Monday, February 27, 2012

We are all QEers now

Richard Nixon famously said in 1971 that we are all Keynesians now. Within a decade, the unintended effects of Keynesian stimulus were plain to see for everyone as inflation raced upwards and out of control.

Today, as the world holds its breath for the results of the ECB's LTRO2 auction later in the week, we are all Quantitative Easers. The Bank of Japan, Federal Reserve, the European Central Bank and Bank of England have all embraced quantitative easing, or money printing. Recently, both the BoE and BoJ have announced further rounds of quantitative easing.


In the short run, there are clear benefits to the US federal government of the Fed's ZIRP and quantitative easing. In 2011, the US paid $454 billion in interest payments under ZIRP and, despite skyrocketing debt, interest expect was less than it was in parts of the 1990's.

Moreover, L Randall Wray points out that the Federal Reserve holds assets equal to one-fifth of GDP. What's more, an astounding 50% of its assets have maturities of 10 years or more.

Governments of the developed world are trapped by their central bankers dual policies of ZIRP and QE. If central bankers were to raise rates, interest costs would spiral out of control and overwhelm budgets. Just read Reinhart and Rogoff to see what happens next.

This has resulted in a binary investment environment of risk on, when central bankers are engaged in QE, and risk off, when they are not. The endgame will either inflation or debt default - and I don't know what the result will be.

For investors, this means becoming more tactical in understanding the risk on/risk off backdrop and participating in the trend of the day. Right now, central bankers are engaged in another round of QE around the world. Despite what you may think of the ultimate costs of such policies, the right thing for an investor to do is to party and worry about the consequences later.



Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

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 article 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 Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Sunday, February 26, 2012

Mario Draghi reveals the Grand Plan

Policy in Europe has generally been done in the back rooms, with the theatre, e.g. PIIGS debt re-negotiations, done in the front rooms. Last year, the markets were panicked because they perceived the backroom elites had lost control of the situation and events were spiraling out of control.

Today, it appears that the elites have calmed things down and there had always been a Grand Plan. We got hints of this when Angela Merkel said that there was no silver bullet to the eurozone crisis, but resolution was a "long process".

Now ECB head Mario Draghi, in a WSJ interview, reveals the Grand Plan. Not only does he speak on monetary policy, I found it more important that he touched on fiscal policy and micro-economics, which is an indication that he was speaking about the European Grand Plan.

The Grand Plan involves austerity, but it's not all austerity all the time. Draghi distinguishes between "good austerity" and "bad austerity".
WSJ: Austerity means different things, what’s good and what’s bad austerity?

Draghi: In the European context tax rates are high and government expenditure is focused on current expenditure. A “good” consolidation is one where taxes are lower and the lower government expenditure is on infrastructures and other investments.

WSJ: Bad austerity?

Draghi: The bad consolidation is actually the easier one to get, because one could produce good numbers by raising taxes and cutting capital expenditure, which is much easier to do than cutting current expenditure. That’s the easy way in a sense, but it’s not a good way. It depresses potential growth.
Lower taxes and less government expenditures? That sounds positively...Anglo-Saxon (excuse my French).

Draghi went on to say that the next step, after austerity, is structural reform "because the short-term contraction will be succeeded by long-term sustainable growth only if these reforms are in place". Draghi went on to say [emphasis added]:
WSJ: Which do you think are the most important structural reforms?

Draghi: In Europe first is the product and services markets reform. And the second is the labour market reform which takes different shapes in different countries. In some of them one has to make labour markets more flexible and also fairer than they are today. In these countries there is a dual labour market: highly flexible for the young part of the population where labour contracts are three-month, six-month contracts that may be renewed for years. The same labour market is highly inflexible for the protected part of the population where salaries follow seniority rather than productivity. In a sense labour markets at the present time are unfair in such a setting because they put all the weight of flexibility on the young part of the population.
In other words, union busting and going after all of the entrenched interests of the old with their lifetime jobs and gold-plated pensions at the expense of the young jobless. It sounds positively Thatcherite. Draghi went on to say that the old days of the European social model are gone [emphasis added]:
WSJ: Do you think Europe will become less of the social model that has defined it?

Draghi: The European social model has already gone when we see the youth unemployment rates prevailing in some countries. These reforms are necessary to increase employment, especially youth employment, and therefore expenditure and consumption.

WSJ: Job for life…

Draghi: You know there was a time when (economist) Rudi Dornbusch used to say that the Europeans are so rich they can afford to pay everybody for not working. That’s gone.
Mario Draghi is an important central banker and chooses his words carefully. I can't believe that he would go rogue and speak so frankly about fiscal and other government policy outside the ECB's mandate without the consent, or at least informing, the likes of Merkel and Sarkozy. So you have to believe that he is speaking on behalf of either the Elites or at least Merkozy in detailing this Grand Plan.
 
 
Can the Grand Plan work?
Today, I see commentary about how austerity is biting and the people of Greece (followed by Portugal) cannot possibly survive with a policy of all-austerity-all-the-time. They are missing the point. Draghi said that structural reforms must follow because "short-term contraction will be succeeded by long-term sustainable growth only if these reforms are in place."
 
This sounds like a long and hard road. Can it succeed?
 
The plan sounds like it was written out of the Maggie Thatcher playbook. It is also somewhat Teutonic in that it is well aware of the link between competitiveness and productivity, as well as the remarkable German technique of achieving a consensus between business, labour and government.
 
I am cautiously optimistic that the Grand Plan could work, which would lead to a period of European Renaissance. For it to work, however, many things have to go right. First of all, you need all of the actors to fall into line and no one to quit because "enough is enough". So watch the upcoming Greek elections and watch the upcoming French elections for how much support Marine Le Pen gets as important barometers of discontent on the Street. I remain optimistic because we are not at that breaking point because, despite the mass content with the bailout plan, the latest opinion polls of Greeks show that 77% want to stay in the eurozone "at all costs".
 
As well, you need to have an accommodative Dr. Draghi (and Dr. Bernanke) standing by to inject the patient with additional quantitative easing morphine if necessary while he is still in recovery. That appears to have been accomplished. Note how Draghi did not rule out another round of LTRO despite other quarters of the ECB voiced concerns about the banking system becoming overly dependent on ECB support:
WSJ: Would you be open to doing more, or longer, LTROs if needed?
Draghi: You know how we answer these questions. We never pre-commit.
Also notice how the ECB's LTRO program amounts to de facto quantitative easing and money printing, but there hasn't been a single word of protest from the German hardliners? That's an indication that there is a Grand Plan which the elites are executing.
 
The jury is out on the Grand Plan but if this all works, Merkel could be lionized as the new Thatcher and Draghi as the new Maestro.
 
 
 
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
 
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 article 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 Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Saturday, February 25, 2012

War with Iran:Would you go bankrupt for your country?

There has been a fair amount of chatter about a geopolitical risk premium on the price of oil stemming from a conflict with Iran. While I generally don't agree with candidate Ron Paul on most matters, I do agree with him when he said in a debate last week that America can't afford another war.

The Institute for Economics and Peace (h/t Josh Brown) came out with a paper called Economic Consequences of War on the U.S. Economy, which Josh summarizes as:
  • Public debt and levels of taxation increased during most conflicts;
  • Consumption as a percent of GDP decreased during most conflicts;
  • Investment as a percent of GDP decreased during most conflicts;
  • Inflation increased during or as a direct consequence of these conflicts.
Fiscal conservatives should be appalled by the march to war, especially when you consider the immense deficits that are facing the government today. I once rhetorically asked if the Pentagon has a downward sloping demand curve and today I very much doubt it. Consider this account of how gasoline costs $400 per gallon in Afghanistan - that's before the Pakistanis cut off supply routes that raised prices roughly sixfold. Are American interests in Afghanistan that important to warrant those kinds of costs? (I read somewhere once that the United States spent $1 million for every Vietnamese man, woman and child during the Vietnam War. Could it have achieved its objectives for a lower cost?)

Instead of fighting wars intelligently, the military industrial complex focuses on the development of gadgets like the iRobot’s Warrior, which is “strong enough to tow a car and dexterous enough to open its trunk using the handle.” Is this the sort of device the military really needs in a counterinsurgency?

Imagine if your local police force deployed such machines instead of real people and you interacted with them through an automated call center. How would that affect your interaction with the police? Would you trust them more? Or less?
Instead of fighting wars intelligently, the military industrial complex is now intent on building the Death Star - and damn the cost!
Star manager Jeff Grundlach compared the US to the Roman Empire. American share of global military spending is 43%, but meanwhile its debt is spiraling out of control.


During times of vital interest to a nation, its leaders have asked its young men to be prepared to die for their country. On the other hand, how many Americans are prepared to lose their jobs and homes and go bankrupt for their country?

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest. 
 
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 article 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 Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Thursday, February 23, 2012

Is ECRI changing its recession call?

Here's an announcement on the ECRI website.

Will Achuthan back off on the recession call? If he did then surely clients would have heard it first but I haven't heard any leaks from the blogosphere. On the hand hand, it does say "updated outlook".

Stay tuned.



Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

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 article 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 Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Watch how the ECB acts, not it says

As we await the ECB's LTRO2 auction next week, there was a story on CNBC entitled ECB preparing to close liquidity floodgates:
The European Central Bank wants its second offer of cheap ultra-long funds next week to be its last, putting the onus back on governments to secure the euro zone's longer-term future.

There is no doubt that the ECB would rather not seen banks staying on LTRO life support, but what it wishes for and what it will do are two completely different matters. The story sounds like a plant, intended to warn the markets not to expect another round of LTRO.

The expectations that LTRO will stop on February 29 don't seem credible. Consider this Bloomberg story on February 10 of how Mario Draghi was practically begging banks to participate in the three-year LTRO program:
European Central Bank President Mario Draghi lashed out at bankers who said tapping the ECB’s three-year-loan program carries a stigma, after executives including Deutsche Bank AG (DBK)’s Josef Ackermann said they shunned the loans.

“There is no stigma whatsoever on these facilities,” Draghi said at a press conference in Frankfurt yesterday. “Some have made some sort of statements that I would call statements of virility, namely it would be undignified for a bank, a serious bank, to access these facilities. Now let me say that the very same banks that made these statements access facilities of different kinds -- but still government facilities.”
Which do you think represent the real views of the ECB?



Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

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 article 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 Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Wednesday, February 22, 2012

Preliminary verdict: Consolidation and correction

In my last post, I wrote that I was watching the European bourses and the Hang Seng Index for signs of whether we are likely to see a continuation of the bull move or a consolidation period.

The preliminary verdict is consolidation and correction. You can tell the short-term tone of the market by how it reacts to news. On the weekend, China unexpected cut reserve requirements by 50 bp. The Shanghai Composite rallied on the news, but the Hong Kong market was unable to hold its gains and finished the last few days beneath a key technical resistance level.


In Europe, we saw the Greek bailout deal finalized late in the night. Markets staged a mild rally on the news and then sold off. The Dow rallied to kiss the 13K level and wound up roughly flat on the day. Does this sound like a market where the bulls are in control or does it sound like they're exhausted?

In the wake of the easing of financial tensions in the eurozone, can anyone explain to me why the EURCHF exchange rate hasn't rallied and appears to be slowly declining to the 1.20 level where the SNB said it would defend?


The Swiss Franc has long been regarded as a safe haven and the EURCHF rate is a measure of risk appetite so the above chart appears to be anomalous. What does the FX market know that the equity markets don't know?

I generally agree with Barry Ritholz's scenario for the market, though I believe that the Fed is likely to be proactive on QE3:
If the past is prologue (and that cannot be relied upon), we could see a scenario something like this (Note: Wild ass guessing to follow). Markets kiss 13,000, pullback and consolidate. But they are not overbought sufficiently for anything more serious than a modest retracement, and so they continue higher for several months, until the % of stocks over 200 day MA is near 90% (they are at 75% today). That takes us somewhere between March and June. The next sell off begins, lopping 25% or so off of the SPX. The Federal Reserve waits until after the November election to introduce QE3, and the cycle starts anew.

My base case scenario calls for a short (1-3 week) consolidation phase and a grind upward. After that, we'll have to watch how events unfold.


Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

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 article 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 Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Sunday, February 19, 2012

Breakout or consolidation?

On Friday, the Dow Jones Industrials Average staged an upside breakout to a new recovery high. The move was confirmed by the large cap OEX, but not by many other averages.


The S+P 500, for example, is still struggling with resistance. The intermediate term trend, however, appears bullish as it is in a well-defined uptrend and there are signs of global healing from stock indices around the world. In my mind, there is no question that the bulls are in control of this market in the intermediate term. The more relevant question is whether they have exhausted themselves in the short-term. Can the S+P 500 clear resistance or are we due for a period of consolidation?


More disturbing for the bulls is the narrowing leadership of this rally as it has been led by the large cap stocks. Small caps have not been as strong, which is a bearish negative divergence. As shown below, the small cap Russell 2000 is barely approaching its resistance zone, though it is in a similar well-defined uptrend.



Cylicals say consolidation
To discern the future direction of equities, I turn to the answer from three place. I analyzed the chart patterns of the cyclicals, as well as the other two sources of macro risk, Europe and China. Consider the Morgan Stanley Cyclicals Index. These stocks staged an upside breakout in mid-January, but have started to consolidate as they moved sideways through the uptrend line.


Other cyclically sensitive indices and currencies, such as the Australian Dollar, the Australian All-Ords, the Canadian Dollar and the TSX Index all show a pattern of breakout and consolidation.

Commodity prices, on other hand, have lagged this rally. They broke out of a downtrend in mid-January and they appear to be consolidating. I am watching to see if the sideways pattern continues or if they can stage an upside breakout through resistance.



Are fundamentals improving?
Josh Brown puts the bull and bear debate into perspective this way:
I'm convinced that the single most important decision facing asset allocators right now is whether or not to join The Big Shift or to ignore it and ride it out. Guys like me need to decide if we're going to dance with the sinners in the high-beta, risk-on sectors that have been leading this market or stick with the saints - the defensive, income-heavy non-cyclicals that saved our lives when things got dicey last year.


He went on to say that equity prices may have gotten ahead of fundamental [emphasis added]:
The trouble with this is that while we may yet be able to avoid another recession scare this year, the data simply does not confirm (just yet) what the homebuilders, banks, casinos, REITs and materials stocks would have us believe. Instead, I think we're witnessing a major rotation, one of the biggest I've ever seen, and that it cannot get much further until the data on housing and jobs improves markedly and materially.

Have the fundamentals improved? Well, sort of. On the earnings side, things are improving as reporting season progresses. Thomson-Reuters reports that the "beat rate" for companies have been steadily getting better.


Corporate guidance, while negative, has been improving as well [emphasis added]:
Looking ahead to the next earnings season, in which companies will give investors a glimpse of how they are faring in the early months of 2012, the number of companies offering downbeat guidance continues to exceed those steering analysts’ forecasts higher. So far, 52 companies in the S+P 500 have issued negative earning guidance compared to 20 that have issued positive earnings guidance for the first quarter of 2012; the resulting ratio of negative to positive preannouncements is 2.6. While that’s still not telling investors that corporate executives are bullish, it’s a significantly more positive reading than the N/P ration of 3.6 observed as recently as last week.


Watch overseas markets
The other important "tell" of market direction are Europe and China, which are the two big sources of macro risk. I am watching closely the action of the Euro STOXX 50, which has staged an upside breakout, but it isn't clear whether the breakout will hold. (With the ECB about to unleash LTRO2 that is expected unleash over €600b of liquidity to the eurozone banking system, does anyone want to bet against a breakout?)


Moving east, I pointed out last week that the Shanghai Composite had rallied through a downtrend line. That development had alleviated my concerns of China as a source of tail risk and signaled that a hard landing is less likely. Indeed, China has cut bank reserves another 50 basis points as it followed suit on a trend of global monetary easing by the BoJ and BoE.


Next door in Hong Kong, the Hang Seng Index has rallied to fill a downside gap and is encountering overhead resistance. I am watching carefully to see if the bulls can stage a rally to overcome resistance.



Where to next?
Is this a period of breakout or consolidation? My inner investor tells me to stay with the bull trend in equities as they are in a well-defined uptrend. Moreover, a glance at the 30-year Treasury yield shows that it is forming a saucer bottom pattern, indicating that the risk-off trade is on its last legs.


My inner trader, on the other hand, is more agnostic on the question of breakout or consolidation. On one hand, he is aware that the combination of under-invested equity investors and bullish sentiment can  lead to  a series of "good overbought" conditions that result in higher prices. On the other hand, the markets are overbought and they are ripe for a pullback and he is watching market conditions carefully next week for signs which way the markets break.



Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

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 article 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 Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Friday, February 17, 2012

China saves the world

When my Asset Inflation-Deflation Trend Model flashed an asset inflation signal on February 6, 2012 to buy high beta and high octane inflation hedge and emerging market stocks, the major risk to the bullish forecast was a Chinese hard landing. One of the key indicators that I was watching at the time was the Shanghai Composite, which had been in a well-defined downtrend.

All that has changed. Since I wrote those words in early February, the Shanghai Composite has managed to stage a rally through the downtrend, signaling that China's hard landing scenario is becoming less likely.


Indeed, Reuters reported the PBoC indicated that it is prepared to ease policy gradually in order to keep inflation in check:
In its monetary policy implemention report for the fourth quarter of 2011, the central bank said it will use a mix of policy tools, including interest rates, to maintain reasonable credit growth while keeping a lid on inflation.
Next door in Hong Kong, the Hang Seng Index has already rallied through its downtrend line and the 200-day moving average at about the same time, which is another signal of global healing and recovery.


Now that both the Shanghai Composite and Hang Seng Index have rallied through their respective downtrend lines and the fundamentals are becoming more positive, it seems that China is in the process of confirming the global bull move in risky assets. In fact, it's saving the world as it indicated that it would continue to buy euro denominated debt, which it said it would do once the Europeans got their act together (and it is in the Chinese self-interest as Europe is a major export market).

These developments confirm my recent observations that we are seeing a intermediate term bull market in stocks and risky asssets.

So party on and let's rock 'n roll!



Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

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 article 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 Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Tuesday, February 14, 2012

Interpreting the retail sales number

The retail sales number reported today came in mixed. The headline number came in below expectations, but the ex-auto number was strong. There were revisions everywhere.

What to make of this?

I believe that the American consumer it's would be a mistake to think that the American consumer as down and out. The Consumer Metrics Institute produces a series of figures that tracks American consumer activity on a daily basis. The daily series shows a modest uptick.



Daily numbers are inherently noisy, but the monthly figures show a definite rebound in consumer demand.



For the final word, Nomura (via Business Insider) interpreted the retail sales report positively:

The control measure feeds into estimates for the consumer spending component of GDP and suggests a healthy round of spending to start the year. Lastly, our preferred measure of consumer comfort, the category of dining out, increased by a strong 0.6% in January. Dining out can be seen as one of the ultra-discretionary categories of spending that is typically the first place households will cut back on spending if confidence is faltering.
Remember that we are in a central bank induced liquidity rally. Last week the BoE joined the party, this week it was the BoJ. Enjoy.


Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

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 article 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 Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Monday, February 13, 2012

Hold your nose and "rent" the junk

The stock rally in 2012 has been characterized by a low-quality rally, or "dash for trash". I wrote here that investors were under-invested in equities and have been rushing for the entrance. They have been chasing the low-quality high-beta names as a way to quickly increase their equity exposure.

If I am right in my thesis that we are in the midst of a buying panic, then the low-quality theme makes sense as a trade. The way to participate is through the use of the Phoenix strategy.


The Phoenix rises again?
I gave a buy list of Phoenix stocks on February 24, 2009, shortly before the ultimate bottom in the stock market in March 2009. The idea behind the strategy is to find beaten down stocks that barely survived the bear market and have the financial or operational leverage to benefit from the coming upturn.

The February 24, 2009 list produced many winners. Notable among them were household names such as the Bank of America (BAC):



Liz Claiborne (LIZ):



...and Saks (SKS):



Different macro backdrop, but still dashing for trash
This time, the macro backdrop is different. We were not in a recession, though arguably it has been a period of anemic economic growth, so the situation for many companies isn't as dire as it was in late 2008 and early 2009. Nevertheless, Phoenix does make sense as a way to participate in the "dash for trash" theme.

With that in mind, I screen the members of the Russell 3000 for the following characteristics:
  • Stock price below $8 (lower quality, high beta names)
  • One year return of -50% or less (beaten down stocks)
  • Market capitalization of $100 million or more (must be "real" companies)
  • Net positive insider buying (number insider buys - number of insider sells > 0, which should provide some downside support should our thesis turn out to be wrong)
I came up with the following 39 names:
American Superconductor Corp (AMSC), ATP Oil & Gas Corp/United States (ATPG), Aviat Networks Inc (AVNW), Broadwind Energy Inc (BWEN), Central European Distribution Corp (CEDC), Clearwire Corp (CLWR), Cleveland Biolabs Inc (CBLI), Coldwater Creek Inc (CWTR), Demand Media Inc (DMD), EXCO Resources Inc (XCO), Fairpoint Communications Inc (FRP), Frontier Communications Corp (FTR), Gentiva Health Services Inc (GTIV), Geron Corp (GERN), Globalstar Inc (GSAT), Hampton Roads Bankshares Inc (HMPR), IntraLinks Holdings Inc (IL), Kratos Defense & Security Solutions Inc (KTOS), K-Swiss Inc (KSWS), MEMC Electronic Materials Inc (WFR), Meritor Inc (MTOR), MGIC Investment Corp (MTG), Monster Worldwide Inc (MWW), Office Depot Inc (ODP), OfficeMax Inc (OMX), Opnext Inc (OPXT), Overstock.com Inc (OSTK), Pacific Biosciences of California Inc (PACB), Popular Inc (BPOP), Quepasa Corp (QPSA), Radian Group Inc (RDN), RAIT Financial Trust (RAS), Savient Pharmaceuticals Inc (SVNT), SIGA Technologies Inc (SIGA), Sigma Designs Inc (SIGM), Skilled Healthcare Group Inc (SKH), Sun Healthcare Group Inc (SUNH), TriQuint Semiconductor Inc (TQNT) and Willbros Group Inc (WG).


Important caveats and disclaimers
I know nothing about your investment objectives and risk tolerance so don't construe this as investment advice as this may not be a suitable strategy for you.

This is obviously a high risk approach and I would take the following steps to control risk. First of all, determine how much of your portfolio you want to put into this strategy as 100% commitment is not suitable for pretty much everyone. Second, diversification is critical. I have received feedback when I last issued the call to buy into the Phoenix strategy about this stock or that stock not working out. If you do employ this strategy, you should buy a basket of these stocks and not focus on just one or two names.

Do your own due diligence on the stocks on the list. For some investors, this list could serve as a starting point to do some investigation of their own. As well, define your risk tolerance carefully, either on an individual stock basis and/or on a portfolio basis.

Lastly, this is a momentum dependent strategy that should be rented and not owned. As soon as momentum wanes, that will be the exit signal.

You're on your own.


A shorter list
If 39 names is too much for you to think about, then I winnowed the list down to eight names by requiring that there are no insider sells (instead of just positive net insider buying) and heavy insider buying, defined as more than five insider buys within the last six months:
ATP Oil & Gas Corp/United States (ATPG), Coldwater Creek Inc (CWTR), Gentiva Health Services Inc (GTIV), MEMC Electronic Materials Inc (WFR), Savient Pharmaceuticals Inc (SVNT), SIGA Technologies Inc (SIGA), Sun Healthcare Group Inc (SUNH) and Willbros Group Inc (WG).
Since the market rally has been going on for several months, buying into a Phoenix strategy now is being late in the game. However, as equity underweight investors rush to get into the stocks, this strategy should yield some decent returns if my investment thesis is correct. One important component of this approach is to watch momentum indicators carefully. When they start to turn down, then it's time to get out.

Be bold. This is the time to hold your nose and "rent" the junk.


Full disclosure: I am personally long ATPG and SVNT and may seek to get long the other names mentioned in the days to come.


Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

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 article 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 Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Saturday, February 11, 2012

Bullish sentiment can be bullish, not bearish

On Friday, US stocks had their worst day of 2012 as the S+P 500 fell by -0.69%. With market conditions overbought and sentiment surveys showing high levels of bullishness, does this mark an intermediate term top?

I don't think so. Let's get back to first principles on sentiment models. When investors are overly bullish, the market declines because there is no one else left to buy. Read that last sentence carefully, especially the last part. Is there anyone else left to buy?

Doug Kass thinks so, because many investors are under-invested in equities:
Today's dominant investor classes -- individual investors, hedge funds and pension funds -- have de-risked and are relatively uncommitted to equities.

A re-allocation into stocks (and out of bonds) represents an underappreciated and potentially massive (and latent) demand that could easily be the catalyst for a move to all-time highs in the S+P 500 in 2012.
Mebane Faber showed this chart of AAII asset allocation on January 27, 2012 showing individual investors were under-weight equities versus their historical average. (The figures have since been updated by AAII and individuals are only at their average weight.) These readings indicate that equity weightings have much farther to run.


Last week, Barry Ritholz spoke with one technician who said that she didn't know anyone who is bearish and even Roubini has become a bull. Ritholz then rhetorically asked, "Where are the bears?" Here is one key comment in response to his post indicating that individual investors are not excessively bullish in their portfolios [emphasis added]:
This is of interest. Helene Meisler, a technical analyst at theStreet.com, conducted a non-scientific survey which I’d guess probably got a majority of responses from the retail folks about how what they were expecting in the near future. Less than 1 in 5 reported they were positioned for further gains, with rest split between people expecting a pullback of less than 5% and a smaller number expecting a larger decline.

I find this interesting because the last I heard the “smart money” was slightly bearish and the “dumb money” was significantly, though not exuberantly, bullish. So either sentiment has changed, I was wrong and her responses drew from the “smart money” crowd, or else her survey sample was distorted in some way.

A series of "good overbought conditions"
The good news for the bulls is that tcombination of high bullishness and a market underweight is a recipe for a buying stampede.
Don't forget that this is a central bank liquidity fueled rally. The BoE, the Federal Reserve and the ECB (through LTRO) are committed to quantitative easing. The best analogue is the QE2 rally seen in the latter half of 2010. The market experienced a series of "good overbought conditions" as it advanced.



So am I overly concerned that stocks encountered resistance for the first time and experienced its "worst" one-day decline of 2012?

No. This is a time to be buying the dips.




Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

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 article 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 Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.  

Wednesday, February 8, 2012

Greece is so...last year

As Mr. Market waits for the will they or won't they news on Greece, he is telling me that worrying about Greece is so...last year. Despite all of the angst about a possible Greek default, the Greek stock market has been rallying and outperforming the Euro STOXX 50 in the past few weeks.


Worries in the eurozone has shifted to Portugal, whose stocks have been dramatically underperforming.


All is not lost for the bulls. The Portuguese market is staging a tactical rally and testing its downtrend line.



In addition, Portuguese 2 year yields, which had spiked above 20%, are now in retreat, perhaps indicating that Mr. Market is anticipating further relief from the ECB's LTRO2 program.



That's why I am relatively sanguine about the risk trade. If this is the worst that Mr. Market is worried about, it's time to get long and stay long.



Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

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 article 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 Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Monday, February 6, 2012

Buy growth and inflation hedge vehicles

Last week, my Inflation-Deflation Trend Model moved from a "neutral" reading to an "asset inflation" reading, indicating that model portfolio should move to an aggressive risk-on trade of growth stocks and commodity producers. This is a somewhat surprising development as the Trend Model only moved to a "neutral" reading from a defensive "deflation" reading in mid-January.

The Trend Model is an asset allocation model based primarily on commodity prices. Trend following models generally don't from one extreme (defensive) to the other (aggressive) in less than a month. From an analytical viewpoint, however, the development is not entirely unexpected as the signs of global healing are abundant.

Firstly, commodity prices have move out of a downtrend and staged an upside breakout from a wedge, which is bullish. As well, I wrote last week (see Time to ride the commodity bull) that long-term fundamentals, medium term sentiment and short-term catalysts are pointing to another bull run for commodity prices.


The global uptrend in the risk-on trade has been confirmed by most stock markets. US equities saw a well-publicized Golden Cross, which is a bullish condition that points to an uptrend in prices.


Looking around the world, there is an imminent Golden Cross in UK stocks as well.


Across the English Channel, the Euro STOXX 50 has shrugged off worries about Eurogeddon and in the process of staging an upside breakout.


The cyclically sensitive South Korean KOSPI has staged an upside breakout.


Even the Brazilian market, which had been a laggard last year, saw a recent Golden Cross.


The only fly in the ointment has been the dismal performance of the Shanghai Composite, which remains in a well-defined downtrend.


Is the Shanghai Composite signaling a dramatic downturn in the Chinese economy? I'm not sure, but I am somewhat comforted by the price action of the Hang Seng, which recently rallied above its 200-day moving average.



Considerable the upside potential
If we are indeed poised for a major bull move in risky assets, then the next question has to be, "What's the upside potential?"

The upside potential can be quite high. Consider, for example, the resource heavy Canadian market as measured by the TSX Composite. One analog might be to think about is the market reaction after the Lehman Crisis of 2008. The Trend Model correctly moved to a defensive "deflation" reading in August 2008 and went "neutral" in late March 2009, about three weeks after the March bottom. It later moved to an aggressive "asset inflation" reading in August 2009.


This time around, the Trend Model moved to a defensive position in late August 2011, but Eurogeddon did not materialize. It went "neutral" in mid-January 2012 and flashed an aggressive "asset inflation" signal last week.

If we were to measure the TSX Composite from the March 2009 neutral signal to the market peak in early 2011, the move was roughly 6,000 points and roughly 4,000 points from the "asset inflation" signal in August 2009. So how far up can the market move up this time?

Another way to think about this is to look at the relative performance of the high-beta and recovery candidate US Broker-Dealer Index (XBD) relative to the stock market in the wake of the Lehman Crisis. From the bottom in 2008 to the peak in 2009, the XBD staged a relative rally of close to 60%.


A more logical technical target for this bull move, should it develop, would be an outperformance of roughly 30% against the market.

My inner investor says that the aggressive signal from the Trend Model is not altogether unexpected. Central banks are throwing parties and it's time to participate. The ECB's February LTRO auction is expected to attract bids of over a trillion. The Fed is standing ready to unleash QE3.

My inner trader is well aware of calls for a correction and he is a nervous bull. He is tempted to wait for a pullback before deploying new cash as some of the short-term measures appear overbought. Should we see a sustained up move, however, the overbought condition could be what my former Merrill Lynch colleague Walter Murphy calls a "good overbought". An example can be found in the bullish impulse that began in late 2010 after the onset of QE2. The market began to move up and saw periods of sustained "good overbought" conditions.



In any case, enjoy the party. It promises to be a good one.



Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

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 article 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 Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Saturday, February 4, 2012

QE3 is still on the table

After the blowout number from Friday's Non-Farm Payroll (NFP) release, there was some buzz that it would lessen the probability that the Federal Reserve would undertake QE3. I don't think so.

According to its statement after its January 2012 FOMC meeting, the Fed has a 2% inflation target but no target for employment [emphasis added]:
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee’s ability to promote maximum employment in the face of significant economic disturbances.

The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections.
Charles Schwab recently published a research note indicating that the Fed is watching inflation as measured by core PCE because it has a lower housing weight than CPI [emphasis added]:
The Fed also announced an explicit 2% inflation target for the first time in its history. This explicit inflation target also helps reduce uncertainty about policy long-term. The Fed will use the 2% annual target, based on changes in personal consumption expenditures (PCE) as their measure. The current year-over-year increase in PCE is 1.8% in the latest numbers. So they're still a touch below those targets. Bernanke was asked in the press conference following the meetings, "why PCE and not the consumer price index?" One reason is that in CPI, housing has a far greater weight. It appears to have understated inflation during the housing bubble and may overstate it now that renting is more popular than buying. The PCE is also adjusted more flexibly to changing consumption patterns. Fed critics might also argue that annual increases in PCE also tend to be lower than changes in the CPI.

Remember, under the Fed's new transparency initiative, we don't have to guess what the Fed is going to do anymore and revealing their methodology. Consider these figures from the Dallas Fed for PCE, core PCE and trimmed mean PCE, which is another technique for excluding the more volatile components of the inflation rate.

Any way you look at it, core PCE and trimmed mean PCE remains stubbornly low and below the 2% target. This suggests to me that the Fed believes it has more room to stimulate without igniting an inflationary spiral. Watch this series for hints that QE3 might be moving off the table and don't fret about signs of a cyclical rebound from economic releases like NFP.

The Bernanke Put still lives, at least for now.



Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

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 article 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 Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Thursday, February 2, 2012

Apple's problem with the inscrutable Chinese

Last week, the New York Times published an article detailing some of the troublesome working conditions in Chinese factories that makes Apple products:
[T]he workers assembling iPhones, iPads and other devices often labor in harsh conditions, according to employees inside those plants, worker advocates and documents published by companies themselves. Problems are as varied as onerous work environments and serious — sometimes deadly — safety problems.

Employees work excessive overtime, in some cases seven days a week, and live in crowded dorms. Some say they stand so long that their legs swell until they can hardly walk. Under-age workers have helped build Apple’s products, and the company’s suppliers have improperly disposed of hazardous waste and falsified records, according to company reports and advocacy groups that, within China, are often considered reliable, independent monitors.
The article ignited a firestorm of controversy. Consider the reaction that the paper published in a follow up entitled Apple in China: Has iOrwell Arrived?


The inscrutable Chinese
What should Apple do? How should the company react? Before jumping to conclusions, Charles Hugh Smith put the Chinese attitude into context and compared it to the attitudes in an immigrant societies such as America. He writes that in America:
Nobody cares where you're from, or what caste you are, or anything like that. As long as you do your work without being a real pain in the rear-end, are pleasant to your neighbors and workmates, keep your pitbull chained, etc., then you are good to go. Many if not most of the people you interact with also know English as a second language, and since that's burden enough for all of us, we dispense with all the insider stuff. America is on most levels a WYSIWYG culture: what you see is what you get.


Places like China and Japan are on the opposite end of the spectrum: they are not immigrant cultures. Very few nations have a culture that is adapted not to tradition and an opaque mindset but to getting on with immigrants from everywhere. This is one reason people want to come to America; they lose their baggage here and can be themselves, because nobody cares, we're busy with other things, and it doesn't take 15 years to figure out how things actually work here. If it did, the whole thing would grind to a halt and that would be really annoying.
Unspoken attitudes and preferences are far more important in cultures with long established traditions. Smith writes [emphasis added]:
[T]here are always two doors in Asia: the front door, carefully arranged to present a face-enhancing image to the outside world, and the back door, where everything important actually takes place.

A typical front door in China is the banquet with the glad-handing mayor. The back door is for his mistress, the cash "commissions" from various deals and the cover-up of the face-damaging deaths in the local factory. Bad business, that; we lost face. Go take care of it with cash, threats, promises or whatever is required to bury it and restore face.  
What is going on at the back door in this Chinese manufacturing operation that makes Apple products?

The truth of the matter is that a class structure exists in Chinese society. Those at the top don't think that "little people" matter. The dirty little secret is the belief that human life is cheap.

The Globe and Mail peeked behind this door recently with the article entitled: In de-coding class in China, cars are your best clue. The story began when Canadian envoy seemingly "lost face" with the locals because he drives a Toyota Camry:
A Toyota Camry isn’t usually the type of car that turns heads. It certainly isn’t considered a flashy ride on the streets of Beijing, where Audis, BMWs and Mercedes SUVs dominate where three-wheeled rickshaws once ruled.

So when David Mulroney, Canada’s ambassador to China, posted online photos of his official car – a silver Camry hybrid – the reaction from the Chinese Internet was something close to shock. Especially when he explained that even cabinet ministers in Canada only have a budget of $32,400 for their official car.
"Face" matters in China. It signals class and status, which matters a lot. The Globe article went on to decode the class structure, as interpreted by a Bejing cabbie:
Toyota sedan – Driven by putongren. Ordinary people. Not so ordinary that they have to use public transport or ride a bicycle, mind you.

Mercedes SUV – Driver Zhao presumes someone who drives one of these ubiquitous (and always black) vehicles is a laoban. The word means “boss,” but in this case laoban can mean anyone who recently come into cash and wants to show it off.

Buick GL8 minivan – Wildly popular in China (though discontinued in North America), these vans aren’t for soccer moms. To Driver Zhao, someone driving a Buick GL8 is a “xiao laoban,” or little boss. Someone who can’t yet afford the Mercedes. Just as often, the driver is a professional and the passengers are Western expatriate families with kids.

Audi A6 – Weibo had it bang on, it’s the automobile of choice for the Chinese bureaucrat. Seeing an Audi A6 in traffic means you’re idling beside part of the country’s power structure. As The New York Times put it , the A6’s “slick frame and invariably tinted windows exude an aura of state privilege, authority and, to many ordinary citizens, a whiff of corruption.” (The Beijing government says there are 62,000 official cars in the city, a figure that seems far too low. The state-run CCTV television station reported last year that the real figure is closer to 700,000.)

Humvees or Ferraris – Driver Zhao says the only people arrogant enough to drive one of these on Beijing’s streets are the well-off children of top government officials. As evidence of that, I once saw a bright yellow Humvee rip the wrong way through traffic in Beijing’s busy Sanlitun bar district, before proceeding to drive through a red light without so much as tapping the brakes. At least three policemen witnessed the same scene, but seemed to conclude from the driver’s brazen behaviour that he was too powerful to be stopped.
When the New York Times article appeared, the Chinese reaction is quite predictable, characterized by Smith as "Bad business, that; we lost face. Go take care of it with cash, threats, promises or whatever is required to bury it and restore face."
 
For Apple, however, it has a tricky public relations problem with its customers, a problem that may eventually devalue its image and the value of its brand. It too, has "lost face" with its customers. How it responds will be a key test of new CEO's marketing and management savvy. As well, it will be a sign of how far the West has journeyed to meet the East.
 
 
 
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
 
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 article 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 Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.