Asian telecommunication companies (telcos) have long enjoyed oligopolistic hold in their respective markets in the past 2 decades when Asians found their love with mobile phones, internet broadband & cable TV. From the normalised (adjusted to USD) chart above (encompassing Singapore, Malaysia & Hong Kong telcos & cable operators), since the 2008 financial crisis, they have managed to performed very well indeed given their phenomenally stable earnings & relatively high dividend yields averaging 2.5 – 5% in general.
However, all good things must come to an end, sometimes it is some disruptive technological change or advance that renders certain businesses and processes obsolete. We have seen that with the steam locomotive, polaroid instant snaps, Xerox copiers, pagers, … the list goes on. The roll-out of 3G-4G networks and fast breakneck fibre broadbands across Asia encouraged the growth of social media, peer-to-peer streaming & other usage of applications that are able to harness the tremendous speed & connectivity into the last mile into Asian consumers’ homes & even when they are on the move. However, the country / domicile walls that these oligopolistic Asian telcos & cable operators have enacted in the past with their respective government support are crumbling down fast!
The key is that there are serious dearth of unique domestic content & services provided by all these Asian telcos & cable operators. Most contents, apps and media come from the West or recently from China, Korea & Japan that all the Asian operators syndicated, bought or licensed from. This extends to the current FIFA 2014 World Cup that has enthralled all viewers around the world. The ridiculous price that Singapore football fans have to endure to watch the World Cup matches http://www.goal.com/en-sg/news/3880/singapore/2014/03/18/4690244/singapore-costliest-place-to-watch-world-cup is a case study of what has gone wrong in ”paying based on where you happen to live” when it can be free or much cheaper even within other Asian countries.
Asianmacro has been using a VPN service so that he can simply be in the USA, UK, Europe, Latin America or any other country he fancies as identified by his IP address & gateway / DNS to provide security for his online activities. The fringe benefit to this is I have access to watch all the FIFA 2014 World Cup matches for free in those countries that provide free viewing to residents in them too (where Asianmacro will be simply be there by choosing to be there online)!
I have taken profit on my long position in Asian telcos like Singtel recently. While I am not going short these stocks as they pay relatively high dividends that many yield hungry investors do chase, the question that we should be asking is whether Asian telcos really have a future besides being “dumb pipe” gateway providers in communications & media, without any real innovative apps or unique domestic content that people want & will pay for!
Asianmacro had previously called for a continuous rally in S&P500 when it was at 1880 around May 24 and it has advanced almost 4% since http://asianmacro.com/2014/05/24/path-of-least-resistance-is-up/. Back in May, many doomsayers were on CNBC and various media calling for an impending collapse of even 10-15% in stocks. But looks like the shorts and underweights in equities and bonds were all forced to scramble and had to catch up with their benchmarks that they are underperforming against.
However, another indicator which is the USA Federal Reserve Money Supply M2 yoy growth that I track to give me an idea of the pace of liquidity creation in the US monetary system. It has peaked in 2012 in spite of further QE which has propelled the equity markets higher. M2 in itself don’t mean much but belongs to an array of economic & other market indicators which I track. While we might see S&P500 ending higher and maybe even cross 2,000 level by December 2014. But Asianmacro will take his chips off the table for now, pour himself a glass of nice burgundy, followed by a fabulous single malt whisky and watch the FIFA2014 World Cup action unfold. The market is now left to the losers who need to be around. Not me!
There have been many naysayers & dooms -day-prophets in the markets lately. It’s always easy to call for a 10-20% correction in stocks & general markets & saying ‘Sell in May & go away!”. The key is when precisely? And also after all the selling in protecting your downside if you cannot take the temporary marked-to-market pain; when & how are you going to get back onto the financial market bus before it speeds off again without you is key!
Sometimes when everybody call for a market correction or move in either direction up or down, usually, it just ain’t gonna happen that way. Just like the past week when calls of 1815 or 1780 in S&P500, a 5% correction to the downside seems imminent … we end up at almost 1900 by the end of the week.
Asianmacro likes to look at relative performance of EEM vs SPY (the Emerging Market ETF vs S&P500 ETF) as an indicator of flow of funds between developed & emerging markets whenever the direction of the general market is uncertain. From the chart above, we see that SPY has outperformed EEM since 2010 till January 2014 when it reversed. The biggest components of EEM are the likes of Samsung Electronics (3.93%), Taiwan Semiconductor (2.50%), Tencent (1.88%), China Mobile (1.55%), China Construction Bank (1.31%); where the top 5 names account for about 11% weighting & all are from North Asia.
From the chart below, new units creation in EEM have been driving the rally outperformance of EEM evidently. The question now is will we see this continue or we might have plateaued & reverse instead?
It was a full moon last night on 14 May 2014 & usually more often than not, it signals a short term market top or reversal especially in equities. We did see an intraday high where S&P500 pushed above 1900 before reversing lower. It does not mean that we do not get a potential summer rally squeeze in risky assets http://asianmacro.com/2014/05/13/the-summer-carry-melt-up-in-risk-assets/ as we are not into summer yet but just knocking the door around the corner.
However, it does bring to mind the uncertainty & sense of not knowing what to do on certain days with conviction especially by the humble Asianmacro here who is only a small minion in the big scheme of things in the financial markets. The only thing that made sense is the video clip produced by Samsung assembling some of the best footballers on Earth to save us from an Alien invasion where the outcome is determined by a football match .. what else is new!
From the chart above, if you look at the spread between the 1st & 2nd VIX futures contract, we are back again to 155 b.p. difference. Usually a big & growing difference where the 2nd contract value is greater than the 1st contract value implies an upward sloping volatility curve (for VIX) & represent a normalisation of sentiment (or complacency). A small or narrowing difference and in the extreme when it goes to negative value implies an inverted volatility curve (for VIX) where heightened fear of imminent risk of crash in markets resulted in buying of volatility (or VIX) in near contract over that of far contracts.
The above is just a generalisation so as not to bore most of you who might not be equity derivatives & volatility traders. However, as you can see above, whenever we reach 155-175 b.p. spread in VIX 1st & 2nd futures, we do see a correction lower in S&P500 subsequently for a short period of time. Anyway, there are just so many mixed signals in the markets at the moment. Sometimes it’s best to just sit back on the sidelines & wait …
“The desire for constant action irrespective of underlying conditions is responsible for many losses on Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.” – Jesse Livermore
Football, rugby, cricket, baseball, (*OK American football & Aussie rules football too just to be inclusive) are popular sports with most in the global financial markets. With the impending FIFA14 World Cup upon us in summer, what will happen to the traders & portfolio managers in banks, hedge funds, pension funds, mutual funds & insurance companies? Short of abandoning their posts, their attention will be on the TV in the dealing room playing that match while they root for their teams. Only the algos running the HFTs machines will continue to do their work unfailingly!
However, this FIFA14 World Cup fever does increases the likelihood of the potential path of least resistance .. which is for a higher stock market & in risky assets in general as uninvolved cash on the sidelines, cautious traders & portfolio managers failed to invest & tracked the grinding higher markets. Perhaps, the silent algos in HFTs who do not watch any FIFA14 World Cup matches might get it right & actually be the culprits pushing & buying the markets even higher from here!
The hardest trade to put on mentally & physically in execution more often than not ends up being the right profitable trade. This was learnt the hard way by Asianmacro over the years like when overnight & tomorrow/next Thai-baht (THB) rate was at 10% at mid-day at the onset on the Asian crisis in May 1997, when it was only 3% in the morning, it still made sense to pay up to secure any funding if you really need them. It ended up at 1,000% by late afternoon & everything keeled over.
There is a sense of deja-vu at the moment except that this time instead of the markets keeling over, there seems to be a slow motion melt-up in risk assets led by U.S. stock markets with S&P500 leading the way while Nasdaq100 & Russell2000 recovered from their respective corrections over the recent weeks.
From the chart above, where both the EUR/AUD FX cross & VIX bear high correlation & R-square with each other. Everything seems to suggest with declining VIX and a continued search for FX carry best represented by EUR/AUD shorts (to earn the interest rate differential between EUR & AUD) … the pain trade is to see risky assets melt up even more into summer!
There is definitely no place in Asia and even the world that is more glitzy, over-the-top & catering to every debaunchery that you can think of except in Macau. Casinos raked in the money over the last few years especially when the gambling addicted mainland Chinese were unleashed onto the gaming tables like pent up addicts. But of course a lot & how much of that money flow onto the gaming tables is anybody’s guess on the percentage which came from money laundering of ill-gotten gains in China. These sums were brought into Macau that is widely speculated through various means as discussed here http://www.businessinsider.com/how-people-use-macau-to-launder-money-2013-11?IR=T&.
SJM (800 HK), Galaxy (27 HK), Wynn Macau (27 HK), Melco (200 HK), Sands China (1928 HK) & MGM China (2282 HK) that are the listed gaming stocks of the casino operators soared in the last 2 years. However, with the anti-corruption crackdown in China initiated with a renewed vigour since late 2013, the gaming stocks reached a top in January 2014 & have fallen about -26% since according to the chart above; showing the performance of a composite basket of gaming stocks.
Sometimes it pays to take a step back from looking at the trees to see the forest. Indeed, most people will know of the explosion in Social Media & also the dizzy rise in the stocks of the lucky listed firms in this sector. But few will be aware that Biotechnology sector stocks have even surpassed the explosive rally in both Social Media & Internet related stocks since beginning of 2012.
The above chart clearly illustrates what happened in the last two & a half years using IBB (Biotech ETF), FDN (Internet ETF) & SOCL (Social Media ETF). Now, all 3 sector ETFs have suffered corrective move lower from March 2014 all time highs of around -16% for IBB, -19% for FDN & -28% for SOCL. S&P500 (SPX) & Nasdaq100 (NDX) only suffered a -1.5% & -5% drop from March 2014 highs respectively.
Some commentators & analysts out there think that there are nuggets to be found in the Biotech carnage http://www.forbes.com/sites/kenkam/2014/04/18/opportunities-among-the-rubble-of-the-biotech-selloff/ . However, Asianmacro think that unless you are very familiar with the precise potential new ‘wonder drug’ or ‘cure all treatment’ that is in the pipeline of some of these Biotech companies; more often than not, it is like prospectors trying to make it big in drilling for oil or finding the next new gold vein in the ground. Who dares win!
Really interesting proposition by ex-Harvard Business School alumni, Grace Choi, the founder of Mink .. that promise to ”3D print” pretty much any colour in the spectrum for face powder & other cosmetic product of your choice when finding the right shade was always a tough thing …. Asianmacro thinks anything that sells & appeal […]
Years ago when Asianmacro was about to graduate from university, he did well at interviews (or perhaps sufficiently lucky enough) to secure a position with a top Wall Street investment bank as a trader even before graduation. But thoughts of pursuing a PhD & even becoming a professor did cross my mind. However, the thought of forever needing to prove that your thesis & research is ‘right’ empirically or scientifically is way too much use of whatever brain-cells that was left in me … so Wall Street here I come more than 20 years ago!
Unlike Strategists, Economists, Analysts & other spin-masters from investment banks’, brokerages or asset management firms that can usually throw tonnes of information & justifications on why you need to buy, sell or hold … whatever that they want you to believe in; Asianmacro does not want to nor need to. It’s my money that I am risking & I can believe in the brevity of thought, analysis, decision & execution. Detailed & overly myopic empirical or scientific proof reminiscent of what a professor or PhD candidate needs to do might more often than not cloud the view of the forest from the trees.
Looking at the above heatmaps for Hang Seng Index (HSI) & the Dollar Index (DXY), you cannot help but notice that statistically speaking, HSI has fallen while DXY has risen in May over the last 10 years more often than not by a considerable margin.
Is it the ‘Sell in May & Go Away’ catalyst for risky assets at play … or is it something else? It’s really too much use of my brain-cells and perhaps just a sufficient bet in short HSI (which I did on the break of 22,000 for May14 futures) and DXY June14 futures now at 79.15 (from 79.20 to 78.90) that gives you participation if this seasonality happens again but without breaking the bank & your sleep if it does not.