UPDATE

most of you must be longing for some updates after recent events in the us and a very volatile stock market.

usa
this country is famous not just for democracy [claiming to support human rights etc], but also for a series of economic mishaps that affect the rest of the world. just to quote a few cases within a short span of a century:

1. great depression during 1920-29;
2. sovereign loan problem [of latin america] in the 70s led by citibank;
3. savings and loan crisis in the 80s, the rescue of which cost us taxpayers billions of dollars;
4. LTCM crisis in 1998;
5. internet bubble in 2000 when nasdaq reached 5000 only to fall back to 1100 in 2003 and still hadnt fully recover;
6. waging war on afghanistan and iraq costing billions of dollars of govt deficit and indirectly encouraging corruption both at foreign and us govts.
7. housing [the subprime] bubble created by Greenspan ever loose interest rate policies.

even with so much of what they called checks and balances in place, us economy had floundered on one mistake after another because they can afford to since us dollars is a reserve currency and major commodity exchanges are all us based ie they enjoy privy information to act against other speculators to make a profit and a comeback.

how will us markets pan out is anybody's guess? but taking a look at DJ and Nasdaq charts [chart 1 and 2] above will give some insights. the third chart is a monthly chart of aussie, it indicates an inverted head/shoulder chart with good support at 81.

what do the 3 charts tell us?

• chart 3 indicates major corrections before a strong rally of the aussie. since the chart is a monthly one, it will take quite some time for the corrections to reach 81.
• nasdaq also indicates good support at 2150 also with inverted head/shoulder chart reaching a max of 3150.
• dj should also have strong support along the band 10000-11000 [lasted 2 years and more], but it had already reached the minimum magnitude under an inverted chart breakout [at 11000, bottom is 7500 which gives a 3500 points rise above the neckline 11000 reaching 14500 - current peak is 14000, pretty close] which makes it tricky to predict its future.

if you believe that aussie will rise as the chart has shown, then us is likely to lower interest rates to support the economy thus giving nasdaq a new high later, then it would not make sense that dj will fall while nasdaq has room to grow.

should job growth continue, the fallout from subprime [a 20% downturn is likely] can be contained as long as inflation is mild.

china
apparently H shares are always engineered to have 50% profit growth in their first year of ipo, thus the ipo subscription price looks subdue.

if you check out a number of H shares in the past year or two, those that rallied 2 times or more, they either have listed as A shares or have chosen to do so but no announcement yet. china coal [1898] is a good case in point, it got stuck around 8 but rallied to 15 and announced it will list as A shares too. why the rally? - to avoid dilution since the funds from A shares are not needed short term, so they can generate little at the bottom line and would only dilute and drag down EPS, one way to avoid such dilution and foot dragging is to boost the share price to compensate. china mobile shouldnt have rallied to 90 if it choose not to list as A shares, it will soon if it hadnt announced yet.

it is interesting to find out why china allows A and H shares to co-exist. since its capital account is closed and with two class of shares, even talks [with no action yet] in the future about merging the two will introduce arbitrage and shock to markets on both side of the border before the capital account is open.

this kind of uncertainty is unnecessary, A/H is very similar to A/B shares introduced long ago by the china securities authority. now they have to figure how to handle the two - A/B since they are exact duplicate other than the nationality of the owners behind them, but there is a huge gap in their pricing by the markets.

the us fallout could be a gain for china since the effort to suppress speculations in both [stock and housing] markets need not be as heavy handed as it would without a us fallout.

those of you who would like to read what to do should the us fallout turn out to be a major crash this time round can read more about crashes at this website - http://www.stock-market-crash.net/

UPDATE - Shg A

If you are familiar with charts, this one should be easy for you. The chart is that of Shanghai A shares index.

There are two declining tops - 2001.5 and 2004.2 which formed a down line finally broken in 2006.1.

During the uptrend, there were two glitches - one at 2006.6 and 2007.2, this leg up took 8 months, the last leg up will take less than 2/3 or 1/2 the time which means it will hit the peak 4-6 months from 2007.2 ie between 2007.6 - 2007.8 or earlier. So brace yourself for a rough ride soon.

Usually a peak is followed by a sharp drop and then followed by a quick rally which would not hit the peak or only slightly above the peak to dry up the last bit of buying power. This is called a double top which has devastating impact on the economy.

GST

Why do governments push for GST? They said it is to have a broad tax base.

The Hong Kong case is worth investigating. HK govt said we have a narrow tax base relying heavily on salaries/profits tax and also proceeds from sale of land. Without a strong and steady tax base, they cannot deliver quality services year after year to the public. They also quoted we had severe deficits in the past cycle [1997-2004] wiping out almost 1/2 - 2/3 of our reserves. What they did not say is the real estate is down 60-70% from top. How many times in one's lifetime you see a 60-70% drop in real estate over a period of 7-8 years? Maybe only once if you do not have wars, so why worry.

There is reason to worry about the governments' intention as they dont have sense in spending money and they want GST to protect them so they do not have to figure out how to cut costs in down cycles. GST is an indirect tax and raising GST rates has less resistance from the public. Direct tax hikes are overwhelmingly rejected by the public in most cases.

Once GST is installed, the govt has a blank check in their hands, they can raise rates as they wish. History indicates that in 9 out of 10 cases rates are hiked not lowered. In Singapore, they even raised GST rates to subsidize corp tax rates ie lower the corp tax rate by two points. Europe is a good case in point, it started the VAT in the lower teens and raised it all the way up to 20.

Japan and Singapore are late adopters of GST but both raised rates since implementation not lowering them.

GST also tends to eliminate layers of transactions because govt taxes at every turn of a transaction with GST in place. For example, say co A is short 100 units of goods G, co B has excess stocks of G say 100 units, but they dont know each other yet each knows co C. What they can do is C buys from B 100 units of G and sells them to A, you can imagine there is a great difference here with and without GST in place.

Small to medium enterprises would find it hard to survive, manage the costs of implementing GST and deal with GST audits.

In summary, GST is bad because

• rates are mostly hiked not lowered
• gives a blank check to the govt and thus no incentive to lower costs
• hurts SME most
• add costs to enterprises
• govt admin costs on GST are high too
  

Broker commissions/Stamp duty - low or no,

if you read financial posts around the world, i-banks and stock exchanges always demand lower or elimination of stamp duty, negotiable broker commissions for stock investments, WHY?

they said it is for your good, create liquidity and stock exchange excels, more stocks will list so you have more choices and liquidity to get in/out of the market. do you think this sounds right.

yeah, it sounds right for the i-banks and exchanges but not you and me. why? because they had been pushing derivatives mainly stock warrants to the public, with no costs to trade [if no stamp duty and very low commissions], they can manipulate the market as they wish because it does not cost them anything or very low costs.

small individual investors probably encountered one way or the other that they guessed right the trend of the stock [north or south], but when the warrants closed out, the stock managed to stay above or below strike price and falls/rises sharply after the derivatives expired. one sure indication of manipulation.

look at the hong kong market, the turnover is around 40-50 billion, yet a quarter of the turnover are in covered warrants. who eventually bet right - the i-banks.

if you cant beat them, join them, buy i-banks stocks.

Continuous education

If you have read the great divide early on in this blog, this is a dessert or extension to that article.

I would not argue that we do not need further education in our life after university graduation, most that are needed are technical issues, issues related to new inventions or discoveries. But what you find these days in big corps, the internal educations or seminars are mainly social science in nature which you can acquire through job experience, observations and reading in book stores - you do not need to buy such books if you have read 10-20 of them already because most of the books expand on a few main themes only with just too many elaborate examples that occupy the pages.

There are many reasons that contribute to the preaching of continuous education:

1. US MNCs have long been preaching globalization and the tearing down of trade barriers via their govt to improve their businesses. What they did not expect is that the loss of jobs in their own turf is just as serious after both T&T [telecom and transport] costs crash. Once jobs are offshored, they wont come back, thus the need for continuous education - another word for re-education; retraining for another job even though chances are remote to land another job with such training.
2. When a lot of people are in stressful jobs with no escape route or in a desperate state after retrenchment, the only way governments can do is to preach continuous education to this group of citizens so there looks like a slim line of hope ahead although there is really little.
3. Tertiary education institutes [and obviously the vested group of professors] are more than ready to get their share of the pie to secure their jobs if people believe in continuous education throughout their lives.
4. Just a side talk on investor education - options trading: investment banks like to preach that buying options [on index futures, stocks, commodities etc] is the best way for investors to make big money with limited resources, what they do not tell you is that they are the writers [or underwriters] of such options ie they are the sellers and you are the buyers. If options is so great for buyers of it, then why they are sellers most of the time? It is similar to lazik surgery for myopia, all of the surgeons who operate on you say they are great for you, but they themselves wear glasses. Why then do those surgeons stay away from it - because no one knows the long term impact of it, they are on the safe side.

How many government officials go on continuous education on their private budget, very few. Then why do they attend internal courses or govt sponsored ones - they get time off.

In summary

* start with a clear and analytical mind;
* choose your career carefully;
* spend your time enhancing your financial position

than on continuous education.

If you achieve financial independence early on in life, you have more choices than to go through retraining later in life.

Economic myths

In the next few months, you will read some of the economic myths that many governments these days educate their citizens on matters of daily life which they cannot manage, thus dispersing many myths such as follows:

1. Continuous education;
2. Lowering/cancellation of stock broking commission and related stamp duty;
3. VAT or GST
   

The above list will be updated from time to time to cater for new ideas that come across my mind.

UPDATE - what triggers

The excesses [housing and stock market bubbles] created by Greenspan will take quite some time to clear out. But what would trigger a collapse? - an earthquake hitting Tokyo city.

Historic experience from China indicates that in the event of an earthquake Richter scale 7.8 or above hitting key city of a country, that city would take more than ten years to rebuild. If it is a key financial centre, the impact would extend to the country as a whole.

The San Francisco bay area and LA are both vulnerable cities which would have global impacts if ruined by earthquakes. WHY? It is simply because the roads to eastern USA and ports may be blocked, logistics grind to a halt, consumer demand slackens in the biggest state which impacts USA and beyond. China's economy will run into a standstill because of cancelled orders from the US. Food and grain export will run into severe problems causing at least a short term famine on countries relying heavily on US grains.

If Tokyo and SF/LA got hit within a reasonably short period of time say a few months, then the impact on the global economy would be huge.

Key financial centres such as HK, NY and London must have well thought out plans to handle such contingencies, otherwise a global financial meltdown could occur.

UPDATE

Review the copper chart above, it topped out in May06. Why reading the copper chart - because it has most relevance to the global economy. Almost every industrial product needs copper for electrical supply, thus it is a lead indicator of industrial production and corp profits.

The lead time indicates falling results in most corporations within 6-9 months after peak which points to Nov-Feb. The copper chart indicates a fall to 1900 if it breaks through the 2900 mark with follow through.

After fancy period of IPOs and outsized bonuses this year at i-banks, 2007 looks dead beat in comparison. We already are seeing some layoffs here in HK before Xmas, so brace yourself for a rough ride ahead.

RETIREMENT

this is not an economic update. for young recipients, you may not be interested.

many of my friends ask me how much is enough to retire, what age to retire, what portfolio to carry?

since we all live different lifestyles, it is hard to give a meaningful estimate for all.

i summarize below my views on retirement planning.

reality check

first of all, you must not be renting a place to live unless you have a matching residence or properties that generate similar income if not more.

estimate your monthly expenses [property related and personal], x12 to become annual expenses, then x20 is the size of your portfolio. e.g. if you need 10k a month, then your retirement portfolio must be about 2.4M. this assumes your portfolio generates a 5% return p.a. if your country taxes the income generated from your portfolio, the 10k is then the net disposable income not gross income.

estimating your expenses is tricky:

property related - rates, government rent [taxes], management fee, repairs, utilities etc.

personal - food costs, entertainment [hobbies, eating out, massage], travelling [local and overseas], others [wedding/birthday gifts, clothing].

you may want to mark the total up 10% for margin of error.

portfolio

stocks, bonds, property and cash.

what percentage allocation to each category? a balance portfolio would be 30% each with 10% cash.

if you are overweight in property that generates income monthly, you need less cash and bonds.

stocks should mostly be in utilities and energy related sector.

spending habits

as with most families before retirement, after the mortgage is paid and with two income, eating out a lot and spending freely become a habit. purchases of unnecessary [limited usage or luxury] items usually takes up a lot of the budget when you are still employed.

you must learn to live within your means in your retirement after on a high pay for such a long time. if you cut unneeded purchases and meals in restaurants down to the minimum, your monthly expense need would then be drastically cut.

many of the healthy habits of living do not require a lot of spending such as trail walking or visiting the gym a few times a week. when you spend time on low cost hobbies, you have less time for high cost ones too.

age

a friend who retired at 60 told me that if you can afford it, retire early since he said after reaching his present age of 68, he found that he does not have the vitality he had at 60 and he does not enjoy as much now on food and travel.

well, maybe you feel young at 70, who knows. just some more info to help you decide.

UPDATE released 06 nov 24

usd exch rate

i have maintained in my past updates that usd will not weaken significantly which had been true, but i changed my mind recently on the outlook of usd, it will go south.

reasons?

1. recent movements of many currencies point to a further weakening of usd of 10% plus within a two year or less time frame. the most conspicuous is the aud which formed a round bottom. if it breaks out of 0.78 with follow through, it will hit 0.84.
2. the us m3 money supply is expanding quickly which should not be the case with 17 rate hikes, might be the us govt is printing more money.
3. recent merger & acquisitions volume also suggests there is so much money around probably due to 2 above. the m&a volume is at par with the volume during the era of internet bubbles.
4. stalled [or even -ve] growth in household net worth due to weakening of the housing market does a lot of damage even when stock prices are heading north. most households own a house but not necessarily stocks, the housing market has a stronger effect on consumer demand than the stock market.
5. greenspan evils [23 aug 04 update] - he singlehandedly created the housing bubble which is now leading to a dilemma - control inflation and the bubble bursts which hurts us consumer demand; let inflation off, then usd exch rate dives. it is more likely that the fed has already choosen the later option. us is heading towards a third world mentality, they tried to devalue their currencies to get out of a hole they digged themselves into.

note [for 2] - us federal reserve is not releasing figures on m3 http://www.federalreserve.gov/releases/h6/discm3.htm citing it is not relevant to present monetary policy. recent estimates by finance pros indicate it is expanding at 9%.

goto saxobank.com for exch rates, choose weekly time scale.