Dubai Bond Default

More problems at work because of Dubai bond's default. Not because of direct exposure to their bonds and CDS but rather more because of HSBC pulling the HSI down. We are experiencing pretty big VaR moves all over the place due to panic selling. Whether there are more trouble than meets the eye? We still do not know. However, many of my colleagues are keeping their fingers crossed. Apparent from the comments, "Now is already the month of December, I don't want this thing affecting my bonuses!"

My opinion is that the default per se is not a big issue $80-90Billion may be large but not insurmountable. What I think is more important is the health of US consumers who are still in a balance sheet recession. Most probably they are taking the opportunity to stock up hugely on necessities during this Black Friday. The financial media as usual might again want to distort this as a sign of financial strength.

Lucky for me, sold out on my Capitamall Asia positions just before markets closed on Thursday, made some coffee money. Kudos to discipline of not leaving speculative positions over weekends. Experience has taught me that market sentiments can change at the snap of a finger. Didn't expect this Dubai issue to pop out immediately out of nowhere though.

Buying opportunity? Well, depends on the extent of correction that happens later. Given how US and Europe reacted, doubt there will be anything more than a small 3-5% move. As they say, bonuses coming up, thus window dressing season is in, doubt traders will be in the mood to rock the boat now.

Fortune's Formula

Bought it over at HarbourFront PageOne bookshop. Haven't been able to put it down ever since. Though it's a little pricey for a paperback and probably a book you can get over at the library. However, I still never regretted owning it. That for itself, my friend, speaks volumes.

Relooking History with a new perspective

I was doing some financial research and came across an interesting phenomena. Unfortunately, I have no rational economic explanations for it. Therefore, it might one of those predictors that performs excellently in backtesting but to fail miserably going forward. Nonetheless, it might lead to something though.

This experiment was conducted under the scenario that if one were to buy the S&P500 and hold it there for the next ten years without selling. How well would the investor fare through companies' earnings and dividends without considering capital appreciation of the stock itself? Earnings risk premium tends to overstate performance (upper bound), whereas dividends risk premium usually understates performance (lower bound). The real performance usually lies in between the two.

It would be interesting to note that backward earnings premium is highly correlated to forward dividends risk premium. It has a correlationship of almost 90%. An astonishing predictor considering the fact that forward dividend risk premium are figures made with hindsight hence impossible to produce at that point in time. However, backward earnings premium is another different story altogether.

The results have shown that ever since 1977, investing has become a lot more harder than ever. Earnings risk premiums and dividend risk premiums have virtually collapsed, sometimes even negative. This runs against the prevailing notion that if one had bought stocks in the long bull market of 1990s and they would have earned quite substantially. In fact, most of the time, these people would be much better off if they had bought 10 year treasury bonds instead. This showed that most stocks between the late 1970s till the recent crisis were just plain overvalued.

Good news is that according to this indicator, stocks are fairly cheap even at current prices. This is in direct contrast of my qualitative analytical work. In a way, it could also be a defining moment, for the outcome would allow me to place more weightage on qualitative or quantitative factors in the future.