The second chance to buy FXI is here

As expected, FXI, the ETF for the Chinese blue chips, has tested its 50 DMV. The left upper chart was posted less than a month ago and the right lower chart is what looks like right now for FXI. So FXI has followed my script in the past month and has reached the target price. I think this is a good second opportunity to invest in the Chinese stock market and FXI is a safer way to do so. As I said, if history is any guide, double or even several times your money from investing in the Chinese market now at this rather low level with quite poor sentiment is not out of reach.

 



Be ready to short US$

Exactly one month ago, I suggested to short Euro via EUO. If you followed my advice, then you should be happy to see that you will have made about 8% in just a few weeks. Believe or not, this is equivalent to an annualized return of 96%! Take it and run. While it may not sound a lot that Euro (FXE) "just" dropped about 4% in a month, this is an enormous move for a major currency in such a short period of time. Now the sentiment is extremely bearish for Euro and conversely extremely bullish for US$. This is also reflected in the price action for EUO, which is clearly overbought. When the sentiment become extreme in anything, you got to take the contrary action. Although I still think Euro has a lot more to drop in the long run, in the near future, Euro will likely bounce back, a dead cat bounce! I'd sell EUO to take the profit and be ready to short US$. It has just too much euphoria on it at the moment and it is never a good thing from a trading perspective. I will tell you when the time is right to short US$ and how to do it. It is close but not just yet.

Macro: The Bottom Line (9/22/14)

Beware of the blue dots

 

In last week's posting ("The ECB and the Fed: the transatlantic tug-of-war"), we discussed how the Fed and ECB were headed in opposite directions, and that markets may enter a period of uncertainty as the two central banks jostle with one another. In terms of dominating headlines, the Fed definitely scored a point in this tug-of-war tournament last week.

 

From the start of the week, markets were anxiously awaiting the results of Tuesday-Wednesday's FOMC meeting. Specifically, they wanted to see whether the Fed would keep its longstanding pledge to keep rates low for a "considerable time." Any qualification to this pledge would have been interpreted as a sign of an imminent rate hike. 

In the event, the FOMC did preserve the "considerable time" phrase word-for-word. But even so, all was not well in the markets, for the Fed still gave markets a rude awakening elsewhere: in its "blue dots." These refer to the interest rate projections of the FOMC's individual members, which are published quarterly in the form of scatterplots. [In case you haven't figured it out yet, the individual members' rate forecasts for the coming three years are shown as blue dots]. 

Back in the money-printing days when a rate hike appeared to be light years away, few paid much attention to these forecasts. But now, with the Fed on the cusp of ending asset purchases and likely less than a year away from raising rates, the dots have assumed paramount importance. And on Wednesday, they showed that FOMC members expect the fed funds rate to be 1.375 pct by the end of 2015. Three months ago, the median projection for end of year 2015 was 1.125 pct. Taking the consensus view that the first Fed hike happens in June 2015, this means that there would be at least 1 full percentage point worth of rate increases within a space of six months. 

In short, even while professing low rates for a "considerable time," the FOMC has in fact turned meaningfully more hawkish. This is surprising, given the dovish credentials of most voting FOMC members, whether it be Chair Yellen, Vice Chair Fischer, or NY Fed President Dudley. But as they say on the Street, never bet against the Fed. 

Draghi, now it's your turn ...

Be cautious about tech stocks

I'm extremely busy with my submission work and have to catch up in evenings and weekends, which will likely last for a few months from now. So really not much time to write but I will still post some short notes for some quick thoughts as often as I can.

I hope those who had bought Yahoo had sold already before the Alibaba IPO on Friday. As predicted, Yahoo would be sold off hard as soon as Alibaba IPO came on board in the market. Actually just within 2 days, Yahoo has already declined by 5%. Likely this will continue for a while.

I'm also concerned about the teck stocks. Without going into details, technically teck stocks are not behavoring well and there is a good chance that they may be significantly under pressure in the next few months. If you hold a lot of teck stocks, then you need to be very cautious and should mind your stop loss. E.g. raise your stop loss and be ready to exist or even proactively lighten up your portfolio with such stocks by selling some of them, especially if you have good paper profits with them. If you know how to play with options, then you can think about buying QQQ put options as hedge against your teck stock portfolio. This can protect you if indeed the overall teck stocks are sold off hard. I think this is likely coming and a 10% correction is not unthinkable. Having said that, any sold off will be a great buying opportunity for longer term. Will let you know if I start to see such opportunities.

Sell Yahoo tomorrow

I started to talk about buying Yahoo (YHOO) 2 years ago when it was traded around $15 and one of the reasons was its big stakes in Alibaba. If you have bought Yahoo, congratulate to and pat yourself at the back but you should sell it tomorrow. Why? Tomorrow is the last day before Alibaba's IPO on Friday, Sep 18. In Wall Street, the famous saying is Buy the rumors and Sell the news. It means people usually become very euphoric prior to the event actually happening but then quickly sell when the event materializes. Yahoo has shot up quite a lot in the past couple of weeks due to the expected Alibaba IPO.  Based on my past experience, there is a good chance that YHOO will be sold hard on the day when Alibaba starts being traded at IPO.

Sell YHOO tomorrow!!

Macro: The Bottom Line (9/15/14)

The ECB and the Fed: the transatlantic tug-of-war

 

Just a week after the ECB pulled out the Big Bertha (see last week's post), market attention shifted abruptly back to the Fed. If Draghi's big guns were enough to push bond yields to absurdly low levels, the past week's recoil was no less powerful. In fact, the 10-year U.S. Treasury yield, which just last month was testing the 2.30 pct level, closed north of 2.60 pct on Friday.

 

The main cause of the abrupt about-face was - believe it or not - an academic study. That's right, researchers at the San Francisco Fed released a study suggesting that market participants were underestimating the speed at which the Fed would raise rates. The recent market calm - so the researchers - was deceptive and symptomatic of complacency about how long easy-money would last.

 

Coming directly after the ECB's announcement, the SF Fed report had the effect (intentional or not) of placing the Fed in direct opposition to its counterpart in Frankfurt. On the one hand, there's Draghi and his Governing Council, preparing to blast open the liquidity floodgates and take on unprecedented risk onto the ECB balance sheet (remember, Draghi and company are planning to buy asset-backed securities, some without government guarantees). On the other hand, you have a Fed ending its buying spree and readying itself for its first rate hike since 2006. A transatlantic tug-of-war, between two powerful central banks, is shaping up.

 

So who will "win" this tug-of-war. Or to frame the question more accurately, who will end up ultimately influencing markets more? Will the ECB prevail, leading to a cross-asset rally, with bond yields setting new record lows and equity prices setting new record highs? Or will it be the Fed, touching off another cross-asset selloff similar to the taper madness of summer 2013? It's hard to argue entirely for one or the other. At the very least, both sides will create noise, periodically pulling the markets one way or another. But our inclination is that renewed 2013-style mayhem is unlikely. For all the flashiness of the SF Fed's study, the "conclusions" reflect the findings of its researchers, not necessarily the views of Janet Yellen or of other FOMC members. Not to mention that a 2nd half 2015 rate hike has already been largely priced in. And for all the rosiness in the U.S. labor market, the issues that we have repeated over and over again - weak wage growth and lackluster productivity increases - will not disappear overnight. 

 

Bottom line: don't expect a violent price correction across financial-market assets. But do fasten your seat belt for bouts of volatility ahead, as Mr. Draghi and Ms. Yellen dig in for an extended round of tug-of-war.

Macro: The Bottom Line (9/8/2014)

The ECB and the euro: make way for the Big Bertha 

 

The euro has gone full circle within 12 months. After rising to nearly 1.40 versus the USD from last summer through May, the currency has since gone practically only one direction: south. Last week, it crossed a psychological barrier, dropping below the 1.30 handle for the first time in 2014.

The reasons for the summer slide should be no surprise to Red Bull readers. Early this year, we argued that, with the Euro region experiencing a rocky recovery and facing deflationary threats, the ECB would have no choice but to pull out the Big Bertha - i.e. flood the system with liquidity. For a while, ECB President tried to tiptoe around pulling out the big guns: starting with some jawboning in the spring, he then cut deposit rates to negative in June (along with unveiling some conditional liquidity measures). But even that didn't solve the issue - instead, inflation continued to trend lower (YoY Eurozone inflation now stands at a mere 0.3 pct), and GDP growth remained stagnant (with Germany contracting in the 2nd quarter).

So last week, Draghi finally did the inevitable and rolled out the Big Bertha. He announced that the central bank would start purchasing securitized assets outright in October. Remember, these are the dicey securities - backed by consumer loans, auto loans, mortgages etc. - that wreaked so much havoc on the financial system back in 2007-2008. The thought is, by underwriting the risks of such securities via the ECB's balance sheet, commercial banks in Europe would have fewer qualms about extending credit. This, in turn, would help jump-start the moribund economy. Or at least so the theory goes.

There are certain unknowns though about going this route. Key details - such as the size of the program - remain unclear. Reuters reported that the purchases could total at least 500 billion euros. But there's an important impediment to reaching this size: lack of liquidity of the European securitized market. You see, the total stock of securitized assets outstanding as of 1st quarter 2014 is little more than 1 trillion euros (according to HSBC calculations). In contrast, the U.S. Federal Reserve focused its quantitative easing on the Agency MBS market (whose outstanding stock was over $7 trillion in 1st quarter 2014). So the ECB will have to weigh - to a much greater extent than the Fed - whether the potential market dislocations from its actions represent a risk worth taking. After all, the more realistic option for the ECB to achieve the necessary scale would be to purchase government bonds. But it has already faced stiff German opposition to doing so, and will likely continue to do so.

For these reasons, the Big Bertha's effects on the Eurozone's real economy are unlikely to be immediate. However, the impact will be felt in risky financial assets - be it higher-yielding government bonds, emerging-market assets, or equities. These assets already reacted positively to the news, and will likely remain well-supported for some time. At least until the Fed diverges from the ECB and starts hiking rates (likely in the second half of 2015).

"Save" money in emerging markets

As the US stocks goes up non-stop for 5 years, it is rather difficult to find good valuation stocks nowadays. But you cannot simply save your money in cash in the bank as it pays you near nothing. So where you need to put money then?  Emerging market (EM)! The emerging market is poised for substantial growth in the next few years as I’m expecting. In addition to put some money in the EM stock market, which I think will be performing much better than in the US, you may also “save” your money in the EM bond market, enjoying a high yield. I find one bond fund, Templeton Global Income (GIM), with a current yield of 5.2%. This fund holds bonds from the Emerging Market Countries with the asset allocation of 31% in Asia, 40% in Europe and 17% in Latin America. I expect GIM will be also doing great along with booming EM in years ahead. Two things I’m particularly interested in:

·         It pays a monthly dividend, which is more efficient in terms of compounding with dividend reinvestment

·         Its price action presents a bullish technical setup: a reverse head and shoulders, which often leads to an upward price movement.

I think it is a good buy at this price.

 

Apple is poised for a big move

Apple (AAPL) is set up for a big move on Tuesday next week, one way or the other.  Why so? Well Apple will debut on its new line of iDevices, which may include bigger-screen iPhones and iPads, iWatch, iWallet etc. I can tell you, the expectation is extremely high for Apple. If it cannot meet the expectation, it will drop like a stone. But somehow I bet Apple will live up to the high expectation. In that case, Apple can also shoot up to the moon. This may very well be your last chance to get this price for Apple if my bet is correct. Of course this is purely speculative. Personally I’m ready for both: enjoy the moonshot or buy more if it experiences a mini-crash.