Sunday, November 1, 2009

Market Outlook: Where is the Bear?Hibernating?

Dow Jones index has touched the 10000 mark for the first time last 2 weeks ago since the meltdown of worldwide financial system. The market has never been so bullish and the sentiment is at all time high. We have seen the US housing market rebound from the lowest point in March as the stimulus effect starts to kick in at 2Q2009. We also witness the remarkable rebound of stock market since March 2009, especially at the bank sector where the top US bank earning result constantly beating the expectations (imagine that 1 year ago, all of this too large to fail bank need government bailout to survive!).

How does this miracle happen considering the magnitude of the crisis last year? Warren Buffett has described it as the economic Pearl Harbour – “A perfect suicide”. The government from around the world have pulled out an unprecedented effort of pumping in trillions of stimulus dollar into the system. By doing that, I am afraid we have just actually planted the seed for next financial crisis. The main problem of the banking system is that too many toxic assets in the “crestfallen” bank’s balance sheet. The Fed is trying to make a market for all these toxic assets where theoretically there is virtually none exist! Consequently, the banks will not have to mark down their balance sheet; hence, they don’t need to scramble for liquidity to shore up their capital ratio. Meantime, Fed is pumping in billions of dollar into the system to encourage banks to continue lending, in order to thaw the credit freeze.

With so much cheap liquidity in the system, the stock market has found its perfect catalyst to power ahead non-stop since early March this year. However, the question that lingering in everyone mind now is when is the correction coming?

It is very interesting to look at Euro-Dollar currency vs Dow Jones chart. We saw the depreciation of Euro to the lowest level in 2008 at around 1.25 when the Lehman Brothers collapsed at September 2008. Subsequently, the rebound at the end of 2008, follow by another dropped to 1.25 level at March 2009. Since then, the Euro has strengthened against the US dollar to around 1.50. This gives you some hints on the market direction.

We can’t predict the market movement and my prediction so far has proved to be way off the mark. However, we can focus on re-balancing our portfolio instead of trying to time the market.

There are still some bargain stocks in the market where the share price has lost the correlation with the market, due to unfavourable outlook. Nonetheless, there is still some value left in the stock, as it offers quite a decent dividend yield. At this moment, the best strategy is to play it safe by investing into business which is resilient so far.

Monday, August 31, 2009

Week 36: US Economy Calendar

The main dish for this week is August employment report (Wednesday, 8.15am ET) and ISM manufacturing index (Tuesday, 10.00am ET) before the long Labor Day weekend. China market has continued the retracement, started since early month of August. This is the sign that market has reached their peak and primed for correction. There is old Chinese saying like this “Flower can’t be red forever”, the same things apply to stock market. It can’t be continued going up every month!

Last week, Consumer Confidence index came in at 54.1 as a full surpise to everyone, as it beat market expectation of 47.6. Overall, consumer confidence has rebounded back to approaching May confidence level. Take a look at below table:

The Case-Shiller house price valuation metrics has caught my attention lately. The graph shows that the house price is at 1999-2000 year level. Obviously, now is the best time to buy a house in US.

Wednesday, August 19, 2009

Buffett: Slow Growth and the Greenback Effect

By: Warren Buffett
Special to The New York Times

In nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.

The butterfly effect reaches into the financial world as well. Here, the United States is spewing

a potentially damaging substance into our economy — greenback emissions.

To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.

They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.

The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.

To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.

Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.

An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.

The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.

Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).

Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.

Slowing them down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.

Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt. The United States remains by far the most prosperous country on earth, and its debt-carrying capacity will grow in the future just as it has in the past.

But it was a wise man who said, “All I want to know is where I’m going to die so I’ll never go there.” We don’t want our country to evolve into the banana-republic economy described by Keynes.

Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.

Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.

—Billionaire investor Warren Buffett is chairman of Berkshire Hathaway.

Sunday, August 16, 2009

Week 34 US Economic Calendar: Is Housing hit the Bottom already?

Weekly Economic Calendar, from Action Economics, Businessweek

This week focus point is Producer Price index, Housing Starts and Leading indicator

Last week, Consumer sentiment index drop and weak retail sales result serve as a good reminder of weak recovery. People are spending cautiously, as the employment outlook is still bleak. The other reason is the stock market has run too far ahead. If you look into some of the US blue chips now, they are trading at 2 digit of Leading P/E (Trailing P/E is Price divided by previous earnings, Leading P/E is Price divided by forecast earnings). In some cases, I personally think that it is over optimistic already. In the end of day, a business value is weighted by its underlying cash flow (Owner’s Cash flow – after deduct any debt/interest). However, more often, people are always misled by the sentiment and buying into the hope of making quick profit!

Housing sector is stabilizing, as the sentiment has been very bullish lately, due to the quick recovery of stock market. People, who are looking for new home will start to buy, as fears of rebound in home sector may send the price flying up again. This not only happen in US, as people in Singapore and Malaysia (Damansara) are queuing for new house launch. Can anyone imagine this at start of the year when everything is postponed?? Construction activity is at nearing zero level.

House is a place for people to rest and re-charging energy after a hard work day. However, people have started to treat house as a commodity now. Bank no longer doing their traditional business, as greedy executive is using mortgage as collateral, securitized it and sell it at the market. The main reason is their bonus is tight with the profit.

Sunday, August 9, 2009

Week 33 US Economic Calendar: Fed Meeting & July Retail Sales Dominate the Week

Weekly Economic Calendar, from Action Economics, Busienssweek

July unemployment rate has showed some good positive sign, by dipped to 9.4% from 9.5% last period. Like what i say previously, the traders will be eager to bet along the upside of employment result. Friday was a testament of how bullish the market right now. Dow Jones was trading up 113.81 points and closing at 9370. Technically, the market has broken the previous downtrend and moving upward. The strong resistance for Dow Jones now will be at 9600!

This week, US Fed will have their regular meeting and Wall Street will be closely looking at Fed’s policy statement , due to release at 2.15pm ET, Wednesday. As an investor, we would like to understand the Fed policy. It would be interesting to see how the Fed going to deal with over-flowing liquidity in the market right now.

US July Retail Sales is another interesting figure (Release at 8.30am ET, Thursday). Last month, retail figure has shown good increment growth in foods, electronics, motor vehicles and sporting goods but the dining place, clothing and furniture result are still dismay. Anyway, I think this is pretty normal. If your career are at risk and you don’t know what’s going to happen tomorrow, then, probably, the best solution is to spend as few as you could and building up the buffer. This is exactly what happens now at US; the same things that happen in South-East Asia during the late 90’s recession.

Monday, August 3, 2009

Week 32: US Economic Calendar

Weekly Economic Calendar, from Action Economics, Businessweek

I have to sincerely apologize to my readers for upload this calendar late, as i struggle to set up my desktop and online as well. I had started a new venture today and it going to take out some of my precious time. However, i am always very committed as i do. My goal is to update at least 1 or 2 post each week.

Last 8 months Performance of PMI Index

July ISM Index Component

ISM Manufacturing index for July is 48.9% and beat the forecast of 45.8%. Dow Jones immediately trading at 1% upward range.

Summary of Report as below:


Manufacturing contracted at a slower rate in July as the PMI registered 48.9 percent, which is 4.1 percentage points higher than the 44.8 percent reported in June. This is the 18th consecutive month of contraction in the manufacturing sector. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI in excess of 41.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates growth for the third consecutive month in the overall economy, and continuing contraction in the manufacturing sector. Ore stated, "The past relationship between the PMI and the overall economy indicates that the average PMI for January through July (40.6 percent) corresponds to a 0.2 percent decrease in real gross domestic product (GDP). However, if the PMI for July (48.9 percent) is annualized, it corresponds to a 2.4 percent increase in real GDP annually."

Well, the 48.9 index is still below 50, which indicate expansion for manufacturing, but it certainly not far from it now.

The main dish for this week is ISM Manufacturing index and July Employment report (Wed, 8.15am ET). ISM manufacturing has given the market something to cherish on and continue to march towards 10000 for Dow Jones. Employment figure is a lagging indicator and it always recover when; only the business confidence is back. In this case, my opinion is Traders will be eager to bet along the positive upside of Employment figure. Therefore, i foresee that market will continue trend up for time being.

Sunday, July 26, 2009

Week 31: US Economic Calendar

Weekly Economic Calendar, from Action Economics, Businessweek

Last week, US Existing Home Sales up 3.6% in June to seasonally adjusted annual rate of 4.89 millions. This is the third straight months up for existing home sales and the highest level since October last year. Market has digested this news well and investors are swarming into the market to push Dow Jones and regional market to new heights in this year.
In the coming week, we will see some several important reports coming out. Traders will closely watching at 3 heavyweights report:

i. New Home Sales report at Monday (10.00 am ET Release)
ii. Consumer Confidence Index at Tuesday (10.00 am ET Release)
iii. GDP at Friday (8.30 am ET Release)

The New Home Sales figure is a good indicator to showcase how far the sentiment at US has recovered. At this time, home buyer is waiting for a bottom before they start to buy house. Based on June Existing Home Sales report, the supply is at 9.4months now. In this case, the housing price will be stable now at 7months supply. Therefore, the mortgage foreclosure should be slowing down. All this are good sign of economy is recovering but albeit at a very slow pace.