Wednesday, January 27, 2010

How Do I 'Bear' Thee ... Let Me Count The Ways

Let's look at the current issues scaring the equity markets:

a) Stronger USD, lower commodity prices - Technically, we all want lower commodity prices, but somehow that does not work so well in equity markets. They seem to favour higher commodity prices so that bullish equity markets could continue. Its a matter of where we are in the recovery, as we have bottomed, any hike in commodity prices is deemed as heightened demand and vice versa. When economic activity is bubbling, lower commodity prices is welcomed as that reduces inflationary expectations and help improve margins. Yes, its investing is a strange world. Anyway, the lower commodity prices is not really a reflection of lower demand but rather a carry trade play on the USD. It is more a factor of where USD is headed which causes commodity prices to be inversely correlated. More importantly, a strong USD send shivers to investors because of heightened risk aversion among investors.

b) China's Applying Brakes - The fact that China has asked banks to stop or reduce bank lending in January naturally caused some to exit the markets. You cannot win on this. Everybody talks about how China is allowing a too easy monetary policy, and when they do something about it, markets get nervous. Its a temporary nervousness rather than a major sell off in the making. By acting now, that is preserving the longevity of the bull run, not putting an end to it.

c) Obama's New Medicine Bag - Attempts to regulate banks more closely will be OK and welcomed. Attempts to stop or tax proprietary trading is bad but not debilitating so. Even so, it will take a whole lot more to even pass any of the regulations. I would like to see caps on leverage on capital deployed by financial firms. Its the uncertainty that is rocking the markets as I believe most of the additional measures should be welcomed for the longer term.

d) Bernanke's Confirmation - This is so unnecessary, just go ahead and confirm, don't drag it out. Will be confirmed as there are no better visible candidates, and Zeti's not an American.

e) Sovereign Credit Rumbles - Deteriorating public finances of some eurozone countries such as Greece , and you can throw in the UK, have sent shivers on advanced nations' debt rating situation (read Black Swan #1 Japan posting). The euro has fallen 3% over the last 2 weeks, and the pound has tumbled following weak GDP figures yesterday.

f) Big company earnings from the US have come in at or above expectations but markets are ignoring all that for the time being. However, these data flows cannot and should not be ignored as it grounds the undertone that we are in a healthy equity market phase rather than an over-exuberant one.

Dangers of tightening too soon - not happening in the US, UK or EU. Even in China's case its an acceptable effort to rein in liquidity velocity there now. I have never seen a meaningful correction (i.e. more than 20%) happening while interest rates are at near record low levels everywhere. This is more a period of nervousness to reassess the overall parameters, and after a while we all will realise that interest rates are still low, things are mostly still recovering with pockets of difficulties in various countries, but liquidity is still seeking a place for better returns, back into the markets we go.

Technically HK has had a 10% correction already from its peak. Brazil is off 7% already from its peak. As all markets have gained more than 50%-100% over the last 12 months, its only fair that a 5%-10% correction be allowed for digestion purposes, even at a buffet you have stop a while before gorging yourself again and again.

Obama's state of the union address tonight following Bernanke's likely confirmation should set a new path uptrend again, provided Obama's address does not whack on taxes and the banks too debilitatingly.

p/s photos: Fala Chen Fat Lai

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