Monday, July 28, 2014

Nostramoney's Prediction For The Future

Of course, this is silly to begin with. No one can predict the future. If I could, I would be rich and I'll be blogging about how I spend all my money instead, haha! However, this is just an exercise for me to just put down to words some of the thoughts and scenarios that I can imagine happening in the future.

Firstly, I still think that the US markets are in a long grinding topping process, slowly killing the shorts and getting the retail bulls to get more excited. The market looks like a very interesting rising wedge and that is a bearish pattern. Just sayin'.

I think the most ridiculous of the indices is the Russell 2000. The ETF proxy for the Russell 2000 is the IWM by iShares. Now, why do I think it is ridiculous? Well, firstly, it's PE ratio was 30.22 based on end of June figures calculated by iShares. I know it doesn't seem that crazy, but iShares has a weird way of calculating PE ratios: Negative earnings are excluded, and PE ratios over 60 are set at 60. That means that the PE ratio would actually be much lower than what is stated on the iShares website. Well, I went to see what the Wall Street Journal had to say about that. And guess what? PE ratio is 73.84. Yeah, seriously. 73.84. Now, why is it trading as such ridiculous multiple is beyond me, but all I know is that I would not want to be long in that.

The other indices also look very toppy, but I think the best fundamental thesis is with shorting the small caps. When this start getting messy, the first things out of the portfolio are the less safe stocks and the overpriced ones, which now the Russell clearly fulfills. I would think that the Russell 2000 will lead the way down, followed by the rest of the market once people realizes that the game is up.

Q2 GDP is being released on Wednesday and I am very sure that the US is going to fall short of estimates and in fact print a much uglier number than they are expecting. Will Wed be the start of a trend reversal? We will see.

Equities in many markets don't look compelling to me, save for a few. I think China has potential if they can flush out all their nonsense out of the system and start fresh. For those with longer horizons, I think this is quite a compelling place to be allocating capital now.

Bonds seem like a tough bet. Most of the developed world have ridiculously low bond yields, so I think the margin of safety is not very good, although every mother-father-son are saying interest rates will HAVE to go up eventually. I'm not saying that it won't, I am absolutely sure it will, but the question is when? I am in the camp that I think interest rates will continue to stay low - at around the current levels - for at least another 2-3 years until the global economy really has recovered. However, since this is a "when" scenario rather than an "if" scenario, I also do not feel comfortable going long bonds and profiting while the yields drop. Like I said, I think the margin of safety is just not there.

However, I think emerging market bonds are actually a fantastic place to be. I will stalk this space a bit more, but I think I might want to put quite a nice portion of my bond allocation over to this space, where yields are healthy and the margin of safety seems rather reasonable. My EM bonds have been doing well and I am quite pleased so far.

Commodities to me actually seem like the best plays. The precious metals, needless to say, I am accumulating on every major dip. I have a feeling that the precious metals sector will be having a big smash soon. Based on CoT data, Silver went massively long just recently of the previous price spike. We shall see how precious metals go. The fundamentals for the monetary metals has not changed at all, perhaps only to make the thesis stronger as even more time goes by and more money printing has been taking place.

Other commodities are looking especially good. Corn and Soybeans are two of the examples that I have been watching. I just went long on Corn, it really looks so depressed. The best thing about commodities is that you know that the goods cant really go to zero, they have an intrinsic value.

I think the Singapore property market is very telling, showing signs of weak available credit and the greed of many "flippers" will be tested now as prices slowly head lower. All signs point towards a deeper correction in housing prices. I still maintain my thesis that Q4 2015 would probably be a good time to purchase property in Singapore. I am concerned about how we get there though. I think it is very unlikely that the property market will move independently of the stock market here, so that would mean that we should be expecting a market correction soon locally as well.

The current doomsday scenario that I am envisioning is a market correction, a property correction and also a property supply shock hitting the market all at the same time to create the perfect storm for the property market. All those property buyers will have then have no one to rent to (bad economy), as well as having to service their mortgages themselves in a cash-tight market. Ideally then, property owners will be flooding the market and trying to offload their property or else they will be stuck with months of negative cashflows.

Currently, I am shortlisting property that I would be interested in if there really is a market correction soon and it presents a good opportunity to purchase a place. I am considering getting either a 1 or 2 bedroom small condo, which is mainly depending on the place and of course the price. If the correction is not very deep, a well-located 1 bedroom condo would suit me just fine. A nice stepping stone for me to move out from my parent's place. If the correction is deep enough, then a 2 bedroom place would be a cherry on top. I'll have more space and hopefully I will be able to manage to second room, most likely by renting it out, or by maybe even listing it on Airbnb.

Anyway, this is all very hypothetical. However, my current investment strategy is actually taking this view. I am light on equities, with my only exposure being local SGX counters which I think provide me quite a decent margin of safety. Bonds have been outsourced to unit trusts that have had excellent track records. I have gone through their holdings to make sure that toxic holdings are minimal. I have been quite steadily a backer of commodities, but I can find no way to invest long term without incurring too much expenses except for precious metals, so I am no longer increasing my holdings for my diversified commodities. And on top of this, I am squeezing my cash hard to work for me while I continue to build up a sizeable war chest - either to deploy into my first physical property purchase, or to accumulate lots of quality stocks for the long run.

Anyone else wants to take a stab at what the future might hold?


  1. Hello there...thankx for posting ur analysis abt the mkts.

    Just being sg, it is illegal to rent out room for anything less than 6mths.

    1. Hi pf,

      Thanks for your comment! I didn't know about the 6 months rental issue by URA until you mentioned it, so I went to search until I found their original text here:

      However, I strangely found this link before I found the URA website link, and it seems that that the 6 months minimum rental tenure is a guideline, so it is actually not illegal to rent out private property rooms for less than 6 months. ( )

      Of course, the source doesn't seem very "credible" because it is a Question/Answer website, but another website that quoted the same source and broke it down quite well to show the distinction between the HDB law regarding HDBs and the URA guidelines regarding private property. ( )

      I will have to do more research though, but thanks for pointing that out to me pf!


    2. I noted this in a news report some years ago. Recent conservation with a friend in property development industry confirmed this is still in effect.

      To be honest, if u stay in a condo, security is a salient feature as compared against HDB. Some people who stay in private property might not want their safety to be jeopardized by strangers frequently coming and going in the same compound.

      Btw, that said, i love airbnb. Used that for all my personal trips. :)


Observe the house rules.