A trading opportunity in bonds

What a non-surprise from the Fed! As I awaited the FOMC announcement, I thought that the markets were expecting a highly dovish message that any hint of a balanced statement would cause the markets to sell off. Indeed, stock prices duly tanked as the FOMC statement appeared to have "disappointed" the market with a statement that was not even more dovish.

Even the bond market was not immune from the selloff as a lot of dovish expectations were already built into bond prices. Across the Curve wrote on October 28 that there was a crowded long in the belly of the curve:

In the Treasury market the risk is in the belly of the curve as traders and investors have plowed back into that sector and have reloaded the carry trade which fears of taper had led them to regurgitate in the May/July period. So if there is even a hint that that Fed might taper in 2013 that sector and associated spread product is at great risk.

As an example of the extent of the recovery in the belly you can observe that the 2 year/5 year spread traded as wide as 134 basis points in early September when the market was at its worst levels (10s traded 3 percent then). That spread is now bank to 97 basis points as fear of tapering has receded rapidly.

Nevertheless, I believe that there may be a near-term trading opportunity to go long the bond market here. The momentum in high frequency economic releases have been tanking, as shown by this chart of the Citigroup US Economic Surprise Index - and that should be conducive to lower bond yields (and therefore higher bond prices):

What's more, Jon ("Fedwire") Hilsenrath wrote today that Fed researchers believed that the Fed balance sheet would not return to normal until 2019 at the earliest. How much more or a bond bullish environment do you want?


The technical picture for bonds
From a technical viewpoint, the 10-year yield has been rolling over, but it nearing a key level of technical support from both a chart support viewpoint but also a 38% Fibonacci retracement level. Should yields breach the key 2.43-2.50 level, there could be further downside to yields.

The area of greater opportunity could come from the long bond. This chart of the 30-year yield shows that a similar topping pattern, but it has not reached the 38% Fibonacci support level yet, indicating further near-term downside.

In conclusion, recent economic releases are weak and supportive of lower bond yields and higher bond prices. From a technical perspective, there is a better upside opportunity in the long Treasury in this trade.






Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.

The stakes are rising for China's Third Plenary

Further to my last post (see Watching for China-related volatility in November), a number of articles have indicated how the stakes are rising for China in the Third Plenary which is to be held November 9-12.


Middle-income trap = Slowing growth
First of all, Akio Egawa, who is a visiting fellow at Bruegel, studied the issue of a middle-income trap (otherwise known as the Lewis turning point where long-term growth slows) for Asian countries, he concluded:

A sensitivity analysis for three Asian upper-middle-income countries(China, Malaysia and Thailand) also shows that the situation related to a middle-income trap is worse than average in China and Malaysia. These two countries, according to the result of the sensitivity analysis, should urgently improve access to secondary education and should implement income redistribution measures to develop high-tech industries, before their demographic dividends expire. Income redistribution includes the narrowing of rural urban income disparities, benefits to low-income individuals, direct income transfers, vouchers or free provision of education and health-care, and so on, but none of these are simple to implement.

BIS warning
In addition, Ambrose Evans-Pritchard at The Telegraph highlighted a BIS report warning of the risks of rising foreign currency loans to China and Chinese companies:

Foreign loans to companies and banks in China have tripled over the last five years to almost $900bn and may now be large enough to set off financial tremors in the West, and above all Britain, the world’s banking watchdog has warned.

“Dollar and foreign currency loans have been growing very rapidly,” said the Bank for International Settlements in a new report.

Should we see a policy error that results in an slowdown, we could see financial contagion spread to the rest of the world because of the size of these foreign currency loans. Loans to SOEs are one thing, but private companies cannot be expected to get rescued [emphasis added]:

The Chinese state holds the world’s largest foreign reserves at $3.7 trillion and the country has capital controls, so there is little danger that China itself could suffer the sort of currency crisis that hit Korea, Indonesia, or Thailand in the 1990s. That does not mean foreign banks will necessarily get their money back if they lent too much to over-indebted Chinese companies.

The Chinese state has already signalled that it will not rescue private firms with too much debt, letting the solar company Suntech Power default on $541m of notes. Premier Li Keqiang is pledging market discipline as part of his liberalization and reform drive.

For China itself the risk is that a dollar funding crisis becomes the trigger for an internal financial crisis. Chinese credit has soared from 125pc to 200pc of GDP in just five years, prompting a string of warnings from Fitch Ratings over the stability of the financial system. A dollar squeeze could come at a very unwelcome moment.

A necessary adjustment?
Andy Xie believes that the authorities should change direction and the bubble should be pricked now [emphasis added]:

GDP targeting no longer serves a good purpose. It sends a dangerous signal for resisting economic restructuring and sustaining speculation. Continuation of GDP targeting would lead to an economic hard landing and massive non-performing loans.

The recent upturn in GDP growth is not good news for China. It has occurred by further increasing the economic imbalance and prolonging speculation. It merely delays the inevitable economic restructuring and increases its final cost.

The bursting of the property bubble is a necessary step in China's economic restructuring. It decreases funding for investment and increases it for consumption. Prolonging the property bubble is equivalent to resisting economic restructuring.

Either unwind it in an orderly way now, or in a chaotic way later:

Market forces are likely to trigger China's bubble to deflate again, following the 2012 downturn, within six months. Liquidity will be squeezed between demand from growing fixed-asset investment and downward pressure due to the Fed tapering. The available liquidity for the property bubble will decrease as a consequence.

Further, China's credit creation increasingly depends on the shadow banking system. The higher interest rate in its credit creation makes the property bubble unstable. Even if the liquidity squeeze does not pop the bubble, the breakdown in credit circulation, due to fears of underlying asset quality, may do the bubble in anyway, just like in the United States in 2008.

As an aside, see this WSJ article about a how a prospectus frankly discusses how Chinese banks make money from the shadow banking system without utilizing their capital.

Xie ended his commentary with an ominous forecast for 2014:

The will to end the bubble seems absent. Only market forces will bring it to the end. Dark clouds are emerging on both the liquidity and credit creation fronts. It appears that China's property bubble is likely to sink big in 2014.

Steven Barnett of the IMF expressed a similar sentiment as Andy Xie, though not as forcefully. Rebalance now and hurt a little, but the payoffs will be greater longer term:

Somewhat slower growth in the near-term is a tradeoff worth making for higher future income. This is clearly good not only for China, but also the world economy. By 2030 China—especially with successful reforms—will almost certainly be the world’s largest economy. So China’s success—which will substantially increase income in China—will also mean much higher global demand and will thus be hugely important for a robust and healthy global economy.

Less growth in China today in exchange for more, much more, income in the future. So, less is indeed more.

High risk of a policy error
Chinese macro policy makers have only experienced hyper-growth their entire lives. Even with the best of intentions, the risk of a policy mistake is high. As an example, consider the impact of the Fed's tapering message in May and the subsequent reversal in September on emerging market currencies and bond yields (from the Council on Foreign Relations):

Nope, nothing to see here. Move along...

While a number of analysts have some general idea of what gets announced at the Third Plenary, I have no idea of how the market will interpret the announcements. Get ready for greater macro volatility in a few weeks.






Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.

Watching for China-related volatility in November

In October, we have seen considerable volatility over US government shutdown and debt ceiling concerns. As October draws to a close, I am looking ahead to November and watching developments in China as a source of volatility.

Specifically, the Chinese Communist Party is holding their plenary in which policy issues are discussed. Note that this is the Party and not the government. Here is how David Keohane of FT Alphaville put it:

No point in getting too excited about China’s big policy bash — November’s third plenary session of the 18th Party Congress — just yet. It may be a once-in-a-10 year event but it’s probably going to be rather coy on detail.

It’s also important to remember this is the party’s meeting not the government’s and it’s not likely everyone sees eye-to-eye on a host of issues. Never easy getting people excited about changes to the teats upon which they suckle…

China's challenges
The entire post is useful reading inasmuch as it discusses what can be expected out of the meeting. Regardless, the Party goes to plenary as China faces a number of important challenges.

The most important issue is the nature of China's growth. Dani Rodrik worries that growth is set to slow [emphasis added]:

The pattern is unmistakable. While early industrializers managed to place 30 percent or more of their workforce in manufacturing, latecomers have rarely managed that feat. Brazil's manufacturing employment peaked at 16 percent and Mexico's at 20 percent. In India, manufacturing employment began to lose ground (in relative terms) after it reached 13 percent.

This may come as a surprise, but even China employs few workers in manufacturing, relative to its huge labor force. Moreover, the manufacturing share of employment in China seems to be coming down (caveat: Chinese data on manufacturing employment are problematic).

As I explain in a new Project Syndicate column, the early onset of deindustrialization has a number of implications. On the economic front, it slows down growth and delays economic convergence. Politically, it forecloses the typical path to democracy -- through the development of a labor movement, disciplined political parties, and habits of compromise and moderation arising out of industrial struggles over pay and working conditions.

In other words, China may have reached its Lewis turning point and export led growth is set to slow. Such a slowdown can create political problems.

Analysis from ANZ Bank confirms the change in the character of Chinese growth (via SNBCHF):

The following graph from the ANZ Banking Group shows that – as opposed to the period until 2008 – net exports do not add to GDP growth. This means that global imbalances caused by China are not increasing. On the other side, Chinese growth is still driven by investments.

Despite the apparent slowing momentum on exports, China's response to the 2008 global financial crisis was to spend, spend and spend on infrastructure and the growth was debt financed.  If you think that the Fed primed the pump in the aftermath of the financial crisis of 2008, consider what the PBoC did (as per Alan Ruskin of Deutsche via Business Insider):

Many analysts are pointing to diminishing returns to growth from credit expansion. Here is George Magnus of UBS (via Business Insider):

Ed Yardeni agrees [emphasis added]:

Another troubling development is that China’s total social financing rose rapidly again during August and September after a brief slowdown during the previous three months. Why is this troubling? It seems that China is getting less bang per yuan of debt, as the current pace of borrowing is about the same as since 2009 yet real GDP growth has clearly slowed over this period. One more troubling development is that the CPI inflation rate may be picking up, led by food prices.

Despite the rhetoric about re-balancing growth away from infrastructure led growth to the consumer, the latest round of growth has been more of the same - infrastructure led growth. Property prices have continued to climb as the government has been slow to act. This prompted David Cui of BoAML to ponder when the PBoC might tighten (via Business Insider):

As a result, the government's fiscal deficit has skyrocketed. Nomura estimates that the deficit may be 9.7% of GDP, depending on how you count (via The Telegraph):

Data from the International Monetary Fund shows that China’s budget deficit reached 9.7pc of GDP last year if regional spending is included and one-off land sales are stripped out. This is higher than previously thought and above levels in the US, India, or Southern Europe’s debt-stricken crisis states. 

Regardless, Michael Pettis pointed out that debt will eventually have to get paid back in some fashion. Pettis has a good news-bad news message [emphasis added]:

I agree that China is in a very different position than the US, but this isn’t necessarily a good thing. The main relevant difference is that because all the banks are perceived to be guaranteed by the central government, and Chinese households have a limited number of ways to save outside the banking system, it is unlikely that China will experience a system-wide bank run as long as the credibility of the guarantee survives, and runs on individual banks can be resolved by regulatory fiat (banks that receive deposits will be forced to lend to banks that lose deposits). We are not likely to see a Lehman-style crisis.

We are also not likely to see, however, the advantages of a Lehman-style crisis, and these are a relatively quick adjustment in the process of investment misallocation. I have always said that the resolution of the Chinese banking problems is far more likely to resemble that of Japan than the US, and instead of three of four chaotic years as the system adjusts quickly, and at times violently, we are more likely to see a decade or more of a slow grinding-away of the debt excesses. The net economic cost is likely to be higher in a Japanese-style rebalancing, but American-style rebalancing is risky except in countries with very flexible institutions – financial as well as political.

Pettis believes that China will not see a Lehman-style crash because the banks are perceived to be all government guaranteed, but the costs will be repaid in the form of Japanese Lost Decade(s) like slow growth.

I would, however, add one caveat to Pettis' analysis - we have no way of forecasting the contagion effects of a Chinese bad debt crisis. While the Chinese banks may be supported by the Chinese government, no one knows if any western large financial institutions are overly exposed to China's loan markets. Let's suppose that a large global bank like HSBC (it's only an example, I know nothing about HSBC's exposure to China) were to get severely impaired over a Chinese shadow banking system/subprime-style crisis (see my previous post The canaries in the Chinese coalmine for a discussion of the shadow banking system and wealth management products), could such an event create havoc in the global financial system? What if a Chinese banking crisis were to arise and global risk premiums on emerging market debt were to skyrocket, you can't tell me that these large global banks aren't exposed to emerging market debt in places like Brazil, India and Turkey. We saw a preview of what happened when the markets got just the whiff of Fed tapering - risk premiums on emerging market debt shot up and the risk of emerging market currency crises rose accordingly.

Notwithstanding my concerns over the contagion effects of a Chinese banking crisis, Pettis makes a good point about the resilience of China's financial system. While it could theoretically absorb the hit from a banking crisis, the costs are ultimately borne by the Chinese household. If that happens, you can forget about the stated strategy of re-balancing growth to the consumer as the household sector will be struggling with the costs of the aggregate costs of the bad loan writeoffs. Pettis made some important points as he addressed the issue that a lot of the bad loans don't matter because they are hidden and government guaranteed [emphasis added]:

Even those who do not understand why this reasoning is incorrect should know that it must obviously be incorrect. If it weren’t, any country could solve all of its debt problems merely by borrowing in a non-transparent way through the central bank. As the Greeks and the Italians most recently showed us, non-transparent borrowing may cause us to recognize a problems later than we otherwise would have, but it cannot solve the problem.

The reason is because in any case debt must either be serviced or the borrower must default. If the assets which were funded by the debt do not create enough wealth with which to service the debt, and if the borrower does not default, then by definition there must have been a transfer from some other entity to cover the difference between the debt servicing cost and the returns on the asset.

Typically this other entity, in China and elsewhere, has been the household sector, and in the case of China the transfer occurred primarily in the hidden form of severely repressed interest rates. Whether the transfer is from the household sector, however, of from other sector, this is where the problem of debt lies for China.

The IMF's wish list
Recently, Anoop Singh of the IMF penned an article in which he addressed these issues facing China, but in less alarmist fashion that I have. After outlining the challenges, Singh outlined the way forward:

Shifting to a sustainable growth path––one that uses resources more efficiently, is more inclusive, and more consumer-based––requires actions on several fronts: financial sector and fiscal reforms, as well as structural measures.

Further financial reforms are essential to contain the buildup of risks, enhance the efficiency of investment, and boost household capital income. The main dimensions of reform are deposit rate liberalization; the elimination of perceived widespread implicit guarantees on financial products and intermediaries through the introduction of deposit insurance, and a formal resolution framework for failing institutions; and gradually moving away from administrative guidance on credit allocation to adopting a policy rate as the main operating target for monetary policy.

Fiscal reforms, including giving local governments authority over their own revenue sources more in line with their expenditure mandates; shifting the tax burden toward progressive and efficient forms of taxation; and channeling dividend payments from state-owned enterprises to the budget; all these measures will complement financial sector reforms in addressing the vulnerabilities in local government finances, reducing excess investment, and boosting household consumption.

The third broad area––structural measures––will reinforce the impact of financial and fiscal reforms and enable a shift toward a growth model less reliant on capital accumulation and more dependent on the efficient use of resources (‘total factor productivity’ growth). The measures include leveling the playing field within and across sectors through deregulation and easing barriers to entry (particularly in services); raising resource prices to rationalize investment and protect the environment; and reforming the hukou (household registration) system to improve labor market mobility and achieve a more efficient matching of workers to vacancies.

Singh went on to say that he believed that the Chinese leadership is aware of what needs to be done:

Implementing these significant measures is a tall order and involves tough choices, including possibly accepting slower growth as the economy adjusts to the new path. But starting now will allow China to sustain its convergence to the level of higher income economies and deliver the benefits of growth to an ever-wider cross section of its population in a way that’s environmentally sustainable and sound. But delay reforms and the challenges grow larger, raising the probability of stalled convergence.

China’s leadership recognizes the challenges and has already indicated their reform objectives. The priority now is to lay out and then, critically, implement concrete reform plans to manage the transition to a new growth path.

The stakes are high, especially when 124 countries count China as their biggest trading partner – compared to 76 for the United States. A hiccup, or even any shifts, in the Chinese economy will have global implications. We will all be watching the Third Plenary for signs of direction from the Party.


How will the market react?
Remember, the plenum is a Party confab, not the government. The best analogy I can give is what happens under a British parliamentary system. The party in power can hold a meeting (a plenum) to discuss the way they want to move forward. Such pronouncements do not necessarily equal immediate government policy, even though the party holds a parliamentary majority.

So how will the market react to announcements? Will any announcement be interpreted as bullish or bearish. Consider, for example, this Financial Post article entitled 4 concerns about China that have investors freaked out again. Last week, we saw four news items out of China that created bearish market reactions:

• China's biggest bank tripled its loan loss provisions: Is that bullish because it's finally facing reality and cleaning up its books, or bearish because it's a sign of weakness in the financial system?
• China's interbank market rates are rising, suggesting a repeat of liquidity worries. Isn't financial liberalization the way forward? Or did you want more of the unbalanced credit and infrastructure driven growth?
• Reports that a central government official announced policy tightening. [BoaML's Ting] Lu writes that this comment was “actually made by Beijing university professor who was an external member of the insignificant non-voting “PBoC monetary policy committee.” Moreover, he said monetary policy should be “adjusted a bit from the easing stance in Q3.”
• Central government pressuring local governments to set 2014 target based on realistic targets. This has prompted some to think that the government will cut its growth forecast to 7% from 7.5%. Lu thinks there is nothing wrong with the central government pushing local governments to be more realistic but that the likelihood of the central government setting a 7.5% 2014 growth target is higher than a 7% growth target. [This is also consistent with Premier Li Keqiang's announcement to more closely audit local government finances in order to control spending.]

No doubt we will see more announcements out of Beijing. Don't expect them to have too much specifics, as they are more meant to set direction.

Will the market interpret the announcements bullishly or bearishly? I don't know, but as the chart of the Shanghai Composite shows, the index has already violated a technical uptrend and an important support zone, which indicates market nervousness.

Be prepared for greater China-related market volatility in the weeks ahead.




Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.

A time for caution

I wrote that my inner trader was turning more cautious after getting long to await the post-government shutdown/debt ceiling relief rally (see Time for a market pause?) and my tactical position remains unchanged.

We are seeing further confirmation of frothy markets and a crowded long reading - which of which suggest that there is an accident waiting to happen. As always, Bespoke ably pointed out the latest AAII sentiment readings shows a condition represented by too many bulls and too few bears:

As well, froth is coming back to equity markets. The New York magazine featured an article entitled The Age of Bullshit Investments Is Back! Junky More speculative investment ideas are gaining traction once again:

Look around today's markets and you'll see a surfeit of senseless investment opportunities wearing the cloak of legitimacy.

You'll see, on page one of the New York Times, a start-up called Fantex touting a new investment vehicle that allows fans of NFL running back Arian Foster to support his career by purchasing stock that gives them a share of his future earnings. (What didn't make page one: Foster's career-worst game the very next Sunday.) This investment opportunity, which will appeal mainly to those too young to remember Bowie Bonds, is a terrible idea on multiple fronts: It bases returns on the unpredictable performance of professional athletes, it gives stock that can only be traded on a private, relatively illiquid exchange, and its single-athlete stock can be converted into common Fantex stock whenever the company feels like it.

Look harder, and you'll see companies like Goldman Sachs throwing millions of dollars at hare-brained schemes like Motif Investing, a "theme-based stock investment platform" that allows rank amateurs to make up "motifs" of stocks they think are going to behave in a certain, coordinated way. (Professional stock traders do this all the time, without calling it a "motif" strategy — but they don't charge ordinary people what can amount to double-digit fees, nor do they base their investment decisions on "Companies with lots of Facebook likes," as Motif suggests.)

You'll see Bitcoins, the everlasting fascination of Silicon Valley crypto-geeks, being not only spoken about as an investment-grade commodity despite having higher volatility than your average Baldwin brother, but inspiring entire investment vehicles (one of which is structured by celebrity twins) that give ordinary investors as well as the tech-savvy crowd the chance to lose money when the fad runs its course. You'll also see art dealers trying to convince you that betting on the paintings of unknown artists is a sound portfolio move.

I could go on, but you get the idea. The dumb money is now chasing the risk trade.


Bearish catalysts
These conditions suggest that markets are vulnerable to a pullback, but without a bearish catalyst, markets can continue to grind higher.

The bearish catalyst may be in seen in the form of institutional money flows. Institutions move glacially and once their fund flows start to move in one direction, the trend doesn't reverse itself easily. Kevin Marder, writing at Marketwatch, recently detected signs of institutional selling:

Like an elephant getting in or out of a bathtub, their buying and selling is there for all to see. Despite prices holding up near their highs in many cases, there is net selling taking place in the liquid glamours, as well as in some of the tertiary leaders.

While this began a few weeks ago in some cases, Tuesday it was seen in a number of stocks, including Priceline.com , Facebook and LinkedIn, name just a few.

Notably, this selling occurred on a day in which the Nasdaq Composite was up. Others not listed above were distributed on Monday or Wednesday.

Perhaps the truest sign of institutional sentiment are the liquid glamours, those titles that are gifted with rapid earnings growth and also deep liquidity. Institutions can never own enough of these simply because liquid glamours do not grow on trees. Large investors, such as mutual funds and pension funds, often overweight these names in their portfolios as a means of differentiating their performance from those of their peers and their benchmark, e.g. the SP 500.

My own long-term risk-on/risk-off fund flows model flashed a sell signal on Friday, indicating a the start of sustained selling pressure. Indeed, the BoAML fund manager survey confirmed that institutional investors continue to scale back their US equity holdings, though they remain overweight (via Marketwatch):

Asset allocators have scaled back their equity holdings. A net 49 percent of global asset allocators are overweight equities, down from a net 60 percent in September. Over the past month, investors have reduced their positions in eight out of the 11 sectors monitored by the survey. Last month, a net 9 percent of the panel remained overweight U.S. equities, and this month, that measure has dropped to zero percent. At the same time, investors have shifted back towards fixed income, scaling back their underweight positions in bonds and portfolio cash levels rose.

So putting it all together, we have excessive bullishness and froth back in the markets, combined with institutional selling in US equities. What's more, results from Earnings Season has been so-so. Bespoke reports that corporate guidance has been weak:

What more do you need to know? This is a time for caution. Don't try to be a hero.




Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.

How to forecast stock prices

Further to my recent post (see The ABCs of financial planning), I promised that I would write about how to forecast stock prices. First, let me outline my analytical framework. In awarding this year's Nobel Prize for economics, the Royal Swedish Academy of Sciences noted the following in its press release:

There is no way to predict the price of stocks and bonds over the next few days or weeks. But it is quite possible to foresee the broad course of these prices over longer periods, such as the next three to five years. These findings, which might seem both surprising and contradictory, were made and analyzed by this year’s Laureates, Eugene Fama, Lars Peter Hansen and Robert Shiller.

In other words, trying to call the stock market in the short term is very hard work, but calling it long term is relatively easy. However, there is a right way and a wrong way to forecast long run equity market returns.


The wrong way
Robert Shiller is well-known for his analysis showing that long-term stock real returns, i.e. after inflation, to be 7%. With CPI at 1.5%, the long term stock returns should be 8.5%, right?

There are a number of problems with that approach. First of all, will you live long enough or be patient enough to see those kinds of returns? The long-term chart below shows periods when the stock market has been in multi-decade range-bound episodes. If you are in one of those periods, your returns may be subpar for a very long, long time. Can you be that patient?

Dow Jones Industrials Average (from 1900)

Lancer Roberts, writing at Pragmatic Capitalism, made the same point. Stock returns depend on when you start. As the chart below shows, there are wild variations in equity price returns, though an upward long term trend is discernible.

Here is Roberts' analysis of 40-year stock returns by starting decade. Do you want to roll the dice on what you get?

Most analysis of stock returns have focused on US equities - which suffers from a survivorship bias because the US market is not the only market in the world. Imagine that you wanted to invest in the capital markets in the year 1900. The stock market was nascent and undeveloped, the major markets where most of the the global capital was invested was the bond market. Consider what the developed and emerging markets were in 1900.

The bluest of the blue chips was the British bond market. Other developed markets included France and Germany. Oh, yeah, don't forget the Austro-Hungarian Empire. If you wanted to take more risk, you could have looked at emerging markets such as Russia, the US, Canada, Argentina and Japan.

Fast forward 113 years, how did that portfolio work out? Now you understand what I mean by survivorship bias. Global Financial Data went all the way back to 1800 and reported the instances of government bond defaults:

1. Germany 1938,1948
2. Japan 1942, 1946-1952
3. France 8 times between 1558-1788. Last one in 1812
4. Italy 1940. Almost daily speculation of another default since 2008
5. Spain 1809, 1820, 1931, 1834, 1851, 1867, 1872, 1882 and 1936-1939. Since 2008, Spanish yields spiked considerably and have been volatile on the back of another default
6. Austria 1938, 1940, 1945
7. United Kingdom 1822, 1834, 1888, 1932

The point I am trying to make here is we have no idea who the winners and losers will be in the future, so if you step back in time and only considered the returns of the winner (US equities) in your study, you will have overstated returns by a huge margin.


How much would Dracula be worth?
Think about it this way, let's take Robert Shiller's assertion that equity real returns of 7% to be correct. Supposing that a hypothetical immortal like Count Dracula (hey, vampires are rich - they have castles and other stuff, right?) invested $10,000 into the stock market 500 years ago. Assuming 3% inflation over the 500 years, Dracula's wealth he would have today would have 24 zeros after it. Is that plausible?

To put the problem of estimating long term equity returns into perspective, Morningstar broke down risk into three categories:

1. Destruction: The reason why Dracula might not be a super-tycoon is that in the last 500 years, a lot of empires went down and a lot of people got killed in some very nasty ways. Wealth was destroyed during those episodes.
2. Volatility: This is the "conventional" risk that most academics focus on, but it's not the only source of risk.
3. Uncertainty:: Uncertainty can be best described as the risk of fraud or poor governance. Morningstar described it as: "The simplest species of uncertainty is not knowing when writing a check whether the other party is a crook."

In summary, using these very long term estimates of equity returns are problematical at many levels. Even if we were to assume away the risks of destruction and uncertainty, there are huge variations in stock returns and you may not live long enough to see the 7% real return postulated by Shiller.


A more realistic approach
I prefer a more realistic approach. Instead of using multi-decade long time horizons, a more realistic forecast horizon is 3-7 years. As the Royal Swedish Academy of Sciences noted, "It is quite possible to foresee the broad course of [stock] prices over longer periods, such as the next three to five years."

My principal approach to 3-7 year equity return forecast is based on two elements, valuation and demographics. In the short run, valuation doesn't matter much to the direction of stock prices. In the 3-7 year time frame, valuations matter a lot. The simplest way to forecast prices is to watch stock market.valuation.

The long-term chart of the Dow at the beginning of this post shows that the stock market has moved to new all-time highs, indicating that equities may have broken out of a range-bound period. I am skeptical of that view because of valuations. Consider this chart of market cap to GDP that goes back to 1927 as a proxy for price to sales for the US stock market. Does this look cheap to you? Past secular bulls have not begun with valuations at such elevated levels.

For another perspective, Ed Easterling analyzed historical P/E ratios and concluded that the current secular bear market, which has been associated with range-bound markets, has only just begun. He charted the normalized P/E ratio progression of secular bulls, where stocks have gone to multi-year and multi-decade new highs:

...and he did the same for the secular bears where the market stayed range-bound. The current bear, shown in dark blue, began at stratospheric normalized P/E levels and the normalized P/Es have only descended to readings that can be best described as elevated:

What are smart investors doing?
If you don't want to do the work to judge whether the stock market is over or undervalued based on P/E and other valuation measures, one simple way is to watch what smart investors are doing. Here, the signals for long term returns are ominous.

Consider the Bloomberg report that private equity funds are selling via the IPO process:

Private-equity managers from Fortress Investment Group LLC (FIG) to Blackstone Group LP (BX), which made billions by buying low and selling high, say now is the time to exit investments as stocks rally and interest rates start to rise...

“It’s almost biblical: there is a time to reap and there’s a time to sow,” Apollo’s Black said at a conference in April. “We think it’s a fabulous environment to be selling. We’re selling everything that’s not nailed down in our portfolio.” 

Black’s New York-based firm, which oversees assets worth $114 billion, generated $14 billion in proceeds from the sale of holdings between the first quarter of 2012 and the first quarter this year.

Simply put, they can't find anything to buy [emphasis added]:

The industry’s focus on exits has reduced volumes of leveraged buyouts this year, with the number of private-equity deals announced declining 20 percent to 3,047 worldwide from the same period last year, according to data compiled by Bloomberg.

“It’s a difficult environment to find really attractive things when the markets are robust as they are,” Fortress’s Edens said yesterday.

As well, legendary investors like Warren Buffett, Stan Druckenmiller and Carl Icahn have recently come out with cautious statements on the stock market (via Business Insider). Buffett echoed the views of private equity investors that he can't find much value in the market. However, he did allow that the underlying businesses of Berkshire Hathaway was doing well:

[Buffett] noted that the equity market was fairly valued and stocks were not overvalued. Specifically, Buffett said “They were very cheap five years ago, ridiculously cheap,” and “That’s been corrected.” He also noted, “We’re having a hard time finding things to buy.” One has to take note when the world’s most high profile investor (a long investor), cannot find stocks to buy although he reports his business is improving.

Stan Druckenmiller believes that stock prices are artificially buoyed by Fed policy. He has no idea of when this stops, but such a few does not bode well for long-term stock returns:

Druckemiller elaborated “My first mentor and boss, Dr. Ellis in Pittsburgh, used to tell me it takes hundreds of millions of dollars to manipulate a stock up, but the minute you have this phony buying stop, it can go down on no volume and it can just reprice immediately. I personally think as long as this game goes on, assets will stay elevated. But when you remove that prop - and let's face it, the Fed has said they're targeting those asset prices - those prices can adjust immediately.”

One common thread of these smart investors is that their belief that stock prices are fairly or over-valued, but there is no imminent risk that the market goes over a cliff.


Demographics is destiny
Another way of forecasting stock prices is to study the demographics of equity supply and demand. I have written about the demographics issue before (see Demographics and stock returns and A stock market bottom at the end of this decade). For stocks to go up, there has to be more buyers than sellers at a given price. The propensity of Baby Boomers, as they move into retirement, is to take money out of stocks. In order for equities to rise, those negative fund flows have to be met by the retirement savings of their children, the Echo Boomers. Two research groups looked into this topic (see papers here and here). Their conclusion - the inflection point at which the fund flows of Echo Boomers moving into stocks start to overwhelm the Baby Boomers taking money out is somewhere between 2017 and 2021.

Niels Jensen at Pragmatic Capitalism summarized the issues much better than I ever could:

Given the large number of boomers knocking on the 70+ door, these findings should not be ignored. In another study from 2012, McKinsey Global Institute found that U.S. households reduce their exposure to equities in a meaningful way as they grow older, supporting Arnott’s and Chaves’ conclusion that large cohorts of 70+ year olds is bad news for equity returns (chart 3). We know that U.S. baby boomers own 60% of the nation’s wealth and account for 40% of its consumer spending, so their effect on the economy and financial markets shouldn’t come as a surprise.

US household asset allocation by cohort 

Jensen pointed to the San Francisco Fed paper that suggested a stock market bottom in 2021:

The most likely stock market trajectory
Putting the valuation and demographics forecasts together, the 3-7 year equity market forecast is for further subdued returns. Under these circumstances, the GMO forecast -2% real return for large cap US equities appears to be in the right ballpark:

I am also in the same camp as John Hussman in his long-term return forecast:

However, the comments from Buffett et al are also revealing. While equity valuations appear to be elevated, there is underlying momentum in Berkshire's businesses so there doesn't seem to be any imminent risk of a bear market.

So should you be bullish or bearish? That depends on your time horizon. The best perspective is one chart produced by Steve Suttmeier of BoAML. The firm's official view is that the major stock averages have convincingly broken out to new highs and we are seeing the start of a new secular bull. However, Suttmeier found parallels between the current range-bound market with the 1966-1982 period and did allow for a final bearish relapse before the market blasts off to new highs as they did in the mid-1980's.

In summary, I remain long term cautious on equity returns. It seems that with the market trading at such lofty multiples, we only need to see a negative catalyst to send stock prices tumbling. By their very nature, negative catalysts are unpredictable and can come out of left field. As I have pointed out before (see The sun will come out tomorrow), I am therefore watching the following three tripwires on a tactical basis for a bearish signal:

• Earnings
• Signs of economic slowdown
• Monetary policy

In the meantime, my inner trader is staying long this market and enjoying the ride.




Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.

Time for a market pause?

OK, the major US equity averages have staged upside breakouts to new all-time highs. What's more, US market strength has been confirmed by upside breakouts and uptrends in many other foreign market indices. However, markets are overbought and short-term sentiment models are nearing crowded long readings (see AAII bull readings via Bepoke). This suggests that the stock market may be in for a consolidation or minor corrective period lasting about a week or so.


Market is overbought
Consider this chart of the SPX, which poked its head above the 2 standard deviation Bollinger Band last Thursday. Many other US indices, such as the NASDAQ Composite, Russell 2000, etc., also closed above their 2SD Bollinger Bands at the same time. Markets that close above their 2SD Bollinger Band levels generally don't stand there for long. I circled the last occasion when this happened, which was mid-September, and the market retreated back to bottom of the 2SD band.

What happens when the SPX closes above its 2SD Bollinger Band? To answer that question, I went back to 2000 and found 68 occasions when we saw such a signal. I then calculated the median cumulative return 1-10 days after the first instance of the signal. The results are shown in the chart below. The red bars represent the median return after a close after the 2SD band and the blue bars are for all instances during the study period. As you can see, the market underperformed in these instances. Negative performance bottomed out, on average, seven days after the violation of the 2SD level - which was last Thursday. Note that the return for Monday, October 21st represents day 2 of the signal.

In addition to the return metric, I also considered the batting average of this signal, as measured by the percentage of positive cumulative returns after the signal. As the chart below shows, the SPX typically starts to weaken significantly on day 4 and bottoms on on day 7.

Bearish tripwires
My inner trader got more cautious last week on the basis of my bearish tripwires (see Buy the rumor, sell the news?), which were:

• Earnings outlook
• Macro outlook
• Fed policy

I stated that while Fed policy remained bullish, the macro outlook had begun to deteriorate, which was a concern to me. However, New deal democrat noted on the weekend that some of the high frequency economic releases were bouncing back:

Despite the looming US debt default on Wednesday, the high frequency data this week generally had a positive bounce. The long leading indicator of interest rates improved, and mortgage refinance applications had a slight rebound, although purchase applications and real estate loans remain negative. Money supply remains positive and seems to have stopped decelerating. Spreads between corporate bonds and treasuries also slightly improved this week.

While the uptick in macro indicators was a reason to be more sanguine about the market outlook, the earnings picture had deteriorated. Bespoke pointed out that the earnings beat rate was mediocre:

Below is a look at the historical earnings beat rate for US stocks by quarter since 2001. As shown, 60.5% of the companies that have reported so far this season have beaten consensus analyst EPS estimates. This is a mediocre reading compared to the average beat rate of 63% that we've seen since the bull market began in March 2009.

The beat rate on the revenue line was even more disappointing:

Top-line numbers have also been mediocre so far this season. As shown below, 50.9% of the companies that have reported have beaten revenue estimates, which is 9 percentage points below the average of 60% that we've seen since the bull market began.

So far, this Earnings Season report card can only be described as so-so. But Earnings Season is just a report card, what is more important is the Street's reaction to the reports, which has been mildly negative. Brian Gilmartin noted that consensus forward 12 month earnings estimates were revised downward last week:

Per ThomsonReuters, “This Week in Earnings”, the “forward 4-quarter” estimate for the SP 500 estimate finished the week at $118.75, down $0.19 from last week.

This is the second consecutive week that forward 12 month earnings have ticked down and the continuing downward revisions represent another headwind for market bulls.


A correction/consolidation in an uptrend
My inner trader is in the business of playing the odds. The odds suggest that we are due for a one-week pullback and consolidation of the gains that stocks saw last week. If history is to be our guide, then any correction is likely to be shallow. My initial SPX target is the 20 day moving average, which is about the 1700 level. If the correction were to get deeper, it would likely get halted at the bottom of the Bollinger Band, or the 1650-1660 level.

Longer term investors, on the other hand, shouldn't be concerned about these tiny blips.Consider, for example, that European equities are staging upside breakouts and remain in an uptrend:

Like Europe, China's Shanghai Composite is in an uptrend:

Resource sensitive markets like Australia has staged upside breakouts:

So had Canada, though the move looks a bit extended and may be due for a pullback:

Similarly, the cyclically sensitive Korean market has broken out to the upside:

Bottom line: Analysis of the intermediate term trend indicates that the bulls are in control of the tape, but the short-term technical picture suggests that markets look a bit extended and may be due for a brief pause or pullback.

There is potential for lots of volatility in the week ahead. About 30% of SP500 components will be reporting earnings and there will be a couple of major market moving events. On Tuesday, the US releases the all-important employment report, which was delayed because of the government shutdown. On Wednesday, the ECB will be releasing the details of its Asset Quality Review of eurozone banks. It is not a stress test, but a review of eurozone bank assets, but the report has the potential to shake up markets.

At the very least, traders may wish to step aside given the unpredictability of the cross-currents.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.

Could inequality have caused the Washington standoff?

There has been a lot of discussion on the blogosphere about growing inequality in the United States and its possible negative effects. See examples from FT Alphaville, the IMF paper on inequality and monetary policy, Josh Brown wondering if inequality is responsible for why the American economy can't recover and Washington's Blog,.

The Tea Party's world view
One unintended consequence might have resulted in the recent Washington confrontation over the government shutdown and debt ceiling. This isn't some socialist rant, so stay with me on this.

Brett LoGiurato of Business Insider recently wrote about a trip he made to the district of Rep. Ted Yoho (R-Fla.), a prominent Tea Party leader in the debt ceiling fight. It was unfortunate that the tone of the article was "look at the local yahoos that I found in the land of debt ceiling deniers". Nevertheless, the article had some interesting insights. The district is relatively homogeneous and therefore serves as an echo chamber for Yoho's world views:

As Jeremiah Tattersall exasperatedly puts it, Yoho is living in an echo chamber with people just like him. That's what happens when you win a district drawn in such a way that you win 65% of the vote.

"You answer to birthers. You answer to people who seriously believe you're like Martin Luther King Jr. and Rosa Parks and would be standing next to them," said Tattersall, a field staff of the North Central Florida Central Labor Council, a group that opposes Yoho and often demonstrates against him.

"And you answer to people who don't believe the debt ceiling is a real thing."

Tattersall is right. If you walk up to 20 people at random at various points in this district, there's a good chance that at least 15 will appreciate the fight in which Yoho is participating on their behalf in Washington. The economists' warnings, the temporary Wall Street freak outs — nothing has tempered their willingness to engage in this battle.

I generally don't characterize anyone as a local yahoo, because people have a right to their views. However, it seems that the views of Yoho's constituents are not corroborated by the mathematical realities of the US federal budget:

Why aren't you concerned about defaulting?
"The people who are saying that are using scare tactics," said Todd Newtown, the clerk of the Circuit Court in Trenton.

It's almost a unanimous consensus among economists.
"Well, sure, the Ivy League liberals ..."

There are more than a few Republicans and conservatives who agree that breaching the debt ceiling and risking default would be dangerous, no?
"I think they've bought into the scare tactics."

Brainwashed?
"Sure, brainwashed."

Asked about what they would cut out of the federal budget, the Yoho constituents' consensus was foreign aid and arts funding. Such comments are typical of the sentiment that I have heard from Tea Party supporters.

Notwithstanding the fact that the foreign aid budget is a drop in the bucket of the federal budget, much of what is termed "foreign aid" can be properly classified as part of the military budget for the United States. Wikipedia shows that in the 2011 US foreign aid budget was roughly $50 billion (out of a total of $3.5 trillion in spending). Most of the foreign aid budget went to the following five countries (in order of magnitude): Afghanistan, Israel, Iraq, Pakistan and Egypt, most of which is military aid for American weapon systems that benefit US manufacturers. As well, aid to most of those countries are for US national security purposes. For example, aid to Afghanistan, Iraq and Pakistan are in support of US military operations in the region and aid cutoff could severely hamper operations in that theatre.

Similarly, arts funding represents roundoff error in the federal budget and their complete elimination does little to affect the level of the deficit.

As well, one of the solutions to hitting the debt ceiling was the prioritization of payments. This way, it was thought, Tea Party supporters could achieve their ideological goal of smaller government. The Bipartisan Budget Policy Center recently laid out some sample choices on what was needed to close the budget gap in the case of payment prioritization.

While the points raised in these slides are moot in light of the latest political developments, they nevertheless illustrates the difficult choices that need to be made. Have Tea Party supporters actually gone through the realities of the budget and done the math?


Could math and financial literacy be the problem?
Then it came to me, it's not that Tea Partiers are stupid, it's just the broad American population doesn't score well on math and financial literacy compared to other major industrialized countries, as per this USA Today report. (Here is a sample version of the test.) Maybe they are just not math and financially literate!

A first-ever international comparison of the labor force in 23 industrialized nations shows that Americans ages 16 to 65 fall below international averages in basic problem-solving, reading and math skills, with gaps between the more- and less-educated in the USA larger than those of many other countries.

The findings, out Tuesday from the U.S. Department of Education, could add new urgency to U.S. schools' efforts to help students compete globally.

The new test was given to about 5,000 Americans between August 2011 and April 2012. The results show that the typical American's literacy score falls below the international average, with adults in 12 countries scoring higher and only five (Poland, Ireland, France, Spain and Italy) scoring lower. In math, 18 countries scored higher, with only two (Italy and Spain) scoring lower. In both cases, several countries' scores were statistically even with the USA.

To bolster my point, a recent FINRA study found that way over-estimated their own financial knowledge but scored badly on the basics of finance.

How could that be? The US higher education system remains the envy of the world. The United States gets the lion's share of Nobel Prizes and parents from all over the world strive to send their children to schools like Harvard and Stanford.

While the quality of the top schools are still unquestioned, the problem is that society and the education system is becoming increasingly bifurcated. Rebecca Strauss of the Renewing America initiative at the Council on Foreign Relations documented this problem [emphasis added]:

Averages can be misleading. The familiar, one-dimensional story told about American education is that it was once the best system in the world but that now it’s headed down the drain, with piles of money thrown down after it.

The truth is that there are two very different education stories in America. The children of the wealthiest 10 percent or so do receive some of the best education in the world, and the quality keeps getting better. For most everyone else, this is not the case. America’s average standing in global education rankings has tumbled not because everyone is falling, but because of the country’s deep, still-widening achievement gap between socioeconomic groups.

And while America does spend plenty on education, it funnels a disproportionate share into educating wealthier students, worsening that gap. The majority of other advanced countries do things differently, at least at the K-12 level, tilting resources in favor of poorer students.

A Darwinian education system
The bifucation is becoming increasingly acute given the reality that not everyone can go to a top school like Princeton or Yale, where earnings prospects are considerably higher. In effect, the elitism that exists in the higher education system is creating inequality and a two-tiered economy (see my previous post Another American step to Argentina). A recent Hamilton Project study showed how income levels affect education. The education system is becoming Darwinian even for the very young. As the chart above from Strauss and the chart below shows, wealthier families can afford to invest more in their children and the results show it.

High achievers get into the best schools. While the stated admission policy of a school like Harvard is "needs blind", most people don't get into Harvard without enrichment when they are young, which costs money. The chart below shows the level of college admission by income quintile (bottom = green, top = purple).

Consider the student loan problem as an illustration of the divide in higher education. While a college degree is still valuable than a high school education, the net value of a degree is falling and the debt incurred to obtain that degree is becoming more of a problem for the average Joe (via Business Insider):

The student loan delinquency problem is particularly acute in the Red States where Tea Party support is the strongest:

It seems that one of the unintended side-effects of the growing inequality is the lack of financial and mathematical literacy. When combined with the Tea Party's populist anger of being isolated and left behind, it resulted in a misguided willingness to take the country over a financial cliff over the issue of the debt ceiling and possible default.

Unfortunately, this situation isn't likely to get any better. Gerard Minack of Morgan Stanley showed that inequality, as measured by the Gini coefficient, is highly correlated with political polarization (via Business Insider):

It seems that we may have to put up with greater polarization and political volatility in the United States. It's no wonder that the US debt rating is getting increasing scrutiny from the rating agencies.



Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.