Posts Tagged ‘share market’

There are some troubling signs in China and from currencies- I attach some graphs for who is more trading oriented. But this could be the trigger of the bull trap in the next month or so.

Usually currencies and commodities are Early Warning Systems for market changes.

The Chinese Yuan had a break up (RISK AVERSION)

The Iron Ore had a Break DOWN (also the all important Steel)

The AUD JPY in reversal

Capture AUD JPCapture iron oreCapture CNH

 

 

2014

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

Outcome:

–         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

Economy

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

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

USA

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.

Japan

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.

Asia

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.

America

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.

Europe

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!

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.

The market analyst in general are very blase’ about the potential of a technical default of the US (technical means that you are defaulting as you do not want to pay, not because you do not have money – as the US can print it!).

Everyone is very calm and convinced of a very last minute “as usual” deal. It is just a feeling born from over 13 years of market experience that when everyone agrees the market does completely the opposite of what is supposed to do.

It also is how the Congress work….now there is no pressure from the Tea Party support base onto their senators to make a deal as they are not suffering any economic pain.

Also the Volatility Index is still hovering around 20 (the last crisis, August 11, was double that number).

Logically there are word of dissent. Fidelity, one of the largest US investment manager, sold all of its US Treasury position due in October/November.

 

I think the most realistic view is the one of Potomac Research (one of the more politically conscious US Research House), after talking with the Tea Party senators. it estimates the chances of a US Default at 20%. If you think what is a US Default it is not such a low number.

Well…just a little more than 1 hour to the the final moment.

I think that the market is already “pricing in” at least a partial shut-down. But this is a prequel to the real battle on the US Debt Ceiling battle (the limit technically expires the 17th October). In reality this shut-down does not have much impact on the market as it hits mainly the public sector. Not that is good, but during the previous shut down (Clinton Era) actually the market rose a little – as in reality they cannot keep the Government close forever.

But the 17th October is extremely close.

Syria – reloaded

Posted: September 11, 2013 in Uncategorized
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Be wary into believing that the Syrian Conflict scenario has waned.

As an investor, not a punter, you should leave these days of profit to day trader as everything can become the biggest trap the market constructed. Or not. But losing your capital is a no go zone – and you do not have to risk everything for a fistful of dollars.

As I see Obama is cornered. But he is an astute President. He knows that the same people that hails is democratic process can literally impeach him as a lame President in a fortnight.

The Russian bluff, up till now worked. In exchange Putin is basking in the former USSR glory. The prize are all the Baltic region state ex USSR. And it depends if Obama thinks the price to pay is too much – also in light of the current alignment of interest between Germany and Russia.

The UN resolution is completely a waste of time: they cannot decide the consequence of a breach by the Assad regime – go figure when they have to decide which country technician and troops have to go in 50 sites in the midst of a civil war with an heavy involvement of Al-Qaeda – a sitting duck scenario.

I always thought that that the most logical side that conduct the gas attack is or a rogue side of the Syrian Army or some Saudi sponsored terrorist (spies?). I am pretty sure of my conclusion – but that conclusions bring an extra layer of uncertainty as we do not know what they will do at this point. The Saudi and affiliates states even offered the US to pay for the bill of teh war (US Army as mercenaries!)

On Assad’s side it seem that the attack on the Syrian Christian town of Maaloula has been let happen by the regime to pressure the US Tea Party against Obama.

And, on top of that, there are some parts of the Assad’s regime that are pretty sure that the US will find an excuse to attack

anyway and they want a preemptive strike on US interest (for example, Syrian Minister for the Reconciliation Haidar))!

The Chinese are pretty much involved in fixing their own economy. They have a slight interest aligned to Syria/Russia/Iran as they sell weapons to them. I bet they would love a US limited strike…it takes the eyes of the world off what happens between them and Japan (yes still going on – as of two days ago two Chinese warship went in Japanese sea) and plus they would battle test some radar they sold to Syria. But they are not pro-active.

This is not about Syria. This about Geopolitical World War 3 after the Global Financial Crisis –  the shaping of the new world.

Pay attention who read this as the end of the US….during the Global Financial Crisis lots of commentators where seeing the GFC as the demise of the US. As you see it now, it was more the demise of the rest of the world in an economical sense. Pearl Harbor should teach us something.

So even if there is a BUY signal in the market the risk are extremely high.

September highlight

This month there are a number of dangers in the market which we are not comfortable with,

as one of the main objectives of our strategy is capital preservation.

– Australian election: at the moment the polls indicate a Liberal win and that would be a positive for the market

– Syria: a potential war could lead to volatility both because of potential oil price spikes or, even worse, potential spillover of the conflict in Israel, Lebanon, Iran and Turkey (member of NATO).

– End of Quantitative Easing. This could lead to a sudden outflow of capital from the share market, in particular from emerging markets. Emerging markets, in particular India and Indonesia, are already starting to suffer a liquidity crisis .

– Reach of the US Debt Ceiling by 15 October. In 2011 the ensuing battle between Democrats and Republican has been what provoked a 10% fall in the global markets.

-Nomination of the new US Federal Reserve Chairman: Bernanke, current chairman, will resign in January 2013. Within the next month President Obama will announce his successor.

The two main candidates are Mr. Summer and Mrs. Yellen. Mr. Summer is currently seen as the winning candidate and the his ideas are against Quantitative Easing and so his election would spur a market retreat. Mrs. Yellen would be viewed as a positive for the stock market.

-German election (21 September): at this moment the polls indicate that Mrs Merkel will be re elected and this should be a positive for the market

– Soon after the outcome of a challenge of the German Supreme Court to the European Stability Market (ESM) system powers will be notified to the public. This could be a mildly negative for the market as the ESM is the mechanism that allowed to contain the European Crisis.

As you can see there are too many random events to predict with any kind of certainty what the market could do – even if the odds are clearly on the negative side.

In Depth

Australian Election

As of now it seems PM Tony Abbott will win. I am not going to delve into the various policies as there are already plenty of analysis in the various newspapers. A Liberal Party strong win will be seen as a confidence booster for the Australian share market as the Liberal party is seen as favorable to business condition.

Syria

 

The Syrian battlefield is, in reality, a proxy war between the two emerging Middle Eastern powers: Iran (Muslim Shia) and Saudi Arabia (Muslim Sunni).

In August 2011, US President Obama clearly stated that the usage of chemical weapon against the population was a clear red line that would warrant intervention. With every probability he thought nobody would have dared to cross that line.

 

Even if the US clearly does not want to enter another Middle Eastern war, a non intervention would send a clear message to Iran, North Korea, Russia and China that the US is not anymore a world superpower, but more a “first between equals”. This could even be seen as the start of the US decline by its enemies.

On the other side an attack could lead to help Al Qaeda seize power in Syria or, at worst, a Middle East war that involves Syria, Iran, Saudi Arabia, Israel, Turkey (and consequently NATO) and the flaring up of a Second Arab Spring and cyberwarfare – this option, although threatened – is pretty minor as it would escalate a conflict that Assad cannot win. More likely we would see some cyberwarfare increase and an increase of Hezbollah terrorist activities against Western and Israeli targets. This is why Obama is seeking Congress approval and a broader alliance.

 

US Federal Reserve New Chairman

 

The two main candidates (quite often there is a last minute candidate) are both academics, but very different from each other.

 

Mrs Yellen is seen as an astute negotiator and is seen as a continuation of Bernanke’s pro-market policies. She is currently Vice -Chairman of the US Federal Reserve System. Per converse she has very few political alliances and she is seen with hostility by the Republican for the “dovish inflationary views”.

Mr. Summers, instead, is a pretty controversial figure that openly declared that the Quantitative Easing (money printing) does not have any effect and he will terminate it as soon as possible. He is one of the fathers of the financial deregulation in the US and, moreover, when he was Harvard University President he lost almost all of the entire endowment fund of the University (USD2 Billions). He is a very keen politician with a lot of political alliances and personal friend of President Obama.

 

All this negativity will have just a temporary effect on the market as the Syrian war, if it happens, will be most likely soon over and the US Fed Chairman has to act within a board and build consensus as in any democratic institution.

 

So, at all effect, this September will be a “buy the dip opportunity” than a second 2008 Global Financial Crisis. But we are prepared for every eventuality

Obama bluff has been called and there will be war. And there will be death. Americans will be again seen as heroes and ruthless killers at the same time.

Obama last year declared that a gas attack would be a clear red line because he thought Assad was not so stupid to conduct one.

What really happened, nobody will know. has it really been staged by rebels to provoke an attack (smartest move from rebels on a verge of defeat- but they do not seem to have the weapon delivery systems to conduct such an attack – US “Mission Impossible” kind of spies? Difficult – Saudis spies….that could have a chance). Was it Assad? He is not stupid…I do not think so. What I think (and it is of no consequences) is that some rogue part of the Syrian Army (Assad’s bloodthirsty brother or  some Iranian proxy) did it.

As a famous Italian comedian, Pirandello,  says ” It is so (if you think so)”.

The reality is that the Obama’s bluff has been called and war will be. Otherwise Iran and North Korea and anyone else (Russia, China) will know that their own red line do not exist.

Obama clearly does not want “boot on the ground” and has delivery weapon systems to proceed with “stand off attacks” (attacks carried from outside the Syrian airspace). 4 US Navy Destroyers are already in place. Strategic bomber can attack from bases in the UK and Saudi Arabia and the US 5th Fleet with two supercarriers are less than 48 hours away. There is at least one nuclear sub around there.

Thursday the UK Parliament has been urgently recalled.

What Syria (and its allies) can do. Syria has a good air defense system, but very limited offensive capacity (specially considering that they cannot risk to “disturb” also Israel. Iran can be a nasty surprise probably asking Hezbollah to attack/kidnap Westerners in Lebanon. Russia has already played its card with Snowden.

So it should be limited. But war is war. And oil and gold will start running again (well they already started) and the market will have its own (overdue) correction.

Louis Vincent Gave, manager of Gavekal Asian Opportunity is one of the most interesting manager to listen to. And he is worried.

There is a clear dichotomy between the Emerging Markets and there are only three potential reason/outcomes

 

1 The first is to say that the tailwinds to the Western economies (shale gas, robotics, ultra-easy monetary policies, fiscal and
regulatory policy visibility…) are just so strong that the valuation gap between emerging markets and developed markets
can only accelerate from here. In this scenario, one would want to continue buying developed market equities at the
expense of almost anything else.
2  The second is to say that, if developed economies really start growing as fast as Western equity markets are increasingly
starting to discount, then one should not worry too much about a China slowdown. Instead, one should use the recent sell-off
in EM growth stocks as a terrific opportunity to increase exposure to Asian and emerging market equities on the cheap.
3 The third, and more worrying conclusion would be that, while emerging markets are rightly discounting a growth slowdown,
developed markets are not, probably because of the excess liquidity created by central banks. However, if/when the spigots
get tightened and/or growth in developed markets is unable to build on the recent momentum, then the valuation gap
might close not through a re-rating of emerging market equities, but a de-rating of developed markets.
It is this third possibility that has GK worried today. Indeed, with a US economy approaching “stall speed” (whenever US GDP and US
industrial production growth fall below 1.5% YoY, the US economy has always experienced a recession), with growing uncertainty
regarding US monetary policy, with the threat of partisan budgetary battles looming once again in Washington, with Southern Europe remaining stuck in a deflationary bust… a number of factors pushed GK to reduce the overall risk across most of the actively managed GaveKal funds in July. This was obviously not the best immediate decision and helped contribute to the past month’s under performance.

So there are two outcomes …or he is wrong or he simply acted to early. This kind of dichotomy is statistically 70% associated with a crisis.

As of me, my personal scary month is mainly September and part of October – I am very traditional guy indeed 🙂

Countdown to Syria

Posted: August 26, 2013 in Uncategorized
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An attache’ to President Obama just released notes that indicate that the US will not wait for the full UN investigation into the nerve gas attack.

-It is pretty clear it is a gas attack, confirmed by Medicine Sans Frontier

-the rebel do not have delivery systems to mount a chemical attack.

The easiest way for the US to attack is using cruise missiles (4 warships have been moved in the area, plus there will be some subs around there) aiming at crippling the Syrian Air Force.

Naturally the first consequence for the markets will be a spike in oil and a sell-off in shares. Then we will have to see what happens and hopefully the war will not escalate (already Lebanon is on a verge of a crisis).