Thursday, December 29, 2011

While I was away

I was on Internet and TV free for a week. It was a truly quiet week, almost doing nothing. Nothing glamorous for our first Christmas at our new home. I discovered something, when you stop to be hyperactive, your family members will also become less active and sitting around you and start talking.

While I was away, our KLCI cracked above 1,500? That was amazing, think again, where will it go? The fund managers are busy doing window dressing, telling their clients their funds at least are not losing money for 2011. Their life depends on it, ours are not.

Since I have done very little efforts to catch up with market analysis, this update will be very brief, no charts, no data -- which is almost a capital crime for me. But I tend to break rules once in a while. So, only hypothesis this morning.

Many things made me unsettling. The Chinese and Indian stock markets were making new lows coincide with negative macroeconomic news made me felt that the theory of emerging economies are going to be the next Hercules begin to look shaky. Can emerging economies hold the sky from falling?

The Europe. The fiscal compact is the right things to do but it has many short term consequences.

To prevent the holes from getting larger, the European Union members will have to limit their budget deficit no larger than 3% of GDP going forward or face penalty. This will establish some accountability but sticking to the plan means less growth(likely to contract) and accept market pricing of higher interest rates. Italian 10 years bond yield persistently on high end of 6% and occasionally above 7% means less money to spend on more productive policy. I would not use a stronger word like spiralling down but the cleansing process will need longer time.

The fact that they let IMF to handle the money which operates based on one tranche one reform, we should see things get worse before it gets better. The sunny side is we will see true reformation. They will emerge stronger later on.

If the ECB is truly independent, they should not print money. But some doubted that because they recently launched an operation to loan banks a big sum of money, 400 billion plus hopefully they will do carry trade, borrow cheap money and buy higher yield assets like government bonds. As of this point of writing, there are no signs of them doing carry trade because the banks still parking money with ECB, close to about 452 billions Euro, up from 411 billions Euro before Christmas. If there is no trust among banks, are we not going back to square one?

There is no doubt that the European markets(DAX, CAC 40, etc) had suffered more than 30% declined from peak lead to many to argue that lower earnings should be expected in 6 - 9 months down the road. Though it has recovered a bit somewhat, these markets are selling close to 10-12 PE. Fair valuation unless the markets are expecting a much more serious deterioration. This lead to some to believe it should fall another 10% from here, in the latter scenario.

The US. The economic data is like stock market -- sending mix signals. People are reacting to those news offer no significant meanings really. To me, it is still bouncing around the bottom. The last two pieces that brought some hopes to the market were better employment figure(of which I doubt a true picture) or a start of housing recovery(but dashed by the latest home price declined again), leaving us wonder where is the market heading. My take is South bound, S & P 950 +/- 50 points. People are keep chasing dividend yield stocks are telling us they are nervous and they don't buy into a a picture the world is my yummy oyster.

Our home, KLSE. If you go drive around kampung, the noisy tar tractors are very busy. They drive me sick because those nice conditions roads are being resurfaced but NOT our old Georgetown roads which full of pot holes. That is the price to pay when you go against the government. But I rather be poor than selling my soul to the government. Even they sell me into a whore house, you can have my body but not my heart, just like an actress line in those old black and white movie.

Mind you there is a judgement will be made for Anwar case by Jan 09, 12. Will he go back to jail? It does not take much intelligence to figure out the general election is around the corner. While the market appears to be robust for now, the risk is also equally high. Gradual sell down could happen prior to general election should not be ruled out.

Not a short update after all? :)

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