Thursday, June 08, 2006

Taking Stock Of Stocks
Refresh Your Page/Mind

Every now and then, particularly when markets are not behaving entirely the way you think they should, it is good to refresh your mind and re-justify your opinion, much like when you refresh your web page or flushes the toilet bowl...

Things affecting the market, my comments in blue:

a) Bernanke hints at raising rates during the 28-29 June meeting by the Fed
This is not something out of the ordinary, or something we could not forsee..., we all could see the need for Fed to at least raise rates another 25 basis points. Whether the upcoming hike is the last for sometime is a crucial debating point. Judging from the release of employment and housing figures so far, this upcoming rate hike could be very very close to the end of a rate hike cycle. The markets are basically trying to discount the end-June rate hike, and as more economic figures are released leading up to end of the month, I believe they will confirm that the rate hike cycle will come to an end. We can safely expect markets to start bouncing even before the rate hike. The rate hike will be a non-event. What is even more dangerous is if the Fed DOES NOT hike rates because that will send jitters to markets owing to the uncertainty of the rate hike cycle.

b) Greenspan warns that oil prices is now finally hurting the economy, and that continuing worries about terrorism and war have been a major factor in supporting high oil prices. He also believed that hedge funds have been driving up oil prices in speculation but added that that is beneficial over the longer term as that will dissuade a heavy reliance on oil
Oil is the one factor which could really derail global equities. The main reason why stock prices have held up so well despite the near doubling in oil prices is that most of the demand has been to produce real tangible improvements in production and productivity, and the bulk of it has been absorbed within the margins and not passed on to consumers (except fuel for cars). However, the equation cannot stand forever, especially if it surges to another new high, say US$90-100. However, we should not be too bothered as any surge in oil prices from here on will only have the effect of slowing down the real economy (which again puts less pressure on global demand), hence any further price surge will be quite temporary.

c) Sharp corrections in commodities prices have knocked the steam off markets
Yes, that is true, and the fact that the markets worldwide have managed to take in the correction to the overblown commodities price correction shows the depth in funds and quality of the bull markets this time around

d) Hedge funds have suffered heavy losses in commodities and some emerging markets (such as India, Turkey and Indonesia) and are licking their wounds
Yes, but they have had a spectacular last 18 months, one month does not kill them

e) Shanghai Composite just tumbled 5.3% yesterday, the biggest one day drop in 4 years on concern that the end of a ban on new share sales will sap demand for existing equities
A correction that is based on demand-supply, but the reality is that the rule introduction will be very good for the longer term. Maybe this will help quell their overblown housing boom too. No big deal.

The thing is, the concerns are all forseeable, things like rate hikes, oil prices ... but they cannot jump out of our sphere of reasoning, i.e. if rates or oil prices extends their runs, then we are in trouble. Why do we even have a bullish stock market in the midst of such a threatening macro scenario???

Justification: - Almost every single stock market is near their all time highs ... I believe the stock valuations in the US are attractive, there is a lot of companies with loads of cash which would stem any sharp corrections. The realignment in US dollar is benefitting the emerging markets in terms of wealth redistribution and pumping growth without imported inflation (thanks to stronger currencies). A resurgent Asia after the 1997-2003 financial crisis and other disastrous events. Asia has basically seen a dramatic shift in its competitive paradigm, things that can be outsourced have shifted, and economies have redefined their competitive edge, there is better transparency, accountability and defensibility in their fiscal and monetary policies. Hence to me, all this is a temporary rest, not a prelude to further weakness in equities.

1 comment:

gsg said...


Just read the lastest marc faber GBD report, he says the following: ".....the best time for equities tends to be at the end of an economic contraction or at the beginning of an expansion, when there are plenty of excess is at these times that there are maximum liquidity in the system and, in the absence of heavy capotal spending, stocks soars. But once an increasing quantity of money is channelled from the financial sector into real economic activity- in the case of middle east, into grandiose residential and commercial construction projects and Ferraris- stocks frequently begin to stall or to decline abruptly......precisely because we are in a global boom, liquidity is likely to become tighter for a while such an environment equities and other asset prices are vulnerable until liquidity conditions improve once again."

wonder if he make any sense?