Here comes the Sun!

                                   ----- Here comes the sun, here comes the sun, and I say it's all right

                                            Little darling, it's been a long cold lonely winter

                                            Little darling, it feels like years since it's been here

                                            Here comes the sun, here comes the sun, and I say it's all right

                                           Little darling, the smiles returning to the faces

                                           Little darling, it seems like years since it's been here

                                           Here comes the sun, here comes the sun, and I say it's all right -----

                                                   Quoted from lyrics of the song – Here comes the sun

                                                   Written by George Harrison and performed by the Beatles 

Don’t get me wrong. I am not a weather reporter.

With the arrival of lunar new year of Rabbit, an animal said to be jumpy and skittish, stock investors are even placing bigger bets that the market will continue to shine, furthering its rise to grasp the psychologically-critical 10,000 mark on a bevy of positive news both domestic and overseas.

Claiming an extended run for 5th consecutive month in Jan, bulls seem to have long grabbed the upper hand as the market wrapped up the lunar year of Tiger at 9,145 points, a 32-month peak. Optimism is so rife that it can churn higher after resuming trading next Tuesday to repeat a traditionally marvelous feat. In the first outing for each of previous two lunar new years, investors rejoiced at upbeat numbers it achieved. 

Glass Is Half-Full: Improved Employment and Consumer Confidence

The glass is half-full, as voiced by Taiwan government expecting better time ahead for 2011. It opined that local economic recovery is taking on a finely-balanced, sturdy disposition both in export and domestic segments. An official also put a positive spin about Taiwan stock market described "more accurately" as a decently-undervalued laggard as compared with its global peers.

In 2010, the island clocked an upwardly-revised GDP rise of 10.47%, a double-digit high unseen since 1988, mainly due to the explosive export and industrial output last Dec. The GDP growth this year will be however pegged at a slower pace of 5.03%. Most notable prediction comes from a breakthrough to USD21,229 for Taiwanese annual per capita income, albeit the last one among Asian Four Little Dragons to hug a level over USD20,000. Also, healthier shape in global and emerging countries' economies, along with widely-watched enforcement of ECFA (a China-Taiwan free-trade framework agreement), will catalyze an extension of robust export.

As to domestic consumption, it is projected to soar 3.73% this year, up from 3.43% in 2010 and an evidence that economic pick-up is well in place. More people are anticipated willing to open their wallets to spend, partly on the back of improved unemployment rate which stood at 4.67% last Dec and is planned to be checked under 4.9%. A crop of 520.000 people are out of works at present, with the level programmed to be trimmed by 100,000 this year. There is some silver lining to the clouds of this beastly jobless figure as official data indicate the multiple of effective jobs supply over those qualified leapt to 1.3X from a low of 0.6X hit in global mortgage crisis couple years ago. The tide has altered, after latest tough years we've struggled through. Bravo !

A palpable sense of optimism pervaded among foreigners, who overall posted a net buy of NTD90 bn in Jan. They had raised targeted upside of Taiwan market index over the 10,000 mark in general. The most rosiest picture is to paint a muscular charge to 11,200 points. A heavyweight foreign house reportedly on Feb.10 is slated to realign again its index weighting covering emerging markets, with more added to Taiwan bourse. The shuffling, if finalized, is speculated to pump more-than-NTD100 bn into the island, a reassuring blessing to the market in the long run.

Concerns Remain: Annoying Inflation and Public Debt

The market’s more optimistic view is understandable, yet investors have to rethink their euphoria a bit. Domestic banking liquidity decelerated in Dec. when M1b money supply grew 8.77%, representing a 10th straight month of declines. That means the potential capital flow into market would have stalled. Inflation pressure, another prevailing bête noire of the jobless and low-income labor, will cast a pall over private sector spending. The CPI in 2011 is estimated to inflate 2.04%, up from a moderate 0.96% a year ago. A reading over 2% will strengthen the case for government to be vigilant and proactive, and that over 3% will carry implications that it will be forced to activate an austerity attitude at any moment.

Even the government survey finds employers set to bring on more full-timers, but, for the lucky, gainfully employed, wages seem likely to keep stagnant with odds for a hike perceived shallow in the immediate future. It has been severely criticized that real per capita disposable personel income in Taiwan was pushed back to the range 10 years ago thanks to unbearable inflation. The weakening buying power can't fuel or sustain any apparent snapback for private spending. Most of regional countries have been vexed by skyrocketing property prices, readying themselves for a foreseeable bubble pop, and Taiwan is not an exception.

Hopes are swirling that Taiwan exporters will enjoy a whopping windfall so long as implementation of ECFA, effective this year, moves as scheduled, though there might be bumps along the way. Both sides have slashed respective import tariffs to boost trade. Under the improved tie, there'll be some standouts, particularly financial issues which now scramble to venture into China to jockey for good positions. Notwithstanding the frenetic growth strides, Taiwan will face limited advance in tax revenue coupled with souring fiscal status, as articulated by Fitch Ratings Ltd which cut Taiwan long-term local-currency rating to AA- from AA on Jan. 27. As of Sep. 2010, outstanding debt of central government totaled NTD5,701 bn, translating into a portion of 42.16% over GDP and exceeding the officially-set uplimit of 40%.

Sell into Peak

Complacency currently looks high in Taiwan market which has long taken its cues from overseas markets. A prolonged bullishness in US market will likely act as a catalyst to prompt a push over the 10,000 points, but a wild card is related to portfolios pruning among foreign traders. In Jan. alone, they snapped up Taiwan shares in a net amount nearly equivalent to 16% of 2010 figure around NTD500 bn. Whether fully-loaded or not, they will take money off the table swiftly, once local currency, NTD, halts its appreciation, or the market starts to top out at which they predicted – higher territory over the 10,000 ground.

Taiwan market in the past cleared the 10,000 hurdle but only to witness sharp nosedives subsequently for three times, each in 1990, 1997 and 2000. The message we receive now from foreigners and government is: buy, buy, buy; here comes the sun on a big price spike. I am not always a doomsayer neither, but where there is a positive, there is a negative. How long can you suspect a market's ongoing rally, mainly driven by hot money, not to be tripped up amid a less-exciting 2011 outlook for economic growth? It won't come as much of a surprise for the government to descend a slope of hope in an island striving for lifting annual per capita income, and fixing the grim jobless and inflation displays. But can it finally pull a rabbit out of the hat to attain those ends?

Just adopt a risk-off approach, if you are a Johnny-come-lately missing last year party hosted by the jaunty, dancing Tiger that had already shown its claws. Then, smiles will be on your face.

Happy Lunar New Year, Good Luck, and Good Trading!