Raging bull in America

Raging bull in America (23 Oct 2013)

Many stock investors have bad memory about October.  We had the Black Monday on 19 October, 1987.  This year, October is a dramatic month for US.  First, on 9 October, we had Yellen being nominated to be Fed Chief in the midst of tapering conversation.  Investors are wondering when would the Fed start to tighten up the Quantitative Easing measures.  As soon as Yellen was appointed, investors and media focus on the US federal government shutdown and the television kept showing disappointing tourists looking at closed gates of museums in Washington. The US market was holding well and was even gaining pending politicians’ decision on Debt Ceiling.  In the 11^th hour, the Senate decided to re-open government until January 2014 and lift the debt ceiling until February.  This set the US stock market on fire and Google reached USD 1,000 a share for the first time on 18 October.  Congratulations and the mighty American is USD 17 billion in debt.

There are some side effects.  The dramatic political cat fight and federal government shutdown got credit rating agencies’ attention.  Fitch Ratings has placed the US ‘AAA’ Long-term foreign and local currency Issuer Default Ratings on Rating Watch Negative.  One does not need to understand the technical jargon to figure out this is bad news.  If US government keeps lifting the Debt Ceiling like Real Madrid paying up for Gareth Bale, how on earth are they going to find enough trees to print the Dollar bills?  The USD has been falling against major currency.  Sterling is back to above 1.60 level against the Dollar.  It was at 1.617 on 18 October after spending almost 2 weeks hovering between 1.59 and 1.60. Euro was at EUR 1 for USD 1.3686 on 18 Oct which is a new high since February 2013.

While investors are switching out of USD into other currencies, a weakening USD is great for some companies who make money from all over the world.  Like all the international giants who are listed in US stock market such as Microsoft, Apple, Coca-cola, JP Morgan, McDonalds, Pifzer, etc.  In fact, that’s pretty much all the stocks in Dow Jones Industrial Index.  They are earning revenue in GBP, EUR, SGD, AUD and other currencies.  Converting these revenue to a weak USD is good cosmetic in results announcement.  Remember Japan Nikkei had an amazing run from the 4^th quarter of 2012 to the first half of this year.  During the time, JPY fell from JPY 80 to a Dollar to JPY 100 to a Dollar.  Most people would not expect US Dollar to weaken by 25% in the coming year but the Dollar could be in a weaker stance until February.  Yellen may have to hold back on tapering until February 2014, the new deadline for another round of Debt Ceiling drama.  What US needs is strong GBP growth and shutting down the government was going the opposite way.  Tapering is negative to growth.  Printing less government debt is negative for growth as the US government is living off debt.  It is hard to see Obama taking both prescriptions together.

Investors’ belief in a weakening Dollar could be adding fuel to an already very hot US stock market.  Money would go to stocks, commodities and gold in a weakening USD environment.  US Treasury at such low yield with a weak USD outlook would struggle to lure investors, hence encouraging investors to take on more risk.

On the other side of the world, China is also doing well and posted 7.8% GDP growth in the 3^rd quarter of 2013.  Some interesting local figures that are worth sharing.  Beijing residential rent has been going up in 52 consecutive months.  Apartment near the CBD area (central business district) are renting out at GBP 800 to GBP 1000 a month.  Imagine paying GBP 200-250 a week for an apartment in Canary Wharf.  In China, a senior banking job’s salary will fall into the highest tax bracket at >40%.  Professionals and top paid jobs in Beijing are probably not London scale yet but comparable to Munich.  A city with 30 million people (a lot of visitors and visiting workers) is jammed pack during peak hours.  Put on your rugby gear before getting into the underground or you can train your EQ by spending over hour in traffic.  People will be willing to pay premium to live closer to work.  The property rental price in Beijing sounds fair and is likely to have more upside.  Perhaps there is no bubble in Beijing residential property.