After Hours
VOLUME 1
ISSUE 3
After Hours
California Investment Association Official Member Newsletter November 12, 2007
Fed Decision Mistake
www.calinvestclub.com
By: Willson Deng, President
Inside This Issue 1
Fed Decision Mistake
2
The Dollar’s Continuing Slide
3
Reflecting on Bubbles of the Past
5
Upcoming events –
CIA POKER TOURNAMENT
Exclusive partnership with Russell * The Russell logo is a registered trademark of Frank Russell Company
“The large financial firms will be taking a hit, but it doesn’t mean you have to also.”
The Federal Reserve Chairman Mr. Bernanke’s decision to cut rates again Wednesday is another step in the wrong direction. As stated numerous times during my lectures, the sub-prime situation is a problem created by the markets and should be solved by the markets. Especially in light of rising oil, a growing economy especially over the summer, recent job growth, etc… cutting rates are not the answer. The purpose of the Federal Reserve Bank is to regulate the flow of money within the US economy. Their purpose is to cushion economic downtimes and mitigate bull runs to maintain a steady growth. However this rate cut coming at a time when the economy is doing well will only make issues worse. It is true that the sub-prime issue is a problem that is impacting the economy and by no means has it been solved or will it be solved within this year. However, this is a problem hitting mainly the big financial firms such as Citigroup, Goldman, etc… From a personal standpoint, I have a “they got what they deserved” stance in this situation. The truth of the matter is that the consumer, the people who took up these adjustable rate mortgages will be ones hit the hardest. Therefore, there should be no sympathy for the major financial firms for luring customers into these mortgages. The Federal Reserve Bank was not created to bail corporations out of their mistakes. The bulk of the sub-prime “crisis” will not end till way into next year if we’re not already into a recession. The market has grown too fast, too quickly over these several years with overseas markets being partly to blame. The Fed should be saving their rate-cut cards till when it is actually needed. While for the typical investor, volatility will be extremely heavy come ARMs rate readjustments next year. Therefore, predictability of the market is very uncertain. Bond markets however are expected to do well; therefore this maybe highly inflated in the times to come. However, for the typical investor, panic is no way to act. Economic downturn is nothing more than a free lunch for Contrarian Investors and Value Investors while growth managers should watch out. The sub-prime debacle won’t end soon. Therefore, investors should simply stay calm and allow the waves of volatility to roll by. The large financial firms will be taking a hit, but it doesn’t mean you have to also. Make sure you diversify and when times become highly unpredictable keep calm, markets are cyclical, there will be better times.
PAGE 2
MEMBER NEWSLETTER
The Dollar’s Continuing Slide By: Ivan Miter, Director of Finance It’s hard to miss the ever continuing slide the US dollar is experiencing against a large number of currencies. Maybe you are wondering why this is happening, especially since it may affect some of you. Here is a brief explanation: As the Federal Open Market Committee decided to yet again cut interest rates by an additional 25 basis points, the dollar tumbled consequently tumbled. As interest rates decrease, this makes borrowing less expensive because you have to pay less per dollar borrowed. This is good news for many companies and individuals that require capital to do what they need to do. However, this has unintended consequences in the foreign exchange markets as well.
“As the dollar continues its decline, their investments look less and less appealing…”
Many foreign governments, as well as international corporations and investors, buy large amounts bonds based from the United States, including commercial bonds as well as US Treasury bonds. US Treasury bonds, which are issued by the US government, help provide a source of financing for public projects. Commercial bonds are another source of financing that companies use to get the capital they require for acquiring assets important for continued and future growth. These two classes of bonds provide many investors, including foreign institutional investors, with a source of diversification and stability in their portfolios. To purchase these bonds, foreigners need to obtain US dollars. Unfortunately, when the yield, or return, on buying bonds, or providing capital to a borrower, decreases substantially as has happened here in the US, these bonds look less appealing to investors. Thus, the demand for these investments naturally decrease. The connection between interest rates and the value of the dollar occurs here: As demand by foreigners for commercial and US Treasury bonds decrease, fewer foreign investors will demand bonds, consequently decreasing the demand for dollars to buy those Treasury and commercial bonds. A dip in the demand for dollars will decrease the equilibrium price for US Dollars when compared to other currencies. Thus, the Federal Reserve has a significant influence when it comes to determining the price of the US dollar. Of course, there are many other economic and political factors both domestically and internationally that affect the price of the dollar compared to other currencies, but the connection just explained is a crucial one. One additional note: Many foreign governments hold billions of dollars of US Debt in the form of US Treasury bonds. As the dollar continues its decline, their investments look less and less appealing, possibly even pushing them to sell some of their positions in an attempt to look for more attractive returns. This additional supply into the foreign exchange market of US Dollars could further exacerbate the problem the US dollar to new lows.
MEMBER NEWSLETTER
PAGE 3
Reflecting on the Bubbles of the Past By: Lawrence Wu, Vice President The Chinese economy is sizzling. China’s government is having a hard time reeling in that growth with the economy growing 11.5% last quarter despite measures introduced to quell that growth. The talk right now is whether or not there is really a bubble forming. The apt analogies are to the two most recent bubbles – the technology bubble of 2000 and one that hits home (no pun intended) – the homebuilders bubble. The similarities between the Shanghai index and the NASDAQ in the late 90s are striking. There was a recent Forbes article, “Sell China Before the Games,” saying the Shanghai Composite Index took a little over 2 years to gain 500% from below 1,000 in June 2005 to above 6,000 while the NASDAQ returned 240% in less than two years to reach the record of 5,000 in March 2000. The same article also cited a UBS report that reported the Shanghai index has a P/E of 68, identical to the NASDAQ’s P/E right before the tech bubble burst. However, just look at a ratio as simple as the price-to-earnings doesn’t paint a complete picture. Many companies during the tech bubble weren’t making a dime, as long as they had an idea to make money that sounded nice, valuations of 50 times projected earnings weren’t uncommon. As long as companies about to have an IPO tack on “.com” to the end of their names (regardless of their whether their business remotely related to the internet), that particular company would have a successful IPO. On the other hand, many Chinese companies do have solid businesses, especially the companies owned by the government. You have PetroChina (PTR), China Mobile (CHL) and China Life Insurance (LFC) that have real earnings and profits. By comparison, Chinese stock markets, with less than 20 years of history are relatively small. According to Wikipedia, the total market cap of the two Chinese stock exchanges is about $3 trillion dollars while the NYSE and NASDAQ have a combined capitalization of $24 trillion. Yet in 2006, China had a GDP of $2.6 trillion compared to the US’s $13.2 trillion. This figure leads me to believe the Chinese stock markets still have room to grow. Both the NASDAQ and homebuilders rallied for about 2000 days. The China stock market has only been rallying for 560 days. However the gains of 488% are quickly approaching the NASDAQ’s peak of 639%. One interesting thing to note is the starting dates of the bubbles. The Homebuilders began their meteoric rise on March 14, only four days after the tech bubble burst. Interestingly, the Shanghai started its rise on July 11, 2005 -- just nine days before the Homebuilders peaked. The conclusion of one bubble usually signals the beginning of another one. The million dollar question is whether this is actually a bubble were seeing in China. I doubt the Chinese government will let the stock market crash before the Olympic Games next year. Either way, I encourage all investors to exercise caution. The air is thin up here.
“The million dollar question is whether this is actually a bubble were seeing in China.”
PAGE 4
MEMBER NEWSLETTER
I’ll leave you with two other points: Bullish - While the Shanghai Composite is up a fairly staggering 158% year-to-date and 188% over the last five years - the five-year return works out to an annualized return of 123%. Granted, that isn't tiny, but it also isn't utterly daunting either. After all, with profits doubling in many Chinese companies on a year over year comparison, and with the Shanghai Composite having been flat from 2002 to late 2006, it can, perhaps, be forgiven for a playing a little catch-up, can't it? Bearish - China Life (LFC), PetroChina Co. (PTR), China Mobile Ltd. (CHL), Industrial and Commercial Bank of China Ltd. and China Petroleum and Chemical Corp. (SNP) are now in the list of the world's 10 biggest companies by market value. Only two of those are in the top 50 by sales.
** This newsletter is the opinion of the authors and is not related to Russell Investments or their ideas. The reproduction or distribution of this material is prohibited without the express written consent of the CIA. ** CIA Newsletters compiled and produced by Truman So, Director of Internal Affairs Please send any questions or comments to [email protected]
MEMBER NEWSLETTER
PAGE 5
Upcoming Events California Investment Association Next meeting:
Tuesday, November 13
Topic to be covered:
TBA
Events to look out for: •
CIA Texas Hold ’em Poker Tournament!
Information: When: November 15, Thursday 6pm-10pm Where: Martin Luther King Building, 4th Floor – East Madrone Room What: No limit Texas Hold ‘em Poker Buy ins: Non members: $15 at the door Members: $5 Pre-register: $10 – email [email protected] with your name and student ID Re-buyins until 7:15 ($10 each) SPECIAL CIA MEMBERS DEAL: ** If members bring 2 other guests to the event, your admission is free.** Prizes!!! 1st BRAND NEW NINTENDO WII 2nd $25 Visa Gift Card 3rd $15 Visa Gift Card FREE FOOD PROVIDED: PIZZA, DRINKS, SNACKS!!! Come with your friends ready to play and you could go home with a brand new Nintendo Wii to enjoy FOREVER!
•
CIA STOCK COMPETITION
There is less than 2 WEEKS of competition left, the Stock competition will end on NOVEMBER 20th, keep on investing and you could win 1st place prize of $100!!! Good luck to all!
ISSUE 3
After Hours
California Investment Association Official Member Newsletter November 12, 2007
Fed Decision Mistake
www.calinvestclub.com
By: Willson Deng, President
Inside This Issue 1
Fed Decision Mistake
2
The Dollar’s Continuing Slide
3
Reflecting on Bubbles of the Past
5
Upcoming events –
CIA POKER TOURNAMENT
Exclusive partnership with Russell * The Russell logo is a registered trademark of Frank Russell Company
“The large financial firms will be taking a hit, but it doesn’t mean you have to also.”
The Federal Reserve Chairman Mr. Bernanke’s decision to cut rates again Wednesday is another step in the wrong direction. As stated numerous times during my lectures, the sub-prime situation is a problem created by the markets and should be solved by the markets. Especially in light of rising oil, a growing economy especially over the summer, recent job growth, etc… cutting rates are not the answer. The purpose of the Federal Reserve Bank is to regulate the flow of money within the US economy. Their purpose is to cushion economic downtimes and mitigate bull runs to maintain a steady growth. However this rate cut coming at a time when the economy is doing well will only make issues worse. It is true that the sub-prime issue is a problem that is impacting the economy and by no means has it been solved or will it be solved within this year. However, this is a problem hitting mainly the big financial firms such as Citigroup, Goldman, etc… From a personal standpoint, I have a “they got what they deserved” stance in this situation. The truth of the matter is that the consumer, the people who took up these adjustable rate mortgages will be ones hit the hardest. Therefore, there should be no sympathy for the major financial firms for luring customers into these mortgages. The Federal Reserve Bank was not created to bail corporations out of their mistakes. The bulk of the sub-prime “crisis” will not end till way into next year if we’re not already into a recession. The market has grown too fast, too quickly over these several years with overseas markets being partly to blame. The Fed should be saving their rate-cut cards till when it is actually needed. While for the typical investor, volatility will be extremely heavy come ARMs rate readjustments next year. Therefore, predictability of the market is very uncertain. Bond markets however are expected to do well; therefore this maybe highly inflated in the times to come. However, for the typical investor, panic is no way to act. Economic downturn is nothing more than a free lunch for Contrarian Investors and Value Investors while growth managers should watch out. The sub-prime debacle won’t end soon. Therefore, investors should simply stay calm and allow the waves of volatility to roll by. The large financial firms will be taking a hit, but it doesn’t mean you have to also. Make sure you diversify and when times become highly unpredictable keep calm, markets are cyclical, there will be better times.
PAGE 2
MEMBER NEWSLETTER
The Dollar’s Continuing Slide By: Ivan Miter, Director of Finance It’s hard to miss the ever continuing slide the US dollar is experiencing against a large number of currencies. Maybe you are wondering why this is happening, especially since it may affect some of you. Here is a brief explanation: As the Federal Open Market Committee decided to yet again cut interest rates by an additional 25 basis points, the dollar tumbled consequently tumbled. As interest rates decrease, this makes borrowing less expensive because you have to pay less per dollar borrowed. This is good news for many companies and individuals that require capital to do what they need to do. However, this has unintended consequences in the foreign exchange markets as well.
“As the dollar continues its decline, their investments look less and less appealing…”
Many foreign governments, as well as international corporations and investors, buy large amounts bonds based from the United States, including commercial bonds as well as US Treasury bonds. US Treasury bonds, which are issued by the US government, help provide a source of financing for public projects. Commercial bonds are another source of financing that companies use to get the capital they require for acquiring assets important for continued and future growth. These two classes of bonds provide many investors, including foreign institutional investors, with a source of diversification and stability in their portfolios. To purchase these bonds, foreigners need to obtain US dollars. Unfortunately, when the yield, or return, on buying bonds, or providing capital to a borrower, decreases substantially as has happened here in the US, these bonds look less appealing to investors. Thus, the demand for these investments naturally decrease. The connection between interest rates and the value of the dollar occurs here: As demand by foreigners for commercial and US Treasury bonds decrease, fewer foreign investors will demand bonds, consequently decreasing the demand for dollars to buy those Treasury and commercial bonds. A dip in the demand for dollars will decrease the equilibrium price for US Dollars when compared to other currencies. Thus, the Federal Reserve has a significant influence when it comes to determining the price of the US dollar. Of course, there are many other economic and political factors both domestically and internationally that affect the price of the dollar compared to other currencies, but the connection just explained is a crucial one. One additional note: Many foreign governments hold billions of dollars of US Debt in the form of US Treasury bonds. As the dollar continues its decline, their investments look less and less appealing, possibly even pushing them to sell some of their positions in an attempt to look for more attractive returns. This additional supply into the foreign exchange market of US Dollars could further exacerbate the problem the US dollar to new lows.
MEMBER NEWSLETTER
PAGE 3
Reflecting on the Bubbles of the Past By: Lawrence Wu, Vice President The Chinese economy is sizzling. China’s government is having a hard time reeling in that growth with the economy growing 11.5% last quarter despite measures introduced to quell that growth. The talk right now is whether or not there is really a bubble forming. The apt analogies are to the two most recent bubbles – the technology bubble of 2000 and one that hits home (no pun intended) – the homebuilders bubble. The similarities between the Shanghai index and the NASDAQ in the late 90s are striking. There was a recent Forbes article, “Sell China Before the Games,” saying the Shanghai Composite Index took a little over 2 years to gain 500% from below 1,000 in June 2005 to above 6,000 while the NASDAQ returned 240% in less than two years to reach the record of 5,000 in March 2000. The same article also cited a UBS report that reported the Shanghai index has a P/E of 68, identical to the NASDAQ’s P/E right before the tech bubble burst. However, just look at a ratio as simple as the price-to-earnings doesn’t paint a complete picture. Many companies during the tech bubble weren’t making a dime, as long as they had an idea to make money that sounded nice, valuations of 50 times projected earnings weren’t uncommon. As long as companies about to have an IPO tack on “.com” to the end of their names (regardless of their whether their business remotely related to the internet), that particular company would have a successful IPO. On the other hand, many Chinese companies do have solid businesses, especially the companies owned by the government. You have PetroChina (PTR), China Mobile (CHL) and China Life Insurance (LFC) that have real earnings and profits. By comparison, Chinese stock markets, with less than 20 years of history are relatively small. According to Wikipedia, the total market cap of the two Chinese stock exchanges is about $3 trillion dollars while the NYSE and NASDAQ have a combined capitalization of $24 trillion. Yet in 2006, China had a GDP of $2.6 trillion compared to the US’s $13.2 trillion. This figure leads me to believe the Chinese stock markets still have room to grow. Both the NASDAQ and homebuilders rallied for about 2000 days. The China stock market has only been rallying for 560 days. However the gains of 488% are quickly approaching the NASDAQ’s peak of 639%. One interesting thing to note is the starting dates of the bubbles. The Homebuilders began their meteoric rise on March 14, only four days after the tech bubble burst. Interestingly, the Shanghai started its rise on July 11, 2005 -- just nine days before the Homebuilders peaked. The conclusion of one bubble usually signals the beginning of another one. The million dollar question is whether this is actually a bubble were seeing in China. I doubt the Chinese government will let the stock market crash before the Olympic Games next year. Either way, I encourage all investors to exercise caution. The air is thin up here.
“The million dollar question is whether this is actually a bubble were seeing in China.”
PAGE 4
MEMBER NEWSLETTER
I’ll leave you with two other points: Bullish - While the Shanghai Composite is up a fairly staggering 158% year-to-date and 188% over the last five years - the five-year return works out to an annualized return of 123%. Granted, that isn't tiny, but it also isn't utterly daunting either. After all, with profits doubling in many Chinese companies on a year over year comparison, and with the Shanghai Composite having been flat from 2002 to late 2006, it can, perhaps, be forgiven for a playing a little catch-up, can't it? Bearish - China Life (LFC), PetroChina Co. (PTR), China Mobile Ltd. (CHL), Industrial and Commercial Bank of China Ltd. and China Petroleum and Chemical Corp. (SNP) are now in the list of the world's 10 biggest companies by market value. Only two of those are in the top 50 by sales.
** This newsletter is the opinion of the authors and is not related to Russell Investments or their ideas. The reproduction or distribution of this material is prohibited without the express written consent of the CIA. ** CIA Newsletters compiled and produced by Truman So, Director of Internal Affairs Please send any questions or comments to [email protected]
MEMBER NEWSLETTER
PAGE 5
Upcoming Events California Investment Association Next meeting:
Tuesday, November 13
Topic to be covered:
TBA
Events to look out for: •
CIA Texas Hold ’em Poker Tournament!
Information: When: November 15, Thursday 6pm-10pm Where: Martin Luther King Building, 4th Floor – East Madrone Room What: No limit Texas Hold ‘em Poker Buy ins: Non members: $15 at the door Members: $5 Pre-register: $10 – email [email protected] with your name and student ID Re-buyins until 7:15 ($10 each) SPECIAL CIA MEMBERS DEAL: ** If members bring 2 other guests to the event, your admission is free.** Prizes!!! 1st BRAND NEW NINTENDO WII 2nd $25 Visa Gift Card 3rd $15 Visa Gift Card FREE FOOD PROVIDED: PIZZA, DRINKS, SNACKS!!! Come with your friends ready to play and you could go home with a brand new Nintendo Wii to enjoy FOREVER!
•
CIA STOCK COMPETITION
There is less than 2 WEEKS of competition left, the Stock competition will end on NOVEMBER 20th, keep on investing and you could win 1st place prize of $100!!! Good luck to all!
