Friday, April 30, 2010

BJToto-CD or BJ-Toto-CF?

Some reader feedback to me that BJToto-CF has better value than BJToto-CD, implying I made a mistake. The reasons I’m responding to the comments so that we all can learn from each other. Let's look this issue from the persepective of present, past and future.

At this point time, it’s absolutely correct that CF has better value because it has lower strike price $ 4.00, 302 days to expiry date, 1.1% premium but has 8.3X gearing.

CD is obviously has less value because of higher strike price $ 4.387, 81 days before become worthless, 3.9% premium but twice gearing 16X. CD value eroding fast as the intrinsic value of time going down fast despite of higher gearing factor!

However, like I said, it’s always 20/20 when we look backward.

I made the transaction around Dec 11, 2009 at around $ 0.05 and CF did not exist yet as it was launched around Dec 13, 2009.

Around that time CD has 212 days to expiry, 9.3% premium but a great gearing of 20X. It has higher intrinsic value because it was the best deal in town, great gearing factor.

CF has at least 1 year before expire (launched Dec 13,09)with 4.7% premium but not so great gearing, selling about 0.155.

When I’m in mood of taking a bigger swing, I prefer to play it aggressive, maximizing gearing at reasonable premium and expiry date. A reader pointed to me CF has better value but I did not make the switch because I like the leverage factor.

For return comparison by putting the price in a real time decision scenario, let’s assumed that we bought CF at 0.155 and sold for 0.18-0.19 on the same day I sold CD, the return will be 16%-22% vs 18% of going for CD. In this case, return was not too much different because my gearing factor compensating the short-comings.

Unless you are very confident that the mother share will go a lot higher in 250-300 days, you may want to continue to hang on or even buy CF. It’s all depend on individual risk appetite.

However, I’ve been saying the corrections is getting closer while I look a lot more stupid because whenever I call for a correction, the markets go higher. S&P breaking 1,200 - can you believe that? I would prefer to wait until the sky is clear before going out for fun.

Hope this will put things in perspective. Have a nice weekend.

Do I regret closing out BToto-CD too early?

Looks like BJ Toto broke out from $ 4.50 today. It has made a least 4 attempts but pulled back quickly over the last 1 year.

Well, we only can make the best judgement at the point of making decision and not after that. Statiscally, the odds were not good(yesterday) so taking profit was the best decision.

I did realize that there is a possibility of it will cross $ 4.50 heading to $ 4.70 which is even tougher by putting on a technical glass. If it can cross $ 4.70 convincingly, it will move on to unchartered territory. Realizing this possibility, I closed out the high risk trade especially warrant that will fast losing its value as time goes on. I however will still hold on to its mother share as I bought the stock for its dividend and a long term investment.

Thursday, April 29, 2010

Closing out all BJ Toto-CD

I made a wild call of BJ Toto-CD as a trading idea.

I've closed out all my positions at 0.065. Even though BJ Toto is tempting to break out from $ 4.50 and I had a 100% return expectation when it was in December 09, but the expiry date is only 80 days away, I'm contended with 18% return. I'm making a follow up on this entry just to show that when circumstance change, if one is taking a trading position, one should not continue to hang on to hope that BJ Toto mother share will reach $ 4.70 - $ 5.50 target even though it well could can happen within a short period of time. Trader should also know the potential headwind is in front of them, getting closer to correction period.

Wednesday, April 28, 2010

US consumer Index, Mirror of economy???

The US consumer confidence published by the University of Michigan can tell us a lot of things, even though they do not necessary equal to willingness to open their wallets, predicting the US consumer spending.

I came across this chart published by Bespoke folks. They spotted the US consumer confidence index has been rising and recovering to pre-Lehman level. The number of 57 is kind of like a magic number because it will continue to rise after clearing this hurdle. I have no scientific explanation to this except it tends to have this statistical bias.

Whether it will continue to rise and bring about continued spending is not really concerning me. The thing that I will pay attention is whenever there is an exceptionally high level of optimisms. Whenever it hit the 90 - 110 level, there is a high correlation that a recession will follow.

Those of you who have been following me for a while(I think many of you are) will understand that my big picture outlook remains unchanged but short term financial markets corrections that I highlighted on April 16, is getting louder.

Monday, April 26, 2010

Why am I not selling out White Horse yet?

When I see a stock that I bought at lower price going through a nice chart like this, completing a cup and handle, then going through a consolidation. Then followed by another mini parabolic with improving volume, I will continue to hang on to the stock until I see some level of exhaution before I take profit. If it can clear convicingly over $1.71, then I will continue to ride on the trend and observe whether it can clear $ 2.34, about 10X PE.

Hulu S'gor: 'No cause to complain now'

Quoting two sources, to prevent being accused from taking one side.

(MalaysiaKini) 'Pakatan will have to live and fight another day. For the Malays, Chinese and Indians, they've made their choice. They will also have no cause to complain from now on.'

(TheStar)Najib said P. Kamalanathan’s victory was significant for Barisan because he won the seat by a 1,725-vote majority in the constituency while Barisan lost by a slim 198-vote majority in the 2008 general election.

The conspiracy camp thinks it's a buy election. The ruler thinks that they have done it right to recapture people heart.

I refrain giving my views since it's highly political. There are four possibilities of interpreting the result:

I. PKR has not been able to deliver what they promised.

II. Giving BN a chance, they have been beaten enough.

III. Both are competing hard, giving their best. BN won this time, PKR needs to work harder.

IV. Both are hopeless, since it’s a “buy election”. Take the highest bidder.

As long as it's not possibility I and IV, I think Malaysia still have hope.

Saturday, April 24, 2010

Good initiative by Bursa Malaysia

Saw these in the market statistics by Bursa Malaysia. I think they begin to release some good information for us to make a better informed decision. Thank you Bursa.

[1] Trading statistics: local vs. foreign

We can see that foreign instituitions are buying quality blue chips i.e. 11% of trading volume but account for 24% of value. Average price that they bought were $3.70.

Local instituitional funds are also buying into higher quality stocks, average stock price is about $3.89, slightly higher than their foreign counter parts.

Our local retails love to "play" penny or lower quality stocks. 42% of trading volume but only account for 20% of value. Average transaction price is 0.74/shre

[2] Trading activities by brokers

CIMB is an obvious choice for some higher net worth or bigger clients. I believe they will spend more time to track a lot of blue chips companies. Not surprisingly their quality is better.

Hwang DBS is not too bad. Surprisingly they still hanging there after their star analyst Vincent Khoo left the company.

I have reasonable resons to believe one of the largest favorite of penny stock broker is OSK as they acccount for 10% of volume but only 6% of value. If you look the buy and sell value, sell is higher than buy, they have some winning market calls. Where else, Aminvest or RHB have money losing calls, sell value is lower than buy value.

Wednesday, April 21, 2010

Just mumbling

Sorry, have been away from the country again for a few days. Let’s leave the bulls and bears alone a few days. They need time to sort out and to settle down among themselves.

Since I have not been able to follow the financial news very closely for the past 2-3 days, I will allow my random thoughts to just spurt out whatever that come naturally. I was one of those guys suffer from cocktail party-phobia. To those who are about to join the working world, you may have an impression that it’s a glamorous assignment, feeling great wearing nice suit(of which I think I don’t have one), holding wine or champagne glass rubbing shoulders with big shots.

Unless, I’m really have no choice – my boss threatening to fire me if I don’t go - I will always prefer to shy away from these kind of scenes for a number of reasons. No 1, I don’ think people are genuinely interested in each other. All they did will be introducing each other, exchanging business card and say something polite to each other. That’s it. Worse than hi and bye.

Or people will keep asking, do you know who and who, can you introduce them to so and so. Would you mind to set up an appointment for me?

Or worst of all, especially Asian, they tend to talk among themselves or some guys will be left alone in a corner by themselves.

Or some guys will boost how they made some killing in stock market. These guys are so convincing on the hottest sectors or stocks(fundamentally, technically and most powerful of all, I’ve got inside tips). Some of these guys are quite powerful, they can be very intimidating exerting peer pressure on you. If you are new and young to investing, this will be one of fastest way to destruction.

Perhaps I’m getting more cynical as I’m getting older. I prefer solitude and need plenty of sleeps nowadays. Good night.

Monday, April 19, 2010

Buy a house or invest first? (some corrections)

This note is for those who read this post yesterday. I made a mistake on the outstanding loan, incorrect timing taken for Mr. C. I have corrected them. Luckily it did not distort the overall picture. Sorry for any inconvenience caused.

Sunday, April 18, 2010

Buy a house or invest first?

I have posted that I did not want to buy a fancy car because of its value will depreciate very rapidly, halved in 5 years. Today posting is to look at things that will appreciate over time. One of the basic securities for us to fulfill is having a roof over our head. I have heard many argued that it is better to invest and grow money and pay in a lump sum for a house or vice versa. I have created three scenarios(Mr. A, Mr. B and Mr. C) to determine their net worth in the first 10 years of their working life.

Some key assumptions

Starting pay RM 2,000 straight from school and having annual salary increase about 10% and occasionally get 20% increment due to promotion.

All three persons are equally good and confident to generate annual compounding return of 10%.

Mr. A.
He decided that he wants to save 10%-20% of his income and spend the rest to upgrade his lifestyle as his salary gets bigger.

At the end of 10 years, his net worth is about RM 105 k but without a house.

Mr. B

Mr. B is an interesting person. He is a strong disciple of delayed gratifications. He figured that if he can survive with RM 21,600 a year expense after his graduation. He should not upgrade his lifestyle as his salary rises. He pinched every penny he has, drove the damn second hand Kancil for 10 years. He loves having cash in hand and do not feel like buying a house yet. Occasionally his girl friend will get angry with him due to his frugal lifestyle and his future mother-in law puts pressure on Mr. B as her daughter is getting older. Mr. B seems cannot be bothered because of his obsession to grow wealth. Despite of occasionally having unhappy moments, at the end of 10 years, his net worth grew to RM 272 k. He is in much better position compared to Mr. A. He paid 272 k for the house and only need to take 18 k loan.

Mr. C

Mr. C is the most interesting lot among three of them. He is aware of future inflation of big ticket item especially house. He is aware that he needs to buy a house ASAP due to rising house price. Why housing price rises over time? Simple, rising labor and commodities like cement, steel, aluminum and etc. House prices have been rising between 7-10%. Let’s settle for 7% for the purpose of this exercise.

At the time he graduated, an apartment cost about RM 150 k. He fears his salary cannot catch up fast enough with house prices. He quickly invested the first for 4 year savings that he accumulated, about RM 30 k. He was right, at 7% inflation, the house already gone up to RM 190 k. So the poor chap have to take a loan of about RM 160 k for 30 years with interest rate of 4%(BLR – 1.8%).

His net worth is RM 283 k, 11 k better than Mr. B despite of him serving 36 k interest to bank.

Wrapping things up.

First of all, we all need to be aware that not many people can generate 10% annual compounding growth consistently over a long period of time. May be only 3 out of 100 people. In case of people lose money or generating return below the housing inflation rate, you know the end result.

If one is as good as Mr. B, invest first and buy later is not so bad.

Mr. C early action protected himself from doing stupid things with his cash and hedged against inflation naturally. A good choice for those do not have strong discipline or ability to invest.

Mr. A probably scores highest marks in enjoying life. After all, you can't bring it with you when you are gone.

Last few words, in case that you need to quote me for any debate, please use it gently and wisely. It's an emotional issue for a lot people.

Saturday, April 17, 2010

Correction or meltdown?

Goldman Sachs triggered the sell down. Is this beginning of something more serious to come?

(Investment U)1. It's All About the Economy, Stupid!
Forget about a double-dip recession cutting off this rally at the knees. The latest economic data points to a recovery that is real and sustainable.

~ Take Warren Buffett's favorite indicator, for example - railroad freight traffic. It just hit its highest level since November 2008 - up 16.5% in the last week of March.

~ Restaurant activity rose to its highest level in 27 months in February, according to the National Restaurant Association.

~ The ISM Manufacturing Index touched a six-year high last month.

~ New orders for manufactured durable goods increased for the third consecutive month, too.

~ Industrial production jumped by a solid 2% in February.

~ Last month, chain store retail sales logged their best year-over-year increase since 1999.

True, the unemployment picture still stinks. But it's a lagging indicator. By the time it improves dramatically, the market will have left you in the dust.

2. The "Sesame Street" Indicator is Bullish
Oscar the Grouch loves trash! So do investors.

Case in point: The stocks that got battered and bruised the most during the market's downturn are the best-performing ones coming off the bottom. Namely, financial stocks. In fact, most are up by double the amount of the S&P 500, if not more.

Of course, this typically happens in the first leg of a bull market. Junk outperforms high-quality companies. But it's a well-documented fact that investors eventually start rotating into undervalued, steady performers.

There's plenty of history to back this theory up, too. That's exactly what happened after the early 1980s recession, the early 1990s recession and the early 2000 downturn, as well. The fact that it hasn't happened on this occasion yet, means there's plenty more upside ahead, as high-quality companies eventually take the baton.

3. Technically Speaking...
Although I favor fundamental analysis over technical analysis, that doesn't mean I ignore technicals completely. After all, we never want to fight the trend. And technicals point to this rally continuing, too.

Take the advance/decline line, for example. It basically gauges the strength of a rally by measuring how many stocks are participating in it (also referred to as the market's "breadth"). The line is currently very bullish. The last three times it's been this bullish - in 1962, 1975 and 1982 - the market kept charging higher, according to Dan Sullivan of The Chartist. All the while, investors doubted the sustainability of the move.

Then there's the common Wall Street wisdom to "never short a dull market." In other words, don't bet on a downturn just because it's been a while since we had one. The bears would like you to believe that the market is overdue for a downturn, since we've gone 27 trading days without a 1% move. Let me put their argument in perspective...

We're not even close to longest streak on record. Back in 1995, the S&P 500 went almost 100 days without a 1% move. So this "dull" market could keep heading higher for many, many more days.

4. Bring on the Buybacks
Companies are spending the lowest proportion of their money on stock buybacks in almost a decade - 28% of operating profit. At the same time, they're sitting on record amounts of cash - almost $1 trillion.

The good news is we've seen a pick-up in buyback activity in recent months. Mizuho Financial Group expects companies to double their stock repurchases this year - resulting in a total of $235 billion. We're nowhere near a top, either. In 2007, companies spent almost $600 billion on buybacks.

Remember, buying back shares reduces the number of shares available and increases earnings by share. As a result, stocks often climb higher.

Long story short... the speed of buybacks is accelerating and there's ample cash available to fuel many more. That definitely points to higher share prices ahead.

5. Stocks Are (Still) Cheap
The S&P 500 currently trades for about 15 times this year's projected earnings, based on Bloomberg Data. If companies deliver the profits they're promising, shares will need to rise in order to match the average price-to-earnings ratio of 20.6 since 1992.

Looking at this from another angle, we always tell members of The Oxford Club that share prices ultimately follow earnings. And with the average analyst in a recent Bloomberg survey calling for a 50% increase in S&P 500 earnings this year, stock prices could easily jump just as high.

6. Life Expectancy
The fact that the current bull market is now one year old is a big deal. The last 13 bull markets that lived that long ending up lasting an average of 4.4 years and returned 153%. This bull is still a baby in comparison.

7. The Herd is Clueless (Again)
We all know it's bad to follow the herd. And right now, the herd is clueless. The entire time the market's been heading higher, they've been plowing their money into bonds!

The latest data from Morningstar reveals that over 95% of the $377.4 billion flowing into mutual funds last year went into bond funds. Year-to-date money flows are similarly lopsided, with 71% going into bond funds.

Even worse, investors are withdrawing money from stocks to fund this strategy. In February, investors withdrew $3.7 billion from U.S. equity funds, the fifth outflow in six months.

So if you're selling now, you're investing right alongside the herd. Bad idea.

Be Invested Or Be Sorry

In the end, if you doubted my prediction last spring and sat on the sidelines, you missed out on a massive rally. Another bout of hesitance could mean missing out on more upside, which would be even more disastrous to your wealth.

So make sure you have some exposure to equities. Just be smart about it. Do these two things...

~ Use position sizing.
~ Use trailing stops.

By doing so, you'll share in all the upside if I'm right. And if I'm wrong, you'll limit your losses.

In my mind, that's a far better proposition than running scared, parking everything in cash and getting paid nothing for it. As the saying goes, "Nothing ventured, nothing gained."

Good investing,

Louis Basenese

That's the big picture outlook. On the tactical level, here is my take:-

Thursday, April 15, 2010

The benefits of property investment

I was not sure why I like something more liquid asset classes such as equity or mutual fund over other form of investments such as property, fine wine, antique or painting. That doesn’t mean we can’t churn our assets especially with property. The time horizon is not terribly long. 5 years may be okay. The current strong competitions among banks offering exceptionally low rates make it very easy to leverage up.

On a very simplified illustration, putting down RM 100 k, borrow RM 400 k to buy a RM 500 k property and

sell it for RM 750 k at the end of 5 years,

assuming your rental is able to cover your interest charges,

your annual compound return is 28%.

It’s quite an attractive investment proposition indeed.

Success or failure to realize this gain is depending on the ability to smell good LOCATION. LOCATION, LOCATION, LOCATION.

I found an article, the reasons for property investment written by a successful property investor Renesial Leong.

(TheStar) Here are several reasons why Renesial Leong likes property investment over other forms of investments:

>Cash flow on a monthly basis
Make sure your rental income is able to cover mortgage repayment, service charges and other expenses.

A 10% downpayment is equivalent to 100% ownership. Be careful with the gearing though.

>Capital appreciation
Well located properties have good capital appreciation over time, especially landed units.

>Property investment pays for itself over time
If the rental income is sufficient to cover the monthly expenses, the property pays for itself over a period of time.

>Return on investment
Well thought out purchases, when put on the rental market, generally provide a positive return on investment.

You have control over what and where you want to buy, and the type of properties you are comfortable with. It is also within your control whether you want to rent or put it up for sale.

>Hedge against inflation
One of the reasons why property appreciates in value over time is due to inflation. The price increase in new properties is generally reflected in an increase in existing properties.

>The benefit of use
Whether it is a house, an apartment or a commercial property, there is a demand for it if the property is well located.

Wednesday, April 14, 2010

Half-full or half empty?

MalaysiaFinance posted an interesting question that requires us to refresh and remind ourselves: Speculator or investor ? Half empty or half full? Am I a speculator or an investor? Does it matter? If you reach the glass and pour it in your mouth, it will quench your thirst. It will keep our body from dehydrations. It will do us no harm as long as it is water. The dangerous part of it is ignorance – drinking a cup of half-empty water contaminated with arsenic! (the latter part requires some level of paranoid thinking, self-awareness and knowledge)

At the personal level, I have been struggling for years trying to reconcile both schools, ended pissing-off a lot of people. The kind of question that forces you to choose right or wrong, which is a tricky question.

Consider this, speed kills!


Some guys may turn around and argue, speed doesn’t kill but STUPIDITY does!

Risk is coming from not knowing what we are doing. The same analog applies speculating doesn’t kill but STUPIDITY does.

What about investing? Can investing kills you? Investing will not kill you, I guarantee you but ……… hiding your stupidity and incompetency in the name of INVESTING will kill you.

There are rules of engagement to be an INVESTOR or SPECULATOR ought to be respected. The worst of all, people call themselves investor or speculator when they are not!(strong words indeed, it took me three shots of Johnny Walker Blue to make this statement). Have a good day.

Disclosure: The author thinks himself is an investor and also a speculator.

Monday, April 12, 2010

Turtle bought 1,000 shares of iCapital

Turtle bought 1,000 shares of iCapital @ 1.79. Why? Simple, I believe in what I published.

If we look into iCapital portfolio, 8 stocks contribute about 86% of its investment. Obviously, the fund manager employs high concentration strategy. Parkson, Astro, KL Kepong, F&N, Petronas Dagangan alone contribute about 69% of investment as at today. I assume there are not too many changes from the information that I extracted from annual report, as his investment strategy is relatively passive. So, I can make things quite predictable. I back tested last week NAV of 2.16 and based on that closing price, this model is lower than its actual NAV by 2%.

Based on today's closing, the NAV stands at around 2.13(2.09*1.02). So it is still selling at deep discount. Perhaps some people are not convinced especially when they see Parkson is under strong profits taking, I would consider the fluctuation as normal. Most of the "China" story is still out of favor because of sideways movement in Hong Kong stock and China stock markets. Once these markets move as people begin to see China is heading to a very soft landing, I would think the NAV can move up to 2.35, when the enthusiams return, at 15% premium, share price will challenge the previous all time high(2.70-2.80)! Phew, thank God that I had taken three beers to make the last statement.

Friday, April 9, 2010

Retail investors are still in high pessimism

This is how most people gets it wrong, buy high sell low. This chart tells it. One of the sentiment indicators is look at discount of closed end fund to NAV. At the peak of pessimism in March 2009, these funds are selling at 20% discount and now is narrowing but not at a premium yet. It still has some rooms to move.

If you feel that you are still kicking yourself for missing the opportunity, there is still an opportunity. iCapital is selling at almost 20% discount to its NAV. The level of pessimism is same like March 2009 in matured market. This means our market is highly inefficient because the institutional investors have not been doing enough research to swallow the mispriced stocks. If you buy into iCapital now, you are getting Public Bank, F&N, Petronas Dagangan, Parkson and etc at 20% discount. So, for those love to buy low sell high, the window is still open but need guts to make the first move! I was at first wanted to keep quiet and keep buying but have been feeling guilty so I share it, though it cost me a bit because price starts to move after I published it in a number of occassions. May be I just "perasan":)-

China on ‘Treadmill to Hell’ Amid Bubble, Chanos Says

To be honest, I have been seeing more of the same headlines over the last 1-2 weeks. Getting a bit tired. Plus, getting busy lately causing me not updating my blog as frequently as I should. So, for the sake of saying something, I will say something. Sorry if I bored you.

James Chanos has earned his famed for being one of the investors who saw the coming of Enron collapsed. With that kind of credentials, what he said will get some attentions.

Chanos, at least you are honest. You have taken short positions in Chinese developers and material builders. With enough actions from the Chinese government, the property prices will have to come down. There is also a good chance that housing stocks will suffer as demand slows. There is also a good chance that he will make some money for himself or his investors.

I disagree with his prognosis however this will sink China economy. Come on-lar. Please do not sow fear after you have taken some short positions to get people dump shares. Hedge fund managers are very good of amplifying fears once they spotted any fault lines.

April 8 (Bloomberg) -- China’s property market is a bubble that may burst by as early as this year, according to hedge fund manager James Chanos.

The world’s third-biggest economy may need to keep up the pace of property investment because up to 60 percent of its gross domestic product relies on construction, said Chanos. The bubble may begin to “run its course” in late-2010 or 2011, he said in an interview on “The Charlie Rose Show” that will air on PBS and Bloomberg TV.

China is “on a treadmill to hell,” said Chanos, who said in January the nation is Dubai times a thousand. “They can’t afford to get off this heroin of property development. It is the only thing keeping the economic growth numbers growing.”

Property prices in China rose at the fastest pace in almost two years in February even after officials this year re-imposed a tax on homes sold within five years of their purchase to curb speculation and ordered banks to set aside more funds as reserves to cool lending. The boom in China’s real estate has fueled concern that China may face a collapse seen in Dubai that has hurt the ability of some of its companies to repay debt.

Since his January prediction, Chanos, the founder of Kynikos Associates Ltd, has been joined by Gloom, Doom & Boom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in China’s property market.

Chinese state and local governments are among the most leveraged to property-related borrowings and the nation will “ultimately” have to nationalize a lot of the bad loans that will arise from the end of the bubble, Chanos said.

China’s Reserves

China’s foreign currency reserves will be “one asset” that can be used to fund a cleanup of the banking system, he said. The country has accumulated a record $2.4 trillion of reserves, and $889 billion of U.S. government debt, partly a consequence of its exchange-rate policy.

Chanos was one of the first investors to foresee the 2001 collapse of Houston-based energy company Enron Corp. The investor said he is short-selling Chinese developers as well as companies supplying building-related materials to the country, without identifying any stocks.

In a short sale, investors bet on declines in securities by borrowing stock to sell on the expectation it can be purchased at a lower price before handing it back.

Tuesday, April 6, 2010

Why redeems OSK-UOB Energy fund?

The exercise is simply to raise cash. Cash level is too low as the market goes higher. This redemption is done from Turtle portfolio's perspective. I still maintaining other long positions related to commodity and particularly very bullish about natural gas and agriculture commodity.

Turtle redeems OSK-UOB Energy Fund

More update later.

Sunday, April 4, 2010

Cyclical bullish or Structural bullish?

The US unemployment was still at 9.7%. Managed to catch Mohamed El-Erian appeared on the Bloomberg right after the number was released. He opined that it's all depends how you look at the issue, are you buying into cyclical or structural story. He thinks it's more difficult to judge the economy at this point of time because of so many temporary factors in the systems - stimulus, easy monetary policies, etc. The inventory cycle is also at the turbo-charged rate now. That's what driving the cyclical part of it. Looking ahead of many quarters ahead, structural side of huge amount of potential deficits from the developed countries will make it difficult to maintain sustainability.

They posted some interesting views on their website recently.

This is their views on the cyclical outlook.

The first issue is the peg between the Chinese yuan and the US dollar, which essentially gives us a one-size-fits-all monetary policy in a very differentiated world. Progress, or lack of progress, on this issue could lead to several outcomes. If China were to let its currency appreciate, it could regain a degree of monetary policy autonomy and a better ability to manage the risk of overheating and asset price inflation. Another outcome, however, is that China refuses to let the yuan appreciate, essentially maintaining too easy of a monetary policy for itself and the developing countries that shadow Chinese policies. This would create bubble risk, particularly for assets such as emerging market (EM) equities and commodities.

The second major uncertainty is what will happen when the Fed completes its mortgage-backed securities (MBS) buying programs. We know that it will have an unfriendly effect on the interest rate markets, but we don’t know the magnitude, because it’s too hard to isolate the supply and demand dynamics between fundamentals and the stimulus programs. The key variables are the “stock” effect, or the lingering price impact of the amount of duration taken out of the marketplace, and the “flow” effect, which is the price impact when the Fed stops buying. They’ll keep the stock, but they’re just not going to be part of the flow any more.

The third uncertainty is any change in the Fed’s pre-commitment language, which is currently committed to keeping the fed funds rate exceptionally low for an “extended period.” We don’t think the Fed is going to tighten any time in 2010, but long before the FOMC (Federal Open Market Committee) actually does the deed, it will have to change its language. That could very well happen in 2010, and there is genuine uncertainty over how quickly and strongly the market will anticipate a tightening process. Our gut feeling is that the moment the Fed changes any one of its words, it’s going to be a very unpleasant experience, because the marketplace has very little patience and a very big imagination. The most important book at the Fed right now is a thesaurus, and it’s probably sitting on top of Paul Samuelson’s Foundations of Economic Analysis.

Bill Gross elaborates the structural headwinds:

That horse, like Billie, however, died in 2008 and we face an uncertain and lower growth environment as a result. The uncertainty comes from a number of structural headwinds in PIMCO’s analysis: deleveraging, reregulation, and the forces of deglobalisation – most evident now in the markets’ distrust of marginal sovereign credits such as Iceland, Ireland, Greece and a supporting cast of over-borrowed lookalikes.

The folks in the Pimco are really smart to position themselves on the cyclical side and also on the long term structural side. Not many people could can hold two conflicting forces in balance, I find their strategies are really brilliant.

Friday, April 2, 2010

Turtle Portfolio Update - April 2010

Apart from setting bullish tone, some readers may be wondering why I did not make any stock specific recommendation. Am I contradicting myself pretending to be bullish while "chicken out" in taking action? Or am I subscribing to sell in May and go away - the months of March - April are typically the most favorable for equities before earning season kicks in?

Firstly, in a bull market, everybody will look incredible smart. There is a good chance of anything ones buy will go up. Anything that analysts recommend will go up too. Anything that your uncle, untie, kopi O kaki recomend will go up too. Normally I try to look stupid rather than smart.

Secondly, sell in May and go away. The macro picture looks brighter each day despite of some news coming from Europe of potential downgrading or bailots and etc. The European countries are typical management running by committee, which could be even slower than Japanese. I believe we are coming to tail end of it. I also believe even sell in May and go away scenario does happens I would think the correction will be shallow 10% max. So, if upside potential is another 10% and downside is 10%, it would really depend on one risk appetite at this juncture.