Sometimes you read something which makes you think again - my friend Yoshi often does this to me, so I have asked Yoshi for permission to print this e-mail he sent me today. Yoshi is an independent trader in Singapore and one of the true warriors of trading. Enjoy - Steen -
We have now arrived at S&P 950 and my model is flashing its short-term upside risk to 1050 while the current fair value is at $43 x 15-17 (S&P at 750). Well, that's what my head says, but my heart is saying the Japanese style long-term decline will eventually lead S&P to $35 operating ESP at 15x multiple assuming the positive correlation between Obama's approval rating and S&P. So forget about any quick killings in the mkt!
The Bilderberg Group, the plunge protection team, the Japanese PKO and the European something, validity of their existence is irrelevant. In the new world of Tarp, the Fed and the rape of tax payers, I have no problem believing anything. But, even putting these old bones together still would not make a big enough dinosaurs to make troubles for the emotionally sane equity and USD bears.
So I came across a FT article by Sundeep Tucker: (http://www.ft.com/cms/s/0/a7d56c18-5505-11de-b5d4-00144feabdc0.html)
Summary of the article: Early last year CIC picked two or three fund management groups for each of six investment mandates with an aggregate sum of $12bn. CIC has also earmarked a further $30bn of its liquid assets for global portfolio managers over the next 6 to 12 months. CIC and SAFE will hand additional monies to hedge funds and private equity firms, neither of whom typically need to declare the source of their financing. The collapse of the Chinalco/Rio deal will spark soul searching in Beijing. The irony is that it will hasten China’s push to hand bucket loads of money to foreign fund managers.
Well, CIC & SAFE/$2 trillion China plus the old bones may be enough to bully the mkt in the equity, govies, commodities and FX mkts to adjust their reserve portfolio without affecting the USD peg. Greenspan had kept quiet about China's UST purchase with his "Conundrum" bluff. The UST kept going up regardless of the Fed fund rate for sometime.
Now, are we seeing a Chinese Texas hedge after they got burned in their 2007-2008 equity debut? I am guessing their average S&P break-even is around 1100-1200. Considering their concerns over the UST, high priority on energy & commodities security and their determination to keep the peg, their indirect equity investments could make sense if they get their hedge ratios vs. UST right. They could well have decided to readjust their reserve portfolio when S&P happened to be around 650.
S&P M09 emini is now at 928 as I write my letter, but I just think the next bear mkt to the initial target of S&P 750 (and ultimately to 350-450) will be a long process with a few more false rallies.
Remember the African proverb? "When a man threatens you when you are asleep, stay asleep. But when a women curses you, stay awake." So then, what should we be looking out for to time for the next sustainable reversal in S&P and UST? It will be tax and rate hikes as we saw PM Hashimoto's 98 consumption tax increase and Hayami's 2000 premature ending of ZIRP had killed off the feeble recovery and all came to its head during the Japanese banking crisis.
Before the real black swan (geopolitical risk) will finally have landed upon us, I see tax and rate hikes as the precursors however improbable they may seem right now. Once Geithner, Summers and Bernanke fall from their grace, the political repercussion will dictate the fiscal and monetary policies and I sure will feel sorry for Volcker to take over the Fed to tarnish his good reputation by having to raise the Fed fund rate.
Well, with these current long term macro views of mine, I will get some sleep so I can make it to the Asian open this morning to trade short term in the mess of futures roll overs.
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