Water related industry

Recently at a dialogue session during Lee Kuan Yew Water Prize Ceremony, Singapore Minister Mentor Lee emphasized again the importance of water to Singapore. Although global water shortage issue is obvious, only certain countries such as island countries like Singapore will be more badly hit than other bigger countries which have more natural water supplies and resources such as China, India. Therefore, this gives more initiative to local water treatment companies like Hyflux, Boustead to do well in the field, main reason is that Singapore cannot afford to rely solely on water technology from overseas because importing foreign technology is expensive, while there is even a stronger demand locally, the cost of importing such technology will become even higher. Local water companies have a bigger mission on hand, than merely doing a good business.

Next Assignment

Recently RT and I attended a 2-day technical analysis course which we find very useful, especially to fundamentalists like us. While we have started to appreciate more on TA, we still believe that trading with TA alone is not our style. Our strategy is to pick the right companies by using FA and put them on the watchlist and then trade them during obvious trends.

I was very tempted to come out a topic on TA for June’s assignment since we have just recently aquired new skills on this topic, but there is really nothing much to write about TA unless we drill into trading strategies which will require more practice and experience than research. Therefore, I have come out the topic on macroeconomics which is important to both fundamentalists and technicians and it is a topic that we can research on.

Have fun with the assignment.

Beginner’s take on interest rates

About 1 month ago, I attended another (disappointing) free investment workshop preview, the speaker boasted how successful he was in trading in sideway markets during uncertainty. He briefly touched on the topic of interest rates. At that point in time, Fed has cut rate to 2.25% (now, after the latest cut on 30 April, 2008, it’s 2%),  he expressed his unique view that one should not overly reliant on theory because theory tells people that ‘when interest rate goes down, the stock market goes up’. Apparently, during mid-March to early April when I attended the preview, the market was still going down and there were still a lot of negative sentiments in the market. Fed’s interest rate cut did not successfully stimulate the market enough, at least during that point in time. And the speaker went on and on and continued boasting about his savvyness on market and subtly made fun with the so-called paper-analysts who knew only theories.

RT taught me a new phrase: ‘Ceteris paribus’. It’s Latin and it basically means ‘all other things being equal’. So, when all other things being equal (such as market sentiment, investors’ expectation and confidence, general economic climate, political factors, no unusual economic issues such as sub-prime problem, etc.), the statement ‘when interest rate goes down, the stock market goes up’ should still stand.

Quoting Pring, let me be a theorist now and attempt to elaborate why from a very layman’s point of view.

1. Interest rate is basically the cost for credit, the higher the interest rate, the higher cost for borrowing money to do business and therefore the lower the corporate profits. The lower the corporate profits, the lower the price investors are willing to pay for equities, hence the lower the stock price.

2. Interest rates affect profits in 2 ways. First, almost all companies borrow money to finance capital equipment and inventoy. Second, a substantial number of sales are in turn financed by borrowing. The level of interest rates influence on the ability and willingness of customers to make additional purchases. One of the most outstanding examples is the automobile industry, where producers and consumers are very heavily financed. So are capital-intensive utility, transportation, construction and housing industries.

3. A substantial number of stocks in the market are purchased on borrowed money (aka margin debt). The higher the interest rate, the higher the cost of carrying that debt, the lower the desire or ability of investors or speculators (rather!) to maintain these margined position. When this cost becomes excessive, stocks are liquidated and the debt is paid off. Rising interest rates have the effect of increasing the supply of stock put up for sale with consequent downward pressure on prices.

Vice versa when the interest rate goes down as lower interest rate stimulates economy and corporates earnings as well as investors’ or speculators’ activities in the market.

Reference: Technical analysis explained by Martin Pring, Chapter 25.