Key Challenges Plaguing Today's US Stock Market

Dear Friends,

Most people have a good way of handling bad news; ignore them, or better still, don't even want to know about them. However, in management, it has been said that "It is not a matter of how fast you get the good news, but the bad news that reflects the quality of the management."

Ignorance is bliss, but only for the short term. What we don't know may hurt us badly. Thus, I always adopt the attitude that I don't have a problem sleeping at night, if I know what is the worst thing that can happen. On the other hand, I DO have a problem sleeping at night, if I DON'T KNOW what is the worst thing that can happen.

I also adopt the attitude that good news / events are easy to manage, and thus, do not need much thought in advance. There is a lot more time to respond to good news because the decisions tend to be made easily.

Thus, this blog is skewed (biased) towards analyzing bad news, potential and real. Most bad news and potential problems will never turn into the worst case scenario, but sometimes, it is not a question of quantity, but of the significance in impact should merely a single less probable event hit us with full force. Not to be prepared is pure laziness, which I cannot accept as a philosophy of life.

In my mind, the biggest challenges plaguing the US Stock Market today (Short Term of less than 6 months) is the fear that

• Commercial Mortgage Backed Securities (CMBS) may be in the process of doubling on their defaults in year 2009. Click on the website link to check out MarketWatch Article by Laura Mandaro dated 19 November 2008 , AND
• The Consequences of further Corporate Debt Default from the Auto Industry if it were allowed to FAIL.
  

If General Motors is bleeding losses / burning cash at the rate of US$1 billion to US$2 billion a month, what is the total amount owed by the Auto Industry, i.e. not only GM, Ford and Chrysler, but also the businesses of dealerships, spare parts manufacturing, etc.?

Also, can you imagine 2 to 3 million people out of work and further aggravating the already badly hit housing market with new houses for sale?

There is also an argument by Paul B. Farrell, also of Market Watch, of a coming Great Depression 2, in his article dated 19 November 2008, entitled We'll be in Great Depression 2 by 2011. Farrell provides 30 reasons why he is of such a gloomy opinion. Please click on the website link to read the article.

Farrell mentions US$2 trillion of loans which he claims the Federal Reserve has refused to disclose (how did he know then?), which he calls the Shadow Banking System.

I don't know how far this claim is true, but if it is true that the Fed can loan out US$2 trillion without disclosure, I think this will be the ultimate breach of confidence in the US Banking System.

It would raise important issues like, "How can the Fed loan out such a material amount without Congress approval?" and "If such a big, material issue is covered up, what other cover ups are there?"

However, I would like to emphasize that I don't know and I can't verify Farrell's claim. It is important for us to take note of issues that may arise, but sometimes we have to make our own decisions, rightfully or wrongfully, whether to accept the explanations, claims and assumptions of others.

One of my biggest concern in the medium term (6 months to a year) is the financial health of Freddy Mac and Fanny Mae. Already the two US Government owned mortgage firms have asked for US$200 billion in bailouts. If this is enough, and the bailout money requirement stops here, that's fine. BUT, I fear (without any real evidence, and thus, just an intuitive fear), that US$200 billion is not enough to cover losses arising from around US$5 trillion of mortgage loans.

If we take a default rate of 10%, the total bailout money required may eventually hit US$500 billion.

Of course, one of my biggest concern over the longer term (1 to 2 years) is the effect of various defaults, from housing to commerical properties, to corporate loan defaults, to banking collapses, on the Credit Default Swaps Market and its players, of which the top banks of America are very much exposed to.

And as you would have guessed from my numerous blogs on Hyper Inflation and the consequences of Excessive Printing of Money, that I am extremely concerned with a potential US$ Devaluation Crisis.

In year 2006, I conducted a detailed Scenario Planning Study of the Future of the US for the timeframe of 10 years, i.e. up to 2015. I concluded then that at best, the US Economy would chug along in a lethargic manner, but the possibility of a Depression exist.

However, I also concluded then that only four Key Driving Forces would be strong enough to push the US Economy into such a devastated state.

First, there must be a bursting of an asset bubble. This has happened in the form of the Sub-Prime, Near Prime, and now, Prime Housing Mortgage Default Crisis.

Second, the US Dollar has to devalue significantly. This scenario has happened for a while until the last few months when it unexpectedly strengthened significantly, erasing a large portion of its devaluation.

However, as the saying goes, the story does not end till the fat lady sings. Will the US Dollar experience a devaluation crisis in the future? Some people like Peter Schiff and Jim Rogers think so. Their opinions have been recorded on my blogs.

If there is a US Dollar Devaluation Crisis, due to the excessive printing of money, then, this will eventually trigger an International "Lack of Confidence" Crisis, and there will be no foreign investors' money to fund the irreversible Balance of Payments Deficits, and thus, the economic situation will worsen considerably for America.

This will lead to further Asset Deflation, which is a nice way of saying even more crashes in asset prices like properties and stocks, and even business ownerships, due to foreign investors pulling out their investments in US.

This should do it, i.e. push America into a Depression. BUT, if it doesn't, then the Trade Protectionist Policies that will be pushed for adoption by some Congressmen, to win popular votes, in an effort to protect jobs, will push THE WORLD, into a Depression.

This was THE WORST CASE SCENARIO that I foresaw in year 2006, before all the crisis happened. There is no reason to change any of my earlier analysis / scenarios.

This is why I have been monitoring the situation very closely, and emphasizing what seems like the words of "Doomsday" sayers, on my blog. Our job is to take all kinds of data into account, and then, only then, sift through each one of them with a fine toothcomb, to separate the fairy tales that cannot arise from the plausible situations that can arise, however, improbable.

With that, we will be in a much better position (better prepared) to take advantage of any opportunities that may arise that conforms to our strategic foresight and scenario planning.

Please be reminded on the Liability Exclusion Clause, which is at the top of my blog page, i.e. that the final trading decision is yours, and I will not be responsible or liable for any losses you may incur from whatsoever reason. :)

Best wishes,

Ooi

© Copyright 2008 of Praesciens.Blogspot.Com.

Intuition Speaks Today -The Loonie as the Potential Winning Market Strategy?

Dear Friends,

Usually I pride myself in doing a lot of research for scientific evidence before forming conclusions. However, as the saying goes, "Rationality has an older sister; her name is Intuition."

I must admit that I haven't been trading this month, and it is because of my intuition. I don't take a trade based on intuition, but I do stop myself from taking trades if my intuition tells me otherwise.

Which is Better? Rational Analysis or Intuition?

The scientists overemphasizes the importance of Rationality and Scientific Evidence, while most people tend to go with Intuition, without looking for scientific evidence. Neither is correct.

The correct thing to do is to conduct scientific research, and rationally analyze the issues. Then, Intuition will synthesize the various factors into a holistic picture, and voila, foresight happens.

There are times when waiting for scientific evidence will be too late. What is the point of realizing today that this is a Bear Market? We want to be able to foresee such an event long before it happened, i.e. say, 1.5 years ago.

But at that time, when I was screaming bloody murder, some people thought I was an alarmist, a pessimist, or worse, a neurotic. Today, there is blood on the streets, and it is a very sad thing.

It's the same as the Poseidon adventure where most people stayed in the Ballroom and drowned, while a few decided to climb up.

BUT, the few adventurers could easily have made a wrong turn and drowned as well. That is the reality of life.

I remember the time when I first wrote the email that said, "This is the last train to London, get out of the stock market now." That was in July or August 2007.

But back then, there were no scientific evidence to back up the argument. Even the consumer spending statistics were still holding up, and the talk then was that the Sub-Prime issue would be resolved, and the crisis will be contained.

So, with hindsight, we know that Rational Analysis is useless for events that are about to happen, because Rational Analysis is based on scientific evidence of events that have happened.

So then, if if Intuition is not based on scientific evidence, what is it based on?

The correct answer is that Intuition must always be supported by Rational Analysis. Intuition that is not supported by Rational Analysis is a wild guess; a wild gamble, no more.

Systems Thinking (Cause & Effect) Modeling as the Mother of Intuition

But, the Scientific Evidence and Rational Analysis is not a direct evidence, for no direct evidence will exist as things have not happened, or is not reported to have happened yet.

In this case, we can only use a Systems Thinking Model of the World, which is actually, a Cause & Effect Model based on identifying the Key Driving Forces, and understanding their relationships and potential range of outcomes, and how they impact each other.

Why is this Important?

I have invested time to explain the relationship between Rationality & Intuition because most people tend to act on their own intuition, but hardly ever trusts another person's Intuition. Human Behavior is such that trusting a person's Rational Analysis with all the supporting scientific evidence is already hard enough, what more, for another to trust a person's intuition.

Also, very few people know how to train and develop good intuition, and thus, can't differentiate or evaluate good intuition from bad intuition.

These are the types of things which I feel should be taught in schools and universities, because the knowledge here is the key to uncommon wisdom, but alas, this will not be the case, for a long, long time. Try convincing any professor to accept Intuition as an Equal Subject to Rational Analysis, and you have a big challenge on your hands.

Anyway, my experience is such that Intuition is very important, especially Good Intuition developed from Systems Modeling as informed by Scientific Evidence and Rational Analysis.

Ok, now that I've got the issue of Rationality & Intuition out of the way, let's get down to serious business of making money.

Market Anomalies I Don't Understand

Supported by Rational Analysis, my Intuition identifies the following Market Anomalies (Inconsistencies): -

• US Dollar should be weak, not at its strongest for the last few years, as it is now. Why? Because the US Government is printing money, even much more than ever.
• Oil Price should not be so low; not so fast, anyway. Crude Oil went below US$50 per barrel today.
• Gold should not be so high at US$750 per ounce, which does not seem to match with the price falls in other commodities, especially Oil.
  

Yet, the Price Movements continue to suggest Gold in a sideways movement, with increasing potential to go higher. From Rational Analysis, Oil is expected to rebound, and yet, it keeps dropping in price.

The US Dollar strengthening momentum seems to have abated somewhat, i.e. it is now see-sawing in more or less a sideways motion, with a slight strengthening bias, when it should be weakening.

Why?

The Price movements as depicted on the Technical Charts is not telling me the same story as my Intuition. Why?

I don't know. But, from many years of good experience, I trust my intuition, which is why I stay away from the markets. I haven't lost a single cent, but neither have I made any. But considering the world lost a few trillion US dollars in this month alone, I think I can live with my not making any money, and having lost none.

But defensive play does not buy the milk powder. So, what are we to do?

The Potential Winning Market Strategy - The Loonie?

My Intuition has been right more often than wrong in pointing me to the winning market strategy. If my Intuition is correct, Oil must strengthen once more, and the US$ should weaken at the same time.

From a forex perspective, one of the purest Oil play is the Canadian Dollar / Yen (CADJPY) Forex trade. For years, when the Oil Price was climbing rapidly, the Loonie (Canadian Dollar) strengthened against the Yen. However, when Oil Price fell, so did the Loonie against the Yen.

If the strengthening of the Oil Price may precipitate the weakening of the US$, then we need to also watch the USDCAD (US Canadian Dollar) Forex Rate.

Thus, my intuition points me toward the strengthening of the Canadian Dollar against both the US$ and the Yen.

Again, I reiterate that this is based on Intuition, not Technical Analysis nor Rational Analysis, so we need to wait for the Technicals to provide the right confirmational signals before trades are taken.

US$ Relationship with the Yen

But how will the US$ behave with regard to the Yen? CNBC has not been focusing its attention on the consistent and persistent weakening of the US$ against the Yen in recent weeks. The US$ weakened below 100 a few weeks ago, and is now at 94.5 Yen to the Dollar, which is a very strong Yen.

As a matter of reference, the USDJPY exchange rate was around 145 Yen to the US$ in 1997, during the Asian Currency crisis.

The key question is "What will happen if the Yen breaks below 90 to the US$? Sooner or later, US consumers are going to feel the inflationary effect of a strong Yen, especially once the deflationary effect of a weakened but stable Oil price wears off.

It should be noted that the Yen is also sometimes seen as the proxy of the Chinese Renminbi, which is not freely traded on forex markets.

Righfully, the Yen should not be strengthening because the Japanese Economy is also in deep trouble. However, the answer for the strengthening of both the US$ and Yen have been noted in my previous blogs, i.e. the Unwinding of Carry Trade, where the interest rate differential between the Japanese BOJ (Bank of Japan) rate and the Federal Reserve FOMC rate is now less than 1%, when it used to be 4% to 5%.

Will the Yen continue to strengthen? I don't know. Based on observations of more than a decade, the BOJ has always worked very closely with the Federal Reserve, and any strengthening or weakening of the USDJPY has always been based on what both authorities agree upon more than anything else.

So, what do the Fed and BOJ want in the future, assuming they will still be in control of the USDJPY forex market?

I think the Fed is testing the market whereby, it is encouraging US exports while deterring imports with a weaker US$ to the Yen. When it reaches a point where it starts to hurt the US consumers, or the BOJ feels that it is too painful for Japanese exporters, the Yen strength trend will reverse, again, in a managed, well behaved manner.

CONCLUSION

In conclusion, it is not possible to form a reliable opinion of the future direction of the USDJPY, which is why we will need to let the Price Charts tell us which trade to take, i.e. USDCAD or CADJPY, or both, in the future.

If my intuition is correct, and this current weakening of the Canadian Dollar is reversed, it will be the start of a new Uptrend for the Loonie. To catch the start of a new Uptrend and ride it all the way to the top is every trader's dream.

So, I would watch the Loonie very carefully. Hopefully, the LOONIE will make us a lot of MONEY. Haha.

I would reiterate that this market strategy is only based on my intuition, not Technicals. Wait for confirmational technical signals before taking the trade.

Please be reminded on the Liability Exclusion Clause, which is at the top of my blog page, i.e. that the final trading decision is yours, and I will not be responsible or liable for any losses you may incur from whatsoever reason. :)

Best wishes,

Ooi

© Copyright 2008 of Praesciens.Blogspot.Com.

Tranquility is what the Financial Markets Are Experiencing Today

Dear Friends,

What the Financial Markets are experiencing right now, is Tranquility, with relatively small volatility, ahead of the Christmas Holiday. This is not a bad thing, for this Christmas.

God knows, with so much drama and trauma in October and November 2008, it is no wonder that the newspapers have not reported a drastic increase in suicide cases. In fact, in one email I received from a friend, there was a contrast of the two eras, between the 1929 Great Crash, and the recent October 2008 Stock Market Crash.

In the 1929 Crash, a number of well known Wall Street personalities jumped from their office windows. However, in this recent crash, the email depicted a number of protestors at Wall Street, possibly people who oppose the use of taxpayers' money to bailout financial institutions, or those who are upset with the mortgages crisis, carrying pickets with the message, "Jump, you idiots, jump!"

However, with bailout money forthcoming so easily, it is possibly the consumers and the taxpayers who have to jump in time to come.

But I digress. I was talking about the Tranquility of the Financial Markets today. The slow price movements of the Financial Markets can be depicted by this beautiful, serene song, "Opposition to an Arranged Marriage" from "The Butterfly Lovers (Erhu Concerto), performed by The Philharmonic of China.

The Erhu Instrument soloist is Xu Ke, while the Conductor is Mak Ka Lok.

I don't pretend to know Chinese Orchestra, but I do enjoy Chinese Classical Music, especially the instruments, Erhu and Guzheng.

I listened to a Soloist Guzheng played in a Chinese Garden in Suzhou and it was so fantastic, especially in the aesthetically pleasing surroundings of Suzhou Art of Gardening, which, in my opinion, is one of the best gardening art in the world. Of course, I have yet to visit the Chinese Gardens in Beijing, which I was told, also had its roots from Suzhou Gardening Art.

Best wishes,

Ooi

Amazing! Guitarist Playing With His Feet!!!

Dear Friends,

This year's Christmas is one of the toughest ever for some people. So, let me write an Inspirational blog to revive your spirits, especially if you are feeling a little down.

If you think "Life is Tough", watch this amazing video clip I found in YouTube. No one seems to know who the guitarist is, but did you notice he is playing the instrument with his feet?

What's more, he's enjoying himself thoroughly even though no one seems to be appreciating nor donating to his cause.

If you think you are handicapped because life has not been fair to you, think again. You can do it, if you keep working on it.

WE CAN DO IT! Yeah!!! Enjoy!

Best wishes,

Ooi

Tina Turner is here to provide us Inspirational Energy

Dear Friends,

I have been writing so many bad news into my blog that I think we need a "Lift Me Up!" Inspiration. I can think of nothing better than to listen and WATCH Tina Turner as she does Proud Mary.

There are two versions here. The first is a much younger Tina Turner with Ike Turner. It's very, very cool, and sure to bring up your energy level.

The second video clip is Tina Turner many years later (already a grandma), doing Proud Mary in a super charged energy level that makes us all shy of our own energy and enthusiasm level. I was amazed and inspired by her "Will to Live Life" so well.

In this video clip, Tina said, "People ask me when am I going to slow down, you know what I tell them? I'm just getting started!"

So, whenever you need a "Lift Me Up!" just watch or listen to Tina Turner's rendition of Proud Mary. Which version is your choice. Enjoy!

Best wishes,

Ooi

US Properties at US$250k to US$300k

Dear Friends,

Want to buy a nice property? What can US$250,000 to US$300,000 get you today? Check it out.

Best wishes,

Ooi

US$100 for a House with Land?

Dear Friends,

Some of you are probably thinking, "All of you Doomsayers, and Media are just sensationalizing the situation. Are you sure it's as bad as you say it is?"

Well, watch this video clip from MSNBC and make up your own mind. Can you really buy a House (4 Bedrooms) with Land for a mere US$100?

It's a beautiful house which for more than 2 years, it couldn't be sold, and thus, the owners are actually raffling (lottery) the house off, i.e. you buy a lottery ticket for US$100, and if you are lucky, you may just get the house for that price.

That's how creative people are becoming, to sell their house, even nice houses like the one in the video. Very sad. Heart breaking, but true.

Necessity is the Mother of Invention. As Hannibal said, "We'll either find a way, or make one."

Best wishes,

Ooi

Deflation Environment Confirmed - A Little Late Though

Dear Friends,

If you are still wondering what is happening in the economy and financial markets, watch this video report from CNBC Erin Burnett NBC Nightly News.



We are in a Deflation Environment, both Asset Deflation (House & Stock Prices Dropping) and now, Consumer Deflation, i.e. Consumer Goods Prices are dropping, although not as much as we would like it to be.

When in an Asset Deflation environment, adopt an Asset Deflation Strategy to manage your investments. I have written out a simple guide on my blog on Asset Deflation Strategy written on 12 October 2008.

Best wishes,

Ooi

Citigroup Lost 23% of its Value Yesterday - Why?

Dear Friends,

Citigroup lost 23% in one day! What's happening?

CNBC's Maria Bartiromo explains on NBC Nightly News that today's stock market is about "CONFIDENCE, or rather the LACK of it". She went on to say that "People do not have clarity about what banks have in their books"

In my opinion, the Short Term challenge is Confidence, but the bigger, more fundamentally structural challenges are

• banking losses aggravated by lack of transparency, and
  
• exponentially rising Unemployment

Can any Government solve these problems? The market wants the US Government to do so, but I think the reality is that it cannot be done. Time will heal all wounds, and Time for Healing will start AFTER reality sets in, and the world goes through the necessary pain. I'm not trying to be a doomsayer, or a sadist, but I really believe that's the reality of the situation, and trying to fight against it, adds new problems to an already complicated situation.

It is very sad when the reality of the future is a BLEAK Outlook.

Best wishes,

Ooi

US Stock Market Indices Outlook 081119 - Bearish All the Way

Dear Friends,

In my last outlook blog for the Dow Jones Industrial Average Index, Dow Outlook 081111 - Hopes of a Climb Back to Health Fading, I stated that: -

"The Medium Term Outlook for a "steady, well behaved, Climb Back to Health" Scenario is fast fading away, into a more sober, continued volatile, and difficult trading conditions of the 1948, 1969 Medium Term Correction Wave Scenario. This is the most consistent outlook with the Short Term Sideways Consolidation, and Long Term Bearish Outlooks, based on the price pattern movements today."

For the Other Stock Market Indices Outlook, S&P500, Nasdaq, Russell 2000 Outlook 081111 - Bearish Except for S&P500, I stated that: -

"The S&P 500 has the same outlook as the Dow, i.e. Short Term Sideways Consolidation, Long Term Bearish whilst Medium Term Hopes of a "Climb Back to Health" Scenario is fading.

We would trade the Nasdaq 100 and the Russell 2000 only on a Short Position Strategy, with a Stop Loss just above the latest Pivot High. If our Continued Downtrend Outlook for Nasdaq 100 and Russell 2000 is right, the Indices should not break above this Pivot High."

A week later, with the exception of the Dow (DJIA), ALL the key US Stock Market Indices, i.e. S&P500, Nasdaq 100, Russell 2000, have broken their Key Support Level set in last month's October Crash. The Dow is set to re-test its Key Support Level of 7882 as well, as it has closed at 7997.

With the high possibility of Margin Calls pressurizing the Dow, it doesn't look like this Key Support will hold, at least from an Intra-Day perspective.

Thus, our Dow Outlook for all durations, i.e. Short Term, Medium Term, and Long Term, is Bearish. It is possible that there will be persistent wild fluctuations up and down, but the odds of success is on a Short Strategy, for the foreseeable future, pending new price information.

Please be reminded on the Liability Exclusion Clause, which is at the top of my blog page, i.e. that the final trading decision is yours, and I will not be responsible or liable for any losses you may incur from whatsoever reason. :)

Best wishes,

Ooi

© Copyright of Praesciens.blogspot.com, 2008

Jim Rogers on the US Dollar

Dear Friends,

Here is a good video clip discussion between UK Financial Times' John Authers and Commodities King, Jim Rogers. He explains his view of why the Dollar is strong, and his outlook that eventually the Dollar will weaken.

Jim Rogers on the Dollar and Post Crisis Financial Order

One of the most important and amazing lesson we can learn is the humility of Jim Rogers to be able to say, "I don't know, and I probably will get it wrong" so easily, when the normal person has so much difficulty saying the same statement.

Best wishes,

Ooi

Earnings Expected to Be Weak for Tech Stocks until year 2010

Dear Friends,

Here is the Wall Street Journal video clip warning of the weak earnings of Tech Stocks. So, if you are thinking of buying Tech / Nasdaq, just note that earnings are expected to be bad till year 2010.

Best wishes,

Ooi

WSJ - Home Auctions Find Few Buyers

Dear Friends,

This is a very important situation to consider if you intend to invest in properties. There is a significant gap between what the banks want in auction prices and what buyers are willing to pay, resulting in only 3 properties sold, out of 23 properties auctioned in this video.

Usually, there will come a time when the sellers will decide that any amount is better than not getting the sale done, and this will result in severe "Distressed Selling", which will be the last phase in a Property Market Cycle. However, the last phase may last for some time, if and when it happens. So, do be careful, when you invest in properties today.

Best wishes,

Ooi

Dear Friends,

Here are three Wall Street Journal Video Clips that summarize the Real Estate situation in the US today.

The first video clip brings news of continued record plunges in Home Prices.

This 2nd Video Clip from Wall Street Journal explains what the US Government, mainly the FDIC is doing to help Slow Foreclosures, and whether it is working.

This 3rd and last video clip from Wall Street Journal attempts to explain "What the Housing Bottom Will Look Like?"

Best wishes,

Ooi

Why Paulson's Plan Won't Work

Dear Friends,

Here is a Wall Street Journal video clip of the Interview of David Ranson, (H.C. Wainwright & Co., Economics Inc.), by Simon Constable (Dow Jones Newswires Columnist) where Mr. Ranson explains why he is of the opinion that the Paulson Plan won't work.

In fact, he mentions the current Uncertainties plaguing the markets and the economy, and proposes the idea of Accelerated Bankruptcy, which is in conformance with the concept of Creative Destruction, a term first coined by Schumpeters.

Should the financial institutions that are about to fail be encouraged to fail? According to Mr. Ranson, this is the fastest way for the economy to recover. Does that make sense? Take the pain and move on, OR, fight and minimize the pain.

Be careful what you wish for ..... some wise man once said this. When financial institutions drop like flies hit by a nuclear bomb, will it be too late to regret?

To be, or Not to Be, that is the Question (Shakespeare).

In my opinion the US Authorities have to have a clear understanding of the situation before they can make a final decision. The authorities must be clear that despite the vast resources of the US Government, they cannot save everyone, be it a depositor, a mortgage borrower in trouble, or a financial institution.

Where the authorities draw the line, in terms of what is good for America, will depend on the ROI (Return on Investment), i.e. the cost benefits of a Rescue Plan. The key objective must surely be the most benefit for the least cost. Easier said than done, but unfortunately, this is the ONLY way to spend money wisely, what more in this case, hard earned taxpayers' money.

Best wishes,

Ooi

US Economy in Worst Part of the Recession?

Dear Friends,

There was an Economists Survey which was reported in the Wall Street Journal. video clip below The Survey suggest that the most economists expect the US Economy to be in its worst part of the recession right now, and will improve next year, albeit painful, slow growth.

How you want to interpret the Survey Results is up to you. Some will take it at face value, and thus, this is good news. Others, who believe that most economists are wrong, will take a Contrarian View, and form an opinion to the contrary.

The Fallacy of Statistics in the Current Economic Situation

Most Economists are trained mathematicians, and they use statistics to make informed decisions. This is fine, provided that the Key Assumption of the Statistical Data of Normal Distribution is met.

What is this Key Assumption? It is that the Economy is behaving NORMALLY. However, this is not the case under the present, "Worst Economic Crisis since 1929 Great Depression / 1974 Severe Economic Recession" Situation.

The Current Economic Situation is one of the worst to be experienced in the last 50 to 100 years of US Economic History. How bad it will get, is anyone's guess at present. Under this extremely stressed conditions, Statistics that rely on Normal Distribution will not yield reliable guidance.

So what will yield reliable guidance, if not statistics? It is a Management Technology called Systems Thinking, applied to Scenario Planning.

Scenario Planning Technology as an Alternative Tool to Develop Foresight

My view is that we should not make wild guesses. Rather, we should ask ourselves the important Scenario Planning question: -

"If the US Economy is in its worst part of the recession, what events should be happening right now, to tell us that this is the High probability Scenario?"

Or, rephrased, the question could be: -

"If the US Economy is to recover, what Key Milestone Events have to happen before we can see the Bottom of the Recession?"

It has been said that Asking the Right Questions is the most important thing to getting the right answers. The person that can answer the above questions correctly, will be in a fantastic position to take advantage of the Great Strategic Investment Foresight.

Key Driving Forces that Shape the Future

However, answering this question is not as easy as we think it to be. To complicate matters, we need to ask ourselves a few more important questions regarding the Key Driving Forces that will shape the future of the US Economy, and thus, the World Economy.

"What are the Key Driving Forces Shaping the Future of the US Economy in the next 10 years?"

I would name the following: -

• The Future Price of Oil.
• The Highly Significant Demographic Shift of the Ageing Baby Boomers.
• The Social Security Fund Deficits (both the Income Deficit, and ultimately, the Contribution Deficit).
• The Significant Shortfalls in Medicare and Medicaid Programs.
• The Significant Losses Experienced in the last 1.5 years by Pension & Retirement Funds and Mutual Funds.
• The Significant and Ballooning Effect of the Government Debt, Government Budget Deficit, and Balance of Payments Deficits.
• The Unquantified Amount of Banking Losses that will ultimately flow through the Banking System, from Sub-Prime & CDOs, Normal Housing Mortgages Defaults, to Consumer Loans, Credit Cards, Automobile Loans, Student Loans, to Municipal / State Bonds Defaults, to Commercial Property Loans & Corporate Loans Defaults.
• The Unquantified Losses of the Credit Default Swaps (CDS) Derivatives Market which has freezed in liquidity to a large extent.
• The Growing Unemployment and the Cash Strapped Consumers which may reach double digit levels, if left unchecked.
• The Asset Deflation Environment where Prices of all types of Assets (Properties, Stocks, Commodities) just keep going down, and down, and down.
• The Artificially Low Deposit Interest Rate, compared to the Significantly Much Higher Loans Interest Rate. Here, we are led to believe on the one hand, that there is plenty of liquidity in the banking system, and thus, the low level of deposit interest rate, and yet, on the other hand, the complete freeze in lending due to lack of liquidity in the banking system. The longer term implications of the Central Banks' actions to keep deposit interest rates artificially low, whilst the banking system is struggling with shortage of liquidity should be significant and interesting to analyze.
• The Effectiveness of any US Economic Stimulus Package to create / retain Employment. It has always been assumed that Keynesian Theory works. But Keynesian Theory of Government Spending to stimulate economic growth worked in the Great Depression when it was administered in the later years, i.e. 1934 onwards, after the necessary economic pains and banking & corporate collapses had been experienced. Will it work BEFORE the collapses and the necessary pain? No one knows the answer because we have never experienced such a situation. We know Keynesian Theory Government Spending works for normal recessions, but it may not necessarily work in a Balance Sheet Recession as experienced in Japan and now, the US.
  
• The Effectiveness of the US Authorities' Rescue Plans to minimize Panic in Financial Markets - The US Authorities can't save ALL Financial Institutions, and thus, we can expect that the Panic isn't over. There will be other Panics in the next one year.
• The Sustenance of Foreign Investors' Confidence in the US Dollar and the Potential of a US Dollar Currency Crisis.
• The Inflationary Implications of Excessive Printing of Money by the US Authorities.
  

Increased Possibility of a Primary Long Term Recessionary Cycle

There is an Increased Possibility that this time, the economic situation in the US is a Primary Long Term Recessionary Cycle. If the US has experienced 20 years of unprecedented economic growth due to the Baby Boomers' Demographic Trend, why do we ignore the same Key Driving Force in developing foresight on what may happen for the NEXT 20 years?

If Baby Boomers caused booms in the past 20 years, in consumer goods, automobile market, stock market, property market, etc., what makes us think that the same Ageing Baby Boomers Demographic Trend will not cause Bust after Bust in all kinds of markets as they face retirement and health challenges?

I am still in the process of researching the implications of the Changes in the Baby Boomers' Demographic Trend. When I have completed that research, possibly in the next two weeks, I will be in a much clearer position to finalize the answers / Scenarios to the above mentioned questions.

I urge anyone who is thinking of a "Buy & Hold" Investment Strategy to seriously consider the above questions before they invest.

Best wishes,

Ooi

© Copyright 2008 of Praesciens.Blogspot.Com

Lords of Wall Street - 5 People that Earn More than a US$1 Billion Each in Year 2007

Dear Friends,

Most of us go through our entire lives never ever knowing who is the highest paid (salary and incentives) person on earth, not to mention what he looks like, or how he did it.

NOW, you get a chance, with this 3 mins NBC video clip, to get to know the top 5 earners in the Hedge Fund Industry.

These men are the epitome of "Fulfiling One's True Potential". They are called the Masters of the Universe; the Lords of Wall Street, due to what they earn in salaries and performance incentives in a single year.

BUT, they didn't receive the money from the Government. They earned their pay by charging the Super Rich for managing their money, and the Super Rich willingly pay them for their services.

Whilst the general laymen in US and the world are screaming and complaining about how much CEOs in US are paid, i.e. around US$100 million, the Super Rich have no qualms paying these Hedge Fund Managers 10 to 37 times more!

The Top 5 Hedge Fund Income Earners for year 2007 are: -

• John Paulson (Paulson & Co., Inc) - US$ 3.7 billion (Highest in the whole Hedge Fund Industry)
  
• George Soros (Soros Fund Management, LLC) - US$2.9 billion
  
• James Simons (Renaissance Tehcnologies) - US$2.8 billion
  
• Philip Falcone (Harbinger Capital Partners) - US$1.7 billion
  
• Kenneth Griffin (Citadel Investments Group, LLC) - US$1.5 billion
  

Any one, who has shown a little bit of interest in the financial markets, would have heard of George Soros. He is probably the most famous Hedge Fund Manager in the world. Many aspiring Hedge Fund Managers have also bought his book, "Alchemy of Finance", but few have read it to the end. I am one of the few.

Soros is more notoriously known as "the man who broke the Bank of England" when he attacked the British Pound and won, and he was alleged by Dr. Mahathir as "the Rogue Speculator" who is the cause of the Asian Currency Crisis.

However, there is another side to Mr. Soros. He is an active philantrophist, from supporting the black students in apartheid Africa, to pledging US$50 million to the Jeffrey Sachs "Millenium Promise" program to help fight extreme poverty in Africa.

Mr. Soros' Hedge Fund adopts the Global Macro Strategy Approach, which is actually a Fundamental Analysis Approach of Global Markets & Economy.

It has been extremely difficult, if not impossible for the media to print a picture of Mr. James Simons, so, to be able to view him in person on this video clip, is ....... like viewing your favorite actress in the nude .... hahaha, .... at least for a great fan of the Hedge Fund Industry, it is.

Practically, no one outside the Hedge Funds Industry, and only a few specialist journalists have heard of Mr. Jim (James) Simons, or of his Hedge Fund, Renaissance Technologies, and yet, Mr. Simons runs one of THE MOST Successful Hedge Funds in the World.

His hedge fund is so successful that he doesn't need any marketing publicity, nor does he need to market for investment funds at all. In fact, some claim that he has turned a number of potential clients down.

One may think that this is an exaggeration, but wait till you read the next piece of information. Mr. Simons charges much, much more than George Soros. Where George Soros charges 30% profit sharing incentive above a certain threshold in fund performance, Mr. Simons charges a whopping 50%, and yet, there is more money coming to him, than he cares to manage.

In year 2006, the Financial Times named him "THE SMARTEST BILLIONAIRE" in the world. He is also ranked the 57th Richest Man in America. Mr. Simons has a Ph.D in Mathematics from University of California, Berkeley and taught this subject at MIT and Harvard University, prior to becoming a Hedge Fund Manager.

For those of you who think that most professors are mere academician,s Mr. Simons is the epitome of a brilliant professor who has converted knowledge into money in the bank.

Mr. Simons' Hedge Fund Strategy is called Systematic Quantitative Trading, and it has been said that he employs 50 Ph.Ds to develop complex mathematical models to analyze and execute trades. It is said that his firm doesn't use traders, but instead, gets the computers to make all the trading decisions.

Guys, if you are still reading at this point, here is the profound statement: -

"50 Ph.Ds are working their butts out to refine computer programs that will trade WITHOUT FEAR to make money from you.

Computers are trading against you every time you take a trade.

These computers have one objective written into their software program in making trading decisions - Win your money!"

If you have a son or a daughter who loves mathematics, tell him about Dr. James Harris Simons, THE SMARTEST BILLIONAIRE on earth.

What is most impressive about Mr. Simons and his hedge Fund Technology is not his Rocket Scientist Approach, but his fund's ability to deliver consistent profitability year after year. IT CAN BE DONE, BUT YOU'VE GOTTA KNOW WHAT TO DO, AND TO PUT IN REAL EFFORT TO MAKE IT HAPPEN.

Philip Falcone is 707th Richest Man in the world according to Forbes, and Business Week calls him the "Midas of Misery" as he betted correctly on the Sub-Prime Defaults, and made a huge fortune last year.

It is important to note that Mr. Falcone did not cause the Sub-Prime Crisis, nor did he take part in lending money to these people.

He started his career at the junk bonds desk, and became THE EXPERT on Distressed Debt Hedge Fund Strategy. He has a Harvard Bachelor's Degree, and is a self made billionaire. He lives in New York.

Kenneth Griffin is 117th Richest Man in the world (Forbes) for year 2007. He also has a Harvard Bachelor's Degree (Economics), and when he graduated, he started making money in Convertible Bonds. Eventually, he impressed an investor who gave him his first US$1 million to invest, and word soon spreaded t the Rich People that Mr. Griffin was a great Hedge Fund Manager who delivered results. With that kind of performance reference, Mr. Griffin has grown Citadel to being one of the largest and best hedge funds in the world as at 2007.

John Paulson is 165th Richest Man in America (Forbes 2007). He graduated top in his class at NYU for his Bachelor's Degree, and for his MBA at Harvard, he won the school's top academic honor, i.e. the designation of Baker Scholar. Mr. Paulson (no relation to Treasury Secretary Hank Paulson), is proof that Harvard MBAs can become rich as an entrepreneur, and not merely as consultants or investment banker.

It has been said that George Soros bought Mr. Paulson lunch, just to find out how he did it. At Soros age, his will to learn new things should amaze all of us. Most of us won't even read the book that is in front of us, even if we are told it will help us make money, much less, buy lunch to learn from someone. Of course, Mr. Paulson is not anyone. He is SOMEONE - he is the Highest Paid Hedge Fund Manager on Earth.

I hope you enjoyed this short introduction to the 5 Masters of the Universe, the Lords of Wall Street. These are the people we should be listening to, when we want an opinion on the markets. However, it is rare indeed for any one of these Billionaire Hedge Fund Managers to give their opinions and advice on the market, with the notable exception of Mr. George Soros, who started his career as a research analyst. Up to today, Mr. Soros' research paper on REITs, written in the 1970s, is still a brilliant and an enlightening paper to read.

The story of Dr. Jim Simons was the man who inspired me 1.5 years ago, to research into the mysteries of the Hedge Fund World, and find the secret formulas to success to making money.

Best wishes,

Ooi

More than US$1 Trillion Needed for the US Bailouts

Dear Friends,

MSNBC Interview of CNBC's Michelle Caruso-Cabrera. Michelle gives us a good strategic overview picture of the total amount of money needed for the US Bailouts - a staggering US$1 Trillion, and still counting.

I reiterate my opinion - "No Country, can bail out every one who is in trouble". Sooner or later, the US Government is going to throw up its hands, and let those who need to fail, FAIL.

My biggest guess? AIG.

AIG has already received US$110 billion, and now needs another US$40 billion. It would be worth considering IF for sure, this is the last needed cash injection, BUT, I doubt it.

So far, people have been complaining and criticizing as to why taxpayers should be paying for such mismanagement. I would like to share a different paradigm -

How many jobs would be created if the US Government invest this money to build thousands of schools, universities, hospitals, and old folks homes, for the ageing Baby Boomers?

What about Joint Ventures to the set up Pharmaceutical Manufacturing Plants for Generic Drugs, to cater to the impending demand, and to lower costs to consumers?

What about building a few important highways / MRT (Mass Railway Transit) to further ease traffic jams and reduce gasoline consumption?

US$150 billion would sure help a lot of people who need help. US$1 Trillion Bailout Funds is a lot more Money. Maybe it's time to start asking

"What is the ROI (Return on Investment) for every Dollar to be Spent, in terms of Job Retention / Creation, that is SUSTAINABLE?"

Best wishes

Ooi

Treasury Secretary Paulson's Paradigm of the US$700 Billion Bailout

Dear Friends,

In my last blog, I had posted a video clip that argues that the US$700 billion Bailout Plan is now Uncertain, and possibly in a mess. To be fair to Treasury Secretary Hank Paulson, and more importantly, so that we are not biased, we should listen to his explanation / paradigm as to what happened, and why he is doing what he is doing, in his interview with CNBC Interviewer, Erin Burnett.

I would also like to compliment Mr. Neil Kashkari, Head of TARP (Troubled Assets Relief Program), for making this statement: -

"I don't think that it is good use of taxpayer's money to put taxpayer capital into financial institutions that are going to fail."

Best wishes,

Ooi

World Markets Outlook 081117

Dear Friends,

The World Financial Markets influence one another to a certain extent. Today, We make an effort to compare the Oil, Gold, US Dollar Index, and the Dow (DJIA) Stock Market Index in the hope of developing some strategic foresight on the future direction of these markets as they relate to each other.

Charts Courtesy of StockCharts.Com

The key to our analysis is Oil. If Oil Price goes down further, this would ease inflationary pressures even more, and thus, there would hopefully, be a little more left over for cash strapped consumers to spend, to sustain their cost of living.

On the other hand, if Oil Price starts to climb back to US$100, then, both the consumers and businesses would be badly hit once more, especially so today, when unemployment is rising rapidly.

A High Oil Price does not augur well for the US and World Economy.

Oil ($WTIC) Price has fallen by US$90.30 or 61% from the historical peak of US$147.90 per barrel, to US$57.60 as at 14 November 2008.

If you take a look at the $WTIC Oil Daily Chart, don't you feel like kicking yourself hard, for not taking advantage of such a well behaved, Strong Downtrend, that just keeps going down, down and down?

There were only two minor rallies, i.e. once in mid August 2008, and another stronger rally in mid to late September 2008. THIS is the type of market we want to trade and make money in. Unfortunately, I have yet to get access to trading Oil CFDs, and I don't like to trade Oil Futures because there is an expiry date.

What is our Market Outlook for Oil ($WTIC)? The Stochastics is showing that Oil is at Gross Oversold Level.

So what? If you look more closely, Oil has been in Gross Oversold Territory on the Slow Stochastics Indicator for more than a month now!!! The Stochastics Indicator is not very useful in a Trending Market, unless you know how to interpret it beyond what is taught in the Technical Analysis books.

Howver, there is an Indicator that is useful, i.e. the MACD (pronounced Mac D), because in this situation, it has been showing a bullish divergence against the Oil Price. Whilst Oil Price is still trending down, the MACD has crossed over and started trending upwards. This is a sign of accumulation by Market Bulls.

It is important to note that we cannot take a Long Trade just because there is a MACD Bullish Divergence. Why? Because the Price is still going down, despite the Divergence, and thus, we need a Trigger Signal to tell us that NOW, is the right time to buy.

To convert this Potential Opportunity into a trade, we need the Oil Price to form some kind of pattern that will give us such a Trigger Signal. The latest Pivot Low is US$55.50, and if this Support Level can hold, while the Oil Price consolidates sideways in a narrow range for a while, or if it forms a W Pattern, then we will eventually have a Trigger Candle.

Charts Courtesy of StockCharts.Com

At present, if we just jump in the trade, we don't know if Price will hold above US$55.50.

It should be noted that any Uptrend is expected to be merely a Medium Term Secondary Wave Correction, in a Long Term Primary Wave Downtrend. So, please be careful with any Long Position you may want to enter.

The Oil Market is already in a Long Term (3 Months to a Year) Downtrend, which is due for a Medium Term (3 Weeks to 3 Months) Uptrend Correction.

If Oil is about to rebound, perhaps we may gather some market intelligence from the Gold Market. Why? Because Oil is THE Cause for High Inflation, and Gold is a Popular Hedge against High Inflation.

However, based on the Daily Chart, the Gold Market seems to be in a Medium Term Sideways Consolidation Price Pattern Formation (SCPF) Mode, amidst a Long Term Primary Downtrend Wave.

Gold tends to have an inverse relationship to US$. When US$ strengthens, Gold tend to weaken, whilst when US$ weakens, Gold strengthens. This is not the case all the time, but sometimes, especially when the "Flight to Safety" story is being propagated, then this relationship holds true, for a while.

Charts Courtesy of StockCharts.Com

In this case, the US$ Index seem to be suggesting a higher probability that the US$ is now toppish, and thus due for a Medium Term Secondary Wave Downtrend Correction, although the Primary Wave is in an Uptrend.

Both the MACD and Slow Stochastics are showing Bearish Divergences, with the Slow Stochastics coming down from an Gross Overbought situation.

Thus, US Dollar seems toppish and due for a Medium Term Downtrend Correction Wave, which is fairly consistent with the Oil Medium Term Outlook which is facing increasing probability of a Medium Term Uptrend Correction Wave.

When Oil Price goes up, US Dollar Index tend to go down.

Occasionally, the US$ strengthens before the Dow moves up. This has been due to the sell down by Global Mutual Funds / Hedge Funds on the Global Markets, so that they can adjust their portfolio allocation, and raise the necessary cash. They then remit the cash into US to be invested in the US Stock Market.

Charts Courtesy of StockCharts.Com

The remittance of the cash funds into the US causes a short term demand for US$, which causes US$ to appreciate a week or two before the US stock market moves up, due to the cash inflows.

However, this does not seem to be the present situation observed.

On the other hand, there are times when there is not much of a correlation, when the strength or weakness in either market is not the major cause or effect on the other.

In reviewing the Dow (DJIA) Daily Chart, we would maintain our Long Term Primary Downtrend Outlook, and a Short Term Sideways Consolidation Price Formation Outlook. The Medium Term Outlook is unclear for this market, and if anything, is starting to yield a slightly bearish feeling, as hopes of a "Climb Back to Health" scenario fades with each passing day, as the pattern gets nearer and nearer to the SMA50 (Red Line), which currently stands at 9758.

CONCLUSION

Oil Market Outlook

Long Term: Primary Downtrend, i.e. Bearish
Medium Term: Higher Probability of a Secondary Uptrend Wave Correction

Gold Market Outlook

Long Term: Primary Downtrend, i.e. Bearish
Medium Term: Sideways Consolidation Price Formation (SCPF)

US Dollar Index

Long Term: Primary Uptrend, i.e. Bullish
Medium Term: Probability of a Secondary Wave Downtrend Correction is increasing.

Dow (DJIA) US Stock Market

Long Term: Primary Downtrend, i.e. Bearish
Medium Term: Unclear with Hopes of a "Climb Back to Health" Uptrend Scenario fading.
Short Term: Sideways Consolidation Price Formation (SCPF)

Lastly, please be reminded on the Liability Exclusion Clause, which is at the top of my blog page, i.e. that the final trading decision is yours, and I will not be responsible or liable for any losses you may incur from whatsoever reason. :)

Best wishes,

Ooi

© Copyright 2008 of Praesciens.Blogspot.Com

US$700 Billion Bailout Plan is Now Uncertain

Dear Friends,

This video is from MSNBC.Com and shows the Interview of Robert Reich, President Elect Obama's Economic Advisor, and former Clinton Labor Secretary, amongst others.

Now, it looks like the US$700 Billion Bailout Plan is up for debate once more, and as one interviewee said, "It's a mess."

The main argument now is that the US$700 billion bailout money is supposed to be used to help the people who are suffering, to get refinancing and a breather from mortgage defaults, where possible.

If this is so, why don't the US Government just form a new bank, and capitalize it with US$700 billion, making it possibly THE largest capitalized bank in US, and do the commercial lending from thereon?

The biggest argument against the bailout seems to be the fact that the banks are taking the money, which is hard earned by taxpayers, to pay bonuses, dividends and even buy other banks!!! Whatever the case, the banks are NOT lending; or so it is claimed.

I remember reading somewhere that the bank lending is rising, but nowhere near the good old days of Pre-Crisis, which is to be expected, because with asset prices falling, it is natural that banks have become extremely cautious.

In my opinion, the issue is not forcing the banks to lend. The US Government should form 2 or 3 commercial banks for that purpose if necessary, rather than put the money with the existing banks, which are still reeling from lending losses.

If forming the new commercial banks take too long, the US Government can easily nationalize 2 or 3 of existing banks, install new senior management, and start lending. Thus, getting credit to consumers is NOT a challenge.

The challenge is the eligibility of the consumer to borrow. Lending money to people who can't pay, or are intending to use the loan to invest in assets that may go much further down in value, doesn't make proper business sense. THAT, is the problem.

The two most critical issues that the US Government should consider carefully are: -

Job Creation - Lending to those who need money to do proper, profitable business is the most important strategic objective. There are genuine businesses that have been doing proper business and are still profitable, but have been badly affected by the credit crunch, and it would be a sin not to support these businesses, of all businesses.

Why put money with badly managed firms, when well managed firms are not supported? Lending MUST be linked to the important objective of Job Creation or Job Retention, whilst ensuring that the loans will be repaid properly.

Security of the Bank Customer Deposits - It doesn't do any one any good if banks start to collapse all over the place, as was the case in the 1929 to 1934 Great Depression. During this period, about 10,000 banks collapsed, and this was one of the key causes of the Great Depression.

Why? Because the general layman, who had not speculated in the stock market and property market bubbles; who had worked hard, and saved consistently with prudent family financial management, lost his / her entire life savings when the banks collapsed.

The issue is whether the US Government should guarantee the full amount of the Bank Customer Deposits, in the form of FDIC Insurance?

On the other hand, maybe, a better question is, "Can the US Government guarantee everyone? Is it even possible?"

The bubble excesses, toxic assets and credit loans losses may be so massive that this might not be possible without incurring ridiculous burdens on the taxpayers, and risking Hyper Inflation.

I don't think any one, not even the US Government, understands how much money is needed to guarantee everyone, much less, bailout all the banks. There is a difference between the two solutions.

Bailing out the banks keeps employment, and thus, the argument for it is that the money is more productive. Merely paying out the FDIC Insurance when a bank collapses would be a loss to taxpayer for no returns at all.

On the other hand, the continued funding of financial institutions that are not well managed doesn't seem to make good business sense. This predicament is much clearer in the case of General Motors which is seeking government bailout on the grounds of employment retention, but without a good plan for profitability, why do it?

The same argument goes for loss making, badly managed banks.

I really do believe that the US Government can take positive action to mitigate the risks of a Depression, and to minimize the pain as much as possible, without going overboard in risking Hyper Inflation.

Such an objective will definitely require a more strategically integrated plan that has been carefully conceived. The US Government MUST NOT be involved in charity, but may lend to potentially profitable businesses, be it banks or firms from other industries, no matter how small the firm.

Like all commercial ventures, it must take precautions to minimize the risks of loan defaults. Where a borrower is not eligible, in accordance with good, solid banking practices, there is no choice but to let such a firm fail, no matter how big it is.

As for helping individuals who face "under water" equity in their property investments, this will depend on the proposals and creditworthiness of the individuals to pay. Where an individual has no way of making good the installments on their loans, there is no choice but to go through due process.

Unfortunately, this is the reality of life; unless the US Government decides to force American taxpayers pay for the indiscretions of those in financial trouble.

Lastly, the question of security of bank customer deposits. This is a very tough problem. If there is no guarantee, there will be bank runs. If there is, what is the COST to the US Government? Obviously, the Government will need to conduct a Deposit Stratification Study to make a decision on how many people they can / should indemnify, to minimize losses, and risk of bank runs. Bank collapses are already an inevitable part of reality.

It should be noted that uncertainties will always exist. Where there are uncertainties that cannot be properly ascertained, then emergent strategizing becomes an important integral part of the solution. Thus, there cannot be a single Grand Plan, but a series of Key Plans that move the Government closer and closer to solving the economic problems.

Best wishes,

Ooi

There is No Certainty in the Markets Today Except Certainty of Uncertainty

Dear Friends,

When you hear of news that Las Vegas Sands the world's largest casino group, owned by Mr. Sheldon Adelson, the 3rd Richest Man in the US for the year 2007, is facing potential bankruptcy, you know the economic situation is extremely abnormal.



This news is especially important to Singaporeans who thought that the Marina Bay Integrated Resort Project (Casino) was a "sure thing". More important is today's news report from Channel News Asia that the Singapore Government will not bail out Marina Bay IR Project

DO NOT SIMPLY BELIEVE THAT A BUY & HOLD STRATEGY IS A WINNING STRATEGY TODAY

This situation is a lesson that "Buy & Hold" Strategy will not necessarily work this time. It did not work for Japan, and no one knows for sure that it will work for US.

It is important to note that the US Financial & Economic System is experiencing similar economic situation as that experienced by Japan in 1990, although it is claimed that the US Government is acting differently from the Japanese Government, and thus, the US Stock Market will not perform in a similar manner as the Japanese Stock Market.

Why shouldn't the US Stock Market be lethargic from now on, like the Japanese Stock Market for the last two decades?

Just because the US Government is acting differently? Is it really acting differently? How is the US Government acting?

Just today, Treasury Secretary Hank Paulson has announced that the Government will not be buying toxic assets in the article Stocks Beaten Down by Changes in Bailout Plan.

Can we even be sure of what the US Government will really be doing in the next 6 months? Will there be flip flops in their decisions? I think there has to be, because I don't think the US Government can really bail out every financial institution in the US, not to mention other industries.

Also, more importantly, how can we simply shrug off the similarities of the Japanese 1990 economic situation and the current US situation? To assume that any Government, even the US Government has control over the economic situation is way to presumptious.

If any Government has control over its economy, it should be the Singapore Government with its vast financial and management resources. Yet, Singapore continues to experience economic recessions after economic recessions. Even more importantly, Singapore is unable to avert the current economic recession, despite the money and management resources available, and despite the fact that it is not affected in any significant manner by the Banking Crisis.

If Singapore can't be sure of a short recession, what makes anyone think that the US Recession will be short? Sigh ..... there's a lot of wishful thinking with highly biased opinions by a lot of supposedly highly intelligent, experienced fund managers and analysts today.

Be very careful. A fool and his money are soon parted.

Fundamental Analysis works only if one can forecast with a high degree of accuracy and reliability the financial results and the valuation of the Balance Sheet Assets of the relevant stock.

Right now, no one can make any forecast with any degree of reliability; not even the CFOs of the public listed companies themselves. Why? Because these are uncertain times with a vicious cycle, called a Negative Loop.

The Negative Economic Environment is causing consumers to cut down spending even further, and causing Asset Prices to decline even further. This in turn, has the effect of causing a further aggravation in the already Negative Economic Environment, and the cycle continues, spiraling down and down.

You can be sure that there will be many research analysts' downgrades in EPS (Earnings per Share) forecasts, and thus, the PE valuations. Also, as the Market PE and Industry gets cheaper and cheaper, suddenly, the historical PE valuations no longer look reasonable as well. Thus, all the perceptions change with time.

So, how then can we INVEST based on fundamentals?

Let me share a very simple formula. Of course, to refine the methodology would be even better, but sometimes, a Simplified Version is practical, i.e. useful to be applied as compared to a Rocket Science Formula that even the writer has difficulty explaining.

Here are the Rules of Simple Fundamental Investing: -

1. Good Management of High Integrity; If you don't know management well enough, you cannot invest in the stock. End of conversation.
2. Market Leader in the Foreseeable Future; it does not matter whether the stock is a market leader in terms of market share today, but it must be THE Market Leader in terms of winning PROFITABLE sales today, tomorrow, and the foreseeable future.
   
3. Stable & Reliable Forecasting of EPS; unless you can make reliable EPS Forecasts, there is no such thing as Fundamental Analysis.
   
4. Reliable Industries; select an industry that can be easily understood, and more importantly, is less cyclical, and thus, more reliable in forecasting business performance. The idea is to minimize the risk of negative shocks.
5. EPS Growth is at a minimum of 15%; there is one caveat - we must be fairly certain, and not merely guess. Research Analysts do visit CFOs and CEOs of PLCs (Public Listed Companies), and thus, if they are worth their salary, they can help you establish reliability of forecast.
6. Current PE must be not more than 8. Why? Because PE of 8 means 12.5% ROI delivered by management, which ain't that great. To invest in a stock at a PE of 12, i.e. a 8% ROI delivery, is not enough discount on its intrinsic value. Most people laugh at such stringent standards, but guess what? You find what you seek. Believe me. I have found many such stocks in the past. Why compromise with lower standards?
7. Financial Strength; Never invest in a PLC that cannot settle all its debts with a maximum of 5 years of Profit Before Tax (PBT). It is preferred that the debts are covered by a maximum of 3 to 4 times PBT. Why is this important? Because PLCs do disappoint in delivering results from time to time. We want to make sure that the stock will survive througn some tough times if and when one occurs. If PBT is halved for whatever reasons, a debt settlement period of 8 years, instead of 4, is still acceptable to the bankers. However, try talking to bankers when a PLC with a PBT Debt Settlement period of 8 times experienced a 50% drop in profitability. This means that the PLC will take 16 years to settle the debt, and in this case, the bankers may just pull the plug on the PLC.
   

Right now, the biggest challenge facing Fundamentally Driven Investors is the ability to forecast EPS with any degree of accuracy and reliability. Also, there is no EPS Growth; in fact, if anything, we can expect EPS to drop in the foreseeable future for most PLCs.

Based on these two criteria, we know that this is not yet the time to invest. Just because a stock has gone down quite a lot, or even the whole stock market has gone down quite a lot doesn't mean that it won't go down further. In the 1929 Crash, the Dow went down from 380 to about 200, but in the next 2 years, it went down to 40, i.e. it lost 90% of its total value from its historical peak.

I know what you are thinking. No, it won't happen, not this time.

Well, I've got news for you, my friend. The Stock Market is known as a FAT TAILED Normal Distribution Curve. What this means is that things that are not supposed to happen in a thousand years, happen more than once within a decade or two.

So, be very, very careful. Follow the simplified rules of Fundamental Investing, and you have minimized your risks, although, you still don't have a stop loss point where you move on when you are wrong. In my opinion, this is very important, but that is a whole basket of fish, better discussed in another blog, another time.

Meantime, be happy, stay healthy, and be nice to all around you.

Lastly, please be reminded on the Liability Exclusion Clause, which is at the top of my blog page, i.e. that the final trading decision is yours, and I will not be responsible or liable for any losses you may incur from whatsoever reason. :)

Best wishes,

Ooi

© Copyright of Praesciens.blogspot.com, 2008

Forex Fundamental Analysis 081112

Dear Friends,

A number of you have been asking me whether it is time to buy Aussie Dollar. As I do trade Forex, I have decided to invest some time to research the "fundamentals" of key countries. Here are some useful information for you to consider before you "invest" in your favorite currencies: -

Countries       USA  Japan  China   GER     UK   Russia  Aust   NZ     SG  Malaysia
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US$'Billion
GDP          14,499  5,059  4,149  3,707  2,730  1,682  1,041   128    185   216
Trade Bal      -826     81    309    324   -177    171    -10    -2     42    40
Current A/C    -588    188    368    263    -73    109    -45    -9     32    29
Reserves         71    954  2,033    112*   24*    594     34    15    170   125
External Debt 5,466  8,620    421  2,317  1,289    412  1,032    59     26    56

Population(m)   304    127  1,331     83     61    142     21     4      5    28
Net Reserve   -5395 -7,666  1,612  -2205  -1265    182   -998   -44    144    69
Net R/C (US$k)  -17    -60    1.2   -2.7    -21    1.3    -47   -11     29   2.5
GDP / Capita     48     35    6.1     35     36     16     39    27     43    14

Notes
Data extracted from October / November 2008 EIU Reports unless otherwise stated.

112* - Extracted from earlier EIU Report. Current Reports do not show International Reserves any more.

24* - UK Foreign Reserves data is not disclosed in EIU Report. Thus, data was extracted from CEP News website http://www.economicnews.ca/cepnews/wire/article/155590

Most of the External Debt Data is a computation result of Percentage of GDP. Also, it is possible that the data reflects only the Government Foreign Debt and not the total Foreign Debt of the country. This means that the Total Foreign Debt could be larger than the statistic here.

Net Reserve is my own terminology which is a computation of the Reserves less the External Debt.

Net R/C means Net Reserves divided by the Total Population. If the Net Reserve is positive, then the Net R/C will also be positive, and reflects the average Reserve net of the External Debt per Person. If the Net Reserve is a negative figure, it means the country owes more than it owns, and thus, the Net R/C figure reflects the average amount of Debt per person that the country owes.

GDP / Capita is measured in terms of US$'000.

UNDERSTANDING THE NUMBERS

The correct data for External Debt should include ALL Foreign Debt, both Government and Private Sector. However, I have a feeling that the data extracted includes only the Government portion of the External Debt. Thus, I will treat the External Debt as Government Debt.

Foreign Reserves & Government Debt

One of the most important things to understand is that Foreign Reserves of a country is NOT the amount of reserves owned by a Government. Instead, it is the total Foreign Reserves owned by everyone in the country, from foreign corporations, individuals, to the Government.

For example, Japan is a unique country with a strong Foreign Reserve Position of US$954 billion. On the other hand, the Government Debt totals US$7,666 billion. It is important to note that whilst the Debt is owed by Government and therefore, the Japanese taxpayers, the Foreign Reserve is probably owned by entrepreneurs like Akio Morita (Sony), etc.

What is very interesting is that we normally expect a developed country to be stronger in terms of the country's financial statistics, i.e. namely its Net Reserve. However, the data above shows that Developed Countries i.e. USA, Japan, UK, Germany, Australia, and even New Zealand, show a Net Debt Position.

The only Developed Country in the table that shows a Net Reserve Position is Singapore. On the other hand, China, Russia and Malaysia have a Net Reserve Position.

Why? Possibly, it is because entrepreneurs / business corporations in the Developed Countries tend to invest in other developing countries. This is known as Foreign Direct Investment. FDI.

The FDI Outflow is recorded in the Balance of Payments merely as an Outflow, and is usually no longer tracked after it has flowed out, possibly because there is no way of knowing when this money will ever return to its origin country, if ever at all. Sometimes, the money is lost due to business losses, whilst at other times, the money actually generates good returns on investments, but is recycled as FDIs into either the same investee country, or other developing countries.

In any case, a comparison of the Net Debt per Capita sratio with the GDP per capita, which is the average income per person, shows that the situation is not as alarming as initially observed based on absolute balances.

The only exceptions that need to be monitored much more closely are the Japanese and Australian situations, where the Net Debt per Capita has exceeded the GDP per Capita.

What does this mean? Let's look at it this way. How long does it take for you to save exactly the amount of money you earn in a year? For example, if the GDP per Capita of a Japanese is US$35,000 per year, how many years will it take him / her to save US$35,000?

If he / she saves at the rate of 10% per annum, then the answer is 10 years. If the person only saves 5% of his income, then it will take him 20 years to save a whole year's salary. Thus, a situation where the Government Debt per person exceeds the Average Income per person, is much more critical than most situations where debt constitutes less than 33% of the Average Income.

In a country like the USA where the savings rate is minimal, then, any amount of debt can be alarming. This is why some people accuse the USA of being a bankrupt nation which spends more than it can earn, year after year.

Assuming Americans start saving at the rate of 2% of their annual salary, it will take 17 years to settle the debt, excluding interest payments. This assumes that there is no more additional Government Debt incurred from hereon, which is NOT the case.

Current Account Surplus as a Key Driving Force

Theoretically, a country with a Net Current Account Surplus should experience a strengthening of its currency against a country which has a Net Deficit. This means that Malaysia, with a Current Account Surplus of US$29 billion compared to the Australian Current Account Deficit should experience a strengthening of the Ringgit compared to the Aussie Dollar (AUD) in the foreseeable future.

This is based on the assumption that both Current Account performance will persist in the foreseeable future of the next one to two years.

Other Key Driving Forces

Other Key Driving Forces that affect the strength of the currency are: -

1. Interest Rate Differential
2. Unwinding of Carry Trade / Short Term Hot Money Flows
3. Long Term FDI Flows
4. Flight to Safety, if there are concerns over the Political & Social Stability of a particular nation.
   

Malaysian Ringgit vs Aussie Dollar Case Study

We will take the Malaysian Ringgit vs Australian Dollar situation as a case study.

Australian Central Bank (RBA) Interest Rate has come down from a very high 9%, and is falling rapidly, whilst the Malaysian Bank Negara rate remains stable at around 3% to 3.5% throughout the last few years. This means that Interest Rate Differential is narrowing between Australia and Malaysia, and this points to a potential strengthening of the Ringgit.

For the last few years, the Aussie Dollar has been one of the darling currencies for the Carry Trade. The Carry Trade is a strategy where one buys the Aussie Dollar, and puts it in a high yielding deposit. With the Aussie Dollar strengthening, coupled with a higher interest rate, the Carry Trade was one of the most important "investments" for the last few years.

However, in the last few months, the Australian Economy has suffered a change in trend for the worse. Consistent with the fast weakening economy, and the lowering of the interest rate, and the rapid devaluation of the Aussie Dollar, "investors" rushed to unwind their Carry Trade investments.

I am not convinced that the unwinding can be completed within a few months when the inflow took a number of years. Thus, the Unwinding of the Carry Trade provides a Short Term Outlook of a continued weakening of the Aussie Dollar against currencies that did not experience a huge inflow of such Short Term Hot Money. In fact, the Ringgit also experienced an outflow of US$20 billion in Hot Money, in August 2008, which was when the Malaysian Government considered reinstating the repegging of the Ringgit.

Such a statement should not have been made public without a careful study, and in fact, after the study, the Malaysian Government decided against reinstating the Ringgit peg, but the damage is already done - some people lost confidence in the Ringgit, and opinions of a weakening Ringgit formed in the minds of Malaysians, rightfully, or wrongfully, thanks to the Government's ill conceived announcement.

Theoretically, the Malaysian Ringgit should strengthen against the Aussie, but practically, even some Malaysians are worried about political and social stability, and is suspicious of sudden Government proposals like repegging of the Ringgit. This causes outflows of money out of Malaysia, resulting in the selling of the Ringgit.

The last factor is the FDI Flows, which Malaysia is experiencing a NET Outflow. Although FDI Inflows is steady at US$5 billion per annum, the repatriation of profits by MNCs (Multi National Corporations) exceed the FDI Inflows, and thus, there is a net outflow. This is a key driving force that counters the strengthening of the Ringgit, but is already accounted for, in the Current Account Surplus, i.e. Malaysia is still in positive territory, despite the Net Outflow.

Thus, from a Fundamental Perspective, I expect the Malaysian Ringgit to strengthen against the Aussie Dollar for the foreseeable future.

Since the Kiwi usually moves in tandem with the Aussie Dollar, and the New Zealand Economy is somewhat corrrelated to the Australian Economy, I expect a similar strengthening of the Ringgit against the Kiwi (NZD) in the next one to two years.

S$ vs the Ringgit

As for the Singapore Dollar (S$), it has always been the history of the two countries that the S$ will always strengthen against the Ringgit, and there is no reason to believe that this Long Term Trend will change in the foreseeable future of the next one to two years.

S$ vs US$

The future of the S$ against the US$ is not so clear. Until the last few months, the S$ had strengthened strongly against the US$, and within two years, the USDSGD exchange rate fell from 1.52 to 1.32. However, within a short period of time, this long term trend was reversed, to the extent that the exchange rate is now back to the 1.50 level.

Why? Two reasons. The first is that the Monetary Authority of Singapore (MAS) had been adopting a policy of fighting inflation by strengthening its currency. When the S$ strengthens, this means that Singaporean consumers will pay less S$ for the same goods. Although this policy defrayed some of the inflationary pressures, nevertheless, Singaporean consumers felt the inflation strain.

Since inflation is easing, and no longer considered a serious threat in a rapidly weakening economy, it would seem that the MAS has changed its policy stance and has allowed the S$ to weaken, consistent with the basket of currencies that MAS monitors against the US$.

I do not know the exact composition nor the exact formula of the basket of currencies weightage, and it would not seem to matter in the next one to two years. Why?

Because the key currencies of the world, except for the Japanese Yen, and the Swissie (Swiss Francs CHF) are all weakening against the US$, mainly because of the unwinding of Carry Trade, the sales of non US assets and repatriation of funds back to US, and the "acute" shortage of US$ in the world, possibly as a result of the losses arising from investments in US Assets which have depreciated quite substantially since.

Interest Rate Differentials are narrowing rapidly, as the ECB (European Central Bank), the BOE (Bank of England) and the RBA (Royal Bank of Australia) reduce interest rates on a frantic basis, in REACTION to a exponentially deteriorating economy.

This, coupled with the fact that the European, British and Australian exports are slowing dramatically, the earning of US$ by these countries are also slowing. Thus, from an economic perspective, the future of these countries and their currencies are tied to the US Economy. In view of this correlation, one wonders if the Euro, the British Pound or the Aussie has any chance of strengthening against the US$, despite the economic problems faced by Americans.

Given the above scenario, would the Singapore MAS still want to maintain a peg against a basket of currencies?

One argument is that the Singapore MAS wants to devalue the S$ to spur the manufacturing exports which have been facing slowdown pressures for half a year now.

This makes sense, but in my personal opinion, the more important objective for MAS and the Singapore Government is to implement an effective strategy to grow Singapore out of the impending and likely to be severe economic recession.

How can Singapore grow itself out of a recession? How can the Singapore Government ease the economic pains on Singaporeans by encouraging job growth?

Obviously, the only key solution is Government Spending. Fortunately, the Singapore Government has been financially prudent in managing its strong economic growth years, and now, it has the money to spur the economy with infrastructural improvement projects.

As Singapore imports most of its needs, any Government Spending on Infrastructure Projects are likely to involve high import values. This is especially so, when even sand needs to be imported from Indonesia, while it imports plain water from Malaysia.

Thus, it would seem the appreciation of S$ will soften the cost of living for Singaporeans, while reducing the cost of imports for construction of infrastructural projects. Also, with a million foreign workers (work permit holders and permanent residents), there is a lot of capacity for Singapore to shrink in terms of Unemployment.

In any case, I cannot in my mind comprehend a situation where

• the currency of a country with minimal foreign debt, enjoying current account surplus, with one of the world's strongest foreign reserves, and possibly the highest Reserve per Capita in the world, will weaken against
• a country with an extremely high Foreign Debt, with the world's worst Current Account Deficit which is irreversible in the foreseeable future.

In my mind, the S$ must strengthen against the US$ in the longer term future of the next one to two years. This has been the trend of the S$ against the US$ since year 2002, and there is no reason to see why this Long Term Trend will change in the foreseeable future, although, in the Short Term, the various reasons for the US$ rally as mentioned above may continue to prevail.

Lastly, please be reminded on the Liability Exclusion Clause, which is at the top of my blog page, i.e. that the final trading decision is yours, and I will not be responsible or liable for any losses you may incur from whatsoever reason. :)

Best wishes,

Ooi

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