Thursday, March 09, 2006

The BIG PICTURE In March 2006
Give Me A Reason To Stick Around

Well, I have to say that I am generally still bullish on Asian equities for 2006. The present humdrum days make almost everyone to question their investment outlook. Let's look at some interesting pointers:

1) The second year of a US presidency usually is bad news for US stocks. Yes, 2006 is the second year for Bush.

2) The US dollar seems to be losing ground. It seems that the authorities are allowing the dollar to slide to try and address the trade imbalances. If China won't revalue, we will devalue the dollar (albeit gently).

3) Recent weeks (days actually) saw a lot of speculative investors selling out of emerging markets' assets such as currencies like Polish zloty, Hungarian forint, Turkish lira and even Icelandic krona. The selldown was exemplified in the stockmarkets of Karachi and Mumbai, Argentina's Merval, Brazil's Bovespa, Hungary's Buz, Morocco's MASI, etc... The main reason for the selldown in emerging markets' assets is the fear that Federal Reserve will push interest rates above 5% later on.

4) This fear has been reflected in the US Treasuries with the yield on 10-year widening to 4.8%. European bond yields have also widened in anticipation that the European Central Bank will tighten along with the Federal Reserve.

5) All that is happening around Bank of Japan, which is about to announce that they will start raising interest rates. This BOJ move is widely anticipated and is necessary as the liquidity in the system is too strong. This announcement will NOT deter the rise of Japanese stocks in 2006, mark my words. This time around, the gains are genuine and there is sufficient gas to propel the rally into 2007. Ample liquidity, increased foreign participation, better restructuring, genuine turnarounds - the rate increase announcement is just a reflection of the underlying strength of the liquidity and not a sign to fear rise of inflation.

6) Oil is another factor here. OPEC just met in Vienna to keep production stable. US oil inventory has risen. The high price of oil now is a reflection of the fear of increased tensions between the US and Iran over the latter's nuclear programme. Again, based on fear rather than real fundamentals.

7) However, with all the inflationary fears and oil price spikes, gold prices have eased on profit taking. Surprising.

This is indicative of all markets that needs to find reasons to "take some profits", be it stocks, gold, oil prices, emerging markets - all have had excellent run-ups of late, and all are dying to find some reason to rest. Hence it is my belief that nothing much has changed, Asian equities still good. US equities, iffy. US junk bonds, very iffy, as their yields are too close to the Treasuries, too much bond money chasing after too few papers.

US dollar will weaken a bit more but the Fed is not going to ease the dollar and raise rates at the same time - defeats the purpose. Just have to keep a close eye on US consumer prices over the next few weeks and months.

10 comments:

Moola said...

hello there,

for ur reading pleasure...

http://www.quamnet.com/fcgi-bin/columnists.fpl?par2=5&par3=1

{snip}

I am aware that a large number of investors are betting that the Fed will soon refrain from raising short term interest rates. My view about this is that nobody really knows how far interest rates will still rise. But from a simpleton's point of view it should be evident, that for as long as asset prices rise (in particular home and stock prices), the Fed will continue to increase interest rates. Once asset prices no longer increase in value and stall, it is likely that the Fed will then be through with interest rate increases. And, when the Dow and home prices decline by 5% to 10%, the Fed will cut interest rates aggressively (not in baby steps). Now, I am aware that there is a widespread belief among investors (in fact this is presently probably the most entrenched belief within the investment community) that once the Fed starts to cut rates, stocks will rally. However the historical evidence does not support this view. On average, in the post Second World War period, the S&P 500 was, following the end of a tightening interest rate cycle, down 0.5% after three months, down 1% after six months, but up 1% after one year. So, if we assume that the Fed will stop increasing interest rates within the next 3 months or so, the stock market is unlikely to do well right away. Moreover, as I explained in earlier reports, the US dollar should also resume its bear market once investors will begin to anticipate the end of interest rate increases.

{/snip}

Salvatore_Dali said...

moola,

agreed, i am not a big fan of us equities this year no matter how you cut it. whether the FED raises rates or not, is not going to be a big issue. I suspect the Dow will under perform most other equity markets this year. They will be more concern how to address the trande imbalances, vis-a-vis the dollar strategy.

Moola said...

Hi,

For me, i would really agree with the Doc's view on the importance of the short term interest rates, for it really dictates the dollar movements and the equity market.

And for me... i know my limitations in such issues, for i really have no idea what will happen...nor would i try to guess what will happen... so i think i will sit on the fence and ass-u-me that sticking with cash in the piggy bank ain't too bad of an option.

hhc1977 said...

nm,

U have to be careful with currency fluctation. If u only hold one type of currency, it might be affected by the dollar movement afterall.

zentrader said...

To all experts (Dali, moola, hhc1997 ...),

I think most experts agreed that US currency, equity and property all are on the weak side.

But some experts seemed to think that property market on our side here (ie Japan, HK) is entering a boom stage.

Q. What do you all think the property market for Malaysia in long run? TQ

zen

Moola said...

Zen,

the local property market? me no expert wor...

But from a supply and demand point of view... i would consider what are the possible events that might hamper the demand of properties.

For me... i think the interest rates is the key factor.

If it is going to be expensive to finance a property, wouldn't this damper the demand for properties?

What say you?

hhc1977 said...

nm,

True, the skyrocketing BLR is pinching my household income. Based on my spreadsheet on 30 years loan of 180k with 0% Blr-1% and BLR+0.2%, if the BLR rises to 7.5%, the loan will snowball if the payment pattern is kept the same (aka, this is a never ending loan).

I bet most of the mortgate loan now is on floating basis. For me, my first priority for the next 5 years is to settle my housing loan in full. Period.

Moola said...

HHc,

Them credit card bills are very crucial too!

At 18% per annum... compounded... gee.. what u owe doubles up in about 4.2 years!

zentrader said...

I no good at economics 101 but most ppl expecting higher inflation and inflation is good for property price? Most builders are talking a price increase of 5%-10% because of the increase in fuel price.

hhc1977 said...

zen,

If u r a property owner, u will know that 5~10% is peanut. It can only covers only my transaction cost. How about the opportunity cost?

And the caveat, u can have v price on paper, but can u find a buyer for your piece of property at inflated price? Then u have to ask, are u holding on paper gain in Alise wonderland?