Panic in Greece Pahrmacies as Medicines running out

Panic in Greek pharmacies as hundreds of medicines run short

Pharmaceutical companies accused of cutting supplies because of low profits and unpaid bills 



A woman gestures at the state health fund office in Athens. Chemists say patients have been going from pharmacy to pharmacy in search of prescription drugs. Photograph: John Kolesidis/Reuters
Greece is facing a serious shortage of medicines amid claims that pharmaceutical multinationals have halted shipments to the country because of the economic crisis and concerns that the drugs will be exported by middlemen because prices are higher in other European countries.

Hundreds of drugs are in short supply and the situation is getting worse, according to the Greek drug regulator. The government has drawn up a list of more than 50 pharmaceutical companies it accuses of halting or planning to halt supplies because of low prices in the country.
More than 200 medicinal products are affected, including treatments for arthritis, hepatitis C and hypertension, cholesterol-lowering agents, antipsychotics, antibiotics, anaesthetics and immunomodulators used to treat bowel disease.

Separately, it was announced on Tuesday that the Swiss Red Cross was slashing its supply of donor blood to Greece because it had not paid its bills on time.
Chemists in Athens describe chaotic scenes with desperate customers going from pharmacy to pharmacy to look for prescription drugs that hospitals could no longer dispense.
The government list includes some of the world's leading pharmaceutical companies, such as Pfizer, Roche, Sanofi, GlaxoSmithKline and AstraZeneca. Pfizer, Roche and Sanofi all said a few products had been withheld. GSK and AstraZeneca denied the claims.

"Companies are ceasing these supplies because Greece is not profitable for them and they are worried that their products will be exported by traders to other richer countries through parallel trade as Greece has the lowest medicine prices in Europe," said Professor Yannis Tountas, the president of the Greek drug regulator, the National Organisation for Medicines.
The regulator has investigated 13 pharmaceutical companies that have reduced supplies and has handed the names of eight to the ministry of health so they can be fined. Tountas did not disclose the names of the companies, saying this was the responsibility of the ministry of health, but added that they were "big multinational companies".

The body representing pharmacists, the Panhellenic Pharmaceutical Association, confirmed the shortages. "I would say supplies are down by 90%," said Dimitris Karageorgiou, its secretary general. "The companies are ensuring that they come in dribs and drabs to avoid prosecution. Everyone is really frightened. Customers tell me they are afraid [about] losing access to medication altogether." He said many also worried insurance coverage would dry up.

"Around 300 drugs are in very short supply and they include innovative drugs, medications for cancer patients and people suffering from clinical depression," said Karageorgiou. "It's a disgrace. The government is panic-stricken and the multinationals only think about themselves and the issue of parallel trade because wholesalers can legally sell them to other European nations at a higher price."
The Hellenic Association of Pharmaceutical Companies said the picture was more nuanced. Its president, Frouzis Konstantinos, said there were "probably a very few companies" that were not supplying the Greek market, and only for very specific products — "the reasons being a combination of Greece's low medicine prices and unpaid debt by the state", he said.

In Athens and Thessaloniki, Greece's second city, chemists say they are often overwhelmed by people desperately trying to find life-saving drugs. Oscillating between fury and despair, the customers beseech pharmacists to hand over medications that they frequently do not have in stock.
"Lines will form in the early morning or late at night when you're on duty," said Karageorgiou, who is based in Thessaloniki. "And when the drugs aren't available, which is often the case, people get very aggressive. I'm on duty tonight and know there will be screaming and shouting but in the circumstances I also understand. We have reached a tragic point."

Greece's social insurance funds and hospitals owe pharmaceutical companies about €1.9bn (£1.6bn), a debt going back to 2011, with companies expecting payments of €500m this month.
Some companies admitted they were not supplying some medicines. According to the government list, Pfizer had not supplied or would not be supplying 16 medicines. A company spokesperson disagreed with the total but confirmed four medicines had been withdrawn "because alternatives were available and because of the parallel trade [reselling] situation in the country". The products are the two leukaemia treatments Zavedos and Aracytin, which were withdrawn last year, and the analgesic Neurontin and the epilepsy therapy Epanutin, which were withdrawn last month.

Roche stressed it had not halted supplies of medicines to Greece, but said it had withheld supplies to public hospitals that owed the company €200m. Daniel Grotsky, a spokesman, said: "We are insisting that they [the public hospitals] fulfil their contracts and this is something we do in any country … We are withholding [medicines] until they meet their obligations."
Roche could not say how many hospitals were affected but said it was still supplying public hospitals with "critical medicines", which included treatments for HIV and transplantation. Grotsky said patients could still get their medicines through pharmacies.

Angeliki Angeli, spokeswoman for Sanofi Greece, said it was supplying public hospitals with medicines considered life-saving, unique or irreplaceable. "Non-unique products are supplied based on hospitals' outstanding obligations and overdue status," she said. Non-unique products are medicines for which either a generic exists or a therapeutic alternative option is recommended by treatment guidelines.

She said most Sanofi medicines on the government list remained available on the market with the "exception of a couple of dosages/forms where alternatives exist".
GSK Greece said it had never halted the supply of any product in the Greek market. "This is a joint decision taken not only at local level but also at corporate level. Equally, GSK has maintained the uninterrupted supply [to] Greek public hospitals with all its products irrespective of the accumulated debts," the company said.

Vanessa Rhodes, of AstraZeneca, said the company had not halted the supply of any of its medicines to Greece. "Our priority is to ensure patients have access to the medicines they need. Furthermore, we have an emergency 'direct–to-pharmacy' supply system in place should pharmacies find themselves out of stock of any of our products."
Zeta Chatziantoniou, of Boehringer Ingelheim in Greece, stressed it "has not halted any of its medicine supplies in Greece in the retail sector and in the public sector". Novartis said it was not halting supplies to Greece.

The pharmaceutical industry says many shortages are because of products being exported through parallel trade, and has urged the government to address set drug prices. Under EU trade rules, the free movement of goods is allowed. So for example, while a pharmaceutical company may sell a medicine to a wholesaler or pharmacist in Greece, the wholesaler or pharmacist can sell these medicines on to wholesalers in other countries. Parallel traders do this to make money on the price differences between countries.

"The government needs to correct these wrong prices to avoid a surge of exportation. Greece's drug prices are 20% or more lower than the lowest prices in Europe," said Konstantinos, who is also the general manager of Novartis in Greece.
The industry wants the health ministry to bring in a new pricing system so that Greece uses a basket of eurozone countries to calculate prices. At present, medicines are priced at below the average of the three lowest prices in 22 EU countries.

The regulator has introduced export bans for nearly 60 medicines to try to tackle the problem and is looking at 300 more products. It is also investigating 10 wholesalers and 260 pharmacists who it believes have broken the export ban. The ministry of health will decide any punishment, which is likely to be fines ranging from €2,000 to €20,000, said Tountas.

This month will be crucial as Greek officials and Greece's creditors – the European commission, the International Monetary Fund and the European Central Bank – must agree the 2013 public pharmaceutical budget, which has fallen in recent years. More cuts would put patients at a "critical level", said Tountas, who will be one of the key players at the negotiating table. The budget was €3.7bn in 2011 and fell to €2.44bn last year. Tountas is concerned creditors may cut it to €2bn for 2013.

Relationship between Current U.S deficits, Exchange Rates and Triffin's Dilemma

After the Great Depression in the 1930s the state of affair of the World economy can be at best described as turbulence.  As a result of the Great Depression many countries experience a period of plummeting personal income, tax collection, exports and consumption. During that time most of the world’s economies have unstable exchange rates which also resulted in unstable world trade. Following this many countries engaged in competitive currency devaluation which resulted in the ‘beggar thy neighbour’ policies being adopted. Hence due to the intensified currency wars among nations ‘protectionist’ trade policies are also introduced.

Bretton Woods System

By protectionist policy we meant setting up of artificial trade barriers like increased import duties, subsidies for so called ‘infant and export oriented’ industries and setting of quotas among nations. This is the exact opposite to free trade which promotes the smooth flow of international trade without any barriers. The situation had gotten worse and as a result there was a call for a new International Monetary System. In July 1944, delegates from 44 countries gathered at the United Nations ‘Monetary and Financial Conference’ in Bretton Woods, New Hampshire. There are two main agenda that are discussed during the Conference which is to introduce a new international financial monetary system to stabilize the current currency woes and also on the recovery of Europe after the WWII to prevent any recurrence of the problem.

Under the Bretton Woods system member countries are required to peg their currencies to the dollar and are allowed to fluctuate within a fixed trading band and also permitted to convert their dollar holdings to gold at the rate of $35 an ounce.  It is only the natural thing to do because during that time the US economy is accounted for almost half of the global manufacturing capacity and also holds the world’s largest gold reserve.  To facilitate the changes in the monetary system two international institutions are formed and they are the IMF (International Monetary Fund) and the World Bank. Apart from providing loans for the reconstruction of Europe post WWII it is also hope to stabilize the currency fluctuations so as to avoid future currency wars again. However over the long term such arrangement proved cumbersome due to the changes in the currency’s purchasing power parities (PPP).

Purchasing Power Parity

PPP refers to the value of basket of goods in two countries should be equal to the ratio of their exchange rates. For example if the exchange rate between the USD/MYR is 3.20 then a basket of goods consist of chicken, beef, eggs, flour, sugar and cooking oil that costs US100 in the U.S then the same basket of goods should be worth RM320 in Malaysia.  However such scenario will not often played out as expected due to both traded and non-traded inputs.

A good example will be the Big Mac index which is developed by the Economist illustrates the difference in the PPP of different countries. By definition a Big Mac cost US4.20 in the U.S should costs RM 13.44 (US4.20 x 3.2) in Malaysia. A check at a McDonald’s restaurant in Malaysia reveals that a Big Mac only cost RM 7.95 and convert it to US dollars it will translate to (7.95/3.2 = 2.48) US 2.48. This represents a (US2.48/US4.2) 59% discount in pricing on the Malaysian side. So in theory based on the PPP the Malaysian Ringgit is 59% undervalue and in the long run should appreciate upwards until it reaches parity with the USD. The full extent of the Big Mac Index can be shown in the following.






On the left are countries whose currencies are undervalued while those on the right are overvalued. The difference in currency values are attributed to both tradable and non-tradable inputs. In less developed countries certain goods and services such as labour and raw materials are cheaper and hence the end product in this case a Big Mac will be cheaper.  So as you can see the imbalances in the purchasing power parity of the different currencies will somehow has to move towards a more equitable level in the future.

One of the solutions will be the arbitrage of labour and resources through Foreign Direct Investments (FDI). Through FDIs companies from more developed nations are able to take advantage of the availability of cheap labour and resources in less developed countries. Furthermore FDIs will also help to reduce the currency imbalances when foreign companies convert their currencies to the local currency.

Triffin’s Dilemma

So coming back to our discussion on the exchange rates between countries under the Bretton Woods system, there will be parity problems because they are pegged to the USD. Member countries are not permitted to meddle with their exchange rates and hence as a result some of them are burdened by either their overvalued or undervalued currencies.  Without the ability to adjust their exchange rates countries will find it very difficult to achieve both internal and external balance. Sooner or later the currency peg under this system will be under tremendous pressure and eventually will have to give way.  In 1959 Robert Triffin also known for his (Triffin’s Dilemma) warned that the Bretton Woods system cannot survive because in order for the dollar to be continued as ‘the world reserve currency’ it had to supply more dollars and run ever bigger deficits.

The mechanics of it can be explained by the following. When the USD becomes the World’s reserve currency it will be the currency of choice by the world’s central banks when they build up their foreign reserves. Due to the popularity of the USD and hence an ever growing demand for it the value of the USD will keep appreciating. When a currency appreciates it will be cheaper to import and expensive to export. Hence as a result the deficits will be growing larger over time.  

However the growth of Money Supply in the Unites States seems to be on an exponential path as shown by the chart below. As with anything when the supply exceeds demand its value will have to drop. 




The following chart shows the United States Dollar index whose performance is measured against a basket of other currencies such as EUR, JPY, GBP, CAD, CHF and SEK. As can be seen its value seen tumbling since the 1980s which is also coincide with the increase in the money supply during that period then.



Source : Trading Economics


Bretton Woods and Fractional Reserve Banking

The Bretton Woods system operates in a similar way as the ‘Fractional Reserve’ system operates by the Banking industry. In the banking system deposits are used to leverage the bank’s ability to lend. For every dollar deposited the bank is able lend out more than $10 after allocated a certain amount for the deposit reserve ratio. It will be safe as long as all the depositors will not concurrently demand cash for their deposits. In other words when there is no ‘bank run’.  Similarly in the Bretton Woods system it is dealing with Gold and USD. The member countries (holders of USD) were given the impression that there is enough gold for everyone. However Triffin realized that as time goes by the amount of trade between countries will grow and hence the demand for USD will also increase. The problem is that there will come a time when the total dollar holdings by foreign central banks will exceed the amount of gold held by the United States.  

What will happen if foreign holders of USD simultaneously convert their USD holdings to gold at $35 an ounce? This is exactly what happened during the late 1960s. During that time the balance of payment deteriorated badly and there are fears of the Dollar devaluation. As a result many foreign holders of USD began to cash in their dollars for gold. This trend grew so fast and substantial where the U.S gold stock reduced by almost 70%. In other words there is a ‘Gold Run’ going on. So to prevent further depletion of its Gold Reserves, President Nixon on August 15th 1971 announced that foreign dollar holders are no longer able to convert their dollars to Gold.  Hence the USD is no longer backed by Gold and instead it is transformed into the ‘reserve currency of the world’ and is ‘backed by full faith and credit of the United States’. This brought an end to the Bretton Woods system and later the USD is allowed to ‘float’ with other currencies.

Nevertheless the deficits still remained after more than 30 years since then. The following chart shows the extent of the U.S deficits since the 1980s.



The reason why the United States is able to run deficits for more than 30 years is mainly due to the status of the dollar as the reserve currency of the world. Foreign central banks are obliged to keep their foreign reserves in dollars as it is also the currency of trade. Most commodities like oil, gold, corn, wheat and etc are quoted in dollars. Whenever a foreign country exports to the United States it will be paid in dollars. Those dollars will make its way to the foreign central bank which in turn will be recycled back to the United States in the form of purchase of dollar denominated assets or U.S Treasury Bills. Or they can add it to the foreign reserves. Can you notice there is a dilemma here? As time goes by the amount of USD accumulated by foreign dollar holders will multiplied and it is not in their interest to see the dollar ‘race towards zero’. If the dollar losses more value then naturally the value of their dollar holdings and dollar denominated assets will also go down. Put it another way the foreign dollar holders are trapped.


So are there any solutions available?

The first measure available to dollar holding countries is to stop adding more dollars to their reserves but instead diversify their future holdings of foreign reserve in other currencies such as the Euro or the Japanese Yen.

The second measure to counter the depreciating value of the USD is to trade using other currencies or even gold. Malaysia has already set several precedents when it paid the Chinese Government with palm oil for their work and finances in a railway project and also with Russia when it purchased some MIG fighter jets. In fact many countries have already started trading bypassing the use of dollar. India announced last month that it will begin to buy oil from Iran with gold and not dollars. On September 2012 China also announced its intention to sell oil denominated with the Yuan. So as you can see the exodus from dollar denominated trade is gaining speed and sooner or later the USD is going to lose its importance as the world’s reserve currency.  
 

Is Japan's Economy heading for Endgame?

Newly elected Japanese Prime Minister Shinzo Abe has promised to boost the Japanese economy by unlimited stimulus and increased government intervention in the financial market. The Japanese economy has been bogged down by lacklustre economic growth which can be shown by the following GDP Growth chart from 1993-2013.

Chart 1 – 20 years GDP Growth Rate 

Before we delved into the current deflationary problem that is haunting  the Japanese economy for the past decade it is best to gain some knowledge of its origin.

Nature of current Deflation

As a result of the boom years from 1980s to early 1990s the inflation rate had been creeping up and reached its peak in 1998 with the CPI reaching 104.8 index points. It had reached a point where it affected both the consumers spending and the corporations.  As a result the Bank of Japan pledged to rein in prices. In 1998 the Bank of Japan made it known that its main objective is to achieve price stability and one such monetary tool to achieve this goal is to have a zero interest rate policy (ZIRP). By implementing ZIRP it hoped to bring about some price stability. In fact as the years went by prices instead trended downwards as evident from Chart 2 below. When the anti inflationary measures was launched in 1998 the CPI reading was at 105 index points but then prices kept falling until it reaches 99.6 index points in December 2012. Various attempts by the Bank of Japan to end the deflationary economy seems to be getting nowhere.


Chart 2 – 20 years CPI figures

Instead of being a short term objective to stabilize the price level but without a reflation policy in place to restore the price level prior to the deflation episode it resulted in a price decline that prolong till recently. Deflation by definition means falling prices and in the long run this would have profound effects on both consumers and corporations. For consumers it will increase their expectation for further price decline and hence they will spend less and save more which is detrimental to any economy. On the other hand corporation's profits will be further squeezed by falling good,services and assets prices and hence will also dampen their spirit to increase their investment spending. If this were to go on any longer Japan will find it more difficult to extract itself from the current deflation.

For an economy to move forward it needed to have a moderate level of inflation preferably slightly above zero percent. When the economy starts reflating prices of goods, services and assets will be appreciating and this will help change the pessimistic outlook of both the consumers and corporations towards the economy. Without public intervention to change the overall outlook of the economy Japan will not succeed in its endeavour. Therefore to change the existing mood of the economy the government can either increase the inflation or price level expectations. By increasing inflation expectation we mean by setting a certain percentage say (1-2%) on future targeted inflation rate. Similarly the increasing the price level expectations refers to increasing the index points level on the CPI index. Say for example as of December 2012 the CPI index point level is at 99.6 the government can announce its future target for the CPI index point to 102. In such an event it will help diminish any negative expectation or uncertainty towards the financial market and hence the economy.   

Coming back to Present

As can be seen from Chart 1 above, the GDP growth rate has been stagnant and oscillating between +2% and -4% over the entire 20 years period. This deflationary problem has taken its toll on both consumers and corporations because as a result of this they are paying more yen for their debts. Moreover as of late the Japanese economy is encountering some strong economic headwinds which resulted in its exports and balance of trade to plummet. The drop in its exports are due to the following.

1. Strong Japanese Yen (JPY/USD – 80)
2. Slowdown of Global demand
3. Territorial dispute with China resulted in boycott of Japanese goods

The following are the charts of the Japanese Exports and Balance of Trade. As evidently the exports plummet from the high of ¥6204 billion in April to ¥5300 billion in December 2012. In addition from Chart 4 below, in December 2012 Japan also recorded a trade deficit of ¥641 billion. According to the Ministry of Finance exports fell 5.8% while imports increased 1.9% in the same period. For the year of 2012 in totality Japan recorded a trade deficit of ¥6.927 trillion ($78.24 billion).


Chart 3 – Japan exports

Chart 4 – Balance of Trade

Further to this the Japanese economy found it very difficult to divorce itself from the current recession. One of the main reasons for this difficulty is that most Japanese people and its corporate followed the traditional savings mentality. Money saved and not spend meant that there will be negative consequences on the velocity of money and hence the multiplier effect on the economic activity. The following chart shows Japan’s GDP Growth rate for the past 10 years. Notice that since 2008 there have been three periods of negative growth during 2009, 2011 and 2012 which is also known as triple-dip recession. During the last quarter of 2012 the GDP contracted by 0.10 % which means it still unable to drag itself out of the current triple-dip recession.


Chart 5 – GDP Growth rate plotted in Area form

Shinzo Abe’s Reflationary Policy

Despite several rounds of Quantitative Easing however its effects is no longer effective in persuading the Japanese consumers to spend more and hence as a result does not produce any meaningful result from the multiplier effect. From previous experience in the 1930s the Finance Minister of Japan then Korekiyo Takahashi managed to rescue Japan from the grip of the Great Depression by using Reflationary policies which also resulted in a record turnaround of its economy. Korekiyo implemented the following policies as part of his reflationary effort.


1. Took Japan off the Gold Standard and allow the Yen to float
2. Outlaw the conversion of paper currency to Gold
3. Slash interest rates
4. Enshrine BOJ to buy and warehouse bonds for later sales
5. Embark on massive deficit spending


The end result of his policies is immensely successful. The Stock Market tripled, Yen devalued 40% and exports boomed and for the next 5 years the economic growth averaged 6.5%.


Currently the Japanese Government under Abe is also trying to rescue its economy from the current deflationary grip by employing the same strategy during the 1930s which is to reflate the economy. By reflating we mean the government trying to achieve inflation rate higher than the normal long  term rate so as to restore price level to pre deflationary level and in this case before 1998. Recently the Japanese government announced its objective of achieving an inflation target of 2% at any cost. The Bank of Japan is committed to buy into the Bonds and Equities market. Following the Bank of Japan’s intervention in the bond market the Yen fell to a seven month low. As of late the Yen had depreciated about 20% falling from 78 to 94 to the dollar. The following chart shows the performance of the Yen against the US$.


Chart 6 – JPY/USD

           Source : Trading Economics



Side effects of Reflation

Thanks to Mr Abe’s reflationary policy which resulted in the current run up of the Nikkei 225. The good news is that since Abe’s inauguration on 16th December 2012, the Nikkei has soared by more than 1000 points. The bad news is that we doubt the current run up will be sustainable for the long term. One of the indicator is the retail investor’s share of total transactions reaches its highest level of 34.3% (refer to Chart 7 below) since 2009. According to the Tokyo Stock Exchange the combine trading value of the seven largest internet brokers totalled ¥19.5 trillion in January 2013 which represents an increase of 86% over the month of December 2012.  One of the main drivers of the stock market is liquidity. When everybody is ‘Fully Invested’ where will the extra liquidity be coming from to sustain the market? Or we can put it another way, the Japanese retail investors are fully leveraged and any dip in the Nikkei will result in a panic sales of equities. That is why in some days the Nikkei has been trading over a very wide band (±100 points) for the past month.  


Chart 7 – Retail investors in Tokyo Stock Exchange 

Another side effect of Abe’s reflationary policy will be the inflationary effects on goods and services. As a result of the current monetary policy that weakens the ¥ that means imports will be more expensive and exports will be cheaper. The increase earnings in exports will be sterilized by the increasing cost of the imports especially from oil. Japan is not an oil producing nation and virtually all of its oil needs are imported which resulted in its economy being very sensitive to any oil price shock. Any oil price shock will render its economy to a recession and with the current ¥ price of oil moved from ¥6728 on October 2012 to ¥8973 (chart below) on 15th February 2013 we believe there will be repercussions that has yet to be price in. The chart below shows the 180 day oil price quoted in Japanese Yen.  

Chart 8 - 180 days Oil/Jpy




The third side effect of inflation will be the effects on bond yields. As a result of inflation investors will need a higher yield to compensate for the loss of purchasing power due to inflation. As we know interest rate is a very delicate and sensitive element in the Japanese economy. The problem lies with the JGPIF (Japanese Government Pension Investment Fund) where ordinary Japanese contributed to the fund for their retirement. This scheme is quite similar to the EPF and CPF in Malaysia and Singapore where both employer and employees contribute a certain amount of their salaries towards the fund every month. JGPIF is the world’s largest pension fund and worth about ¥108 trillion.

It has the obligation to pay about 5.9% in interest to its members this year which amounts to about ¥6.4 trillion. That means that JGPIF will need to achieve an investment return of more than 5.9%. With such a massive fund it would be a monumental task and any return from fixed income investments will be negligible since the official interest rate is zero. It will be force to invest into riskier investments like the stock market. As we have mentioned above the Nikkei 225 is already reaching a plateau and any severe correction in the index will have big repercussions on its earnings.  Again since the official interest rate is zero how are they going to finance the obligation to pay out the ¥6.4 trillion? What the JGPIF has been doing for the past few years is ‘self-liquidating’. By this it means it is selling its bonds to finance its payout.  The following graph shows the extend of the self-liquidating effects on its assets.


Chart 9 – Japanese Government Pension Investment Fund

One picture tells a thousand words. As more assets are sold there will be less available to earn interest. To compound the problem as we have mentioned earlier with the government’s targeting the inflation rate of 2%, we doubt those members will be sitting still. They will be demanding higher interest rates so as to compensate for the 2% increase in the inflation rate. Given that the current nominal interest they are receiving is 5.9%, the real interest rate they will be receiving in future is 3.9% after inflation (5.9% - 2%). If JGPIF were to oblige to the higher interest rate payment in future, where will be the additional monies coming from?

The fourth side effect is it will dampen the Japanese authority’s ability to raise funds locally through the bond market in future. As can be seen from above the implementation of the 2% inflation target will meant that bondholders will be getting a negative return on their investments. This will force the traditional Japanese investors to seek higher returns and hence transfer their savings in banks and bonds to the stock market. From the above chart the total share of retail investor’s participation in the stock market increased to 34.3% in January which is almost the same rate set back in July 2009. So when the retail investors ‘are all in’ then obviously there will not be any more funds available to invest. 

So for future fund raising the Japanese Government will have to look elsewhere most probably in the international market. Currently the locals represent about 90% of the bondholders and the rest being foreign investors nevertheless this composition will change very soon in the future. Borrowing from the international market not only meant paying higher interest rates but also represents a form of leakage in the economy when they repatriate the interest payment back home. Hence this will further burden the economy in the future as more debts will be created. In totality the total debts held the Japanese Government, household and corporations are more than 500% of GDP.

Can the Nikkei 225 sustain?

We reckoned that the Nikkei endgame will not be very far off as we shall show you the following chart. Below we present to you the Nikkei 225 daily chart. One thing which is very obvious is that there is already a Divergence between the price and indicators. That shows that the trend is weakening and about to turn. It is indicated by the pink line.

Chart 10 – Nikkei 225

The full extent of Japan’s reflationary policy is yet to be seen. Whether it will result in an Endgame of the Japanese economy will also need to be seen. We doubt Abe's reflationary policies will have the same effect as his predecessor's in the 1930s because then,


1. The world was not so globalized
2. Japan was not so indebted
3. The role of oil is not that significant to the Japanese economy
4. There was massive Government on the military before WWII
5. Not many countries (except U.S) engaged in Quantitative Easing, Competitive Currency
Devaluation and Deficit Spending


At this juncture we reckoned that the first salvo of Currency wars had already been fired. While most of the Central Banks around the world still indecisive on whether to devalue their currencies, Venezuela on February 13 2013 devalues its currency by 46%. This is the fifth devaluation in a decade and the new rate for the bolivars to be set at 6.30 from the previous 4.30 to the dollar. How all these will manifest into the future will be an interesting episode as we believe that many countries will not wait for long to join in this currency devaluation bandwagon. As empirical evidence shows that those countries that devalues first will be the ‘early bird gets the worm’.

CLSA Feng Shui Index 2013

CLSA Feng Shui Index 2013 – Year of the Black Water S-s-snake

Will the Hang S-s-seng Index race up the ’adder or is it a s-s-s’pent force?


6 February 2013


Hong Kong - Wednesday, 6 February 2013 - CLSA Asia-Pacific Markets (“CLSA”), Asia’s leading independent brokerage and investment group, today launched its 19th annual CLSA Feng Shui Index (“CLSA FSI”) – a tongue-in-cheek look at what the celestial signs suggest is in store for the Hang Seng Index, key sectors and markets, world leaders and celebrities, and each of the 12 Chinese zodiac signs during this Year of the Black Water Snake.


“The past is a foreign country,” it is said, “they do things differently there”. We can only hope so because the past five Snake years – back to the Water Snake of 1953 – are not encouraging. In only one year did markets end the year convincingly above their opening and the size of the drops of the most recent three has been growing ever worse. As befits “skin-shedders”, Snake years are marked by major transformation and change – and sometimes great upheaval: Pearl Harbour (1941), Twin Towers (2001), Tiananmen (1989), Fall of the Wall (1989), Great Depression (1929), recessions (1953, 2001), revolutions (1917, 1989), and major conflicts (1941, 1965).


However, there are signs that this year’s beast will be better behaved: All five of the basic elements or energies are present in the fortune charts (including the market-driver Fire!); and the annual Flying Star energies all return to their “home” sectors for the first time in nine years.


Once again, this year’s CLSA FSI features a month-by-month guide to the Hang Seng Index; forecasts for key sectors and markets; predictions for each of the 12 Chinese zodiac signs; our popular feng shui property guide for Hong Kong; the fates of some famous faces – from Michael Bloomberg in the US to Hong Kong’s Ricky Wong, Myanmar’s leading Lady, Hong Kong Chief Executive CY Leung, will-o’-the-wisp Tony Chan, Singapore and many more.


Among the new features of this year’s CLSA FSI are: a global all-singing, all-dancing qi-to-qi comparison map; and a stronger focus on the Hang Seng Index (we even cast its fortune chart).
The CLSA FSI forecasts a better 1H, with a quite contrarian resources-led rally gaining momentum over May-July. That comes to a sudden end about August, as the crucial Fire element all but dies away, Earth falls, Metal overshoots and Water puts a damper on prospects. The 2H looks to be more volatile, with big swings in both directions, including a decent rise in the final month taking the HSI
back above where it started.


.



In terms of sectors, we expect the best performances from those traditionally associated with Metal (the likes of broking and financials) and also Water (such as gaming and logistics).
Among the zodiac signs, Roosters, Cows and Dogs look set to be this year’s “grinners”, whereas Pigs, Tigers, Sheep and Snakes may need all the pluck they can muster.
And of course, our CLSA Feng Shui Index is offered with our tongues firmly in our cheeks.

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About the CLSA Feng Shui Index
The CLSA Feng Shui Index began life as a Chinese New Year card for our clients in 1992, with a simple summary of forecasts by a group of feng shui masters and a few views of our own. To flesh it out, we also predicted the performance of the Hang Seng Index based on the omens. No one paid much attention to the contrarian chart, but by year’s end it had correctly called all seven of the Hang Seng’s major turns. Now renowned by investors globally, the CLSA Feng Shui Index took a break during the bull run from 2005 to 2008. Much missed, it was revived in 2009. This year marks our 19th edition.


Copy of the CLSA Feng Shui Index is available for downloading on the CLSA website www.clsa.com.

FBMKLCI Outlook - Time to Buy, Bull taking Control

We issued a ‘Sell’ call on the FBMKLCI on 4th January 2013 when the market was making a new high. However due to the lacklustre participation of retail investors and as anticipated the market did not managed to hold on to that level. Recently (7th February 2013) it did plunged back to the 1590s level which was set in 28th November 2012. In other words it did what we called a ‘full retracement’ from the high back to the low.

So why do we recommend a ‘Buy’ call again? We believed many folks got bashed in the last round before the Chinese New Year because they reckoned that stocks will again run up due to the Chinese New Year and Elections effects. However it did not materialised as anticipated because we did mentioned that the market was in a Divergence Phase in our last article. Hence any rebound will not be sustainable.

Origins of Technical Analysis

Anyway we know that a lot of folks out there are still sceptical about technical analysis. They reckoned that forecasting the financial market with T.A is some kind voodoo or reading tea leaves. However we would like to point out that technical analysis is not some kind of tea leaves reading but it is a scientific approach to market forecasting.

Since many folks believed that the pricing of the financial market follows the ‘random walk theory’ nevertheless we will try to prove otherwise. By random it means we cannot use past stock price movements to predict future prices. In other words the stock price follows a random behaviour thus it is ‘very efficient to assimilate any news’ into the price. Any attempt to use either technical or fundamental analysis will also be futile to predict its price movement. Is this true?

Brownian Motion and Technical Analysis

We don’t believe so because as far as we know it is already been proven scientifically that stock/option prices in fact can determined with various mathematical models. Famed Scottish botanist Robert Brown can be called the pioneer of the ‘Quantitative study in Random walk in finance’. In 1827 through his telescope he found that pollen grains moved in a random manner in water. The idea of this random walk initiated many scientific fields which included the study of the price behaviour in the Stocks/Options pricing. In 1900 French Mathematician Louis Bachelier was the first to quantify the idea of Brownian Motion. He developed a mathematical theory for random walk which will later use a model based on simple normal distribution for pricing options (which is almost unheard of then). This model can be considered the first study on option-pricing and provided the seeds for later works. Modern day mathematical models on financial asset pricing that is based on the Brownian Motion includes Nobel prize winners Paul Samuelson’s option and derivative pricing model, Black-Scholes model for Options/Stocks/Interest Rates pricing and Norbert Wiener who developed the Wiener process from Brownian motion which is necessary in the development of Quantitative Finance in the later years.

Anyway to talk more on trading systems and methodology is beyond the scope of this article. The main point we want to stress is that with such simple technical tools like Moving Average, Relative Strength, Stochastic and so on, it helped us accomplished one thing that is very important in our trading career. I am sure by now most of you folks who bought stocks either through fundamental analysis or news are not aware ‘at what level your stocks are coming in from’.  What do we mean by this? That means you don’t know whether the price you are paying is cheap or expensive? You don’t know how high or low the price you paid? Would it be nice if you buy at the bottom? Below we present to you the FBMKLCI daily chart and an analysis on why we are bullish on the Index.





Why are we bullish?

From the above you can see that we did not recommended a ‘Buy’ call earlier is because there is a lot of noise in the chart. What we needed is a confirmation from the chart breakout. The confirmation finally came through today (13/02/2013) when the candle bar closes above the trend line. As you can see we are just using some simple trend line and some basic oscillators and indicators in our analysis. Our recommendation for a ‘Buy’ is based on the following.

1. RSI is below 30 and moving up
2. Today’s candle bar close above he trend line
3. Looks like a double bottom had just been formed
4. MACD is moving up and seems like it will close above 0.

We should see it test the 1649 points level soon and should make a new high in the coming weeks. Although the above seems to be our reasons for the market to be bullish in the coming week but a word of caution is that sometimes it might be a false signal due to unforeseen circumstances that are beyond our control such as market and systemic risk that are associated with Global Macro Events. If such scenario develops we are still on the safe side because we know that we are buying at the bottom of the Market. We did not buy when the market is at its high during the 4th of January 2013 because we know ‘at what level the market is coming from’.  

So now we hope we have demonstrated that technical analysis is useful in making Buy/Sell decisions in your Stocks Trading and not merely reading tea leaves.