular, businesses can benefit substantially - more than expected but simply changing commision structures paid to salesman. Or to pay the night shift more in order to motivate the night shift workers. Basically, the human mind works for its own interest!
Secondly, there is psychological denial. For example, parents of criminals often think their children are innocent, even if proven guilty. Similarly, investors seldom admit that the stocks they picked were lemons, and end up holding them for long periods without any return.
Thirdly, incentive-cause bias in both our minds and that of the advisors. For example, sale presentations of real estate businesses are never close to truth. Would agents deny themselves the fee by discouraging sales? Similarly, it is common practise for lawyers to try and drag out the legal process as their charges are based on time usage.
In short, Charlie Munger showed that the human psychology often resulted in biasness and misjudgment. And his advice is simple: Avoid them.
But your recent support has made a difference. And I re-commit and promise to keep the blog updated. Not daily but certainly weekly. Thank you again.
This week, I gave a presentation on the "Psychology behind Investment and Trading Decisions". This is essentially a repeat of the same presentation I did a year ago. Again, time constraints did not allow me to elaborate on cetain issues. Hence, I've decided to put them on the blog.
I will start with the 24 Standard Causes of Human Misjudgment, cited by Charlie Munger in a 1995 speech. But to ensure "bite-size" blog entries, I shall at each time, tackle 3-5 Human Misjudgment.
Firstly, the under-recognition of "reinforcement" and incentives. In particular, businesses can benefit substantially - more than expected but simply changing commision structures paid to salesman. Or to pay the night shift more in order to motivate the night shift workers. Basically, the human mind works for its own interest!
Secondly, there is psychological denial. For example, parents of criminals often think their children are innocent, even if proven guilty. Similarly, investors seldom admit that the stocks they picked were lemons, and end up holding them for long periods without any return.
Thirdly, incentive-cause bias in both our minds and that of the advisors. For example, sale presentations of real estate businesses are never close to truth. Would agents deny themselves the fee by discouraging sales? Similarly, it is common practise for lawyers to try and drag out the legal process as their charges are based on time usage.
In short, Charlie Munger showed that the human psychology often resulted in biasness and misjudgment. And his advice is simple: Avoid them.
Saturday, September 5, 2009
Know Your Vowels, Please...
I kind of feel stupid right now. After 40 years, I still got my vowels mixed up. Surely, I meant to keep the "o" and not the "e". What am i talking about? Read on....
In 2007, I had this grand investment idea that surely China will be water scarce given the pollution in the country. Hence i went about investing in companies, engaging in waste treatment, pollution control etc. The two companies I picked was Sino-Environment (SINE) and Sinomem (SINO). The former was into desulphurisation while the latter was into water treatment. Both had good balance sheet (and so i thought).
In mid 2008, SINO announced that there were accounting irregularities at its subsidiaries which would impact its profitability adversely. Given this, i felt it was better to sell the investment away as it was tainted.
In end 2008, SINE announced that its Chairman had lost its entire stake in the company to a Hedge Fund as the Chairman had pledged all his shares to them. This resulted in a management change of control that triggered loan convenants etc. Also the company's ability to remain as a going concern was threatened as the Chairman was the key man to the business. The stock unravelled. Interestingly, there were no breaches of rules, even when the Chairman failed to disclose its share pledges.
In the meantime, there were no further bad news on SINO. Today, as I write, SINO has recovered 8X from the lows, while SINE languished at the bottom. As it turned out, the "O" was Outstanding while the "E" got Executed. And I kept the E. Sigh, that's investment.
So what is the moral of the story? When investing in Waste, make sure it is referring to the product and not the company. I invested in toxic waste...little did I realise that it was the management that was toxic.
In 2007, I had this grand investment idea that surely China will be water scarce given the pollution in the country. Hence i went about investing in companies, engaging in waste treatment, pollution control etc. The two companies I picked was Sino-Environment (SINE) and Sinomem (SINO). The former was into desulphurisation while the latter was into water treatment. Both had good balance sheet (and so i thought).
In mid 2008, SINO announced that there were accounting irregularities at its subsidiaries which would impact its profitability adversely. Given this, i felt it was better to sell the investment away as it was tainted.
In end 2008, SINE announced that its Chairman had lost its entire stake in the company to a Hedge Fund as the Chairman had pledged all his shares to them. This resulted in a management change of control that triggered loan convenants etc. Also the company's ability to remain as a going concern was threatened as the Chairman was the key man to the business. The stock unravelled. Interestingly, there were no breaches of rules, even when the Chairman failed to disclose its share pledges.
In the meantime, there were no further bad news on SINO. Today, as I write, SINO has recovered 8X from the lows, while SINE languished at the bottom. As it turned out, the "O" was Outstanding while the "E" got Executed. And I kept the E. Sigh, that's investment.
So what is the moral of the story? When investing in Waste, make sure it is referring to the product and not the company. I invested in toxic waste...little did I realise that it was the management that was toxic.
Thursday, August 27, 2009
August Insanity
Sun-burnt and tired after a Kelong trip, I sit here typing away wondering what else to add on the stock markets and the general asset markets. I mean, as far as warning about markets being over-valued, I done that numerous times, to the point of sounding like a broken record player.
Thus for August, I have chosen to write more about life and the joys it bring. For the markets, it is insane enough, driven by liquidity that ought to have been used to spur economic growth instead. So the less said about it the better.
Still, I noticed that after severely lagging markets, the S chips have rallied quite sharply in the last week. From a valuation perspective, they are still great value, but given the opaqueness of management in general, caution is warranted. The rally could be simply liquidity-driven rather than a re-valuation of S chips.Then again, such pessimism is normally the recipe for an unexpeced rally.
So what did August bring? And can we expect more in September? Barring a dramatic collapse, August was another great month, and since insanity has no time limit, September could be another insane month too. For me, that meant more time doing quiet reading and loving life... markets will take the back seat, again.
Thus for August, I have chosen to write more about life and the joys it bring. For the markets, it is insane enough, driven by liquidity that ought to have been used to spur economic growth instead. So the less said about it the better.
Still, I noticed that after severely lagging markets, the S chips have rallied quite sharply in the last week. From a valuation perspective, they are still great value, but given the opaqueness of management in general, caution is warranted. The rally could be simply liquidity-driven rather than a re-valuation of S chips.Then again, such pessimism is normally the recipe for an unexpeced rally.
So what did August bring? And can we expect more in September? Barring a dramatic collapse, August was another great month, and since insanity has no time limit, September could be another insane month too. For me, that meant more time doing quiet reading and loving life... markets will take the back seat, again.
Monday, August 17, 2009
Inactive August
No, it's not the asset markets that are inactive... but me. Judging from the blogs, one can see that entries have been infrequent.
Besides a lack of genuinely interesting material, August has also been disruptive for me as our company entered into wind down stage. So there were lots of packing and unpacking at the office.
But not to worry; this is simply an end of one chapter (of my life) and a beginning of a new one. I intend to re-surface quickly in the market, although the exact nature (of the job) remains uncertain.
In fact, the frequency of future blogs also remains uncertain - as much as I enjoy imparting my views via the blogs, the amount of resources (time) that i can spare may now be more limited. Still, I am committed to maintaining this blog. OK, enough about me...
As for the asset markets, it is still a great mystery to me how new home-dwellers seemed willing to cough up SGD1000psf and beyond for mass market type condos. Even the "low end" mass market prices of SGD750-800psf must surely bust every affordability ratios?
Well, I have resigned to the fact that I am an old bear, compared to the modern crop of risk takers. So, I've gladly moved aside and withdraw into my cave and watch this new batch of risk takers bash each other up. Hopefully, I would be around to pick up the nice pieces after this bloody fight.
Besides a lack of genuinely interesting material, August has also been disruptive for me as our company entered into wind down stage. So there were lots of packing and unpacking at the office.
But not to worry; this is simply an end of one chapter (of my life) and a beginning of a new one. I intend to re-surface quickly in the market, although the exact nature (of the job) remains uncertain.
In fact, the frequency of future blogs also remains uncertain - as much as I enjoy imparting my views via the blogs, the amount of resources (time) that i can spare may now be more limited. Still, I am committed to maintaining this blog. OK, enough about me...
As for the asset markets, it is still a great mystery to me how new home-dwellers seemed willing to cough up SGD1000psf and beyond for mass market type condos. Even the "low end" mass market prices of SGD750-800psf must surely bust every affordability ratios?
Well, I have resigned to the fact that I am an old bear, compared to the modern crop of risk takers. So, I've gladly moved aside and withdraw into my cave and watch this new batch of risk takers bash each other up. Hopefully, I would be around to pick up the nice pieces after this bloody fight.
Wednesday, August 5, 2009
The Robot Trader
I had a most fascinating dinner last night. Among us was a Chicago pit trader, who has been day-trading the various markets for the past 18 years. But recently, he left the USA for Asia, locating his family in Chiang Mai, while he shuttles down to Singapore to day trade.
Singapore was the obvious choice as she has the infrastructure to conduct the high speed trading, and still close enough to Chiang Mai, where his Thai wife and family lived. But why the move to Asia in the first place? He could not successfully compete against the robot traders.
Robot Traders? These are the emotionless super computers that trade using advance algorithms that could accurately predict short term fluctuations in prices. Now, computerised trading has been around for decades, so what has changed? Technology and Stock Exchange rules.
Technology has evolved so quickly that algorithms began to learn and mimic human behavior. The speed of executing a trade also got faster. But the most damning development was the Exchanges' decision to sell information to their clients about impending orders for a fraction of a second before the trade is routed to rival platforms.
But with these super computers, the information is processed at an estimated speed of 300-millionth of a second, faster than the time taken to route this information to the exchange platform. Hence, super computers could "front run" the order and have an "unfair" advantage over the other traders. This was technological insider trading, but allowed by the Exchanges. This was also known as Flash trading.
Consequently, day traders began to stop trading as they were the ones at the receiving end. Complains of unfair practices reached the Congress, and SEC announced yesterday that they will plan to ban these practices.
In the meantime, many day traders have flocked to Asia, where robot trading is less apparent. Still, this is a timely reminder of how disadvantaged is the common man, in the world of day trading. In fact, this phenomenon has even infiltrated into the world of online poker. Financial Institutions have Poker Division whereby they employed high speed algorithms to play poker! Amazing but apparently true. That's probably why I dislike computers.
Singapore was the obvious choice as she has the infrastructure to conduct the high speed trading, and still close enough to Chiang Mai, where his Thai wife and family lived. But why the move to Asia in the first place? He could not successfully compete against the robot traders.
Robot Traders? These are the emotionless super computers that trade using advance algorithms that could accurately predict short term fluctuations in prices. Now, computerised trading has been around for decades, so what has changed? Technology and Stock Exchange rules.
Technology has evolved so quickly that algorithms began to learn and mimic human behavior. The speed of executing a trade also got faster. But the most damning development was the Exchanges' decision to sell information to their clients about impending orders for a fraction of a second before the trade is routed to rival platforms.
But with these super computers, the information is processed at an estimated speed of 300-millionth of a second, faster than the time taken to route this information to the exchange platform. Hence, super computers could "front run" the order and have an "unfair" advantage over the other traders. This was technological insider trading, but allowed by the Exchanges. This was also known as Flash trading.
Consequently, day traders began to stop trading as they were the ones at the receiving end. Complains of unfair practices reached the Congress, and SEC announced yesterday that they will plan to ban these practices.
In the meantime, many day traders have flocked to Asia, where robot trading is less apparent. Still, this is a timely reminder of how disadvantaged is the common man, in the world of day trading. In fact, this phenomenon has even infiltrated into the world of online poker. Financial Institutions have Poker Division whereby they employed high speed algorithms to play poker! Amazing but apparently true. That's probably why I dislike computers.
Tuesday, August 4, 2009
A Kelong Trip
Over the weekend, I did an ambitious trip to a fish farm, a sort of modern day "Kelong". I used the word "ambitious" as along with me, were 72 other people. It was a cell group outing and outreach that turned really successful. It might have been the evangelical works of me and my cell members, but I think it was the charm of the out-of-the-city experience that did the trick.
This Kelong is located off Changi, and a mere 5 minutes from Changi Sailing Club. It is about the size of a football field (i think), huge by any standards. Like many Kelong, it housed many different types of fish, and the kids had a great time, catching them (from their ponds) for dinner! Groupers cost about SGD10 while snappers and sea bass were SGD6-8. Very affordable. For others, it was the nostalgia of sitting on a stool and facing the open sea, armed with a fishing rod and a beer, waiting for the real fishing experience. Pond-fishing was too easy and didn't count.
By night-fall, activity slowed as we wound down and ended the night with a BBQ and great fellowship. The food was prepared by the restaurant at Changi Sailing Club, which by the way is open to public. Very tasty. So for those looking for a night of romance by the seaside, filled with that rustic ambience, Changi Sailing Club restaurant might be the place.
On the whole, the day was fun-filled although there were minor glitches. The children enjoyed themselves while the pro fishermen, who "denounced" the pond fishing, had few catches. As one puts it: "Even the fish stayed home to watch the stock market. Either that, they were queueing for a condo". Still, it was a terrific experience and a big thank you to all who helped to make it a success.
This Kelong is located off Changi, and a mere 5 minutes from Changi Sailing Club. It is about the size of a football field (i think), huge by any standards. Like many Kelong, it housed many different types of fish, and the kids had a great time, catching them (from their ponds) for dinner! Groupers cost about SGD10 while snappers and sea bass were SGD6-8. Very affordable. For others, it was the nostalgia of sitting on a stool and facing the open sea, armed with a fishing rod and a beer, waiting for the real fishing experience. Pond-fishing was too easy and didn't count.
By night-fall, activity slowed as we wound down and ended the night with a BBQ and great fellowship. The food was prepared by the restaurant at Changi Sailing Club, which by the way is open to public. Very tasty. So for those looking for a night of romance by the seaside, filled with that rustic ambience, Changi Sailing Club restaurant might be the place.
On the whole, the day was fun-filled although there were minor glitches. The children enjoyed themselves while the pro fishermen, who "denounced" the pond fishing, had few catches. As one puts it: "Even the fish stayed home to watch the stock market. Either that, they were queueing for a condo". Still, it was a terrific experience and a big thank you to all who helped to make it a success.
Tuesday, July 28, 2009
Migration of the Chinese Albatross
This is the time and season - Those S chips listed on the SGX are stirring. For a long time, they have slumped and weighed heavily like a dead albatross on many mariners' shoulders. Now, some are rebelling.
The first off the block is Chinese fertilizer company, China XLX Fertilizer, who yesterday announced that they are seeking a dual-listing in HK. Away from the usual PR talk of how a HK listing will align their business more closely with the capital markets, the real reason is simply, HK listed entities have enjoyed a higher price multiple. In other words, HK counters generally trade higher than those listed in SGX. One reason is: Investors believe that the HK Exchange regulates the listing more tightly and there is less risk of fraudulant listing. The recent spate of S chip problems strengthened this view. SGX must now be fretting and quite worried that this could become a trend.
The implication is huge. Imagine, if the better few starts the migration to HK, what will investors think of those that didn't migrate? Thus, the risk is: S chips that remained on SGX that didn't seek dual listing would be assume to be of a second class to those listed in HK. The entire SGX could be tainted.
In the meantime, today's price action said it all. At 9:40am, CXLX was up 16% while China Milk, probably a rumored candidate with migratory tendencies, was up 10%. This must be a sad day for the SGX. But, what can the SGX do? There are so many S chips running afoul that they have casted a cloud of doubt on all S chips. If I were a S chip CEO (assuming I'm clean), I too would be disappointed that my company's stock price has underperformed because of wrong association.
Well, SGX could start by acknowledging their laxness. Then they could review the listing and disclosure policies. For one, if the Management of a company pledges its entire stake to financial institutions, shouldn't this be disclosed? Currently, I think it is not required. In addition, Singapore and China should sign some extradiction treaty so that recalcitrant CEOs could be tried in Singapore Courts.
In the meantime, the migration north is starting. Happy reading.
The first off the block is Chinese fertilizer company, China XLX Fertilizer, who yesterday announced that they are seeking a dual-listing in HK. Away from the usual PR talk of how a HK listing will align their business more closely with the capital markets, the real reason is simply, HK listed entities have enjoyed a higher price multiple. In other words, HK counters generally trade higher than those listed in SGX. One reason is: Investors believe that the HK Exchange regulates the listing more tightly and there is less risk of fraudulant listing. The recent spate of S chip problems strengthened this view. SGX must now be fretting and quite worried that this could become a trend.
The implication is huge. Imagine, if the better few starts the migration to HK, what will investors think of those that didn't migrate? Thus, the risk is: S chips that remained on SGX that didn't seek dual listing would be assume to be of a second class to those listed in HK. The entire SGX could be tainted.
In the meantime, today's price action said it all. At 9:40am, CXLX was up 16% while China Milk, probably a rumored candidate with migratory tendencies, was up 10%. This must be a sad day for the SGX. But, what can the SGX do? There are so many S chips running afoul that they have casted a cloud of doubt on all S chips. If I were a S chip CEO (assuming I'm clean), I too would be disappointed that my company's stock price has underperformed because of wrong association.
Well, SGX could start by acknowledging their laxness. Then they could review the listing and disclosure policies. For one, if the Management of a company pledges its entire stake to financial institutions, shouldn't this be disclosed? Currently, I think it is not required. In addition, Singapore and China should sign some extradiction treaty so that recalcitrant CEOs could be tried in Singapore Courts.
In the meantime, the migration north is starting. Happy reading.
Monday, July 27, 2009
The Emotional Life-cycle of Investment
The Emotional life-cycle of Investment is an interesting observation. Some of you may have heard or seen this chart before. Essentially it tracks the behavioral aspect of Investment. According to this chart, psychology affects our decision making process.
To the pure value investors, the view is Psychology detracts from performance as our human bias affects our decision making process negatively. Therefore, they advocate a cold, analytical approach. Famous value investors include Charlie Munger and Warren Buffet.
On the other hand, technicians and traders often take psychology into their decision making process. The key difference here is: Technicians (and Traders) believe they can outsmart others, by understanding the psychology that is prevalent in the financial market place.
Whilst it is unclear which approach is universally better, the availability of the two sometimes contrasting approaches, make the markets interesting. For me, I try and mesh the 2 approaches together. If nothing else, it makes interesting conversation piece. Happy reading.
Thursday, July 23, 2009
PIKA Saves The Day
It is 2012. A new flu virus hits the world.....But "Don't Worry... Be Happy". The PIKA adjuvant saves mankind from destruction. Movie stuff? Maybe. So, what is PIKA?
PIKA is an adjuvant start up company I invested in, in 2004. An adjuvant is a compound that is added to vaccine to improve its performance as a preventive drug. It is like the caffiene in your coffee, and the "tiger in your tank", for those who still remember the Esso commercial. For a long time, in spite of the very positive scientific results, PIKA looked like it would not survive, as it was running out of cash. No new investor seemed willing to fund it. Certainly not the Singapore Government.
Then a breakthrough happened in mid 2008, when a team of local private equity investors chipped in money to fund the company. Soon, by introduction, a second group of private equity investors got interested and invested too, in 2009. Suddenly, PIKA lives again.
More interestingly, the scientific results continued to be very positive. The animal trials yielded results that were about 75 to 100 times more effective than conventional vaccines. Shareholders that have medical training or from the medical profession began to sound very excited and positive, as they felt that this could be a breakthrough in science. I am very excited too, given my stake in the company. Hopefully the returns could be life-changing.
This week, the Company will be submitting their findings to the Singapore Government. If approved, Human clinical trial testing could begin this year at the SGH. For now the company's plan is simple. Get the positive results from the human trial, and dangle that in front of the big pharmaceutical companies. If successful, this could be my legacy for mankind.
Even though my stake is very small, I am proud to be part of this venture. I remember fondly what the founder told me in 2005. In Chinese, he said: " I would not mind being called an ant and remain insignificant, if my product can be used to save the millions of lives". In similar tone, "All flesh is as grass, and all the glory of man as the flower of the grass. The grass withers and its flower falls away". But let this legacy be the one that endures forever.... No moth will eat away this legacy....
PIKA is an adjuvant start up company I invested in, in 2004. An adjuvant is a compound that is added to vaccine to improve its performance as a preventive drug. It is like the caffiene in your coffee, and the "tiger in your tank", for those who still remember the Esso commercial. For a long time, in spite of the very positive scientific results, PIKA looked like it would not survive, as it was running out of cash. No new investor seemed willing to fund it. Certainly not the Singapore Government.
Then a breakthrough happened in mid 2008, when a team of local private equity investors chipped in money to fund the company. Soon, by introduction, a second group of private equity investors got interested and invested too, in 2009. Suddenly, PIKA lives again.
More interestingly, the scientific results continued to be very positive. The animal trials yielded results that were about 75 to 100 times more effective than conventional vaccines. Shareholders that have medical training or from the medical profession began to sound very excited and positive, as they felt that this could be a breakthrough in science. I am very excited too, given my stake in the company. Hopefully the returns could be life-changing.
This week, the Company will be submitting their findings to the Singapore Government. If approved, Human clinical trial testing could begin this year at the SGH. For now the company's plan is simple. Get the positive results from the human trial, and dangle that in front of the big pharmaceutical companies. If successful, this could be my legacy for mankind.
Even though my stake is very small, I am proud to be part of this venture. I remember fondly what the founder told me in 2005. In Chinese, he said: " I would not mind being called an ant and remain insignificant, if my product can be used to save the millions of lives". In similar tone, "All flesh is as grass, and all the glory of man as the flower of the grass. The grass withers and its flower falls away". But let this legacy be the one that endures forever.... No moth will eat away this legacy....
Wednesday, July 22, 2009
W-shaped Recovery and Asia
Whilst Asia cheered the recent round of US quarterly earnings, the better-than-anticipated results generally pointed to a stabilization and not an imminent recovery. Therefore, many economists fear that the "green shoots" we are witnessing may not sustain, or at the very least, take a while before blooming. Hence, they have warned of a W-shaped recovery, whereby 2H 09 data disappoints. How would Asia react?
According to a UBS research, the bad news is Asia (and the emerging markets) would not escape unscathed. Asia is still very dependent on global trends and global risk appetite; if growth momentum in the G3 turns for the worse, Asia would not get the quick export-led rebound.
On the other hand, UBS believed that the downside for the emerging markets, including Asia, has been sharply reduced when compared to end 2008 or early 2009. A W-shaped recovery would not carry the same negative connotation for EM today than say 6 months ago. He cited 3 reasons:
Firstly, global trade volume have fallen more than underlying G3 demand, implying the sharp inventory adjustment is over. Secondly, the financial pullout from emerging markets is already at a very advanced stage, and there is less scope for damage going forward. Thirdly, domestic trends, like the massive infrastucture spending in China has gained importance, supporting their economies.
On hindsight, it is likely that the 1Q 09 lows in asset prices marked the cycle lows. But, given the nature of this global recession, it is equally likely that the rally would be bombarded with less favorable economic data going forward. But will the markets care? This is beyond fundamentals, and would depend on the psychological and emotional state of the markets. In short, don't know...
According to a UBS research, the bad news is Asia (and the emerging markets) would not escape unscathed. Asia is still very dependent on global trends and global risk appetite; if growth momentum in the G3 turns for the worse, Asia would not get the quick export-led rebound.
On the other hand, UBS believed that the downside for the emerging markets, including Asia, has been sharply reduced when compared to end 2008 or early 2009. A W-shaped recovery would not carry the same negative connotation for EM today than say 6 months ago. He cited 3 reasons:
Firstly, global trade volume have fallen more than underlying G3 demand, implying the sharp inventory adjustment is over. Secondly, the financial pullout from emerging markets is already at a very advanced stage, and there is less scope for damage going forward. Thirdly, domestic trends, like the massive infrastucture spending in China has gained importance, supporting their economies.
On hindsight, it is likely that the 1Q 09 lows in asset prices marked the cycle lows. But, given the nature of this global recession, it is equally likely that the rally would be bombarded with less favorable economic data going forward. But will the markets care? This is beyond fundamentals, and would depend on the psychological and emotional state of the markets. In short, don't know...
Tuesday, July 21, 2009
Deflation and Liquidity Trap. The Solution.
Paul McCulley, PIMCO wrote an interesting article that reminded us of the risk of deflation, Japan-styled. Often, this risk is the result of politics when government officials withdraw the stimulus prematurely to appease the people. Today, this pressure is already building with everyone pre-occupied with the Fed's bloated balance sheet and the Treasury's huge budget deficit.
For those with monetarist roots, this excess money supply must surely be the classic brew for inflation. For others, this current policy brew is a deflationary force, as the huge deficits would provoke foreign investors to flee from both the USD and Treasuries, driving up interest rates. Indeed, the current brew of policies seemed to please no one. Yet, everyone knows there are no other choices, given the state of the consumer and the negative wealth effect on the economy.
As a result, everyone goes along with the policy brew grudgingly... complaining about it every now and then, and hedging ourselves by saying the Government has to have an exit plan and be fiscally responsible. But here lies a problem.
In 1998, Paul Krugman in the context of the Liquidity Trap, warned that if the public believes that the central bank will exit the printing of money ie. no inflation, then the printed money will simply be hoarded as the deflationary expectations remain entrenched. Hence, to be effective, Mr Krugman said central banks must "credibly promise to be irresponsible" to permit inflation to occur. To get out of the trap (deflation), Krugman said central banks needed to radically change expectations. Quite a radical!
In 2003, Bernanke made comments to the same effects. Essentially, his recipe to get out of deflation is price level targetting. This is more stringent than inflation targetting, as inflation target "forgives" past deflation. This would imply that after a period of deflation, Bernanke would actually allow inflation to be higher and exceed the desired long term rate, to close the price-level gap. This is the reflationary stage. But do central banks and government have the will to do this, knowing that they could come under heavy criticism if expecations swung to the other inflationary extreme? Hence, it was on this point, that Bernanke once remarked that the Fed should subordinate itself to the fiscal authority. Quite a radical too!
Fortunately, we are not quite there yet. The US consumer and stock markets have surprised me and they seemed embarked on a self healing process. Still, it bears watching. The antidote for deflation can be radical.
For those with monetarist roots, this excess money supply must surely be the classic brew for inflation. For others, this current policy brew is a deflationary force, as the huge deficits would provoke foreign investors to flee from both the USD and Treasuries, driving up interest rates. Indeed, the current brew of policies seemed to please no one. Yet, everyone knows there are no other choices, given the state of the consumer and the negative wealth effect on the economy.
As a result, everyone goes along with the policy brew grudgingly... complaining about it every now and then, and hedging ourselves by saying the Government has to have an exit plan and be fiscally responsible. But here lies a problem.
In 1998, Paul Krugman in the context of the Liquidity Trap, warned that if the public believes that the central bank will exit the printing of money ie. no inflation, then the printed money will simply be hoarded as the deflationary expectations remain entrenched. Hence, to be effective, Mr Krugman said central banks must "credibly promise to be irresponsible" to permit inflation to occur. To get out of the trap (deflation), Krugman said central banks needed to radically change expectations. Quite a radical!
In 2003, Bernanke made comments to the same effects. Essentially, his recipe to get out of deflation is price level targetting. This is more stringent than inflation targetting, as inflation target "forgives" past deflation. This would imply that after a period of deflation, Bernanke would actually allow inflation to be higher and exceed the desired long term rate, to close the price-level gap. This is the reflationary stage. But do central banks and government have the will to do this, knowing that they could come under heavy criticism if expecations swung to the other inflationary extreme? Hence, it was on this point, that Bernanke once remarked that the Fed should subordinate itself to the fiscal authority. Quite a radical too!
Fortunately, we are not quite there yet. The US consumer and stock markets have surprised me and they seemed embarked on a self healing process. Still, it bears watching. The antidote for deflation can be radical.
Monday, July 20, 2009
A Cautious Minister
Mr. Lim Hng Kiang, Singapore's Trade Minister, warned that the rebound in drugs and electronics output might falter, preventing a quick recovery from the country's deepest recession since Independence.
In an interview today, Mr Lim said demand for goods from US, Europe and Japan was still weak and any pick-up would be "bumpy". Whilst the economy expanded a whopping annualised 20.4% in 2Q09, compared to the previous 3 months, Mr Lim felt Singapore had to wait for a more general demand recovery to be on a sustained growth path. Mr. Lim did not expect a V-shaped recovery.
The service sector, for example, continued to languish and shrank for the third consecutive quarter. Tourism has slumped on the back of the global slowdown, as well as concerns over the H1N1 influenza. Fortunately, the employment situation appeared manageable and retrenchments in 2Q09 was not as high as in 1Q09. However, Singapore is still not "out of the woods" and the situation bears monitoring. As Mr. Gan Kim Yong, Manpower Minister puts it: " It remains uncertain whether companies can sustain hiring".
In the meantime, the local stock market seemed more positive than government officials. On the back of the more favorable US earning releases on Friday, the STI added a further 1.5% (as at 3.45pm) today. Sadly, I have long given up trying to explain the market... the articles and publications I read are not adrenalin-coated and therefore this 60% rally from the lows scares me.
My occupation as an applied psychologist (Trader), requires that I accept the view that "markets can choose to behave however they like". Often, traders have small ego and that is how we survive. Happy reading.
In an interview today, Mr Lim said demand for goods from US, Europe and Japan was still weak and any pick-up would be "bumpy". Whilst the economy expanded a whopping annualised 20.4% in 2Q09, compared to the previous 3 months, Mr Lim felt Singapore had to wait for a more general demand recovery to be on a sustained growth path. Mr. Lim did not expect a V-shaped recovery.
The service sector, for example, continued to languish and shrank for the third consecutive quarter. Tourism has slumped on the back of the global slowdown, as well as concerns over the H1N1 influenza. Fortunately, the employment situation appeared manageable and retrenchments in 2Q09 was not as high as in 1Q09. However, Singapore is still not "out of the woods" and the situation bears monitoring. As Mr. Gan Kim Yong, Manpower Minister puts it: " It remains uncertain whether companies can sustain hiring".
In the meantime, the local stock market seemed more positive than government officials. On the back of the more favorable US earning releases on Friday, the STI added a further 1.5% (as at 3.45pm) today. Sadly, I have long given up trying to explain the market... the articles and publications I read are not adrenalin-coated and therefore this 60% rally from the lows scares me.
My occupation as an applied psychologist (Trader), requires that I accept the view that "markets can choose to behave however they like". Often, traders have small ego and that is how we survive. Happy reading.
Friday, July 17, 2009
An Interview with Bob Shiller and Nouriel Roubini
The afternoon rally in US stocks was largely on the back of Nouriel Roubini's prediction that the recession will end by year end. To some, this is the capitulation of the last Bear, one that had earlier in the year, painted scenarios of a Great Depression and financial ruins and chaos.
But to be fair, these views were not new, as in an interview, together with Bob Shiller on the 11 July 2009, both of them agreed that the worst was over and a recovery was in sight by the end of the year. Before elaborating further, a quick introduction first... Robert Shiller is the co-designer of the famous Case-Shiller Housing Index used widely in the the US. He is also a Professor, at the Yale University. Nouriel Roubini, Professor, New York University, is the famous doomsayer that gripped markets in late 2008 with his warnings of financial ruins.
Today, the markets again exhibited selective hearing. Whilst Roubini talked about the end of the recession, he also talked about a period of exceptionally slow recovery of 1% or less in the US for the next 2 years. Here is the summary of the 11 July interview:
Essentially, both panelists agreed the recession would end soon (6 months), but the recovery would be exceptionally slow as this is a balance sheet recession, and the sharp falls in all asset classes, would force a deleveraging at corporate and consumer level. The consequence of such recovery is zero job growth. Hence, unemployment would rise for the next 12 months, peaking at over 11%.
The risk of this is a self-fulfilling reverse "animal spirit", as Bob Shiller described it, that discouraged consumers from spending. Roubini simply described this as a rationale response to the fear of job losses and falling asset prices. Nonetheless, both agreed that the consumer is a spent-force. Hence, Bob Shiller said we have no choice but accept that fiscal intervention has to be considered.
In fact, both also agreed that a second fiscal package is probably required, if unemployment turned out to be expectedly weak. But would the political landscape allow it? Would foreign investors still happily fund the US deficit? Against this, there was also the risk that to appease the US public and foreign investors, the US might prematurely withdraw the stimulus. These were mistakes Japan made back in the 1990s. Would they be repeated?
In short, the US is not out of the woods. Policy responses over the next 12 months will be key. But sadly, markets are too short-sighted to think about them. It seems only bloggers with too much time on their hands bother with such issues. Oh well, at least these topics make good conversation piece. Happy reading.
But to be fair, these views were not new, as in an interview, together with Bob Shiller on the 11 July 2009, both of them agreed that the worst was over and a recovery was in sight by the end of the year. Before elaborating further, a quick introduction first... Robert Shiller is the co-designer of the famous Case-Shiller Housing Index used widely in the the US. He is also a Professor, at the Yale University. Nouriel Roubini, Professor, New York University, is the famous doomsayer that gripped markets in late 2008 with his warnings of financial ruins.
Today, the markets again exhibited selective hearing. Whilst Roubini talked about the end of the recession, he also talked about a period of exceptionally slow recovery of 1% or less in the US for the next 2 years. Here is the summary of the 11 July interview:
Essentially, both panelists agreed the recession would end soon (6 months), but the recovery would be exceptionally slow as this is a balance sheet recession, and the sharp falls in all asset classes, would force a deleveraging at corporate and consumer level. The consequence of such recovery is zero job growth. Hence, unemployment would rise for the next 12 months, peaking at over 11%.
The risk of this is a self-fulfilling reverse "animal spirit", as Bob Shiller described it, that discouraged consumers from spending. Roubini simply described this as a rationale response to the fear of job losses and falling asset prices. Nonetheless, both agreed that the consumer is a spent-force. Hence, Bob Shiller said we have no choice but accept that fiscal intervention has to be considered.
In fact, both also agreed that a second fiscal package is probably required, if unemployment turned out to be expectedly weak. But would the political landscape allow it? Would foreign investors still happily fund the US deficit? Against this, there was also the risk that to appease the US public and foreign investors, the US might prematurely withdraw the stimulus. These were mistakes Japan made back in the 1990s. Would they be repeated?
In short, the US is not out of the woods. Policy responses over the next 12 months will be key. But sadly, markets are too short-sighted to think about them. It seems only bloggers with too much time on their hands bother with such issues. Oh well, at least these topics make good conversation piece. Happy reading.
Thursday, July 16, 2009
CIT-Ting Duck
After a boisterous +256 points rally in the US, one would have expected Asia to take over the baton and rally further on the back of Intel's positive forward looking expectations. This did not eventuate. Instead, after an initial morning rally, Asia traded cautiously throughout the day as news filtered through that CIT, a 100 years old finance company turned bank in the US, might file for bankruptcy after all.
CIT must surely have felt like sitting ducks as their fate was out of their control. As the Treasury, the Fed and FDIC deliberated their fate, CIT sat and wait. By 6pm (US), CIT announced that their talks with the Government has ceased and said that "US support was unlikely".
I guess the critical reason why CIT was left to die, was because it was not deemed "to big to fail", unlike the likes of Citibank and AIG. With total assets of USD 70 billion, it accounted for less than 1% of the total banking system. For now, they are the albatross on the mariner's shoulders. But with market so bullish, I think it will turn out to be a sparrow, rather than an albatross. The market would probably digest the bad news easily. Instead, investors would be more interested in JPM, CITI and BAC earning results, which would be released over the next 2 days.
Meanwhile, after a 150 points rally in 3 days, the STI paused today despite the strong overnight session in the US. How would we trade tomorrow?.....It depends on JPM and the albatross (or is it the sparrow).
CIT must surely have felt like sitting ducks as their fate was out of their control. As the Treasury, the Fed and FDIC deliberated their fate, CIT sat and wait. By 6pm (US), CIT announced that their talks with the Government has ceased and said that "US support was unlikely".
I guess the critical reason why CIT was left to die, was because it was not deemed "to big to fail", unlike the likes of Citibank and AIG. With total assets of USD 70 billion, it accounted for less than 1% of the total banking system. For now, they are the albatross on the mariner's shoulders. But with market so bullish, I think it will turn out to be a sparrow, rather than an albatross. The market would probably digest the bad news easily. Instead, investors would be more interested in JPM, CITI and BAC earning results, which would be released over the next 2 days.
Meanwhile, after a 150 points rally in 3 days, the STI paused today despite the strong overnight session in the US. How would we trade tomorrow?.....It depends on JPM and the albatross (or is it the sparrow).
Wednesday, July 15, 2009
California and CIT
In my blog entitled "The Fourth Turning Point", I mentioned that California was the bad boy of US municipals. Here is the update.
California, the most populous US state has started to issue IOUs to its creditors as payment for goods and services as it ran out of cash. This was the consequence of lawmakers' failure to agree on the USD 26 billion funding gap. This step has been taken only once before, since the Great Depression. Rating agencies warned that if weeks go by without a resolution to the cash crisis, California would risk further downgrades. Presently, California is rated Baa1/A/BBB by Moodys/S&P/Fitch respectively.
Meanwhile, California Controller, John Chiang, said there was little risk of default as the IOUs carry the highest priority of payment under the state constitution. In his mind, the state should have the funds to meet these obligations from September. Nonetheless, California bonds have traded lower, reflecting the elevated risks.
Over at Wall Street, another financial institution is battling for its life. CIT Group, a hundred years old finance company turned bank, is pleading with the Fed to save them and lend them funds via the FDIC Government-guaranteed program. Regulators at the Treasury, Fed and FDIC are now debating whether to risk more tax-payers money on top of the USD 2.3 billion granted in December, to keep the lender afloat.
CIT problems stemmed from the mismatch of fundings and an increased risks from its borrowers. Essentially, CIT borrows from the capital markets and lends the funds to SME in the US. At one time, CIT was the largest independent commercial lender in the US. Now, with CIT battling cash shortages, and facing a USD 1 billion bond redemption next month, it risk bankruptcy without Federal aid.
As I write, regulators are rushing to craft a rescue package. In their minds, regulators are working out the impact on markets, should CIT fail... and there is no room for mis-judgment. On paper, CIT is not that big, only USD 70 billion. But they are lenders to over 1 million businesses.
So how will it go? Judging by its latest stock price, market believes a bailout will happen.
California, the most populous US state has started to issue IOUs to its creditors as payment for goods and services as it ran out of cash. This was the consequence of lawmakers' failure to agree on the USD 26 billion funding gap. This step has been taken only once before, since the Great Depression. Rating agencies warned that if weeks go by without a resolution to the cash crisis, California would risk further downgrades. Presently, California is rated Baa1/A/BBB by Moodys/S&P/Fitch respectively.
Meanwhile, California Controller, John Chiang, said there was little risk of default as the IOUs carry the highest priority of payment under the state constitution. In his mind, the state should have the funds to meet these obligations from September. Nonetheless, California bonds have traded lower, reflecting the elevated risks.
Over at Wall Street, another financial institution is battling for its life. CIT Group, a hundred years old finance company turned bank, is pleading with the Fed to save them and lend them funds via the FDIC Government-guaranteed program. Regulators at the Treasury, Fed and FDIC are now debating whether to risk more tax-payers money on top of the USD 2.3 billion granted in December, to keep the lender afloat.
CIT problems stemmed from the mismatch of fundings and an increased risks from its borrowers. Essentially, CIT borrows from the capital markets and lends the funds to SME in the US. At one time, CIT was the largest independent commercial lender in the US. Now, with CIT battling cash shortages, and facing a USD 1 billion bond redemption next month, it risk bankruptcy without Federal aid.
As I write, regulators are rushing to craft a rescue package. In their minds, regulators are working out the impact on markets, should CIT fail... and there is no room for mis-judgment. On paper, CIT is not that big, only USD 70 billion. But they are lenders to over 1 million businesses.
So how will it go? Judging by its latest stock price, market believes a bailout will happen.
Tuesday, July 14, 2009
Merry-dith Whitney and Singapore GDP
Meredith Whitney, the widely followed stock analyst last night issued a buy verdict on financial stocks. This moved market capitalization by the billions with financial stocks rallying between 6-10% yesterday. Ironically, few cared to digest what she had to say. Essentially, she said banks such as Goldman would do well, as growth would be very slow in the US, and more would have to turn to the capital markets for funding, benefiting banks like Goldman. She reiterated her "sustained bearishness" view of the US economy. Now, how would a "sustained bearishness" of the US be good for stock markets in general? I guess few read the report. Selective reading.
In the meantime, Asian markets got another boost when Singapore announced a better than expect 20.4% annualized quarter-on-quarter jump in 2Q09 GDP. This beat consensus forecast of 13.4% growth. Year-on-year, growth still declined by -3.7% but the pace of decline moderated. Very quickly, analysts queued up to offer their bullish take on Asia. Asia is bouncing back in a V-shape manner, they exclaimed. Others suggested that Asia will see sequential improvement in underlying demand.
Still, there were the nay-sayers... that said growth will peter out unless there is recovery in the advanced economies. And for now, "we'll really getting ahead of ourselves". So who is right? For now, as we approach lunch time, the index is up about +1.5%...Bulls are leading.
In the meantime, Asian markets got another boost when Singapore announced a better than expect 20.4% annualized quarter-on-quarter jump in 2Q09 GDP. This beat consensus forecast of 13.4% growth. Year-on-year, growth still declined by -3.7% but the pace of decline moderated. Very quickly, analysts queued up to offer their bullish take on Asia. Asia is bouncing back in a V-shape manner, they exclaimed. Others suggested that Asia will see sequential improvement in underlying demand.
Still, there were the nay-sayers... that said growth will peter out unless there is recovery in the advanced economies. And for now, "we'll really getting ahead of ourselves". So who is right? For now, as we approach lunch time, the index is up about +1.5%...Bulls are leading.
Monday, July 13, 2009
Busy Start to the Week
It will be a busy week - full of important earning results from prominent, bell weather stocks in the US.
But this morning as I write, it was a rumor of a delay in the Taiwan-China Trade (Financial Markets) Agreement that spooked markets in Asia. As background, this Agreement was first discussed last month and many had anticipated a swift implementation. With news of a possible delay, Taiwan stocks reacted violently, plunging over 4%. This dampened sentiments in Asia, and Singapore and HK fell in sympathy. At one point, HK fell almost 700pts or 4%.
Otherwise, markets remained range-bound. Warnings from Chevron sent oil prices lower and below USD60 per barrel. But signs of a slower decline in US house prices boosted investor sentiments, and mitigated the stock losses.
As I looked over the various charts, many markets have already turned negative, with the exception of Singapore. Being the laggard in the rally, Singapore also appeared to be slow to respond to the current bout of profit taking. For the optimist, they said this reflected Singapore's underlying strength. I'm less optimistic about this.
Nonetheless, this week will be dominated by US earning results. In the Financials, market will look to Goldman (14/7), JPM (16/7), CITI and BAC (17/7) for direction. In the Industrials, we have Intel and J&J (14/7), Texas (15/7), IBM and GE (17/7) announcing their results.
Looks like markets could go either way in the near term. Enjoy.
But this morning as I write, it was a rumor of a delay in the Taiwan-China Trade (Financial Markets) Agreement that spooked markets in Asia. As background, this Agreement was first discussed last month and many had anticipated a swift implementation. With news of a possible delay, Taiwan stocks reacted violently, plunging over 4%. This dampened sentiments in Asia, and Singapore and HK fell in sympathy. At one point, HK fell almost 700pts or 4%.
Otherwise, markets remained range-bound. Warnings from Chevron sent oil prices lower and below USD60 per barrel. But signs of a slower decline in US house prices boosted investor sentiments, and mitigated the stock losses.
As I looked over the various charts, many markets have already turned negative, with the exception of Singapore. Being the laggard in the rally, Singapore also appeared to be slow to respond to the current bout of profit taking. For the optimist, they said this reflected Singapore's underlying strength. I'm less optimistic about this.
Nonetheless, this week will be dominated by US earning results. In the Financials, market will look to Goldman (14/7), JPM (16/7), CITI and BAC (17/7) for direction. In the Industrials, we have Intel and J&J (14/7), Texas (15/7), IBM and GE (17/7) announcing their results.
Looks like markets could go either way in the near term. Enjoy.
Thursday, July 9, 2009
The Fourth Turning
My colleague showed me a book entitled the "The Fourth Turning", written by the Historian, William Strauss in 1997. Here was a book written more than a decade ago, by people who are experts on the rise and fall of civilizations and economies.
In Chapter 10 of this book, my friend pointed out that some of the prophecies now look chillingly probable. For example, in the first scenario, Strauss saw the country beset by a financial crisis that resulted in the states laying claim to the residents' federal tax monies. Declaring this as an act of secession, the Federal government intervenes. Soon "tax rebellion" emerges in other states. This frightening scenario is already at play, as bankrupt states like California is trying to raise taxes massively (Will they in the end try and repeal Federal taxes?) as it juggles its finances.
In the second scenario, Strauss postulated the possibility of an escalation of nuclear armament amongst rogue nations. To counter this threat from within, Congress declares war, and authorizes house-to-house search. Opponents charge that this was concocted for political reasons and the nation is torn by political bickering and foreign capital leaves the US. To me, this seemed to describe the Bush Administration, but fortunately, no capital flight during that period.
In scenario 3, Strauss talked about the impasse over the federal budget and the impact of this stalemate on state spending, the USD and asset prices. Judging by how difficult it was for the Obama-Administration to pass the first stimulus package in early 2009, this is a real risk, if a second package is required.
Next, Strauss warned of a new communicable virus striking and paralysing the country. For me, I only need to look at the current H1N1 flu to know that the risk is real.
In summary, the USA is closer to what historians warned about a decade ago. We have not hit a (US) confidence crisis yet, but there are growing signs of concerns over the US leadership. If unchecked, we could see the dawn of a new era in the next decade which could see the gradual death of the USD.
In Chapter 10 of this book, my friend pointed out that some of the prophecies now look chillingly probable. For example, in the first scenario, Strauss saw the country beset by a financial crisis that resulted in the states laying claim to the residents' federal tax monies. Declaring this as an act of secession, the Federal government intervenes. Soon "tax rebellion" emerges in other states. This frightening scenario is already at play, as bankrupt states like California is trying to raise taxes massively (Will they in the end try and repeal Federal taxes?) as it juggles its finances.
In the second scenario, Strauss postulated the possibility of an escalation of nuclear armament amongst rogue nations. To counter this threat from within, Congress declares war, and authorizes house-to-house search. Opponents charge that this was concocted for political reasons and the nation is torn by political bickering and foreign capital leaves the US. To me, this seemed to describe the Bush Administration, but fortunately, no capital flight during that period.
In scenario 3, Strauss talked about the impasse over the federal budget and the impact of this stalemate on state spending, the USD and asset prices. Judging by how difficult it was for the Obama-Administration to pass the first stimulus package in early 2009, this is a real risk, if a second package is required.
Next, Strauss warned of a new communicable virus striking and paralysing the country. For me, I only need to look at the current H1N1 flu to know that the risk is real.
In summary, the USA is closer to what historians warned about a decade ago. We have not hit a (US) confidence crisis yet, but there are growing signs of concerns over the US leadership. If unchecked, we could see the dawn of a new era in the next decade which could see the gradual death of the USD.
Wednesday, July 8, 2009
Inflation or Not
There is great debate in the markets these days. In the Inflation-wrestling match, we have 2 of the market's biggest giants at odds with each other. In one corner, we have Inflation doves, Goldman Sachs and in the other corner, we have Inflation hawks, Morgan Stanley. Essentially, the question on everyone's mind is: Will Inflation be a problem in the medium term.
According to Goldman Sachs, the Fed can relax as they have time, and plenty of options on how to end their USD1.1 trillion aid to the banking system. In fact, Goldman warned that that the risk going forward was the Fed might not ease quick enough. In a research note, Goldman said it was very unlikely the Fed will err on the accommodative side. And to deal with any threat of inflation, the Fed may reduce or end the emergency and non-emergency lending program, sell or cease to buy securities, issue Fed debt etc. In short, plenty of tools to unwind the excess credit.
This view is also shared by the New York University and many top Fed officials.
On the other hand, Morgan Stanley said the greatest risk is the Fed might keep accommodation too long and lack the political will to raise rates when needed to. Supporters of this view included Allan Meltzer, a Fed Historian and Economics Professor at Carnegie Mellon University who questioned if the Fed has the "guts" to do it. As he puts it : "I don't think there is a snowball chance in hell they will be willing to tighten to slow inflation down."
Right now, few people really bother with inflation and the primary focus is trying to get out of the recession. To them, the inflation discussion seemed distant and academic. But how long will people remain sanguine? Or is there no threat? Frankly, I'm one of those sanguine ones... haven't really thought about it.... and still haven't.
According to Goldman Sachs, the Fed can relax as they have time, and plenty of options on how to end their USD1.1 trillion aid to the banking system. In fact, Goldman warned that that the risk going forward was the Fed might not ease quick enough. In a research note, Goldman said it was very unlikely the Fed will err on the accommodative side. And to deal with any threat of inflation, the Fed may reduce or end the emergency and non-emergency lending program, sell or cease to buy securities, issue Fed debt etc. In short, plenty of tools to unwind the excess credit.
This view is also shared by the New York University and many top Fed officials.
On the other hand, Morgan Stanley said the greatest risk is the Fed might keep accommodation too long and lack the political will to raise rates when needed to. Supporters of this view included Allan Meltzer, a Fed Historian and Economics Professor at Carnegie Mellon University who questioned if the Fed has the "guts" to do it. As he puts it : "I don't think there is a snowball chance in hell they will be willing to tighten to slow inflation down."
Right now, few people really bother with inflation and the primary focus is trying to get out of the recession. To them, the inflation discussion seemed distant and academic. But how long will people remain sanguine? Or is there no threat? Frankly, I'm one of those sanguine ones... haven't really thought about it.... and still haven't.
Tuesday, July 7, 2009
Internationalising the Renminbi
Despite denials that China will be proposing a new currency regime at this weekend's G8 meeting, recent actions suggest that China is preparing to "internationalise" the Renminbi. Essentially, this will allow the currently controlled currency, to be more freely available, for trade purposes (initially). This is a major development and I expect more media coverage soon. In the meantime, below are some of the main points, extracted from a HSBC publication.
China has previously complained of their dissatisfaction of how the US is managing its economy and the resultant impact of a weakening USD. To counter their over-reliant on the USD, China has embarked on an ambitious scheme to raise the Renminbi's (CNY) role in International trade and finance. This is a multi-year, gradual process but it will be a structural shift - a paradigm shift in world economics.
In the initial phase, the plan will focus on expanding CNY role in settling cross-border trade. Already the Authorities, have introduced measures such as tax break, trade finance and currency swaps arrangement, to encourage the switch from USD to CNY settlement. Combined with the USD uncertainty, as much as USD2 trillion worth of trade flows, or 40-50% of China's total trade could be settled in CNY by 2012.
In the longer term, this internationalising of the CNY will have other key implications. Firstly, by pricing in CNY, exporters will reduce their cost as they need not hedge or take exchange rate risks. This may help export recovery. Secondly, the switch will lower the growth in China's USD revenue. Combined with initiatives to allow foreign companies to issue CNY bonds and IPO, there will be a sharp slowdown in China's USD accumulation in the coming years. This will have a significant impact on USD, in light of the Obama Administration's expansive fiscal stimulus package (who will fund the US?). Thirdly, the plan allowed for a steady appreciation of the CNY. Over time, Hong Kong could benefit most and become the offshore center for CNY.
I see this development as a major turning point. Or is this a bluff? In a world driven (largely) by sentiments, once a major player like China turns gradually away from the USD, it opens the flood-gates for the oil exporting nations to do likewise. Hence, next to turn away (from USD) could be Russia, Middle East, Brazil etc. While the pace may be slow, it could finally spell the end of a strong USD policy. The ramifications will be significant.
Readers should read the publication or similar ones, to get the fuller picture. This is worth nothing.
China has previously complained of their dissatisfaction of how the US is managing its economy and the resultant impact of a weakening USD. To counter their over-reliant on the USD, China has embarked on an ambitious scheme to raise the Renminbi's (CNY) role in International trade and finance. This is a multi-year, gradual process but it will be a structural shift - a paradigm shift in world economics.
In the initial phase, the plan will focus on expanding CNY role in settling cross-border trade. Already the Authorities, have introduced measures such as tax break, trade finance and currency swaps arrangement, to encourage the switch from USD to CNY settlement. Combined with the USD uncertainty, as much as USD2 trillion worth of trade flows, or 40-50% of China's total trade could be settled in CNY by 2012.
In the longer term, this internationalising of the CNY will have other key implications. Firstly, by pricing in CNY, exporters will reduce their cost as they need not hedge or take exchange rate risks. This may help export recovery. Secondly, the switch will lower the growth in China's USD revenue. Combined with initiatives to allow foreign companies to issue CNY bonds and IPO, there will be a sharp slowdown in China's USD accumulation in the coming years. This will have a significant impact on USD, in light of the Obama Administration's expansive fiscal stimulus package (who will fund the US?). Thirdly, the plan allowed for a steady appreciation of the CNY. Over time, Hong Kong could benefit most and become the offshore center for CNY.
I see this development as a major turning point. Or is this a bluff? In a world driven (largely) by sentiments, once a major player like China turns gradually away from the USD, it opens the flood-gates for the oil exporting nations to do likewise. Hence, next to turn away (from USD) could be Russia, Middle East, Brazil etc. While the pace may be slow, it could finally spell the end of a strong USD policy. The ramifications will be significant.
Readers should read the publication or similar ones, to get the fuller picture. This is worth nothing.
Monday, July 6, 2009
Unemployment - The Ticking Time Bomb
The following is a summary of an article written by Ambrose Evans-Pritchard from the Telegraph. Essentially, he is not from the "green-shoot" camp and has warned of further hardship and gloom.
In the article, Ambrose warned that "the unemployment time bomb is ticking away". In his past work as a news reporter, covering the US in the early 1990s, he has visited numerous militia groups that sprang up in Texas, Idaho and Ohio, in the aftermath of the 1990s recession. All were early victims of the global labour arbitrage. Then, these people were angry enough with Washington to spend weekends in fatigues and armed with M16 rifles. One fringe group even blew up the Oklahoma City Federal Building in 1995. Fortunately, the protests gradually dissipated once the recovery fed through the system.
This time, however, the job recovery could be non-existent. Capacity has fallen to record lows of 68% in the USA and 71% in Europe. And the deeper purge in labour has yet to come. And if the May US payroll number of -467,000 was sobering, then the total full-time job losses of 9,000,000 so far this cycle must be extremely worrying.
Combined with the drop in time worked, to 33 hours per week, or 6.9% lower from a year earlier, wage deflation could be setting in. Earnings, for example, declined 1.6% (annualised) in the last 3 months. Moreover, some of the wage cuts have been disguised with workers having to take compulsory leave without pay. There is now an increased risks that other countries may set off a ruinous spiral by chipping away at wages to gain "beggar-thy-neighbor" advantage.
More ominously, the situation could be worse than anticipated. Published US unemployment rate stood at 9.5% while some studies have put the number as high as 18%, if counted the old-fashioned way. In addition, 20,000,000 US home-owners are already in negative equity and evictions could increase at a terrifying pace. Already, some state police, such as in Michigan and Illinois, are quietly refusing to toss families out into the streets. A social disorder in the making?
In the meantime, Ambrose, taking a dig at the fat-cats, suggested that Bankers take a teacher's salary for a few years, while tax-payers pay for the bankers past mistakes. Otherwise, Bankers should expect a ferocious backlash (In December 2008, Royal Bank of Scotland (RBS) staff had to be police escotted, as they were hurled with snowballs by angry tax-payers).
Maybe, prices of rotten eggs and tomatoes will be in hot demand soon.
In the article, Ambrose warned that "the unemployment time bomb is ticking away". In his past work as a news reporter, covering the US in the early 1990s, he has visited numerous militia groups that sprang up in Texas, Idaho and Ohio, in the aftermath of the 1990s recession. All were early victims of the global labour arbitrage. Then, these people were angry enough with Washington to spend weekends in fatigues and armed with M16 rifles. One fringe group even blew up the Oklahoma City Federal Building in 1995. Fortunately, the protests gradually dissipated once the recovery fed through the system.
This time, however, the job recovery could be non-existent. Capacity has fallen to record lows of 68% in the USA and 71% in Europe. And the deeper purge in labour has yet to come. And if the May US payroll number of -467,000 was sobering, then the total full-time job losses of 9,000,000 so far this cycle must be extremely worrying.
Combined with the drop in time worked, to 33 hours per week, or 6.9% lower from a year earlier, wage deflation could be setting in. Earnings, for example, declined 1.6% (annualised) in the last 3 months. Moreover, some of the wage cuts have been disguised with workers having to take compulsory leave without pay. There is now an increased risks that other countries may set off a ruinous spiral by chipping away at wages to gain "beggar-thy-neighbor" advantage.
More ominously, the situation could be worse than anticipated. Published US unemployment rate stood at 9.5% while some studies have put the number as high as 18%, if counted the old-fashioned way. In addition, 20,000,000 US home-owners are already in negative equity and evictions could increase at a terrifying pace. Already, some state police, such as in Michigan and Illinois, are quietly refusing to toss families out into the streets. A social disorder in the making?
In the meantime, Ambrose, taking a dig at the fat-cats, suggested that Bankers take a teacher's salary for a few years, while tax-payers pay for the bankers past mistakes. Otherwise, Bankers should expect a ferocious backlash (In December 2008, Royal Bank of Scotland (RBS) staff had to be police escotted, as they were hurled with snowballs by angry tax-payers).
Maybe, prices of rotten eggs and tomatoes will be in hot demand soon.
Friday, July 3, 2009
The PPIP revisited
Back in March, The US Treasury announced the Public-Private Investment Program (PPIP), an initiative designed to help Banks remove toxic assets off their balance sheet. Essentially, it was an offer to the private sector to raise funds, which the government would subsequently match, to buy distressed assets off US Banks. Initially, the idea was to approach 4 to 5 large Asset managers and Hedge Funds, who will each commit to raise USD 7 to 10 billion of private money for a Distressed Asset Fund. The Government will then commit as much as USD 50 billion in public capital to match the PPIP funds raised.
However, as a sign of changing needs, The US Treasury announced that the program will now be around USD 20 billion in size, down from the targetted USD 100 billion. The plan now is to pick 8 to 10 Managers, who will each commit to raise USD 1.1 billion in private money. The Government will then match this amount with Government-backed loans. This change of plan is a reflection that the worst of the Banking crisis is behind us. The need to remove the "toxic assets" is less relevant with the rising asset prices. US Banks have also successfully raised over USD 100 billion by selling equity and assets, easing market's concern.
A separate portion of the PPIP to be managed by the Federal Deposit Insurance Corp (FDIC), and designed to aid the sale of loans from Banks to investors have also been postponed indefinitely. Essentially, interests (Banks) in such programs have waned considerably as confidence improved substantially.
In addition, US Banks have also returned Government aid back to the Treasury. There is a consensus that the worst of the Banking crisis is over. Yes, there is a gradual unfreezing of credit and liquidity. However, the question remains: How quickly will it be, before things normalise back to pre-crisis levels? A long time, I think....
However, as a sign of changing needs, The US Treasury announced that the program will now be around USD 20 billion in size, down from the targetted USD 100 billion. The plan now is to pick 8 to 10 Managers, who will each commit to raise USD 1.1 billion in private money. The Government will then match this amount with Government-backed loans. This change of plan is a reflection that the worst of the Banking crisis is behind us. The need to remove the "toxic assets" is less relevant with the rising asset prices. US Banks have also successfully raised over USD 100 billion by selling equity and assets, easing market's concern.
A separate portion of the PPIP to be managed by the Federal Deposit Insurance Corp (FDIC), and designed to aid the sale of loans from Banks to investors have also been postponed indefinitely. Essentially, interests (Banks) in such programs have waned considerably as confidence improved substantially.
In addition, US Banks have also returned Government aid back to the Treasury. There is a consensus that the worst of the Banking crisis is over. Yes, there is a gradual unfreezing of credit and liquidity. However, the question remains: How quickly will it be, before things normalise back to pre-crisis levels? A long time, I think....
Thursday, July 2, 2009
Chinese Chess
China's Vice Commerce Minister Chen Jian, announced another poor set of Foreign Direct Investment (FDI) today. Year-to-Date, FDI in China amounted to USD 34 billion, or USD6 billion less than the corresponding period in 2008. After a string of 8 consecutive declines, Chen pledged that the "Government will announce policies to stabilize investment soon".
However, when you view this together with the growth in Fixed Asset Investment (FAI), which are mostly large infrastructure spending (read: Government intervention), the picture is far from bleak. Consequent to the massive fiscal package announced in late 2008, FAI has surged in China. Year-to-date, FAI amounted to CNY 5.35 trillion, compared to CNY4.02 trillion in the corresponding period in 2008. Surely this increase of CNY 1.33 trillion (USD170 billion) will more than offset weakness in FDI which have been export-oriented. Even after accounting for slippages and a lower money multiplier, one has to be extremely pessimistic to ignore this surge in FAI. Pessimists expect a collapse in 2H09 arguing that the FAI was front-loaded.
For me, I view 2009 as a "mixed" year- A winner, if one is in the construction/infrastructure business; A Loser, if one is in the export business. But as a whole, China will do fine.
Meanwhile, Chinese officials were "playing chess" elsewhere too. For the past 1-2 months, China has been constantly drumming up their dissatisfaction over the weak USD. Some senior officials even went as far as suggesting a "new" reserve currency. Premier Wen even asked the US to guarantee the credit-worthiness of their US Treasuries.
But today, ahead of the G8 meeting next week, Chinese officials were heard playing a different tune. Chinese Vice Foreign Minister , He Yafei said he was not aware of a plan to discuss a new currency at the G8 meeting. His comments were overall supportive of the dollar and hoped it would remain "stable". Consequently, the USD closed the afternoon stronger.
So, be it the economy or the currency, China is playing "chinese chess" - In the economy, they have "exchanged" one sector for another. In the currency market, they are still "setting up the pieces" for a grand strategy; not ready for execution.
However, when you view this together with the growth in Fixed Asset Investment (FAI), which are mostly large infrastructure spending (read: Government intervention), the picture is far from bleak. Consequent to the massive fiscal package announced in late 2008, FAI has surged in China. Year-to-date, FAI amounted to CNY 5.35 trillion, compared to CNY4.02 trillion in the corresponding period in 2008. Surely this increase of CNY 1.33 trillion (USD170 billion) will more than offset weakness in FDI which have been export-oriented. Even after accounting for slippages and a lower money multiplier, one has to be extremely pessimistic to ignore this surge in FAI. Pessimists expect a collapse in 2H09 arguing that the FAI was front-loaded.
For me, I view 2009 as a "mixed" year- A winner, if one is in the construction/infrastructure business; A Loser, if one is in the export business. But as a whole, China will do fine.
Meanwhile, Chinese officials were "playing chess" elsewhere too. For the past 1-2 months, China has been constantly drumming up their dissatisfaction over the weak USD. Some senior officials even went as far as suggesting a "new" reserve currency. Premier Wen even asked the US to guarantee the credit-worthiness of their US Treasuries.
But today, ahead of the G8 meeting next week, Chinese officials were heard playing a different tune. Chinese Vice Foreign Minister , He Yafei said he was not aware of a plan to discuss a new currency at the G8 meeting. His comments were overall supportive of the dollar and hoped it would remain "stable". Consequently, the USD closed the afternoon stronger.
So, be it the economy or the currency, China is playing "chinese chess" - In the economy, they have "exchanged" one sector for another. In the currency market, they are still "setting up the pieces" for a grand strategy; not ready for execution.
Tuesday, June 30, 2009
US Securitised Mortgage Market - A Summary
In the previous blog entry, I talked briefly about the state of the US mortgage market and Banks' attitude towards it. Today, I like to give a summary of the former to give better all-round understanding of the issues at hand.
Essentially, the entire US mortgage market is about USD 10 trillion. The securitised portion of it, in other words, those re-packaged and sold to investors is about USD 7 trillion. Of these, about USD3 trillion are considered non-prime assets and they included the Jumbos, the Alt-A and the sub-prime mortgages. To drill it down further, about half of them ie. USD 1.5 trillion was issued during the fraudulent years of 2005-2007. I called them fraud as the practises of the housing brokers, middleman, banks, credit agencies etc were then void of integrity and were over-run with greed. And now, it is payback time...
Looking at the latest US mortgage remittances data, it is a stark reminder of the reality at hand. The crisis is not over and the asset markets will be disappointed.
There was little to cheer about in the survey. Green shoots were certainly choked to death by the brown weeds of despair. In the Jumbo market, delinquencies have hit 15% in some cases and rating agencies generally expect actual losses to touch 7% for mortgages that originated in 2007 (the most permissive period). In the Alt-A sector, the statistics become more frightening with current delinquencies already hitting 40% in the 2007 vintages. Roughly speaking, 4 in 10 borrowers have fallen behind in their mortgage payment. Finally, in the sub-prime market, the total delinquency rate was in excess of 50%.
In all 3 cases, their respective repackaged AAA bonds would be in danger of default. Of course, one could say that this is already priced into the banking system. But the fact remains - the bonds will default.
In the meantime, foreclosures would continue to rise throughout 2009-2010. This would dampen house prices in the US and the negative wealth effect created could curtail spending. This in turn could result in higher unemployment rate and a further increase in the negative wealth effect. In short, the risk of a further slowdown in consumer spending and a rise in the saving rates in US could continue to hurt Asian exporters, well into 2010.
But, do we sense that? No. By the way, I had to queue to get in to the Thai Village Sharksfin on Friday. No recession in Singapore, yet.
Essentially, the entire US mortgage market is about USD 10 trillion. The securitised portion of it, in other words, those re-packaged and sold to investors is about USD 7 trillion. Of these, about USD3 trillion are considered non-prime assets and they included the Jumbos, the Alt-A and the sub-prime mortgages. To drill it down further, about half of them ie. USD 1.5 trillion was issued during the fraudulent years of 2005-2007. I called them fraud as the practises of the housing brokers, middleman, banks, credit agencies etc were then void of integrity and were over-run with greed. And now, it is payback time...
Looking at the latest US mortgage remittances data, it is a stark reminder of the reality at hand. The crisis is not over and the asset markets will be disappointed.
There was little to cheer about in the survey. Green shoots were certainly choked to death by the brown weeds of despair. In the Jumbo market, delinquencies have hit 15% in some cases and rating agencies generally expect actual losses to touch 7% for mortgages that originated in 2007 (the most permissive period). In the Alt-A sector, the statistics become more frightening with current delinquencies already hitting 40% in the 2007 vintages. Roughly speaking, 4 in 10 borrowers have fallen behind in their mortgage payment. Finally, in the sub-prime market, the total delinquency rate was in excess of 50%.
In all 3 cases, their respective repackaged AAA bonds would be in danger of default. Of course, one could say that this is already priced into the banking system. But the fact remains - the bonds will default.
In the meantime, foreclosures would continue to rise throughout 2009-2010. This would dampen house prices in the US and the negative wealth effect created could curtail spending. This in turn could result in higher unemployment rate and a further increase in the negative wealth effect. In short, the risk of a further slowdown in consumer spending and a rise in the saving rates in US could continue to hurt Asian exporters, well into 2010.
But, do we sense that? No. By the way, I had to queue to get in to the Thai Village Sharksfin on Friday. No recession in Singapore, yet.
Monday, June 29, 2009
Are We Immunized Against it?
No... I was not referring to the H1N1 flu, which someone told me one unfortunate air-stewardess referred to as the dreaded HINI (Hee Nee) flu. Poor girl, she was probably grounded after that.
Here, I am referring to Banks' attitude towards lending. Apparently, US banks have tightened their lending standards, after experiencing near-death. As one lender puts it : " Six years ago, standards were pretty permissive; and two years ago, all you needed was a pulse. These days, people who have reserves that equal the amount of the loan are getting rejected."
Now throw in the recent 2% rise in 30 years US Treasuries, which is the common benchmark for US mortgages, the lending becomes near impossible. Consequently, the 2.1 million unoccupied houses in the US will impede any recovery. Including the available for sale properties, it would take close to 10 months, just to unload them. Four months into President Obama's tenure, Housing, the engine that powered every US recovery since 1960 is stalled. The lousy job market, with unemployment rate expected to hit 10% have made things worse.
Still, the market wants to believe that this time around it would be different - Government spending will kick-start housing, and then consumer spending comes around to kick-start the economy. Seems simple enough... But, the US home-owners are still waiting for that to happen.
In the meantime, US Banks remain trigger-shy. Is this contagious? Hopefully not. With Asian exports still weakening, Asia will increasingly have to depend on domestic consumption, and a credit-shy banking system will not help. Now in Singapore, considering the currently available 1% mortgage rates, I must say we are immunized and that my concerns are misplaced. In fact, I am impressed by the confidence Banks have on consumers. May be it is the belief that Singaporeans don't default on their homes. Well, let see as the story unfolds.
Here, I am referring to Banks' attitude towards lending. Apparently, US banks have tightened their lending standards, after experiencing near-death. As one lender puts it : " Six years ago, standards were pretty permissive; and two years ago, all you needed was a pulse. These days, people who have reserves that equal the amount of the loan are getting rejected."
Now throw in the recent 2% rise in 30 years US Treasuries, which is the common benchmark for US mortgages, the lending becomes near impossible. Consequently, the 2.1 million unoccupied houses in the US will impede any recovery. Including the available for sale properties, it would take close to 10 months, just to unload them. Four months into President Obama's tenure, Housing, the engine that powered every US recovery since 1960 is stalled. The lousy job market, with unemployment rate expected to hit 10% have made things worse.
Still, the market wants to believe that this time around it would be different - Government spending will kick-start housing, and then consumer spending comes around to kick-start the economy. Seems simple enough... But, the US home-owners are still waiting for that to happen.
In the meantime, US Banks remain trigger-shy. Is this contagious? Hopefully not. With Asian exports still weakening, Asia will increasingly have to depend on domestic consumption, and a credit-shy banking system will not help. Now in Singapore, considering the currently available 1% mortgage rates, I must say we are immunized and that my concerns are misplaced. In fact, I am impressed by the confidence Banks have on consumers. May be it is the belief that Singaporeans don't default on their homes. Well, let see as the story unfolds.
Friday, June 26, 2009
Closing the Week Strongly
Barring a dramatic collapse, equities will close the week strongly. And why not? The weekly data out of US and Asia has been relatively benign.
In US, the Treasury funding program went smoothly, particularly the 7yr Treasury auction. It was a vote of confidence for the US. Meanwhile, the Fed Chairman, Ben Bernanke's positive assessment of the economy (that it was recovering) was also well received by the market. Merger and acquisition talks in the US added the icing to the bullish cake.
In Asia, the PBOC said monetary policies would remain accommodative as the Authorities were still concerned over the sustainability of the recovery. In Korea, BOK made similar comments, when they said the expansionary policies would be kept in place until clear signs of the recovery emerged. In a nutshell, Government around the world seemed less optimistic than the stock markets, and have vowed to keep interest rates low. That's great news for the stock market that has chosen to focus on the low interest rate bit, and ignored the growth concerns of the Authorities. This is a complete 180-degrees turn in sentiments... just 3 months ago, the market would have focused on the growth concerns and ignored completely the low interest rates and fiscal stimulus that were put in place.
This make a mockery out of financial theories that advocate perfect markets; that prices are "perfect" and always reflect all available information. In the latest survey of its members by Britain's Chartered Financial Analyst Institute, over two-third of the members rejected this proposition. More than 77% now believed investors behave rationally. Sounds like an urgent rewriting of textbooks is needed quickly.
So, will it be plain sailing for the rest of the year? Not according to Warren Buffet. In fact, Mr Buffet reckoned the recovery willl be so tepid, that a second round of stimulus may be necessary. Does the stock market think so? No. And right now, the Bulls are charging...
In US, the Treasury funding program went smoothly, particularly the 7yr Treasury auction. It was a vote of confidence for the US. Meanwhile, the Fed Chairman, Ben Bernanke's positive assessment of the economy (that it was recovering) was also well received by the market. Merger and acquisition talks in the US added the icing to the bullish cake.
In Asia, the PBOC said monetary policies would remain accommodative as the Authorities were still concerned over the sustainability of the recovery. In Korea, BOK made similar comments, when they said the expansionary policies would be kept in place until clear signs of the recovery emerged. In a nutshell, Government around the world seemed less optimistic than the stock markets, and have vowed to keep interest rates low. That's great news for the stock market that has chosen to focus on the low interest rate bit, and ignored the growth concerns of the Authorities. This is a complete 180-degrees turn in sentiments... just 3 months ago, the market would have focused on the growth concerns and ignored completely the low interest rates and fiscal stimulus that were put in place.
This make a mockery out of financial theories that advocate perfect markets; that prices are "perfect" and always reflect all available information. In the latest survey of its members by Britain's Chartered Financial Analyst Institute, over two-third of the members rejected this proposition. More than 77% now believed investors behave rationally. Sounds like an urgent rewriting of textbooks is needed quickly.
So, will it be plain sailing for the rest of the year? Not according to Warren Buffet. In fact, Mr Buffet reckoned the recovery willl be so tepid, that a second round of stimulus may be necessary. Does the stock market think so? No. And right now, the Bulls are charging...
Wednesday, June 24, 2009
Hi Mom, I need Help....
It started out as an uneventful day, with markets hugging close to the zero line, until about 11am when markets like Taiwan moved up sharply, dragging the rest of Asia higher.
This was on the back of rumors of closer China-Taiwan relationship and financial co-operation between the 2 nations. Consequently, Taiwanese banks and other blue chip stocks spiked higher. By midday, the "rumor" was confirmed as Taiwan announced it was sending 13 Cabinet Ministers to China in early July for talks on forging closer relationship. Subsequently, the Taiwan Stock Index posed an intraday high of 6511 or a 5% intraday gain, before succumbing to late profit taking.
In the meantime, this "game-changing" news began to spillover to the other markets. HK and Singapore, in particular, began to share this optimism and traded higher. For me, I found this amusing. I can understand HK (trading higher), but Singapore reacting so favorably to this? In many ways, I have always assumed Taiwan and Singapore to be competitors. And more business for Taiwan must surely be at the expense of Singapore? I guess my stock market friends see things differently. This was the catalyst for them to re-position themselves after so many down days.
Nonetheless, this is an optimism I don't quite share. In the near term, credit markets (void of retail interests) which have proven to lead asset turning points still suggested more risk aversion. I think more market consolidation is needed.
Tuesday, June 23, 2009
North Korea Grabs World Attention
Come 2010, soccer fans will see 2 Koreas in action at the World's most prestigious soccer event. Both the South and North Korea qualified for the 2010 World Cup.
I would have thought that North Korea's qualification which came at the expense of Iran (I guess FIFA can only deal with 1 axis of evil at a time), would be great for their sponsors, ERKE, the subsidiary of Singapore listed China HongXing Sports Ltd, but I was wrong. Instead, since North Korea's qualification, China HongXing Sports (CHHS) has lost another 10%, bringing their month-to-date loss to about 30%. So maybe CHHS has a crap balance sheet? Wrong again. Unless the accounts have been cooked, I see net cash of 18c, compared to the current closing of 13.5c...
In the meantime, North Korea is also grabbing attention in a less desirable way. Since their missile-testing launch and nuclear testing in May, there has been increasing reports of a long-range missile test scheduled for 4 July, one capable of reaching Hawaii. US Defense Secretary, Robert Gates, subsequently ordered US military to take defensive measure. To add credibility to this, North Korea has closed its coastal waters to shipping, in view of a "military exercise" in that area.
Meanwhile, a suspicious North Korean ship has been monitored to be sailing past Shanghai. The ship is suspected of carrying illicit weapons en route to Myanmar, where the Burmese Junta is known to be supporters of North Korea's military technology. While being trailed by a US Destroyer, a high-sea interception is unlikely.
Still, with so much geo-political risk in the pipeline, one would have thought Asian markets should be trading more cautiously. But the fact remains: Asia is up 30% in 2009 (so far). Oh well, I guess the market's idea of pricing in the North Korean risk, is to hit out at their sports sponsors, CHHS, in protest of the regime's provocative manners...... And we say Mr Kim is irrational?
I would have thought that North Korea's qualification which came at the expense of Iran (I guess FIFA can only deal with 1 axis of evil at a time), would be great for their sponsors, ERKE, the subsidiary of Singapore listed China HongXing Sports Ltd, but I was wrong. Instead, since North Korea's qualification, China HongXing Sports (CHHS) has lost another 10%, bringing their month-to-date loss to about 30%. So maybe CHHS has a crap balance sheet? Wrong again. Unless the accounts have been cooked, I see net cash of 18c, compared to the current closing of 13.5c...
In the meantime, North Korea is also grabbing attention in a less desirable way. Since their missile-testing launch and nuclear testing in May, there has been increasing reports of a long-range missile test scheduled for 4 July, one capable of reaching Hawaii. US Defense Secretary, Robert Gates, subsequently ordered US military to take defensive measure. To add credibility to this, North Korea has closed its coastal waters to shipping, in view of a "military exercise" in that area.
Meanwhile, a suspicious North Korean ship has been monitored to be sailing past Shanghai. The ship is suspected of carrying illicit weapons en route to Myanmar, where the Burmese Junta is known to be supporters of North Korea's military technology. While being trailed by a US Destroyer, a high-sea interception is unlikely.
Still, with so much geo-political risk in the pipeline, one would have thought Asian markets should be trading more cautiously. But the fact remains: Asia is up 30% in 2009 (so far). Oh well, I guess the market's idea of pricing in the North Korean risk, is to hit out at their sports sponsors, CHHS, in protest of the regime's provocative manners...... And we say Mr Kim is irrational?
Monday, June 22, 2009
Doctor Prescribes Caution
Saul Doctor (that's his name), European Credit Derivatives Strategy, JP Morgan, has warned that technical signals have turned bearish in the credit markets. 3 indicators that he uses have all turned negative. The RSI and "House of Cards" Index turned negative last week, and on Friday, the third of their indicator, the "Momentum" Index turned as well.
Essentially, these indicators have been designed to pick the turning points in the credit sentiments, and past back-testings have proven the effectiveness of these indicators.
Therefore, if past relationships hold, rallies in equity markets may be close to an end as widening credit spreads signal market's diminishing risk appetite. We saw this trend in 2008 as well, as the widening of credits led the declines in stock markets.
So, is Doctor's prescription too conservative and premature? Time will tell, but after a 50% rally from their lows, Equities may be due for a pause.
Essentially, these indicators have been designed to pick the turning points in the credit sentiments, and past back-testings have proven the effectiveness of these indicators.
Therefore, if past relationships hold, rallies in equity markets may be close to an end as widening credit spreads signal market's diminishing risk appetite. We saw this trend in 2008 as well, as the widening of credits led the declines in stock markets.
So, is Doctor's prescription too conservative and premature? Time will tell, but after a 50% rally from their lows, Equities may be due for a pause.
Friday, June 19, 2009
Asian Banks' Loan-to-Deposit Ratios
Not wanting to make a prediction on how Asian stock markets will close today, I shall use the time to share with readers some data on the Asian economies instead. From time to time, you will hear me tout bullish thoughts of Asia, but these are usually fundamental arguments which frankly, the markets ignore. These days, trading has become very technical and depend more on liquidity.
So, as we put aside the trading view and look squarely at Asia's fundamentals, one reason we can remain bullish on (Asia) is the relative strength of Asian Banks. Firstly, Asian Banks were hardly affected by the Structured Credit blow-up. Some banks did take a small hit, but nothing life-threatening. Secondly, as we look at the average Loan-to-Deposit ratios, Asian Banks in general have the capacity to lend with most Banks averaging 0.75 times. This is important, as it measures the ability of Banks to lend, if forced to. China, for example, lent heavily in the 1Q09 after the Central Government "suggested" that Banks should lend more aggressively.
Of course, a purist would argue that it is wrong that Government intervenes in such manner, but what if it was collectively good for the economy? I think the argument is less straight-forward. Still, the above chart is a reminder, that Asian Banks are strong and have the capacity to lend. But will they? Well, looking at China, they did.
Thursday, June 18, 2009
A Big Chinese Cake
As Mr Zhang Yong Qun, general manager of Songjiang Plywood Factory puts it: " The domestic market is a big cake which everyone wants to have a bite of it."
Yes, as China transitions into a more domestic growth fuelled economy, the Chinese cake has gotten bigger. Unfortunately, the number of hungry mouths (companies) wanting a piece of it is ever-growing as export oriented companies turn to the "domestic cake". The scene is similar to that of Oliver Twist... "Please Sir, Can I have more?" And this is best summed up by views expressed by many at the current 20th China Harbin International Economy and Trade Fair.
While the Fair was a success, attracting 25% more booths this year, and reaching over 120,000 exhibitors and buyers from 70 countries, the mood was sombre. Many of the participants that came from the inland provinces talked about the domino effect, as the slowdown moved from the southern provinces to the northern ones. As Mr Zhang Hou (another Zhang), Chairman of the Heilongjiang Province Construction Group, said : " The impact has been delayed by 4-5 months. Business began to drop in February and orders from developed countries have been cancelled."
"Like the winds, the crisis landed first on the Yangtze and Pearl river delta, but has blown across the nation", was another metaphor used to describe the current inland sentiment.
So what is the real situation out there? Official Chinese data shows loan growth accelerating and automotive sales recovering strongly. The stellar stock market performance of the past few months is certainly suggesting the worst is behind us. For me, I think the worst is over and there are signs of green shoots in the Chinese economy. But being such a vast nation, a couple of green shoots doesn't say much, unless you are skilled enough to spot those green shoots. Hence, for most of us, it will be a bumpy 2009 even in China... and if you spotted a "green shoot", stick to it but don't try pulling them to help them grow... they'll die on you....Patience needed.
Yes, as China transitions into a more domestic growth fuelled economy, the Chinese cake has gotten bigger. Unfortunately, the number of hungry mouths (companies) wanting a piece of it is ever-growing as export oriented companies turn to the "domestic cake". The scene is similar to that of Oliver Twist... "Please Sir, Can I have more?" And this is best summed up by views expressed by many at the current 20th China Harbin International Economy and Trade Fair.
While the Fair was a success, attracting 25% more booths this year, and reaching over 120,000 exhibitors and buyers from 70 countries, the mood was sombre. Many of the participants that came from the inland provinces talked about the domino effect, as the slowdown moved from the southern provinces to the northern ones. As Mr Zhang Hou (another Zhang), Chairman of the Heilongjiang Province Construction Group, said : " The impact has been delayed by 4-5 months. Business began to drop in February and orders from developed countries have been cancelled."
"Like the winds, the crisis landed first on the Yangtze and Pearl river delta, but has blown across the nation", was another metaphor used to describe the current inland sentiment.
So what is the real situation out there? Official Chinese data shows loan growth accelerating and automotive sales recovering strongly. The stellar stock market performance of the past few months is certainly suggesting the worst is behind us. For me, I think the worst is over and there are signs of green shoots in the Chinese economy. But being such a vast nation, a couple of green shoots doesn't say much, unless you are skilled enough to spot those green shoots. Hence, for most of us, it will be a bumpy 2009 even in China... and if you spotted a "green shoot", stick to it but don't try pulling them to help them grow... they'll die on you....Patience needed.
Wednesday, June 17, 2009
A Fresh Beginning
After a one year hiatus, I'm back...not with vigor but with apprehension. Cautious, not knowing if I can maintain this blog faithfully. Nonetheless, I shall try again. The first blogging lasted about 5 months before I got overwhelmed with work and fatigue. Not being a natural born writer, daily blogging was tough.
Still, with the encouragement of 1 reader (you see, it is so easy to please me), I commit to do better this time around. And what can you expect from the blog? The header says it all : Stocks, Credits and Me.
In the meantime, the archive has been cleared out as I did not want to be reminded of my failed attempt last year. Otherwise, happy reading and I hope everyone learns something along the way.
Still, with the encouragement of 1 reader (you see, it is so easy to please me), I commit to do better this time around. And what can you expect from the blog? The header says it all : Stocks, Credits and Me.
In the meantime, the archive has been cleared out as I did not want to be reminded of my failed attempt last year. Otherwise, happy reading and I hope everyone learns something along the way.
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