Monday, December 14, 2009

Hong Kong Real Estate: Bulls See 30% Price Gain in 2010

So I read this article in the South China Morning Post on the way back from London to Hong Kong 2 weeks ago and I've been meaning to blog about it. I couldn't find the online copy of it so I'll just copy some interesting tidbits:
"Opinions about the outlook for Hong Kong home prices next year are sharply divided, with the biggest bulls forecasting a repeat of this year's 30 percent price gains, while others caution that prices have already hit the limits of buyer affordability."
So for those of you who are not from Hong Kong, basically for the last year Hong Kong real estate prices have rebounded to 2007 levels, meaning they've gone up A LOT.

To be honest, I haven't really followed the Hong Kong real estate market all year due to my absence. But reading this article really piqued my interest, because the US real estate market has just been in a horrible slump all year - how and why was the Hong Kong real estate market still going up?

I read the following section of the article and began to think:
"Peter Churchouse, a director at hedge fund manager LIM Advisors, said demand for properties in Hong Kong would continue to increase taking into account...economic growth on the mainland, the recovery underway in the Hong Kong economy and the low interest rate environment in the city... 'The US has to keep interest rates low for the time being.' "

Then it hit me, the reasoning was all quite simple: Low interest rates and the weaker US dollar were the culprits.

The Hong Kong dollar is pegged to the US dollar. The RMB has gained strength versus the USD and Hong Kong dollar this year and a rush of people have been taking advantage of this. Amid slower asset growth in the developed countries, people were seeking higher returns - the Hong Kong real estate offers just that.

Interest rates in Hong Kong are basically managed by US monetary policy - which presents a future "problem". As Asian economies (including HK's) recover next year, they will and should hike interest rates to prevent inflation. The US cannot really hike interest rates for a while, especially with unemployment looking to be around 10% for at least most of next year. Most Asian economies have mid to low unemployment rates and are very likely to increase interest rates as soon as the first half of 2010 to prevent serious inflation.

So when next year comes, and if and when Hong Kong's economic growth returns, normal monetary policy would dictate that the Hong Kong government should increase their interest rates. But they can't. What does that mean? Hong Kong's interest rates will be "artificially" low, which means loose monetary policy when it should be tightening. With easy money, money will flow into some kind of high returning assets - and in Hong Kong that usually means real estate.

So I predict that the Hong Kong real estate bubble will continue to bubble further in 2010 due to the soon-to-be "artificially" low interest rates. In the past when Hong Kong's economy ran on "US battery", this was no problem because the two economies usually ran side by side. But now for Hong Kong, it mainly runs on "China battery", and the Chinese economy by all means looks like it's going to run in the opposite direction of the US economy. If Hong Kong doesn't unpeg itself from the US dollar, this could pose some serious problems as inflation goes out of control. Of course, this won't happen for a little while, so enjoy the real estate bubble while it lasts...

Friday, November 27, 2009

Dubai Request for Debt 'Standstill' Raises Fear

I was originally going to blog about an article about an Economist article on interest rates and monetary policy or something about the fiscal deficit.

But that’s nowhere near the most interesting news story for today, and quite possibly for the next week or next few months.

“DUBAI, United Arab Emirates (AP) -- Just a year after the global downturn derailed Dubai's explosive growth, the city is now so swamped in debt that it's asking for a six-month reprieve on paying its bills -- causing a drop on world markets Thursday and raising questions about Dubai's reputation as a magnet for international investment…Dubai World, would ask creditors for a "standstill" on paying back its $60 billion debt until at least May.”

Link to Article

Another bubble finally dropping the ball. Inherently connected to the original sub-prime “crisis”. And very much related to the U.S. commercial real estate problems that I’ve been discussing in my previous posts. It’s all in the same realm. Countries that have relied on cheap credit to finance the past real estate boom such as the U.S., Dubai, and Spain are all currently in trouble. And countries that have relied on those countries are also in trouble, which means quite a lot of countries.

Investors hate uncertainty. And this extremely vague announcement from Dubai just upped the uncertainty in the stock markets (obviously including the bond markets). And don’t think just because it’s so far away in Dubai that it won’t affect the international markets.

Expect some violent swings coming soon to a stock market near you.

Saturday, November 14, 2009

Commercial Real Estate ‘Crisis’ Looming for U.S.: Chart of Day

Returns on Commercial Prop

So lately, I’ve been getting bored of the consistent banter by the media about gold’s rise, despite being quite bullish on gold myself. The bubble is definitely starting to foam – easily seen by the outrageous contrast in headlines. For example one day there will be a headline like “Dollar plunge leads to increase in gold prices”, then the next day the headline will be “Dollar rebound unconvincing to investors as they flee to gold”. It feels just like when oil made new highs every day up to about $147. It’s all quite boring after a while.

So instead of really paying attention to the media on gold, I’ve been looking at the second big theme I’ve been focusing on – commercial real estate. The chart above is from Bloomberg and it shows just how bad the commercial real estate market is right now. My take on this is that the recent increase in corporate profits have to do with cutting costs, and this includes rent. I’ve read about how all these companies have started selling their real estate. Recent case in point (actually just from today) is HSBC divesting their headquarters in London for 772.5 pounds [HSBC Sells Its Group Headquarters]. Simple rule is that when things, from stocks to real estate, are sold, their market value decreases. From economics class - it’s like when you sell something, supply goes up and price goes down given a fixed demand curve.

Anyways, my take on this is that as companies continue to cut costs in the face of slower economic growth, commercial real estate will continue to shrivel. Negatively affected industries are obviously financial companies that have significant commercial real estate loans, construction companies (maybe), and Real Estate Investment Trusts, or otherwise known as REITs. Right now I’m not really sure of the overall impact on the economy from this fall of commercial real estate, since it’s not like every Average Joe/Jane out there owns commercial real estate. However, it’s definitely another major macro theme out there that people have pushed aside in the wake of the “Gold Rush”.

Monday, November 2, 2009

Why is America gloomy when the news is good?

I've been traveling for the last month, and while in London at Sunday brunch with my friends, I read an commentary in the Times (UK newspaper) that struck me. And I warn you, it's as gloomy as the title of the article. It starts off with an interesting introduction:

"It has been a long time since the economic data have been flashing positive signals, and an equally long time since consumers, businessmen and occupants of the White House have been so gloomy. It’s worth considering why this disjunction of fact and perception is dominating the economic news."

- Irwin Stelzer
Link to the Article

It’s exactly the same thing that I’ve been thinking about lately. I have to confess that it’s been hard following the markets as much as I did before over the summer. However, I’ve been following the big trends, which is arguably good because I don’t get caught up in all the “noise” of the media. And this is one of the big trends that I have been following/thinking about: the disconnect between sentiment and the rising stock markets.

Stock markets are generally forward looking. I say generally because, c’mon despite all the academics saying markets are efficient, blah blah – they can be occasionally slow to realize things. The reason I bring this up is that this recent stock market pullback can be attributed to a less than optimistic outlook for the future. And that’s precisely what this article writes about:

“Businessmen tend to look further ahead than most participants in the economy — consumers worry about paying the rent or the mortgage next month, and politicians worry about tomorrow’s opinion polls. Company executives know that the profits picture is improving but they worry that much of the improvement comes from cost cutting rather than increased demand.”

Essentially, the article is saying that businessmen are still worried about the future because despite companies reporting decent earnings recently, they fear that it’s more because of cost-cutting and less because of revenue increasing. And obviously “consumers” are not happy because they are part of the cost cutting – getting laid off.

This paragraph slowly leads to the climax of the commentary, a forecast of the future that sent chills throughout my body. Certainly woke me up on a lazy Sunday afternoon:

“[Businessmen] They see an administration and a Congress that are spending America into such deep debt that the dollar will continue to decline, forcing the Fed to raise interest rates to prevent a collapse of the currency.

Some executives expect the price of gold to double or triple in the next five years, interest rates to climb from their current level of close to zero to perhaps 8%, and taxes to soar to bring the deficit under control.”

It’s a doomsday prediction, but actually quite realistic. It sounds like a similar situation to the recessionary period of the 70’s, of the Volcker reign at the Fed. It’s completely possible, even though most people right now could not even imagine double digit interest rates.

Investment ideas from this article? Long gold, and short US dollar

After reading this article, I kind of want to hide under a rock in an island in the Pacific Ocean somewhere for the next 5 years.

Read the Full Article

Monday, October 26, 2009

Lender Capmark Financial Group Files for Bankruptcy

“Oct. 25 (Bloomberg) -- Capmark Financial Group Inc., the lender owned by firms including Goldman Sachs Group Inc. and KKR & Co., filed for bankruptcy protection after posting a second- quarter loss of about $1.6 billion.

Capmark is one of the largest U.S. commercial real estate finance companies, with more than $10 billion in originations, according to Moody’s Investors Service. The company, formerly known as GMAC Commercial Holding Corp., services more than $360 billion of debt.

The Horsham, Pennsylvania-based company has struggled as the default rate on commercial mortgages held by U.S. banks more than doubled to the highest since 1994. Capmark said on Sept. 2 that it may reorganize under Chapter 11 of the bankruptcy code.”


Just when people are thinking the worst is over…is this a signal for more commercial real estate related bankruptcies? More problems ahead?

Sunday, October 18, 2009

2009 Federal Deficit Surges to $1.42 Trillion

Associated Press (AP):

“WASHINGTON – What is $1.42 trillion? It's more than the total national debt for the first 200 years of the Republic, more than the entire economy of India, almost as much as Canada's, and more than $4,700 for every man, woman and child in the United States.”

-MARTIN CRUTSINGER, AP Economics Writer, 10/17/09

Let’s take a look at what $1.42 trillion really is.

According to the Bureau of Economic Analysis (BEA) of the Department of Commerce , the GDP of the United States, or what the media roughly calls “The Economy” in the second quarter of 2009 was $12.901 trillion. With a little division, we can easily find that the federal deficit as a percentage of GDP is approximately 11%.

Put in those terms, the deficit doesn’t look thaat bad. I’m not a bull currently, but it is funny when the media exaggerates.

Moving on, further down in the article it does write out the troublesome quintessential bear argument which I found a bit more interesting:

“If those investors [such as China] started dumping their holdings, or even buying fewer U.S. Treasurys, the dollar's value could drop. The government would have to start paying higher interest rates to try to attract investors and bolster the dollar.

A lower dollar would cause prices of imported goods to rise. Inflation would surge. And higher interest rates would force consumers and companies to pay more to borrow to buy a house or a car or expand their business.”

Yikes. People are finally looking into a repeat of Paul Volcker, chairman of the Federal Reserve in the late ‘70s, who in order to combat inflation had to increase the federal funds rate to more than 20%. What a lot of people aren’t getting right now is that the Federal Reserve is going to definitely increase interest rates to combat inflation and reign in the monetary supply which it has let loose rampantly.

The big question is just how fast the Fed will increase interest rates and just how high. My guess is that it’s going to be high, to counteract this period of near 0% interest rate. This, counter-intuitively, won’t necessarily cause the economy to stagnate considerably if people expect the increase in interest rates. What’s more important is that the Fed increase rates in a manner that plays well with the expectations of people and also at a speed that doesn’t create a shock to the economy.

If the Federal Reserve either increases interest rates too fast or too high, expect another big recession. If the Federal Reserve increases rates too slowly or too low, expect another big bubble. Or, if the Federal Reserve does its job and Ben Bernanke is successful, expect a steady economy where you get what you expect.

Tuesday, October 13, 2009

Bloomberg: Central Banks’ Reserve Shift Ignores Dollar Data

central bank “Oct. 12 (Bloomberg) -- Central banks have been shifting their record reserves into the euro at the expense of the U.S. dollar..”

I’m a little worried. There’s a long term trend that the dollar is declining.

Many people have dismissed this with simple arguments like “The US Dollar is too important to go away” or “US Dollar is still the currency that everyone uses”.

One of the top ten rules in my invisible book of investing is that the past does not predict the future. It really wasn’t too long ago that the British Pound was the leading currency of the world. I’m not going to make a solid prediction on what will become the next leading currency, but my bet is on the Euro or the Chinese RMB.

The simple concept with currency exchange is that money inflows into a country increases the value of that country’s currency. Outflows decrease the value of a country’s currency. The biggest driver for money flows are differences in interest rates. So for example, if the US’s interest rate is at 0% and another country’s interest rate is at 3%, more so than not people will put their money into the other country. This is a bit of an overgeneralization, but the point here is that money is flowing out of the United States which has its federal funds rate set at near 0%. The result? A lower value for its currency.

I’m pretty worried. Even though Bernanke has recently said that the Fed will rein in its monetary stimulus and be on a lookout for inflation, I don’t think the market is believing it at all. The market is a little worried about inflation in the US dollar (which will decrease the real value of the dollar) and money outflows and the decline of the dollar from the US shows it.

Where are investors putting their money?

Anybody read about how gold hit record highs above $1000? That oil has hit levels above $70?

They’re putting their money into commodities. Is it a real rally?

I’ll explore this in a future blog post.

Wednesday, September 30, 2009

Finding a Job May Be Getting Easier Than It Looks

"Sept. 29 (Bloomberg) -- Employment in the U.S. is rebounding at a “significantly faster” pace than seasonally adjusted data on jobless claims would suggest, according to Oscar Gruss & Son Inc."
First, some definitions -

Seasonally Adjusted Data:
Observations over time modified to eliminate the effect of seasonal variations. For example, students tend to flood the job market in the summer after graduating, increasing the number of workers seeking employment.

Continuing Jobless Claims: The number of U.S. residents collecting state unemployment benefits. Usually, people who have worked full time are eligible for 26 weeks of regular state unemployment benefits.

A very optimistic report.
What this news report/analysis is saying is that seasonally adjusted data on continuing jobless claims shouldn't be trusted and that unadjusted continuing jobless claims should be looked at:
“Our assumption is that the sheer brutality of the current cycle has caused the statisticians to cease to trust the ‘raw’ data and therefore fall into the trap of abusing the process of seasonal adjustment.”
My question is this: Since when have statisticians EVER trusted 'raw' data?

In Oscar Gruss & Son Inc.'s attempt to paint a positive picture of the U.S. economy and the employment picture, they've decided to look at unadjusted continuing jobless claims (to the left) versus the more accurate seasonally adjusted continuing jobless claims (to the right).

In Intro to Econometrics, we always learned that you always have to adjust numbers such as employment data for seasonal change. For example, if we were looking at an ice cream vendor, it's obvious that they would sell more ice cream in the summer versus the winter. Comparing the sales of ice cream in the winter versus the summer would be like comparing apples to oranges. It makes a whole lot of sense to adjust for the seasons.

Likewise for any employment data, students flood the job market in the summer. Summer tends to be slower for job recruitment. People tend to take holidays in the summer (and perhaps hold off looking for jobs).
It sure makes a whole lot of sense to seasonally adjust continuing jobless claims.

Looking at the subject title: "Finding a Job May Be Getting Easier Than It Looks", I can't help but think that it might not be so true after looking at the seasonally adjusted chart. Rather, if I had to look at the charts above and make my own title, I'd headline with this:

"Finding a Job Remains Difficult as Trend Of Job Losses Remains Flat"

Friday, September 25, 2009

Muscling With The Markets

"The market wasn't agreeing with my view. But rather than listening and being patient, I tried to muscle it. It was a classic case of thinking I knew more than the market...I was so badly hurt that all I could do was lick my wounds and get the hell out of there. Not only did I lose a lot of money, I missed a great opportunity."

- Yra Harris, Praxis Trading, from Inside the House of Money, Steven Drobny
I've had some down time recently and have been reading Inside the House of Money, put together by Steven Drobny. It interviews hedge fund managers/traders who have the style of investing known as Global Macro, which is essentially investing in everything, from stocks to bonds to commodities to trees. You get the point, they invest in anything! (Pretty badass, if you ask me)

So I read an interview with Yra Harris, a veteran trader on the Chicago Mercantile Exchange, and came across the quote above, and it got me thinking.

Is it possible that right now, with the stock markets rallying roughly 50-60% from its March '09 lows, that my continued pessimism is like "muscling" with the markets? Is this the classic case of thinking that I knew more than the market? Am I missing something?

After reading a lot today, I find that the most prevalent bullish case in finance media and blogs is nonetheless still that the "global governments are pumping lots of money into the system" and that monetary policy drives the markets. As I argued in my previous two posts, this pumping of money into the system is neither effective due to the reduced risk taking of the financial sector nor will it be healthy for the economy since it increases risks of high inflation. If there are other stronger bullish arguments, somebody tell me please!

After some evaluation, I believe that while my fundamental argument is still intact, my timing is off. I don't think I'm still a bear simply because I'm arrogant or too proud or anything like that. I sure wouldn't mind a happy-go-lucky bullish market.

I'll need to continue honing my entry points into the market as I gain experience in trading.

Monday, September 21, 2009

CNN: Americans are $2 trillion wealthier


"The soaring stock market accounted for much of the gain. Stock holdings rose by 22% to $6.3 trillion, while mutual funds' value jumped 15% to $3.7 trillion, according to a Federal Reserve report released Thursday"

So most of this wealth gain in the past months was because of the stock markets. How do I read this?

Well, it illuminates why America's savings rate is so low (roughly in the low single digits now) - the indicator for "savings" does not account for American money in stocks.

What I want to know is, will this increase in wealth mean more U.S. consumption, which accounts for something like 2/3 of GDP?

Will people forget that just less than a year ago the US financial system was at the brink of collapse?

A snippet at the end of this article gives us an indication of the answer to this question:

"At the same time, consumers continue to pay off their bills. Household debt shrunk by an annual rate of 1.7% in the second quarter, the fourth consecutive decline. Debt loads had never contracted until the current downturn.

Businesses are also pulling back on the debt they carry. Debt contracted at an annual rate of 1.8%, the second decline in a row.

Governments, however, are loading up on debt as they try to prop up the economy. Federal government debt ballooned 28.2%, the fourth straight increase, while state and local governments increased their debt levels by 8.3%"

Two things I see from this:

Debt Decrease = Lower potential for GDP growth
More Government Spending = Crowding out of private investment

Both are not good for the U.S. Economy.

Tuesday, September 8, 2009

This Ain't A Happy First Post

The following is a chart of the last 12 months of the Dow Jones Industrial Average, with some of my preschool drawings on it.

A quick look at the title of this post and the drawings on the chart and you can reckon that this is not a happy first post on what I see brewing in the US markets (with consequences to other international markets, of course).

Let's start off with some of what a random assortment of optimists are saying:

  • “Leading indicators are now strongly suggesting that a U.S. labor market recovery is just around the corner, with commensurately bullish implications for spending,” Barclays said in a note to clients this week.
  • "For stock traders, low interest rates act like oxygen fueling a fire."
  • "Interest rates are ridiculously low and will remain that way until inflation starts to pick up. When that will be is anyone’s guess as this relates to the second point about the believability of government figures. So if the Fed is banking on inflation, you should too. Bonds, money markets, and other fixed income vehicles are out. Stocks and commodities are in."
  • “Looking at the survey results in aggregate, we believe the stage is set for the world economy to gradually recover, driven in part by relatively benign inflation, rolling impacts from global stimulus packages and improving credit conditions,” UBS said in a note to clients this week

Essentially what a lot of the smarter optimists are saying is that with interest rates so low, money flooding into the markets, and government intervention, the economy has no where else to go but up. This is a la Milton Friedman's famous quote: "Inflation is Always and Everywhere a Monetary Phenomenon"

This concept is good, logical, and has been ably applied to previous cases. But as we've all seen, this recent financial crisis is not like other cases. The Fed can't just lower interest rates, provide monetary stimulus, pour money into the financial institutions, and solve this problem. You need a working financial system and this is where I think this crisis is critically different from previous cases.

Banks globally are cutting down on risk. The drivers behind this trend are basically government regulation and severe losses that banks took from the crisis. And with less risk taken, this means less money being lent out. As we all learn in Intro to Macro Principles, the money multiplier function of the banks is critical to the expansion of money supply and economic expansion. And right now, with banks cutting down on risk, increasing their tier one capital, the money multiplier is not being put to use.

So what needs to happen? Banks need to actually increase risk. Businesses then get more money to spend on expanding their capital and labor. More people will become employed to create more goods and provide more services. People will spend more. And then finally, we will gear back into economic expansion.

I need to stop reading stuff like this:

G20 toughens bank capital standards

Sat Sep 5, 2009 9:09am EDT

LONDON (Reuters) - Group of 20 finance chiefs agreed on Saturday to back a U.S. plan for banks to hold more and higher quality capital.

--some parts skipped--

"Banks will have tighter constraints on the high quality of core Tier One capital," the source said. "This means banks will have to hold more capital and higher capital to act as a buffer."

Under Basel II, a bank must hold at least 8 percent in capital, of which at least half must be in the form of top quality Tier 1 assets such as equity. Since the credit crunch, banks have become much more conservative and are holding much higher levels of Tier 1 capital.

Until I start reading more about the financial sector taking more risks and actually lowering their capital ratios, I'm not buying this ferocious rally that started in March. Volume was low in the most recent rapid rally in July and we're about to hit into some resistance. The path of least resistance is downwards.

You Ain't Right Until Everyone Says You Are

Hi Everyone!

This is my first blog post ever, but it is not the first time I have written about my opinions on the financial markets. I wrote first to my father and brother, who are both also interested in finance, and coincidentally after a few emails my brother suggested to me to start my own blog. Alas, as suggested by the title of this blog, it will cover generally what I feel like is going on in the financial markets, things I read in the press, and my market outlook.

In my own opinion, it's critical to know what the press is saying, not necessarily for the accuracy of what they say, but to know what the mainstream mindset is. A person can be correct with their views on the fundamentals of the economy and the market, but if nobody else thinks so, that person is, well...actually wrong! More simply put, you ain't right until everyone says you are.

For me, what drives the markets is this simple equation:

Economic Fundamentals x Market Mindset = What Moves The Stock Market

Now, onto my first commentary...