Which Party is Better for the Market?

Markets around the world stayed quiet and reluctant to make a move until the mid-term elections results are out tomorrow. I have been doing some research to see whether political parties affect the markets, particularly the equity markets. There are a numerous of academic research on the topic, analysing which political party does better with the market, but these studies are bound to fail. These academic researches claim that a particular party is better for the market however their findings has its statistical bias, it also ignores the vast differences and underlying nature of specific policies. What we need to evaluate is not the political ideology but the policies of both candidates and how the polices they impose will affect the US economy.

One indicator to see who the market favours is who Wall Street bets on. This time around they donatate to Rommey for this election, the money would benefit his anti-Obama adverts, particualy in the swing states. Wall Street has previously supported Obama in 2008 but now they started to place their bets on Romney’s campaign as he seems to favour more deregulation and tax cuts for Corporate America. One of the main concern for the finance industry is the Dodd-Frank Act, which the governor promised to repeal on day one if he is sworn in. He promises to replace it with a more “sensible” financial reform so banks can spend less resources on complying regulations and carry out more profitable but riskier investments. Romney also wants to make the Bush-era tax cut stay in place whereas, Obama would like to put up taxes for the top bracket who will see their income tax go up by 3% to 38%, their capital gains tax increase by 5% to 20% and their dividends tax rate go to their personal tax rate. Taxing will also carry interest at normal tax rates and this causes concerns with hedge funds and private equity. You can begin to see why Wall Street likes this guy.

Do not think that Obama is anti business, he may not be as attractive to the markets in the short run but at least market participants know what they can expect from Obama and this eliminates political risk. Obama is all about getting the country back on track, taxing the rich to generate a revenue to simulate growth but the revenue is handing back to corporations and also giving them a tax cut of 7% to 28%. He also wants to bring manufacturing back to the States and help them by capping manufacturing tax rates to 25%. These cuts will not go unpunished, it will mean a decrease in government revenue but in the hopes of these cuts, they will generate enough growth and jobs to break-even.

Obama communicate his plans a lot better than Romney does, Obama provides definitive answers and does not refuse in-depth discussion, where the Governor does. Romney do promise some enticing polices but how realistic are they? For example, he may repel the Dodd-Frank but what will he put in place? This is left unanswered. He wants to keep the tax cuts, balance the budget and carry on full military spending, this is deemed wishful. Financial backing from Wall Street does help a candidate to sway voters but Romney does not really appeal to the masses. What will lose him this election is his relationship with the finance industry and his fat cat image that came with it, no matter how hard he will try to rinse that image the public knows his background. I have even hear the media calling him, Mitt “Money Bag” Romney.

In my opinion, Obama will win the elections because I do not feel the American public is ready for a president who is going to heavily favour Wall Street and deregulation, which is what caused the economic downturn in the first place. Obama’s plans may seem to be hard on big businesses on the surface but it is actually benefiting the economy and restoring balance to the deficit. It is common knowledge that all politicians lie but at least Obama’s goals are more realistic than that of Romney’s.

Hurricane Sandy Hits Wall St.

Nearly all students thank god for Hurricane Sandy as it means they can party in the blackout for two days but for Wall St. time is money. Stock traders are itching to trade but option traders are taking a hit in the wallet as markets stays closed for a second day. An option has an expiration date, and as the market stays closed the option loses time value, especially with weekly options. Weekly options only have a five day lifespan and taking two days away from that will mean that they will lose 40% of their option value. This will benefit the sellers of the options as the likelihood of the option will expire out of the money.

Blackout in Lower Manhattan                                                                              – Courtesy of Dailymail

The NYSE is said to be prepared to open on Wednesday. The timing here is auspicious because the job report is out on Friday and the US elections are approaching. Both of these are two big market moving events. There will also be a huge order imbalance causing choppiness in trading as bulk orders stack up over the weekend.

Trading volume has been low, unaffected exchanges in the US remain closed because the NYSE and other markets worldwide have been conservative with their positions as Hurricane Sandy is still in affected and data on damage still needs to be measured. The loss in business activity will be a short term blow to the American economy.

NYSE closed in the aftermath of Hurricane Sandy                                     – Courtesy of Denver Post

Once the market opens, we can expect to see insurance stocks dip as they will have to pay off insurance contracts. It will seem like shorting them will be a no brainer. If you are planning to react to the price movement, I suggest you think again. One recent academic study by Utah State University examines Hurricanes Katrina and Rita, looking at attempts to short sell insurance companies. These companies typically need to pay out claims in the wake a storm, and the events can hurt their bottom line, providing bearish investors with a profit opportunity. Because of the complexity involved, short selling is a relatively rare tactic for individual investors to employ. Many consider it mostly the province of professionals like hedge funds and Wall Street trading desks. The findings: investors did time short sales to Hurricane Katrina, but they were late to the game. In fact, short selling didn’t spike until three trading days after Hurricane Katrina’s landfall, when stock prices had already fallen.

When Hurricane Rita appeared about a month later, investors were faster on the draw, with a spike in short selling of insurance stocks starting in the week before landfall. Even then, however, trading seemed somewhat indiscriminate, with investors failing to concentrate on insurers that had Gulf Coast exposure.

Of course, while Katrina has become synonymous with devastation, particularly for New Orleans, Rita seems destined to be a footnote in history. So in retrospect, those moves look less like prescience and more like bandwagon jumping.

To be sure, it can be difficult to predict investors’ intentions from looking at aggregate trading data. Blau points out that it is impossible to tell for sure whether any particular bet was profitable for the person who made it.
Still, investors planning to bet on a hunch about Hurricane Sandy don’t seem to have history on their side. Not that will stop them.

Tech bubble 2.0?

The younger generations will be more familiar with the housing bubble than with the dot-com bubble of early 2000’s (tech bubble 1.0).

Let us begin with a definition of a tech bubble before going in-depth with the topic.

“A tech bubble is the rapid inflation in the valuation of public and private technology companies that exceeds their fundamental value by a large margin. It is accompanied by the rationalisation of the new pricing, and then followed by a spectacular crash in value.”      Steve Blank – Consulting Associate Professor at Stanford University

We are in the longest economic downturn since the great depression. In the past couple of weeks, Apple and their new iPhone 5 sold 5 million units in the first three days, selling faster than 4 and 4S model. How are they able to achieve this, whilst central banks around the world struggle with rising unemployment rates and debt levels. Apple is not the only one in the spot light this year, Facebook’s initial public offering was able to raise $16 billion, which is 8 times more than what Google raised in 2004; what makes it impressive is how they were able to raise this amount in the midst of economic uncertainty. Facebook went on to become the third largest IPO in history and the largest technology IPO.

Fans Lines Up A Week Before The Launch                                                              Courtesy of Getty Images

The technology industry is the best performing industry for the past three months and valuation of both public and private companies has a higher margin than other industries’ average. Because of the high valuation, companies have recently been looking for valuation and going public, there have been some high-profile listings with lots of media attention such as Groupon, Linked-in and Zynga.

For smaller private companies, venture capitalists and other already established companies are now providing liquidity to entrepreneurs for their companies; a recent example would be the $1 billion purchase of Instagram by Facebook Inc.. Because of these inflation in valuation, it has led some entrepreneurs to come into the industry, create a company quickly with some value and seek for a high valuations to cash in on. This is known as flipping, which will cause some concern to investors as this contribute to the build up of a bubble.

Are we beginning to see the same symptoms of the 2001 dot-com bubble? No, the difference is that previously the smaller companies were not provided liquidity until they went public. Also in 2001 the stock price was grossly overvalued, purely built on expectation rather than grounded metrics and since then IPOs have tougher listing rules, without creditable metrics, real growth and profit it is unlikely they will be able to float on the exchange. What is happening now is nothing like the insanity that gripped the market in 1999, where they had 290 internet-related IPOs , much more than we have today. In 1999 internet related IPOs accounted of 60% of the IPO deals and the average tech stock doubled on the first trading day, today we are nowhere near these percentages.

Google and Apple are not significantly overvalued and have the ability to generate profit and growth rates to support their stock value. As for the private technology companies and start-ups, they are valued so high is because they have a growth rate that the market has never seen before and their profit models are very interesting, being able to generate margins of 40% EBITDA so the valuation will have a premium built-in.

To understand where we are currently in the build up to the bubble, we need to understand that a bubble have four phases; stealth, awareness, mania and blow-off. In my opinion we have gone pass the stealth stage where Venture Capitalists invest in social networks, consumer and mobile applications long before institutional investors and profit from these new start-ups.

Courtesy of The Economist

We are at the awareness stage, institutional investors and large venture capitalists have taken notice of the momentum and have brought in more capital and created an upward pressure on price. The most notable examples are Russian investment group, DTS and Goldman Sachs who invested over $700 million into Facebook before the IPO.

Are we in the Tech Bubble 2.0? I believe there is definitely some effervescence but I cannot see any signal that there is an irrational demand for tech IPOs. Facebook being the best example, regardless of the publicity and being the largest of all tech IPOs, it has provided proof for us that they have not traded above their listing price since their second day of trading and are now trading at around half of their listing price. I am bullish on the tech industry as global growth without sovereign risk is hard to find and investors will find stable and profitable growth in the industry.

Can Uninhabited Islands Cost Over $345 Billion in Trade?

China and Japan continue to be in the spotlight as the tensions over uninhabited islands in East China Sea continues to escalate. Economic cooperation between the world’s second and third largest economies greatly benefit each other, however there are rising fears that the two countries will slip into an armed conflict.
The Japanese government’s action of purchasing the islands from a Japanese family last month sparked anti-Japanese protest across China’s major cities, including Beijing, Shanghai, Guangzhou, Shenzhen and Hong Kong. Demonstrators went on rampage, damaging anything Japanese from cars to Japanese department stores. A number of Japanese manufacturers have halted productions in China until further notice. With the increasing anti-Japanese in China, demonstrators demand a boycott on Japanese goods, impacting Japanese companies at least in the short term.

Courtesy of Times Magazine

It is not yet clear to Japanese companies the extent to which this will affect domestic sales and production or how long the demonstration is going to last. But what is clear is that trade between the two countries has declined by 1.4% compared to 2011 and trade will further decline in the coming months due to concerns of investment safety. Fitch Ratings has already stated that the Japanese auto and technology industries will come under pressure of downgrade if the tensions carry on. Japanese auto makers are especially exposed to this risk as China absorbs about a quarter of global Honda sales and a fifth of Toyota’s.

Investment safety is key here, as trade between the two countries is valued up to $345 billion. A breakdown in trade would be devastating to their economies as both have their own economic problems excluding those of the west. The investment safety does not only affect Japan but also the multinational corporations who have direct foreign investment in China, leading MNC to rethink their strategy and the investment position it has in China. I believe Japanese companies are already reconsidering their future in China and in the coming months there will be a decline in FDI invested into China and if the tensions increase it could mean MNC could move operations elsewhere in Asia.

We can see that no one will benefit from the breakdown of trading relations between the world’s second and third largest economies but the root of the problem is that both countries are stuck in history’s trap and this cannot be solved economically. What the Western press have left out is this: the demonstrations over the disputed islands are not the symptom of a sudden outburst of anti-Japanese sentiment. To the contrary, there are deep-rooted feelings of resentment between the two countries, which have recently been veiled by economic prosperity. The problem is deeply entrenched in education systems, textbooks and history, and grudges between two nations still linger. However, it seems that both governments are anxious to prevent a trade war, let alone an armed conflict because trade is the one positive thing both these nations share, and serves as a uniting force. It is hard to predict the outcome of the situation as of now and increasing American influence in the Asia Pacific is not helping matters.

Welcome To The Money Badger’s Burrow

Dear Reader,
You are probably wondering why my blog is called “The Money Badger”. A creature called the honey badger provided the inspiration. The honey badger is an intelligent, fearless animal, attacking others to get what it wants. It is even known to repel much larger and dangerous predators such as lions and cobras. Honey badgers favour bee honey, and will often search beehives to obtain it, which earns them their name.

Okay, so now you are probably asking “Where’s the connection?”. In my blog I hope to share my opinion with you on economic and financial events affecting the world economy. I want to encourage my readers to be fearless and share their opinion on my blog. I am driven by pursuit of knowledge and the almighty dollar, seeking out information and money in the same spirit as the honey badger.

The Money Badger

Courtesy of outdoorphoto.co.za

.