Key indicators this week (Week 50)

Tuesday
- Australian NAB business confidence
- UK manufacturing production


Wednesday
- China`s CPI


Thursday
- New Zealand official cash rate
- RBNZ press conference, rate statement
- Australian employment change and unemployment rate
- Swiss LIBOR rate
- ECB long term refinancing option (LTRO)
- US core retail sales, retail sales and unemployment claims


Friday
- China`s industrial production
- US PPI
- US preliminary UoM consumer sentiment


I`ll be away from Wednesday onwards till the first day of 2015. No trading till the new year.

Non-farm employment surged, tiny improvement in trade balance deficit

An astonishing 321 thousand new jobs were created in November according to official government figures. The ADP report out two days ago only predicted 208 thousand new jobs last month.

However, the trade balance deficit narrowed to -43.4 billion compared to -41.3 billion predicted by economists. This is a tiny improvement from October`s -43.6 billion.

Swiss foreign reserves increase

The Swiss Central Bank recorded an increase in foreign reserves to 462.4 billion compared to 460.6 billion in October.

ECB: Real GDP revised downwards

In an earlier post this week, I mentioned about shorting EUR/USD whenever there`s a European Central Bank (ECB) press conference. Historically this pair has fallen each time Mario Draghi has given an official speech.

Well, nothing new this time around. The key interest rates remain unchanged. Non-standard monetary policy measures are to be taken, the purchase of covert bonds and asset backed securities will continue for two years.

Growth has been expected to be weaker and there`s a downward revision of the outlook for the euro area real GDP growth. It is expected that the growth in 2014 is 0.8%, followed by 1.0% in 2015 and 1.5% in 2016. The downwards revision have started since September.

The full speech can be found here.

Unemployment claims solid; Target price for USD/JPY reached

Unemployment claims this week showed a decrease of 17 thousand less people filling for unemployment benefits. This brings the number to 297 thousand.

The USD/JPY pair breached my target price of 120.00 and suffered a slight drop afterwards. This level will be tested soon and the overall consensus for this pair is upwards.

Clarence Lim, a trading associate also agreed on the movements and predicted that the price of this pair will hover around this level till the year end.

I decided to hold this pair to collect swap interest and the potential gains from more appreciation.

BoE rate maintained at 0.5%

The Bank of England`s (BoE) Monetary Policy Committee (MPC) held the bank rate at 0.5%.

Australian retails sales and trade balance beat estimates

Australia`s trade balance in November beat estimates by a healthy margin by closing at -1.33 billion. This is a huge drop from October which recorded a deficit of -2.24 billion. The full report on the trade balance can be found here.

While retail sales beat estimates it failed to record an improvement from the growth rate of 1.3% in October. November ended 0.4% vs 0.1% estimates. The breakdown of this figure can be found here.

ISM: Non-manufacturing growth up in November

The ISM non-manufacturing PMI rose to 59.3 in November, beating estimates and the previous period.

The full report can be found here.

ADP: 208 thousand new jobs created in November

Ahead of the official non-farm employment change by the government, the ADP national employment report estimates that 208 thousand new jobs were created  last month. This figure failed to hit the estimates of 223 thousand new jobs and a substantial drop from October`s 233 thousand jobs.

The full report can be found here.

Surprisingly though the US dollar is pretty strong at this hour in spite of the weak data.

 All the common pairs as seen above moved in favour of the greenback`s strength.

Here is how my USD/JPY long is doing:

I bought this pair at 117.90 last Tuesday as seen in my earlier post. Once it hits my target price of 120.00, I`ll call it a day for this position.

Surprise growth in UK services sector

I expected the services PMI to be red today based on the recent GDP report and the fact that the services PMI in October was a 17 month low.

UK service sector grew to 58.6 beating the estimated 56.6 and October`s 56.2. Anything above 50 indicates an expansion in the economy.

The key points of the report are:
- Activity and new business both rise at a sharper rate.
- Employment continues to increase as capacity constrain persist.
- Higher wage bill push up operating expenses, but low fuel prices limit inflation.

Check out the full report here.

Australian GDP growth down to 0.3%

In my post yesterday, it was stated in the Reserve Bank of Australia (RBA) rate statement that growth will be below trend for the next few quarters. As a country that is quite dependent on commodities, the decline in commodity prices has taken a toll on the Australian economy.

For the quarter ending September this year, the GDP recorded a growth of only 0.3%, missing estimates of 0.7%.

Check out the full report here.

I missed an entry to short the AUD/USD pair based on fundamentals as the signs of an uninspiring figure were present.

UK construction 13 month low

UK construction PMI fell to 59.4, a 13 month low since October 2013. The Chartered Institute of Procurement and Supply (CIPS) mentioned that this is due to much weaker increase in civil engineering activity. However,  job creation still remains strong in November.

The full report can be found here.

Minimal changes to RBA statement

The Reserve Bank of Australia (RBA) decided to leave the cash rate unchanged at 2.5%.

There are only tiny changes to the statement compared to the one issued last month. The key points are:

- Economic policies have responded in a way to support growth in the property market.
- Growth to be a little below trend for the next several quarters.
- Australian dollar remains above its fundamental value.

Traders should take caution of the final line as a lower exchange rate is likely to be needed to achieve balanced growth in the economy.

The statement can be obtained here.

Australia building approvals more than double estimates

Building approvals in October was at a staggering 11.4%, more than double of what economists expected. This is a huge growth after the contraction of 11.2% in September.

The full report for the building approvals can be found on the Australian Bureau of Statistics website. 

ISM manufacturing PMI projection at 58.7

The Institute for Supply Management (ISM) projected the manufacturing PMI in November at 58.7. This is a decrease of 0.3 from October`s 59.0.

Note that this is not the official manufacturing PMI released by the government.

The full report by ISM can be found here.

UK manufacturing at a 4 month high

Manufacturing PMI rose to 53.5 compared to October`s 53.3. This represents a 4 month high in terms of the expansion rate in the manufacturing industry.

The full report is provided by the Chartered Institute of Procurement & Supply (CIPS).

Environmental analysis for startups

Environment is defined in the Meriam-Webster dictionary as the conditions that surround someone or something. It is no surprise that environmental analysis in the context of business strategy is related to the analysis of external factors.

As seen above, environmental analysis can be separated into different layers according to Johnson Scholes and Whittington (JS&W). This is how the macro-environment is connected to an organization and in this post, I shall focus on this layer in the context of a startup.

Before developing the business plan, I believe the crucial step that many startup entrepreneurs overlook is the macro-environment. Here are some models to get started:

1) PESTEL

Who hasn`t heard of PESTEL: political, economic, socio-cultural, technological, environmental and legal factors? Fundamentally, entrepreneurs need to identify the factors that may contribute to the success of their business idea. For instance, in my dating startup, due to socio-cultural differences in Europe and Malaysia, our content has to vary. Also, in the real world, a number of these factors are interconnected and thus should not be seen separately.

2) Key drivers of environmental change

It is of utmost importance that entrepreneurs remember the business environment is not static. The key drivers of environmental change are based on globalisation trends:

• Cost globalisation
• Market globalisation
• Global competition
• Government policy

Entrepreneurs should have a bird`s eye view when working on a business idea. The strategic part of planning is crucial and should not be overlooked.

China`s manufacturing expanding slower than expected

China`s manufacturing PMI fell to 50.3 in November, failing to meet estimates of 50.5. In comparison, October`s manufacturing PMI recorded a figure of 50.8.

As for the HSBC final manufacturing PMI, it recorded a level of 50.0.

These data show that the expansion of the manufacturing industry is slowing down as both the official PMI and HSBC final fail to better the results in October.

RBNZ: Reflections on 25 years of inflation targeting

The Reserve Bank of New Zealand (RBNZ) Governor Wheeler delivered a speech on inflation targeting done by the central bank for the past 25 years. The insights of the speech are:

1) Inflation targeting has delivered price stability without reducing long term growth rate.
2) Low and stable inflation expectations increase monetary policy`s effectiveness.
3) The long term path of real exchange rate is unaffected by the monetary and exchange rate regimes.
4) There are limits to what monetary policy can do: supportive structural and fiscal policies are also needed.
5) Monetary policy`s independence requires a high level of accountability and transparency.
6) Monetary policy needs to be supported by sound prudential policies.
7) The emergence of marco-prudential policies.

In his concluding comments, Governor Wheeler mentioned that there has been strong growth in new sector of activity including the information technology sector. He also remarked that the economy has remained resilient in the recent shocks from the GFC and Christchurch earthquakes.

The full speech can be found here.


Figure 1: Inflation and GDP growth

Figure 2: New Zealand`s real effective exchange rate

This is where traders should take caution as the RBNZ has mentioned several times that the exchange rate has been too high and making exports uncompetitive.

FXStreet has a recap on this speech as well.

Key indicators this week (Week 49)

Monday (1/12)
- RBNZ Governor Wheeler is set to speak
- China manufacturing PMI
- China HSBC final manufacturing PMI
- UK manufacturing PMI
- US ISM manufacturing PMI

Note: Chinese data would be an indicator for the Australian GDP out on Wednesday.


Tuesday (2/12)
- Australian building approvals
- RBA cash rate
- RBA cash rate statement
- UK construction PMI
- New Zealand GDT price index


Wednesday (3/12) 
- Australian GDP
- UK services PMI
- ADP non-farm employment change
- ISM non-manufacturing PMI

Note: The ADP non-farm employment change is an estimated change in the labour market that is out 2 days before the government one. May or may not be indicative of the actual numbers.


Thursday (4/12)
- Australian retail sales
- Australian trade balance
- UK official bank rate
- UK MPC rate statement
- Euro minimum bid rate
- ECB press conference
- US unemployment claims

Note: Euro pairs usually drop during the press conference and a fall of 100 pips is normal. Shorting EUR/USD now would be a good option.


Friday (5/12)
- US non-farm employment change
- US trade balance
- US unemployment rate

Investment management: Science or art?

Is investment management a science or an art?

Here`s a good read from CFA Institute Research Publication for the weekend.

Inflation slows down to 0.3% in Euro area

The consumer price inflation (CPI) dropped to 0.3% in the Eurozone. This is a drop from 0.4% recorded in October.

Check out the full report here.

"Sweet spot" for New Zealand business outlook

The ANZ business confidence stood at 31.5, more than last month`s 26.5. This indicates that optimism is growing. In fact, the subheading of the report is titled "sweet spot".

Here are some highlights of the ANZ business outlook report:

- The economy is in an enviable sweet spot; demand indicators remain strong
and inflation nuances benign.
- Readings across the survey flag good growth, employment and investment.
- Inflation expectations have now fallen to within a whisker of the RBNZ’s 2%
target, a first since September 1999. Whether this is a one-shot wonder
remains to be seen.

OPEC continues production

Organization of the Petroleum Exporting Countries (OPEC) is maintaining the current supply level of oil. This action shall continue to push prices down.

This is a good catalyst to short oil contracts and energy companies.

Australia private capital expenditure 0.2% vs -1.6% forecast

Australia private expenditure grew 0.2% in comparison to the forecasted contraction of 1.6%.

The key figures in September can be obtained from the Australian Bureau of Statistics.

This growth is still less than the June quarter which recorded an increase of 1.6%.

New Zealand`s trade balance still red

Exports fell 5.1% in October 2014 compared to a year ago stated Statistics New Zealand.

The trade deficit stood at -908 million, a 6 year low for the month of October. The slump in dairy prices was one of the main contributors to this figure.  Although a slight improvement from September`s deficit of -1 357 million, it failed to meet estimates of -645 million.

The New Zealand dollar (NZD) is in a weak position today. The trade balance is directly linked to currency movements as an increase in exports would mean an increase in demand for the NZD, thus increasing its value. In today`s scenario, less foreigners would need to buy NZD to pay for exports and when demand drops, the value of the currency follows.

Weak US core durable goods, unemployment claims and home sales

Core durable good orders decelerated to -0.9%, worse than September`s -0.1%.

Unemployment claims went up to 313 thousand when economists were predicting a reduction of 5 thousand from last week`s data. This is the first time in 11 weeks the number has exceeded 300 thousand.

New home sales increased to 458 thousand although still short of the estimated 471 thousand.

The US dollar isn`t as strong as it should be this week due to weak figures like these.

UK second estimate GDP unchanged

The second estimate GDP remained at 0.7%.

Bearish position for UK second estimate GDP

Ahead of the official figures for the revised GDP, it is no surprise that a bearish tone is expected. Primarily, the advanced third quarter GDP showed a slow down in growth compared to the second quarter.

Based on economic data in this month alone here are some points for a solid GDP data:
- Manufacturing expanded
- Retail sales up
- CPI accelerated
- Wage increase

As for a weak GDP figure:
- Bank of England (BoE) lowering forecast for growth and inflation
- Unemployment benefits drop less than expected
- Slack in the economy
- Services at a 17 month low
- Construction industry at a 5 month low
- Weak trade balance

Arguments for a weak GDP figure arguably carry more weight than those for a solid one.

This site shows another analysis on the slowdown of the UK economy. It predicts that there will be no change to the previous figure.

US Q3 prelim GDP up but consumer confidence falls

In my earlier post on the key indicators this week, I did mention that the third quarter preliminary GDP should be solid. The actual growth recorded was 3.9%, more than the estimated 3.5% which was revised up from last month`s advanced figure of 3.3%. There are 3 announcements of the GDP figure each quarter a month apart - advanced, preliminary and final with the advanced figure being the most influential one in moving markets.

The full GDP report can be found here

On the other hand, consumer confidence fell in November to 88.7. Economists were expecting 95.9,a slight increase from last month`s 94.1. This miss caused the dollar to not be as strong as it should tonight. Clarence Lim, a trading associate also noted the inherent weakness in the USD.

The Conference Board consumer confidence can be obtained here.

BoE inflation report hearings

The Bank of England (BoE) inflation report hearings can be watched here. Unfortunately I can`t seem to get the link to work due to my internet connection so I`ll just have to rely on the reports by Ian McCafferty, an external member of the monetary policy committee and Jon Cunliffe, Deputy Governor for financial stability.

In the first report, it is highlighted that the economy has grown by 3% and the unemployment rate has fallen below the 7% target to 6%. However, inflation has fallen more sharply than expected "from over 3%, below our target of 2%." The rate of productivity growth and spare capacity is difficult to estimate.

For the second report by the Deputy Governor of the BoE, the monetary policy committee (MPC) will not tighten policies until there is a significant reduction in spare capacity. Other issues include the nominal pay growth.

Kuroda`s speech and yen movements

The Bank of Japan governor, Haruhiko Kuroda had a speech at 9 am today. It was delivered at Nagoya with business leaders present. The content of the speech largely reflects the Japanese economy and monetary policy. 

This is an M1 chart for the USD/JPY pair. Ignore the time though as the wrong timezone was selected. Kuroda`s speech came out at 9 am (1 am on the chart) and this pair fell for about 10 minutes post data. The rebound after the lowest point was clearly seen through price action as a red hammer was formed indicating that buyers were winning as the closing price was higher the opening.

I entered long at 117.90 based on fundamentals as the US third quarter preliminary GDP will be out tonight. The advanced figure out last month was solid and I expect tonight to continue the trend. Technical analysis confirms the time of entry.

The M1 chart for the GBP/JPY pair is has similar movements to the USD/JPY pair. Price action is obvious during the reversal.

I decided to skip this pair as the UK inflation report is out this evening and it has been pretty unpredictable so far.

German business sentiment positive

The German IFO business climate advanced to 104.7 this month beating estimates of 103.2. This is an increase from last months 103.2. Bloomberg stated that this is the first rise in 6 months.

With this data out for a couple of hours now, it is a good opportunity to short EUR/USD. Fundamentally tomorrow, the US Q3 preliminary GDP will be out and it should carry a similar tone to the advanced GDP a month ago. This will in turn push the EUR/USD pair to new lows.

Key indicators this week (Week 48)

Here are the key indicators to look out for this week.

Monday (24/11)

- German IFO business climate

Tuesday (25/11)

- Bank of Japan Governor Kuroda is set to speak.

- UK inflation report.

- US preliminary GDP
- US consumer confidence 

Analysis: Bank of Japan has been increasing its monetary base, bad news for the yen. US had a solid advanced Q3 GDP. Preliminary GDP is less impactful but should be in sync with advanced. 

Wednesday (26/11)

- UK second GDP estimate

- US core durable good orders 

- US unemployment claims

- US new home sales

Note: UK preliminary GDP grew 0.7%

Thursday (27/11)

- New Zealand trade balance 

- Australian private capital expenditure 

- German preliminary CPI

Note: US bank holiday

Friday (28/11)

- ANZ business confidence 

- European CPI flash estimate 

Special feature: OPEC decision on oil supply. 

5 ways to survive in a start-up

A start-up is a different kind of beast in comparison to other organizations. Burn outs are pretty common when the norm is an eighteen hour work day. So how does one survive in a start-up? Here are my top five lessons:

1) Get up before 5 in the morning
Getting up early can do wonders. It is not necessary to start work at that time, but getting up say at 4 am does give me the extra time for my personal thoughts. It can also be used to visualize the entire day ahead or meditate. The serenity and quietness at this hour is simply magical.

2) Maintain peak health
Stamina is important. It`s best not to rely on too much coffee or red bull to get work done. Exercise, work out and eat healthy. I run 12 km daily, with one morning session before the sun rises and one in the evening. Doing something physical is also a great way to get all the stress out from a hectic lifestyle.

3) Read a book a day 
Too hectic? Bring a book and read it during lunch.In a start-up, one has to be brilliant in a particular area in addition to being a Jack of all traders. Unlike MNCs and other large organizations, where the job scope and roles are clearly defined, it is not a clear cut in start-ups. One may be in a business development role but it is vital to pick up new skills in addition to sharpening his/her core competency.

4) Prioritize 
Too much to do and too little time is customary. There are times where simply certain tasks cannot be completed. Maintain a to do list and start with the most important item for the day. It may be advisable to outsource or get freelance staff during busy periods.

5) Network
Go out, take a break and meet like minded minds. The phrase "it is not what you know but who you know" pretty much carries weight here. Meeting other people is also a superb way to get new ideas.

US CPI virtually unchanged, tiny drop in unemployment claims

The consumer price inflation (CPI) stood at 0% while the core CPI met estimates at 0.2%. The decline in gasoline and energy indices was a major contributor to these figures. The CPI report can be found here.

Unemployment claims dropped by 2 thousand this week to take the figure to 291 thousand. Bloomberg highlighted it has been 10 weeks since less than 300 thousand people claimed unemployment benefits.

UK retail sales up

Retail sales in the UK increased at a pace of 0.8%, double of what economists predicted. 

The key areas of the report are:

• Continuing a sustained period of year-on-year growth, in October 2014, the quantity bought in the retail industry increased by 4.3% compared with October 2013, this is the nineteenth period of consecutive year-on-year growth.
• On the month the quantity bought increased by 0.8% compared with September 2014. There was growth in all sectors, except non-store retailing. Clothing stores showed growth of 0.5%, however, as growth in this store type fell by 5.9% in September the rise does not cancel out the fall seen last month.
• The three-month on three-month movement in the quantity bought showed continued growth for the twentieth consecutive month increasing by 0.4%. This was the longest period of sustained growth since November 2007 when there were 25 periods of consecutive growth.
• Average store prices fell by 1.5% in October 2014 compared with October 2013, this was the largest fall since December 2002 when prices also fell by 1.5%. Once again the largest contribution to the year-on-year fall came from petrol stations where petrol/diesel prices were at their lowest level since the end of 2010.
• In October 2014, the amount spent in the retail industry increased by 2.8% compared with October 2013 and by 0.7% compared with September 2014. Non-seasonally adjusted data show that the average weekly spend in the retail industry in October 2014 was £7.1 billion compared with £6.9 billion in October 2013 and £6.8 billion in September 2014.
• The proportion of sales made online fell by 0.1% to account for 11.2% of all sales in October 2014. Online sales increased by 7.5% compared with October 2013, this was the lowest year-on-year increase since November 2012 (6.9%).
• Revisions to this period were caused by the incorporation of late data. More information on revisions can be found in the background notes.

The full report can be found from the Office of National Statistics. 

Eurozone manufacturing slows down

Mario Draghi is facing a lot more pressure lately. The European Central Bank actions have not generated anything solid for a full recovery in the Eurozone.

The French manufacturing purchasing managers index (PMI) fell to 47.6, a drop from 48.5 in October. This is the seventh consecutive month where the private sector output fell. The full report can be found here.

In Germany, the PMI was not much better although it did register a figure of 50.0. This is a 16 month low due to stagnation in new orders. Head over to the report for more numbers.  

Some traders have said that the strength in the Euro currency would lie in the German productivity. 

Manufacturing contracts in China for the first time in 6 months

In the HSBC flash manufacturing purchasing managers index (PMI), the flash PMI stood at 50.0 in November which is a six month low. The manufacturing output index on the other hand fell to 49.4, which represents a 7 month low.

A figure above 50 indicates an expansion for this index whereas below 50 shows a contraction in the industry.

New Zealand PPI down due to lower milk prices

For the producers price index (PPI): September 2014 quarter, Statistics New Zealand mentioned that lower milk prices pushed the index down.

The PPI input for the quarter decelerated to -1.5%

A technical FOMC minutes

The FOMC meeting minutes this time around is a lot more technical than previous ones. It covers:

- Developments in financial markets and the Federal Reserve`s balance sheet
- Staff review the of economic situation
- Staff review of the financial situation
- Staff economic outlook
- Participants` views on current conditions and the economic outlook
- Committee policy action
- Longer-run goals and monetary policy strategy

As expected, Narayana Kocherlakota voted against the FOMC policy action.

Bloomberg did not cover any of the content of this report. Traders have stated that this report is causing confusion in markets.

Building permits rise to 6 year high

More houses are to be constructed in the US. Building permits in October rose to 1.08 million, putting housing starts at a six year high. In comparison, September recorded 1.03 million new permits.

MPC votes unchanged

In the Bank of England (BoE) monetary policy committee report, the bank rate is set at 2.5% and that the BoE should maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion.

The votes remained at 2-0-7, that is 2 members in the board voted to increase the rate while the other 7 voted to hold rates.

BoJ statement

This time around, the monetary policy meeting was passed with a vote of 8-1, a significantly larger majority in comparison to the narrow 5-4 in October. Asset purchases remain unchanged.

The consumer price inflation (CPI) is set to remain at its current level till the end of this year.

The Bank of Japan`s monetary policy meeting can be found here.

Dairy prices down again in New Zealand

In the second GDT report this month, the prices of dairy fell to -3.1%. In addition to the strong US data, this is another contributor to why the NZD/USD pair dropped.

US PPI up in October

Producer prices in the US accelerated to 0.2% in October. A negative growth was expected after the contraction in prices in September.

An in depth breakdown is available in the the producer price index (PPI) report.

As stated in my previous post regarding the German ZEW sentiment, it is reasons like this that make EUR/USD very risky for a long position.

Is the Eurozone finally picking up ?

A first in this year, the German ZEW sentiment finally showed some optimism. This is an index surveyed by institutional investors and analysts and a level above 0 shows optimism. Germany recorded an impressive 11.5 this time, a huge leap from Octobers -3.6.

Head over to the ZEW press release for more details.

Regardless of the data today, a number of traders remain skeptical on its accuracy and going long on EUR/USD would be foolish unless it is a scalp or short term position.

UK inflation speeds up

The UK consumer price inflation (CPI) accelerated to 1.3%, beating the estimates and September`s CPI by 0.1%.

Other key points include:
- Smaller falls in transportation cost than a year ago.
- Food and motor prices reduced the CPI by 0.3%.

The CPI report for October can be obtained here.

The GBP/JPY pair is relatively safe for a long position. This position can be fairly passive as the direction of this pair is biased towards one direction.

RBA monetary minutes

Members of the Reserve Bank of Australia (RBA) board observed that the growth of Australia`s trading partners are a little lower than the average pace in the June quarter. In terms of domestic conditions, growth in the September quarter is below average. "Low interest rates and ongoing population growth were expected to continue to support the growth in both housing activity and the established housing market."

The cash rate remains unchanged at 2.5%.

Get the full report here.

Recession time for Japan

The third quarter preliminary GDP in Japan shrank to -0.4%. The additional stimulus by expanding the monetary base so far has not managed to help the Japanese economy.

Prime Minister Abe is said to delay a second sales tax hike with the uninspiring GDP results.

Traders with yen exposure in their portfolio would have made fat unrealised gains if they were long on USD/JPY and GBP/JPY. Things do not look good for Japan at the moment and a short would be suicidal for a trader.

Food industry lifts New Zealand retail sales

According to the Retail Trade Survey for the quarter ending in September, retail sales rose 1.5% after a 1.1% rise in the previous quarter. This exceeded the estimates of 0.8%.

Entrepreneurship in Malaysia

Only one line is needed to describe the entrepreneurship scene in Malaysia- it is not fairing well.

The primary reason for this in my opinion is due to the lack of exposure to entrepreneurship in schools and universities. How often do you hear a student saying he or she wants to start a business? Everyone wants to take up a professional course like medicine or law and end up as a professional. Social pressure does nothing to help either. The education system does not encourage students to venture out of their comfort zones and do things differently.

Richard Branson said that universities and colleges are warehouses to keep students in his book, “Like a Virgin.” In addition to agreeing with him, I would like to see a change in the syllabus of business courses. Subsequently, our universities should encourage the start-up culture. For instance, a top school like Harvard has an Innovation Lab to encourage and grow businesses that are inspired in dorms or on campus. Even a mid-school like Cardiff University has its enterprise centre to encourage entrepreneurship.

Can the entrepreneurship scene in Malaysia be better? Yes, but there are plenty of steps needed.

Firstly, the start-up culture and enterprising nature is not prevalent yet. This is the first area that needs to be addressed and rectified.

Aspiring entrepreneurs need more support. It is common to see someone with a business idea or a product but he or she doesn`t know how to proceed further. In addition to having enterprise centres in universities, they should also be set up in various states. Business in Wales, a government unit in Cardiff for instance conducts a week long course on start-ups, assigns you a business mentor after that and constantly follow up with your development. There is a lot we can emulate from this system.

US retail sales picking up

Retail sales and core retail sales both increased by 0.3% in October. The effects of a cheaper oil prices are encouraging consumers to spend more. Bloomberg said "as unemployment falls and energy costs continue to retreat, consumers will have the means to maintain purchases heading into the all-important holiday-shopping season".

A number of high importance economic data from the US have been predictable lately since the third quarter GDP figures came out.

Growth in the Eurozone

French preliminary GDP beat forecast by increasing at a pace of 0.3%. Economists estimated the figure to be at 0.1% after the poor Q2 results. In Germany, the preliminary GDP matched estimates at 0.1%.

The Eurozone is finally showing signs of growth but it is still unwise to go long on EUR/USD unless it is a scalp or short term position. The US economy is still strong and on a day like today, in spite of the good Euro numbers, core retail and retail sales beat estimates making it a dangerous situation for traders who held on to their long positions.

BoE inflation report

The Bank of England (BoE) governor, Mark Carney has lowered his forecast for growth and inflation levels. Consumer prices could slow down below 1% in the subsequent months and will return to the target 2% rate in 3 years.

The full inflation report can be obtained from BoE.

Chart 1
GDP projection based on market interest rate expectations and £ 375 billion purchased assets.

Chart 2 
CPI inflation projection based on market interest rate expectations and £ 375 billion purchased assets.

The charts above do no favour for GBP pairs. GBP/JPY may still be safe for traders with a long position as these projections are countered by the Bank of Japan`s monetary based expansion. 

UK labour market

UK wages increase more than expected as the average earnings index came out at 1%. This data represents a 3 month moving average compared to the same period a year ago. Forex factory highlights that this data is an indicator of inflation.

In terms of people claiming unemployment benefits, only 20.4 thousand less people filled for claims. Economists predicted a drop of 24.9 thousand claims.

The full labour market report for November can be obtained here.

RBNZ financial stability report

This post is a summary of the Reserve Bank of New Zealand financial stability report. 

The main point of this report is that the financial sector is sound and operates effectively. "The banking system is well capitalised, funding and liquidity buffers are above required minima and non performing loans continue to decline. The report mentioned that the four risks the financial sector in New Zealand faces are imbalance in the housing market, high levels of indebtedness in the dairy sector, the potential effects of the Chinese economy and the banking system`s reliance on offshore banking. 

The charts above represent the outcome of this report.

NAB business conditions worsen

The NAB business confidence in October fell to 4, a level lower than September`s 5.

Business conditions recorded its highest monthly gain since the GFC according to The Age. In spite of this, confidence remains low due to uncertainly in industries and the Australian dollar still fundamentally overvalued for the economy to be competitive.

Financial markets remain slow today with US and Canada having bank holidays.

China`s CPI steady

The Chinese consumer price inflation held steady at 1.6% which was in line with expectations. Reuters quoted that this is further evidence that the economy in China is cooling down.

China is expected to continue its stimulus given the risk deflation and lack of growth getting more serious.

Trading idea: Just 5 pips

I stumbled upon a thread on forex factory on how to consistently make profits in forex. The idea is to just aim for 5 pips and lock in gains. This translates to making about $25 per hour based on a standard account.

Head over to the thread to get a closer look on how the system works.

Non-farm unemployment not in line with the ADP prediction

The official non-farm employment change showed that only 241 thousand new jobs were created in October, falling short of 21 thousand jobs economists predicted and worse than the 256 thousand new job openings in September. This is somewhat of a surprise considering the ADP data was good and it beat estimates.

The unemployment rate fell to 5.8%, an improvement from the 5.9% in September. Bloomberg mentions that the jobless rate is at a 6 year low.

More good news for those who kept on to their EUR/USD short or USD/JPY long positions. The strength in the US economy is a catalyst of the dollar not ending its bull run yet.

Another generic statement from the RBA

The Reserve Bank of Australia (RBA) published another generic monetary policy statement today.

There is nothing in the statement that is fundamentally new. It summarizes the highlights of the global economy, the decline in commodity prices and increased volatility in financial markets among other things. The RBA predicts that the US will increase rates in October 2015.

EUR/USD fell with the ECB press conference

As expected, the European Central Bank (ECB) press conference caused the EUR/USD pair to fall sharply. I have been monitoring the movement of this pair during an ECB press conference since March and there is only one direction where it can head, that is a drop.

The Eurozone is still in trouble and there is little Mario Draghi can do. The lack of confidence in the ECB continues to plummet the value of the Euro.

The press conference can be found here.

I was out during the press conference and I closed my EUR/USD pair due to a misleading Bloomberg article so my profit was less than what it could have been. Traders should never trust news sites especially for high importance data, it is best to go to the source which is in this case, from the ECB.

Weekly unemployment claims solid

The weekly unemployment claims once again fell, in line with the ADP non-farm employment figures on Wednesday.

Ten thousand less people filled for unemployment benefits this week, bringing the unemployment claims number to 278 thousand. 

BoE policies unchanged

The Bank of England kept the asset purchase facility at 375 billion and maintained the official bank rate at 0.5%.

Manufacturing production increases in the UK

The September index of production stood at 0.4%, a tiny growth from the previous period and beating estimates of 0.3%.

The key points of the report include:

• Total production output is estimated to have increased by 0.2% between Q2 2014 and Q3 2014. The largest contribution to the quarterly growth came from manufacturing, which increased by 0.4%.
• Total production output is estimated to have increased by 1.5% in September 2014 compared with September 2013. Of the four main sectors, manufacturing output was the only one to rise, increasing by 2.9%.
• Total production in September 2014 is estimated to have increased by 0.6% compared with August 2014. There were increases in three of the main sectors, with mining & quarrying being the largest contributor, increasing by 3.8%.
• Manufacturing output is estimated to have increased by 0.4% between August 2014 and September 2014. The main subsectors contributing to the increase were transport equipment; computer, electronic & optical products; and chemicals and chemical products.
• In the three months to September 2014, production and manufacturing were 9.5% and 4.1% respectively below their figures reached in the pre-downturn GDP peak in Q1 2008.
• The preliminary estimate of GDP, published on the 24 October 2014, contained a forecasted increase of 0.5% for production in Q3 2014. This release of data estimates that production increased by 0.2% between Q2 2014 and Q3 2014 and the impact on the previously published GDP estimate for Q3 2014 is minimal. This was due to revisions to electricity, gas, steam & air conditioning sector data, where estimates were replaced by late data.

More jobs in Australia but data doubts remain

The jobs data at 24.1 thousand beat estimates while the unemployment rate remained at 6.2%.

Bloomberg did mention that they doubt the data and a number of economists interviewed shared a similar view as well.

ADP: Employment increased by 230 000 jobs

The ADP non-farm employment report indicated that 230 000 new jobs were created in October. This is an estimate of the actual non-farm employment change that typically comes out during the first Friday of the month.

The bull run of USD/JPY should set to continue.

UK services growth slows down to a 17 month low

The services PMI fell to 56.2, missing estimates of 58.5 and September`s 58.7. The Chartered Institute for Procurement and Supply (CIPS) remarked that the activity growth is down to a 17 month low.

The key drivers of this pace are:
- Activity and new business rise at slower rates in October.
- Business sentiment weakens.

Clarence Lim, a trading associate stated that his target price for GBP/JPY at 196 would take a longer period given the slowdown.

Less people are unemployed in New Zealand

The unemployment change for Q3 was 0.8%, an increase from Q2`s 0.5% and bettering the forecasted 0.6%. As expected, the unemployment rate fell to 5.4%, a slight improvement from last month`s 5.6%.

Statistics New Zealand said rising employment is more than keeping up with our growing population. A total of 74 000 more people were employed over the year in contrast with the additional 64 000 people in the population.

Dairy prices fell in New Zealand

The New Zealand Global Dairy Trade (GDT) index fell to -0.3%. The GDT index is a leading indicator of the trade balance with other countries as rising export prices would increase export income. It is derived from the weighted-average sampling of 9 dairy products and compared to the previous sampling.

The GDT a fortnight ago was 1.3%.

US trade balance deficit widens

The trade balance in the US stood at $ -43.0 billion, missing estimates of $ - 40.0 billion.  This is an increase of 3 billion in deficit compared to the figure last month.

I used this opportunity to short EUR/USD as the US economy is still fundamentally strong and in view of a Mario Draghi speech this week. Historically, Draghi has always caused this pair to fall every time he speaks. 

UK construction a 5 month low

The construction PMI at 61.4 missed estimates of 63.5. The Chartered Institute for Procurement and Supply (CIPS) remarked that this is the weakest expansion since May. This was led by a sharp slowdown in residential building growth.

This miss caused GBP/JPY to fall slightly, hampering its bull run since Friday.

Japan`s additional QE

On Friday, the Bank of Japan (BoJ) in its monetary policy statement unexpectedly increased its monetary base at an annual pace of about 80 trillion yen. This represents a hike of 10-20 trillion yen.

As additional money is being printed, it is natural for USD/JPY and GBP/JPY to rise. A very conservative intrinsic valuation would set a target price of USD/JPY at 120 and GBP/JPY at 190. Clarence Lim, a trading associate agreed on these values and stated that they are very likely to be reached in 3 months.

Spanish unemployment triples

The EUR/USD pair only has one direction this week, that is a drop. Traders should add short positions in their portfolio.

The number of people unemployed in October stood at 79.2 thousand, triple of what economists expected and a huge hike from September`s 19.7 thousand.

Australia`s retail sales, trade balance and RBA statement

Retail sales in Australia expanded in September at a growth of 1.2%, beating estimates of 0.3% and August`s dismal 0.1%.

Trade balance in September was once again a deficit, this time at $ 1 850 million, a $ 50 million rise from August.

In the RBA statement today, it was highlighted that the Australian dollar while weaken is still trading higher than its fundamental value. The cash rate remained unchanged at 2.5%.

With the decent third quarter GDP from US, the AUD/USD pair long term should be a short position.

Manufacturing industry expands in China, UK and US

The HSBC final manufacturing purchasing managers index (PMI) equaled estimates and last month`s figure at 50.4.

In the UK, the manufacturing PMI climbed to 53.2, beating the forecast of 51.3 by a healthy margin. Bloomberg labels this growth as an unexpected rise.

Things were good in the US as well, the ISM manufacturing PMI was at 59.0, bettering estimates of 56.5. This is an early indicator of the strength of the US economy this quarter.

RBNZ cash rate unchanged

The Reserve Bank of New Zealand (RBNZ) left the official cash rate (OCR) unchanged at 3.5%. The rate statement suggested some softening in global economies apart from the US.

A strong construction sector, high net immigration and historical low interest rates continue to support the expansion of the economy. In addition, it is important to note that a further depreciation of the New Zealand dollar is expected.

FOMC does not make sense: Ending QE and expecting inflation to rise

The Federal Reserve (Fed) is set to end its quantitative easing programme end of this month. The asset-purchase so far has added $ 1.66 trillion to the Fed`s balance sheet. 

In the Federal Open Market Committee (FOMC) press release, it was stated that labour market conditions improved "with solid gains and lower unemployment rates." Everything else seems in place except the housing market which recovery is still sluggish. 

Slowness in the global economy and low inflation levels are key risks the Fed needs to combat. Ending quantitative easing (QE) means pumping less cheap money into the US economy, slowing down recovery and driving inflation rates down.
Narayana Kocherlakota, the Minneapolis Fed President dissented "in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer-term inflation expectations, the Committee should commit to keeping the current target range for the federal funds rate at least until the one-to-two-year ahead inflation outlook has returned to 2 percent and should continue the asset purchase program at its current level."

Clarence Lim, a trading associate remarked that the decision to end QE does not make sense although he acknowledges "QE is no longer the fad". 

Business confidence doubles in New Zealand

The ANZ business confidence doubled to 26.5 in October. The report`s subheading "Feeling wheelie good" indicated that business conditions are improving.

Business confidence in Germany drops

Bloomberg mentioned that the German business confidence dropped for the sixth month now, highlighting more trouble in the Eurozone. The confidence level dropped to 103.2, worse than last month`s 104.7.

Economic news/data for the week

On Tuesday, the RBA released its monetary policy minutes. The cash rate is left unchanged at 2.5%. This was then followed by China`s GDP. The economy grew a tad more than expected at 7.3% but still 0.2% off the GDP from the previous period. In addition, the industrial output at 8.0% beat estimates and prior data.

With the acceptable Chinese GDP, the Australian consumer price index (CPI) beat forecasts by growing at a pace of 0.5% on Wednesday. This is the same level as the previous quarter.

In the evening, the Monetary Policy Committee (MPC) released its asset purchase facility votes and bank rate votes. Both were unchanged, in line with expectations. US CPI grew by 0.1% after last month`s disappointing contraction of -0.2%. The core CPI displayed the same number but did not meet the target rate of 0.2%.

It was New Zealand`s turn on Thursday. The CPI remained at 0.3%, failing to meet estimates of 0.5%. China`s HSBC flash PMI manufacturing indicated a growth in the manufacturing sector. The flash PMI bettered estimates and September`s results. More bad news for the Eurozone as the French manufacturing sector contracted yet again as seen from the flash PMI`s uninspiring numbers.

However, Germany did show a growth at a flash PMI of 51.8, ahead of estimates and the previous month. UK retail sales dropped to -0.3%, worse than what economists predicted and last month`s rate. The unemployment claims in the US rose by 17 thousand this week, not what economists predicted.

Finally on Friday, New Zealand`s trade balance stood at -1 350 million. This deficit is more than double of what was expected. UK`s preliminary GDP met the forecast of 0.7%, although this figure is still less than the previous quarter. New home sales in the US increased by only a thousand, falling short of the target sales of 473 000.

First meal in 40 hours

I`ve missed out a number of high importance data from Tuesday. I had a bad case of food poisoning and only recently had a meal since Wednesday night.

I`ll summarize the necessary data I`ve missed in a single post.

ECB is purchasing covert bonds

The European Central Bank (ECB) acquired short-term French and Spanish notes. The IMF has projected a growth of 1.3% next year, down from the 1.5% predicted in July by Mario Draghi. The bond purchasing is expected to improve the deflation risk Eurozone has been facing so far.

With the additional money supply pumped into the economy, the Euro should depreciate against major currencies. EUR/USD is looking good to short for those who have not entered.

Vix index

The guardian has a write up on the Vix volatility index. It`s a good article as it is written with a layman approach.

How to make a million dollars

I was reading "The Millionaire Messenger" by Brendon Burchard yesterday. To be blunt, it`s one of the less interesting/ impactful books I`ve read this year. Do not be fooled by its philosophical title, the focus is on informational marketing. However, there is one chapter that stands out regarding cash flows.

As per title, how to make a million dollars? The idea is this, conduct a seminar that charges $ 1 000 per person and get 1 000 people to attend (at once or through multiple seminars). There`s your million, as simple as that.

This of course is an extremely basic and theoretical approach on cash flows and one of the reasons why this is not the kind of book I would recommend others to pick up and read. The ideas are too simple and the content lacks any real depth to be impactful. I feel that the book is just another tool for the author to sell his advanced programmes. In addition, the author constantly brags on how much he can charge his clients.

1.02 million new building permits approved

Slightly over a million new home construction took place in September. This is a growth of 6.3% from August`s 957 000.

Tune Ins

Tune Ins was my favourite counter last year as it had solid fundamentals and its price range was easy to predict. It peaked to nearly RM 2.50 this year before dropping below RM 2 this week. Here are my findings from the 2013 annual report.

Income related: 

- Revenue growth of 30.85% (geometric growth).
- Net claims increased by 116%.
- Net claims rate per revenue of 24.2% in 2013 as opposed to 19.18% in 2012.
- Fees and commission expenses nearly doubled.
- Finance costs dropped to just 20% of the cost in 2012.
- Management expenses nearly doubled.
- EPS of 9.29 cents in 2013 versus 16.25 cents in 2012.

Cash flow related:

- Net cash from operating activities dropped by RM 30 million in 2013.
- Investing activities only used RM 2.7 million in 2013 compared to RM 79.2 million in 2012.
- Financing activities show a positive inflow of cash due to the issue of new shares.

Notes to the financial statements:

- In Note 17, the company was given a loan of RM 160 million. The weighted average effective interest rate at 6.25% is way higher than a standard bank loan.


Valuations 

1. Book value plus model would put it at RM 0.52 per share.
2. EVA gives a meager RM 0.07 per share.

Intrinsically this counter is not at a discount. The fundamentals may be solid, but its charm has slightly eroded compared to its performance last year.

S&P yearly gains wiped out

The global stock market continued its bearish tone today, with the S&P falling by 1.2% today, losing its gains for the year. Crude oil fell below $80 per barrel  and 10 year Treasury yield lost 7 basis points.

I recommend reading this article from Bloomberg.

Industrial production advanced

The industrial output in the US grew by 1%, bettering estimates and last month`s -0.2% decline. Bloomberg stated that this is the best increase since November 2012.

After the unexpected drop of the USD/JPY pair earlier this week , fundamentals would dictate that is it possible to long this pair with the solid results today.

Jobless claims at a 14 year low

The weekly unemployment claims in the US decreased by 23 000 to 264 000. According to a Bloomberg reporter, "it is rare to go this long below 300 000."

More red data from US: Consumers are taking a break

Core retail sales contracted by -0.2% as opposed to a forecasted growth of the same number after recording a growth of 0.3% in August.

Retail sales missed targets as well, contracting by -0.3% while economists were predicting a smaller decline of -0.1%. Bloomberg said consumers are taking a breather.

The third miss for the day, the producer price index (PPI) decline to -0.2%, worse than the stagnant results of August. This is good news for consumers but bad for companies and investors.

I should have held on to my short positions in USD/JPY much longer.

Unemployment falls in UK

The unemployment rate in the UK fell to 6%, better than the forecasted 6.1% and an improvement over last month`s 6.2%.

However,  only 18 600 less people filled for unemployment benefits. This is uninspiring after last month`s solid 33 200 less claims.

The average earnings index remained at 0.7%.

Inflation in China slower than expected

Following yesterday`s poor trade balance data, the consumer price inflation (CPI) fell to 1.6%. Economists were expecting 1.7% after last month`s 2.0% growth.

Further economic slowdown in Germany expected

The ZEW indicator of economic sentiment suggests a further economic slowdown in Germany is expected. This is certainly bad news for the global economy. China, UK and Germany have missed the targets of high importance economic data this week and one may start to wonder when to pull out from equity markets in anticipation of the next recession.

The indicator showed a contraction of -3.6. This misses estimates of 0.2 and the prior period`s 6.9.

The ZEW press release can be viewed here.

UK inflation lower than BoE`s expectation

The Consumer Price Inflation (CPI) grew by 1.2% in September, less than the target of 1.4% and the prior period`s 1.4% inflation growth.

The key points from the CPI report are:

• The Consumer Prices Index (CPI) grew by 1.2% in the year to September 2014, down from 1.5% in August.
• Falls in transport costs (notably sea fares and air fares) and prices for a range of recreational goods provided the largest contributions to the slowdown in the rate of inflation between August and September.
• Housing & household services (including utility bills) accounted for a third of the rate of inflation in the year to September. If falling food and motor fuel prices were excluded, the rate of inflation would be a third higher.
• CPIH (not a National Statistic) grew by 1.2% in the year to September 2014, down from 1.5% in August

Business confidence in Australia is low

The NAB business confidence survey is at a worrying level. According to Business Insider Australia, the confidence level is at its lowest since the election.

Potential in Censof?

A number of friends have added Censof Holdings Bhd (Censof) to their portfolio. Let`s take a look at this counter`s intrinsic value. Censof is not undertaking any mergers or acquisitions exercise, hence the valuation techniques used are from my part 1 article.

The values used for this post are derived from the 2014 annual report.

1) Book value plus model

	(RM)`000
Total value of net assets	411 722
Less: Intangibles	63 554
Non-current liabilities	(76 862)
Net value of equity	398 414

Total number of shares (Note 16 in the financial statements) = 399 576 (`000)

Value per share = Net value of equity / total number of shares

                          = 398 414 / 399 576

                          = 0.997

The book value plus model gives an intrinsic value of close to RM 1 per share. 

2) Economic Value Added (EVA)

Weighted average cost of capital (WACC) calculation:

(i) Cost of equity = Dividends per share/ Share price
(Note: I`ll assume the share price used for this calculation is the market value today, which is RM 0. 585)
                            = 0.01 / 0.585

                            = 0.0171

                            = 1.71%

(ii) Cost of debt

Ignoring any adjustments, I`ll use the interest paid over total borrowings.

                           = 3 835 / 152 549
                           = 0.0251
                           = 2.51% 

(iii) WACC = [ 0.0171(39 960) + 0.0251(152 549)] / 39 960 + 152 549
                    = 0.0234
                    = 2.43%

EVA = NOPAT - (WACC x Book value of capital employed)

         = 4 129 - 0.0243(39 960)

         = 3 157.97

Value per share = 3 157.97 / 399 576

                          = 0.0079

EVA would give this counter a value of RM 0.0079 per share.  


3) Market Value Added (MVA) 


The MVA is simply the present value of EVA and in line with, it gives too low a value for a meaningful comparison.


Conclusion 
If compared to the book value plus model, this counter is trading at a discount. However, the economic profits are meager which should raise the alarm for value investors. In addition, the level of debt of this company is rather high, exceeding the value of equity. 

Regular, accounting profits would give an earnings of RM 0.30 per share. This translates to every RM 1 invested in Censof makes RM 0.51. 

Bursa closes below 1800 post Budget 2015

The KLCI index closed at 1792.2, close to a 12 point drop from Friday.

A sharp selloff happened after 4 pm causing the index to fall below 1800 level.

Mr Clarence`s prediction was correct.

China`s trade balance drops in line with the global economy

China`s trade balance dropped to 30.1 billion from an estimated 41.2 billion and the previous month`s 49.8 billion.

This data is in line with the global economy slowdown.

Valuation of acquisitions (Part 2)

In part 2 of my acquisition series, we`ll head over to type 2 acquisitions where the acquiring company is exposed to financial risk only. Business risk remains unchanged here.

The average investor/ trader would rarely use this method to intrinsically value a counter unless there`s an acquisition that changes the financial risk of the joint entity.

An example of this type of acquisition is the recent merger between CIMB, RHB and Malaysian Building Society. Fundamentally, all three companies are involved in a similar business but the financial risk is changed due to the differences in capital structure and debt.

Think of the acquisition in terms of a project, when the capital structure changes, the adjusted present value (APV) model is used. This model can indicate how the net present value of a project (or in this case, an acquisition) is affected by the difference in financing. An acquisition is valued by discounting the free cash flows by the ungeared cost of equity followed by adding the present value of the tax shield.

APV = Value of target company (Fully equity financed) + PV of debt tax shields - Initial investment 

Steps:

1. Calculate the net present value as if it is ungeared.

2. Add the present value of the tax saved from the debt interest payments.

3. Deduct the debt of the target company to arrive at the value of equity.

4. Minus out the cost of acquisition to arrive at the net equity figure.