IABFM Expert Opinion

LONG Lebanon - SHORT Taiwan ?

By Naaim Abbasi

Sunday, June 14, 2009 04:12:13 AM

[b]Last Week:  Where the Money was Made & Lost[/b]

Global Equity Markets, last 5 days trading patterns and best and worst performing markets. Lebanon’s BLOM Index was the World’s Best Performing Market.

Please notice that apparently more and more traders and investors seem to focus on the Vietnam Story. The previous week, Vietnam surged +17% and this week again, Vietnam rose another +6.7%.  Could the good old concept of “reversion to mean” come into play here again.

In 2008, Vietnam was Asia’s worst performing Market. So far this year it is Asia’s 2nd  best performing market after China Shenzhen.  Tactical minded investors might want to consider building exposure to Vietnam stocks on a pull-back / Correction in global markets.

On the downside, Taiwan was the best market to go SHORT or at least “book” investment gains. More and more banks and research analysts seem to say that the Taiwan stock market rally is coming to an end based on valuations. Charts increasingly look bearish, so stay SHORT and even consider adding to the short side.

As always, portfolio weighting and position sizing is key and only next month or even next quarter portfolio valuation will tell whether the trend was indeed your friend ?

Between a hard rock and a cold place

By Martin Davies

Sunday, June 14, 2009 04:01:33 AM

Some readers expressed a range of interesting market based opinions to our last blog Greedy glut feeding frenzy so in the theme of this we are going to continue the topic.

Back in March you could have put capital under any stock on nearly any market and made incredible returns.
One night I did just that, I printed out the price movement for one of the notorious US banks, took a ruler on the curve and drew a line dissecting the average daily price swing for the week then went long with a doomsday stop loss and limit to close out at around 75% on the average move.

Then I went to bed.

Amazing as that may be logging off and crashing but, I had a huge day coming up and I wanted to be fresh. In the morning, I grabbed a coffee as one does, logged on and the limit order had been fulfilled. The notional contract had sold and at possibly the best rate of return I think I have made for the time invested. Foolish perhaps, irresponsible umm that depends who's funds I put at risk; as this was my money not an investors I see the moral issue was a personal one, the type you have with your alta ego when you shave and talk to yourself in the mirror before going to work.

[b]Would I do this now?[/b]

[b]ABSOLUTELY NOT[/b]

This market has changed and while global equities are still climbing at a phenomenal rate when looking at the 60 day moving average, several things have occurred.

Firstly relative pricing has come back into play as it should. Not all stocks are equal and some are starting to fracture. If the fundamentals (operating margin, eps, debt to equity ratio etc) are not under the company be cautious buying it and holding long.

Secondly this huge influx of cash into stocks has encouraged some companies to value the price of equity differently. It has been difficult to borrow and some standing commercial paper bought back in the heyday on higher rates is stinging when discounted today.

Some of these companies are taking advantage of this flash of liquidity and resolving the problem by engaging in financial restructures. The most common approach is to issue additional equity as preferable shares and payout the debt. Good in principle but the investors then hurt as this process has a tendency to shock the current price of existing shares when holders see dilution in the stock they own. I have been caught on one such animal and the price fall was a cliff face with a hard landing.

There is however something far more concerning with the economy than the hike of equity values, this is just part of the picture and the focus is not GDP growth, social economic sentiment (a measure of confustication but seems to have effects) or unemployment which is umm well a few thousand less than it was a month ago.

The real concern is what is going on in the adjacent markets; commodities, money markets and bonds. The signs are concerning, let's take the first one.

Where will be, if demand and economic output grow at a positive (oh let`s not over excite ourselves here) 0.9% and the price of oil blows the roof off every month with a 2% climb? Imagine the operating costs for businesses increasing and sales remaining weak, even slower if these business price in and pass on the real cost of delivery.

[b]The bond market is even more of a worry.[/b]

The US treasury department might start to run out of takers for its debt, certainly China has expressed a concern over the last thirty days and new issues are going to eventually need higher yields to attract buyers. The ten year note has been very low, actually at a record low of 2.3% last year but that has been changing. As the ten year note rises, so does the rate on consumer loans because these bond yields are used as a baseline for the loan contracts. The ten year note is certainly closely tied to home mortgage rates and is now floating around the 3.8%.

Rising interest rates and higher commodity prices together have a compounding effect and are likely to dampen any fast V shaped economic recovery. Rising interest rates are also going to increase the default rate on standing obligations and take that nice shine off these "new" banks profit margins.

The effects in the equity markets are obvious, on the May 28th we had another wonderful run, not as big as March but it is graphically visible. Since then however the heat has been coming off some of the stocks away from energy and the volume of trading has been really low, notably low. On Friday I had one stock hit its entry price 15 times in the trading day, the whole market was just churning between buyers and sellers but there was little advance for what seemed like ages.

We are at pernicious juncture, somewhere between a hard rock and a cold place. Interest rates will eventually have to increase otherwise inflation is going to be a concern but the markets have become fragile again.



[b]What is the solution?
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