BT: There's money to be made in a recession (20 Feb 2008)
MONEY MATTERS
There's money to be made in a recession
Stay focused on the big picture so that opportunities can be seized before the next turning point of the business cycle
By CLEMEN CHIANG
THE four phases of the business cycle of rising and falling economic growth are:
Expansion or recovery (a speeding-up in the pace of economic activity),
Peak (the upper turning point of a business cycle),
Contraction or recession (a slowdown in the pace of economic activity), and
Trough (the lower turning point of a business cycle, where a contraction turns into an expansion).
The role of an investor is to monitor the tendency of the business cycle to move from one phase to the next. The investor assesses the strengths and weaknesses in the economy as clues to a quickening or slowing of future rates of economic growth, as well as to cyclical turning points in moving from the upward expansion to the downward recession, and from the recession to the upward recovery.
This is based on the theory that expectation of future profits is the motivating force in the economy. When business executives believe that their sales and profits will rise, companies tend to expand production of goods and services and investment in new structures and equipment. When they believe profits will decline, they reduce production and investment. These actions generate the four phases of the business cycle.
The table on the right shows the last 10 recessions in the US business cycle, from November 1948 to November 2001. In this 53-year period, the average duration of each recession (or contraction) was around 10 months.
There were two exceptions in situations somewhat reminiscent of the present climate.
Situation 1: 1973 oil crisis (1973-1975)
A quadrupling of oil prices by Opec coupled with high government spending due to the Vietnam War led to stagflation in the United States. The recession lasted for 16 months.
If we take into account the inflation adjusted monthly crude oil price in December 2007 dollars, the December 1979 monthly average peak would price at US$104.06. This is comparable to the breach of US$100 on Jan 2, 2008.
Situation 2: Early 1980s recession
This began in July 1981 and ended in November 1982. The duration of the recession also lasted 16 months. The recession hit financial institutions such as banks and savings and loans particularly hard. The recession also significantly worsened a crisis in the savings and loan industry. This is also comparable to the sub-prime mortgage crisis where a sharp rise in home foreclosures which started in the US during the autumn of 2006 became a global financial crisis during 2007 and 2008.
The situation that we are now in is both a combination of rising crude oil prices and a credit crunch. The key question is: How do we profit from this recessionary market?
Strategy 1: FOMC
Beginning in 1994, the Federal Open Market Committee (FOMC) began announcing changes in its policy stance, and in 1995 it began to explicitly state its target level for the federal funds rate.
Since February 2000, the statement issued by the FOMC shortly after each of its meetings usually has included the Committee's assessment of the risks to the attainment of its long-term goals of price stability and sustainable economic growth.
The fed funds rate was slashed gradually from 8 per cent to 3 per cent during July 1990 to September 1992. This was the eight-month recessionary period from July 1990 to March 1991. It was also slashed gradually from 6 per cent to one per cent during January 2002 to June 2003. From here, we can establish three very critical points:
The lowest rate is ranging from one per cent to 3 per cent before the FOMC switches over to increase the rate.
During the recessionary years from March 2001 to November 2001, recession only kicked in on the third announcement of rate decrease. Using a similar and simplified model, this will position the current recession to effectively start on December 2007.
If the average recessionary period is 10 months, then the projected end of recession is due in September 2008.
Let's arrange the above three critical points into a projection of the federal funds rate's decrease in the future.
Strategy 2: Casino resort development
Investors who pumped dollars into real estate investment in Sentosa Cove are now literally sitting on a goldmine. This is because a S$5.2 billion integrated resort (IR) is currently under construction on a 49-ha site on Sentosa Island to welcome 15 million visitors in 2010. IR is a Singaporean euphemism for a casino-based resort development.
The next big thing has one billion people living within three hours' flight!
The Pescadores are an archipelago off the western coast of Taiwan in the Taiwan Strait consisting of 90 small islands covering an area of 141 sq km. They are administered as Penghu County, Taiwan Province, Republic of China.
Following the Jan 12 legislative elections, the Kuo-mintang (KMT) gained absolute legislative control in a landslide victory, with 81 seats against the ruling party's 27. The KMT's party policy is to support the legalising of gaming in Penghu, and analysts currently report that legislators will be much less likely to be coy about the passage of the bill now that their constituency seats are not at risk, reinforced by their absolute majority.
Until recently, the Pescadores was off-limits for development during the martial law era, but since the rapid democratisation of Taiwan, conditions have improved and Penghu is now well positioned to take advantage of this pristine location as the first major beach-front development on the islands.
Gaming in Asia is concentrated in Macau, although Singapore has recently ended its ban on gaming and granted two gaming licences. Macau is experiencing phenomenal growth following the end of Stanley Ho's monopoly in 2002.
This growth is driven by factors including strong macro-economic activity, significant capital investment, increasing disposal incomes in countries such as China, and a lifting of some of the travel restrictions between Macau and mainland China.
Macau's 18.7 million visitors in 2005 came from across South-east Asia, including Hong Kong, mainland China, Taiwan, Japan and South Korea.
Two significant highlights are:
1.14 per cent of visitors came from Taiwan - which shows a strong domestic demand for travel.
2.15 per cent of the opening year revenue of US$230 million of the Sands Casino was from Taiwanese gamblers - which will further boost demand for Penghu's properties.
This represents a unique investment opportunity to replicate Sentosa Cove with a much larger potential.
Putting all these together, investors have sufficient buffer to tide over the current US recessionary period and consolidate their financial positions.
However, the mind must be focused on the big picture so that opportunities are seized before the cycle shifts - again.
The writer is CEO of Freely Business School (www.freely.com)
Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.
There's money to be made in a recession
Stay focused on the big picture so that opportunities can be seized before the next turning point of the business cycle
By CLEMEN CHIANG
THE four phases of the business cycle of rising and falling economic growth are:
Expansion or recovery (a speeding-up in the pace of economic activity),
Peak (the upper turning point of a business cycle),
Contraction or recession (a slowdown in the pace of economic activity), and
Trough (the lower turning point of a business cycle, where a contraction turns into an expansion).
The role of an investor is to monitor the tendency of the business cycle to move from one phase to the next. The investor assesses the strengths and weaknesses in the economy as clues to a quickening or slowing of future rates of economic growth, as well as to cyclical turning points in moving from the upward expansion to the downward recession, and from the recession to the upward recovery.
This is based on the theory that expectation of future profits is the motivating force in the economy. When business executives believe that their sales and profits will rise, companies tend to expand production of goods and services and investment in new structures and equipment. When they believe profits will decline, they reduce production and investment. These actions generate the four phases of the business cycle.
The table on the right shows the last 10 recessions in the US business cycle, from November 1948 to November 2001. In this 53-year period, the average duration of each recession (or contraction) was around 10 months.
There were two exceptions in situations somewhat reminiscent of the present climate.
Situation 1: 1973 oil crisis (1973-1975)
A quadrupling of oil prices by Opec coupled with high government spending due to the Vietnam War led to stagflation in the United States. The recession lasted for 16 months.
If we take into account the inflation adjusted monthly crude oil price in December 2007 dollars, the December 1979 monthly average peak would price at US$104.06. This is comparable to the breach of US$100 on Jan 2, 2008.
Situation 2: Early 1980s recession
This began in July 1981 and ended in November 1982. The duration of the recession also lasted 16 months. The recession hit financial institutions such as banks and savings and loans particularly hard. The recession also significantly worsened a crisis in the savings and loan industry. This is also comparable to the sub-prime mortgage crisis where a sharp rise in home foreclosures which started in the US during the autumn of 2006 became a global financial crisis during 2007 and 2008.
The situation that we are now in is both a combination of rising crude oil prices and a credit crunch. The key question is: How do we profit from this recessionary market?
Strategy 1: FOMC
Beginning in 1994, the Federal Open Market Committee (FOMC) began announcing changes in its policy stance, and in 1995 it began to explicitly state its target level for the federal funds rate.
Since February 2000, the statement issued by the FOMC shortly after each of its meetings usually has included the Committee's assessment of the risks to the attainment of its long-term goals of price stability and sustainable economic growth.
The fed funds rate was slashed gradually from 8 per cent to 3 per cent during July 1990 to September 1992. This was the eight-month recessionary period from July 1990 to March 1991. It was also slashed gradually from 6 per cent to one per cent during January 2002 to June 2003. From here, we can establish three very critical points:
The lowest rate is ranging from one per cent to 3 per cent before the FOMC switches over to increase the rate.
During the recessionary years from March 2001 to November 2001, recession only kicked in on the third announcement of rate decrease. Using a similar and simplified model, this will position the current recession to effectively start on December 2007.
If the average recessionary period is 10 months, then the projected end of recession is due in September 2008.
Let's arrange the above three critical points into a projection of the federal funds rate's decrease in the future.
Strategy 2: Casino resort development
Investors who pumped dollars into real estate investment in Sentosa Cove are now literally sitting on a goldmine. This is because a S$5.2 billion integrated resort (IR) is currently under construction on a 49-ha site on Sentosa Island to welcome 15 million visitors in 2010. IR is a Singaporean euphemism for a casino-based resort development.
The next big thing has one billion people living within three hours' flight!
The Pescadores are an archipelago off the western coast of Taiwan in the Taiwan Strait consisting of 90 small islands covering an area of 141 sq km. They are administered as Penghu County, Taiwan Province, Republic of China.
Following the Jan 12 legislative elections, the Kuo-mintang (KMT) gained absolute legislative control in a landslide victory, with 81 seats against the ruling party's 27. The KMT's party policy is to support the legalising of gaming in Penghu, and analysts currently report that legislators will be much less likely to be coy about the passage of the bill now that their constituency seats are not at risk, reinforced by their absolute majority.
Until recently, the Pescadores was off-limits for development during the martial law era, but since the rapid democratisation of Taiwan, conditions have improved and Penghu is now well positioned to take advantage of this pristine location as the first major beach-front development on the islands.
Gaming in Asia is concentrated in Macau, although Singapore has recently ended its ban on gaming and granted two gaming licences. Macau is experiencing phenomenal growth following the end of Stanley Ho's monopoly in 2002.
This growth is driven by factors including strong macro-economic activity, significant capital investment, increasing disposal incomes in countries such as China, and a lifting of some of the travel restrictions between Macau and mainland China.
Macau's 18.7 million visitors in 2005 came from across South-east Asia, including Hong Kong, mainland China, Taiwan, Japan and South Korea.
Two significant highlights are:
1.14 per cent of visitors came from Taiwan - which shows a strong domestic demand for travel.
2.15 per cent of the opening year revenue of US$230 million of the Sands Casino was from Taiwanese gamblers - which will further boost demand for Penghu's properties.
This represents a unique investment opportunity to replicate Sentosa Cove with a much larger potential.
Putting all these together, investors have sufficient buffer to tide over the current US recessionary period and consolidate their financial positions.
However, the mind must be focused on the big picture so that opportunities are seized before the cycle shifts - again.
The writer is CEO of Freely Business School (www.freely.com)
Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.
posted by mrmoon at 7:31 AM
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