Archive for October, 2007
Will US Fed cut its Fed funds rate in its coming FOMC meeting this week? This is the question investors from all over the world are asking. However, it seems that most investors are betting that the Fed will cut by another 25 basis points. Is this a done deal or the US Fed has other idea? In fact, the US Fed is at the catch 22 situation at the moment. On one hand, the weak economy and the housing loan problem call for a cut in interest rates. On the other hand, a record high in commodity price, especially the historical high crude oil price as well as a weak dollar necessitate a hike or at least no change in interest rates. As we know that high commodity price will flame inflationary pressure. In short, US Fed is in a bind right now where the US economy is slowing and yet there is a potential threat of inflationary pressure.
Under normal circumstances, one will not face inflationary pressure if the economy is slowing down. However, the case for US is unique in the sense that, while its economy is slowing down, the commodity price is sky rocketed due to strong demand from rest of the world, especially China and India. A weak dollar, indeed adds fire to fuel on the phenomenal rise in commodity price.
It seems that there are only two scenarios, that is cut or no cut. If Fed cuts the Fed fund rates by another 25 basis points, the trend for all asset classes will continue (until they reach some breaking points). In other words, we will continue to see record breaking for regional stock markets in Asia Pacific region in the remaining months of this year, also record prices for most commodities and crude oil is likely to test US$100 per barrel soon. Please note that I am not saying the current crude oil price represents the natural equilibrium price between the real supply and demand. Current crude price level not just reflects the real supply and demand, it also reflects the tense situation in the Middle East as well as the huge positions by speculators.
If there is no interest rates cut, then the stock markets may consolidate for a few days as investors who bought the markets in anticipation of a cut will be disappointed. However, regional stock markets in Asia should still resume their uptrend after the initial “disappointment” over US markets. In short, if there is no interest cut, regional markets may take some time to consolidate and are likely to resume their uptrend in the next two months.
My concluding remark is I am still bullish for stocks, especially regional markets in Asia in the next two months barring unforeseen circumstances. Of course, markets are getting more volatile due to events such as FOMC meeting, earnings reporting period and so on. More importantly, we could be on the last leg of the bull which started since early 2003. The duration of this last leg could be shortened or extended due to a host of factors. One obvious factor is the US Fed fund rates. As mentioned before in my earlier blogs, continue to monitor those factors that are likely to short-circuit the markets!
By the way, I have promised to share with you some of the photographs taken during my recent seminar organized by the Singapore Stock Exchange on 27 Oct 2007. I must apologise that the photos are not very well taken.
However, the important thing is that I am able to share my investment knowledge and experience with many enthusiastic and keen investors. Many of these participants have visited my investment education website:www.master-rider.com in the last few days and have also purchased the e-publications such as the e-book, e-seminars, investment spreadsheets from the website. To be very frank, all these e-publications are really very good value for money. FYI, I have never advertised them in any way except to introduce them during the seminars. Just like my website which enjoys more than 1,000 hits per day, these e-publications are simply selling by themselves through words of mouth.
For instance, I introduce the e-seminar on “Wealth Creation via US Options” to some of them. This e-seminar is content rich but cost peanut as compared to those live seminars which normally cost S$3000 to S$8000 per pax. As I said in my website, my sincere objective is to share all my investment knowledge and experience with as many people as possible. I did not offer free down load of these e-publications as freebies are always subject to abuse. From my point of view, the economic value of the e-publications is at least ten times higher than the prices. Whether to have these e-publications or not, whether to attend very expensive seminars or not, and whether to master the investment knowledge yourself (hence benefit for the rest of your life) or rely on others, the choice is entirely yours. The key message is that if you can grasp the investment knowledge that I am trying to share with you via those e-publications, the benefits are tremendous. The very least is that you would avoid losing money big time! Cheers!
Master “The Essence of Stock Investment” and ride towards the journey of your financial freedom to be the “Master of Your Own Destiny”!
Disclaimer: Investors are investing at your own risk. Please read full disclaimer at the end of the blog or from the main page of the website.
October 30th, 2007
NW Teong
Regional stock markets are being played out as expected. Barring unforeseen events, we will continue to see bull run in regional markets, especially in Asia pacific region ex-Japan. We will continue to see bull run in commodities, crude oil is likely to break new record and US$100 is not too far away. I reckon we may even see it (crude oil at US$100 per barrel) happens this year! Of course, US$ will continue to weaken and we will continue see record high in Euro versus US$. In short, this bullish tone aided by huge liquidity inflow should continue till at least end of the year.
Hong Kong market is already catching fire and the Hang Seng Index has easily cruised pass 30,000 points. As mentioned before, Hong Kong market is unique. Besides a key beneficiary of this huge liquidity inflow, it is also the potential beneficiary of domestic funds in China seeking investments in overseas markets. As for Singapore market, the surge will not be as spectacular as Hong Kong market but it should be on the up trend too. However, the recent policy regarding deferred payment in the real estate sector will act as a dampener in the stock market, especially in the real estate sector. We shall closely monitor the reaction in the market whether this latest measure has tilted the balance in the supply-demand situation in Singapore. My view is that there will be a short term damp in the property sector but still bullish on a longer term. Having said that, we need to watch out for more measures (if any) from the government.
The very important date to watch, of course is the FOMC meeting on 31 Oct. This should set the tone for the rest of the year! My take is that Fed would cut another 25 basis points in this coming FOMC meeting (well I may be wrong on this). If this happens, the party due to liquidity driven bull run should continue all the way till end of the year barring unforeseen circumstances (please also read my blog titled “Big Scare” on 23 Oct).
By the way, I have a fantastic response (about 138 participants) for my investment seminar on “A Beginner’s Guide on Effective Portfolio Management” on 27 Oct organized by Stock Exchange of Singapore. We have so many enthusiastic participants that are so eager to learn more about investment and I have shared my investment knowledge and experience unreservedly with them. I shall share some photos (taken by SGX staff) of this seminar in my blog the next time. I am also pleased to announce that for those who have purchased more than S$10 of my e-publication, you are automatically in my MRiders Club and you will be the first to receive important news and messages (e.g. My important market call on 17 Aug 2007) from me.
Cheers!
Master “The Essence of Stock Investment” and ride towards the journey of your financial freedom to be the “Master of Your Own Destiny”!
Disclaimer: Investors are investing at your own risk. Please read full disclaimer at the end of the blog or from the main page of the website.
October 29th, 2007
NW Teong
This morning, I read an article titled “Jim Rogers Shifts Assets Out of Dollar to Buy Yuan” from Bloomberg website with great interest. For those who wish to read this article, you may wish to click the link here:
http://www.bloomberg.com/apps/news?id=20601087&sid=aqNT0qlW_zQE&refer=home.
The gist of this article is that Rogers is very bearish on US dollar and very bullish on China RMB or yuan as well as commodities. He feels that yuan could appreciate as much as quadruple in the next decade. On currency front, he is also bullish on Swiss Franc and Japanese Yen.
Rogers remains very bullish on commodities, he feels that the bull in commodities could last as long as next 5-15 years. While I am not able to predict how long the bull would last in the commodities, what I noted with great interest is that Rogers’ view on currency as well as commodities is basically in line with my own (for those who read my blogs for the first time,
please refer to my earlier blogs).
Rogers also feel that the bull markets for stocks and bonds are over. While I share his view on bonds, I bet to differ on the stock markets.
I feel that we still have one last leg for bull on stock markets (please read my earlier blog on this, also my comment on yesterday’s blog “Big Scare”).
Base on the above view, we should then devise our investment strategies accordingly. Please note that if investors such as Rogers are switching their US assets into Asia based assets, many more will follow. What will happen then? Logically speaking, if the initial trickle leads to a stampede, US$ will collapse vis-à-vis other currencies. We have to watch out on this space. While a gradual depreciation is acceptable, a sudden collapse of US$ would be very disruptive to global trades and hence would be bad for world economy. I am sure Rogers is not the first one to shift its US assets into Asia assets (especially China and India) and obviously he will not be the last one as well. On the contrary, there will be more investors to follow this path. If you can recall, we have already witnessed some divestments of US assets by Asian sovereign funds. It is definitely worth while to monitor the funds outflow from the US and its impact on the weak US$. Cheers!
Master “The Essence of Stock Investment” and ride towards the journey of your financial freedom to be the “Master of Your Own Destiny”!
Disclaimer: Investors are investing at your own risk. Please read full disclaimer at the end of the blog or from the main page of the website.
October 24th, 2007
NW Teong
As far as I am concerned, the big scare of a market meltdown on 19 Oct 2007 due to a host of factors such as sub-prime loan problem, US economy slow down, high oil crude price and so on is over. In the first place, I never believe that there will be a meltdown. As I mentioned in my earlier blogs, while I have ruled out a market meltdown, I did expect some corrections. I further stressed that these corrections are “small” as compared to the huge sell down on 19 Oct 1987. I have also warned readers at the beginning of this month that October being the jinx month will be a volatile month for stocks.
While there will still be volatility in the markets for the next few days, my take is that the liquidity driven rally should creep back into the markets by the end of the month barring unforeseen circumstances. That leads us to another important date, yes that is the FOMC meeting on 30/31 Oct. Will US Fed cut its Fed funds rate again? At the moment, market has priced in more than 50% chance that Fed will cut another 25 basis points. If this is the case, the cut in interest rates is akin to add fuel to the fire for the regional stock markets. In short, the rally will really fly in the next two months. Of course, we still need to watch out for the usual culprits that could shock-circuit the markets such as sub-prime loan worsen, high crude price and so on. Please note that even if Fed keeps the rate unchanged on 30/31 Oct, I am still positive about the stock markets in the next two months. Historically, this is about the best time to buy stocks as historically Nov, Dec and Jan is the best quarter for the stock markets!
Congratulations to all of us, we have survived the anniversary of this dreadful Black Monday. All we need to do now is to sit back and relax and enjoy the rally being played out in the markets in the next two months. This could well be the last leg of the bull run started since early 2003! Cheers!
Master “The Essence of Stock Investment” and ride towards the journey of your financial freedom to be the “Master of Your Own Destiny”!
Disclaimer: Investors are investing at your own risk. Please read full disclaimer at the end of the blog or from the main page of the website.
October 23rd, 2007
NW Teong
While SUVs help to push up the crude oil to its record price recently, SIVs help to spread the pain due to the sub-prime loans crisis in US. Indeed, SIVs are the core concern of the sub-prime loans crisis. What are SIVs and what are SUVs? SIVs are Structured Investment Vehicles and SUVs are none other than Sport Utility Vehicles. While we are all familiar with how much SUVs help to consume the petrol, most of us are not so familiar with these SIVs.
SIVs are basically entities that raise funds by issuing short-term, low-yielding notes called commercial papers and invest in longer-term, higher-yielding instruments such as credit card debt and mortgage-backed securities. SIVs can be hurt in two ways, one is that the funding dry up and two the assets that SIVs hold suffer huge losses. The funding dry up actually happened at the peak of sub-prime loan crisis in the middle of August 2007 where there were no takers of the commercial papers that these SIVs issued. In short, investors were spooked by the sub-prime loans problem that they refuse to look at other debt papers except the Treasurys which are considered risk-free. As most SIVs are affiliated to banks, banks were forced to provide the funding or liquidate the vehicles altogether. This creates severe liquidity problem as banks scramble to raise funds for these vehicles. At the same time, the assets that these SIVs hold suffered huge losses as investors are dumping the debt papers, be it asset backed or not. In short, banks face liquidity problem as well as suffered huge losses. The worst thing to happen will be that these banks are forced to sell the assets in order to repay debts. If all the banks with exposure to SIVs started to this, it will cause a negative chain effect. So much so that the whole debt market will collapse, this means the breakdown in the whole financial system which will have dire impact on the real economy. In order to cushion this, Citibank has initiated to create a Super fund which in essence is to provide funding as well as to prevent panic selling among the players.
Both SIVs and SUVs are smart creations of human beings but they are still not perfect. It is challenging to come up with a financial vehicle so as to give you a decent return and yet shield you from any market turmoil all the time. Of course, it is equally challenging to create a SUV (with the same power and performance) that consumes little petrol or gasoline. While we cannot overcome this issue (powerful and consume little fuel) overnight, I am very sure we will have better products over time with the advancement of technology and financial innovation.
Someone asked me right after lunch today, “Hey Mr. Teong, why don’t you talk about markets today as the regional markets are under great pressure?” I replied this gentleman that I have said what I wanted to say about markets days ago. Didn’t I talk about The Big Trend on 9 Oct, Liquidity Play Intact on 10 Oct, Heightened Volatility on 12 Oct (mind you, I talked about this last week), A Tale of Two Markets on 16 Oct and Eve of Black Monday Anniversary on 18 Oct 2007? In short, my view is that the markets would be very volatile in Oct but I feel that any correction would be short term as the liquidity play will resume after each correction barring unforeseen circumstances. My take is that there might be “small” (small if you compared to the fall on 19 Oct 1987) correction in global markets today (all eyes would be glue to US markets tonight), i.e. there will not be any huge correction that will cause panic among investors. By the way, US Fed still have plenty of ammunitions to be deployed should the need arises. Cheers!
Master “The Essence of Stock Investment” and ride towards the journey of your financial freedom to be the “Master of Your Own Destiny”!
Disclaimer: Investors are investing at your own risk. Please read full disclaimer at the end of the blog or from the main page of the website.
October 19th, 2007
NW Teong
Let me summarise the following key points which I have shared in my blogs in the past few weeks as they remain relevant:
US Markets continue to be plagued by the sub-prime loan crisis and it is likely to take longer to settle down. The impact on the economy is likely to be deeper and wider than expected. In short, a slow down in US economy is inevitable and this together with the fear of inflationary pressure has prevented US Fed from raising its interest rates. In fact, to prevent a severe slow down in economy as well as a full blown impact from the sub-prime loan crisis, Fed had just cut its interest rates by 50 basis points on 18 Sept 2007. This indeed is a right move as the cost for not doing so could be potentially higher.
However, as argued before in my earlier blogs, due to this inability of raising interest rates or rather the inevitable of lowering of interest rates, the key beneficiaries would be those US exporting companies and companies that have massive operation overseas. These companies are likely to report good results in the days and months ahead. These benefits come partly at the expense of a weaker US$. Of course, the other phenomenon is that foreign investors are divesting their US assets due to the concern of further weakening of US$. Naturally, when these investors divest their US holdings, the proceeds raised would find their way into regional markets such as Hong Kong, India, Singapore and so on. In addition, we have witnessed the creation of huge sovereign fund as well as a couple of domestic funds in China. These funds are slated to invest in regional markets. In short, there are plenty of liquidity at the moment. The cut in US Fed interest rates not only calm the investors’ nerve w.r.t. sub-prime saga, it has also caused a huge influx of liquidity into regional markets (e.g. Hong Kong, India, Singapore and so on). The cut in US Fed fund rates has caused the US$ to weaken further, this in turn has caused most commodities to surge to new level.
In fact, with the preemptive move of US Fed, we can safely rule out the big melt down we have witnessed on 19 Oct twenty years ago! Yes, my bet is that tomorrow will pass by without major meltdowns in the global stock markets. On the contrary, while volatility remains high, I feel that the liquidity play is intact and will continue throughout the remaining months of the year. In addition, the fund flow pattern (from US, even Europe markets to Asia markets) should continue. Investors would continue to bid commodities prices higher (see Baltic Exchange Dry Index, refer to my earlier blogs). It would be interesting to see what investors would react should crude oil hits US$90 (or even US$100) per barrel. Investors should continue to do well on holding onto the key beneficiaries sector which I have described above.
I have mentioned about locking in profits for both India and China markets two days ago purely from risk and reward profile. Interestingly, both markets started to trade wildly yesterday, i.e. one day after my blog. However, from liquidity’s perspective, both markets as well the entire Asia Pacific region are still intact. In short, the up trend due to this huge surge of liquidity is still intact and probably has some more legs to go.
Enjoy the liquidity party for the year and perhaps with bountiful returns by end of the year. Remember not to be greedy, especially come 2008. One announcement: My seminar on “Beginners’ Guide on Portfolio Management” on behalf of Singapore Stock Exchange (“SGX”) on 27 Oct 2007 is confirmed. For those who are interested to attend, you are advised to register with SGX asap as the class is almost full now. Please note that this is the first SGX seminar I am conducting since I have stopped all seminars more than one year ago. I will not be conducting many SGX seminars every year due to my investment career. However, I will still try to conduct1-2 seminars per year so as to connect with people like you. Cheers!
Master “The Essence of Stock Investment” and ride towards the journey of your financial freedom to be the “Master of Your Own Destiny”!
Disclaimer: Investors are investing at your own risk. Please read full disclaimer at the end of the blog or from the main page of the website.
October 18th, 2007
NW Teong
If we take a quick glance at the two charts below, we will see that they are very similar in shape. They both enjoyed a good run since the 3Q of 2005. However, the similarity stops there. Yes, one is the Dow Jones Industrial Index and the other one is the sizzling hot Shanghai Stock Exchange (“SSE”) Composite Index. While Dow has surged about 37% since the 3Q of 2005 to reach about 14,000 now, SSE has surged a whopping 500% to breach 6000 during the same period of time! This is achieved in a space of two years!
While US market is grappling with the sub-prime loans problem and its inevitable slow down in its economy, China economy continues to enjoy its double-digit growth and the super-charged stock market is a reflection of this strong growth. Obviously, a prolonged investors’ optimism in the market is a pre-requisite for any long and sustainable super bull market like SSE now is experiencing. However, any correction (don’t know when but could be near for SSE, especially in 2008) to a prolonged super bull would be painful. Let’s make this clear, there is no such thing as “painless” correction. Any correction is painful and it is a matter of degree for different investors. While I hope the market would consolidate in a more gradual manner, however I am very sure the suicidal rate would surely go up If there is a market melt down in China, This applies to any prolonged bull markets such as the Sensex index in India.
For momentum or trend investors, I suppose they would know how to react when the markets started to turn. This group of investors/traders would normally be among the first to leave the market before it falls off the cliff. What I would like to caution are those so-called value investors. That is those investors invest based on fundamental analysis. From fundamental analysis, we can still buy stocks with high valuation (e.g. high PER) if the potential for both top and bottom line growth is huge. However, how does one consider the PER as high? Is 20 times high or 50 times high? For those who have read my e-publications, you know that we can use another ratio to gauge this, yes this is the PEG ratio. In short, this ratio measures the valuation versus the potential growth in bottom line.
However, we have to be cautious whenever we have high PER reading despite a low PEG ratio. High PER can be read as high growth potential or high disaster potential. The reason is simple, since it is a potential and not a sure thing and anything could still happen along the way. In short, the risk associated to this should logically be higher. From this argument, I would advise those investors in China and India markets to lock in their profits and this should preferably be done in the 4Q of 2007. Put it simply, we may not be able to predict the top but we can surely sleep soundly with money safely in our pockets. So what if we sold the market 10-20% too early? It is alright to let other investors to make that additional return for taking much higher risk! Bear in mind that a correction of a super bull can be anything from 20% to as much as 70%.
Yes, after close to five years of un-interrupted bull run, we have to be prepared for a slower global growth looking forward. In short, the easy money to be made in stock markets worldwide is almost over for now and we need to be more selective come 2008. While I am not optimistic for 2008, I am still bullish for the remaining months for 2007. Regional indices have continued to scale greater heights as I have expected (refer to my earlier blogs in Aug and Sept 2007). By the way, the Baltic Exchange Dry Index continues to breach historical record on a daily basis. Enjoy the party while you can and be sure to watch out for some triggering events (e.g. record crude oil price, US bad loan problem, China anti-inflation measures etc) and not to forget the countdown of the Black Monday anniversary! Cheers!
Master “The Essence of Stock Investment” and ride towards the journey of your financial freedom to be the “Master of Your Own Destiny”!
Disclaimer: Investors are investing at your own risk. Please read full disclaimer at the end of the blog or from the main page of the website.
October 16th, 2007
NW Teong
A quick glance at the global indices seems to tell us that the global stock markets are enjoying one of its best bull cycle. However, precisely due to the record-breaking levels (and hence richer in terms of valuation), the markets will be very volatile looking forward. Despite having plenty of liquidity, the under current is very strong meaning that the market swing could once again be wild. As I mentioned in my blog “Liquidity Play Intact” dated 10 Oct 2007, I have advised investors to put in place a profit-locking (or cut-loss) mechanism. This practice should be in place all the time and is especially important at moment like this. I view this as especially important when the surge in stock prices is due to liquidity or momentum push. This is so for many markets in the region, especially the stock markets in China and India.
As I argued many times before, while I am optimistic about the stock markets in the next couple of months till end of this year, it is wise for us to lock in profits NOW. This is especially so for two simple reasons: 1) valuation is richer now as compared to few months back, 2) heightened volatility means higher risk for the same expected rate of return. Being in the “jinx’ month of October (reminder: Black Monday anniversary 19 October) will also add to market volatility (perceived or otherwise). For investors in China and India, it makes perfect sense to lock in profit at this level and go for a short break. One can always re-look at the market at the end of October (i.e. post Black Monday).
Crude oil is at a record high of about US$83 per barrel and strangely enough no one seems to be very worry about this. As I argued before on this impact, some ones need to pay for this higher cost. To put it bluntly, this is a process of wealth transfer. The wealth is being transferred from almost every consumer like you and me into the hands of the oil producers. If you have read the report on the power of the petrol dollars, you would notice that these oil producers have accumulated wealth at an incredible speed. No wonder they can build a massive city out of a desert. In fact, with that kind of wealth, they can build anything to their fancy. While there are lots of reports argued for a limited impact on world economy due to high crude oil prices, we should not ignore its impact. It is always difficult to predict the triggering point, i.e. what at level that it will trigger a crisis?
The incredible thing to note is that the Baltic Exchange Dry Index continues to surge, it closed at 10,513 yesterday! It shot up another 6.6% in two days’ time. It seems that the party is still on, especially the energy related, shipping related, commodity related companies would continue to break record in the days to come, of course barring unforeseen circumstances!
Never allow your winning positions to turn into a losing one! You see, this is precisely why I am advocating investrade mentality (you can find out more about investrade and investrade strategy from my e-book or e-seminar: www.master-rider.com). This strategy would allow you to make money most of the time (if not all the time), and help you to achieve Win Big and Lose Small objective! Cheers!
Master “The Essence of Stock Investment” and ride towards the journey of your financial freedom to be the “Master of Your Own Destiny”!
Disclaimer: Investors are investing at your own risk. Please read full disclaimer at the end of the blog or from the main page of the website.
October 12th, 2007
NW Teong
If we look at the global stock indices now, they all look with great similarity, i.e. up and up and up! For instance, look at the Dow Jones Industrial index chart below.
Many of the indices are making historical highs and the trend is nothing but bullish. In short, the huge surge in global indices due to the re-emergence of liquidity is being played out nicely as I have predicted in my earlier blogs weeks ago. This is also being helped by the fact that while US economy is probably slowing down, the global economy is humming along pretty well. If we look at the Baltic Exchange Dry Index (“BADI”), it has also closed at historical high of 9860 yesterday.
The BADI index has surged at an incredible speed, it was just about 2000 in early Jan of 2006 and in a space of less than 2 years has surged more than 390%! If we use this index as a proxy to world economy, then we can say that the global economy is doing fine but if we use it as an indicator to measure how fast human beings consumed our limited resources, then we should be worried. We should start to worry for the earth that we live in. Can our earth satisfy our insatiable demand of raw materials from food to energy? Can our earth withstand the pollution that comes along with further developments and perhaps exploitations? In short, can our earth withstand the abuse that we human beings exert on it for a long period of time?
In a materialistic world today, human beings are perpetually in search of greater profits at the expense of perhaps our only living place, i.e. the planet earth. We dig and dig for what ever treasures that we can find from the earth and we dump any kind of garbage back to the earth. At times like this, it is good to pause for a while to think of how we can contribute to the society and to protect the environment that we are living in. The very least that you and me can do is to do things without causing harm to our environment and to others. To me, an act that will harm our environment such as littering is a blatant act of selfishness. Those who caused harm to our earth really have no consideration at all for other human beings and for our future generations.
As for the stock markets, enjoy your uptrend ride but remember to build in some profit locking mechanism. For instance place a trailing stop order at all time, this stop order will be triggered only if the condition that you set is breached such as a fall of 5% in stock price. In this way, you can enjoy the surge but able to lock in profit should the market started to change direction. Cheers!
Master “The Essence of Stock Investment” and ride towards the journey of your financial freedom to be the “Master of Your Own Destiny”!
Disclaimer: Investors are investing at your own risk. Please read full disclaimer at the end of the blog or from the main page of the website.
October 10th, 2007
NW Teong
We all know that US economy is slowing down this year, and probably more next year. However, the selected sectors such as energy related sector, and export-oriented sector which include most big tech companies would still be doing well. This is partly helped by a weakening US$ in two ways, one is the made in US products or services are getting more competitive vis-à-vis those from other countries as these are seen to be cheaper when converting to local currencies and second is when these foreign revenues are being repatriated back to US. The added translation gain will further swell the bottom lines of these US companies.
Hence, we have to be extremely careful when investing in stock markets at this juncture. Under the scenario of a slowing economy, we should not get overjoyed simply because US Fed has cut its interest rates. The key thing to monitor is that whether this cut will reverse its course of a slowing economy. In short, we need to go back to the basic. We need to ask ourselves what drives a stock price up? It is not the interest rate and it is also not the cheap currency. Yes, it is the bottom line as well as the potential of making even more money in the future that really attract investors to load up the shares. Of course, the cut in interest rates would help all companies as the cost of borrowing is lower but that does not really affect your decisions to pick the winners. To put it bluntly, a company would still lose money even if the interest rate is zero for a host of reasons (e.g. mismanagement, obsolete technology, wrong cycle, expansion aggressively at the wrong time etc).
Similarly, when an economy is slowing down (or worst still go into recession) which means that many companies are going to slow down too. You see, the aggregate of all outputs of companies forms the economy (You may wish to refer to my book, “The Essence of Stock Investment” to understand the supply and demand side of GDP). So, if we have concluded that the economy is slowing down, we will deduce that companies’ growth would slow down too, we will then deduce that the valuation of the stocks should come down too. What happens to a stock price in a slowing economy? First is the profit contraction and from valuation point of view, the stock price of a stock will need to come down so as to maintain the same valuation (e.g. same price to earning ratio) and the second thing to happen is the valuation or PER contraction. In other words, investors now accord the valuation of the stock at a lower PER as the potential of making more money is simply reverse now.
What happened in the markets in the past few weeks is what I called a “relief rally” which is of course triggered by the aggressive cut of interest rates by the US Fed. Investors feel a great relief that the worst of the credit crisis is over. Of course, the rally also built on the hope that the interest rate cut could reverse the slowing down in the US economy which remains to be seen. As I argued in the past few weeks that this liquidity driven markets are likely to create asset bubbles here and there and would have to be deflated one day. While we continue to enjoy the wild run of these asset bubbles, we have to be mindful that this might be the last leg of a bull run since early 2003. In short, we need to monitor the markets closely and be the first one to run if there are signs of a market meltdown.
My personal take is that there is still a good chance for the regional stock markets to reach record level in the remaining months of the year barring unforeseen circumstances (especially this month). My view is that the 3Q earnings for most US companies should still be respectable albeit those companies directly affected by the sub-prime loan problems. As long as there is no huge disruption in US stock markets, regional markets should continue to do well. If the stock markets are doing well in the final quarter of the year as expected, we should be more careful come 2008. The reason is as explained above, i.e. we are facing with a slowing down US and global economy. I am not saying we should not look at stock markets in 2008, however we have to be more selective in choosing the markets that we wish to invest. Look for markets that are mostly spurred by domestic demand, or sectors that still enjoy strong potential growth looking forward. Cheers!
Master “The Essence of Stock Investment” and ride towards the journey of your financial freedom to be the “Master of Your Own Destiny”!
Disclaimer: Investors are investing at your own risk. Please read full disclaimer at the end of the blog or from the main page of the website.
October 9th, 2007
NW Teong
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