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  • Market View Update - Global Equities, China/HK, And Gold

    Thanks for the Talentum from God that my last few calls work OK. I'll continue my blog here with Yahoo blog shutting down.

    Macro

    My view on the macro adjustment from my June blog maintains: "asset prices need to gradually migrate from liquidity-driven to fundamentals-driven. The adjustment also has a political dimension: China new power still trying to stabilize itself. On timing of Fed tapering, massive tapering not expected until end 2014 as unemployment rate could not go below 6.5% Fed first target before then."

    So under this macro environment, only the sound companies with good management, niche products, decent margin and growing profit trends will perform sustainably, without sexy upsides though. So the entry point is important. Chasing the laggards won't work, unlike classical phenomenon towards the end of a bull market, as new liquidity is not entering into the market.

    Yes, I think US is approaching the final phrase of its 5 year-old bull market. We'll probably have another 12-18 good months referencing to the life of previous bull cycles. More thoughts below.

    US

    S&P has crunched a major technical resistance, the triple top, since year 1995, thus it should not stop here. It has at least 5-10% further upside benchmarking the PE of the previous cycles since '95. The target of 2,000 points (@ '95 turn-around PE of 27.5) is also the 150% target between the '09 low and the triple top. Average Earnings per share is also in intact uptrend. Details self-explanatory in the chart below.

    (click to enlarge)

    China

    Many street commentaries are wishfully thinking that the current Party Meeting would boost equities prices. I do not think so. SHCEI index is also not responding that way.

    While specific policies might help equities prices of related sectors, an overall boost is not likely, because Premier Jia is still continuing his reform mode, which means easy liquidity is not likely. Premier Jia is adopting the "politically conservative, economically liberal (政緊經鬆)" approach, the wide gap between the two can easily result in social instability. Thus a clean and powerful Govt is required. That's why Jia continues his reformative clean up in the Govt & SOEs. Therefore, easy liquidity not likely. But I do not think tight liquidity around end of June to continue as general stability is important for China's reform.

    Note that 3 month SHIBOR is currently settling at higher levels compared with that before the June squeeze - 4.7% c.f. 3.9%. Confirming my view above that easy liquidity not likely.

    The weak mgt quality of general Chinese companies means that they need liquidity to drive asset prices up, as they do not have the ability to deliver profits growth to support higher asset prices.

    Contrasting the US mkt's bull trend, SHCEI is still in its 4 year bear trend. With neutral liquidity and relatively low valuation, SHCEI could find support at its double bottom of ~2,000 points; after which could provide 10%+ upside.

    (click to enlarge)

    (click to enlarge)

    HK

    HSI has been caught between US and China since the past 10+ years. This characteristic holds well since 2009 - US resumes the bull, China still in bear, HK naturally is rangebounded. With US liquidity mildly tapering, China liquidity to be stable, HK liquidity should be relatively stable; thus rangebounding in the upper half of the range, ie 22,000 to 24,000 for the time being.

    (click to enlarge)HSI

    Gold

    Bitcoin price went up 350,000 times in the last 4 years post Financial Meltdown, partly due to the limited supply of Bitcoin, compared with increasing supply of real monies USD, EUR, JPY etc. Against that background, Gold price should be supported against my moderate US tapering view. Yet technically, we have not seen the bottom for Gold yet, as clearly demonstrated in the chart below - whenever Gold price turns, the Gold Miners index always turns earlier and turns more. We have not seen relationship yet.

    (click to enlarge)Gold price (SPDR) vs Gold Miners

    Help the Philippines

    If my prior blogs had been useful to you, please share part of your gains to help the Philippines, not only the typhoon victims but also other parts of the country. Virtually their spring harvest are all blown away, which is normally the family's whole year food supplies.

    Disclaimer

    I'm sharing my investment views out of my prior work & investment experience, not out of a licensed entity. The above does not constitute any invitation to trade.

    Nov 11 4:52 PM | Link | Comment!
  • Thoughts On AIA

    I took a look at AIA (1299.HK) amid its rapid price drop due to I&I (India & Indonesia) concern. My thoughts are as follows, be mindful that this does not constitute any investment advice or solicitation to trade.

    I. AIA basics
    - good mgt
    - I&I are not its major mkt. HK, Thai, Sing, China, Malay constitutes 85% of its operating profit and new business. Indon does have some importance among AIA's "other markets", but its absolute profit contribution is too low to impact the overall company
    - profit growth trend intact.

    AIA key figures trendAIA Operating ProfitAIA Value of New Business

    II. Current I&I problem is not as systematic as 1997
    - Asia inflation as a aftermath of worldwide QE impacts all Asia countries, but AIA's major markets seen inflation moderating c.f. I&I
    - Budget and Fiscal deficit not a (big) concern in these countries c.f. I&I
    - The sytematic problem of funding & currency gap of 1997 is not happening today. (back then, Asian Govt, Semi-Govt & Corp borrowed massive short term loans in USD to fund its long term investment in Local Currencies. They thought they could take advantage of the interest rate and FX advantage, but the huge funding gap blown them off in 1997)
    - The I&I issues are not new. Even the Asia concern is not new. Asian currencies started to depreciate Q1 this year already.
    - Taking THB as a representative of AIA's major Asean mkt, it does not show the rapid depreciation as IDR.

    III. AIA valuation and technicals
    - Reasonable (even a bit cheap) valuation among peers both in terms of historical PE and PB. Given its intact profit growth trend & good mgt, prospective PE is cheap.
    - Upward price trend intact
    - channel & 250 DMA support @ $32-33
    - strong volume support @ $26-29

    insurance valuationAIA price chart

    IV. Reference to AIG stock price back in 1997
    - Stock price of AIG, Holding of AIA, went down by 30% max in 1998, that translates into $26- for AIA. Don't think we'll get there.
    - Price resumes uptrend afterwards. That's typical for the price movement of well managed companies.
    - AIG price went down badly in 2007, but the reason behind is not repeated in today's macro or AIA.

    AIG in 97

    All the financial history reminds human beings not to be too arrogant, not to be too greedy. The Universe is operating with a much bigger and universal rule along its 18 billions years of history. Respect God always.

    Disclosure: I am long AIA.

    Tags: AIG, AIA, AIG
    Aug 21 9:47 AM | Link | Comment!
  • Thoughts On SHIBOR And Fed

    Thanks friends for your support in my premier blog & tweet. Please continue to exchange views.

    Please note that while I may discuss a particular asset class in each blog, a portfolio should consist of well diversified uncorrelated asset classes. Personally since 2009, equities do not account for more than 1/3 of my portfolio, within which only a minority in HK/China.

    I'll share my thoughts on interest rates in this blog. Though the first part of SHIBOR might be of more interests to my friends in HK, please read through the second part on Fed. That's more useful intellectually and for a longer term investment.

    SHIBOR & HSI
    Major assets continued the macro adjustments as discussed in the last blog. The weakness in HK/China is worse than I expected. Surface reason due to high SHIBOR, deeper reason is the stronger reform intentions to the political & thus financial system.

    (click to enlarge)

    SHIBOR started to come off in the last 2 days, think that to continue moderately, say for another 1-2 months before it settles on PBOC intended levels. Current 3mth SHIBOR at 6% when CPI is in a downtrend with 2.1% latest does not make sense. That's why SHIBOR comes off, SHCEI or bank requests is just a precipitator. But whether 3 mth SHIBOR settles to prior 4% levels is worth monitoring. From chart 1, you can see that PBOC's contrarian actions was actually behind the mkt. So SHCEI would be disappointed if it depends on PBOC for a quick fix, that's why the panic sell-offs recently. PBOC injected liquidity to specific banks last night, but I view that a one-off tightness soothing action, an overall injection of liquidity not expected because the reform intentions are still intact. But think we have seen the worst of SHIBOR for the time being, esp after June when the half year end balance sheet pressure eases.

    Mindful that the moderating SHIBOR only takes away the acute negative force on SHCEI. The deeper systematic reform, which exposes the weak mgt of majority of China companies in difficult times, will cap the upside for SHCEI. The mgt issue, together with the weak political outlook of HK, caused me to underweigh China for the past 18 months - I'll discuss further in future blogs. Having said that, HK becomes so dirt cheap that I had started some trading positions for rebound.

    (click to enlarge)

    HK is dirt cheap in terms of PE as discussed in last blog. It is also attractive at dividend (historical) of 3.8% in the absence of a major crisis (Japan is at the back of my mind as the next crisis candidate, but think we still have some time). Earnings and Dividend both show mild downward trend in recent quarters, but don't think the slope to worsen. See Chart 2 above.

    (click to enlarge)

    But "cheap" or "attractiveness" is relative to cost, which is interest rates for equities. Chart 3 plots out HSI's excess dividend (over 5 yr HK "Govt" yield). The following observations are interesting:

    · recent divergence between dividend yield and excess dividend - due to rapid rise of Govt yields in the past 2 weeks.

    · current excess dividend not as "dirt attractive" compared to last HSI major low in year 2011 & 12 - this might push HSI to 18,000 if yield continues to rise rapidly, yet I do not think the recent pace in rates to continue. And an expected gradual lowering SHIBOR should help HK rates.
    · inspite of the above, current excess dividend is very high in a 20 years context. Excess dividend had been elevated after 2009 due to QE (and thus artificially low yields), it is normal for that to gradually settle lower now that QE is expected to be tapered. So lowering excess dividend from here not a reason for price sell-off within the long term timeframe.

    But the HSI mkt tone is weak due to sentiment impact from the China mkt. So expect this as a rebound with first selling pressure at 21,000. Nicer base to take a few months from here to 18,000. Upside in the next 6-12 mth I still see 22,000 or above when PE goes to more normal levels say 13x.

    Stock pick is difficult though. I would pick the decently managed companies with upward earnings & price trend still intact. I would avoid China real estates, impact to them from the financial reform to surface later. Some might even be the target to be punished in the next round. Crowded space and heavy debted ones not to mention as discussed in last blog already.

    Fed

    Fed is more interesting to me. UST moved faster than I expected esp after 2.2% taken. It also stayed above 2.5% critical level. Next target 2.8-3%. Staying there would mean that the bond bull trend since 2007 has turned. Is the bond preparing to turn the 30 year bull trend since the 80s? Are we stepping into a clearer stagflation era? We have to observe 3.5% handle. That is another topic for future blogs.

    Then is the bond mkt reacting too much to Fed? In terms of pace, I think so. In terms of magnitude, maybe a yield level of 3% is not too worrying for Fed as seen in 2009-11. We should have a clearer clue from the July 10th Tsy auction.

    (click to enlarge)

    I had assumed the Fed tapering as a gesture before Bernake goes in my last blog. But the mkt reaction prompts me to research deeper within Fed. I found quite some preparatory research papers from Fed in the last 24 months. So now I think Fed's tapering is part of its serious Keynesian plan. Sorry Mr Bernake, I had misunderstood you.

    Several Fed papers modelled on the impact of QE to interest rates. Conclusion is roughly 65bp to 10 yr Tsy; 40bp from QE1, 20 from QE2, minimal effect from later QEs. Now that Tsy has moved 100 bp from recent low, one can say that the current Tsy level has taken out all the QE artificial effects.

    One paper confirmed the useful information from the yield curve shape for the economy and policy makers. This has been academic & mkt consensus for long. Actually yield curve shape was a reference in many Fed meetings. So taking out the artificial effect ensures Fed still has the useful information for its next major policy step, ie when to hike rates. (I'm not saying Fed to hike rates soon, still think that earliest is 2015).

    Then some papers discussed the impact of extreme low bound rates to the economy. Conclusion is fiscal impact in a low bound environment is much less effective than in normal rates era. Fiscal deficit is a big concern to Fed since Greenspan & Clinton. So this may be a main reason for Fed to taper.

    Is Fed tapering too early? I don't think so. US economy has shaken off recession since 2010, growth firming since late 2011. Jobless Claims are back to healthy levels. Though overall growth is still sub-optimal, the deeper solution is productivity gain, mgt excellence and technological advancement, not monetary stimulus. US has been doing well in its Natural Gas, Biotech and Tech space in recent 3 years. Also Fed had a long paper in the Greenspan time discussing the Japanese lesson. That paper concluded that too early policy retreat was the main reason on why the Japanese recession had lasted so long. And later repair to inject again could not neutralize the too early retreat damage. So Bernake being a recession expert, don't think he would repeat Fed's conclusion on Jap mistake.

    Where is Tsy heading? I do not think the recent impulsive rocket to repeat as bond being a relatively rational mkt, though some of that character is being diffused after QE. I tend to think a gradual bottom building between 2.5% - 3.5% in the next 12 months of Fed tapering. Dow should perform well if that's the case. Let's see.

    Important Disclaimer: I'm no longer a licensed financial advisor, but I'm a valuable person same as you. I do not receive any compensation from my blog sharing. The above is not an invitation to trade, but invitation to coffees. Asset allocation and diversification is important, and the most important asset is time and love, not money. So don't spend all your time reading my blog, hehe. God Bless!

    Jun 27 8:07 AM | Link | 1 Comment
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