Headwinds for the bull case

I called for a Santa Claus rally in late November (see Waiting for a Santa Claus rally) and equity markets cooperated and prices have moved up strongly since then. Now that Santa Claus has come and gone and we have seen the "fiscal cliff" relief rally, what's next?

Technically, there are a lot of reasons for stocks to at least pause at these levels. The SPX is now testing an important resistance level.

More comforting for the bulls is the broader NYSE Composite has managed to stage an upside breakout through resistance, indicating that the underlying strength is broad and deep.

However, I don't expect that the SPX will break through to new highs in the short run for several reasons. Simply put, this bull is getting tired and this latest up move is facing too many headwinds. First of all, the SPY to TLT ratio as a measure of the risk-on/risk-off trade is also testing a relative resistance level and showing a near overbought reading where stocks have retreated in the past.

In addition, the VIX Index has retreated to a major support zone where it has bounced off in the past. The CBOE noted that the VIX saw its largest percentage move since inception (h/t Global Macro Monitor), which is another sign of an oversold condition for the VIX and overbought condition for equities. In order for the stock market to advance, volatility would have to fall through a major support level.

Last but not least, the bulls have to contend with the seasonal patterns seen in past Presidential cycles. As the chart below from the Chart of the Day shows, the opening week of the first year of a presidential term starts with a rally, which we have seen right on schedule, and the market starts a broad decline into February. So far, the stock market's behavior in 2013 is consistent with this historical pattern.

Watch this Earnings Season!
In addition, Earnings Season will be a source of volatility for stocks. Barry Ritholz warned about an "earnings cliff" and Q4 earnings will be an important test of his thesis. I explained before (see What happens after the Santa Claus rally?) that the "earnings cliff" is the result of a deteriorating profit outlook by large cap multi-national companies. In that context, the outperformance of the NYSE Composite, which is more reflective of small and mid cap stocks, is consistent with that thesis.

Jeff Miller over at A Dash of Insight has an excellent post where he discussed earnings expectations and concluded that this Earnings Season could be pivotal to stocks:

For the upcoming earnings season I remain open-minded and I will be very attentive. Last quarter was a minefield for corporations. If the complete story -- earnings, revenue, outlook -- was not perfect, the stock price moved lower. I avoided earnings dates in our most aggressive trading programs, and I was nearly always right.

So what now? We all know that the economy remained sluggish in Q4, so earnings will not be great. Much of the uncertainty has been lifted. We know the election result and also tax policy for the near future. Will companies provide a little more guidance? What will it be?

I have more respect for the analyst updates than I do for the pontificating pundits with opinions but absolutely no record. I understand that analysts are too bullish in their multi-year forecasts -- basically following trends with no allowance for bad news. I also understand that by the time earnings are actually reported, the bar has been lowered so that more than 60% of companies beat expectations.

Most experts share these views, but I seem to be alone in drawing the logical conclusion:

If estimates are too bullish in the long run and too bearish at the time of the report, there must have been a "crossover date" when the forecasts were pretty good. My research shows that this occurs at about one year in advance.

To summarize: This earnings season will be important for estimate revisions as well as the current "beat rate."

In short, the bull case is facing too many technical and fundamental headwinds to see the market advance too much further in the short-term. I believe that we are likely to see a pullback at these levels. The bulls will have to watch how the market behaves in response to news, such as the upcoming Earnings Season and the political posturing that is likely to occur over the Debt Ceiling, in order to discern the likely direction of the next major move.


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.

Why a gold standard is a bad idea (III)

Regular readers know that I have stood against the idea of a gold standard (see my previous posts in 2008, 2010 and 2011). I have always regarded the hard money crowd as longing for a mythical time and place that never quite existed.

I came upon some analysis from Frances Woolley at Worthwhile Canadian Initiative that highlighted some of the points that I made about the inflexibility of a gold standard by analyzing a time and place that is mythical - Middle Earth [emphasis added]:

The full economic impact of [the dragon] Smaug [with his gold treasure hoard] can only be understood by recognizing that the dragon's arrival resulted in a severe monetary shock. On the left is shown Smaug's hoard. On the right, for purposes of comparison, are the gold reserves of the Bank of England. It is clear from a simple inspection of these two figures that the amount of gold coinage Smaug withdrew from circulation represents a significant volume of currency. This would, inevitably, lead to deflation and depressed economic activity.

Woolley is making the point that under the monetary model of the economy (PQ = MV), if you withdraw money supply from the system, lower economic activity would be the result. The question then becomes what the proper response if Middle Earth had a central bank using a more flexible monetary system using fiat money would be in the face of such a macroeconomic shock:

One has to ask whether or not a more innovative monetary policy framework could have ameliorated the impacts of the dragon-induced economic downturn. If the peoples of Middle Earth had abandoned their gold specie standard, and switched instead to a paper currency, they could have revived trade-flows without sacrificing so many lives. Unfortunately, the lack of a central bank, or indeed any but the most rudimentary monetary institutions, was a major obstacle to currency reform.

Dragons come. The question is how to respond to them.

The post is worth reading in its entirety. In particular, there are some interesting wonky responses in the comments, especially when you consider that Middle Earth is a mythical place. Here is just one amusing example here:

Considering that Smaug actually took over the castle some 150 years before "The Hobbit" takes place, would not price rigidities have resolved themselves and economic production returned to pre-Smaug levels?

On the other hand, I suppose if Smaug had continued to ravage the countryside year after year, perhaps the money supply was continually decreasing. Fully downwardly rigid nominal prices (like for debt, or if social standards hadn't adjusted, for wages) could then prevent economic adjustment.

But then again, just to continue the argument, it seems unlikely that prices would be very sticky at all in a feudal economy. The two stickiest prices, wages and debts, probably didn't exist. Most workers are subsistence farm owners and are not paid wages. The financial system is negligible - if it even exists - making debt contracts rare. While there certainly could be some sticky prices, those are adjusted over time with much more ease than wages or debts, no?

If this were the case Smaug's deflationary actions would be purely nominal and all his real effects would be through the "fiscal policy" you mention.

Bottom line: I am against the adoption of a gold standard because such a regime creates inflexibility that creates unnecessary volatility for an economic system, regardless of whether the system is real or mythical.


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.

From anti-inflation to pro-inflation

With the release of the Fed minutes yesterday, some commentators (such as Steve Goldstein of Marketwatch) came to the conclusion that the Fed is running out of bullets:

To put it differently: the Fed thinks the economy isn’t that great and there’s very little inflation to worry about, but its primary program to improve the economy doesn’t do very much.

It’s a clear admission the Fed is running out of gun powder. And that’s quite a shot it has fired to the markets.

A sea change in approaches to central banking
I emphatically disagree. In the last few years, we have seen a sea change in the approach to central banking. Gone are the days of Paul Volcker's adoption of Milton Friedman's monetary paradigm of PQ = MV. In a speech by (then) Governor Ben Bernanke on July 23, 2003 entitled An unwelcome fall in inflation?, he implicitly dismissed excessive money growth as a source of inflationary pressure [emphasis added]:

You may have noted that I did not include money growth in this list of inflation determinants. Ultimately, inflation is a monetary phenomenon, as suggested by Milton Friedman's famous dictum. However, no contradiction exists, as the expectational Phillips curve is fully consistent with inflation's being determined by monetary forces in the long run. This point, originally made by Friedman himself, has been demonstrated in many textbooks and so I will not discuss it further here. I only note that, as an empirical matter, instabilities in money demand, financial innovation, and many special factors affecting the monetary aggregates make them relatively poor predictors of inflation at medium-term horizons. For this reason, the role of the money supply remains implicit in this discussion.

In other words, PQ = MV doesn't work well in the short term because V, or monetary velocity, is not constant.

What's more, Bernanke has some very creative ideas of what to do when interest rates hit the zero bound. In a May 31, 2003 speech entitled Some Thoughts on Monetary Policy in Japan, he argued for monetary and fiscal authorities cooperation [emphasis added]:

Discussing the optimal objectives for Japanese monetary policy is all very well, but what of the argument, advanced by some officials, that the Bank of Japan lacks the tools to achieve these objectives? Without denying the many difficulties inherent in making monetary policy in the current environment in Japan, I believe that not all the possible methods for easing monetary policy in Japan have been fully exploited. One possible approach to ending deflation in Japan would be greater cooperation, for a limited time, between the monetary and the fiscal authorities. Specifically, the Bank of Japan should consider increasing still further its purchases of government debt, preferably in explicit conjunction with a program of tax cuts or other fiscal stimulus.

Wow! The government to spend and the BoJ to buy government bond in support (by printing money)? What happened to monetarism and the discipline of the markets? What happened to Reinhard and Rogoff's work on the sustainability of public debt? Bernanke addresses this issue:

Isn't it irresponsible to recommend a tax cut, given the poor state of Japanese public finances? To the contrary, from a fiscal perspective, the policy would almost certainly be stabilizing, in the sense of reducing the debt-to-GDP ratio. The BOJ's purchases would leave the nominal quantity of debt in the hands of the public unchanged, while nominal GDP would rise owing to increased nominal spending. Indeed, nothing would help reduce Japan's fiscal woes more than healthy growth in nominal GDP and hence in tax revenues.

Bernanke goes even further by stating that debt monetization could support public spending programs in order to generate a little inflation. Indeed, a little inflation isn't a bad thing to have under the circumstances [emphasis added]:

Potential roles for monetary-fiscal cooperation are not limited to BOJ support of tax cuts. BOJ purchases of government debt could also support spending programs, to facilitate industrial restructuring, for example. The BOJ's purchases would mitigate the effect of the new spending on the burden of debt and future interest payments perceived by households, which should reduce the offset from decreased consumption. More generally, by replacing interest-bearing debt with money, BOJ purchases of government debt lower current deficits and interest burdens and thus the public's expectations of future tax obligations. Of course, one can never get something for nothing; from a public finance perspective, increased monetization of government debt simply amounts to replacing other forms of taxes with an inflation tax. But, in the context of deflation-ridden Japan, generating a little bit of positive inflation (and the associated increase in nominal spending) would help achieve the goals of promoting economic recovery and putting idle resources back to work, which in turn would boost tax revenue and improve the government's fiscal position.

That's what I meant by a sea change in the way that central bankers think. The thinking have gone from focusing on monetary growth targets (in order to control inflation), to monetary stimulus (to stimulate growth), quantitative easing, nominal GDP targeting and fiscal and monetary cooperation. Bernanke believes that fiscal and monetary cooperation is one more tool that the Fed has when interest rates hit the zero bound, as per his helicopter speech [emphasis added]:

As I have mentioned, some observers have concluded that when the central bank's policy rate falls to zero--its practical minimum--monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.

Is the Fed out of bullets? Definitely not. Once you recognize that Bernanke believes that the mission of the Federal Reserve has moved from primarily an anti-inflation mandate to a pro-inflation (anti-deflation) mandate, you understand how far Bernanke is willing to go.




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.

Some sober second thoughts during the party

As I write these words, most equity markets are melting up between 1% and 2% in Asia and Europe in the wake of the news of a "fiscal cliff" deal in the US Congress. While my Inflation-Deflation Trend Allocation Model remains in at an "inflation" reading indicating a risk-on environment, I am a very nervous bull.

Here are some thoughts to ponder:

• Doesn't this deal set the United States up for more political drama at the end of February? Two months isn't a long time, even for a trader.
• The payroll tax cut didn't get extended, which is an effective tax increase on the middle class. What will happen to consumer spending and consumer confidence? Isn't this contractionary for the economy?

Cullen Roche at Pragmatic Capitalism concluded that [emphasis added]:

• If my rough math is right we’re looking at something in the range of $225B in cuts out of a potential $575B.
• The total drag on the economy (using the CBO’s fiscal multipliers and Goldman Sachs estimates) is ~1.3%.

I know that risky assets are rallying in relief because it could have been worse, much worse, but isn't a 1.3% drag on the economy bad?

Don't get me wrong, I turned more positive on risky assets in November and have gotten increasingly bullish ever since. I am long and I am enjoying this party. Nevertheless, I am edging closer to the exit and keeping an eye for the cops, who will no doubt raid the joint.


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.

Time to avoid US equities

As I write these words, the news out of Washington, DC is that a fiscal cliff deal has reached an impasse in the Senate. Nevertheless, I was surprised to see ES futures up modestly.

Regardless of the outcome of the fiscal cliff negotiations, a review of global equity markets indicate that the leadership is outside the US and a fiscal cliff relief rally (when it comes) would be a good opportunity for American investors to diversify their holdings outside the country. Consider this chart showing the relative returns of US stocks compared to MSCI All-Country World (ACWI). US equities peaked out on a relative basis in July and have been underperforming global equities ever since.

Despite the sunnier outlook shown by the American economy relative to many parts of the world, this analysis shows that the outlook for US equities may not be so bright in 2013.

When we analyze the weightings in ACWI, the main components by weight are US stocks, developed market stocks (EAFE) and the emerging market stocks. EAFE is composed mainly of Japan and Europe, with a minor weight in the Asia Ex-Japan region. Any way you look at it, developed market stocks, as represented by EAFE, are showing relative leadership. They bottomed on a relative basis in August and have been roaring ahead ever since. In December, these stocks staged a relative breakout indicating sustainable strength.

Much of the relative strength in EAFE comes from Europe, which I have written extensively about before (see Europe poised for a renaissance). The other major component of EAFE is Japan and Japanese equities have recently staged a turnaround. The chart below of Japan against ACWI shows that Japanese stocks have rallied through a relative downtrend that began in October 2011.

The last major component of ACWI are emerging market stocks. These stocks bottomed on a relative basis in early September and they have been outperforming ever since. Technicians can be encouraged by the fact that EEM staged a relative upside breakout against ACWI in early December and they have been on a tear ever since. Much of that strength can be attributed to the perceived soft landing in China.

In conclusion, these relative return charts show that US equities have been trailing global stocks since the summer of 2012. Regardless of how the fiscal cliff resolves itself, this analysis suggest that equity investors are better served by a larger weighting outside the US.

My personal favorites are Europe and the emerging markets (in that order), but the bottom line is: avoid US stocks for the time being.


Full disclosure: Long FEZ.


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.

Europe poised for a renaissance

The cover of Barron's features a bullish article on Europe. I agree.

Europe made remarkable progress in 2012. Consider how far 10-year Greek bond yields have fallen:

The Barron's article states that the STOXX 600 trades at a forward 12 month P/E of 11.5 and sports a dividend yield of 3.8%.


Bullish technicals
Technically, European indices appear poised for further gains. I previously wrote about a possible inverse head and shoulders relative breakout of the Euro STOXX 50 (FEZ) against the MSCI All-Country World Index (ACWI) (see Intriguing head and shoulders patterns). Since then, FEZ has staged a relative breakout against ACWI:

Despite the bad news that the eurozone saw last year (Greece, Spain, Italy), eurozone stocks, as measured by the Euro STOXX 50 has shrugged off the negatives and rallied strongly since the summer. In fact, the index has staged a decisive upside breakout in the last month:

Looking longer term at the weekly chart, the index has managed to rally through a long-term downtrend that began in late 2007.

Bottom line: The short and long term technical picture, as well as attractive valuation of European equities, suggest that these stocks are poised for significant gains and outperformance in the medium term. If I had to make one forecast for 2013, this would be my favorite long for the coming year.


Full disclosure: Long FEZ


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.

Peace on earth?

In these pages, I have tried to make sense of the world from a financial and quantitative viewpoint, so let me try to focus on a framework that is appropriate for the season. Sometimes this form of analysis can provide an economic framework for analysis showing the incentives for different actors that is different from conventional wisdom.

'Tis the season to wish "Peace on earth and goodwill towards men." Indeed, when I examine some of the literature, there are strong financial incentives for peace. In a recent article, Geoffrey Kemp and John Allen Gay wrote that there are strong disincentives for the United States to go to war with Iran. They mainly cite the economic costs of an oil spike on the global economy and the resources needed to open the Straits of Hormuz and keep them open. The article is well worth reading in its entirety, the conclusion was:

Living with a nuclear Iran would require expensive countermeasures and create significant risks. But going to war to impede Iran’s nuclear ambitions, and containing the subsequent chaos – including oil-price spikes, increased regional volatility, and reduced American strategic flexibility – would be far more costly. If Obama stands behind his first-term declarations, the world will pay a very high price.

If we were to turn the spotlight on the Holy Land, Lawrence Solomon believed that there are strong economic incentives for Israel to make peace, largely because it is able to significantly cut government spending in the form of military expenditures:

Should that ever-elusive peace deal with the Palestinians one day materialize, Israel’s economy would be ever so much stronger, probably growing at 5% to 7% per year, according to 2010 estimates from Bank of Israel Governor Stanley Fischer.

Part of that boost would come from Israel’s ability to cut its military spending, which today is about 7% of its GDP, just a fifth of its mid-1970s levels but still painfully burdensome. In contrast, the U.S., despite its military presence around the globe, spends less than 5% of its GDP on the military; countries with peaceable neighbours such as Denmark, Sweden and Canada typically spend 1.5% or less.

On the other hand, a Palestinian state would lose much of the foreign that flows into the region:

But would peace serve Palestinians as well? Probably not. As a fully fledged state, Palestinians would no longer have an entitlement to Israeli aid and with the high-profile Israeli-Palestinian issue defused, Arab oil states that have reluctantly provided aid in solidarity against Israel would be able to bow out. More importantly, with the end of unrest Palestine would soon lose the raison d’être for international aid from Western countries and agencies such as the World Bank — the belief that the West could leverage its aid to end conflict and arrive at a peace treaty. Foreign aid diplomacy, in fact, has driven the peace process since Bill Clinton in 1993 brought together PLO chairman Yasser Arafat and Israeli prime minister Yitzhak Rabin to sign what is known as the Oslo Accord.

This gives the Palestinian the paradoxical incentive of embracing peace talks, but not peace itself:

Unlike Israelis, Palestinians fear they would see no glorious peace dividend — to them peace looks more like a punitive tax. Not surprisingly, while public opinion polls show Israelis to overwhelmingly favour a two-state solution in which Israel and an independent Palestine live side by side, they also show Palestinians in the Palestinian territories to overwhelmingly oppose it.

At the same time that Palestinians reject peace, they embrace peace talks. Earlier this year, the Palestinian Center for Policy and Survey Research surveyed Palestinians on how the government should meet a budget shortfall for this year. Only 9% backed tax increases while “a majority of 52% selected the option of returning to negotiations with Israel in order to obtain greater international financial support.”

Greg Mankiw once said that people respond to incentives. If we do want peace on earth, then the correct incentives must be put in place to encourage those ends.

Whatever your beliefs, let me close this post with a tribute to one of the giants of science and early pioneers of mathematics, without whom quantitative finance would not be possible without his work. December 25 was the birthday of Sir Isaac Newton.

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.

Is more government the answer?

I got a lot of feedback, mostly negative, from my post last week On the kinds of conversations regarding the shooting tragedy in Connecticut. Most of them were in the form of "you don't know what you're talking about", but they don't specify what they object to.

Were there objections that I pointed out that guns are part of American culture? There are benefits to gun ownership, just as there are benefits to owning a car. Were readers upset that I pointed out that there are risks to gun ownership? Guns are, by definition, dangerous - they are designed to kill and having a weapon in your house and possession raise your risk level, just as owning a car is risker (you can run over people with it). The debate is over whether the benefits outweigh the risks.

What I do find curious is that the gun ownership constituency tends to be of the "get the government off my back" variety and, at the same time, the NRA's called on the federal government to station police officers in every school in the country.

Is this where we've come to? A "get the government off my back" crowd calling for more government? How about deploying elements of the 101st Airborne or 4th Mountain in schools? Wouldn't that deter the "bad" guys even more?

If you do believe in gun ownership and your philosophy is "less government is better government", then there is a better way forward - let the market do it.


The free market solution
Just as everyone above a certain age is allow to own a car, everyone who is qualified could be allowed to own a gun. Just as car ownerships are required to have insurance, gun owner should be required to carry a large level of liability insurance in case the guns under his control are used improperly.

That way, we can let the market regulate gun ownership rather than the government. Insurance companies are in the business of pricing risk and they should be able to price the cost of gun ownership properly. That way, the market can create barriers to the "crazies" owning guns.

No doubt, the level of gun ownership will decrease under such a proposal, but the "right kind" of gun ownership, i.e. responsible ones, will be largely unaffected. In America, everyone who is qualified is allowed to own a car, but not everyone is owns one because of the costs involved. Under this proposal, the free market would tend to weed out the higher risk cases.

If America is the embodiment of the embrace of free markets, then this would be an important step in the application of this principle pertaining to the gun ownership and control debate.



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.

No need to panic over insider selling

Mark Hulbert reported that, according to Vickers, insiders are turning to the sale of equities after turning bullish in late November:

Corporate insiders are no longer on the side of the bulls.
This represents a remarkably quick shift from the situation that prevailed just one month ago, when the average insider was behaving quite bullishly. ( Read my Nov. 21 column, “Insider behavior points to imminent rally.” )

After all, the stock market is barely 4% higher today than then. And though a return of that magnitude in one month’s time is nothing to sneeze at, is that really enough of a rise to justify such a big shift in insider behavior? Either something has led them to change their minds about their companies’ longer-term prospects, or they have become short-term traders like the rest of the market.

It’s probably a little bit of both. Since the government doesn’t gather data on the reasons for insiders’ behavior, we don’t know for sure.

He concluded that:

But regardless, the picture the data paint is unmistakably bearish.

I beg to differ. There are a couple of one-off reasons that could account for the flurry of insider sales:

1. They are selling in anticipation of the end of the world, as predicted by the Mayan calendar; or
2. They are selling in anticipation of higher capital gains taxes in 2013, especially when it appears a fiscal cliff deal is near.

Assuming that the Mayan Apocalypse doesn't happen this Friday (here is one way you hedge the end of the world), there is no need to panic just yet. Explanation #2 is a perfectly plausible reason for the rash of insider activity as 2012 draws to a close. In that case, I would wait for the insider activity data in January to see if insiders are indeed selling because of deteriorating corporate fundamentals, or for tax related reasons.


  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.

Where is the resource stock rally?

Regular readers know that I have been tactically bullish by calling for a Santa Claus rally. Indeed, with relative breakouts seen in emerging market and European equities (see Intriguing head and shoulders patterns), the weight of the evidence suggests a friendly risk-on environment.

Indeed, the relative performance of the Morgan Stanley Cyclical Index against the market is also suggestive of a bullish view on the economy and risky assets.

Waiting for the resource sector
Here's what's bugging me. With most of my indicators in bullish territory, why is the resource sector lagging? In particular, why aren't Materials and Energy leading this market upward? Until I can see participation from the resource sector in this rally, I remain constructive but cautious on this bull move.

Here is the relative performance of the cyclically sensitive Materials ETF (XLB) against the market (SPY). Materials remain range bound on a relative basis. While these stocks have shown some degree of relative strength in the last couple of weeks, they are by no means in a relative uptrend indicating sustainable leadership.

This pattern is not restricted to American stocks. The Basic Materials sector in Europe is showing a similar pattern of relative performance.

More worrisome for the bull case is the performance of the Energy sector, which is in a minor relative downtrend against the market.

The relative performance of energy stocks in Europe can only be described as dismal:

Commodity outlook
Nevertheless, I remain cautiously bullish on the outlook for commodity prices. The chart pattern for Dr. Copper, which is an important cyclically sensitive industrial commodity, appears to be constructive. The price of the red metal remains in an uptrend but, at the current rate of ascent, it will encounter important overhead resistance.

The truth of the matter is, the energy complex is underperforming (for reasons unknown). Nevertheless, a relative performance chart of the equal weight Continuous Commodity Index (CCI) against the CRB Index shows a relative uptrend indicating positive breadth.

To explain, both the CCI and CRB have the same commodity components. While the CCI is equal weighted, the CRB is liquidity weighted, which gives a higher weight to the energy complex. Thus the CCI to CRB ratio is a measure of market breadth in the commodity complex. The relative uptrend shown in the above chart is an indication that the general commodity complex is performing better than the headline CRB - which is one reason why I remain cautiously bullish on the commodity outlook.

Bottom line: I am watching for commodities and commodity-related stocks to start outperforming as a sign that this rally has legs. If we don't see sustainable relative strength breakouts from the Materials and Basic Industry sectors, then I would interpret such a development as a negative divergence and a caution flag for the bulls. For now, I am inclined to give the bull case the benefit of the doubt, but I remain cautious.



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.

On the kinds of "conversations"

Josh Brown had a great post entitled "No need for a conversation":

My heart is breaking for the families of those affected by the events in Newtown, Connecticut this morning. Just as I'm sure yours is, regardless of your stance on the gun issue.


Now, we're going to hear people talk about this sudden need for a "national conversation" or a some grand debate over guns and gun control. I can't think of a more pointless waste of time.

He correctly pointed out that there are entrenched views on both sides of the gun control issue and incidents like the latest mass shooting aren't going to have a significant effect on peoples' attitude. Mrs. Humble Student of the Markets was particularly upset with the news of the shooting, largely because we have a 7th grader and we used to nearby Stamford, Connecticut.

Nevertheless, guns are part of the culture of America. However, look into your own heart and consider how the "national conversation" would change if the shooter had been:

• Black;
• An illegal alien from Latin America; or
• Muslim

Regardless of where you might stand on the issue of gun control, I believe that the allowing the presence of firearms increase the level of systematic personal risk in a society. As the Washington Post points out, America is a far more violent society than many other industrialized countries:

Deaths due to assault

On the nature of risk
Consider this financial analogy. There are some obvious benefits to financial derivatives. They are useful tools for spreading risk around and an investor can use the leverage inherent in derivatives to better enhance his useful of capital. Now imagine allowing every mom and pop investor to use derivatives such as options, futures and swaps, whether they be listed or OTC, in their portfolios.

Regardless of the benefits or derivatives, do you think that there would be more or less market volatility under such a regime?

Addendum: Remember, derivatives don't destroy balance sheets, people destroy balance sheets.


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.

Intriguing bullish head and shoulder patterns

Another day, another rally. While the stock market's response to the Fed's QE4 announcement was disappointing for the bulls, my review of some charts indicate that the bullish risk-on case remains intact.

I wrote on Monday that I was seeing bullish upside breakouts in selected stock indices around the world (see Key tests of market psychology). Further analysis showed that upside strength is now spreading and I am now seeing greater upside participation in the bull move.


Upside breakouts in Europe
Starting in Europe, we saw the STOXX 600 stage an upside breakout last week. That strength has now spread to eurozone equities, as represented by the Euro STOXX 50, despite the news of the Monti resignation and Berlusconi revival.

A relative return chart of the Euro STOXX 50 ETF (FEZ) against the MSCI All-Country World Index ETF (ACWI) shows an intriguing inverse head and shoulder formation forming. With the caveat that you shouldn't be betting on a head and shoulders pattern until it breakts out, I am not counting my chickens until then hatched. However, should FEZ stage an upside relative breakout to ACWI, the potential outperformance could be considerable based on the technique of setting and upside target based on the distance from the head to the shoulder breakout level.

Breakout in emerging markets stocks
As well, emerging market equities (EEM) staged a relative breakout against ACWI in the context of a reverse head and shoulders pattern.

When I step back and look at the bigger picture, upside relative breakout by European and emerging market equities add up to a friendly environment for the risk-on trade.

Full Disclosure: Long FEZ.




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.

Bulls 2, Bears 0

You can tell a lot about the likely market direction by the way it reacts to news. By any measure, the bulls appear to have seized control of the helm based on yesterday's market action..

In my last post (see Key tests of market psychology), I suggested that equities needed to show further strength for the bulls to prevail. Specifically, I was watching:

• Can the Shanghai Composite rally through the downtrend line?
• How will European stocks react to the Monti resignation news?
• What will the Fed do on Wednesday and how will the market react?

We have answers for two of the three. The Shanghai Composite staged an upside rally through a downtrend that began in March. While the index may not necessarily head straight up from here, the technical outlook for Chinese stocks is far less bearish than it was a week ago. Score one for the bulls.

In Europe, the news that Italian prime minister Mario Monti was resigning early and former prime minister Silvio Berluxconi was trying to return to power frightened the markets. The French publication Libération depicted it as "the return of the mummy":

Stock markets sold off at the open on Monday, but rallied as the day went on and closed near the highs of the day. As I wrote yesterday, the STOXX 600 had staged an upside breakout through technical resistance. The index not only held on to its breakout but closed higher on the day, which is bullish.

Italy's MIB index was the hardest of of the European bourses on Monday. Nevertheless, it did rally to close near the highs of the day - another bullish sign.

This kind of market action is indicative that sellers are exhausted and the bulls are in control of the tape. Score another for the bulls.

So far, the bulls have score two (China and Europe) and the bears none. I will be watching closely Wednesday to see the market reaction to the FOMC decision. From what I have seen so far, it looks like the Santa Claus rally is underway.


Full Disclosure: Long FEZ, FXI.


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.

Key tests of market psychology

OK I was wrong about NFP on Friday (see Take the "under" in the NFP sweepstakes) and, as someone with a tactical bullish view, I was also disappointed with the stock market's reaction as it sold off after the announcement in the morning. Nevertheless, my Inflation-Deflation Timer Model moved to an "asset inflation" reading from "neutral" early last week indicating a risk-on environment.

After reviewing the charts on the weekend, I would cautiously agree. While I remain cautiously bullish, I am also closely watching how the market reacts to a couple of key events to see how the market reacts.

First of all, let's start with the bull case. While chartists were watching the SPX to see if it would overcome resistance, I am seeing signs of technical breakouts indicating a Santa Claus rally may be on the way.

By contrast, the broader NYSE Composite has already staged an minor upside breakout, though there is still overhead technical resistance at the 2012 highs. Similarly, the Dow (not shown) has also staged an upside breakout - another bullish sign.

The SPY (stocks) to TLT (default-free long Treasury bonds) ratio, which is a measure of the risk-on/risk-off trade, also staged a minor upside breakout.

Cyclical stocks continue to behave well, as the ratio of the Morgan Stanley Cyclical Index (CYC) to the market remains in a relative uptrend.

A tour around the world
Most other major stock indices around the world also had bullish technicals. Across the Pacific, in Hong Kong, the Hang Seng Index has staged an upside breakout in the context of an uptrend.

The outlook for China can be best termed as cautiously optimistic. The Shanghai Composite has been rallying in the last week to test downtrend resistance. If the index can overcome the downtrend line, it would represent another technical win for the bulls.

Next door in South Korea, where China is its largest trading partner, the technical pattern of the KOSPI can similarly be termed cautiously optimistic. KOSPI has been rallying since mid-November and at this rate will be encountering technical resistance - much like the pattern of US equities like the SPX.

Over in Europe, the STOXX 600 has staged an upside breakout. While other indices, such as the FTSE 100 and the Euro STOXX 50, are still testing their resistance levels, this development must still be regarded as bullish.

Key tests of market psychology
On the other hand, the news of Mario Monti's resignation and Silvio Berlusconi seeking to return to power may unsettle the markets. One of the key upcoming tests of market psychology will be how Mr. Market reacts. Has the actions of the ECB to largely eliminate tail risk cause the markets to shrug this off? Or will this news cause a major selloff?

Another catalyst for a major move may be the FOMC meeting Wednesday, where Tim Duy's views are typical of the consensus that the Fed will add further stimulus as Operation Twist runs out [emphasis added]:

The employment report offered me no reason to change my baseline opinion that the US economy continues to grow at a slow, steady pace regardless of the quarterly fluctuations we see in GDP growth. Indeed, there seems to be little news in November's numbers. This is good news in the sense that fears that the economy is slipping toward stall speed in the final quarter of the year is not yet translating into weaker job growth. The same is true for fears of the fiscal cliff, debt cliff, austerity bomb, etc. The bad news is that we are not seeing the 200k+ numbers that the Fed is leaning towards as evidence of stronger and sustainable improvement in the labor market. That means the Fed will continue to add to its stock of assets, converting most if not all of Operation Twist into an outright purchase program next week.

As another example of market expectations, here's what Bill McBride of Calculated Risk had to say:

I expect the FOMC to announce additional asset purchases at the meeting this week (to start at the conclusion of Operation Twist). It seems the FOMC will move to thresholds, but probably not until next year. On projections, I expect GDP to be revised down for 2013, and the unemployment rate to be revised lower for 2013 and 2014.

Watch the Fed news Wednesday and see how the market reacts.


How to grade the market psychology test
In summary, I am seeing technical signs that stock markets around the world are poised for a Santa Claus rally, though the markets need to show more technical strength in the days ahead. For the bullish case to prevail, we need to see technical confirmation in the form of further upside breakouts in major stock indices around the world and follow-up in the form of positive price momentum. The key is to watch how the market behaves in the next few days as tests of market psychology:

• Will the market shrug off the Monti resignation or will it panic?
• Can the Shanghai Composite stage an upside breakout through its downtrend?
• What will the Fed do Wednesday and how will the market react?

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.

Take the "under" in NFP sweepstakes

I hate the Non-Farm Payroll release because the market can react in a violent fashion to what is essentially noise. The error term in the NFP release is so enormous that it's meaningless. Nevertheless, we have to deal with this source of volatility.

With Friday's NFP release, we are seeing signs everywhere that employment is weakening. How much of that is Sandy related, I have no idea.

Nevertheless, here is the analysis from Gallup, which produces a daily tracking poll of employment and whose daily poll figures continue to tick down:

Gallup's unemployment results for the 30 days ending on Nov. 15 suggest that the improvement in the U.S. unemployment situation found in October was short-lived. Still, on an unadjusted basis, Gallup's unemployment and underemployment measures over the past two months show what might be expected holiday seasonal improvement. U.S. companies increase hiring for the Christmas holidays at this time of year.
At the same time, superstorm Sandy distorted weekly jobless claims, according to the U.S. Bureau of Labor Statistics, and may be doing the same to Gallup's unemployment results. The presidential election may also have disrupted the job market for a few days in early November.

Taking seasonal factors into account, it appears that the unemployment rate has remained around 8.0% since May. This seems consistent with other general economic data showing the economy growing slowly, the most recent of these being the 0.3% decline in October retail sales.

Looking ahead, Gallup's mid-November unemployment data have generally provided predictive insight into the official BLS numbers. In turn, Gallup's results suggest that in early December, the BLS could report an unchanged seasonally adjusted unemployment rate for November.

 

The outlook isn't entirely dire, the internals of part-time workers looking for full-time work is unchanged, indicating that the deterioration isn't serious.

The consensus estimate for NFP is 93K as the Street is forecasting a serious drop from the 171K release in October. Given the inherent volatility of NFP day and the uncertainty caused by Sandy, I would stand aside. If you don't have an edge, don't bet.

However, if you put a gun to my head and made me make a forecast, then given the recent indications of weakness in consumer spending I would have to take the "under" bet that it would come in below consensus.    



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.
 

Some surprising market leaders

Ever since I delved into research about the combination of momentum and trend following models (see my post here), I have been monitoring sector and group leadership much more closely. Here are a few surprising groups showing either sustained market leadership or emerging leadership that are potential outperformers.


Homebuilding
The first and most obvious are the homebuilders. The chart below of the homebuilder ETF (XHB) against the market (SPY) shows XHB to be in a well-defined relative uptrend. With the housing market bottoming and the Fed's QE3 buying MBS paper to support the housing market, this is an industry that has a definite tailwind at its back.

Technology as emerging leadership?
One somewhat surprising sector that may be staging a turnaround is the Technology sector. The chart below showing the relative performance of this sector against the market is showing the signs of a potential relative return bottom.

The trouble with the Tech sector is that the heavy influence of Apple on the performance on the sector. AAPL continues to struggle as the stock's rally was rejected at the 200 day moving average. The negative action of this single stock is weighing down the performance of the sector.

The relative performance of the equal weighted NASDAQ 100 (QQEW) as a proxy for the Technology sector tells the story of a relative turnaround in a much clearer fashion. In November, QQEW rallied through a relative downtrend that began in February and it has staged a robust relative performance rally.

As further confirmation, analysis from Bespoke shows that breadth is recovering nicely for the sector.

An agribusiness turnaround
Another surprising industry that is turning around is Agribusiness. The relative return pattern of the Agribusiness ETF (MOO) is similar to the one seen in QQEW. MOO rallied out of a relative downtrend in September and has been in a relative uptrend ever since.

A word of warning is warranted here. MOO is relatively thinly traded and doesn't have a lot of components. As well, the agricultural commodity complex is not showing a similar level of leadership relative to the broadly diversified commodity indices - which makes this trend slightly suspect.


Will Europe break out?
The last group of stocks that I would pay attention to is Europe. You would have to be on Mars in the last few years to be unaware of the rolling series of crisis in the eurozone. Greece, Ireland, Portugal, Spain, Italy - the list goes on and on. While the world waits for Eurogeddon, chartists are now watching the European stock averages such as the Euro STOXX 50, i.e. eurozone stocks, rallying strongly to test a major resistance level.

On a relative basis, the Euro STOXX 50 (FEZ) rallied through a relative downtrend against the MSCI All-Country World Index (ACWI) in August and it has now staged an upside relative breakout. Count European stocks as another leadership group.

In summary, here are some areas of the market to watch as sources of returns:

• Homebuilding
• Technology
• Agribusiness
• European stocks

If you do buy into any of these groups, watch the relative return charts for signs of relative weakness as they would be warning signs that they may be running into trouble.



Disclosure: I am personally long FEZ and XHB.


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.