Seth Klarman just wrote his letter lambasting the FED as usual. Here’s an extract from zerohedge.
“if you’re more focused on downside than upside, if you’re more interested in return of capital than return on capital, if you have any sense of market history, then there’s more than enough to be concerned about. A policy of near-zero short-term interest rates continues to distort reality with unknown but worrisome long-term consequences. Even as the Fed begins to taper, the announced plan is so mild and contingent – one pundit called it “taper-lite” – that we can draw no legitimate conclusions about the Fed’s ability to end QE without severe consequences. Fiscal stimulus, in the form of sizable deficits, has propped up the consumer, thereby inflating corporate revenues and earnings. But what is the right multiple to pay on juiced corporate earnings? Pretty clearly, lower than otherwise. Yet Robert Schiller’s cyclically adjusted P/E valuation is over 25, a level exceeded only three times before – prior to the 1929, 2000 and 2007 market crashes. Indeed, on almost any metric, the U.S. equity market is historically quite expensive.
A skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix and Tesla. The overall picture is one of growing risk and inadequate potential return almost everywhere one looks.
There is a growing gap between the financial markets and the real economy.”
“Someday, financial markets will again decline. Someday, rising stock and bond markets will no longer be government policy – maybe not today or tomorrow, but someday. Someday, QE will end and money won’t be free. Someday, corporate failure will be permitted. Someday, the economy will turn down again, and someday, somewhere, somehow, investors will lose money and once again come to favor capital preservation over speculation. Someday, interest rates will be higher, bond prices lower, and the prospective return from owning fixed-income instruments will again be roughly commensurate with the risk.
Someday, professional investors will come to work and fear will have come to the markets and that fear will spread like wildfire. The news flow will be bad, and the markets will be tumbling.
Six years ago, many investors were way out over their skis. Giant financial institutions were brought to their knees…
The survivors pledged to themselves that they would forever be more careful, less greedy, less short-term oriented.
But here we are again, mired in a euphoric environment in which some securities have risen in price beyond all reason, where leverage is returning to rainy markets and asset classes, and where caution seems radical and risk-taking the prudent course. Not surprisingly, lessons learned in 2008 were only learned temporarily. These are the inevitable cycles of greed and fear, of peaks and troughs.
Can we say when it will end? No. Can we say that it will end? Yes. And when it ends and the trend reverses, here is what we can say for sure. Few will be ready. Few will be prepared.”
ABR holdings sold its lucrative chocolate retail business back to the founders and has a big sum of cash for investment, but instead of using it to expand its core food business, it intends to diversify into property business.
Is this a sign of diworsefication? Does the management has expertise in property business and considering that property business will be tougher as interest rates rise, is it a wise choice?
Extracted from Edge Singapore:”Second Chance entered the business of investing in properties in 1999-2000. It has held its properties as long term investments and earned steady rental income which became an increasing part of the group’s revenue and profits over the years.
The group said it has reaped the benefits manifold over the past 14 years or so in the property investment business.
“Going forward, the board thinks that it is prudent to significantly reduce the group’s exposure to its investments in properties. Additionally, the opportunity to sell the properties en masse is a rare one and provides the group with an easier and more expedient means of disposing the properties as compared to selling each property individually,””
Since Second Chance is retreating from the property scene and its CEO is a shrewd property player, it shows that property will no longer be the high-flyer as of yesterday.
Telegraph reports that:”markets face an “new oil supply glut” as three forces combine. US shale will add 1m barrels a day (b/d) to global supply for the third year running; Libya will crank up shipments after a near collapse in 2013; and Iran will come out of hibernation. “This will push OPEC spare capacity to levels last seen in the depths of the financial crisis in 2009..Saudi Arabia may have to slash its output by a quarter to 7.5m b/d this year to stop the bottom falling out of the market. The Saudis no longer have such money to spare. They are propping up an elephantine welfare nexus to keep a lid on explosive tensions in the Eastern Province, home to Saudi oil and its aggrieved Shia minority. A cut of this size would push the budget into deep deficit….a simultaneous return of Iran and Libya could add up to 3m b/d. Just a third of this “positive supply shock” could shave $20 off the world oil price, unless OPEC’s fractious cartel can slash output quickly enough to offset it. “
Falling oil price will be good for the economy in the long run as energy cost are reduced and consumers will have more spare money although the price of oil is not likely to repeat the lows of 2008.
Extracted from Straits times:”MORE than 90 per cent of units at the 66-storey Marina Bay Suites have been sold – though most remain unoccupied after being snapped up by investors who are not living in them.
Mr Thomas Tan, director of residential and marketing for Raffles Quay Asset Management which manages the luxury condominium, said there are residents living in only about 20 of the 221 units. So far, 203 units have been sold.”
Yesterday, an analyst wrote in a forbes article likening Singapore to Iceland. I think he is exaggerating, Singapore banks may take a dent in profits but they won’t require Singapore government to bail them out since their capital ratios are well above required threshold. In the event of a failure, Singapore’s reserves is still ample to save the country from any credit bubble bursting.
However, a property bubble caused by cheap money will eventually burst. Prices of property are already dropping, it will drop further. The vacant condominiums still looking for renters is a sign of this bubble. Rental rates will have to drop further to find occupiers and thus the price of condos will drop too.
Koh Wee Meng,Fragrance group CEO has sold a large chunk of Tee Land and Roxy-Pacific shares in order to use the cash to buy his own companies Fragrance Group and Global Premium Hotel. On first look, it looks like he is confident of his companies prospects and less of other companies propects. However, these companies are in the same business,property and hotel. Unless, his companies has a special competitive advantage over others, they will suffer and prosper together.
It means that he is eager to shore up defence in his own companies to hold up the share price due to selling pressure and the cash has to come from shareholdings in other people’s companies.Of course,my deductions may be wrong but if it is correct, property bubble may burst soon and hotel business also may take a setback. Watch Out!
Extracted from Businesstimes:
“By April 2014, the Fed’s balance sheet will have grown to US$4.4 trillion (5.2 times bigger than in 2008) and officials will decide enough is enough, success or no, Mr Carbon quipped.
But the Fed could U-turn if housing prices fall, with QE4 aimed at the housing market, he said.
The Fed has been buying US$45 billion worth of houses every month since September 2012 – that’s five times the value of all new homes being purchased each month.
When the Fed stops buying all those houses, sales will begin to drop, Mr Carbon said.
“Prices (will then) start to fall. GDP growth starts to fall – to 0.5 per cent in 2Q14 and, according to forecasts, below zero in 3Q14.
“(New Fed chief Janet) Yellen’s in a pickle. Promises to keep Fed funds at zero forever fall on deaf ears.
“The Fed has no choice: it pulls a U-turn in September. QE returns, with asset purchases aimed entirely at the housing market. Markets dub the U-turn QE4,” Mr Carbon added.
The incoming Fed chairwoman last month said that interest rates will remain low following tapering, which the market seems to have absorbed.
But Mr Carbon expects QE4 to be greeted with chaos, rather than cheers.
“Markets do not cheer QE4. On the contrary, they cower. Why? Because the Fed and the economy are now stuck, seemingly permanently, between a rock and a hard place. QE? You can’t live with it; you can’t live without it. Growth was weak when you had it – and even weaker when you get rid of it,” he said.
“It turns out the bond market isn’t a sell after all. Ten-year Treasury yields, which jumped to 4 per cent after tapering began in April 2014, fall back to 1.5 per cent by December. The S&P 500 ends the year at 1,200, where it stood at end-2011.”
On Europe, Mr Carbon is sceptical, and predicts it could be almost zero growth for another two years.
“When Europe reported positive GDP growth in 2Q13 – the first time in six quarters – many assumed it would continue to accelerate towards 1-1.5 per cent growth. We were, and remain, sceptical,” he said.
He also does not expect Abenomics to follow through as structural reforms in Japan will be stalled – as they have been the last 20 years.
The market will finally realise the G-3′s ultra-expansionary monetary policies are no panacea.
“The hypothesis here is that in 2014 everyone realises that ultra-expansionary monetary policies were nothing but a great big placebo; they never ‘fixed’ real economies. So markets that had assumed otherwise become ‘unfixed’, unglued, uncooperative,” he said.
Asia will have to rely on itself to drive its growth as it has done since 2008.
Since the collapse of Lehman Brothers five years ago, the US, Europe and Japan have gone nowhere. Asia has continued to grow at nearly a 7 per cent rate – about average, in other words. In the five years since Lehman collapsed, Asia “added” 1.25 Germanys to the economic map, right here in Asia.
“Even with China’s ‘slower growth’, Asia puts a new Germany on the map every four years. That Asia was capable of driving its own growth used to strike many as heretical; today, it’s conventional wisdom,” Mr Carbon said.
“We think Asian markets will outperform in 2014, given the expected growth differentials and given how kind/generous markets were to G-3 economies in 2013. We do not expect them to be so kind to the G-3 in 2014,” concluded the DBS Bank chief economist.”