Paris and Amsterdam Beckons

Having a good rest is so important. I did some backtesting using some refined methods of technical and fundamental analysis. I found that using my methods, I am able to create lots of Alpha, even after factoring in 1% buy and 1% selling costs. From April 2006 till April 2012, I am able to achieve 12.4% per annum after transaction costs for the MSCI WOrld, vs a 7% fall in a buy and hold method. My model is able to long and short the index. In the last one year, from April 2011 to April 2012, I achieved 20.5% instead of 2.4% for buy and hold.

I have had a good rest, well not really because I had to give a seminar to 300 people last Saturday, but I had time to think in the last two nights and again for tonight. Giving me time to think is very important because I am able to reflect and reinvent myself. I am also able to analyse the problems in my investment methods and come up with solutions. It has been a very fruitful weekend for me.

In 3 weeks' time, I will be heading to Amsterdam and Paris for 15 days. I will be very relaxed, spending time to study the architecture in France and Netherlands. Amsterdam is a very beautiful country. The city is full of canal and the pace of life slower than Singapore's. But the hotel rooms are prohitively expensive. One night, even at corporate rates, cost me S$330 per night.

Paris is even more beautiful because of the architecture. I am very interested in the real estate. 5 years down the road, if I have a family, we will be thinking of migrating. But we have to be financially free first. This is a picture of the Louvre in Paris. It's a wonderful museum that you cannot finish touring in a day.

Correction Could Be A Shallow One

I mentioned that we have entered into a correction since 27 March. So far, most indices have fallen by 3 -5%, which is not much. It increasingly looks as if there won't be a repeat of the May - Aug 2011 correction. Back then, the OECD Composite Leading Indicator was heading south, signaling that a recession was imminent. This time round, the CLI is turning upwards. As mentioned in my previous post, when technicals look bad but fundamentals look good, my suggestion is to do nothing.

http://musingsonwallstreet.blogspot.com/2012/04/what-to-do-when-fundamentals-point.html

It's still not a time to buy yet. I would wait till May to see how things pan out. There's a saying, "Sell in May and go away." So far it held true in 2010 and 2011. I'm not sure if it will hold true again in 2012. History seldom repeats. It rhymes. I believe we could have an extended run all the way till the 2nd half of 2012. But do not rush in yet. Let's be patient. Hang on tight. Be increasingly diversified across high yield bonds, high dividend stocks, 10% into gold and do lots of alternative funds like Amundi Volatility WOrld and Winton funds.

What To Do When Fundamentals Point North and Technicals Point South

A client was a little upset recently that her portfolio was down by 10%. She had forgotten that she made more than 18% previously and the profit was taken out of her portfolio already. I tried to get her into bonds much earlier in 2011 but was told that her risk profile was very high. Right now, the asset allocation is 70% equities, far too much in my opinion at this stage of the cycle. Of course, I could be wrong. The rally that is over 3 years old could develop into a decade long one as seen between 1990 - 1999 or some where in the 50s.

I advised the client not to be hasty in selling off equities now because the latest OECD Composite Leading Indicator is pointing north for the world's largest economies. The April 2012 CLI for the US, EU, China, Russia, Japan, even Brazil and India are showing signs of turning around. Inflation expectations in the US is still below 3%. As long as unemployment rate in the US remain above 7% (it's now 8.2%), inflation is unlikely to rise, although it could rise very suddenly.

It's true that technicals are pointing south. AUDUSD, mining index, MSCI World have indicated that a deep correction may occur. Gold is also showing signs of deep injury that will not see a fast rebound for the next month or so.

Under such contradictory information, I tend to not buy nor sell unless the client is deep in profit.
I am looking forward to financial freedom. It is not far away. The economic cycle is nearing a point where I can do many things with my investments around the world. There will be a day that I can relax and sip my cuppa by a cafe, watching people rushing to work. I can then spend my days looking at my investment portfolio, taking care of my family, and exercising, staying healthy. The best thing in life is to get out of the rat race, and be financially free as early as possible, and enjoy the rest of my life.

I am not ambitious in the corporate world. I believe that depending on someone else to decide my future is not a route that I should pursue. Many people, especially in Singapore think that a job is a be all and end all. They worship their bosses as "gods" and constantly assess whether they are following the right God. If their God falls, they usually fall. So shifting of alliances is very important. One must be nimble at all times. I only worship one true God and not human beings.

By the way, my asset allocation has shifted to 20% equities, 10% gold, 10% commodities, 40% high yield bonds, perpetuals, emerging market debt, 20% alternatives like DB Systematic Alpha and Amundi Volatility World. I took the cue from 27 March 2012, when the AUDUSD gave me a dead cross signal.

A Significant Correction Has Begun

Stocks have been overbought since late Feb 2012. Finally, we have a confirmation that a significant correction has begun. Last week, there were signs that a significant correction has started because the AUDUSD fell below 1.035. This correction may be as deep as the previous correction between May to Oct 2011. As with the last, this correction may last between 5 - 10 months and MSCI Asia ex Japan could easily fall 10 - 20%.

It is time to buy Amundi Volatility World and DB Systematic Alpha.

Additional comments: 13 April 2012

A short term rebound seems to have begun. It may last for up to a month. But beyond that, a significant mid term downtrend signal has been triggered for AUDUSD, mining indices, and the HSCEI Index. The mid term trend could last for 6 months to a year and the downside could be 10 - 20%! Within a downtrend, there will be short term rises that can last a month or two. The short term rebound seems to have begun for these indices. Use these rebounds to get out.

For the other indices, such as the MSCI Asia ex Japan, the midterm trend that began in Oct 2011 is still in tact, although it is losing ground. The short term trend is on the up. Again I would use this rebound to exit rather than add more risk now.

Tipping Point of Residential Properties Could Be 2012 and May Not See the Bottom Until 2015

Take a look at the schedule of completion from 2012 - 2015. The report is from Standard Chartered Bank. If you check out Sing Stats, the average population growth is around 100,000 per year. During periods of recession, there is zero growth in population, presumably because the organic growth in population is more than offset by departures of expatriates. In periods of strong economic growth, population growth actually hits 200,000.

Now again, from Sing Stats, the average person per household is 3.5. 100,000 divide by 3.5 is 28,571 new homes needed per year. In economic boom times, if population growth hits 200,000, the demand is 57,143 new homes. Now if you compare it against the supply, it could easily mop up the peak supply in 2015.

Let's look at the various scenarios:
2012: weak economic growth of 3 - 5%. Population growth 75,000. Demand for new homes 21,429. Supply of 20,000 just meets demand. Home prices will probably plateau.

2013: Best case scenario: Strong recovery because of zero interest rates in the west, rebound of China's GDP. Singapore's GDP hits 5 - 10%. Population growth 125,000. Demand for new homes = 35,714. Supply again meets demand. Home prices in the best case scenario will not rise at all.

Worst case scenario: Recession. West needs to balance their budgets. China's real estate continues to fall. GDP of China hits 7.5% as it adjusts its model. Population growth 25,000. Demand = 7,143. Big drop in property prices of maybe 10 - 20%.

2013: at best flat growth in prices. At worst a big drop.

Now will 2014 be a better year? Let's see:

2014: if we follow the best case scenario in 2013, then 2014 will be a slowdown back to 0 - 5% because the west will start to hike interest rates. Population growth 50,000. Demand = 14,286. Supply 40,900. It will still be a whopping drop in prices to the tune of 15 - 25% in 2014.

If we follow the worst case scenario in 2013, then 2014 will be a slow recovery after the crash. But interest rates in the west will still rise. Economic growth will revert to 3- 6%. Population growth 75,000. Demand for new homes 21,429. Supply 40,900. It will still be another drop of 10 - 20%. That means the combined drop from 2013 to 2014 will be between 20 - 40%.

2015. Things could get better but let's see the supply. It's 47,000.

If we follow the path from 2014's best case scenario, then 2015 will be a mild recovery. Population growth 50,000. Demand 14,286. It will still be another drop of 20-30%. So the combined drop would have been between 35 - 65%. That's very drastic indeed.

If we follow the path from 2014's worst case scenario, then 2015 could be a stronger recovery. Population growth could be 150,000. Demand could hit 42,857. The drop could be between 0 - 10%. The combined drop following the second path could be 20 - 50%.

2016: Things start to pick up.

If you expect normalisation of economic growth in both paths, then population growth could revert to 100,000.  That meant 28,571 demand. Interestingly, it is still an over supply because 31,000 will be completed. Prices could stay flat.

2017 - 2020. The population in 2011 was 5.2m. Assuming it grows by 100,000 per year on average, by 2019, it will hit 6 million! From thereon, how much more will Singapore's population grow? It might drop to 75,000 per year, because even at such a rate, in 13 years, we would have reached the physical limit of 7 million by 2032! The demand from 2019 onwards will drop to 21,429 new homes!

Singapore can renew itself and alleviate partially the ageing of its population by using the Iskandar region as an attractive destination for retirement, housing of workers of companies that have outsourced to that area. The population can be kept younger and the dependancy ratio lowered this way.

2020 onwards will be more challenging for Singapore's property market. There will be demographical and physical constraints. But that's another story altogether.

Thoughts from a Famous Stock Guru and Singapore's Future

My wife and I went to Jason Wee's investment seminar preview. Jason is one person who really can make money, is good at investments and is willing to teach. 50% of the trainers don't know how to make money but want to earn money by teaching students. 30% of them have already made some wealth through investments, but still need recurring income so they teach. However, I'm not sure if they are really imparting their knowledge or wish to make use of club members' money to help themselves. 20% of them know how to invest, and are willing to teach for fun. Jason probably belongs to the third group because he was well known in the investment research industry for the last two decades.

I've been to many previews before. Some property investment clubs claim to enrich members by helping them pool money to invest in properties. However, the trainer often masquarades as a master agent, taking commissions as much as 20% for overseas properties. I've also met self-proclaimed property gurus who got members invested in a real estate fund with a lock-in period that is unknown. Basically, members are shareholders in a company that holds a commercial or hotel. The guru earns a profit share of up to 20% and annual management fees on income generated from the investments.

After some exchanges of ideas, I realise that Singapore's residential real estate is really at the tipping point. Interest rates can only rise hereon. The younger generation has not gotten a bite of the real estate boom. The government is under pressure to push down property prices to make it affordable to first time buyers again, or at least rein in prices for a couple of years. The prognosis is not bright. By 2014, interest rates will start to rise and affordability of properties will be tested. It may be a long-drawn affair with properties slowly drifting lower like the 2000 - 2004 scenario.

With regards to stocks, Jason doesn't feel that stock markets can rise higher beyond June 2012. Marc Faber feels that after May 2012, stocks will plateau and start to drift lower. Jim Rogers on the other hand feels that the rally can last until 2013. Jeremy Grantham feels that profit margins of S&P500 companies are at historical highs now and will only mean revert.

I tend to agree with all the above. On top of that, I believe that earnings will disappoint because China's slowdown may be sharper than expected. Even more important is the fiscal deficits the western countries need to grapply with. By 2013, whoever the US president is will have 3 years to address the deficit problem before the next election in 2016. According to Jason,  a balanced budget in the US will lop off 2 percentage points out of its GDP growth.

Let's look at some charts. In Chart 1, the AUDUSD has turned bearish since Feb 2012. The weekly MACD has turned negative, which indicate that AUDUSD may fall (AUD weaken vs USD) for 6 to 7 months. Why is AUDUSD falling? Because China is importing less commodities from Australia.


Chart 1: AUDUSD

Currency pairs like AUDUSD are good forecasters of mining stocks. A look at one very popular fund, the Blackrock World Mining daily chart in Chart 2, confirms that the mining sector is in some serious problems. The daily chart shows that a rebound is possible, lasting a week or two.

Chart 2: Blackrock World Mining Daily Chart

But chart 3 shows that Blackrock World Mining is in for a longer decline than just a month or two. The monthly MACD has shown a dead cross.

Chart 3: Blackrock World Mining Weekly Chart

So China's commodity inventory is at record levels. Their GDP growth target of 7.5% does not bode well for the commodity sector.

But what can we expect from gold? Gold performs well when inflation is rising, and real interest rates are negative. But QE3 is not forth coming. Interest rates cannot fall any further.

A look at the weekly MACD confirms that for the next 1 to 3 months, gold may continue to drift lower. I believe USD1600 oz is a good support. It may have a good run in the second half of 2012 because as stocks drop, the US Fed may feel pressured to release QE3. The chairpersons of ECB and the US Fed have mentioned before that they view stock markets as the key indicator of consumer sentiment. If stocks suddenly drop and inflation expectations fall, quantitative easing will happen.


Chart 4: XAUUSD Weekly Chart