Tuesday, April 14, 2009

The Might of China, Its Potential Success & Risks

Dear Friends,

ICBC (Industrial & Commercial Bank of China) is the Biggest Bank in the World, measured by Customer Deposits. It now has CNY 8.9 trillion (RM 4.5 trillion or around US$1.2 trillion) as at end of March 2009 in Customer Deposits. JP Morgan used to be the largest with US$1 trillion.

China's rise is amazing, and China's Might dwarfs that of most other countries in the world.

However, despite China's Might, it is still not in a position to drive the world economy. The US remains the only key driver of world economy. Nevertheless China's domestic consumers are sufficiently large to have a significant impact on its country's economic growth.

This is an important reason why we should be bullish on China, at the right time and why we cannot ignore investments in China in the next one to two decades.

Currently, an important way to invest in China's stock market and take advantage of China Might and Future Economic Growth Prospects is through the iShares FTSE Xinhua China 25 ETF (Exchange Traded Fund).

However, there are risks involved. The key risks are political and social stability. Whilst China is relatively stable today, the growing divide between the Rich and the Poor, not only between Rural and Urban areas, but more importantly, within each city or town, is a potential driving force that may cause disruption to its continued political and social stability and thus, its economic success.

In my opinion, China's Government understands this risk of a Growing Wealth Divide very well, and has taken action to improve the poverty situation. Thus, the issue is not one where the Government is not trying to do the right thing, but HOW a Government can be effective in combating one of the most significant consequences of Capitalism.

There are many brilliant people in China, and in China Government. It will be very interesting to monitor the Government Policies to see how they try to solve this problem, where the West has failed.

Is it even possible to resolve the Wealth Divide Problem in a Capitalist Society? Only time will tell.

The consequences of a persistent, significantly Growing Wealth Divide, is an ever increasing risk of political and social instability. And, political and social instability tend to result in a lot of negative unintended consequences.

Thus, it is crucial that not only China, but the rest of the world, especially the Developing Countries, act to manage this potentially destructive consequence of Capitalism from becoming a significant Driving Force shaping the future of the nation.

Best wishes,

Ooi

Dreams Do Come True!

Dear Friends,

Most news are not worth reading, and I don't usually read the newspapers except for business news. However, I do read news of people who do amazing and inspiring things.

There is a video clip on Youtube of the hottest sensation that has rocked the world in the last two days.

Susan Boyle is 47 years old, unemployed, never been kissed, lives with a cat, and every one was very cynical about her ambition to be like her idol, Elaine Page, just looking at her.

Judge for yourself. "Dreams do Come True", and it is moments like this that makes life exciting and enjoyable. Click on the name of Susan Boyle, and make one of the best 7 minutes time investment of your life. Almost 1.5 million people have watched Susan in the last two days on Youtube. You should too.

Susan Boyle is Unemployed, but definitely not down and out.

Some people may think that "Yeah, right. That's one in a million success story. You just picked the rare exceptional achievement. It doesn't depict the real world out there."

Well, here's another one. His name is Paul Potts. He was a sensation one year ago, and as at today, 47 million people have invested 5 mins of their time to watch him. Click on the name Paul Potts and enjoy the success of one of the first ordinary person to become Extraordinary because he was given ONE Chance.

You would be right in saying that these people are rare and exceptional. They WERE Ordinary People, who decided to become Extraordinary. Of course, they had hidden talent, which they had been working on for years, but they never had the chance to show their talent, and possibly, they never had the courage to do it in the past. Then, they took the ONE CHANCE that was given to them, and they made their Dreams Come True.

These people had Talent. But Talent was not enough. I'm sure that they worked hard on developing their Talent for years before they could become successful with just one chance. I don't think Susan or Paul worked on their Talent because they knew that some day they would make their Talent work for them. They worked on improving their Talent because they had a passion for Singing. Chase your Passion! Work on your Talent.

So, we've got Talent, Hard Work, and Passion. Two more ingredients are required to make Dreams come True. There is a need for an Opportunity to arise. Susan and Paul's Talents were ready a long time ago, but the Opportunity did not arise, and that's why they remained in obscurity.

This is the one Element that we cannot control. There is still an element of Good Luck involved. But without the other three Key Factors of Success, i.e. Talent, Hard Work and Passion, these people would still not have been able to convert Opportunity (Good Luck) into Success.

In my opinion, many people have the Talent and Passion, and are willing to work hard, and do have Opportunities (more than once), and yet they remain in obscurity. This is because they lack the Ultimate Key Factor of Success, the one that determines the Doers from the Talkers, i.e. Courage.

"Courage is the Ability to Act despite the Presence of Fear." Susan and Paul were nervous. Susan even left the stage immediately after she finished singing, without waiting for the judges' comments, and had to be called back. BUT, she did it. And aren't we proud of her?

In conclusion, it doesn't matter if you are ordinary today. If you want to be Extraordinary, you must "Chase Your Passion" and Work Hard to develop your Talent. Then, when you are ready, you must go out and search for Opportunities. Ultimately, you must "Seize the Day", the chance that is being given to you, and make that ONE CHANCE in a Lifetime happen for you.

If you are ready, Opportunities will come. But, you must be ready, and you have to be able to see Opportunities when they arise. You must have the Courage to Act, at the Opportune moment, or it will pass you by.

With this, I wish every one of us "Ordinary" People, an Extraordinary Life, be it known to the public, or only to you. What is most important is not to live the Extraordinary Life only in your mind, but to live it with your heart and soul.

"Dreams Do Come True" ........... at least to some of those who dare to dream, and willing to work towards their dream.

Best wishes,

Ooi

How Much Will the US Bailout Cost?

Dear Friends,

We keep hearing / reading about concerns regarding the Excessive Government Spending to Bailout and stimulate an American Economy in serious trouble. This Excessive Government Spending translates to an Excessive Printing of Money by the US Government, since it doesn't have any money in its coffers in the first place. The US Government knows that US taxpayers will have to pay up for what the Government spends today, some time in the future, but there is no proposed solution as to how the Debt will be paid.

Exactly how much is this "Excessive" Government Spending on Bailouts and Economic Stimulus?

John W. Schoen, Senior Producer of MSNBC.Com, estimates that as at today, 13th April 2009, the total announced effort has come up to US$7 trillion, although he expects the actual tab to the taxpayers to be far lower. You can read his interesting article entitled "What's the Tab for the Bailout? Take your pick. " by clicking on the title.

The Population of the US is about 300 million people, and if the US Government splashes US$7 trillion in 2 or even 3 years on bailout and economic stimulus, this will translate to an additional tax debt of US$23,333 per person, including the one day old baby just born yesterday.

Can you imagine being indebted to the US Government by US$23,000 right from the first day you are born? This is on top of the US$14 trillion Government Debt already in existence, and thus, the total debt of this new born baby will be US$70,000. This is despite the fact that the poor fellow hasn't even learn to say, "Mama".

If we exclude the young and the aged, and only expect the working population to pay for the Government Debt, including that proposed to be spent, then we are looking at US$123,000 per worker, before interest charges.

This is on top of his housing mortgage, credit card debt, personal loans, car loan, student loan, etc. No wonder babies come out crying. They are so highly indebted even I would cry.

The problem is not how much the taxpayers will have to pay up on Government Debt. The problem is that US Government keeps spending more than what it can collect from the American taxpayer, and thus, even if it collects more tomorrow, the tendency is to spend everything it collects and even borrow some more to spend. Good economic times, bad economic times, you name it, the Government always spends more, and has NEVER brought its debt level down.

Now, if you are a banker, do you think such a person is creditworthy? If you are that person, do you think any banker will find you creditworthy?

This is the crux of the concern that we are having, i.e. one of Excessive Printing of Money just because it is paper not backed by anything. Many decades ago, a country had to have Gold Reserves before it prints paper money. The US Government stopped this during the time of President Nixon, and now, it just prints and prints.

If there were absolutely no repercussion to this printing of money, why don't every country just do it and pay its people more?

I leave you with these questions for your further contemplation.

Best wishes,

Ooi

Monday, April 6, 2009

Gold & Currency Outlook 090406

Dear Friends,

Gold has been a favorite play amongst retail investors who have been advised by private bankers based on the "Flight to Safety" story. In my opinion, the Gold Market is a bubble whose fate depends very much on whether the Hyper Inflation argument will hold water. This explains its high volatility in the past one year.

From the Weekly Chart we can see that Gold fell from a Historical High of US$ 1033.9 per ounce, to a Low of 681, in a classic EWT (Elliot Wave Theory) 5 Wave Motive Structure, which suggested that it was in a Primary Downtrend.

Chart Courtesy of StockCharts.Com


However, in light of the excessive printing of money by the US Government and the proposed mammoth Budget Deficits, Gold has risen from the grave with a fresh air of breath. In one major upswing, Gold rose from 681 to 1007.7, before experiencing the current correction.

It should be noted that the Weekly Stochastics was at Gross Overbought, and have crossed over to the downside.

Based on my Forecasting Model, Gold should drop to 825 +/- 20, and this current downturn is expected to last till some time in June 2009, barring any sensational new activity plans from the US Government.

This is assuming that the current downturn is a normal Trend Correction Wave in a Primary Uptrend which started in November 2008 from the low of 681. However, it is possible that this Downturn may not be a normal correction, and may actually be the start of a Primary Downtrend, as some fund managers have argued on CNBC, although they are still a minority view today.

The argument has some valid points and should not be simply dismissed. As at today, the retail investors have been pouring money into the Gold market for some time, so what happens when the flow of funds trickle to a stop? That's how markets make a Top, i.e. it reaches a point where there is no more money left that is willing to chase prices higher.

Usually, Retail Investors are the last to buy, and the ones left holding the baby, when the musical chair game stops.

Consider this argument in light of the recent call for IMF to sell down its Gold shareholdings to fund its operations to help countries that are currently in financial trouble, and we have an ever growing wave of higher and higher probability of a market downturn.

I do admit to a contradiction in my analysis. On the one hand, I am very concerned about the excessive printing of money by the US Government. This has been mentioned in many of my blog articles, the most recent being the article on 19 March 2009, entitled US Government Continues to Print Even More Money!" and the most detailed being The Inevitability of A US Dollar Devaluation Crisis published on 9th February 2009.

On the other hand, I am not a firm believer in the Gold Uptrend, and the "Flight to Safety" argument. Why?

This is because of what George Soros calls the Reflexivity Theory. The market has already acted on the "Flight to Safety" story. In my opinion, to act now, on this story, is to court the ever increasing risk of a potential bursting of the bubble.

If anything, I would put my money on Silver and Plantation & Mining Stocks or ETFs (Exchange Traded Funds) as the appropriate hedge, should the Hyper Inflation and US Dollar Devaluation Crisis risks increase to a level that is considered dangerous.

However, before we dismiss the Gold Hyper Inflation Hedge argument, let's consider the risks associated with the US Dollar from a Technical Analysis perspective of the US Dollar Index.

A review of the Weekly US Dollar Index Chart reveals increasing Probability of a US Dollar downturn against the major world currencies. The USD Index had breached the previous high of 88.46, but had not made convincing progress as it turned down at 89.62. Usually, this phenomenon is a signal of a potential Market Top, and the Index fell by 7.8% in the two weeks immediately after making the new High.

Chart Courtesy of StockCharts.Com


The Index has made a comeback in the last two weeks, having made a Pivot Low at 82.63, but the Weekly MACD is showing a Divergence, and is still trending down, and so is the Weekly Stochastics, which has fallen from the Gross Overbought Zone.

Currently, the Index is supported by the SMA200 (Simple Moving Average for 200 Weeks, i.e. almost 4 years) at 82.9. Should this level be broken, then we can expect the US Dollar to face further devaluation pressures.

Nevertheless, a review of the Daily USD Index Chart shows the Index in the process of attempting to rise, with the Daily Stochastics rising, and the Daily MACD about to turn up. However, the upturn is not strong, suggesting a lack of conviction in the market for continued strength in the US Dollar.

Chart Courtesy of StockCharts.Com

The USD Index is at a critical phase. If the present attempt to rise above the latest High of 89.62 fails, then, it is possible to see a major downturn in the US Dollar in the Medium Term.

What is interesting is that despite the claims of a potential disintegration of the European Union and thus, the dissolution of the Euro, the Euro Index is starting to show signs of life, of a potential strengthening. Both the Weekly MACD and Stochastics are now trending up, and the Euro Index has broken above its SMA200.

Chart Courtesy of StockCharts.Com

Based on the Charts, it would seem that the risk of Hyper Inflation is still sufficiently low for us to act today, although this risk seems to be on the rise. Nevertheless, the Probability has increased that the US Dollar will weaken against other major world currencies in the next few months.

In conclusion, the Probability is increasing that in the Medium Term, (3 Weeks to 3 Months) the US Dollar will weaken against the Euro, while Gold is expected to fall to 825 +/- 20.

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 2009 of Praesciens.Blogspot.Com.

Dow Outlook 090406 - Significant Medium Term Bear Market Rally

Dear Friends,

There are generally two kinds of Technical Analysts; those that are firm believers in Elliot Wave Theory (EWT) and those that aren't. I am one of those that believe that we should not become fanatical about any analysis tool, but neither should we ignore one that shed some light on the mysterious happenings of the financial markets.

Thus, I am going to start off this Technical Outlook of the the Dow (Dow Jones Industrial Average) with an important EWT Observation.

As can be seen from the Weekly Chart, the Dow has completed its 5 Wave Downturn. Wave 1 started with the fall from the historical peak of 14198.1 to the Intermediate Pivot Low (IPL) of 11634.8, yielding a loss of 2563.3 points for a Correction of 18.1 %

Chart Courtesy of StockCharts.Com
Wave 2 was a Bear Market Rally, that took the Dow higher from the IPL of 11634.8 to a Intermediate Pivot High (IPH) of 13136.7, for a Retracement Value of 1501.9 points or a 58.6% Retracement from its Wave 1 Downswing.

Wave 3 was a disastrous downturn for the Stock Market Bulls, falling from the IPH of 13136.7 to an IPL of 7449.4, yielding a downswing value of 5687.3 points. Wave 3 is never the Shortest Wave, and is usually the Longest Wave, especially for the Stock Market, and this seems to be the case, for the Dow.

Wave 4 moved from 7449.4 to a IPH of 9008.1 before succumbing to a Wave 5 of what seems to be a Primary (Long Term) Downtrend. This gave an Upswing Value of 1558.7 or a Retracement Percentage of only 27.4%.

The Final 5th Wave was constructed with the fall from IPH of 9008.1 to the Low of 6470, for a fall in value of 2538.1 points.

It is interesting to note that the Downswing Value of Wave 1 of 2563.3 points is very close to the Wave 5 Downswing Value of 2538.1. Wave 3 is the longest wave with the Downswing Value of 5687.3 points. Thus, the Dow had lost 7728.1 points or 54.4% of its value from the Historical Peak of 14198.1 when it reached the Market Low of 6470.

For the Non Believers of EWT, the performance of the Dow thus far, seem to suggest that one should not dismiss EWT so easily.

The analysis above is well and fine, but how do we use EWT to make money? If we believe in EWT, then the Basic Wave Cycle consists of a 5 Wave Trend Structure (1-2-3-4-5), and a 3 Wave Corrective Structure (A-B-C). Thus, we can expect a significant Bear Market Rally after the Market Low of 6470.

My work with Fibonacci Theory Modelling and analysis of Key Support and Resistance Zones suggest that this Bear Market Rally has the potential to reach as high as 10900 +/- 300 points, before resuming its Primary Downtrend movement.

However, the fulfilment of this potential very much depends on how price behaves at the level of 8900 +/- 300, which is a Key Support & Resistance Zone.

This anticipated Corrective Structure is significant because it is expected to retrace a minimum of 2430 points from the Market Low of 6470 to 8900, whilst the potential exists to rise as much as 4430 points to 10900. Thus, it may not be wise to hold any Short Positions at this stage. In fact, can we do without a Long Position in this coming upturn?

It should be noted that the Weekly MACD and Stochastics have turned bullish, and thus, support this idea of a Significant Upturn.

Nevertheless, a review of the Daily Chart for the Dow reveals that the Daily Stochastics has been at Gross Overbought Level for some time. This suggests a High Probability of a Lower Degree Short Term Downward Correction Wave within an Upward Higher Degree Medium Term Correction Wave Bear Market Rally).

Chart Courtesy of StockCharts.Com
This Lower Degree Downward Correction Wave is forecasted to bring the Dow down to the level of 7100 +/- 150 points before resuming its Medium Term Upward Trend.

This leaves one last point which is very much in contention even between respected fund managers, i.e. the million dollar question, "Is this a Medium Term Bear Market Rally within a Long Term Primary Downtrend, or have we seen the worst, and formed a Primary Trend Market Bottom, and thus, this is the continuation of the 20 year Primary Uptrend?

The truth is, only time will tell who is right and who is wrong. However, in my judgment, we have not seen the worst of this US and World Economic Recession. Obviously, with President Obama throwing huge chunks of money at the economic and financial system problems, i.e. US$3.8 trillion to be exact, we are likely to witness GDP Growth, at least statistically speaking.

Why? Because of the simple formula, GDP = C + I + G, where C = Consumption, I = Investments and G = Government Spending.

If Government Spending is large enough, it will offset the decrease in Consumption and Investments that is currently being experienced, and thus, yield a statistical result of GDP Growth.

Whilst statistically, the US Economy will experience GDP Growth, it will feel like the economic pain is very much the same, for the average layman on the street. Why? Because this GDP Growth is not broad based, and more importantly, this economic growth is a Jobless Growth, i.e. we could see Unemployment not only persisting, but actually rising, despite the statistical GDP Growth.

Investments will not be made as long as Consumers don't spend. Without Investments, there will be no Job Creation. However, how can Consumers spend, when they are uncertain about their Employment Future? This is a Vicious Cycle of an Economic Recession.

In the past, more specifically, in the Great Depression Era, John Maynard Keynes came up with this idea of Government doing the spending, so as to jump start the economy. With Government Spending, businesses will start to invest, and this in turn will create jobs. With Job Creation, and given enough time, Consumers will increase spending, as they will have a bit more money, and more confidence, with better job security.

However, there is one major difference between the US Economy during the Great Depression of the 1930s and today. The US Economy is now one of Services, whilst in the Great Depression, the United States was the Industrial Might of the World.

Today, if the US Government spends, it does not necessarily mean that US Businesses will benefit, because the materials is likely to be manufactured outside of US. Even labor might be imported from Mexico.

In view of the fact that the US Economy is largely Services based, the effect of Keynesian Theory, i.e. Government Spending in the form of Economic Stimulus, may not have the necessary traction to deliver desired results.

Today, Government Spending is the most expensive way to achieve economic growth, and if spending is not wisely done, will be a waste of taxpayers' money, i.e. without real job creation,. Even worse, when the time comes, somebody, i.e. the US Citizens will have to pay for the increased Government Debt due to the Budget Deficit.

It is important to note that a Budget Deficit means that the US Government will have to increase Government Debt by the amount of the Deficit because it will have spent that amount in excess of what it earns in taxes and other income from Americans and American Corporations.

Thus, the most important question is not whether the US Economy will experience GDP Growth some time in 2010. The US Government has already "bought" the necessary statistics with a Government Budgeted Spending of US$3.8 trillion, which will result in a Budget Deficit of US$1.8 trillion. We can expect the US Economic Statistics to yield the necessary growth figures for the year 2010, despite the lack of Traction (Results) today.

The most important question is, "What happens AFTER the huge Government Spending and trillion dollar deficit?" Will the US Government continue its path of excessive printing of money, or will it stop? If the US Government reigns in the spending and the Budget Deficit after 2010, then, the US Economy will only have experienced an Upward Statistical Blip, and then, go back into another Economic Recession, or possibly, a Depression, now that the US Government is powerless to spend more.

This is why I believe that the Primary Downtrend Wave will not only continue, but will take the Dow even lower, to the 4000 level, after this Significant Bear Market Rally. However, in the meantime, as the saying goes, "Strike while the iron is hot", and thus, we should "make hay while the sun shines", and enjoy the impending upturn.

In view of the above, my Outlook for the Dow is as follows: -
  • Short Term Outlook (3 Days to 3 Weeks) = Bearish with a Downward Correction to 7100 +/- 150.
  • Medium Term Outlook (3 Weeks to 3 Months) = Bullish with an Initial Target High of 8900 +/- 300 and a potential Maximum High of 10900 +/- 300 points.
  • Long Term Outlook (3 Months to a Year) = Bearish with a Market Bottom at 4000.
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 2009 of Praesciens.Blogspot.Com.