Friday, September 28, 2007

Yen breaking out?

My fundamental assertion here is that a breakout of the yen to fresh 52 week highs would have bearish implications for the equity markets. Yen has been making a higher high and a higher low..

The fly in the ointment: Kiwi currency is rallying again after correcting sharply.

Market timing: Once the end of September window-dressing is over, it'll be interesting. Another factor to keep in mind: October is mostly when mutual funds sell their stocks/rebalance for tax purposes, and seasonally amongst the worst times to be in the market.

Revision ratios have started trending towards bearish territory as well.

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Wednesday, September 26, 2007

Sallie Mae, First Data and Japanese Yen.

I do not like the fact that the yen is still up against the dollar. Even though the markets have largely made up their losses, the yen hasn't retreated from the panic highs it set when everything was in a swoon. Either it will play catch up, or the deleveraging has already happened.

Are we setting up for another fall? Or is this a normal course of de leveraging, and a general reprising of risk? Only time will tell.

If the Sallie Mae LBO deal collapses, would the markets remain unaffected? There was hardly a hiccup when Harman Kardon collapsed.

It'€™ll be good to keep an eye on First Data. I know they were able to close the deal. An interesting tell would be if the investment banks are able to sell the loans from their books. If yes, risk appetites are on their way up.

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Tuesday, September 25, 2007

On China and risk repricing in the India subcontinent

It’s not hard to figure out why China might be a sector to avoid.

Jim Rogers, the perennial China bull, at the beginning of the year, had said that if China doubles this year, he would sell his holdings. That’s exactly what China has done so far
A PE ratio in the 50’s is certainly a recipe for disaster. Won’t surprise me if Rogers has already sold out. When would the Chinese bubble prick? No one knows. One would think that the market will keep going up as long as the Chinese investors feel optimistic. Have faith, is their new mantra.

Faith. A new paradigm. A permanently higher plateau, we’ve seen this all before.

A collapse of this market will surely have repercussions in stock markets around the world. But how exactly do you time this?

Are Chinese investors safe till the Beijing Olympics? Can the market double from here? Hitting a PE of 100 maybe? Bubbles tend to last longer than you can remain solvent. Opening up Hong Kong to the mainland investors is a good move, but only delaying the inevitable in my opinion.

Emerging markets: one doesn't see the point of investing in emerging markets, with their higher PEs. We need risk premium dammit!

Today, you can invest in the US and Europe with their reasonable PE ratios. There needs to be a risk adjustment in their valuations, regardless of their ‘growth fundamentals’. Let’s not forget, the Communist Party of India is still in the alliance at the center. The possibility of them screwing things up is just very very high. These are exactly the same guys who banned multinationals from India in the 1970s, relegating India to the ‘Hindu rate of growth’. Their recent posturing on the nuclear deal is a good example of their potential nuisance. India needs nuclear power if they have to maintain their growth rates. If CPI succeed, the growth prospects of an infrastructure constrained, energy constrained, and corruption constrained India would surely need to be revised down.

The risks in India are under appreciated. A reprising of risk in the Indian subcontinent is due.

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Random thoughts: Money velocity, China and Oil.

John Mauldin's Outside the Box edition this week is really interesting. It's titled Do Not Forget About Changes in Velocity.

It argues that because the velocity of money supply is negative, the credit contraction could be ahead of us.

At least in Asia, reserve ratios in India and China have gone up, though that obviously hasn't done much to the animal spirits prevalent there. I agree with the fact that we may be reaching the tipping point with respect to RMB appreciation. It's easier to keep a currency undervalued than overvalued (you can always print more), but the inflation would kill Chinese growth if they don't act soon.

Also, looks like it might be a good idea to short oil sector..


From the charts, it seems like Hong Kong, and maybe Singapore, have just started on a long bull. As the Chinese govt. opens up foreign investments to mainland investors, I think this is fundamentally bullish for the neighboring exchanges.

China is now exporting money supply too!

EWH 3 month chart

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Friday, September 21, 2007

Reasons to be bullish or bearish:


1. 2008 election period timeframe. The administration and the PPT will do what it takes so that George W Bush junior doesn't suffer the fate GB senior did. A slowdown coupled with a lousy market would basically wipe out any chance Republicans might otherwise have had.

2. China Olympics. China induced liquidity in terms of interest rates and an undervalued currency. They'll do their best to ensure an orderly world economy before their big moment in the sun next year. I'm not too sure if the Chinese markets can double from where they are right now. A PE of 110?

3. Fed rate cuts. Historically, stocks have outperformed by a big margin over a 6-12 month period after the fed starts cutting rates.

4. Massive 9:1+ up day the day Fed cut rates.

5. Over the short term, analysts have cut estimates sharply, which should be bullish when companies start reporting next month.


1. Rising 10 year yields. Rising yields often presage declining markets.

2. Margin pressure on companies because of commodity inflation. This might manifest itself towards the latter part of 2008.

3. Short term overbought. The markets should experience some profit taking the next week or two.

4. Pre-earnings funk before we hit October. Seasonally a weak time to be invested.

5. Long-term. Wouldn't surprise me if the earnings estimates of the Financials are revised downwards. With the financials contributing 31% of the S&P, how is that bullish for the market?

6. Real-estate induced consumer weakness.

IMHO, Any weakness over the next 2 months would be a great buying opportunity for the next 6-12 months.

Check out the massive 1000 point breakout in the BSE index in India. Indian sensex had been under performing most of 2007. As it breaks out, prepare for BSE 20,000. That's a good indicator of the return of risk appetites. Is this the final hurrah for the Indian markets? Stay tuned for my analysis on market returns in India given current interest rates, rupee valuations, and BPO forecasts.

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Sunday, September 16, 2007

Bernstein's commentary.

An interesting take by Richard Bernstein.

Bernstein then lists six capital-intensive danger areas: 1) China, 2) emerging market infrastructure, 3) small stocks, 4) indebted U.S. consumers, 5) financial companies, 6) commodities and energy companies. As I said, the guy's worth paying attention to.

Multi-year leadership change is underway, according to Richard Bernstein.

I will elaborate on some of these points in a later post.

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