Master Rider Blog

FOMC Meeting

September 17th, 2007 NW Teong

All eyes would be on Federal open Market Committee (FOMC) meeting tomorrow (18 Sept 2007) when Fed Chairman Ben Bernanke and his central bank colleagues meet to decide on their interest rates policy. All signals really point to a cut of 25 basis points from the current Fed funds rate of 5.25% though some have expected for a higher cut.

Markets have actually factored in a 25 basis points cut already, hence if there is just a 25 basis points markets would be at best mildly positive but would very likely to be soft for a while. However, if there is a 50 basis points cut then there will be a short-term euphoria on the stock markets. My view is that Fed would just cut 25 basis point, my argument as follows: 1) To-date, sub-prime problem has not spread to actual economy yet, though there is sign in last month labour data, 2) There is still a fear of inflationary pressure in view of record high crude oil, 3) If needed, Fed can always cut the Fed funds rate anytime that it sees fit.

If the cut is indeed 25 basis points, I would view this as a positive sign though markets may be somewhat disappointed initially especially for those that have expected a higher cut. Positive because it shows that Fed would not hesitate to take measures and indeed have taken measures to counter a possible crisis and they are ready to take more measures if necessary. Having said that, I see October as another volatile month as investors continue to witness the problems unfold from the sub-prime saga and its impact on certain sectors in the economy. More importantly, we need to watch the labour data closely to have a better gauge of the stage of the economy. A weak labour data would suggest a slowing economy in the coming months.

Today’s regional markets in Asia would likely be boring and not many investors would like to take huge positions on the eve of the FOMC meeting. This means that markets are likely to trade sideways in a lack-luster manner. My strategy remains the same, i.e. core holding plus a hedge (insurance). As I mentioned in my blog last Friday that I have taken some profit on this stock, BRC. However, instead of cash out, I use the proceeds to buy into one of the most ‘boring’ tech stock, Surface Mount Tech (SMT) listed in Singapore Stock Exchange. This stock is boring as not many people are following this stock and it takes time for it to move. However, if you are patient enough, it can give you 30% to 40% return in less than a year provided your timing is right! Trading at S$0.32, a price where I bought the share last Friday, it is trading at about 7 times its historical earnings of 2007 ended March and its prospective PER of only 5 times on its current earnings (of course the assumption here is that the forecast of the earnings is good). I bought it not for its earning potential but for its very cheap valuation as it is also trading at a PBR (i.e. Price to book) of only 0.6. Wow, at this price, you can actually buy over the entire company and make money from its assets. How many tech stocks are actually trading at such a deep discount to its book value? The best part of the story that I enjoyed most is that at S$0.32 it is giving me a dividend yield of about 5%! Of course, like all tech stocks, I am anticipating to take advantage of a cyclical up turn in the last quarter for this stock too.

Continue to investrade in this volatile quarter, cheers!

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Entry Filed under: Macro, Stocks, Singapore