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.
Tuesday, July 28, 2009
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.
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