Archive for December, 2013

End of year 2013

Posted: December 20, 2013 in Uncategorized
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Well before we heading off….. the triple witching in the US and the Fed announcement  (same expiry date for options, future contracts and index options) conspire to give a target for end of year around 1,850 for the SP500 and 5,500 for the battered ASX.

This rally will probably end (or better we will have to reconvene and analyse) in March with SP500 at 1,900 and the ASX around 5,600.


Merry Christmas and happy holidays!


Since the era of Mao Zedong, China has adhered to the Zhou Dynasty military strategist Sun Tzu’s counsel: “subdue the enemy without any battle” by exploiting its weaknesses and camouflaging offense as defense. “All warfare,” Sun famously said, “is based on deception.”

The first, long forgotten, act had been the 1950’s encroachment in the Himalayas

Until 2006, China behaved as a good neighborhood. Then it started asserting claims on the Arunachal Pradesh (Indian territory, pretty remote and resource rich)

Last year, 2012, China effectively took control of the Scarborough Shoal, an area of the South China Sea that is also claimed by the Philippines and Taiwan. Philippines has now to accept a de facto conquest or go to war.

Now all attention is on the Senkaku Island for Japan (Diaoyu Island for China) and the Air Defence Zone. Again China is aiming at a “de facto” conquest.

Again in 2013 (bet you did not hear about this) China started ratcheting up pressure on India – on 15 April a Chinese platoon invaded (YES!)  the Arunachal Pradesh erecting a camp 20 kilometers inside Indian territory – retrieved only after three weeks of talks. Since then the LAC (Line of Actual Control….a defensive line between the 2 countries) is actually seeing a gradual build up of military deployment.

Just in the last month:

Tension with Vietnam are also rising in the South China Sea with the US approving a USD33 million package to the Vietnamese Navy.

South Korea just extended its Air Defence Zone to overlap the Chinese one and a US Battle Cruiser, USS Cowpens, almost collided with a Chinese navy vessel.

China has also started a series of dams to deviate river flows to increase pressure on the neighbors.

This seem to be a steady pattern for China – a full diplomacy intervention is needed before something will happen for real.

And considering that the region holds 50% of trades and 70% of electronic hardware, even a limited conflict would have huge repercussions.



Finally the tapering has commenced and the market rallied!

Why first of all it is just USD 10bn a month …and what is more just 5bn of Treasuries (the other is mortgage securities), than they said they will anyway keep tapering/low interest until 2015 at least and the taper was already in (weakness since Nov). Plus there is consistent talks that they are studying how to effectively push banks to give to the economy the money (the free money given to the banks now are re-deposited by the FED) and they cannot risk to upset the bond market. As usual it would take some days (and the press release) for the market to digest the info.

The QE Bull market is dead, long live the Bull Market!

Some extract from the speech – transcript – I just bold the important bits.

“We have emphasized that these numbers are thresholds not triggers, meaning that crossing the threshold would not lead automatically to an increase in the federal funds rate but would indicate only that it was appropriate for the committee to consider whether the broader economic outlook justified such an increase. With many FOMC participants now projecting that the 6.5-percent unemployment threshold will be reached by the end of 2014, the committee decided to provide additional information about how it expects its policies to evolve after the threshold is crossed.”

If incoming information supports the committee’s expectation of further progress toward its objectives, the committee is likely to reduce the pace of monthly purchases in further measured steps in future meetings. However, the process will be deliberate and data-dependent. Asset purchases are not on a preset course.

“If we are making progress in terms of inflation and continued job gains….I imagine we will continue to do probably at each meeting a measured reductionThat would take us to late in the year, certainly not by the middle of the year. If the economy slows for some reason or we are disappointed in the outcomes, we could skip a meeting or two. On the other side, if things really pick up and, of course, we could go a bit faster, but my expectation is for similar moderate steps going forward throughout most of 2014.

“The recovery clearly remains far from complete with unemployment still elevated, with both underemployment and long-term unemployment still major concerns. We have also seen ongoing declines in the labor force participation, which likely reflects not only longer-term influences such as the aging of the population but also discouragement on the part of potential workers. Inflation has been running below the committee’s longer run objective of 2 percent. The committee recognizes that inflation persistently below its objective could pose risks to economic performance and is monitoring inflation developments carefully for evidence that inflation will move back towards its objective over time.”


i- Google (as per i-Robot)

Posted: December 18, 2013 in Uncategorized

The media went crazy on the fact that Google bought the 8 leading US companies that produce robots.

What it does tell you?

– the robot technology now is out of its infancy and ready to hit the mass market

-Google has exhausted the exponential growth in phone, tablet, Android devices. Yes there are still the wearable devices (such as Google glasses), but they already know (as they own 80% of the research data, that it is not a big market

– Robotic devices instead could be the solution for various issues from assistance to the aging population (or substitution of aging population in manufacturing) and personal assistant to warfare and space discovery.


Welcome to a new era

Rising Sun: Japan

Posted: December 18, 2013 in Uncategorized

Japan’s cabinet has just approved a massive military spending boost for the next 5 years for acquiring, drones, stealth aircraft, amphibious vehicles.

It is the new weapon race in Asia and it has just started. Japan has the 5th largest military budget in the world, not bad for a pacifist country. Also, Japan has one of the most advanced robotical engineering industries in the world. Seeing that they cannot match China due to the limited amount of population…watch this space!


Posted: December 18, 2013 in Uncategorized
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2013 is ending up with a double digit performance for the share market, probably continuing into March 2013.

In brief

We identified three themes for 2014:

Australia is slowing down.

China, Japan, UK are in resurgence

US is consolidating momentum


–         Diversify abroad

–         Allocate to companies with earning exposures abroad specially USA, UK and China such as FOX, NAB and Sydney Airport.

–         Dividend plays will remain strong, but not outperform

–         Cyclical and Consumer retail/discretionary and some Government-influenced infrastructure, after the massive rally, will struggle to justify prices

–         Some big cap in the material and energy space such as BHP could surprise with special dividends.

In depth

At first we have to look at the three main factors here and around the globe: the economy, the geopolitical risks and then the share market


Australia is in a problematic position:

-Mining is slowing down
-The Government is proceeding with the fiscal tightening
-The consumer is not increasing spending
-Housing market, after a fast recovery, is stabilizing
-The Australian Dollar is still too high
-Productivity is not improving.

It almost feels the Paul Keating’s “the recession we had to have”. We need a recession to, hopefully, restructure Australia for the new post-mining boom era (mining will still be a great investment sector but not the driver of the entire country.


China has been through major reforms and exited the slowdown phase. This could well be the market to be in for 2014!


The US had an incredible recovery – 2014 will be the test year – to see if valuation matches expectation. But with low red tape, technological innovation and shale oil, it could well beat expectations –again.

Asean/Emerging Markets

Pan Asia market will be laggards respect China and US as the US Federal Reserve “tapering effect” will keep on draining capital from these markets. As oil is cheaper and China recovering, they will perform better than 2013.


In 2014 we will see if the revolutionary approach of Prime Minister Abe will work. He practically laid a path for the country, in a truly Japanese style, of victory or death, we do believe he will be victorious – but what he is attempting has never been done before. As Japan is a very insular country, apart psychologically effects, even a bust effect should not have too much effect in the world.



Great Europe

Europe is starting to exit its economic crisis (but still no end in sight for the political crisis). The markets to watch on the positive side are specially UK and Germany.

Geopolitical risks.


The main risk is the escalating tensions between China, Japan and South Korea. A war is not on the card, but accident could provoke moments of panic.


The main risk here around the end of quantitative easing. But the Federal Reserve has quite a long experience on fiscal tightening and should be able to manage it.


The economic crisis is at the tail end, but the profound social and political problems have not been addressed.   Even if it seems weird to say, there is the potential basis for revolution in some countries (especially in Greece with 50% of youth unemployment), but the Governments are fully aware of the situation and strictly monitor potential unrest as demonstrated by the arrest of the Golden Dawn leaders in Greece.

Middle East

Syria is a battleground between Saudi Arabia and Iran. The openings of US/Iran negotiation is strongly despised by Israel and Saudi Arabia and a potential issue for the oil producers. Apart some wild act of terrorism, for once, in relation to market it could have potential positive effects due to falling oil prices.


The future –geopolitical

In the years to come we will see an increase in geopolitical tensions – this is due to the new non-interventionist stance of the USA. Their new politic is to stay out of direct involvement (Eg Syria, Japan-China). This will allow the rise of regional competing powers, more likely to escalate regional conflicts of limited size.


Share Market take away

2014 will be a much more selective market than 2013 –as valuation have now recovered to normal level – only the companies that really deliver will be prized. And as Australia slows, investors needs to accept the necessity of a truly global asset allocation, even if it means relinquishing a little bit of dividends – luckily providers are coming to market solving this issue!

Russia, second move after Syria

Posted: December 12, 2013 in Uncategorized

After the beautiful example of “KGB style” Syria operation (the one that put off the US striking Syria, sending a message to the ex USSR “colonies” to better be compliant with Russia – not US or the weakling democratic Europe), now Putin is turning its attention to Asia.

Asia it has a clear importance as it needs energy and it is growing. Already Putin is trying to sell energy to China…but it is also playing strategic opening  up agreement with China’s natural enemies…old cold war allies (Vietnam), friendly or neutral countries (India and South Korea) and even old enemies (Japan)

The new US isolationism “first between equals” is creating a new world that, in the future, will be much more scary with a lot of medium powers competing for ever scarcer resources.

A message for the millions of anti-US pacifists: be careful what you wish for…you just might get it.

Australia (part 2)

Posted: December 12, 2013 in Uncategorized

It almost feels that my post of the 6th December was Orwellian…after that Qantas downgrades, QBE downgrades, Holden exit Australia..soon will follow Toyota and 6 days of falls in the AU share market -practically the worst since November in the developed market.

It feels like a 1-2-3 from the old Mike Tyson.

Plus in the US the Fed is playing up with liquidity – I always told that this year the market is driven by liquidity and by someone who (Fed) which we do not really know the game.

At least the Australian politician will have to wake up!

It is now a few years that I am worried about Australian political mismanagement.

Now unfortunately the issue are starting to come to focus to the wider population and the media.

In the developed economy we are trailing both US and UK. Actually the decline has started in 2009 and it has been a fault of the Government:

-misallocation of resources

– high Australian Dollar (also this is a fault of the Government/RBA: if all our major partners are waging a currency war, you cannot just stay idle and watch).

In 2Q13 Australian GDP surprised on the downside (+0.6% against a consensus +0.8%) So an annual decrease from 2.4%pa to 2.3%pa with an increase of population of 1.8%yoy.

RBA estimates for next year are 2.5%pa, but I am pretty sure they will prove wrong and we will be around 2%. Why?

– Domestic Demand Recovery is absent, apart the September /October retail optimism

– Even the RBA says the mining activities and Capex will decrease

-Public sector deleveraging under the Coalition start to have effect on other part of the economy 

– Fiscal squeeze due to the inherited growing budget deficit

– In face of this residential property boom cannot pick up the slack (actually some softness it staring to appear.

What does it mean for the share market? A most probable further rate cut before March 2014. Some cyclical and consumer retail stocks that ran a lot will face an harder truth.

Again, diversification overseas is essential.

At the end, market is all about liquidity. The more the people want to buy the more the market rise. The more money the people have the more the people will buy.

This explain the market behavior.  In the US the Institutional are “at the window” and the Fed pulled back (decrease in Option flows) not top overheat the market.

A study of Goldman Sachs sees that the Australian market suffered the most also due to the number of IPO (Initial Public Offering) hitting the market between November December) that drained from the market AUD7.5bn in November and will drain  this month until the 15 Dec another AUD4.5bn – without taking account off market transactions and the rumors that Shell is divesting another bit of its Woodside Petroleum.  After these deals are down, bar anything else happening, the market will return to previous levels.

In Australia, there are few IPO’s also at the start of 2014, but much less than the last 2 months. Then towards the mid/end of the year will start the Merger and Acquisition cycle which would be positive for the market