Macro: The Bottom Line (1/27/2014)

Don't cry for me Argentina

EM has started off the new year in the doldrums ...

 

For those who felt that 2014 would be nothing more than a mere continuation of 2013 - steady improvement in the US economy, strong corporate earnings and blockbuster equity performance, continuation of Fed tapering etc. - last week's EM "double-whammy" certainly represented a rude awakening.

First, there was HSBC's manufacturing Purchasing Manager Index (PMI) report on China, essentially a barometer for business confidence in the world's secod largest economy. Though markets were expecting somewhat of a cooldown in sentiment, nothing prepared them for the PMI to drop below 50 - the dividing line between "expansion" and "contraction" territory. At a time when concerns about Chinese growth remain widespread, this report certainly struck a raw nerve.

Second, Argentina allowed its peso currency (ARS) to depreciate intraday by the most in over a decade. By market close on Thursday, ARS had depreciated past 8 per USD (for context, at the start of January one USD bought just 6.5 pesos). Now, you may be asking: why all the paranoia about Argentina, a country that's already been a financial pariah for 13 years and a known no-go destination for most investors? The reason is, it's not about Argentina at all. Rather, It's about how symptomatic Argentina's problems are of the still-investable emerging markets: Turkey, Indonesia, South Africa, India etc.

You see, the reason the ARS has been on a slippery slope has to do with Argentina's persistent external imbalances. On the one hand, the country needs a large amount of dollars to pay for imports and to service its huge debt load. On the other, due to 25% inflation and a government with scant respect for property rights, few investors are supplying any dollars to the country, and Argentina's foreign reserves have been dwindling at a very fast pace. A perfect recipe to force your currency lower.

Now, the "still-investable" countries I listed above share many of the same characteristics as Argentina. They're all facing current account deficits (aka. income leaving the country exceeds income coming into the country). Some, especially Turkey, also have perilously thin international reserve buffers with which to defend their currencies. For now, the one thing keeping these countries afloat is the fact that they still have access to international markets - i.e. foreign investors are still willing to put their money there for the time being. But any prolonged crisis of confidence could change that very quickly...

Our view continues to be as we outlined in our last macro post in 2013: it's important to differentiate between individual emerging economies. Focus your investments on those that are pursuing structural reforms, laying the foundations for sustained growth, and have a large stock of international reserves (China, Mexico, or if you're ready to stomach some more volatility, Brazil). Steer clear of the likes of Turkey, Indonesia, India, and South Africa - these countries remain far too much at the mercy of international investor sentiment, with insufficient tools to cushion the impact of boom and bust cycles. While none of them are quite Argentina yet, several of them are certainly moving in that direction.

A quick update

Just a quick update on two things I talked about lately:

• In my year-end prediction, the first thing I was talking about was Muni. At that time, Muni ETFs in general were showing a big discount, around -10% or so. As I said, you want to buy Muni at a big discount, the bigger the better. You will be benefited from both bigger tax free dividends and potential capital gain. Well, Muni has started the year in a very strong momentum. Along with its appreciation, the discount has been quickly narrowing down from its NAV, about -5% at the moment. Muni will still have a lot of room to grow but you don't want to buy when it become expensive with a price beyond NAV. One thing which is pushing up Muni is that more and more hedge funds and mutual funds are starting to move big money into Muni. I'm pretty confident that Muni will be further pushed up this year.
• Since I talked about Target (TGT), its shares continued to slide down. Right now, TGT has been really oversold. I don't know if TGT has touched its bottom and will not go down further, but I think the chance is very good that TGT will bounce back from this level around $57 at least in the near short-term, probably starting from tomorrow. Given how oversold it has been, I won't be surprised to see it jump 5% or so within days. If you are a short-term trader, this may be a good opportunity to make some quick money.

Wow, Microsoft!

Just came back from Switzerland today. As I said, it was really an intensive week. Everyday I had to work till almost midnight. There was just too much data to analyze but within a too tight timeline! But I was still  trying to quickly scan through some top line market news everyday. It was my antidepressant, I meant it!

Yesterday was kind of market panic day and I smelled the blood in the streets. S&P plunged over 2%, which has not been seen in over 2 years. Usually in this kind of market, almost everything will drop regardless. But not yesterday. In the contrast, Microsoft (MSFT), the dead stock in many people's eyes, was shooting up over 2%, definitely a street darling at least for yesterday. Wow, I'm really impressed! I feel like I'm a genius as I was just talking about buying MSFT at my last blog. Indeed, I was also quite aggressive lately to buy more MSFT as it has been such a great value stock. You may not know, there are only a very few stocks with AAA rating (4 or 5 I think) in the whole world, the safest stocks you can get. MSFT is one of them and its rating is even better than the US government bond (i.e. safer than the US$). Buying MSFT is just like saving US$ in the bank but with a much higher interest (dividend). Technically, MSFT is even showing an inverse head & shoulders, a bullish setup to go up. If it can breakthrough the near-term resistance at $37.5, it will easily get back to $40 or higher.  I think the downside risk for MSFT is very minimal but the long-term value is huge. Don't miss it.

By the way, if you followed my advice to short MSFT by selling call options when it was around $40 (I did myself), I think it is the time to get out to take the profit. It would be shame to let your profit evaporated along with the MSFT stock strengthening.

Microsoft is behaving as I have expected

I'm writing from the airport while waiting for my flight to Switzerland. I will be heading there for a whole week for a business "bootcamp". It will be really a tough week to prepare submission documents with a very intensive working schedule (minimally 12 hours everyday)! I hope I may still have some time to screen the market news and information, which is my antidepressant!

Two months ago, I told you that I was shorting Microsoft as a short-term speculation. Based on technical analysis, I was even pinpointing to where MSFT would likely bottom for this correction.  It seems MSFT is indeed following my "instruction" to act in the past weeks and it did stop declining around $35. As I said, MSFT is a stock I will likely hold forever and I may even add more when the time is right. I think now is one of such times one may consider to buy MSFT.

 

Buying MSFT now for long-term holding is certainly a good idea with dividend reinvestment but a better way to do is to juice up your short-term income, which I call as dividend acceleration. MSFT is going to pay its quarterly dividend in Feb and the last date you can get it is to have the shares before Feb 14. You may buy MSFT stocks and sell its Feb call options against your shares. You may instantly get 2-3% income by doing so for just about 4 weeks. You will then either get the dividend plus the instant extra money from selling the calls or you simply have to sell your shares at a higher price if your shares get called away. Either way, you will be the winner. I have a quite detailed write-up on this topic.

Like Cisco all over again

In November last year, Cisco got crashed following its disappointing earning report. When everyone got panicky, we got excited.  If you did act around that time, you should be happy now. I did as I suggested with naked put and I got my quick money today (option expiry date) after one month.

 

 

Today, we got almost the same scenario again, just like what happened to Cisco. This time it is Intel. Intel got killed today also due to disappointing earnings. I really like such things happening again and again. This is kind of the easiest money one can get as long as you know what to look for and when to act. Having said that, I haven't seen the extreme panic yet for Intel at the moment and there is a chance it may continue to weaken in the next few weeks. If so, don't miss the opportunity to get some free money.

 



Macro: The Bottom Line (1/13/2014)

Welcome to 2014! This year certainly promises to be an exciting one, with the Fed managing a change in both its chairmanship and its policy focus, the Eurozone still treading water to avoid relapsing into recession, and the most challenging environment the emerging markets have seen in years. We'll be sure to keep you well-informed on these and other topics through the year.

Let's kick it off with the previous week's highlights.

US jobs data points to a still-uneven recovery: In one of the first high-impact data releases of the New Year, the Labor Department published its December employment report. At first glance, the figures were contradictory. On one hand, it showed the US unemployment rate falling from 7.0% to 6.7%; on the other, it reported that a mere 74,000 jobs were created in the month, well below the 200,000+ we've become used to seeing. This is a good illustration of why a singular focus on the unemployment rate can be misleading. The fall in unemployment was largely a consequence of workers dropping out of the labor forces, either because they're forced to settle for lower-paying p (@)art-time roles, or because they've become discouraged and/or and stopped looking for jobs. In fact, this has been a trend through 2013, with the labor force participation rate falling by nearly a full percentage point in the year to below 63%, the lowest in 35 years. In other words, only about 6 out of every 10 Americans is either satisfactorily employed or actively looking for a job. At a time when the country is grappling with mounting demographic challenges and Social Security costs, lower labor-force participation is not something to be welcomed by any means. What does this mean for your investments? The Yellen Fed will be no different from the Bernanke Fed, with ultra-low rates for years to come and further headwinds for the dollar. And importantly, there's still hope for gold and other commodities. 

ECB meeting - no change to our bearish view on the euro: The other high-relevance item on the economic docket last week was the European Central Bank's policy meeting. As you recall, we've been bearish on the euro for a couple of months now, arguing that with all the weaknesses still handicapping the Eurozone economy, there's no way the euro can stay as strong as it is. Well, the common currency is still trading north of 1.35 against the dollar, and the ECB again refrained from further easing last week. But this by no means changes our view! If you read into the fine print of ECB President Draghi's press conference comments, you'll note some pretty dovish language: e.g. [the ECB Governing Council] strongly emphasizes that it will maintain an accommodative stance on monetary policy for as long as necessary." Also, Draghi cited two "contingencies" that could prompt the ECB to do more: (1) "tightening of conditions in money markets" and (2) "a change in inflation expectations." Well, given how things are going, we can reasonably expect at least one of these contingencies to be met. First, there are abundant signs that liquidity conditions in the Eurozone are tightening - in fact, the rates European banks charge to one another experienced a noticeable spike in December. Second, with inflation stuck below 1%, it's hard to imagine forward expectations on inflation trending lower. Long story short - if the ECB is serious about freeing the Eurozone economy from some the shackles that are holding it back, it will need to undertake something soon.

A value stock from agriculture

Potash Corp. of Saskatchewan, Inc. (POT) is a Canadian company, the largest manufacturer of potash in the world, a major component of fertilizer for agriculture. Everyone has to eat and the world population has been increasing fast on the earth. However, the arable land on the earth is decreasing quickly and there is a serious threat facing the world that there will be a huge shortage of food enough to feed the whole population. That's why potash has become a critically needed commodity to support cropping. In the past few years,  POT has advanced considerably but it has gone too fast too soon. Last quarter, it reported a disappointed earning, causing its share price plunging almost 25%. As you can see below, the stock has basically gone side way in the past 3 months. However, it has just broken through its upper resistance line. Technically speaking, this is significant as it suggests that the worst is likely over for POT. If it can sustain this momentum and does not come back into the side way box, it may start its next leg up. Fundamentally POT is a great company to own due to the obvious reason as mentioned above. It is also paying a high dividend of 4.2%. POT is another long-term value stock to diversify your retirement portfolio.

The best thing a value investor could expect

Target (TGT) got crashed today. It plunged 5% at opening but closed much better at only about -2%. What happened? If you care about news, you should have heard for weeks that Target had a security breach about its customers' credit information being stolen. It has since declined 15% from its recent high back in July 2013. Today, it just announced: "70 million Target shoppers: the people who stole your credit and debit card information also have your mailing address, email account and phone number." This is almost double the initial estimate that "only" 40 million customers were impacted. I'm afraid I may be one of the victims as I also have a Target RedCard.

Well, it is Target's nightmare but it is the "best news" for value investors. Target is a great value company in the retailer sector. It is not as big as Walmart but close and it is very profitable and consistently so. It is also paying a good and increasing dividend for decades. When a great company gets a short-term setback, it is the best time to get in for their better valuation. Believe me, this will certainly only be a short-term snafu for TGT. Nothing has changed it fundamentally. As long as you have a long term horizon, you should be happy to see what happens to TGT and back up your track to load up its shares. Don't miss it!

My 2014 Predictions - International

I did not get a chance to write this one before the end of 2013. Here are my 2014 predictions for international markets.

Yen - Japanese Yen will go way down moving forward. It is currently around $104 and I think it may go down to $125 to $150, although not necessarily within a year time. I like the leveraged ETF, YCS, to bet a downward trend for Yen. YCS is at $70.17 at the moment. On the contrary, the Japanese stock market may be benefited from the weakening Yen and may likely be doing well. The ETF for it is EWJ at $12.01 at the moment.

EU market - Believe or not, I think the EU stock market may be doing well next year, especially with the possibility that they will also start their QE soon. FEZ is the fund for the EU stocks, currently traded at $41.83.

Emerging markets - The emerging markets as a whole may be even doing better than the developed markets. DEM is the ETF for it and is at $49.12 right now.

Russian market - The Russian stock market is probably one of the cheapest markets in the world. It has a great potential in terms of trading. RSX is the fund for Russian stocks, currently at $27.76.

I will come back to these ideas by end of 2014 to see how I'm doing in terms of my predictions. Just be clear of one thing about my predictions. I don't mean all of these predictions will work out immediately, ie. will go up straight from here. Actually some of them may go down first. But I believe they should be doing fine overall during the whole year and will likely be much higher by the year end of 2014.