Market Commentary: December 1st, 2010: 10:30 am (PST). Posted by Manu Walia


Market Commentary: November 16th, 2010: 10:30 am (PST). Posted by Manu Walia

Market Commentary: October 29th, 2010: 10:30 pm (PST). Posted by Manu Walia

Market Commentary: October 19th, 2010: 9:30 pm (PST). Posted by Manu Walia

Market Commentary: October 8th, 2010: 2:30 pm (PST). Posted by Manu Walia

Market Commentary: October 29th, 2010: 10:30 pm (PST). Posted by Manu Walia

Market Commentary: October 19th, 2010: 9:30 pm (PST). Posted by Manu Walia

Market Commentary: October 8th, 2010: 2:30 pm (PST). Posted by Manu Walia

Market Commentary: September 23rd, 2010: 10:30 am (PST). Posted by Manu Walia

Market Commentary: September 16th, 2010: 11:30 am (PST). Posted by Manu Walia

Market Commentary: September 9th, 2010: 2:30 pm (PST). Posted by Manu Walia

Market Commentary: September 1st, 2010: 12:30 am (PST). Posted by Manu Walia

Market Commentary: August 26th, 2010: 12:30 am (PST). Posted by Manu Walia

Market Commentary: August 19th, 2010: 11:30 am (PST). Posted by Manu Walia

Market Commentary: August 16th, 2010: 12:15 pm (PST). Posted by Manu Walia

Market Commentary: August 11th, 2010: 10:45 am (PST). Posted by Manu Walia

Market Commentary: August 6th, 2010: 11:30 am (PST). Posted by Manu Walia

Market Commentary: July 30th, 2010: 12:00 pm (PST). Posted by Manu Walia

Market Commentary: July 7th, 2010: 10:00 am (PST). Posted by Manu Walia

The recovery of any economy is based on the strength of it’s financial infrastructure. We believe that the severe problems faced by the US economy in 2008 and early 2009 were attributable to the inefficiency created in the financial services arena primarily by the housing sector. Since then, the US government has done a good job of providing liquidity to the system resulting in an economic recovery. Even though employment and housing have been the major variables of scrutiny by most investors, one can not ignore the cost of capital for corporate enterprise. In other words, the cost of borrowing for growth and sustenance is a crucial variable catalyzing any economic recovery.

Yield Curve July 7 2010

The chart above signifies the current interest rate environment in the US. The steepness of the curve exhibits the low rates of borrowing for short term and vice verse. This is esepecially positive for the corporate enterprise as the overall cost of capital is at historic low. In addition, the financial sector is in a sweet spot to borrow at low rates and lend those assets at a profit by loaning them for longer periods of time. This in our view is a fundamental macro variable that is favorable for the US corporate enterprise growth.

The most commonly used measure to evaluate whether the market are over or undervalued is the ratio of a broad based index’s price to earnings ratio (P/E ratio, Chart 3).

S&P Trailing P/E Ration since 1870

S&P Trailing P/E Ration since 1870

The average P/E ratio of the S&P 500 index since 1950 has been approximately 16.5 and the high and low ratios have been 123 and 5.3 respectively. Most analysts are projecting the earnings for the S&P 500 companies to be in the range of $70-$75 for the fiscal year 2011. In other words, the index should trade in the range of approximately 1,155 to 1,235 for earnings of $70-$75 respectively. This would translate in a gain of 13% to 20% respectively with the average P/E of 16.50. The over all earnings projections are predicated on the belief that the economy will continue to improve and earnings will follow.

We believe that the world has become a cohesive business entity with great intra and inter region trade possibilities. The premise of this belief is the emergence of a large labor and hence consumer group in the emerging economies. The inter region trade in our opinion should be very robust due to increasing disposable income in emerging countries like India, China, Brazil and other Latin American and South-East Asian countries.

Most of the emerging markets have now been accumulating foreign surplus reserves for sometime. We believe that consumers in economically advanced countries will be compelled to gravitate towards deleveraging their existing debt and increase savings. This phenomenon coupled with increased disposable income in emerging markets will provide a platform for increased domestic consumption in emerging economies. In addition, we also believe that the currencies of major emerging economies will continue to appreciate, allowing stronger buying power for these regions. Therefore, we believe that major consumption will come from emerging markets over the next 5-10 years. The investment themes below provide investing opportunities in US domestic companies that should benefit from this global phenomenon.

Market Commentary: June 22nd, 2010: 9:00 am (PST). Posted by Manu Walia

The world of finance was colored with the news on Yuan (Chinese currency) revaluation. The Chinese government has been bombarded with criticism from American politician in the hope that they would allow Yuan to float freely in the world of currencies, so that the world (especially the US) has a level plying field in terms of global trade.

It can be observed clearly that not only did the Yuan appreciate considerably after the Chinese government’s intent to make the Yuan more flexible, but Foreign exchange markets also experienced gains in other currencies belonging to growing emerging markets.

Emerging Economy's Currency Appreciation on June 21st 2010

Emerging Economy’s Currency Appreciation on June 21st 2010

We believe that the Chinese are coming to a realization that they have to be honest with themselves and have to start paying attention to domestic consumption rather than only focusing on exports. We all know that most emerging markets have been growing primarily due to cheap labor which is their competitive advantage. As these countries continue to accrue reserves due to higher exports, they realize the risk involved with these reserves.

In other words, if exporting countries like China continue to accrue reserves in currencies of countries that keep importing, like the US and Europe, the value of these reserves will eventually deteriorate. We believe that countries like China and India will have to start accepting the fact that they have matured as economies and can no longer sustain that growth by only exporting to US and Europe. Fortunately, these countries have adequate population with disposable income that can add to the economic advent of these respective economies.

We continue to believe in the growth story of emerging markets and also feel strongly that industrialized nations like the US can benefit from the consumption binge that will happen in the emerging markets.

Market Commentary: June 15th, 2010: 9:00 am (PST). Posted by Manu Walia

Even a broken watch shows the right time twice a day. I have observed market analysts sticking to their stances, whether bullish or bearish for extended periods of time. At some point the markets turn and redeem the ones who have shown conviction. We have been bulls for the last 2-3 quarters as we believe that the US economy is improving fundamentally. Therefore, it’s easy for us to rationalize our bullish stance.

Instead we would like to bring some observations from a recent commentary at the Charles Schwab site. Ms. Sander’s, the Markets Strategist at Schwab portrayed a factual scenario of the current economic / market situation. We encourage readers to visit to read the entire commentary.

The most important variables mentioned in this commentary are as follows:

Smart money optimism rising: The following chart portrays the comparison between the smart and dumb money comparison. It can be clearly seen that the blue line representing the Dumb money (in other words scared money) is trending downwards and vice verse. This means that most short term traders and investors are feeling the pressure of the corrections and pulling assets out of the market. On the other hand, the smart money traders (comprising of commercial hedgers and index options ratios) are exhibiting bullish stance by showing increased investments in the market. It can also be clearly seen that these two behaviors have a negative relationship. As a contrarian, we truly believe in the efficacy of this variable ad believe that the market should experience a positive price action as investors start to turn their attention to the improving fundamentals of the economy.

Smart Vs. Dumb Money

Smart Vs. Dumb Money

Yield Curve: the following chart illustrates the recessions in the US for the last 40 years. In addition, the red line shows the yield curve for the same period. As the interest rate differential (between he long and short rates) increase, or the longer rates are higher than the short term rates the economy has experienced a rebound. Currently, the yield curve is indicating an economic turnaround based on its historic data. In other words, if cost of capital is favorable, it fuels economic growth. In addition, inflation is in check and Mr. Bernanke has used rhetoric that indicates a benign interest rate environment.

Yield Curve, Recessions and Economic Recovery

Yield Curve, Recessions and Economic Recovery

Based on these two favorable variables, we believe that patient investors will be rewarded and this could be a good time to dollar cost average and invest in US equities.

Market Commentary: June 4th, 2010: 10:00 am (PST). Posted by Manu Walia

Employment Situation

The headline number for payrolls for May was disappointing due to anemic growth in the private sector. However, overall payroll jobs in May surged 431,000, following a 290,000 boost in April, and a 208,000 gain in March. April’s spike came in much lower than the consensus forecast for a 540,000 jump. April’s increase was unrevised and while March was bumped down 22,000.

Civilian Unemployment Rate June 6 2010

Civilian Unemployment Rate June 6 2010

We strongly believe that unemployment situation and the corporate earnings growth are two very crucial variables commanding the direction of the broad based markets. It can be observed from the Table and the adjacent unemployment charts above that the overall unemployment situation has improved over the last two to three months.

This morning the unemployment rate ticked down to 9.7% from 9.9% recently. The more important element of this improvement came from census jobs created by the government. This is obviously a short term phenomenon and therefore the markets reacted negatively as job creation did not meet investor expectations. On the same token the US has created over 550,000 jobs over the last 3 months. Analysts believe that the economy would truly be in a turnaround situation if 450-500 k jobs were being created on a monthly basis.

Non-Farm Payroll Monthly and Yearly Change June 2010

Non-Farm Payroll Monthly and Yearly Change June 2010

We still believe that unemployment should improve over the next couple of quarters, primarily in the Financial, Industrial and manufacturing sectors. We believe that markets need to resolve the European issue and get clarity on the financial reform in the US. Once this happens, we believe that investors should start focusing on the fundamentals that have clearly improved. We do not want to be blindly bullish, but would remind investors that buying low means buying when everyone else is selling and selling when everyone else is buying.



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