Good to be back from...

Exam that is.

Spend the last few months to take my very last actuarial exam, which I have attempted multiple times. (very frustrated). So after a 8-hour exam on last Thursday (9am - 6pm), it feels great to be back in writing about the market sentiment and my gut feel. (evidence based).

First up, a few updates on what happened recently.

- US debt ceiling will be reached and the government is undergoing debate on whether t o increase the ceiling again.
- QE2 is due to end on 30 June 2010. Fed still keeps a very accomodative monetary policy with interest rate at 0.0%.
- Chinese is still battling inflation with continued tightening of bank lending via raising interest rates and capital ratios.
- US economy still weak despite some slight improvement here and there
- Europe is still under constant reminder f what will happen if one member country having too much debt but without the ability to print money
- Commodities have taken a breather with 35% drop in silver from its all time high of $49.79 reached on April 24, 2011. Just above the its closing high of $49.45 on January 18, 1980.

So where to now...

The stock market sentiment tells that the bullish sentiment is not at an 'overbullish' condition. As a matter of fact, not evern close. (See chart below).



Based on that I will give the rally the benefit of the doubt because the sentiment does not point to a major market top.

Even though the global economy is still weak, this is no news to investors. Market is a discounting mechanism. Current information is broadly reflected in the price. What really drives the price is the deviation from expectations or the 'unexpected'.

For now, I will remain invested in equity.

Weekly update

Here is what happened over the past week.

1. Rattled market by supply-shocked oil price, both domestic and overseas

2. China continue its tightening policy at least in the near term due to inflation concern. China posted one of its biggest trade deficit in Feb (a good amunition toward US regarding currency appreciation)

3. Depsite all the 'gloom' and 'doom' happending in the last week.

To put things to perspective:

- the US stock indices have clocked close to 100% return since the low in March 2009.
- Gold more than doubled its price over similar period
- Copper achieved record price even higher than that prior to the GFC
- Crude Oil...
- Iron ore...
- Cotton...
- Corn...
blah.. blah... blah...

4. Market recent jitter has been long overdue and demonstrates the irrationality of the market can certainly goes on longer than one can stay solvent.

5. The bond market has been ahead of the equity as usually with steady increase in yields on both 10 yr and 30 yr US treasury regardless of Fed's QE2 effort (aka money printing)

...Signaling much feared inflationary scenario with sluggish economy in not so distant future.
Or at least the bond traders are increasingly pricing in this scenario.

6. Richard Koo, chief economist at Nomura sums it up well...
When the households is relunctant to borrow under zero interest rate environment, it is sure sign of de-leveraging. It is what happens when the economy is burdened with so much debt that the only thing on mind is to pay down the debt.

Not a good sign for recovery...

All of the above are examples of consequences of the ultimate cause i.e. money printing

So it will be very interesting to watch the tone of Fed when it comes to end of June/July i.e. the original planned end of QE2

Invest wisely

Investment game

It is hard to read the stock market these days, or maybe it was ever difficult to do so.

Australia is famous for its two speed economy, referring to the disconnect between the booming mining sectors and rest of the economy (somewhat sluggish).

Well.

It is what the current investment market feels like.

On one hand, the fundmental of the global economy is still weak and there exists many threats to the slightly improved economic condition (I have reservation over this).

On the other hand, the stock market is rally like everything is looking rosy from this point now. The following quote from the Economist sums it up quite well.

FDR let gold rise from $20.67 to $35 an ounce in 1933-34, a dollar devaluation of 41%. Since Ben Bernanke took office, gold has risen from $566.15 to $1381.72, a dollar depreciation of 59%. Not many central bank governors in history have "achieved" so much.

When central bank runs its printing press 24/7, it will bring inflation in real asset reflected in rising food prices and price of commodities etc.

When central bank keeps the short rate so low that it won't compensate for inflation, it encourages/forces speculation and risk participation (i.e. distored asset prices and ill-efficient capital allocations).

I understand the disconnect between the stock market and the economy at least in the short run. However, these two will come to senses on day.

But the level of bullishness in the market is making long-term value investor very uncomfortable.

Is this bubble or not?

To me, there is no point to discuss this because bubble or not, the fact is the stock market keeps soldiering on leaving the economy far behind.

Even if there is a bubble, it can go on for a lot longer than one can remain solvent.

It feels like going to a party without watches or clock or any time reference. Everyone enjoys it until they drop. While everyone understands there will come a time when party ends, no one cares about it too much so long as there is booz and fun.

At a time like this, it is more important than ever to remain discipline about investing and focus on the bigger picture.

As I said, market can remain irrational for a long period of time. It is important not to be tempted to join the party if you have already missed it by a long short. If you are having fun, don't forget to pause for a sec before you become too drunk (because it doesn't end well).

Anyhow, I am happy staying on the sideline and wait for the opportunity to emerge.

Price war good for consumers

A few game changer happening from fast food to retail and even mortgages.

Here it goes.

1. KFC has a value meal including a burger, fries and drink for only $5.95. This is a price I haven't been for a long time.
Other fast food chain has responded with even more eye-popping deals such as $4.95 meal from Hungry Jacks.

2. Coles started a retail price war from its 'pricing staying down' campaign. Two litre milk price is now $2.0 for its own brand. Woolworth, the other biggest retailor responded with matching price.

3. National Australia Banks (NAB) delivered a messages loud and clear with its intention to break away from the image of 'big four' banks.
It offers to pay $700 mortgage exit fees for Westpac and Commonwealth (CBA) mortgage customers to switch loan to NAB.
NAB has also been offering the lowest standard variable mortgages amongst the big four as well.

CBA responded with offer to pay $1200 to NAB customers who switch their mortgage to CBA as well as $100 for NAB's credit card and deposit customers to switch.

Game on.

The bottom line is when there is competition the consumers will stand to benefit to some degree.

Bear in mind though, someone will have to pay for all these, either the banks take a hit to its revenue or pass the cost to other customers (e.g. business customers).

Interesting to follow further developments in this space.

Australia housing

People keeps asking the same question:

'Is Australian property market at a bubble state?'

'If so, when will it pop?

My answer will be:

'Yes'

and

'not in the short term' and 'only when the time is right'

It may not sound very much but the point to make here is that in a market with price to average income of 7 time or more, it'll be hard not to call it bubble.

However, the economic condition has not reach a level that will pop the bubble yet.

The interest rate is still at a subdued level depsite rising.
The employment market has picked up and is likely to do so in the future.

So long as people have a job, the mortgage repayment will be the last to forego.

The implication for wannabe owner occupier and investors are very different.

The primary question an investor should ask is 'is the return on investment enough to commensurate my risk?

Whereas wannabe home owner should ask 'am i able to afford the repayments at the current interest rate level and at time when it increases by another 200-300 basis point?

If I were an investor, I will stay clear of proeprty market in general because the expected future return based on current valuation is likely to mean very anemic return at best.

As an wannabe onwer occupier, I will have no choice but to live with this ridiculous property price if I strive to get into the property ladder asap even knowing that I will probably be subsidise someone else's lifestyle in the not-so-distant future.

Greatest asset in life

Just came back from an overseas secondment to spend the Christmas & New Year break with family.

Mum told me that she fell over and hurt her whirst. What relevance does this has?

She accidently went to see a non-family doctor and happened to meet the best general practitioner she has ever came across in her 60-year life so far.

The doctor is very patient and willing to help. Patients walk out of the clinic both of their thumbs up.

One patient told mum that the doctor has gone to the length to call patients 9am to check up on their progress.

It makes me thinking that the greatest asset that one ever has is his/her job, not the million dollar house one lives in or $150,000 invested in equity with a $50,000 collateral.

If most people realise this, we would have avoided numerous financial crisis in the past and many yet to come.

Housing bubble

There are divided opinions about the bubble status of Australian housing market.

It has enjoyed mostly uniterrupted growth over the last decade.

Any real house prices increases in excess of real GDP growth will eventually lead to asset bubble and consequently crash. (i.e. consuming more than one produces is not sustainable)

House bubble has a much larger implication for the economy than a stock market bubble.

The reason is very simple. One needs a roof over its head but not investment in stocks.

Once the housing bubble pops, it will have a broad impact affecting the rich and the poor. Because of the significant amount of capital tied into housing for majority of people's life.

Effect of bubble status will take years if not decades to work through the system mainly via deleveraging of debt starting from the least cost effective forms of debt.

This is essentially the American story. With 70% of GDP relying on consumption, the massive glut of unsold inventory and foreclosed home will take the livelihood of the American consumers when the unemployment is struck at 9%-10%.

What it means for Australian housing market. This is a perfect lesson that most Australian won't learn until it eventuates.

I am not saying the Aussie house price will collapse in near-term. In my opinion, the house market remain reasonably supported by strong employment and neutral interest rate environment.

An outright crash is unlikely. However, the house value has reached a level such that any future return on this asset class will be at best anemic.

If you were told by many that the Australian house market is a sure bet for future financial security, you have been warned.