Will - See the Future

U-shaped or V-shaped Recovery

2009-11-10T14:45:00.002+08:00

Over the past 12 months, the friendly Fed-induced liquidity is giving strong support to the valuation of risk assets. PIMCO's Paul McCulley in his November 2009 newsletter, "The Uncomfortable Dance Between V’ers and U’ers," succintly summarizes the current market dilemma.

"Simply put, big-V’ers should be wary of what they wish for. U’ers, meanwhile, must be mindful of just how bubbly risk asset valuations can get, as long as non-big-V data unfold, keeping the Fed friendly. But that’s no reason, in our view, to chase risk assets from currently lofty valuations. To the contrary, the time has come to begin paring exposure to risk assets, and if their prices continue to rise, paring at an accelerated pace."

Green Shoot? Deflation or Inflation? Dollar Crash?

2009-06-10T11:00:00.005+08:00

These are important questions for not only investors, so what's the answers? I don't have a crystal ball, but I summarize several succint points from Paul Krugman and Andy Xie. Let's take a look:

I Want to Believe...

2009-04-16T16:13:00.005+08:00

Global equity markets rally since March 6 have been very impressive. S&P 500 alone is up 30% in less than a month time. While this rally may still have legs, I am hesitant to play for two reasons.

First, the market is technically due for a pullback (if not the outright return of the bear). The only bullish sign I can see is the technical breakout of some markets, like Hong Kong and China, but Chinese officials are now voicing their concerns of excessive lending growth, which is bearish to the market.

The second reason is that fundamentally I still believe this bear market is not over. The US economy deterioration is improving (i.e. not getting worse, but still bad) and Credit Suisse indicates 2010 and 2011 are the years with even higher mortgage rate resets than 2008. I want to believe the worst is over, but in a market like this, better play safe than sorry.

Expect a Short Term Pullback

2009-03-20T10:32:00.007+08:00

The strength of the recent rally is not surprising and is probably due to option expiration this week. However, I do expect a pullback due to multiple indicators, including TICK, Put/Call ratio (CPC) and Stocks over 10-day moving averages (SECTOR-BREADTH). Therefore, I look for closing of my long position today and wait for a better entry point in the near term.

Bottoming in sight?

2009-03-06T17:02:00.005+08:00

While bank stocks are as predicted collapsing, the rest of the US market is going down with them. Interestingly, the only markets holding up pretty well are the Chinese stock market and, to a lesser extent, the Hong Kong market. One way to argue the outperformance is that HK/China stocks are the first to go down back in 2007. I am inclined to think that we are toward the end of the bottoming process and the equity indices are very near a short term bottom.

Based on my quant model, the stocks as of Feb 2009 are as follows. For those preferring larger cap companies, I backtested another quant model with lower historical return (around 11% p.a. in the past ten years). Please see the second table.

HK981 SEMICONDUCTOR MNFG.INTL
HK2313 SHENZHOU INTL.GP.HDG
HK1175 FU JI F&CG.SERVICES HDG
HK3336 JU TENG INTL.HDG
HK903 TPV TECHNOLOGY
HK732 TRULY INTL.HDG
HK995 ANHUI EXPRESSWAY 'H'
HK480 HKR INTERNATIONAL
HK775 CK LIFE SCIS.INTL.HDG
HK1168 SINOLINK WORLDWIDE HDG

HK267 CITIC PACIFIC
HK293 CATHAY PACIFIC AIRWAYS
HK12 HENDERSON LD.DEV
HK17 NEW WORLD DEV
HK13 HUTCHISON WHAMPOA
HK386 SINOPEC 'H'
HK6 HONG KONG ELECTRIC
HK857 PETROCHINA 'H'
HK330 ESPRIT HOLDINGS
HK823 LINK REIT

Collapse of the Financial

2009-01-20T11:26:00.003+08:00

The short term bounce I anticipated did happen, but only lasted 2 days. Since then, the banking stocks just continue their collapses and dragged global markets down simultaneously. Most notable casualties are RBS, BofA and to a lesser extent HSBC.

The weakness in financial is definitely a concern since market trough is often coincided with the bottoming of financial stocks. While bank bailouts continue and are getting larger and larger everywhere, the key issues now are (i) whether losses are contained (think Merrill and RBS), and (ii) whether captial raising is required and if so, how dilutive (think HSBC and RBS). Both issues are interlinked and tied to the worsening economic outlook. In the US, loan provisions are being revised upward across the board (see JPMorgan's latest financial announcement).

Technically speaking, the market is short term (in terms of days) oversold, but intermediate term (weeks) overbought and due for correction (which is happening). I guess buying in a downtrend is a risky proposition and should only leave for professionals. We should see how things pan out in the next few weeks.

How to trade this market? Get the pulse of the investor sentiment correctly

2009-01-15T16:09:00.010+08:00

After breaking the 50-day moving average, stock market around the world failed to make a new high in early January, subsequently stocks just cratered, due to continuous bad news from the US. Sentiment has turned from optimistic to downright depressing. Another worrying sign is the weakening performance of bank stocks

To get the market direction correct and assist stock picking, I develop a quantitative model to track investor sentiment and capture the market anomalies in stock market. In a nutshell, on one hand, investment sentiment measures the extent to which market is pricing for the future. On the other hand, factor returns are greatly affected by such sentiment. The former drives the asset allocation decision while the latter determines the stock selection process. Back-testing shows the past 20-year annual return of my top 10 holdings (ex transaction fee on monthly turnover) is 18.3%.

The rightmost table is my top 10 HK-listed stocks as of Dec 2008. I also have one for US-listed stocks (not shown here)

HK1169 HAIER ELECTRONICS GP.
HK1168 SINOLINK WORLDWIDE HDG.
HK18 ORIENTAL PRESS GROUP
HK171 SILVER GRANT INTL.INDS.
HK685 MEDIA CHINESE INTL.
HK2866 CHINA SHIP.CTNR.LIN.'H'
HK1033 SINOPEC YIZHENG CHM.FRE. 'H'
HK981 SEMICONDUCTOR MNFG.INTL.
HK1208 MINMETALS RESOURCES
HK338 SINOPEC SHAI.PETROCHEM. 'H'

Several Indicators Pointing to Near-Term Bottom

2008-11-23T22:26:00.014+08:00

Since my last post, the US indices retested the October lows and just fell right through. So the scenario (ii) may be playing out. This bear market already is the worst in terms of decline velocity (except for Great Depression). The key question is whether the current bear will stabilize or deteriorate further.

I think we are very near the bottom but more downside will occur in the coming days. I will take a deep look at the financial over the next few days as financial, the weakest sector just deteriorated in a way not since the bankruptcy of Lehman. The possible collapse of Citigroup (and potentially other banks as indicated by the option markets) very similar to the downfall of Lehman and AIG seems to me more downside in the next few days.

However, I find evidence to be optimistic.

(1) the current decline is already in line with those in 1974 and 2003 in terms of decline percentage, but much shorter in duration.

(2) investor sentiment is hitting the rock bottom, as shown by the US investor stock allocation is reaching the lowest level last since 1989 and 2003.

(3) valuation is also reaching a trough level

(4) In most bottoming process, the previous strongest stocks will drop last. In this case, they are previous momentum leaders, i.e. agriculture, and solar, and also the most trusted firm. Berkshire Hathaway.

We are near the bottom at least in the near term, but the only caveat is that subtantial deleveraging may make all historical comparison irrelevant as the last time it occured in the U.S. was the Great Depression.

Short Term Pain = Long Term Gain?

2008-11-14T12:39:00.000+08:00

The global stock market has been turning weak again since early November. Particularly interesting is the fact that among global markets, only the Dow is testing its October low while the rest of the world are 10% or more above the October lows. I postulate two scenarios:

(i) Global markets lead the US, i.e. global equity markets are trying to bottom
(ii) US market leads the rest of the globe, i.e. more downside

While the extremely oversold conditions in all equity markets indicate (i) is possible, the bottoming may take a good few weeks (if not months). Also, the technicals of a few leading stocks (fertilizer, solar in the US, some big caps like Hutchison in HK) indicate that they are heading lower, so (ii) is still a possibility.

So my trading strategy is to be near term cautious as I have time to buy if (i) is indeed happening or if (ii) is indeed the case.