Archive for the ‘Financial Knowledge’ Category
Gold Silver Ratio
Although both silver and gold have rallied over the last year, on a percentage basis the rally in silver has been a lot sharper. The result of silver’s leadership in the metals rally was that the ratio of the price of gold versus silver dropped dramatically over the last year. With gold still at its $1,490s resistance, and with silver just sliding slightly under its $35, the gold/silver ratio has is still at a bull market low. At 42, meaning that it takes about 42 and change ounces of silver to “buy” an ounce of gold metal, the gold/silver ratio is at its lowest weekly close in 28 years as shown in the chart just below.
From 2000 to 2010, it basically took an average of 60 ounces of silver to buy one ounce of gold, but then in late 2010, silver gained an increased luster relative to gold. When silver made its recent high just over a week ago, the ratio of gold to silver shrunk from close to 70 a year ago all the way down to 37!
Now, even after the recent drubbing in silver, it still only takes about 42 ounces of silver to buy one ounce of gold, which is still extremely low by historical standards. All this seems to imply that short term, unless some new demand for silver materializes from a previously non-existent source, either silver is still overvalued or gold is undervalued. Then there is a longer term view that gold silver ratio will go to 6 as of hundreds of years ago.
Good read on how gold/silver ratio is misleading here.
Interesting Thoughts About Dollar Cost Averaging
I am not going to discuss the basics of Dollar Cost Averaging, I believe readers can find out about the concept quite easily on the Internet. Just going to display some interesting facts and graphs.
India’s New Year
Last year I had some clients in Indian equity, always a consideration and comparison to China. India had a pretty good 2010 and China equity faltered. India’s main stock index, the Sensex, gained 17% last year, and the country’s market cap as a percentage of world market cap increased more than any other country except Canada.
This year seems different. After a small gain of 0.25% on the first day of the year, the Sensex has gone down for all except one day since for a year-to-date decline of 7.90%. The chart below from Bespoke Invest shows the index made a lower high on its most recent rally, and tested its late November intraday low.
I have been noticing this since I read the article on 11th Janurary. The November lows didn’t hold, the technicals will turn decidedly bearish.
Adapted from “India Struggles Out of the Gate” published on Tuesday, January 11, 2011 in bespokeinvest.com
Forecast Of China By Major Brokerages
China’s stocks may slump for a second year as the central bank raises interest rates to tame inflation, according to Zhang Kun, the strategist at Guotai Junan Securities Co. who correctly predicted last year’s drop.
According to Zhang, whose Shanghai- based firm Guotai Junan is the nation’s second-largest brokerage by revenue, said. “Inflation is the biggest risk. The government will keep tightening.”
Guotai Junan is alone among China’s major brokerages in predicting declines for 2011. China International Capital Corp., the only other major Chinese brokerage to correctly forecast the index’s drop in 2010, also expects an advance this year.
The Shanghai Composite fell 14 percent in 2010 to 2808.08, making it the worst performer among benchmark indexes in the world’s 10 biggest markets. Premier Wen Jiabao’s government ordered banks to set aside more reserves six times and boosted rates twice since October to tame inflation and curb asset bubbles after record gains in lending and property prices.
The central bank will keep increasing borrowing costs to cap inflation at around 4 percent this year after it reached a 28-month high of 5.1 percent in November, Zhang said. Last March, he said the Shanghai gauge, which had already dropped 9.2 percent, would fall a further 17 percent to 2,500 in the first half as the government boosted measures to cool economic growth. The index slid 27 percent in the first six months of 2010.
Predicting 11% Gain in S&P 500
“The benchmark gauge for American equities will rise 11 percent to 1,379 in 2011, bringing the increase since 2008 to 53 percent, the best return since 1997 to 2000, according to the average of 11 strategists in a Bloomberg News survey. Goldman Sachs Group Inc.’s David Kostin, the most accurate U.S. strategist this year, said sales growth will spur a 17 percent rally in the S&P 500 through the end of 2011. ”
I was quite suprised by this Bloomberg in a report.
I had mentioned about the term “New Normal” coined by Pacific Investment Management Co. (PIMCO) where the world economy grows at a slower rate than the decades that preceded this crisis years.
A rise of 11 percent in Standard & Poor’s 500 Index will bring the increase since 2008 to 53 percent, though not as impressive as Emerging Markets growth of approximate 80 percent till date. However, an 11 percent rise is a very attractive draw to finally enter the US market at a time Emerging Markets is showing signs that explosive growth has gone to a sustainable pace.
Everything Can Be Structured Into A Money Making Product.
The global financial crisis have presented us with such crazy happenings driven by greed. More is to come, the following is from an actual New York Times article and not FHM or Happy Potter novel. Investors Put Money on Lawsuits to Get Payouts.
“Large banks, hedge funds and private investors hungry for new and lucrative opportunities are bankrolling other people’s lawsuits, pumping hundreds of millions of dollars into medical malpractice claims, divorce battles and class actions against corporations — all in the hope of sharing in the potential winnings.”
This insane practice, thankfully, cannot be found here. Or at least not to any extent of common knowledge. Will you as an investor, want to own payout of your wealthy neighbors’ ugly divorce battle in a loan structure? After all, this thing looks like its gonna hurt the plaintiff good, which is profitable for my clients!
Market Updates October 2010
I have decided to put forth my thought on portfolio strategy first
For clients with substantial portfolio, will look into entering the US market as a diversification. I believe US market is in a better place now, but returns of US market will likely be lower than growth markets. (note: a market need not be in a good place, lesser risk more upside to rally, as can be seen previously). US equity has been in the overbought region. As shown below, the S&P 500 index has been trading within the red zone (between 1 and 2 standard deviations above the 50-day) for some time now. It seldom goes above 2 standard deviations and everytime over the last 10 years it reach, it pulls back.
I still favour Asia and emerging markets, especially some of the less mentioned regions like Indonesia, Brazil, South Korea and South East Asia. I favour markets with good domestic consumption and commodities driven mix. It does seem like the markets are very correlated nowadays.
For fixed income I favour Asian emerging market bonds and high yield bond market. Lower risk fixed income will go to SGD, AUD money markets, countries more developed but stable.
Commodities have run up quite a lot and I believe it is a long term story. Pretty hard to reach a convincing conclusion about outperforming equity markets now.
What Makes Brazil An Attractive Investment.
Many investors have heard about investing in BRIC, which is the well-known acronym for Brazil, Russia, India and China. Economists have determined that BRIC countries could rank among the world’s dominant economies by mid century based on gross domestic product. Some important growth factors in these countries are the huge reserves of natural resources and a large and well-qualified work force with relatively low wage levels. A growing consumer demand stimulated by increases in income across broad categories of the large BRIC population is also an important factor.
Due to proximity and racial demographics, we are more knowledgeable about China’s economy; similarly for India. Many investors have invested in Brazil through BRIC funds and emerging market funds, but know very little about the country. Same goes for their Financial Advisers. I’m going to present some basic facts an investor should know about Brazil here.
GDP
Brazil’s GDP now stands at $2.0 trillion, the 8th-largest economy in the world, compared with China’s $5.7 trillion, $1.5 trillion for Russia, $1.4 trillion for India, $2.1 trillion for Italy.
Currency
Brazilian Real has appreciated against the USD about 6% year to date. 1.70 BRL = 1 USD
Foreign Reserves
US$285.7 billion in November 2009
Equity Market
Brazil usually has the highest weighting in Latin American equity funds.
The Bovespa Index is a total return index weighted by traded volume. It’s made up of about 50 of the most-liquid stocks traded on the BM&FBovespa. The portfolio is rebalanced three times in a year. Total market cap is US$1.27 trillion as of August 2010.
As at 13 April 2010, Petrobras (Brazil’s largest oil producer) and Vale (the world’s second largest mining company) are the key players and they account for over one-third of the market capitalisation in the Bovespa. Steel maker Gerdau is also among heavily weighted resource stocks
Outlook
What concerns investors is usually outlook of the equity market, unless the investor is investing in Real denominated bonds, which is unlikely.
Low interest rates hurts retirees, savers.
Global Financial Crisis of 2007-08 has brought about changes that affected lives of common people. Interest rates are at 1% or below in most developed countries, and there seems to be little prospect of their rising soon. The futures market believes that American rates will still be below 1% in July 2012 while Fed has pledged to keep “exceptionally low . . . for an extended period.”
In Singapore, interest rates have dropped in tandem with US dollar interest rates. While much less drastic than a 5% to 1% for US dollar, fixed deposit interest rates dropped from 3% to about 1%. However, the problem is that inflation in developing countries like Singapore are higher than developed countries. Singapore’s inflation is expected to be 3-4% this year. The Monetary Authority of Singapore keeps inflation in check through exchange rate policy but does not control interest rates. Advance explanation found here and here.
How does low interest rates in the many economies affect the world and life in Singapore? Here are a few effects.
Where will S&P 500 go from here?
An investment consultancy group, Bespoke Investment Group did a recent commentary on direction of the S&P 500 recently. As shown in the chart below, after a sharp decline in late April and early May, the S&P 500 has essentially been range bound for the last three months. The question now is, what’s next?
Read More…
