Fed Surprise Move

News:
The U.S. Federal Reserve made its first interest rate move since December 2008, hiking an emergency lending rate it charges banks from 0.5% to 0.75%, but insisted borrowing costs would not rise for consumers or companies.

Thought:
Everyone knew it was coming as the Fed hinted in the last policy meeting, but no one expected it happened so soon and in between meetings. The discount rate increase is just a symbolic move. It will not have significant effect because the borrowing facility is only for banks and is seldomly used recently as the financial market stabilized. However, by the action, the Fed sends out a clear signal that the economy is on firmer footing and it will raise the Fed fund rate not too far away to prevent inflation out of leash, although it said the opposite during the announcement.

The move may initially affect the market negatively. But, for long term, the market will ascent for the years to come as suggested by history. Interest rate increases after recession when inflation is still moderate is a proof of growing economy. The US Dollar, especially the Dollar and Yen pair, will also be benefited by the future rate hikes.

On the other hand, company M&A activities have picked up pace in the last few weeks to reflect greater confidence in the economy.

China Cuts Banks' Ability to Lend – Part IV

News:

China said it will raise the reserve-requirement ratio for banks by half a percentage point from Feb. 25, the second increase this year. That will make it standard for major banks to keep 16.5% of their deposits on reserve

Thought:

China did it again; the second reserve-requirement tightening in a month. The move once again surprises the market because of the timing of the action. To act right before the Chinese New Year and right after the moderate inflation data released two days ago, China is sending a very strong and clear signal that they concern about the overheating economy: near one-fifth of this year’s loan target (7.5 trillion Yuan /$1.098 trillion) have been made in just one month, the property prices appreciated nine percent over last year in January. More tightening measure is surely expected to come.

In addition to the China concern, Greece’s debt crisis has had full-blown effect to the market. The debt problem not only exists in Greece, it also happens to larger Euro-zone countries: Spain and Portugal. Although German and France vow to assist Greece and are expected to do the same thing to their member countries when needed, it will unavoidably bring volatility to the market.

Asides from the recent negative developments, there are some positive news in US. The outlook of the employment is improving; despite jobs are still being cut, the unemployment rate has dropped,  the hiring of temporary workers is accelerating, and work hours is lengthening, which are the precursor of the eventual job recovery. Second, the Federal Reserve recently outlined the plans to drain capital from the system in the future, which reflects that the government is seeing the economy continue to grow down the road. Third, most of the companies reported growth in profit and revenue for the fourth quarter of 2009, some even hardly beat the expectations with rosy outlook. Since US is still the super power by far, its recovery has a lot more weights than other factors.

The market is in the midst of correction. At one point last Friday (Feb 5, 2010), the market dropped near 10% from the high (Dow: 9822, S&P 500: 1044). The correction may not be too far away from the end. Once the dust is settled down, the market will resume its climb to a new high. Now is probably a good time to prepare snapping up bargain assets.

On the other related topic, interesting enough, China is focusing on using bank reserve-requirement ratio as a tool to fight against overheating economy, which tool was rarely used by the US in the last two decades. The reason of the choice may be trying not to jack up the interest rate to not increase the pressure on Yuan appreciation. Strong Yuan would hurt China export in which the Chinese economy mainly depends on. Meanwhile, the government seems like only concerning and targeting the domestic speculation in assets such as housing. More research and understanding on the structures of Chinese economy and its financial market need to be done as any move by China will greatly affect the whole world as it grows stronger.

The Articles I like

January 27, 2010

“Is It Here Yet? A Few Unnerving Developments Point to a Correction” by James D. Steward on The Wall Street Journal

“One of the fundamental conundrums of investing is that we may be absolutely correct about something and yet unable to profit. Making money on an insight requires two conditions: the information cannot already be priced into the market, and other investors who do not already share that information must come around to our point of view.

There are times when the conventional wisdom about something may well be correct. If the conventional wisdom is already reflected in market prices, then profit opportunities are slim to nonexistent….”

China Cuts Banks' Ability to Lend – Part III

News:

Several state-run Chinese banks have ordered some branches to suspend new lending for the rest of this month, suggesting a coordinated effort by Beijing to manage state banks' torrid lending in the year's first few weeks.

Thought:

Another move by the Chinese government this week, which brings unease to the markets around the world. In the past week, the markets were also shocked by President Obama’s proposed new restrictions on large banks and by the doubt of Fed Chairman Ben Bernanke’s second-term confirmation (which will pass for sure, I think). On the economy side, three mega-size companies recently announced huge layoff; 12000 from Verizon, 11200 from Wal-Mart, and 1000 from Home Depot, although the last two companies said the layoffs are not due to the economic reason. The economy and the market are facing tremendous domestic and international pressure and they are heading to a wrong way for the time being after nine months of rebound. The US stock market has dropped more than 5% in just one week after my last post and the damage has yet done. Nevertheless, again, the current correction is anticipated to have a short live only.

China Cuts Banks' Ability to Lend – Part II

News:
A top Chinese banking regulator said Wednesday that China will tighten its monitoring of banks as it tries to prevent speculative bubbles in areas like real estate. Another report said the China Banking Regulatory Commission asked several banks to stop issuing loans. While the CBRC's chairman denied that he had asked banks to stop lending, Bank of China, one of the country's big banks, said it was taking steps to rein in loans. It would be the latest effort by China to restrict runaway lending and cool that country's overheated growth.

Thought:
The Chinese latest move was predicted in my 1/12/2010 article, China Cuts Banks' Ability to Lend, but the urgency of the action is a surprise. It shows that the government is very serious in slowing down the overheating economy. Today, investors pay more attention to the impact of the news and hand the stock market the worst day of a year (off 1.1%). At the same time, the currencies and the prices of the natural resources mentioned in the last articles are hurt as well.

Besides the move, the bull market shows tiredness recently as the share prices of the big firms (such as Intel and IBM) dropped right after they reported blowout fourth quarter earnings with optimistic forecasts. Moreover, Europe refused to bail out Greece, in which will bring more anxiety to the market. Overall, there is a high possibility of a near-term correction. Around ten percent of fallout from the high is anticipated.

Google vs. China

News:
Google suspects Chinese government hacking its website and vows to leave the Chinese market to stand with its principles: freedom of speech and freedom of press, if China doesn’t loosen its control.

Thought:
Chinese government seems like not going to back off. If Google leaves the world’s biggest internet market, its long-term earning potential will be greatly hurt; besides the direct impact on its search business, its nascent mobile phone and other businesses may be affected as well. Thus, it is interesting to see if Google will really take the action without compromise. The Chinese rivals will be benefited and happy with the Google’s departure. The stock of the largest internet company in China, Baidu (with 58% of market share), has shot up ~$80 (20%) in just two days after the news broke out. However, without Google, the internet development in China will not be as good.

The Absolute Best Time to Buy/Sell

When everyone talks about and recklessly buys the same class of asset, it is signs of bubbling and the peak of the asset price. For instance, housing was a super hot topic few years ago. All medias; newspapers, magazines, TVs, had uncountable coverage on it. You might be also aware that people in different age groups discussed about housing in parks, restaurants, and supermarkets. I heard about two people physically fighting for the right to buy a $500K+ house in Glendale, CA. It sounded crazy!!! The history proved that was the best time to sell if you owned one for investment, or not the right time to buy. History repeated itself as the phenomenon of the housing bubble was identical to the internet stock bubble in 2000.

On the other hand, when everyone is afraid of touching a class of asset, it is a sign of the asset price’s nadir. In March 2009, the stock market fear index, VOLATILITY S&P 500 (^VIX), stayed at a historic height and stock mutual funds had experienced a substantial amount of net outflow for several months. It implied that people were desperate to sell at any price. The history proved that was the best time to buy, or not the right time to sell. History repeated itself as Hong Kong’s billionaire, Ka-Shing Li, started buying properties to build his fortune in 60’s when Hong Kong was in riot and the future was in doubt.

Pay attention on what people and media talk about. If it seems too extreme and irrational, do the opposite of what they do. It may also go against your inner mind, but it will save you huge amount of money or make you handsome return if you can take this psychological discipline. Remember, history had happened and will repeat itself. This strategy always works!!! Be prepared not to make a costly mistake.