Commentary: Bits and Pieces of the Market Jigsaw

There are many bits and pieces of information that can form a clearer picture of the market outlook that I would like to highlight to everyone. These are organised in terms of time horizon.
 
Tactical (1week – 1 month)
USD shows a rebound. This means that non-US investors have less reason to sell their USD assets. Pullback in US stocks have been attributed to selling by non-US investors so if the trend does not persist, downside is limited. On the flipside, the buyers on the sell-down were likely to be US investors. This shows a certain level of confidence they have in their own market. Another point here is the discussion on the budget. This affects the supply of and value of USD and must be observed more carefully.
 
Strategic (1 month – 6 months)
Cheap money remains abundant and shall continue to inflate asset prices. This is in contrary to Bill Gross’ investment outlook. The reason why I would audaciously beg to differ is because our investment horizon is much shorter than PIMCO. Cheap money not only comes from the US but Japan and China as well. Look at how Abenomics is affecting the Japanese economy driving short term price inflations and now fuels the need to increase Japanese income. In China, the government is supporting various labour intensive industries like Shipbuilding so as to maintain employment and income levels. Also, Chinese manufacturing is slowly moving into IndoChina (Vietnam, Cambodia, Laos). This means that Chinese money moves out of China this way as well.
 
At a time when business confidence is just returning there is no reason why central banks would increase interest rates or the Fed do tapering if it still has the means to maintain a loose monetary policy.
 
Mergers and acquisitions have been picking up recently all over the world. In my opinion, business men are taking the opportunity to consolidate weaker competitors because they are optimistic. This is important because earnings projections now are likely to be inaccurate. P/E will get lower when earnings increase. Certain companies with incredibly high P/E due to a slump in profits thus far may become undervalued. It is better to value companies based on their Cash Flow rather than earnings now. This is a part that most analysis and reports lack at the moment. This may change in the coming months so it is something to lookout for and turn to our advantage.