Friday, May 25, 2007

Notable Developments

US markets on a 4 day slide despite the Dow gaining more than 100 points in the opening period yesterday. More likely, funds are squaring off positions ahead of Memorial Day weekend. Data released recently suggests that the Fed may not lower rates by 3Q as previously anticipated.

On the plus side, oil prices have dropped significantly (Nymex crude eased US$1.50) over the last couple of days, which should be good for equity markets. However owing to the holiday ahead, much of the data has been ignored.

Now whenever Alan Greenspan speaks, nothing good seems to come out. First is the "recession" thing in the US. Now its the China overvaluation. I think Greenspan can comment on the China issue. I still think he overstepped his boundary when he said what he did on the plausibility of recession in the US, as that went into the territory of Bernanke and would impact how Bernanke's policy would work. Greenspan should not impose his views there as investors may read too much into whether Greenspan is a leading indicator or that Bernanke holds absolutely contrarian views to Greenspan. Must give your successor some semblance of professional courtesy. As for the China overvaluation thing, well, get in line Alan, you are number 999,999,999th person who believes the China markets cannot last.

Sometimes I dread to call for a correction in a specific market because its quite chicken shit. Heard of the phrase, if you are bearish long enough, eventually you will be right. Hence I am loathed to call for a sell on markets, unless I can feel that the correction is near. For the China situation, the more I look at it, the more resilience I can see in the upside, and that any correction will be swift and well supported by the deluge of foreign funds as well. The trouble is that most of the foreign funds managing China funds have sold out, and now is shouting for the markets to correct to allow them to buy back at lower levels. Its a strange situation.

Shorts are having a bad time in US markets. Most of them were quite short on Nasdaq stocks coming into last week and had to buyback before the upcoming Memorial weekend thus pushing Nasdaq much higher. I doubt shorts would want to retest the resilience of the bull anymore.

The 16% jump in sales of new homes in the US again underlines how wrong the bears were on the US housing slowdown back in March. Now all so quiet. The danger is that it now puts the Teasury bonds on the way to go past 5%, though still about ten basis points away. The 5% level could prove to be a significant figure to persuade more bulls to retreat to safety in the future.

Locally, the KLCI has retraced well to a safer level to build a base. As long as there is no sharp contraction in China, the uptrend for the ringgit will ensure that the bull run is intact. How far could the ringgit go? Actually I see 3.15 this year alone. By allow the ringgit to rise in value, it automatically restructures the economy and its well-being. Initially following the 97 implosion, it was necessary to accumulate trade surpluses and reserves, and keep the currency artificially low to gain FDI and competitiveness. The situation has evolved and thankfully Zeti is smarter than most by allowing this to happen. If we keep currency artificially weak, we will not be able to move up the value chain, and would be too exposed to exports. Now FDI views the entire country favourably with freerer capital flows, and strengthens Malaysia's trade supply chain.

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