Reminiscences Of A Trader

Sunday, August 20, 2006

City Developments

Refer to my previous technical view on CDL (7th August). The stock's price has since risen 7.2% to close at $9.70 on last Friday. So what's next? The various weekly technical indicators which I used have just started to turn up and although profit-taking can be expected in the near term, any pullback will be a good opportunity for those who are bullish in this stock for the medium term to accumulate more.

Resistance: 9.75 / 10.00 / 10.30
Support: 9.45 / 9.25

Has the Fed engineered a soft landing?

The Bull corner : Ed Yardeni

Ed Yardeni, chief investment strategist at Oak Associates, is one who believes the market is ready to move on up and out, as the economy is going to continue growing strongly and inflation will not be a problem. So has the Fed engineered a soft landing?

Ed Yardeni: I'm not sure it's a landing at all. The economy is growing along its trend line, at roughly 3% to 3.5%. And since much of that growth is coming from productivity, it's not inflationary. That really means this is the best-of-all-worlds scenario, allowing the Fed not only to pause, but maybe to leave rates unchanged for a while.

I think a federal funds rate of 5.25% [its current level] or 5.5% is neutral, and at neutral you can have sustainable trend growth with low inflation. It looks as though the Fed is getting its forecast: It wanted to see some slowing with inflation moderating, and the latest data are showing that. The Fed doesn't have a reputation for managing soft landings; it is usually accused of going too far in its tightening campaigns.

Yardeni: It did accomplish one in the 1990s. The Fed raised interest rates a lot in 1994 and then more or less left rates alone. Bond yields stabilized, inflation remained low and the economy did just fine. This sounds suspiciously like the fabled Goldilocks scenario.

Yardeni: I recently pointed out that many economists have been waiting for Godot -- a mid-cycle slowdown or a soft landing or even a recession. But Godot is a no-show, while Goldilocks is doing quite well. There are still bears out to get her: People are still out there fretting about the trade deficit, the federal budget deficit, a super-spike in oil, geopolitical jitters and more. But the economy has weathered all of these storms awfully well, and all in all we do have a Goldilocks scenario unfolding. How long could such a thing go on?

Yardeni: I think it could certainly continue through the end of the year and into next year -- then ask me again.

I really believe the unleashing of globalization through the increase of free trade and the interdependence of financial markets is creating global prosperity, and what we're learning is that it's not a zero-sum game: If Asians are doing well, Americans can do well. We're at full employment. When you look at consumer measures, some economists interpret big increases in compensation as inflationary. But that just proves consumers have the purchasing power to keep spending. But housing is clearly slowing down.

Yardeni: That's not a surprise -- we started to see signs of it last fall when surveys were showing people saying they couldn't afford to buy homes. Prices got too high. Housing is in a cyclical downturn. Isn't that bad news for the economy?

Yardeni: It's an important industry, but it's still pretty tiny compared to the overall economy. And while residential construction is slowing down, what people have mostly missed is that there is a huge boom in non-residential construction. The data show we are building hotels, offices, commercial properties, manufacturing facilities and warehouses. But several economists have noted that housing contributes fairly significantly to economic growth in other ways, including employment.

Yardeni: That's true, but a slowdown doesn't imply that we are therefore going to lose a lot of jobs. We have a 4.2% adult unemployment rate [which doesn't include teenagers]. Lots of industries need to hire. I think what the bears are missing is that this is a very dynamic economy, thanks to globalization. We are creating lots of jobs in the railroad industry, in trucking, warehousing and importing all the stuff that has to be processed and moved. We need people who can sell the goods that foreigners want and who can manage the financing of these transactions. So what does this mean for investors? For months we've heard people talking about getting defensive. Is risk-aversion the wrong idea now?

Yardeni: We're starting to see the mood swing away from risk aversion. You may remember back in May when we saw emerging markets sell off. They've already regained half of what they lost. I think we'll see investors coming back to cyclicals and industrials -- all the stocks that were weakest in May, June and July should do better. You mentioned in a recent note that price/earnings ratios should rise again after the Fed stops raising rates. The S&P 500's average P/E ratio is nearly 15, lower than its historic average of 16 [using trailing, GAAP earnings, which include one-time items], but not nearly as low as it has been at moments when stocks were a screaming buy. It doesn't seem as if P/Es have all that much room to rise.

Yardeni: Stocks are usually cheapest when you are in recessions that look like depressions -- then you get P/E ratios as low as eight. Those are typically associated with significant economic downturns. And those downturns also had very high inflation rates -- you get the worst P/Es when you have stagflation. Some people say that's where we're headed.

Yardeni: They are either too young to remember the 1970s or have lost perspective. Stagflation is when the economy is barely growing or is in recession and inflation won't go away and is in double digits. That's not the case now.

There is no reason P/Es need to go to eight. The recent drop in the average P/E has occurred not because prices have collapsed, but because earnings have soared, and that is not reflected fully in prices.

I think investors are still trying to figure out what stocks they should be paying a high multiple for. Just as over the past five years we have seen P/Es decline and converge, over the next five years we will see P/Es go up as investors figure out which companies will generate enormous earnings in competitive markets. And they could be all over the map -- in tech, health care, energy or other sectors -- so we could have a broadening out of the market.

The Bear corner : John Mauldin

John Mauldin is president of Millennium Wave Advisors, LLC, a Texas investment advisory firm, and Millennium Wave Securities, a broker-dealer. He believes the economy is likely to slow more sharply than markets realize, even as inflation remains a concern -- a bad combination for stocks. You have long been concerned about rising inflation and a potential slowdown in the economy. Recent data seem to have Wall Street feeling better about both. Are you heartened by the same data, or still concerned?

Mauldin: I'm still concerned. What did we see this week? We saw inflation coming in relatively high again and housing coming down. One of our best forward-looking indicators, the yield curve, is inverted. Everybody always says, "This time it's different," but so far it has never been different. I get nervous when you fly in the face of an indicator that is consistently right -- and that is confirmed by other indicators.

The Conference Board's index of leading economic indicators [has fallen at a 1.4% annualized pace in the past six months]. Every time it has turned down in a six-month stretch in the past, we have had a serious slowdown or recession. Another very good leading indicator is the ratio of concurrent to lagging indicators. That has been going down, and that trend has always been followed by a serious slowdown or recession. That doesn't seem to be what the market is expecting.

Mauldin: The market is betting the economy is only going to slow down to 2% growth or so. But a significant chunk of this economy is powered by housing. If housing slows down, it is going to take one or two percentage points off GDP. And if people can no longer use their homes as piggy banks, then that will take another half point to one percentage point from GDP. What about corporate profits?

Mauldin: Corporate profits are at record all-time highs in terms of their percentage of GDP -- meaning you can't get much better than this. And that's a mean-reverting statistic. It always reverts to the mean. What does that mean for stocks?

Mauldin: When everything is priced for perfection -- and we are pretty perfect, I think -- that's a difficult situation in which to be bullish on the stock market. Are we really priced for perfection? P/E ratios seem to be at reasonable levels.

Mauldin: John Hussman [manager of the Hussman Funds] has said that if you normalized earnings, meaning if you took earnings back [from a record-high percentage of GDP] to where they would normally be, the P/E for the S&P would be closer to 24 or 25. If you revert earnings to the mean, you're looking at real room to fall. I think there are better opportunities, with less downside risk, where you can put money to work. What are they?

Mauldin: Bonds. I think a laddered portfolio of bonds [which spreads an investor's money across bonds of different maturities] is where you want to be. You should be in absolute-return funds [which try to avoid exposure to the broader market]. PIMCO has a couple run by Rob Arnott. For the average guy it's tough -- he doesn't have as many opportunities. How long could this situation last?

Mauldin: I think we will see another bull market in the 2010s that will be every bit as big as what we had in the 1980s or '90s. I think it will be driven by another round of telecom, tech, biotech, nanotech and globalized platform companies. I think it will be a really powerful rally -- but not from here. We have just got to hit the reset button on some imbalances. Some people point to the fact that the Fed has managed a soft landing before, in 1994. How does this period compare?

Mauldin: I don't think it's a fair analogy. The consumer wasn't nearly as tapped-out then. Corporate profits weren't as strong, so there was plenty of room to improve. It was a much rougher period of time, and P/E ratios were much lower. And remember, back then we had inflation and interest rates coming down. We're not watching inflation coming down now. What about this week's weaker inflation numbers?

Mauldin: What people didn't notice in the PPI is that finished consumer goods were up 5.1%. Core intermediate goods were up 0.7%, and intermediate goods were up 8.9% year over year. If the economy is slowing down, then inflation should begin turning over as well. But the Fed will have to attack it. You recently wrote a note entitled "The Return of Stagflation." A lot of people scoff at the idea, saying we are nowhere near the ugly stagflation of the 1970s.

Mauldin: We have a slowing economy and rising inflation -- by any other name that's stagflation. And given all the excesses of the 1990s and the excesses of the housing market, a little stagflation -- maybe including a mild recession -- may be about the best outcome we could ask for. I think, ten or 15 years from now, historians will say the Fed did a pretty good job. But a recession is no picnic.

Mauldin: Well, if we do have a recession, I don't think it will be severe. Eighty percent of our economy is service-oriented, not subject to the ups and downs of manufacturing. Meanwhile, a lot of our manufacturing is export-driven, and a weaker dollar is just going to help that.

So I'm not looking for a repeat of 1980 or 1982, barring some silly Fed mistake. I think we're going to have another 1990/91, 2000/01 kind of slowdown. If there's a recession, it will be a mild recession, and then another weak recovery.

source: The Wall Street Journal Online

Monday, August 07, 2006

City Developments

Chart-wise, the stock's price is currently still in a major uptrend channel and based from the various technical indicators used, the current consolidation could be ending soon. Caveat emptor.

Resistance: 9.25 / 9.50
Support: 8.80 / 8.45

Tuesday, August 01, 2006

What's next for the STI?

As expected, the STI tested the 2450 resistance level yesterday but failed to close above it. So what's next?

I think it's not ready to break out of its trading range yet since it is taking its cue from the US market, which have yet to clear the critical resistance levels at 11257 (DJIA), 1280 (S&P500) and 2100 (Nasdaq). So in the short term, regardless whether National Day is coming next week, I think the local bourse will mostly be driven by external factors although there will be some rotational plays among those companies which are about to release their corporate results soon.

Technically, in the next one week or so, I expect the STI to trade between 2400 - 2456.