VOLATILITY MARKETS

Gary Shilling forecasting more sell-offs as the financial markets enter into higher volatility.  

MY OBSERVATION

Over the last couple of months, you can see some of the greatest volatiities in the financial markets (S&P 500, junk bonds, corpoate bonds and volatility bond index) and there are MORE to come, thanks to the LIQUIDITY TRAP, they set it up themselves.

This is a sign of major disconnect created between the real economy vs financial markets as a result of QEs and ZIRPs (most of them went to carry trade, hedge funds, share buybacks, M&As, LBOs).  Latest joke, HP spent about USD5.7billion on share buy-backs (2013Q4 to 2015Q3).  Ask where do they get the money, by cutting another 30,000 jobs.

RECENT RECOVERIES OR JUST A DEAD CAT BOUNCE

Looks more like the latter.  

YELLEN'S FEAR FACTOR

The Fed, again, over that last two years, playing the cat and mouse game with the markets.  Fed decided to postpone the rate hike, pointing to China's volatility a concern (this is a new one).  The Fed change their metrics whenever they want.  On one hand they said US employment at 5.1% is lower than 2008 and consumption has improved dramatically since 2008.  Not even mentioned about inflation rate (which is obvious, energy and other industrial commodities has dropped drastically), hence, inflation is near zero.

Liar, liar, liar, pants on fire.

USA borrowers win again against savers.  USA total debt vs GDP is 3.5X, i.e. only about USD61 trillion vs GDP 17.4 trillion.  The real concern is more on the private debt than public debt.

GET READY FOR THE ROLLER COASTER RIDE or a POOL TSUNAMI

The Great Disconnect (dubbed by Gary Shilling)

The Great Deformation (wrote by David Stockman)

The Great Reset, The Great Crash, The Great Crisis

Yes, undoubtly, we are going to experience one of the HIGHEST VOLATILITY in history.

THE RIGHT QUESTION IS HOW DO WE TAKE ADVANTAGE OF IT?

A. CURRENCIES

Marc Faber said, there are more devaluation coming from China, then, there will be another round of depreciation to Ringgit, Baht, Rupiah, Rupee, etc.

Similarly, from my own research, USD, Yen, Won and Euro had depreciated against GOLD in their own currencies 2X more than Chinese Yuan.  

So, you got the message?

B. BURSA

The recent rebound in Shanghai & Shenzhen, is basically a rebound in a bearish market.  Forget about GDP figures.  There is a metaphor in China, when a BIG TREE is cut down, the surrounding small trees will eventually die.

There are couple of major bankruptcies cropping up here and there, although, the state government will delay the inevitable.  Some can be as long as a couple of years.  

Suntech Power (Solar industry), listed in NYSE, at its peak, the share price is USD50 per share, and today is about 60 cents. (SOLAR INDUSTRIES).  Another solar producer, listed (600550 SS), Baoding Tianwei Electric, first ever state owned default lately.

The real estate associations in China, expect the closures of property developers from 50,000 to 35,000 for next couple of years.  Kaisa Group, one of the major property developer, defaulted in paying its coupons for US dollar bonds.

Haixin Iron and Steel Group filed for bankruptcy with USD1.7billion of debt in its book.

China State Construction Engineering Corp also filed for voluntary bankruptcies, they stopped work on the USD3.5billion resort project in Bahamas.

Rongsheng Heavy Industry, in the shipbuidling industry, lay off 40% of workers.

Shipping industry, COSCO also faces cash flow problems.  Although it is expected the state would not allow it to collapse.

Steel industry, Jianxi Ping Special Steel Co. Ltd, also went into bankruptcies.

Other industries such as LED Lightings, Furniture, Private Equities, is also facing similar pressure.  Home Depot of US closed its branch in China.

If you have a longer term horizon like 3 to 5 years, some of the sectors may be attractive.  However, it is advice to nimble slowly as there are expected more sell off over the next couple of years. 

So, you got the message?

C. PROPERTIES IN MALAYSIA

I read today in Focus Malaysia, about 4,500 units lauched this year, only about 20% take up rate.  Property developers require about 65% take up rate to balance their cash flow (if they are 30:70 Equity:Debt gearing).

Based on my research of Top 10 property companies (by The Edge), profits and revenue peak in 2012, 2013, 2014.  Hence, there is many units (referring to condos and apartments) will be completed over next couple of years.

Developers complained with GST and currencies depreciations, cost of development has increased 15-25%.  Coupled with tougher bank loans to developers and customers, they are hit from both sides.  Glut (expensive condos) in supply coming on stream, and inabiity of customers getting new loans since there are already quite highly leverage at 86% of GDP for household debts.

What is the point when interest is low, and most households is unable to gear up further?  Don't forget, most households will be hit by higher imported goods, education etc.  Their disposable income just shrinked SUBSTANTIALLY (>20%).  They are more worry about sending their kids for tertiary education than making more money from properties.  Property clubs meeting also slowed down, so is the advertisements from them.

So, you got the message?

D. GOLD IN MALAYSIA

Gold normally does not do well in a deflationary environment.  Households will go for things they need instead of what they want.

E. INSURANCE

Hey, insurance is not an investment class.  It is a protection.  We protect our house, car, valuables with insurance, but we always try to avoid talking about LIFE INSURANCE.  During the belt tightening period, one should get/replace/optimise their protections.  Long term savings (RM30,000 to RM50,000) is equivalent to earnings.  

Have a look at www.sosfiancialplanning.blogspot.my.  I have a friend who replaced his expensive coverage with PRUInvestor Care, helping him to save up to RM50,000 with better terms.

For me, finding valuable protection is similar of finding valuable investments in stocks, property, currency or other assets. 

F. TAKE YOUR TIME

Not anyone is entitle to it.  Take your time, but don't take too long to act on all the above.  You will be frustrated once it is over, and kicked yourself for procastinating.