Jingle Bell, Jingle Bell, the bull has run away! 19 November, 2012.

Jingle Bell, Jingle Bell, the bull has run away!  19 November, 2012.

In the second week of November, we had the US Election and a bear attack in the US stock market.  Dow Jones Industrial Index failed to hold on to 13,000 points which is a psychological support and went all the way to 12500 level in just over a week.  Recently, the US “fiscal cliff” has probably got more hit than Niagara Falls in the internet.  It is not as beautiful but it is likely to be more powerful.  The combination of tax increases due to the expiration of the Tax Relief and the spending reductions due to Budget Control could mean recession.  So the bears have arrived the stock market and drove the bulls away.  US stock market has done a nice run since June 2012, putting on a 12.5% in 4 months marking the peak on 4 October 2012.  The UK stock market has been moving hand in hand with the US stock market this year.  FTSE 100 Index also added 12.5% from 23 May 2012 to 10 Oct 2012 but still failed to touch 6,000 level.  The highest close this year is 5989.07 on 14 March, 2012.

One of the strongest performers in the FTSE 100 index is Whitbread that is up around 50% year to date as of 16 November 2012.  They must have sold a lot of Costa coffee and many room nights in Premier Inn.  Whitbread’s other brand includes Beefeater Grill and Brewers Fayre.  Other 2 household names in the top 10 performing stocks list are ITV and Intercontinental and both are up more than 35% this year.  Looks like chatting in coffee shop, watching TV and staying in hotels are what people could afford to do these days.  With good cost control, these companies could do well.  Intertek Group is a very sophisticated quality control company and is also in the top 10 performing stocks list.  The other 6 names are all financials and I cannot blame anyone who read newspaper or watch news for missing them out this year.  They are Hargreaves Landsdown, Lloyds, Aberdeen Asset Management, Standard Life, Royal Bank of Scotland, Legal & General and they have gone up 35-78% this year.  There is so much negative news on the financial sector that most private investors have stayed away from them.

The Eurostoxx 50 index surprisingly outperformed US and UK in November.  It is up 17.3% from June.  In mid September, the Eurostoxx 50 index was up 25% from the June low.  Could the strongest companies in Europe be immune to Eurozone crisis?  Interestingly, if you look at the year to date index performance (as of 16 Nov) of Dow Jones, FTSE 100 and Eurostoxx 50, they range between 1-6%.  If you add the dividend as well, 2012 has matched inflation for long term equity investors.  Will be better if Santa arrives with a few raging bulls in December.

In the currency world, November has been a tough month for GBP.  It fell from 1.617 level to 1.584 level.  The downtrend from September continues.  Considering this year high is GBP 1 to USD 1.6309 on 21 September and this year low is GBP 1 to USD 1.5235 on 13 January, with US Fiscal Cliff hanging around and Draghi’s steroid fading, GBP could trail towards the low again.  If you are going to US for Christmas, maybe you want to change some money now.

EUR has a nice run against GBP since July and it may have ended in October.  On 23 July, GBPEUR was at GBP 1 to EUR 1.2896, EUR has been strengthening from July to October and it was GBP 1 to EUR 1.226 level near the end of October.  Since then, we are back to 1.24 level on 16 November.  There are little reasons for a strong EUR versus GBP.  Even with Greece successfully raised EUR 4bn on 13 November, investors are still very cautious with the Eurozone.  There is no real fix but a few pain killers.  Will be interesting to see how long it takes Spain to accept an international bailout.  That could make both EUR and GBP much weaker against USD.

Gold price is going through a roller coaster ride.  It peaked in October at 1796.05 (this year high) and from 1^st to 6^th November, gold price lost USD 1,700 level in bungy jump style, touched USD 1,675 and rebounded to USD 1710 level.  Once again, investors were disappointed with gold failing to break USD 1,800 psychological resistance and start to wonder if we will ever see USD 2,000 per ounce.  In the end, investors only invest in gold with spare cash.  Money will probably be spent on Costa coffee before gold bars.

Merry Christmas!

US Election 24 October, 2012

US Election  24 October, 2012

6 November, 2012 is the next United States presidential election. Between Barack Obama and Mitt Romney, one of them is going to be the next president and the financial market is wondering what will be the impact on the mighty US Dollar and US Treasuries in all scenarios. The general feeling is that if Obama wins, there will be continuation in the current monetary policy. US interest rate will remain low for a long time. In September, the Federal Reserve said it would keep the federal funds rate at zero to 1/4 percent at least through mid-2015. US Treasury 2 year interest rate has dropped from the peak of 4% in 2008 to currently 0.4%.  (You can understand why you get so little from your deposit.)  Low interest rate is supposed to help business and individuals to pay less to borrow, hence have more money to grow the business or spend. (Some will say the government has made the wrong assumption that banks are willing to lend. This is another topic.)

If we stay on the Obama train, the direction is low interest rate, tax increase and government spending cut. Yes, you read it right, tax increase. The next big scary movie in US is what we called the “fiscal cliff” when tax increases due to the expiration of the Tax Relief and the spending reductions due to Budget Control. The market believes this could send US economy into recession and therefore the whole world economy will fall off the cliff. This is going to be an absolute nightmare for Europe recovery. Remember 2008 when the whole world went upside down, the US dollar was strengthening. Against the GBP, it went from GBP 1 to USD 2 in the beginning of 2008 to GBP 1 to USD 1.5 level at the end of 2008. Institution money was leaving risky asset such as equities and corporate bonds and scooping up safety asset US Treasury bonds. So if Obama wins, please watch how the “Fiscal Cliff” plays out.  (source:  http://abcnews.go.com/Business/federal-reserve-interest-rates-low-mid-2015/story?id=17226149 http://en.wikipedia.org/wiki/United_States_fiscal_cliff)

If Romney wins, he is likely to bring some new variables to the situation and it could include influencing the existing monetary policy. Romney’s pitch to cut tax and reduce deficit have got many economists and politicians puzzled. Whatever calculator Romney is using, I want one.  How can the US government take less tax income and cut spending? Currently, it struggles to any of the two. It is almost equivalent to turbo charged austerity. The market is not convinced Romney's ideal world is feasible and could lead to disagreement between political parties and spread to disconnection between government and the President. One of the outcomes could be Romney’s plan does not realize and US recovery goes off track.  Institutions like soverign funds and pension funds lose confidence in US and money leaves US stock market and US Treasury.  Such selling sends US stock prices lower and US interest rate higher.  There was a very intereating website attacking Romney's tax plan. http://www.romneytaxplan.com/

In both cases, US stock market is not in a good position. US Treasury may remain safe asset if Obama rather than Romney wins.

Such concern over US stock market coincide with a strong 2012 in terms of stock market performance.  Dow Jones Industrial Index have rallied from 12000 level a year ago to 13500 level in September 2012.  As the QE3 steroid fades and election ends, the new president has to act more talk less.

Draghi’s bull run 25 September, 2012.

Draghi’s bull run  25 September, 2012.

Thank you!  Mario Draghi kept his words and did “whatever it takes to preserve the Euro”.  Within his mandate as the president of the European Central Bank, he is going to buy Italian and Spanish bonds to put a fully effective backstop to the Eurozone’s debt crisis.  He substantiated his “OMTs” which stands for “ Outright Monetary Transactions” (although some thought it means “On Merkel’s Tap”.  The decisive speed by Draghi sent institutioins chasing anything but cash.  Let us start with the stock market.

September has been a good month for stock investors in general.  FTSE 100 that contains the top 100 companies by market capitalization traded on the London Stock Exchange challenged the 6,000 psychological level that we have lost since July 2011.  The FTSE100 index is up 4.8% since beginning of 2012 and the top 5 stocks have rallied over 40%.  Lloyds tops the chart with 55% positive performance.  Look for theme, there are 5 financial stocks in top 10.  Other than Lloyds, we see Hargreaves Lansdown (+49%), Aberdeen Asset Management (+45%), Standard Life (+35%) and RBS (+35%).  Perhaps the financial sector is getting to the end of the tunnel and their share performance is getting ahead of the earnings recovery.  On the other side of the pendulum, one may be surprised to find 2 supermarkets in the list of 10 worst performing members.  WM Morriosn and Tesco are down 10% and 16% respectively.  Slow growth in sales plus a very competitive environment are some of the factors that put pressure on supermarket valuation.  There is an obvious pattern at the bottom occupied by 4 miners.  Anglo American, Kazakhmys, Evraz and Eurosian Natural have 21-48% negative perform in 2012.  Media have talked about how a slow down in China economy could affect the resources world.  This has now become a reality and has a massive impact to mining stocks.

Looking at the Eurozone as a whole, the picture is pretty and merry.  Zara, the Spanish fashion chain, is listed under the name Inditex and it is up 54% year to date.  Cheers to the Belgian beer company Anheuser-Busch Inbev that delivered 42% positive price performance.  The more Stella Artois, Budweiser and Becks we drink, the better revenue for them.  The biggest loser in share price among the 50 members in Eurostoxx 50 is Nokia.  The ex-king of mobile phone is struggling to find breathing space between Apply and Samsung.  Overall, Eurostoxx 50 Index is up 10% year to date.  Considering the mess in the Eurozone, this is exceptional.

Dow Jones Industrial Index has matched Eurostoxx 50 performance and it is up 11% in 2012 so far.  Similar to the UK market, top of the league table is the mighty Bank of America which has gone up 65% since beginning of 2012.  JP Morgan Chase and American Express are up 24% and 22% respectively.  Hard to say whether the tightening regulations are working or the bankers are working hard.  Media has been going on about recovery in the US housing market.  Home Depot is up 41%.  Walmart has a very different year versus Tesco and its share price is also up 41% year to date.  Surprisingly, McDonalds is the second worst performing stocks in Dow Jones and it is down 6.6%.  We thought recession will encourage more people to Mackie-D.  Bottom of the league is Hewlett-Packard lagging by far with minus 33% performance.  Consumers are busy chasing mobile gadgets and leaving their PC at home.  Overall, one can see a recovery theme happening with the housing market and financial industry in the center court.

Draghi’s intention to save Euro with easing money supply was echoed by US and Japan with real action.  With 3 mighty central opening the tap and money flowing into the system, investors are concerned about inflation.  Many investors believe gold is a good hedging instrument against inflation and gold price rallied 10% from USD 1,600 per ounce in mid August to USD 1,760 in September.  Silver is even more volatile and rallied 25% from USD 28 per ounce to USD 35 during the same period.  Both gold and silver are trading at top range in the past 12 months.  Worth pointing out silver had a spike in February this year and reached USD 37.48.

Another key factor for rally in gold and silver prices is the weakness of US Dollar.  The USD Index is the average of exchange rates between the USD and major world currencies and it indicates the general international value of the USD.  In the past 12 months, it hit a one year high of 84.1 in July and spend most of September below 80.  To bring this closer to home, GBP USD exchange rate moved from a 6 months low of GBP 1 for USD 1.53 in the beginning of June to 1.62 level in September.  That Sterling has gone 5.9% stronger in less than 4 months.  Sounds like a good time to take a holiday in the States.  The correlation between a weakening US Dollar and a strong stock market is also observable.  FTSE 100 rallied from 5360 in June to a high print of 5933 on 14 September, a 10.7% rally.

When compared against the Euro, the US Dollar has been strengthening from EUR 1 equals USD 1.425 in Oct 2011 to 1.204 in July.  That’s a massive 18.4% appreciation in US Dollar against the troubled Euro.  The timing of Draghi’s “whatever it take” speech in last July marked a recovery of Euro and it rallied against the US Dollar to 1.317 level on 17 September.  Then the Euro retreated back to below 1.30 as of 24 September.  The rally of Euro since Draghi’s speech also had the same effect against the Sterling.  GBP EUR exchange rate fell from a 12 months high of 1.290 on 23 July to 1.232 on 14 September.  The question we have to consider is whether Draghi’s magic has fundamentally changed the course of Euro weakening or it just gives the Euro bear an excuse to take profit.

Of course, policy from the European Central Bank President has an impact to the market but many institutional investors continue to have doubts on the execution.  There are small prints in Draghi’s speech and there are conditions attached to ECB buying bonds.  We cannot blame the bears to be unconvinced by Draghi as there is no real recovery in the peripheral countries’ economy.  The word recession is written on the wall and many professional investors refuse to take steroid as a cure.  The is exactly why the investment world is interesting.  You need buyers and sellers to make a deal and at the moment, we see some increase in turnover after a very quiet summer.  It is always nice to start the autumn term with a rally and let’s hope the bull will last until Christmas.

Talking about Christmas, for Apple fans, Christmas has come early this year with the launch of iPhone 5.  It is longer, faster, slimmer and better looking than the iPhone 4.  What more do you want in a phone?  That’s why it sold 5 million units in the first 3 days of launch.  That is after hitting a record of breaking 2 million units in the first 24 hours of sale.  The lowest specification is 16 GB and it is at GBP 440.83 before VAT.  5 million units mean more than GBP 2.2 billion sales revenue in 3 days.  The next record for iPhone 5 to break is to sell 20 million units in 100 days that is set by Samsung Galaxy S3.  20 million units of iPhone 5 will mean more than GBP 9.7 billion sales revenue.  To put this into a Eurozone prospective, Greece bailout program is GBP 138.4 billion.  Although iPhone 5 is not enough to save Greece, it has given Apple an amazing run in its share price and Apple became the biggest stock ever in August.  The rally continued into September and the stock ticked USD 705.07 per share on 21 September.  An interesting fact for Apply fans: when they bought iPhone 4S upon launch on 4 October, 2011, perhaps they should have bought Apple shares.  The stock has gone up 86.9% since then.  In the same period, ARM, the company that provides the iPhone CPU solution, went up 8.3%.  Foxconn, the manufacturer of iPhone, its share price went down 28.9%.  Apple is an amazing innovator and marketing machine but it is probably a very tough company to negotiate commercial terms with.

The fourth quarter of 2012 is going to be interesting.  We maybe at a tipping point of investment sentiment, shifting from fear to greed.  With the recent rally, UK, Germany and US stock markets are 5-15% away from their 2007 peak.  For equity investors in these markets and if they happen to have left the planet for 5 years, they would not believe there are Global Financial Crisis and Eurozone’s debt crisis.  Considering some dividend income in the past 5 years, most investors should be happy with their stock portfolio especially if they focus on ETFs linked to FTSE100, German DAX and S&P 500.  The good thing about ETFs that link to indices is that they offer diversification.  For example, FTSE 100 contains 100 companies, through investing in FTSE 100 ETF, investors practically invest in 100 companies with good diversification in different sectors.  As we see from some of the top performing stocks in the beginning of this article, even professional investors could have missed the winners.

(Source:  Internet and Bloomberg as of 24 September, 2012)

Captain America 27 August, 2012.

Captain America  27 August, 2012.

after a fantastic olympic, the summer is coming to the end with the US market roaring to recent high.  The Dow Jones Industrial Index closed at  xx on xx August versus its 2012 high of xxxx.  It historical high was xx in  xx 2007.  The strong performance of the US stock market is reflecting US blue chip companies are generally in the fast lane while the European blue chip companies are stuck in traffic.  aren't we supposed to be in a very difficult market where banks are not willing to lend to business? how do the American companies do so well?  first of all, these are global companies like Microsoft, Coca-Cola, Exxon Mobil, Pfizer who has income from many countries in all continents.  They have competitive products and services that are necessities to the society in today’s world.  Their home market, US has friendly labor law when compared against Euro zone.  Their corporate setup has flexibility to redeploy resources and manpower in both bull and bear periods of a cycle.  Many of these companies are cash generating with healthy balance sheet.  They can raise capital from stock market, bond market and banks.  The recent IPO of Facebook is a prime example of how company can raise money from stock market instead of borrowing money from banks to chase dreams.  For those who believe the US equity market still has further upside, there are a lot of US equity fund and ETFs available.

US blue-chip companies have their winning products, access to capital.  Their CEOs need to ensure revenue is growing and always hungry for more clients.  So they are keen to expand into new market or acquire client base.  One way is to buy business.  For example, oil companies are bidding for oil fields, drinks companies are expanding into energy drinks or fruit juices plus getting into new market like India and China.  These corporate expansion plans drive commercial activities globally and often lead to acquisition.  As they pay up to acquire companies, the target company’ share price rallies.  Again, using Facebook as an example, their USD 1 billion acquisition on Instagram is probably the ultimate dream of start up.  Facebook offers USD 300 million cash and 23 million shares to buy Instagram, a mobile application for users to polish and share their photos with their friends.  The 23 million shares used to worth USD700 million upon Facebook IPO.  Unfortunately, Facebook shares 40% price slide since IPO means the Instagram owners is getting almost USD 300 million less for the deal.  I hope they still see their glasses half full.  For high networth investors who do not have the time to invent the next killer App but want to participate in this social network fever, there are opportunities to buy shares of some of these companies before their IPO.  For example, Twitter could be the next big thing.  Some shares are traded privately in clips of million dollars.  Some niche brokers or private banks could get access.  Beside the technology sector, I would also pay attention to the pharmaceutical and resources sectors which are active in merge and acquisition.

The health care reform in US, could be read as a cushion to health care companies income as a wider population will enjoy health care services beyond their affordability.  There are sector funds on health care and pharmaceutical companies. 

Fund that invest in companies that belong to the same sector, such as pharmaceutical and health care.  Investing in sector fund means you are hoping for the whole sector to perform.  Those who have invested into the banking sector would have learnt a painful lesson from 2007 to now.  Investors please beware the difference between what the society needs, what is a good business and what fund managers are willing to invest in.  The society needs banks and there will still be banks on the planet in next centuries.  However, as we have seen in the past 5 years, banking is a tough business to be in and banks are struggling to deliver healthy financial reports and balance sheets.  Hence, fund managers are not buying bank stocks and their share prices are lagging behind other business sectors in the past 5 years.

With the Euro crisis in full swing, the competition from European based companies has faded in general.  The European companies’ war chest is depleting with deteriorating home market revenue.  In most of the arenas, the American companies are in the driving seat.

If the big picture is more colourful in US, should investors pay attention to European companies?  Yes, to win the league, winning the home games are important.  There are some exceptional success such as the fashion brand Zara that belongs to Inditex group (Industria de Diseno Textile) listed in Spain.  Stock picking is difficult as what you see from day to day life and media coverage, what it says in financial reports and how share price behaves may not make sense.  Super Group that owns the fashion brand Super Dry has dropped x% this year, and it still makes really cool clothes and opening big stores.  Investors should consider talking to their stock brokers, advisors before making investment decisions.  There are a lot of stock analysis websites but without some good understanding of financial reports, some of the analysis could seem foreign to the readers.

We have talked about US stock market and some potential advantages of these companies.  We touched on the concept of merge and acquisition opportunities and trends with a US focus approach.  We mentioned the idea of investing into a sector, companies that are in the same field providing the overall backdrop of the industry is bright especially if there is government policy backing the industry.  While we think the grass is greener in US, there are some European champions that we could vote with our money.  While most investors could probably make up their mind on investing in US as a whole, picking particular sector and stocks require a lot of considerations.  You may already have regular conversations with your financial advisors.  Something is going to change on 31 December, 2012.  There is going to be a new regulation in UK called the Retail distribution review (“RDR”). It is changing the financial advisory and wealth management business model.  There are some good reading materials about this in the FSA website (www.fsa.gov.uk).  In short, your advisors need to be paid by you and cannot include their commission or fees in the products you buy.  It is like going to your doctor and you pay a consultation fee and get your prescription from the pharmacy. The doctor does not get any fees or commission from the prescription and only earn the consultation fee.  After 31 December, 2012, your financial advisor will charge you advisory fee and you will pay for the products such as mutual funds, structured products, saving plan from the product manufacturer without the advisor getting a fees or commission.  Again, like most of the new regulations that came out post Global Financial Crisis, they all have good intention but the execution will lead to some practical teething problems.

I would suggest all readers contact your advisors to get some advices or ideas now before 31 December 2012.  It is like asking the taxi drivers for some recommendations of where to party before the meter starts ticking.  There is no harm to zoom into a few areas for 2013 investment with some free recommendations.  Then execute the investment plan after 31 December to enjoy RDR’s good intention.  Of course one should ask the advisors about the future advisory fee schedule.

Tequila Sunrise. Mexico is looking bright! 22 July, 2012.

Tequila Sunrise. Mexico is looking bright!    22 July, 2012.

In July, the Mexican IPC Index reached 40,000 and made many high historical high.  While US, Europe and Japan major stock markets are struggling to attract investors, the Mexican stock market is more than 25% higher than its peak in 2007 and 150% higher than its low in 2008.  Many have enjoyed the growth since the Mexican currency crisis in 1994 and the richest person in the world, Carlos Slim, is a Mexican business man.  Even more charming is that they have a new president who is married to a real life soap opera star.  Sitting right next to the mighty United States, Mexico major trade partners are US and Canada.  So far, everything about Mexico is pretty non Euro with the exception of its language.

According to the World Bank Group, in 2011, Mexico GDP reached USD 1.16 trillion with population at 114.8 million.  So its GDP is almost half that of UK with twice the population.  Automobile is a very important industry in Mexico.  It employs about a quarter of the labor force.   BMW, Mercedes-Benz and Volkswagen all have operation in Mexico and 70% of the Jetta parts are designed here.  Cemex, a construction and cement giant, and Gruma, the world largest producer of tortillas and corn flour, are Mexican companies.  Mexico has strong high tech and aerospace sectors which are benefited by NAFTA (North American Free Trade Agreement) and can export to US and Canada.  Mexico has the 6^th largest electronics industry in the world after China, US, Japan, South Korea and Taiwan (where are the European?) and the 3^rd largest manufacturer of mobile phones after China and South Korea.  And we all remembered BP spilled some oil at the Gulf of Mexico.  With such recipe, no doubt Mexican local investors are happily sipping their tequila sunrise. 

For those who are interested in emerging markets, like watching Tour de France, as BRIC (Brazil, Russia, India, China) take a breather from charging for so long, we see other team members like Mexico, Indonesia and Malaysia moving to the front and take the lead.  As a pack, the Emerging Markets have the energy, determination and physique to take on the Tour.  While the BRIC is already tangled with the Euro crisis as these 4 countries are significant global players, the second row countries have been focusing on their own business and have not got themselves too involved with the Europeans.

“Liquidity is an anaesthetic, not the cure to Europe’s banking problems.” said my City friend as we enjoyed our “liquidity” from the tap.  He was referring to all the money pumping to banks to make sure banks can manage the cash flow.  When the financial news reporter says the interbank market dries up, it means banks are not lending money to each other.  This could create cash flow problem for those banks who struggle to borrow from other banks while they have financial obligation to meet.  These obligations could range from paying back their bond holders or paying back corporates who withdraw cash from their accounts.  As central banks step in and lend money to the struggling banks, these weaker banks survive the cash flow issue.  However, the deeper problem is these struggling banks are often making losses.  Losses will eat into bank’s capital, that’s bank’s own money, not the clients’ money in current accounts or deposit accounts.  When a bank’s capital looks weak,   clients worry this bank could run into deeper problem and start taking money out.  Other banks refuse to lend money to this struggling bank.  This is the vicious circle.   To get out of this spiral, as we saw in Spain, EUR 100 billion was injected to banks in June.  Are there money making opportunities coming out of this injection?  2 observations.  First, politicians in EU seem to understand they cannot afford Spanish banking system to melt.  If this is the case, the same goes for Italy.  Second, since the financial crisis and after a few banks being bailout, the bond prices of many banks are priced for double-digit default rates over the next 5 years.  In day to day language, many people fear banks will go under and there is little demand for their bonds.  Hence, low price.  If now, people start to think these banks will not go under because politicians ask the government to save them, these bonds could worth a bit more.  Worth having a chat with financial advisors or private bankers about bonds in the financial sector.  High risk, high return.

Amazon.com, almost anything that can be shipped in a box would be found in Amazon.  They are growing in electronic sales.  Kindle, for example.  It is also growing its web services such as “cloud” services.  The stock is trading at very high P/E ratio (Price to Earnings Ratio).  Well, to be less vague, the current stock price is more than 100 times its earnings per share.  eBay share price is about 17 times P/E.  Now, we can assume there are many smart analysts and fund managers looking at the stock market.  So why would people buy a shop and pay so much money that it will take over 100 years to make the money back?  Well, if you think this shop could grow like Wal-Mart in the 80’s or has so much potential that it could double its profit every year for the next 3-5 years, you may be paying for the right price.  Just FYI, mighty Apple and Google are trading at roughly 13 times P/E.  Remember Microsoft has teamed up with Barnes & Noble.  The electronic Ecommerce space is exciting but also crowded like London Olympics.

Food crisis!  Worst US drought in 50 years sent agriculture products prices sky high.  Our breakfast is going to get more expensive as corn, soy and wheat prices shot up.  Corn and soy prices are now over 30-50% over their peak prices in 2010 and over 10% higher than their peak prices in 2011.  Wheat price is around its peak in 2011.  Corn is also used for Biofuel and soy is an important animal feed.  So the knock on effect could be meat prices.  In 2008, there were social unrests in some countries due to the dramatic increase in good prices.  Some said the price rally was driven by speculation in 2008.  This time, corn and soy price rallied are driven by falling supply due to drought.  Feeling lucky to buy some corn and soy?  Hold on.  Some readers may have experience in trading futures contracts on agriculture products and they may not have a warehouse to take delivery.  In the agriculture commodities world, many contracts are settled physically and buyers and sellers are obliged to exchange money for physical goods.  If you do not have a farm, think twice before trading agriculture commodities futures contracts.  Investors could participate in some online trading platforms that offer agriculture “contracts for difference” or “spread bet”.  Please beware that the commodity prices on these online platform are closely correlated to their futures contracts in the Exchanges.  I would strongly recommend investors to ask detail questions about how commodities prices on the platform behave near futures contracts expiry.  If this sounds foreign to you, you could consider commodities related ETFs or funds.  My conservative approach to potential raising food prices is to fill the fridge.

Let’s twist again! 23 June, 2013.

Let’s twist again!  23 June, 2013.

In June, the Federal Reserve decided to continue “Operation Twist” and expand its program by USD 267 billion through the end of the year.  The USD 400 billion Operation Twist was announced in September last year and would have expired in June.  The “Twist” is effective in keeping the interest rate curve in shape but less impactful to the shape of US economy.  It keeps the long term interest rate low.  The bulls were hoping for QE3 (Quantitative Easing) to pump steroid to the market but the FED did not pull the trigger.  It is just a matter of time as Eurozone crisis has become Hay Fever that comes around every summer.

Turkey is a winner outside the EURO2012.  Its credit rating was raised by Moody’s and its debt is now Ba1 with a positive outlook.  How does Turkey keep itself out of trouble?  Staying outside the Euro, focusing on managing their current account deficit and maintaining a healthy debt structure were the keys.  Turkey government’s budget deficit is 1.4% of GDP, state debt is 39% of GDP, the lowest in Europe after the Russia and Sweden.  The Dow Jones Turkey Titans 20 Index is up 14.6% this year as of 21 Jun in Turkish Lira or 22.9% in EUR terms.

Every country has a ChinaTown and everyone should be aware of the ChinaDown.  Media and readers these days are getting used to the Euro crisis.  You can see the market mild reaction to the Greek Elections in June.  Now the spotlight is on “China slowing down” and you often see articles in FT and Economist with a bearish view on China.  Well, looking at the valuation of MSCI BRIC Index that track stocks in Brazil, Russia, India and China.  It is at 8.9 times Price to Earnings Ratio (PE) and 3.5% dividend yield.  Then see S&P 500 that follows 500 stocks in US.  S&P 500 is at 13.4 times PE and 2.1% dividend yield.  The investors have voted with their money as BRIC is now “cheaper” than US.  We have all seen summer sale where prices could be reduced and reduced again.  So cheap valuation could get cheaper if there is no buyer.  Investors in the developed countries such as US and Europe, have very significant holdings in mutual funds.  When they feel uncertain, they are likely to redeem their dream and stay close to home.  Hence redeeming their Emerging Markets investment and staying with their home market.  US, UK and European blue chips may enjoy stickier money than emerging market stocks.

Talking about where the money is going, every kid wants an iPhone, an iPad, a PS3.  The men also get sucked into the Samsung Galaxy and any colorful surface that they can stroke with their fingers.  Microsoft joined the game with "Surface", a serious attempt to compete against iPad.  Smartphones and tablets have evolved from gadgets to necessity, like your wallet or purse.  Feel awkward leaving home with it.  The sale of smartphones and tablet PCs drives hardware and software innovation.  The tech bubble was more than a decade ago and some tech companies like Intel, IBM, Microsoft are probably more "blue chip" than banking stocks these days.  Yes, we all feel sorry about the share prices of Nokia and Sony.  There are always winners and losers but you know you will buy more smartphones and tablet PCs for yourself and as gifts in the next couple of years.  Today, the future for the tech sector is bright.

Grexit – a long par 5 with loads of bunkers 27 May, 2012.

Grexit – a long par 5 with loads of bunkers   27 May, 2012.

Greece exit, “Grexit”, is now the hottest topic in town, from being the unthinkable to almost inevitable.  For individual investors, to put it mildly, it is going to be a long par 5 with loads of bunkers and water hazards.  The good news is that all the scenarios are being covered and discussed in details by media, politicians and economists.  You can read them like a map.  The bad news is that most people will drop a few shots in this hole.  The winner is the one who could avoid the bunkers and the water hazard, take advantage of the contour and wind.

Bunker #1:  Greece default

The political situation in Greece is pointing towards a hang parliament.  The voters want to stay in EU but do not want austerity.  I can sympathize that but unfortunately, this could mean EU turns off the tap and Greece will default on its debt.  There will be no money to pay public servants and Greece will need to bring the Drachma back.  The question is that who want to be paid in Drachma?  There is investment bank research saying the Drachma would be significant weaker than Euro.

Bunker #2:  Portugal, Spain and Italy

EU needs to put a solid firewall to stop the panic spread into other members.  One powerful tool is to say, “Your debt is my debt”!  In return, Portugal, Spain and Italy will need to commit to austerity.  So far, the EU or European Central Bank does not give us the impression that they are willing to make such bold statement.  We are likely to have a softer version of bailout and austerity commitment arrangement.  This will keep this Eurozone thriller going for a few more series.

Bunker #2:  Banks

It maybe easier to deal with the bankers than politicians.  In the case of a Grexit, we should prepare to see more banks getting nationalized and state-aid.  Regulators and banks have been looking at the Grexit scenario and there is no happy ending.  To protect the public, there are protection scheme for bank deposits.  I think investors should ask their banks to double check the protection amount and conditions.  Read the small print and make no assumption.  What will happen to the banks in Greece?  If Greece brings back Drachma, they may impose restriction on currency convertibility and movement.  Best to stay well away from this deep bunker.

Water hazard:  Euro

What will happen to Euro?  Can we live without it?  Most European companies are used to dealing with Euro.  Imagine those mighty German car makers.  They manufacture cars in Germany and sell them all over Europe.  If the Euro breaks up, these car makers will have cost in Deutsche Mark and revenue in Lira, Peseta, Escudo.  Moving back to different European currencies will likely sink many companies and lead to even more pressure on banks who lent to corporates.

How to stay on the fairway?

Investors could consider asking their advisors about funds on British government Gilt, Swiss Franc denominated bond, Swedish Krona based products.  The common theme is to reduce Euro exposure and be very cautious about investing into companies whether through buying their shares or their bond.  The strategy is to stay in play and get on the green without dropping shots in bunkers and water hazard.

Once the Grexit happens, there should be a shock to the whole financial market and they maybe bargain hunting opportunities.  Look at 2009 or even the 4^th quarter in 2011, there were handsome return when the markets rebounded from fear to mildly optimistic.  I would think this time round the bargain could be in fixed income products or bonds as desperate sellers push prices to distressed level.  Bargain hunting opportunity could appear in utilities stocks.  People will need water, electricity and trains.  The operators may suffer in the short term as income decreases while long term capacity investment has already been committed.  This could send share prices down or even cripple some companies with weak cashflow and highly leveraged balance sheet.  The survivors could enjoy less competition in the future and share price may recover.  This par 5 could be a chance for you to get ahead of your peers as they drop shots in bunkers.