Friday, July 14, 2006

Bad News Bears
Real Bears Or Scarecrows??

Well, there seems to be a deluge of bad news surrounding global equities. How should investors view the situation?

1) Oil prices breaching US$78 per barrel, mainly due to Israel stepping up military action against Lebanon. Geopolitics are unstable at the moment, and instead of the usual flight to safety, now its a flight to gooey safety of the enveloping oil, Oil is now seen as a good inflationary hedge, political hedge and solid asset for the medium term.

2) Bank of Japan should end its 5 years of zero interest rates policy and hike rates very soon. Many see this as a sign of tightening, my gawd, how much lower can you go from zero. The uptick should be seen as a very positive sign - that there is strong investment demand, sound export growth, good bank lending (finally), and higher prices (no more stagflation). Japan growth story complements the China and India growth cycle very well.

3) Bernanke did the thing expected of him. Non farm payroll figures hints at a peaking of rates, but the higher oil prices may tilt the balance. Overall, we are very close to a peak in interest rate cycle unless oil goes charging towards US$90. Then all bets are off.

We have to remember that all the negatives are surrounding pretty positive fundamentals. Companies in the US are still managing corporate earnings growth past the 10% mark on average, and cash in the bank has never been higher for many US companies. Growth is still too strong at China, good moderation in India, Japan is chugging away nicely. Commodities are better behaved after the recent correction, demand is underpinned by real production in China and India. Rates cycle are near peaking, rates are high because global demand is firm. (please read blog on "Understanding Bubbles" posted on 29 June).

Overall, oil prices spike is based largely on fears, not on real changes in demand and supply. Traders are profiting from overplaying on fears and worst case scenario. Each conflict will see a lot of hands to calm the waters or pacify the differences. I see it as temporal in effect. Underlying forces in equities still good, but a substantive run probably won't start till end of October.


sopskysalat said...

Am a regular of your regular view on global finance market.

I have some opinions with regards to your latest posting.

The recent rebound from global equities market may be over-reacted to the news of the mellow comment from Fed. Taking a look at the fed funds rate since 1955, the rates went up from 1955 to 1981 after which it dropped for 23 years. This cycle may be reversed now with a slew of further rate hikes with us standing at the early stages of a major uptrend which will probably last for years.

Increasing the rates probably is to protect the greenbag from collapsed as people continued to exchange their dollars for tangibles. Back in 1970s, Fed ignored the calls from analysts but went on with its rate hiking programming without caring too much about assetvalues. Fed can tolerate a recession or a bear-market but it can't survive if people realise that the US dollar is basically a junk currenly which will only lead to inflation.

With the rate hikes alone, it will add pressure to what you called, fundamentally positive companies. Yes, they are sound now but if the plunge in stock market back in May is a note to take, we may be heading for recession 15-18 months from May. End 2007 is the key period to note.

Short term, energy prices are over-reacted with political risk. But going ahead, the risk of big plunge in consumer and corporate confidence may be take toll and global inbalance may kicks in.

My worst fear!!!! BOJ's latest rate hike can be viewed as a sign of economic confidence as Japan continues to recover. I do not see further rate hikes in near future as the BOJ fears the more hikes may just stall the world's 2nd largest engine.

Lastly, why do you say the market will not stage a strong rebound until late October?

Just my humble view. CHeers~

Salvatore_Dali said...

October because of seasonality reasons, if markets rally too early, say August Sep period... what will they do for the last quarter. Its also a perception thing, most brokers, managers are waiting for the bonus period and usually all go charging ahead in the last quarter so that all will have a decent bonus.

The other thing is that mid year rallies usually end in tears, if a market shoots up in Aug/sep, they nowhere else to go but really down ... hence October is always the favourite month for major corrections.


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