Monday, 28 February 2005

Funds shift into stocks, but long-term returns may be better elsewhere

A recent survey by Reuters has found that fund managers recently shifted more funds into stocks.

Fund Managers Favor Stocks Over Bonds
U.S. fund managers, apparently worried about a decline in bond prices as rates rise, shifted money to stocks from bonds during February, according to a new Reuters asset allocation poll. The allocation changes in the latest monthly survey put the mix of stocks and bonds back to near where it was in November, when U.S. stocks rallied after the election. The poll showed a 67.1 percent weighting in equities in February, up from 54.5 percent in January. Bonds fell to 27.6 percent in February from 40.5 percent the month before...

Asked what allocation shifts are anticipated over the next three months, the managers anticipate a smaller underweight in bonds and a smaller overweighting in stocks...

Reuters mentions that Anthony Chan, managing director and senior economist at JP Morgan Asset Management, expects US equities to provide a return of only about 5 percent this year.

John Hussman of the Hussman Funds takes a longer term look at returns in "The Likely Range of Market Returns in the Coming Decade". By looking at the current market valuation, he concludes that the likely return for US equities "is in the 2-3% range based on average and median scenarios, with outside possibilities as low as -3% in the very bearish case and still less than 8% in the very bullish case".

Last week's edition of The Edge Singapore carried an interview with Klaus Martini's, chief investment officer for Deutsche Bank's private wealth management. According to Martini, a balanced portfolio consisting of an equal proportion of bonds and equities will probably yield a return of 2-3 percent after taxes and inflation going forward.

"Old mainstream investing is offering less and less returns because everybody is already in there," said Martini. "Therefore, you have to find something that is not mainstream."

The alternative investment recommended by Martini is commodities, especially soft commodities like meat and agricultural crops. Martini thinks China's growth will drive demand for these commodities. To gain exposure to rising prices of soft commodities, Martini has developed an equity portfolio of food producers, especially Asian food producers.

For equities in general, Martini thinks that they will do better than bonds in 2005, which will struggle as interest rates rise. He thinks that European and Asian equity markets look most attractive in terms of valuation, while US equities look relatively expensive.

Martini also thinks that Asian currencies will appreciate against the US dollar this year, especially if China revalues its currency.

However, Martini thinks that real estate in developed countries is "really expensive", especially given the rising interest-rate environment.

Saturday, 26 February 2005

US grew 3.8 percent in 4th quarter, but high oil price threatens

US real gross domestic product for the fourth quarter of 2004 has been revised to 3.8 percent from the previous estimate of 3.1 percent, according to the latest release by the Bureau of Economic Analysis. In the third quarter, real GDP increased 4.0 percent.

This means that the US economy barely slowed in the fourth quarter. But things are not looking so good going forward.

Saudi Arabia, the world's largest oil producer, suggested on Thursday that oil prices would be between US$40 and US$50 a barrel for the rest of the year. Prices have hovered between US$51 and US$52 a barrel over the past few days. It now looks like it will stay around these levels for quite a while, contrary to the expectations of many analysts that it will fall to around US$40 or below later this year.

Friday, 25 February 2005

China and India rising, but US doing fine for the moment

This really is a matter of time, of course, if for no other reason than that they are big.

China, India rival U.S. competitiveness
China and India rivals the United States when it comes to business competitiveness, and the Asian countries may soon surpass American rivals in technological innovation, according to a new survey. More than 300 executives who participated in the study...said Chinese companies were nearly as formidable competitors as U.S. firms... [T]he competitive threat posed by Chinese and Indian companies would likely intensify in the next two years...

However, for the moment, the world still depends on the US for demand. And that demand appears to be holding up reasonably well.

New orders for durable goods in the US fell 0.9 percent in January as demand for autos and civilian aircraft fell, mainly from a 5.3 percent plunge in transportation equipment orders, according to a Commerce Department report. However, excluding the transport category, durable goods orders rose 0.8 percent. Even more promisingly, civilian capital goods orders excluding aircraft grew 2.9 percent.

The US economy may not quite be firing on all cylinders, but it's not exactly rolling over either.

Thursday, 24 February 2005

No acceleration in inflation

After the surprise 0.3 percent rise in January US producer prices announced last week, yesterday's announcement by the Labor Department that consumer prices rose 0.1 percent in January on a seasonally-adjusted basis should lay to rest fears of an acceleration in inflation, at least for now. Excluding food and energy, prices rose 0.2 percent in January, the same as in each of the preceding three months.

In another report from the Labor Department, real average weekly earnings was shown to have fallen by 0.2 percent from December 2004 to January 2005 after seasonal adjustment. A 0.2 percent increase in average hourly earnings was more than offset by a 0.3 percent decline in average weekly hours and a 0.1 percent increase in the consumer price index.

In China, inflation looks like being even less of a worry. On Tuesday, the National Statistics Bureau reported that the consumer price index rose 1.9 percent in January over the same month a year earlier, the smallest increase in 12 months. The consumer price index had risen 2.4 percent year-on-year in December. Inflation had hit a seven-year peak of 5.3 percent in July.

On Monday, the Chinese government had reported that the producer price index had risen 5.8 percent year-on-year in January after reaching a near nine-year peak of 8.4 percent in October.

A similar trend is apparent in Singapore, where the Department of Statistics reported on Monday that the consumer price index had remained unchanged in January from December on a seaonally-adjusted basis.

In view of the prevailing low interest rates, the question to ask: Is the general lack of inflation a sign of adequate capacity or insufficient demand?

Wednesday, 23 February 2005

NABE forecasts growth, consumer confidence dips but oil surges

A panel of economists surveyed by the National Association for Business Economics (NABE) in the US forecasts 3.6 percent real GDP growth in 2005, and projects continued growth for 2006 at the same 3.6 percent pace. The panel forecasts consumer spending to continue expanding at a 3.7 percent rate this year.

That forecast seems broadly consistent with the latest reading of The Conference Board's Consumer Confidence Index. The Index dipped to 104.0 in February from 105.1 in January. The Present Situation Index increased to 116.4 from 112.1. The Expectations Index, however, declined to 95.7 from 100.4 last month. Lynn Franco, director of The Conference Board’s Consumer Research Center, thinks that "both present and future indicators point toward continued expansion in the months ahead".

Rising oil prices, though, may derail the expansion. Yesterday, oil prices jumped to their highest level in more than three months, with NYMEX crude rising above US$51 a barrel.

Recently, Morgan Stanley revised its 2005 forecast for oil prices, raising Brent crude price up by 14 percent from US$36.80 a barrel to US$42.10. Maybe it will have to raise its forecast again.

Tuesday, 22 February 2005

Asian bulls stall

Most Asian stock markets fell today. Among the larger markets, the biggest loser was Korea, where the Korea Composite Index fell 10.91 points or 1.1 percent to 977.80. Another heavy loser was Singapore, where the Straits Times Index fell 19.65 points or 0.9 percent to 2146.73. This pulls it away from the 2,168.86 level it hit last Friday, its highest level since the year 2000.

In my commentary yesterday entitled "STI approaching level of last major peak", I discuss why the 2,200 level is an important level for the Straits Times Index.

Sunday, 20 February 2005

S&P 500 to end 2005 at 1300

Sam Stovall, chief investment strategist for Standard & Poor's, thinks that maybe 2005 won't be so bad. Some of his considerations are as follows:

  • Oil: A relatively warm weather has reduced the risk of higher oil prices.

  • Corporate profits: Earnings have exceeded expectations and it now looks as if fourth-quarter earnings will rise 22 percent and 2005 earnings will rise 9 percent.

  • Fed outlook: Weak payroll increases means that the Federal Reserve is likely to continue with its measured pace of interest rate hikes.

  • Yield curve: Although the yield curve has flattened, the spread between long and short term rates, 1.7 points at the time of his writing, is still more than 60 basis points above the average since 1971.

  • His conclusion:

    Even though rising interest rates, decelerating corporate earnings gains, and the aging of this bull market may cause equity returns to fall short of their long-term averages, S&P's Investment Policy Committee does not believe the U.S. equity markets are likely to end their bull runs in the near term.

    Why? Global economies are projected to grow between 2% and 7% in 2005, with the U.S. projected to post a 3.7% advance in real GDP. Corporate cash levels remain very high, in our opinion, with more than $600 billion on the books of companies in the S&P 500. In addition, it's estimated that corporations will repatriate between $100 billion to $200 billion in foreign earnings. This capital will likely induce managements to repurchase shares, raise dividend payouts, increase acquisition activity, or spur additional R&D investment.

    His end-2005 target for the S&P 500 is 1300, which provides a 7.3 percent full-year price appreciation.

    Saturday, 19 February 2005

    Steve Hanke explains why China won't revalue

    Steve Hanke, professor of applied economics at The Johns Hopkins University in Baltimore, and columnist at Forbes, has been saying that China will not be revaluing the renminbi, and so far, he has been right. In his latest article for the magazine, he explains why he thinks China still won't revalue.

    The Chinese authorities refuse to alter the long-standing renminbi/dollar rate. In their eyes a fixed exchange rate, economic growth and stability are all tightly linked together. And in Beijing stability might not be everything, but without it everything is nothing. For this reason alone it's hard to fathom a renminbi revaluation.

    ... In July of last year [Nobelist Robert Mundell] hosted some of his friends at Palazzo Mundell, a Renaissance villa near Siena, Italy. When it came to China, I took careful notes. According to Mundell, a renminbi appreciation would cut foreign direct investment, cut China's growth rate, delay convertibility, increase bad loans, increase unemployment, cause deflation distress in rural areas, destabilize Southeast Asia, reward speculators, set in motion more revaluation pressures, weaken the external role of the renminbi and undermine China's compliance with World Trade Organization rules...

    [O]n Oct. 28, 2004 Beijing announced the establishment of the Mundell International University of Entrepreneurship. It will be located in the Zhongguancun area, the "Silicon Valley of China." Connect the dots and you get a fixed exchange rate.

    The Chinese interest in maintaining stability that Hanke -- and Mundell -- points out is illustrated by its continuing concern with cooling its economy through administrative measures to sustain its growth over the longer term. And the latest news suggests that it may be succeeding: Growth in China's industrial output slowed in January to 8.9 percent from a year earlier. This compares with the 14.4 percent growth in December.

    Then again, the figure may be misleading. It was apparently adjusted for the Lunar New Year holiday, which fell in January last year and in February this year. Unadjusted, the growth rate would have been 20.9 percent. As John Cairns, an analyst with IDEAGlobal in Singapore, says: "[I]t's very difficult to adjust for seasonality." So there may not be as much of a slowdown as it seems at first sight.

    Indeed, trade data showed that exports jumped 42.2 percent in January from a year earlier, and exports of industrial products rose 31.2 percent from last year, even after adjusting for the Lunar New Year period.

    And if the risk of overheating in China is still intact, the rest of the world is unlikely to remain unscathed. As it is, the producer price index in the US jumped 0.3 percent in January, while the core rate, which excludes volatile food and energy costs, soared 0.8 percent, according to a Labor Department report yesterday.

    Friday, 18 February 2005

    Lack of bullish sentiment

    Barry Ritholtz at The Big Picture looks at the 10 Week Moving Average AAII Bullish Sentiment and quotes Kevin Lane as saying: "The fact that bullish sentiment has moderated, not expanded, on this recent move up in equities is a positive. It suggests to us investors are NOT totally complacent yet."

    I had also mentioned this indicator -- as well as other sentiment indicators -- in my commentary "Will investors turn chicken in Year of the Rooster?".

    Sentiment indicators are not perfect, but they are useful. The AAII indicator, for example, has recently peaked and troughed more or less in line with the market. So its current moderate level suggests that there is still life left in the bull.

    Decline in Singapore exports, decline in US leading index won't help

    The International Enterprise Singapore has reported that Singapore's non-oil domestic exports (NODX) decreased by 0.6 percent in January on a month-on-month seasonally-adjusted basis, following a revised 0.2 percent rise in December. In terms of level, it registered $10.9 billion. On a year-on-year basis, NODX growth was 9.0 percent, following the 16.5 percent and 8.0 percent gain in November and December respectively.

    Non-oil retained imports of intermediate goods, a short term leading indicator of overall manufacturing activities in the months ahead, posted an 8.8 percent rise on a month-on-month seasonally-adjusted basis in January, reversing the revised 3.7 percent contraction in December 2004.

    Domestic exports of electronics showed a clear deceleration, rising only 5.9 percent last month from a year earlier, after an 8.3 percent growth in the preceding month. The slack was compensated by non-electronic products, which grew 12.4 percent in last month, thanks to strong exports of petrochemicals, electrical machinery and raw chemicals.

    Singapore's external sector may not be in for an acceleration any time soon. The US economy, its main destination for exports, does not appear poised to accelerate, based on the latest news.

    The Conference Board's leading index declined 0.3 percent in January. This follows increases in the previous two months, though, so the longer trend is flat rather than down. The leading index now stands at 115.6. Based on revised data, this index increased 0.3 percent in December and increased 0.3 percent in November. During the six-month span through January, the leading index decreased 0.3 percent, with five out of ten components advancing.

    Thursday, 17 February 2005

    Japan back in recession, Singapore in danger too

    Japan went back into recession in 2004 according to the latest figures from the Cabinet Office, which showed that the economy shrank 0.1 percent in the fourth quarter while the figures for the second and third quarters were revised to show falls of 0.2 and 0.3 percent respectively.

    Economists, however, remain sanguine and expect the Japanese economy to pick up in the coming months as private consumption improves.

    For the whole of 2004, GDP expanded 2.6 percent, the highest growth rate since 1996.

    Singapore performed much better, with its Ministry for Trade and Industry reporting that the economy grew 7.9 percent in the fourth quarter on an annualised quarter-on-quarter basis and by 8.4 percent for 2004 as a whole. Manufacturing was the strong driver of growth in the fourth quarter, rising 14.1 percent over the previous year, with biomedical manufacturing outstanding.

    The outlook for 2005, however, is not as good. The composite leading indicator fell for the second consecutive quarter in the fourth quarter, down 1.9 percent over the previous quarter, larger than the 1.2 percent fall in the previous quarter.

    The ministry forecasts economic growth for 2005 at 3-5 percent.

    Alan Greenspan sees good pace of growth

    Federal Reserve chairman Alan Greenspan's semi-annual economic report to the US Congress yesterday gave no indication that he will be deviating significantly from his stated aim of tightening monetary policy at a "measured" pace.

    Greenspan sees 'good pace' of growth, bond market 'conundrum'
    The US economy is growing at a "reasonably good pace," with inflation in check, but could face problems from slow job growth and weak savings, Federal Reserve Chairman Alan Greenspan said. The central bank chief predicted growth this year of up to 4.0 percent, inflation below 1.75 percent and the unemployment level also falling during 2005. Greenspan also said he was puzzled by the behavior of the bond market, where interest rates have turned lower even as the US central bank has been raising rates. He called the phenomenon "a conundrum" that will take time to understand...

    Yes, the Fed chairman is puzzled by the failure of long-term interest rates to rise in the face of rising short-term rates. In raising the federal funds rate, Alan Greenspan obviously must be hoping for long-term rates to rise as well to provide an effective brake on credit growth. However, foreigners -- mostly central banks -- have been buying US dollar assets feverishly, thwarting the Fed chairman's objective. Greenspan had, of course, addressed the foreign element more directly in a speech back in November last year at the European Banking Congress.

    [A] diminished appetite for adding to dollar balances must occur at some point. But when, through what channels, and from what level of the dollar? Regrettably, no answer to those questions is convincing.

    As for Greenspan's relatively optimistic outlook for the US economy, that seems justified by the latest economic news.

    Housing Starts Rise to Nearly 21-Yr High
    A jump in starts on single-family housing pushed total U.S. housing starts to a nearly 21-year high in January, but other data released on Wednesday were not as robust. Home mortgage applications dipped last week and industrial production was flat in January as warm weather dampened demand for heating and dragged down utilities output...

    U.S. housing starts climbed 4.7 percent to a seasonally adjusted annual rate of 2.159 million units in January from an upwardly revised 2.063 million unit pace a month earlier, the Commerce Department reported. The January total marked the highest pace of housing starts since February 1984 when they hit a 2.260 million unit pace...

    Applications for U.S. home mortgages decreased slightly last week as a drop in home purchasing activity offset an uptick in refinancing, the Mortgage Bankers Association said. The industry group said its seasonally adjusted index of mortgage application activity decreased 0.5 percent to 732.3 in the week ended Feb 11, after rising 4.2 percent in the prior week survey...

    U.S. industrial production was flat in January, but manufacturing output remained healthy, the Federal Reserve reported... Output at factories, the largest component of industrial production, rose 0.4 percent in January, matching its December gain. Manufacturing capacity use rose to 78.0 percent, the highest rate since December 2000...

    Despite the weekly drop in mortgage applications, the overall picture still looks one of relatively robust expansion. Look for continued Fed tightenings ahead.

    Wednesday, 16 February 2005

    Europe slows while US retail sales dip

    Europe's economy is struggling. The 12-nation eurozone's economy grew by 0.2 percent in the fourth quarter of 2004, down from 0.3 percent in the previous quarter, according to the EU statistics agency Eurostat. For the whole of 2004, the eurzone economy grew 2.0 percent.

    In the meantime, the European Commission has cut its eurozone growth forecasts for both the first and second quarters of 2005 to a range of 0.2-0.6 percent from its earlier estimate of 0.3-0.7 percent. For the whole of 2005, the European Commission is predicting eurozone GDP growth of about 2.0 percent.

    Eurostat said that growth in the final quarter for the whole 25-nation European Union was 0.3 percent, unchanged from the previous quarter. For the whole of 2004, the EU economy grew 2.3 percent.

    Things appear better in the US. Although US retail sales dipped 0.3 percent in January, sales excluding the volatile car sector gained 0.6 percent, according to the Commerce Department. The Commerce Department revised December's total retail sales slightly lower to a 1.1 percent gain from the originally reported 1.2 percent advance, but the number excluding autos was unrevised at a 0.3 percent advance.

    Meanwhile, in a survey by the Federal Reserve Bank of Philadelphia, 36 forecasters expect growth in the US to average 3.6 percent in 2005, up from an estimate of 3.5 percent in the previous quarterly survey. Inflation is expected to average 2.3 percent in 2005, up from 2.2 percent in the previous survey.

    The main concern with the US economy remains the current account deficit. The latest Treasury International Capital data show that net foreign purchases of both domestic and foreign long-term securities from US residents remain high at $61.3 billion in December.

    Tuesday, 15 February 2005

    Japan's current account surplus rises in December

    Japan's current account surplus in December jumped 35.1 percent to 1.62 trillion yen, well above the economists' consensus forecast of some 1.27 trillion yen.

    The merchandise trade surplus was up a marginal 0.5 percent to 1.30 trillion yen as exports rose 8.5 percent to 5.13 trillion yen and imports increased 11.6 percent to 3.82 trillion yen. However, the overall surplus was further boosted by a narrowing of the services account deficit to 305.5 billion yen from 423.1 billion yen a year earlier, while the surplus on the income account increased to 665.6 billion yen from 434.8 billion yen.

    For the whole of 2004, the current account surplus hit a record 18.59 trillion yen, up 17.9 percent. The services and income account surplus rose 21.6 percent to 10.16 trillion yen. Exports were up 12.3 percent to 58.31 trillion yen while imports grew 10.9 percent to 44.00 trillion yen.

    No doubt, much of the current account surplus will have to be recycled into US dollar assets to fund the US current account deficit. Nouriel Roubini and Brad Setser have a paper discussing the US current account deficit.

    Monday, 14 February 2005

    Thailand under Thaksin

    Incumbent prime minister Thaksin Shinawatra won Thailand's national elections on 6 February, ensuring that his policies will continue.

    Some observers are optimistic that Thailand will thrive under Thaksin. For example, in a commentary for, Marshall Auerback thinks that the election victory, as well as the performance of the Thai economy over the past few years after its recovery from the Asian Financial Crisis, is a vindication of Thaksin's economic policies.

    [T]he Prime Minister's most recent triumph, along with the country's substantial economic recovery since he assumed office, surely validates the anti-IMF program he embraced during his tenure in government...

    Thailand only emerged from the financial crisis of 1997-98 after the new Thaksin administration rejected the Fund's prevailing toxic mix of policies, during which public expenditures of all kinds were cut, creating "social deficits" that matched the economic and financial ones... [T]he Thai PM produced his own good fortune by rejecting prevailing economic orthodoxy through the embrace of the old Asian "Alliance Capitalism" model. This model, with its high household savings and "deep" banking intermediation, had historically proven to be a powerful mechanism for achieving a huge quantum economic leap in living standards for the majority of Asians throughout most of the post-World War II period. Collectivist Asian cultures had disciplined and cooperative work forces that could be mobilized efficiently to implement large, sophisticated projects. The "wave of good fortune" that delivered solid economic growth and allowed the country to run a balanced budget was not an accident, but one which was a product of Thaksin's embrace of a model largely responsible for the region's economic miracle.

    ... [W]e have consistently argued in these pages that there was nothing fundamentally wrong with the Alliance capitalism model that could not be resurrected successfully. For all of the economic destruction meted out by the financial crisis of 1997, many of Thailand's traditional attributes remained intact throughout the worst of the crisis: savings were high, inflation was low, and the country retained extraordinary rates of productivity...

    Broadly speaking, Thailand's crisis, indeed that of all of emerging Asia, was above all else a function of the mass withdrawal of short-term Western capital, rather than a symptom of a fundamentally flawed economic growth model.

    Auerback's "alliance capitalism" is, of course, most observers' "crony capitalism". Most people think that it isn't as benign as Auerback thinks. William Pesek Jr, in a commentary for Bloomberg, quoted Thitinan Pongsudhirak, a political science professor at ChulalongKorn University as saying:

    The revisiting of the crisis in recent weeks indicated that globalization was not the sole cause of 1997. It may have created the conditions conducive to the crisis, but the disastrous cocktail of financial sector mismanagement, collusion, cronyism and corruption which hurried on its effects were made at home.

    In my view, Auerback is probably correct in pointing out that there are advantages to the so-called "alliance capitalism" model. However, I think it is also true that the close alliance between government and business that this model fostered also reduced transparency in the economy. This lack of transparency facilitated corruption and mismanagement while keeping investors in the dark. By the time the problems in the Thai economy became apparent in 1997, investors were forced to make a sudden withdrawal of capital, resulting in a financial crisis.

    "Alliance" capitalism may be just another one of those models that look good on paper but are difficult to implement without creating undesirable side effects.

    Sunday, 13 February 2005

    Corporate leadership

    In the wake of the dismissal of Carly Fiorina as CEO of Hewlett-Packard, Reuters has a story which highlights how some of the managers who left HP during her tenure went on to firms that competed against the company.

    Carly Fiorina Castaways Now Compete Against HP
    Under Carly Fiorina, Hewlett-Packard Co. saw an unprecedented exodus of top managers, many of whom now run rival businesses that are beating the pants off the printer and computer maker in the marketplace.
    Former HP president Michael Capellas and former operations chief Jeff Clarke are just two one-time HP stars who are now successfully running other tech businesses.

    The day after the ouster of Fiorina as HP chairman and chief executive, investors taking stock of HP's competitive stance saw a company that had lost some of its best talent -- putting it in a tight spot in the cutthroat printer and computer markets.

    "The thing that's driven me nuts about the company is that it always seemed like the best people, for one reason or another, ended up leaving," said Dan Niles, chief executive of asset management firm Neuberger Berman Technology Management...

    Insiders blame Fiorina for the brain drain... "You run through the list and ask, so what exactly was wrong with these people? Because they are now at other organizations and they are absolutely killing HP in a lot of ways," said Niles.

    The moral of the story is that investors who assess the CEO must also include an assessment of how he or she affects the performance of other top managers. While strong leadership is often considered an asset, a strong-willed CEO can also drive away other managers from the company, or turn them into yes-men.

    Friday, 11 February 2005

    US trade deficit hits record in 2004

    The US trade deficit hit a record US$617.7 billion in 2004, according to the US Commerce Department. Brad Setser sees nothing that can reverse the rising trend in the near future and thinks that the 2005 trade deficit may hit US$733 billion. That is obviously not good for the US dollar.

    Speaking of the US dollar, Peter Schiff, CEO and chief global strategist at Euro Pacific Capital, says that there is no need to fear that dollar-selling has reached irrational extremes as there is, in fact, no effective bearish consensus on the currency.

    Having just returned from the Orlando Money Show, I can assure anyone that the position that dollar bearishness has risen to the height of fashion is completely contradicted by reality. While my two presentations on the bearish case for the dollar were well attended they were greatly over-shadowed by those espousing the opposite point of view. Much more numerous in numbers, the dollar bulls were assigned the biggest rooms and spoke to significantly larger audiences. One attendee commented that my bearish outlook contradicted every other presentation he heard. Further, as hundreds of investors passed by my booth each day, those who had taken any action at all with respect to non-dollar investments were few and far between.

    The fact is that despite all the talk of dollar weakness, there has been very little action on the part of dollar holders to do anything about it... In order for a mania to exist in an asset class, it is necessary for there to be wide-spread ownership in the asset, and a general belief among those buying it that its price can only go higher. For there to be a mania in non-dollars, the average American would have had to have already sold his dollars. How many people do you know who have bank accounts in foreign currencies?

    Indeed, the biggest players nowadays in the foreign exchange market, the Asian central banks, continue to buy US dollars, as I have mentioned before.

    So it is unlikely that the US dollar has hit an extreme low. It is conceivable, though, that it may have hit an intermediate bottom, especially if the US economic slowdown turns out to be particularly pronounced and reduces imports and trims the trade deficit, or at least slows its growth.

    As Setser warns: "[B]arring a major change in US economic conditions, or a big fall in oil, there is little doubt the trade deficit will keep on growing in 2005".

    Economists in Blue Chip survey see US economy slowing

    According to estimates by economists polled in the Blue Chip Economic Indicators newsletter, the US economy is expected to slow to 3.6 percent growth in 2005. Inflation as measured by the consumer price index will ease slightly to a 2.5 percent rate from last year's 2.7 percent rise, but prices excluding food and energy will continue to creep higher by 2.3 percent this year and 2.4 percent next year, up sharply from 1.8 percent in 2004. The Federal Reserve is expected to raise the federal funds rate to between 3.5 to 3.75 percent by the end of 2005.

    The Blue Chip newsletter expects consumer spending to continue to remain strong in 2005 and rise by 3.5 percent. It sees an average monthly employment growth of 190,000 jobs. Non-residential fixed investment growth is expected to slow to 8.8 percent this year, while the trade deficit is forecast at US$608.8 billion.

    Wednesday, 9 February 2005

    Singapore investors enter Year of the Rooster with something to crow about

    Singapore investors welcome the Year of the Rooster optimistically as the Straits Times Index ended trading yesterday at a four-year high of 2,140.16, rising about one percent in the half-day session.

    In the real economy, however, things do not look so rosy. Singaporeans celebrating the Lunar New Year seem to have left their wallets behind.

    Singapore's Chinatown sees more visitors but drop in sales
    Chinatown is a lot more crowded this Lunar New Year season, compared to last year. Apart from a 10 percent rise in the number of stalls, an increase in public transportation services has also helped Chinatown attract 50 percent more visitors this year.

    But, despite all that, some stalls say their businesses aren't doing as well, some even say sales have dropped as much as 40 percent... And despite having to slash prices by up to 50 percent so far, tonnes of goodies are still waiting to be cleared...

    The bigger picture isn't much better.

    Singaporean businesses cautious in outlook for Year of Rooster
    In the lead-up to the Lunar New Year, some retailers are seeing roaring trade, but they are not popping the champagne just yet. In general, businesses are cautious in their outlook going into the Year of the Rooster, and that is because the economy is expected to moderate to a growth of 3 to 5 percent in 2005, after a strong 8.1 percent expansion last year...

    While the mood is festive and the buying frenzied during the pre-Chinese New Year period, local retailers say this is only seasonal, and business throughout most of last year was a far cry from this... They say retail conditions are tough, with high operating expenses and slowing sales...

    Meantime most manufacturers are in a no better mood, especially those in the electronics sector which is facing a global slowdown. This is expected to last for at least the first half of this year, but there are some bright spots - such as in transport engineering... Sentiment in the hospitality, banking and property sectors is also upbeat.

    Given the overall cautious outlook - analysts do not expect investors to be pouring funds into the stock market... Still there may always be a surprise, as according to Chinese tradition, the rooster is a hard worker, and businesses may find inspiration to outdo expectations.

    And that's probably what keeps some analysts cautiously optimistic for the Year of the Rooster.

    Tuesday, 8 February 2005

    Kevin Colglazier on bonds

    Not everyone thinks that a weakening US dollar will cause a sell-off in bonds and rising interest rates. In last week's edition of The Edge Singapore, Kevin Colglazier, Head of Global Fixed Interest at First State Investments, gave his views in an interview with the magazine:

    On the US dollar:

    When you see these sort of press articles [about American profligacy and the possibility of an imminent collapse in the US dollar], the end of the sell-off is probably near because it is reaching the last person in the trade. In 2005, you may well see further dollar weakness because the US current account will continue to be poor. But I think the majority of the dollar sell-off is over.

    On the rise in the federal funds rate:

    Last year, the Fed hiked rates 125 basis points and yet the bond market...traded sideways... You can't say that the Fed is raising rates so the bond market must sell off. It is a function of where we are in the economic cycle and what the bond market thinks of that. At some points in the cycle, the bond market might take comfort from the Fed raising rates because it is cooling the economy.

    On the US budget and economy:

    I think one of the surprises in 2005-06 is that Bush will turn out to be more fiscally prudent than the markets are giving him credit for. We are not going to see a recession or anything, but I don't see how growth won't be less than last year.

    On low inflation:

    [Developed countries] have effectively outsourced so much manufacturing that is commodity oriented, and the amount of oil required to produce one unit of GDP [in developed countries] has fallen dramatically since 1973. And, producers in Asia and China have so many other advantages in their favour that the increase in commodity prices can be partially mitigated. Globalisation and the Internet are just fantastically deflationary. This is the most deflationary event since the 1880s when you had a combination of railroads, refrigeration and the opening of the prairies in the US, Canada, Australia and Argentina, which really depressed food prices. This is a pretty big deflationary story. It is not going to go away any time soon.

    The bottom line:

    If you could do a trade, close your eyes and wake up at the end of December, you would probably want to have a small long position in the bond market.

    While I have personally been arguing for a rise in interest rates, the views expressed by Colglazier are also highly plausible. Things are seldom clear-cut in investment.

    Monday, 7 February 2005

    Year of the Golden Rooster

    The Straits Times today has a look at what the upcoming Year of the Golden Rooster has in store for investors.

    Investment house convinced...that most Asian stock markets will reach "multi-year highs" in the second half of the year, although feathers will fly in the first six months... "Patience will pay off and investors should remain interested in Asian equities, even if the ride is somewhat choppy in the early part of the year," it says... "Don't be too greedy. The Rooster can jump but does not fly. Take profit before an expected tumble around the middle of the year. Bottom line, though, the Rooster crow heralds the third year of gains for equities."

    With the "fire element" dominating during the early part of the Rooster year, CLSA expects rich pickings in the technology, electronic gadgetry, telecommunications and utilities sectors... [T]he oil sector will fare well, with prices averaging well above last year's levels, even though they would have come off the record levels reached in the Year of the Green Monkey.

    ... "2005 is not a year for the adventure-seeker of day-traders," says Mr Ong Seng Yeow, executive director of Kim Eng Research. He advises investors to buy only high-quality stocks with a sound business model and consistent earnings growth. What may spook market sentiment is the slower economic growth outlook, he adds. Mr Ong also does not expect a post-Chinese New Year rally.

    I also discuss the investment outlook in the Year of the Rooster in "Will investors turn chicken in Year of the Rooster?".

    Saturday, 5 February 2005

    US consumer sentiment and payrolls slip in January

    Are these signs that the US consumer may be about to rein in his spending?

    Consumer Sentiment Ends Weaker in Jan.
    U.S. consumer sentiment finished weaker in January, as respondents to a poll published on Friday grew less certain about their financial outlook. The University of Michigan's final reading of its consumer confidence index for January was 95.5, down from December's final reading of 97.1, according to market sources who saw the subscription-only report... The survey's future expectation index finished at 85.7, down from December's final of 90.9...

    U.S. nonfarm payrolls added 146,000 jobs in January, less than December's downwardly revised gain of 133,000. However, the unemployment rate slipped to 5.2 percent from 5.4 percent in December, the government said earlier Friday.

    [T]he survey's index of current conditions ended at 110.9, up from December's final of 106.7.

    To add to this, Barry Ritholtz at The Big Picture quotes Michael Panzer, author of The New Laws of the Stock Market Jungle, as saying that "the recent drop-off in the spending-income ratio to levels last seen nearly four years ago, amid an overall slowdown in refinancing activity (which is at least partly attributable to Federal Reserve tightening and higher short-term interest rates), suggests that overstretched homeowners' cupboards may be getting bare. Is this a sign of trouble to come for consumer spending -- and the economy at large?"

    Thursday, 3 February 2005

    Fed rates up, Asian markets up

    As expected, the Federal Open Market Committee (FOMC) yesterday raised its target for the federal funds rate by 25 basis points to 2.5 percent. In its statement, the FOMC continues to say that "policy accommodation can be removed at a pace that is likely to be measured".

    This move has been widely discounted and should not affect stock markets. US markets rose marginally yesterday.

    Earlier yesterday, Asian markets had also risen. Markets in Australia and Indonesia hit new highs while Tokyo closed at a two-week high.

    In Singapore, stocks closed at a four-year high with the Straits Times Index rising 0.7 percent to close at 2,108.69. The rise was not broad-based though, as decliners outnumbered advancers 244 to 182.

    Tuesday, 1 February 2005

    Strong growth in US Dec personal income and expenditures

    The American consumer remains alive and kicking.

    The US Commerce Department has reported that personal income increased 3.7 percent, disposable personal income (DPI) increased 4.0 percent and personal consumption expenditures (PCE) increased 0.8 percent in December. In November, personal income increased 0.4 percent, DPI increased 0.4 percent and PCE increased 0.4 percent based on revised estimates.

    The increase in December personal income includes the payment of a special dividend by Microsoft. Excluding this dividend, personal income increased 0.6 percent in December.

    Personal saving as a percentage of disposable personal income improved to 3.4 percent in December from 0.3 percent in November.

    Helped by a fall in the PCE implicit price deflator in December, real DPI increased 4.2 percent for the month compared with an increase of 0.2 percent in November, while real PCE increased 0.9 percent compared with an increase of 0.2 percent in November.