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.

Rubber contracts in Xishangbanna Commodity Exchange

Rubber contracts in Xishangbanna Commodity Exchange (October 18, 2013.)

 

Xi Shang Ban Na?  It is a place in Yunnan province in China.  An Autonomous Prefecture that kind of runs its own show and sitting right next to Burma and Laos.  Driving distance to Thailand and Vietnam who are major rubber producing countries.

 

The Xishangbanna Financial Asset and Commodity Exchange is owned by Pingan, the second largest insurance company in China.  They launched a rubber contract in September.  Physical settled into “SCR WF” standard which is the same standard used in the very liquid rubber contracts listed in Shanghai Futures Exchange. 

 

Rubber maybe a lesser popular commodities for investors but it is the second most traded commodities in Shanghai Future Exchange after copper in 2012.  The volume in Shanghai is shockingly high relatively to other exchanges.  For example, on October 18, 480,000 2014 January Rubber contracts were traded which means CNY 98 billion (USD 16 billion) worth of rubber.  The most liquid rubber contract trading in TOCOM is the 2014 March contract that traded USD 57.8 million notional on Oct 18.

 

Xishangbanna Exchange could take advantage of its location being close to the producers but it is a long way to go in order to attract the speculators in Shanghai Futures Exchange.

Iron Ore futures debut in China. An alternative carry trade?

Iron Ore futures debut in Dalian Commodity Exchange (18 Oct 2013)

 

Dalian in China launched the first physical Iron Ore futures.  Making a difference to the cash settled index based contracts listed in CME, Singapore Exchange and Intercontinental Exchange.  China is the biggest user of Iron Ore and 74.6 million tons of Iron Ores were imported in September according to a Bloomberg article.

 

Market participants are observing how Dalian Commodity Exchange handles the physical settlement.  The standard is supposed to be 62% iron content but in real life, every piece of ore will have some difference in Iron content.

 

Local Iron Ore miners in China see this physical settled contract as a new way to sell their stock.  Currently, big buyers of Iron Ores like State owned Enterprises are asking for 60 – 90 days payment terms from miners.  Funding is tight in China in general as banks are not willing to lend.  Everyone remembers the liquidity squeeze in June and the coming December yearend will be very tight.  Some miners, who are keen to get liquidity, are willing to sell iron ores at a discount for cash upfront.  The discount could be as steep as 5%.  Now this is before the Dalian physical settled contract.  If the physical settlement process is smooth, there is a carry trade angle to buy physical from miners today and sell futures to hedge.  Assuming the physical goods meet the settlement standard and delivery process is tidy, there could be room for arbitrageurs.

http://www.bloomberg.com/news/2013-10-17/iron-ore-futures-debut-in-dalian-as-china-seeks-pricing-power.html

Gold goes up by 20% in 1 to 3 months?

JANET YELLEN, NOMINATION, OBAMA, BERNANKE, CHAIR, FEDERAL RESERVE, DEBT CEILING, CONGRESS, DEBT, PRESIDENT, BUDGET, ASIA: SQUAWK BOX, JAPANESE YEN / US DOLLAR FX SPOT RATE, BUSINESS NEWS
CNBC.com | Wednesday, 9 Oct 2013 | 11:06 PM ET

Amid uncertainty in the U.S. and risk aversion in global markets, gold's performance as a traditional safe-haven has proved lackluster. Yet one strategist reckons the precious metal could rally as much as 20 percent in the next one to three months.

Sean Hyman, editor of the Ultimate Wealth Report, a financial newsletter, says the reason for the bullish call is partly based on a view that under Janet Yellen the Federal Reserve is likely to maintain its hefty monetary stimulus, fueling inflation and boosting demand for gold as an inflation hedge.

U.S. President Barack Obama on Wednesday nominated Yellen, the Fed's Vice Chairman, to replace Ben Bernanke when he steps down as Fed chief in January.

"Gold is having a traditional pull-back and I think we will have another run up to the $1,500, $1,600 level in the next one or two or three months," Hyman told CNBC Asia's "Squawk Box" on Thursday.

(Read more: Obama nominates Janet Yellen to lead US Federal Reserve)

A move to $1,600 would imply a gain of almost 23 percent from current levels around $1,302 per ounce.

Gold has been stuck in a narrow range roughly between $1,280 and $1,320 since a budget impasse in Washington triggered a partial shutdown of the government on October 1. It is down about 22 percent in the year-to-date.

Safe-haven?

Uncertainty about the budget stalemate and fears about a looming deadline to raise the debt ceiling have supported gold. But the precious metal has not received the same boost as other safe-havens such as the Japanese yen, which hit a two-month peak against the dollar this week.

(Read more: As lengthy shutdown looms, why isn't gold rallying?)

"This (move in gold) is a very curious development," said Gaurav Sodhi, resources analyst at the Intelligent Investor. "If you had asked a couple of weeks ago what would happen to gold in the event of the current situation, every gold analyst would have said gold should move higher because historically that's what happens at times of economic and political uncertainty."

Simona Gambarini, associate director of research at ETF Securities, told CNBC earlier this week that the gold trade was not necessarily over and that most investors were on the sidelines waiting to see how U.S. developments pan out.

Hyman said that ultimately gold would respond to the jitters about a looming debt ceiling as well as the outlook for U.S. monetary policy.

"Yellen will have the same concepts as Bernanke. So money will continue to be printed, the economy stimulated and interest rates kept low as possible and that's going to stimulate inflation, be good for commodities and bad for the dollar," he said.

Markets, which had been braced for a scaling back of the Fed's $85 billion-a-month bond-buying program, were taken by surprise last month when the central bank opted to maintain its monetary stimulus.

(Read more: Fed battled over ending bond-buying: Minutes)

"I'm not a gold bug, I don't think every day and any day is a day to own gold, but I do feel we are now in that phase to own gold," Hyman said.

—By CNBC.Com's Dhara Ranasinghe

Angela Merkel wins again and the market smiles (24 Sep 2013)

Angela Merkel wins again and the market smiles.

Well done, Angela!  What a result to win her 3rd term as chancellor.  If she serves the whole 4 years, she will be leading Germany for 12 years since November 2005, half a year longer than Margaret Thatcher had led UK.
Merkel spent a great deal of her second term holding the Eurozone together. Germany is the biggest contributor to EUR 496 billion rescue aid.  The widely speculated “Grexit” did not happen although there was a lot of stressful debates over Merkel German austerity stand versus Draghi European Central Bank “Whatever it takes” gesture.  The European Central Bank Outright Monetary Transactions (“OMT”) is similar to US Quantitative Easing and Asset Purchase Scheme.  Through OMT, European Central Bank was buying sovereign bonds issued by Eurozone member states.  Media made jokes about OMT that it stands for “On Merkel’s Tap”.
For people who have been investing in Germany since Merkel’s leadership, there should be a lot of smiling faces.  DAX, the German stock market benchmark index, has returned 68% since Merkel became chancellor in November 2005 versus a 15% drop in Eurostoxx 50 in the same period.
As for the German citizen, German unemployment rate is 6.8% compared to 12.1% in the 17-nation euro region.  German 10-year bond yields are 1.94% while UK gilts yield 2.92%.  Bond yield is a good reference of cost of funding.  If German government can borrow cheaper than UK government, German corporates are also likely to enjoy a lower base rate reference than British corporates.
What I found most impressive is that in November 2005, EURUSD was 1.164-1.209 and GBPEUR was 1.454-1.491.  On 23 September, EURUSD is 1.352 and GBPEUR is 1.187.  EUR has appreciated against both USD and GBP in the past 8 years.  Euro crisis is painful but the Financial Crisis was also brutal to US and UK.
With Merkel in the helm for another 4 years, the 3rd Greek bailout could not be in better hands.  Yes, Merkel is tough and she will play her austerity card.  She also has been there, done it with the 1st and 2nd Greek bailout.  She knows the drill to balance saving Greece from “Grexit” and winning support from domestic voters.  Merkel retaining her office brings stability to Eurozone.
The next big question in the investment world is “Who is going to be Bernake’s successor?”.  The market expects Bernake to step down in January 2014.  The spot light is on Vice Chairman Janet Yellen.  Bernake has managed to turnaround the stock market and bond market from financial crisis.  “Too big to fail”was managed and now regulators are throwing new rules that are phone book size to prevent any too big could exist.  The FED Chairman still needs to tackle unemployment rate in US.  The solution could be shale gas, a scientific technology rather than buying more bonds.  Shale gas has massively lowered US manufacturing cost and sucking jobs back from the emerging markets like China.  It is a Mary-Go-Round.  Shale gas lowers energy cost to a level that offsets cheap labour cost in emerging markets for certain products.
The other difficult task for Bernake’s successor is that he or she cannot lower interest rate or increase Asset Purchase Scheme to simulate the economy.  Both tools have been “used up” by Bernake after pushing interest rate to practically 0% and purchasing USD 85 billion asset a month.  These are like steroid to the market and the new FED Chairman cannot add dosage. So what monetary policy can he or she use?  Forcing banks to lend to Small and Medium Enterprises?  Or learn from China to put up with massive growth in shadow banking?
Beside US economy, the FED Chairman role has big impact to the rest of the world.  India Rupee almost got knocked out in August when Bernake talked about tuning down quantitative easing.  The currency for 1.2 billion people depreciated as much as 13.8% against USD in August and recovered well in September by about 10% as the FED decided to maintain current Asset Purchase Scheme.  Sure there were a lot of hedge funds and professional traders taking a ride but the trigger is US FED.
To sum up, with Merkel’s victory, a big piece of the Eurozone puzzle is now in the right place.  Investors should expect more of the same.  The big question market is now on Bernake’s successor and what can he or she do more or less than Bernake.  This has big impact to emerging markets.

Uncle Sam is Cutting his credit card (22 Aug 2013)

Uncle Sam is cutting his credit card (22 August, 2013)

The financial market is paying attention to when and how US is going to slow down its Quantitative Easing.  It is currently buying USD 85 billion of asset in the market a month.  Such buying supports bond prices and keeps yield down.  Bernanke and his buddies in FED are planning to reduce the credit card limit from USD 85 billion a month.  The market is reacting to the expectation of tapering.

Yield on US 10 years government bond has climbed from 2.5% a month ago to 2.9% as of 22 August. Yield is the “interest” that investors get from buying the bond.  The higher the yield, the better return for investors assuming the government manages to pay.  European investors have probably heard enough about Italian government bond yields which are at 4.4% now, 6.5% in July 2012 and 7.2% in November 2011.  Falling yield means bond prices going up and rising yield means bond prices going down.  This year, bond investors are smiling with their portfolio in Portugal, Italy, and Spain and not so happy with US. Greece 10 years government bond is yielding 9.9% after printing 12.5% March and 7.9% in May.  This is a baby roller coaster versus last year range of 30.4% in March and 11.2% in December.  EU has another cheque ready for Greece.  Most of Greece’s debt is held by other members of EU and the International Monetary Fund so all parties have their interest aligned.  There will be cat fights between politicians but the debate over austerity measures and bailouts have become American Wrestling.

US and Europe stock markets are running out of steam.  US stock market made new high in the beginning of August and pulled back hard in mid August.  Dow Jones Industrial Index closed at 15,658.43 on 2 August and lost the 15,000 level on 21 August.  Eurostoxx 50 Index made a high print on 14 August to close at 2855.89, beating the high in May.  Interestingly, it was the French that led the market with CAC 40 Index outperforming German DAX Index by 2.4% in the past month.  FTSE is looking weak in August. It zigzagged around 6600 level for 2 weeks then tanked to 6390.8 as of 21 August.  While the developed markets are feeling uphill, the emerging markets are sky diving.  India SENSEX Index did a double flip and fell from 19500 level to 17900 level in August, that’s 8.2% move.  At the same time, the Indian Rupree collapsed from INR 60 to USD 1 to INR 64 to USD 1.  In May, it was INR 54 to USD 1.  iShares BRIC 50 ETF (BRIC LN) dropped from GBp 1600 in the beginning of August to GBp 1520 as of 21 August, still 6.6% higher than the GBp 1426 low in June.  If trend is your friend, global equity market is making friends with the bears.

In a money tightening environment with weak markets in BRIC, the mining sector is feeling wobbly. Looking at FTSE 100 Index members, many mining companies appear in the worst 10 performing list. Fresnillo is a gold and silver mining company in Mexico and it is down 37% this year as the worst performer in FTSE 100 index.  Chilean copper miner Antofagasta, mining giant Anglo American, Russian/Kazakhstan miner Eurasian, African miner Randgold, Rio Tinto, BHP Billiton and Glencore Xstrata are down 12-29% year to date.  That’s 8 spots out of the 10 worst performers.  To make the perfect 10, add Tullow Oil and Petrofac who did not seem to be benefited from the rising oil price this year.  Stay away from resources related stocks seems to be the wise choice so far.

There are happier stories in the tech sector.  If you like the Iron Man movies, you may want to take a look at Tesla.  Founder Elon Musk is Iron Man in real life with his success in Paypal and now Tesla Electric cars, not only made him a billionaire, but put him in the same league as Steve Jobs.  Tesla shares (TSLA US) has gone up 336.6% this year from USD 32 in January to USD 147.86 as of 21 August.  Another better known name facebook (FB US) closed at USD 38.32 as of 21 August, beating its USD 38 IPO price in May 2012.  The stock made its historical high of USD 39.32 on 5 August.  Other names on my watch list and their year to date performance are Amazon (+13.4%), Google (+22.9%), Apple (-5.6%), Microsoft (+18.4%).

With US cooling its money printing machine and the speculation on Bernanke successor, the rest of 2013 could be eventful.  Guru George Soros has occupied a front row seat with a bearish call on the US stock market.  The conservative investors may rather be an audience to preserve their cash, sitting on some European bonds believing the EU can stay together for now.

It’s a boy! Where is the bull? July 2013

It’s a boy!  Where is the bull?  2013 July 24

What a great news to Great Britain that we have a new prince.  It is always nice to have something to look forward to.  For most ordinary families, a new born baby comes with responsibilities physically, emotionally, mentally and financially.  Strong financial health definitely can make life easier, a lot easier.  With longer life expectancy and higher unemployment rate among the youth, parents need to look after themselves for 20 years after retirement. They probably need to help their children with their mortgages plus their grand children school fees.

Luckily, the stock market has been behaving for pensioners this year.  After a major scary correction in June, the FTSE100 Index dropped from 6,600 level to barely defending at 6,000 level. July was a joyful month. FTSE100 was back to 6,600 level as of 22 July.  Looking peakish?  True.  Fortunately, the companies are showing good results and the overall Price to Earning Ratio is estimated to be 12.5 times.  It means you are paying for 12.5 times last year profit to owe a piece of the business.  It may sounds expensive if you are paying for a fish & chips shop round the corner but not too bad if you are buying index stocks like HSBC (8.1% of FTSE 100 index weighting), Vodafone (5.6%), BP (5.3%), Royal Dutch Shell (5.0%), GlaxoSmithKline “GSK” (4.9%).  Should investors stay with stocks especially a board based mutual fund on UK stocks?  FTSE100 has recovered from the 2008/2009 financial crisis and went back to the same level as the 2007 peak.  To decide whether to stay with the winning horse, we need to do some analysis.

First, let’s take a look at our neighbors.  With Euro Crisis becoming a soap opera “Home and Away”, the audience is getting familiar with expected surprises and twists.  Investors only need to keep their seat belt fastened for turbulence. It seems the plane will land in one piece.  There will be disagreement between the German and the French.  Greece has a long way to go before it could stand on its own feet.  Italy, Spain and Portugal will give us fire drill.  The cash rich countries will have to put pressure on the poorer ones to please voters but no one wants to see blood.  We will have to paddle together to survive.  A year ago, I wrote about Grexit.  Now you do not really see this word being mentioned by media.

Second, we ask Captain America.  US stock market is still making history and printing new highs.  So much energy!  The manufacturing sector is experiencing a renaissance powered by plentiful of shale gas.  Bernanke may not create enough jobs to please his boss but he has certainly sent both stock market and bond market to the roof during his term.  Yes, we are close to the end of quantitative easing and money might not get any cheaper (higher interest rate).  But these are the results of US economy recovery rather than punishments for the market and hurting investors.  The wealth creation with the bond market and stock market rally has made pensioners happier.

Talking about happy investors, we have to mention the Japan market.  Abe-nomics has made more than a difference.  If you look at Nikkei 225 Index in USD, the peak in May was higher than the peak in 2007.  This is because it was JPY 120 to a USD 1 in 2007 and currently, it is JPY 100 to USD 1.  This made Nikkei 225 at 16,000 level in June 2013 higher value than the 18,000 level in 2007 in USD terms.  So the American fund managers who invest in Japan are even happier than the jolly Japanese pensioners.  If you look at Nikkei 225 performance in GBP, the Brits are laughing to the bank as it was JPY 250 to GBP 1 in 2007 and now only JPY 150 to GBP 1.  Sterling based investment in Nikkei 225 would have made 30% from the peak of 2007 to May 2013.

The world always has some unhappy faces. This time is the investors in BRIC “Brazil, Russia, India and China”.  Looking at the iShares FTSE BRIC 50 ETF listed in London Stock Exchange which closed at GBp 1582 as of 22 July, it is quite a few pennies lower than its peak of GBp 2220 on 23 May 2008.  Some analysts start to call BRIC a “Bloody Ridiculous Investment Concept”.  Well, one should not go that far.  Every dog has its days. Since the financial crisis, the developed markets have been the winning horses.  It looks like the winning horses will keep leading for the rest of this year as both US and Japan have a clear road map financially.