Sorry if it is offending to anyone to call Euro nasty. But that is true. Because of Euro, many fund / portfolio managers and investors get sleepless nights. Who knows? Someone may even be getting heart attacks.
Second time this year (2010) the world's markets are rattled by Euro problems. Consequently, the values of stock and portfolios plunge, causing numerous issues of margin calls, leverage problems and crystallisation of derivatives. No wonder several portfolio managers and bankers watchover Euro with little bit of fear. A loss of confidence in Euro impacts liquidity and all risk assets. No one can rule out European (British banks are not immune) banks facing pressure.
First, it was Greece, who almost defaulted in April/May 2010. Greece is a very small player in the global economic scenario and its crisis would not have been of any major global impact. (Zimbabawe was in economic crisis, but hardly anyone noticed!!) Why did Greece issue become so magnified? Because of Euro. Media, investors, governments, bankers and across the world feared collapse of Euro. If it is the problem of Euro, it impacts entire Eurozone. And Eurozone economy is globally siginificant.
Second instance is now - Ireland in Nov 2010. Again Irish problems impact Euro and the global investors are worried. On a stand alone basis, Ireland is a very small player. But its problems are magnified through Euro. Markets get 'concerned' about these small Euro countries and fear the possibility of contagion and their impact on Euro and global markets.
Global investors, please brace up for more Eurozone problems. Your portfolio of stocks and commodities are at their mercy. Portugal, Spain and probably Poland are waiting in line to repeat the actions of Ireland or Greece.
Economic crisis due to heavy external debt sometimes happens and the best way to overcome is to depreciate its currency to encourage exports and earn enough foreign currency. For example, this was adopted by India in early 1990s and Brazil in 1980s. Had Greece had an independent currency, it could have devalued its currency. (Euro is not controlled by Greece but by Brussels, mostly influenced by Germany and France) This would have resulted in more export earnings through massive boom in tourism and exports through goods and services. In turn, this would have created more employment in the country.
Of the two choices, Greece was forced to have the German medicine of austerity instead of devaluation. Austerity also includes retrenchment, which means more unemployment. Latest press reports indicate that Greece is falling behind on its austerity promises and hence there is all likelihood that Greece problems may return in the future with vengenance. Bad news for global stock and finance markets.
As long as Euro exists, be ready for more problems ....
Let us hope for the best; but prepare for the worst.
Saturday, November 27, 2010
Tuesday, November 16, 2010
Post QE2 Developments
As expected, after the announcement of the Fed’s new $600 billion bond purchase plan to boost the U.S. economy, the stocks and commodities were driven higher while Euro appreciated further partly reflecting European Central Bank decision to keep the interest rate unchanged. In fact the global stock indexes touched two-year highs while crude oil almost kissed $90/- per barrel and gold zoomed to record highs. Overall, the investors rejoiced the extra liquidity in the system.
And the dollar touched its 11 month low. Wow! that was too much, for China, who views the depreciation of dollar as indirect yuan appreciation. China came out with the most severe criticism and its 'government sponsored' rating agency downgraded US rating. That is China's way of thanking US companies who exported most of the manufacturing jobs to China, making millions of Americans unemployed.
But within a week's time, the dollar began to strengthen while commodities stagnated or dropped. Why? The major reasons are:
1. The market might have over adjusted to the anticipated announcement and now correcting itself.
2. One of the trader’s rules "Buy on rumour and sell on news" may be playing out.
3. Dollar is not only the currency of the US, but also the reserve currency of the world.
4. Many emerging economies have conducted studies and taking steps to control the dollar flow into their economies.
5. Unwinding of a portion of the USD based carry trade after the stock markets touched recent two year high.
However, in the long run, as more and more tranche of USD 600 bn hit the market, the possibility of depreciation of USD cannot be ruled out. One of the studies has indicated that over the next one year dollar can lose as much as 20% of its value.
But as economists say, this will happen ‘only if other things remain the same’. In this current volatile environment, we have to wait the reactions of other nations, who may view this as a step to weaken dollar. Moreover, the bad experiment called Euro is at the mercy of several fringe nations of the European Union. Any crisis for Euro will cause flight to safety causing USD to appreciate.
And the dollar touched its 11 month low. Wow! that was too much, for China, who views the depreciation of dollar as indirect yuan appreciation. China came out with the most severe criticism and its 'government sponsored' rating agency downgraded US rating. That is China's way of thanking US companies who exported most of the manufacturing jobs to China, making millions of Americans unemployed.
But within a week's time, the dollar began to strengthen while commodities stagnated or dropped. Why? The major reasons are:
1. The market might have over adjusted to the anticipated announcement and now correcting itself.
2. One of the trader’s rules "Buy on rumour and sell on news" may be playing out.
3. Dollar is not only the currency of the US, but also the reserve currency of the world.
4. Many emerging economies have conducted studies and taking steps to control the dollar flow into their economies.
5. Unwinding of a portion of the USD based carry trade after the stock markets touched recent two year high.
However, in the long run, as more and more tranche of USD 600 bn hit the market, the possibility of depreciation of USD cannot be ruled out. One of the studies has indicated that over the next one year dollar can lose as much as 20% of its value.
But as economists say, this will happen ‘only if other things remain the same’. In this current volatile environment, we have to wait the reactions of other nations, who may view this as a step to weaken dollar. Moreover, the bad experiment called Euro is at the mercy of several fringe nations of the European Union. Any crisis for Euro will cause flight to safety causing USD to appreciate.
Saturday, October 30, 2010
Will 1932 be repeated in 2012? or Japan in 1990s?
Everyone knows that there are some parellels between 1929 Crash and 2009 Crash. While the stock market touched its low in 1929 Oct, 2009 Mar was the lowest point of Dow in the US market in the recent years.
What caused these downturns? A lot of reasons are similar. The downturn in 1929 and 2008/2009 have common features such as -the structural weaknesses, reckless lending, high leverage, speculation, asset bubbles, massive bank failures, stock market crash, etc were some of them.
The US Govt did not sit idle in 1929. They took steps and as a result the stock market moved up in 1930. But consumer spending dropped due to deleveraging, unemployment, erosion in networth due to fall in asset values, which in turn was due to the stock market crash / real estate crash. Lower consumer spending meant lower demand for goods and services. Business dropped leading to more shutdowns and more unemployment, which reached 25% in early 1930s. Stock market crashed below 1929 levels.
Linked to gold standard, the dollar printing was restricted and US Govt/Fed did not inject liquidity into the economy in 1930s. International trade dropped due to protectionism. Overall, the deflation set in causing drop in prices, translating into losses for businesses, that managed to survive. More unemployment. And for some weird reason, Fed kept interest rates high. All of the above ensured the recession continued into a decade.
As a student (got PhD) of 1929 rececession, Ben Benarke is trying to avoid deflation at all costs. Hence, he plans more quantitative easing in the US economy which will pump up to USD 2 trillion dollars (or USD 2000,000,000,000/- dollars).
Ben Benarke should have taken a PhD on Japan's lost decade as well.
Japan after the envious economic growth in the 1970s and 1980s, witnessed fast rise in real estate, stock market and all asset classes fuelled by cheap credit policy of the Central Bank (CB). Panicing one day, CB increased the interest rates (this reminds the action of Ben Benarke in 2006/07 where he constantly pushed up the interest rates till economy collapsed). What followed is well documented in the history. The asset bubbles got pricked, stock market crashed, bad debts zoomed, debt crisis followed, banks collapsed, triggering bailouts by Japanese Govt. It is clear that US did not learn from Japanese folly.
What is the conclusion from the above? History repeats itself and P.hDs do not help always; but common sense will; however common sense is not very common.
Let us hope the future will be rosy and everything will be fine. But also be prepared for 1932 in 2012 or a lost decade in 2010s. G20 is meeting to avert mistakes of 1929 but the looming currency war between China/Japan/US/other countries does not have appropriate historical parallels and may make a history of its own for future generations.
What this mean to you and me? Well Be on Guard. Your hard earned money could be under attack. Remember the best two principles of Warren Buffet (a) Never lose money in investments/savings (b) Always remember the first rule. It is a tough job; but very little alternatives.
What caused these downturns? A lot of reasons are similar. The downturn in 1929 and 2008/2009 have common features such as -the structural weaknesses, reckless lending, high leverage, speculation, asset bubbles, massive bank failures, stock market crash, etc were some of them.
The US Govt did not sit idle in 1929. They took steps and as a result the stock market moved up in 1930. But consumer spending dropped due to deleveraging, unemployment, erosion in networth due to fall in asset values, which in turn was due to the stock market crash / real estate crash. Lower consumer spending meant lower demand for goods and services. Business dropped leading to more shutdowns and more unemployment, which reached 25% in early 1930s. Stock market crashed below 1929 levels.
Linked to gold standard, the dollar printing was restricted and US Govt/Fed did not inject liquidity into the economy in 1930s. International trade dropped due to protectionism. Overall, the deflation set in causing drop in prices, translating into losses for businesses, that managed to survive. More unemployment. And for some weird reason, Fed kept interest rates high. All of the above ensured the recession continued into a decade.
As a student (got PhD) of 1929 rececession, Ben Benarke is trying to avoid deflation at all costs. Hence, he plans more quantitative easing in the US economy which will pump up to USD 2 trillion dollars (or USD 2000,000,000,000/- dollars).
Ben Benarke should have taken a PhD on Japan's lost decade as well.
Japan after the envious economic growth in the 1970s and 1980s, witnessed fast rise in real estate, stock market and all asset classes fuelled by cheap credit policy of the Central Bank (CB). Panicing one day, CB increased the interest rates (this reminds the action of Ben Benarke in 2006/07 where he constantly pushed up the interest rates till economy collapsed). What followed is well documented in the history. The asset bubbles got pricked, stock market crashed, bad debts zoomed, debt crisis followed, banks collapsed, triggering bailouts by Japanese Govt. It is clear that US did not learn from Japanese folly.
What is the conclusion from the above? History repeats itself and P.hDs do not help always; but common sense will; however common sense is not very common.
Let us hope the future will be rosy and everything will be fine. But also be prepared for 1932 in 2012 or a lost decade in 2010s. G20 is meeting to avert mistakes of 1929 but the looming currency war between China/Japan/US/other countries does not have appropriate historical parallels and may make a history of its own for future generations.
What this mean to you and me? Well Be on Guard. Your hard earned money could be under attack. Remember the best two principles of Warren Buffet (a) Never lose money in investments/savings (b) Always remember the first rule. It is a tough job; but very little alternatives.
Friday, October 22, 2010
Why Commodity / Mining Stocks may be added into your portfolio
In order to further boost US Economy, the vast majority of Analysts expect an announcement on Quantitative Easing (QE) at the US Fed's policy meeting in November.
QE2 in November is all but certain. The only issue is the details of its implementation. The forecasts show that the next round of asset purchases would be c.$500 billion. Estimates ranged from $500 billion to $1.25 trillion (source Reuters).
Mr. Beranake needs this cash to filter into the private sector. This is expected to create jobs in the US.
Well most investors are probably happy to see another round of QE. Why? The stocks may benefit. But BE CAREFUL. Not all sectors are going to reap advantages. How can it happen when economic uncertainties prevail in many sectors. But there is one sector that could still benefit - even if the QE plan fails.
Years of cheap credit and reckless spending by US governments has taken the toll. Pumping more cash into the US economy and hope that things will improve is a doubtful idea. If the economy wants to sustain genuine growth , then the unviable businesses should be closed while US should become more competitive to China
Unfortunately, it appears that the US government wants an easy route. They try to the avoid the pain of economic adjustments with second round of QE.
May be Bernanke is right. The Governor of the Fed studied the 1929 US depression – when the dollar was pegged to gold. Because of this peg, the Fed in 1920s couldn’t just print dollars to counter deflation.
But it is quite different in 2010. Now Mr Bernanke can create all the cash or dollars. He hopes this will work miracles and will get the US out of economic trouble – be it deflation or not. Following are some of the thoughts on QE in November:
1) It may set off some inflation. Commodities should provide an inflation hedge. Invest in commodities.
2) US dollar could depreciate. This is good for commodities. But other export oriented nations could devalue their currencies against USD to keep their competitiveness.
3) QE funds channels into the emerging markets creating some growth in the developing economies. This will also result in more demand for commodities. Commodities should benefit.
If commodities do well, then mining sector should do well.
Do you want to know more about the mining stocks that could gain? Google is selectively placing advertisements in the blog related to this topic. You may click one of them and try your luck at your own risk.
The above content is for information purposes only and not intended to be relied upon for investment decisions. Appropriate independent advice should be obtained before making any such decision. Investing is risky and can lose money. Always seek expert advice before investing.
QE2 in November is all but certain. The only issue is the details of its implementation. The forecasts show that the next round of asset purchases would be c.$500 billion. Estimates ranged from $500 billion to $1.25 trillion (source Reuters).
Mr. Beranake needs this cash to filter into the private sector. This is expected to create jobs in the US.
Well most investors are probably happy to see another round of QE. Why? The stocks may benefit. But BE CAREFUL. Not all sectors are going to reap advantages. How can it happen when economic uncertainties prevail in many sectors. But there is one sector that could still benefit - even if the QE plan fails.
Years of cheap credit and reckless spending by US governments has taken the toll. Pumping more cash into the US economy and hope that things will improve is a doubtful idea. If the economy wants to sustain genuine growth , then the unviable businesses should be closed while US should become more competitive to China
Unfortunately, it appears that the US government wants an easy route. They try to the avoid the pain of economic adjustments with second round of QE.
May be Bernanke is right. The Governor of the Fed studied the 1929 US depression – when the dollar was pegged to gold. Because of this peg, the Fed in 1920s couldn’t just print dollars to counter deflation.
But it is quite different in 2010. Now Mr Bernanke can create all the cash or dollars. He hopes this will work miracles and will get the US out of economic trouble – be it deflation or not. Following are some of the thoughts on QE in November:
1) It may set off some inflation. Commodities should provide an inflation hedge. Invest in commodities.
2) US dollar could depreciate. This is good for commodities. But other export oriented nations could devalue their currencies against USD to keep their competitiveness.
3) QE funds channels into the emerging markets creating some growth in the developing economies. This will also result in more demand for commodities. Commodities should benefit.
If commodities do well, then mining sector should do well.
Do you want to know more about the mining stocks that could gain? Google is selectively placing advertisements in the blog related to this topic. You may click one of them and try your luck at your own risk.
The above content is for information purposes only and not intended to be relied upon for investment decisions. Appropriate independent advice should be obtained before making any such decision. Investing is risky and can lose money. Always seek expert advice before investing.
Monday, October 18, 2010
Global Economy during Q4 2010. Where does it headed to?
The global economy has shown mixed recovery during Q32010. But fears of slowdown are not gone. Stock markets have done relatively done well during this quarter. MSCI World rose 13.3% QoQ in Q3 (vs a decline in 2Q2010), with S&P 500 rising 10.7% QoQ (vs a drop of 11.9% in Q2).
US Federal Reserve is expected to introduce additional Quantitative Easing (QE) measures, while China is under global pressure to allow appreciation of its currency, which will undermine its exports. Hence, currency tensions prevail. Emerging economies face challenges related to the inflow of hot money – inflation and asset bubbles.
Let us see how reputed authorities view the future
• International Monetary Fund (IMF) - Forecasts global growth - to expand 4.8% in 2010 and 4.2% in 2011.
• Nouriel Roubini - 40% probability of a double-dip recession and it could occur within the next 12 months.
• Jesper Koll (JPMorgan, Japan) - Probability of a Japanese-styled, global lost decade has risen due to high government intervention. Private sector spending must be empowered.
• Peter Sands (CEO Stan Chart) - Emerging markets, partially delinked from the west, is getting more resilient and recovering strongly.
• Mark Mobius ( Templeton) - The ongoing global currency conflict, which has triggered capital control discussions amongst policy makers, is likely to be unfavorable for the market
Some leading global investment banks (e.g. Goldman Sachs) have refreshed their old stories about Emerging Markets (EM) and now began to sing praises. They say the attraction of developing markets lie in the higher economic growth rates, younger, more dynamic demographics and under-representation in global stock markets. But you have to note that same positives were harped in the early 90‘s, but between 90s-00s, EM delivered a ‘total’ return of 38% much lower than developed markets.
EM are volatile. They suffered three 25%+ losses in the past 20 years but recorded annual returns exceeding 50% during five years . The volatility is caused by international investors, whose risk appetite changes in accordance with their priority and not the host country’s.
Now, it seems that another boom may be on the way due to the displacement of capital caused by the latest financial crises in the developed world. If we follow history, this is good now and for the immediate future. But the volatility will return to EM. A crash is hiding somewhere in the medium term.
US Federal Reserve will continue the QE, which will also contribute to the creation of asset bubbles in EM, which will burst one day. But the million dollar question is when? A recovery in developed markets or a domestic / global crisis could trigger this. All prudent EM governments should take steps to introduce relevant measures to prevent such asset bubbles and subsequent bursting which will hurt the individuals, institutions and organizations within EM (and usually not the international investors).
Do you fear unemployment? Do you want to know about 200+ business opportunities for just US$ 14.9/-? Do you want to know how to become rich and Warren Buffet principles for financial success without stock market? Please cut and paste the following link to your browser : http://www.amazon.com/Stay-Employed-stop-fear-recession/dp/1451509936#
US Federal Reserve is expected to introduce additional Quantitative Easing (QE) measures, while China is under global pressure to allow appreciation of its currency, which will undermine its exports. Hence, currency tensions prevail. Emerging economies face challenges related to the inflow of hot money – inflation and asset bubbles.
Let us see how reputed authorities view the future
• International Monetary Fund (IMF) - Forecasts global growth - to expand 4.8% in 2010 and 4.2% in 2011.
• Nouriel Roubini - 40% probability of a double-dip recession and it could occur within the next 12 months.
• Jesper Koll (JPMorgan, Japan) - Probability of a Japanese-styled, global lost decade has risen due to high government intervention. Private sector spending must be empowered.
• Peter Sands (CEO Stan Chart) - Emerging markets, partially delinked from the west, is getting more resilient and recovering strongly.
• Mark Mobius ( Templeton) - The ongoing global currency conflict, which has triggered capital control discussions amongst policy makers, is likely to be unfavorable for the market
Some leading global investment banks (e.g. Goldman Sachs) have refreshed their old stories about Emerging Markets (EM) and now began to sing praises. They say the attraction of developing markets lie in the higher economic growth rates, younger, more dynamic demographics and under-representation in global stock markets. But you have to note that same positives were harped in the early 90‘s, but between 90s-00s, EM delivered a ‘total’ return of 38% much lower than developed markets.
EM are volatile. They suffered three 25%+ losses in the past 20 years but recorded annual returns exceeding 50% during five years . The volatility is caused by international investors, whose risk appetite changes in accordance with their priority and not the host country’s.
Now, it seems that another boom may be on the way due to the displacement of capital caused by the latest financial crises in the developed world. If we follow history, this is good now and for the immediate future. But the volatility will return to EM. A crash is hiding somewhere in the medium term.
US Federal Reserve will continue the QE, which will also contribute to the creation of asset bubbles in EM, which will burst one day. But the million dollar question is when? A recovery in developed markets or a domestic / global crisis could trigger this. All prudent EM governments should take steps to introduce relevant measures to prevent such asset bubbles and subsequent bursting which will hurt the individuals, institutions and organizations within EM (and usually not the international investors).
Do you fear unemployment? Do you want to know about 200+ business opportunities for just US$ 14.9/-? Do you want to know how to become rich and Warren Buffet principles for financial success without stock market? Please cut and paste the following link to your browser : http://www.amazon.com/Stay-Employed-stop-fear-recession/dp/1451509936#
Friday, October 15, 2010
Start Small - the best way to learn investing in stocks, futures & options
One of my friends opened an investment account couple of years ago with a broker and began to buy stocks based on the recommendations in newspapers, friends and broker. Since I knew he was new to the stock market, I asked him to be very cautious and get educated about the various techniques of successful investing. He said he get enough advice and guidance from his sources.
I recently met him and asked about his stock market performance. He said that he suffered losses and quit that business. I told him to get educated and start again. But he was hesitant. This is common for many investors. They want easy bucks. That too in truck loads. They ignore the eternal principle that 'there is no free lunch' and that 'the exceptions prove the rule'.
Two important things a new investor in stocks, futures and options should do are the following:
1. Get good education & practice
2. Start small
Start with the small capital and gradually increase as you make more and more money. If you can’t manage small capital; you won’t be able to do it with big.
This is a craft. It is like learning driving or cycling. Initially, you have to be careful. The initial years were difficult for me as well. But over time, you become experienced and expert.
The key is to break the ice, and even if buying only a few cheap options is not economical from a commission standpoint, at least you get in the game.
Though you might be planning on entering far more risky or complex trades, such as spreads or option writing, I suggest, to gain experience, that you start by taking some very small positions. Again, only stick one toe in the water. Then if you make some mistakes, you will not pay a high fee for your experience.
As you gain experience, commit more money into the business.
I recently met him and asked about his stock market performance. He said that he suffered losses and quit that business. I told him to get educated and start again. But he was hesitant. This is common for many investors. They want easy bucks. That too in truck loads. They ignore the eternal principle that 'there is no free lunch' and that 'the exceptions prove the rule'.
Two important things a new investor in stocks, futures and options should do are the following:
1. Get good education & practice
2. Start small
Start with the small capital and gradually increase as you make more and more money. If you can’t manage small capital; you won’t be able to do it with big.
This is a craft. It is like learning driving or cycling. Initially, you have to be careful. The initial years were difficult for me as well. But over time, you become experienced and expert.
The key is to break the ice, and even if buying only a few cheap options is not economical from a commission standpoint, at least you get in the game.
Though you might be planning on entering far more risky or complex trades, such as spreads or option writing, I suggest, to gain experience, that you start by taking some very small positions. Again, only stick one toe in the water. Then if you make some mistakes, you will not pay a high fee for your experience.
As you gain experience, commit more money into the business.
Advantages of Options
Many millionaires have been created by Option trading in stocks, commodities, etc. If you know, the science and art of options trading, it is a sure way to wealth. On the other hand, if you are ignorant of lazy, this could be highly risky.
Many believe options are more risky than buying stock, which in comparison, to be conservative and safe. That need not be true. The bear market of 2008 saw all Indian stocks dive in value, with many high flying stocks dropping 90% in value. But with options, you could have protected your portfolio.
Here lies the secret advantage of trading options. If you would have owned options instead, you could have greatly limited your losses. You can only lose what you pay as premium for the options.
Therefore, instead of owning high flying stocks that have a dramatic amount of downside risk, you could receive better advantage buying options and utilizing option strategies yet only risking 10% of your portfolio.
Other advantages of option trading are
• A method to buy stocks at lower prices and, while you’re waiting for the stocks to drop to lower prices, make money.
• Options provide a way to earn additional income from your portfolio,
• Options enable you to buy an insurance policy on your stock portfolio that is not available from any insurance company.
• With options you can design investment strategies that will profit regardless of what the market does.
• Gains of 1000% are not that difficult to attain - options enable the speculator to become a casino,
• Options are insurance, especially put options an extremely valuable risk-reduction tool.
But, like all medicines, options must be used with prudence and proper care, for if you overdose, options can be dangerous to your financial health.
Many believe options are more risky than buying stock, which in comparison, to be conservative and safe. That need not be true. The bear market of 2008 saw all Indian stocks dive in value, with many high flying stocks dropping 90% in value. But with options, you could have protected your portfolio.
Here lies the secret advantage of trading options. If you would have owned options instead, you could have greatly limited your losses. You can only lose what you pay as premium for the options.
Therefore, instead of owning high flying stocks that have a dramatic amount of downside risk, you could receive better advantage buying options and utilizing option strategies yet only risking 10% of your portfolio.
Other advantages of option trading are
• A method to buy stocks at lower prices and, while you’re waiting for the stocks to drop to lower prices, make money.
• Options provide a way to earn additional income from your portfolio,
• Options enable you to buy an insurance policy on your stock portfolio that is not available from any insurance company.
• With options you can design investment strategies that will profit regardless of what the market does.
• Gains of 1000% are not that difficult to attain - options enable the speculator to become a casino,
• Options are insurance, especially put options an extremely valuable risk-reduction tool.
But, like all medicines, options must be used with prudence and proper care, for if you overdose, options can be dangerous to your financial health.
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