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The recent stock market boom is a symptom of excess liquidity caused by government policies. The liquidity is supposed to be injected into the real economy, but instead it is causing asset bubbles. The premise of the stock market rise is a falling dollar. Recently sentiment of the dollar has become so negative that a correction is over due. However, the government has no sign of monetary tightening, so it is fair to expect the dollar to resume its fall and stock market continue to rise.

Several scenarios are possible that would strengthen the dollar and depress asset markets:

1. Another financial crisis, may it be commercial real estate or credit cards defaulting. This would cause another liquidity crunch. (very likely to happen).

2. Global economies fail to recover. This would cause “flight-to-safety” and all the hot money flown to emerging markets will come back. (fairly unlikely)

3. Increasing opposition to Obama’s spending spree. The failure to pass healthcare and cap-and-trade would mean less money printing and less deficit, which are the causes for the dollar devaluation. This might actually be bullish for stocks. (fairly likely)

4. the Fed shows plans to raise interest rates and signals monetary discipline. In my opinion this won’t happen until employment starts to recover. (fairly unlikely)

If your investment has a long term horizon, then don’t worry too much about the coming correction. With all the structural problems of the U.S. economy, dollar is destined to fall much lower in the long term and stocks would be a fairly good hedge. Though as to diversify, it would be wise to own some gold and foreign stocks and bonds.

admin :: Oct.29.2009 :: Market Analysis :: No Comments »

Here is a comparison of the amount of searches in google for “economic recession” and “economic recovery” with the stock market (QQQQ is the nasdaq index fund).   A peak in interest about economic recession along with a peak in interest about economic recovery calls for the March bottom in stock prices.  This makes sense in that the crash stops when lots of people is worrying about a recession and more people start to see recovery.

You can access the most updated comparison Here.

admin :: Sep.10.2009 :: Market Analysis, Finance/Investment :: No Comments »

Recently there are a lot of debates between the Keynesian and Austrian economists on the skyrocketing government deficit.

My opinion is this:

In general, government spending is wasteful.  To expect governments to efficiently allocate capital is a larger mistake than to believe in Bernie Madoff.

Keynesian policies only makes sense if consistently followed.  The true Keynesian policy maker would save money during good times and spend money during bad times.  The intention of such policy is to smooth out the business cycles.  Unfortunately, our government hasn’t been saving money during good times, therefore to spend now requires the nation to elevate its debt level.  And high government debt would easily lead to money printing & hyper-inflation.  The solution to too much debt is not be accumulating more debt.  If there is no saving, there should be no spending, especially when the spender has a tendency to be very wasteful.  In the U.S. case I would side with the Austrians.

The Chinese government, on the other hand, is also spending a lot of money to stimulate the economy.  Fortunately for the Chinese, they were saving a lot of money during their economic boom.  And now in a global recession, they can snatch up assets and resources for cheap.  This investment mentality is what drives the “easy-money” policy in China right now.   Therefore, in China’s case I would side with the Keynesians.

admin :: Aug.20.2009 :: Market Analysis, The World, Business/Management, Finance/Investment :: 2 Comments »

Everyone is yelling “the recession is over”.  The stock market has risen close to 50% since its march low.  Lets examine the forces that might influence future markets:

Upside:

•  For individuals and fund managers who missed the recent rally.  There are intense pressure to get back into the market.  With talks of recovery everywhere, the baby boomers who lost 30-50% of their retirement portfolio are really anxious to get back into the market.
• Cost cutting + increasing productivity + sales recovery might push companies that have heavy international market exposures to produce positive earning surprises.  The recovery in emerging markets are pretty evident.  With the dollar staying weak, multi-national companies can rake in handsome sales overseas.
• Government Spending, Stimulus programs, and loose monetary policies would inject money into the economy, causing asset prices to inflate.  The prospect of recovery and inflation would cause stocks to be more attractive then bonds.

Downside:

• The short term market is very over-bought.  And profit taking is inevitable.  For those who are lucky to gain from the rally, it would be tempting to lock in the profits.   The current price level is pricing in a $75 earning for the S&P, which is almost impossible consider that the peak earning in 2007 is $85, with almost half of it from the financial sector.
• The economic system is not cleaned.  It is actually gotten worse due to poor government policies.  Household deleveraging has not happened, and with the cash-for-clunkers program, people are accumulating more debt.  Therefore, the rosy sentiment that “good days are back” are not backed by fundamental improvements in the economy.  Such positive sentiment might mark the top of the “recovery” bear rally.

admin :: Aug.11.2009 :: Market Analysis :: No Comments »