A Turbulent First Quarter

Contrary to some Fengshui Masters who use Chinese horoscope and geomancy to predict the behaviour of the stock market, the "calm" Rabbit year started the year rather turbulently. For the past two months, we have seen unrelated events, cascading to result in a mini crisis. In late January, there was a huge continuous selldown of Asian markets by large fund managers for 3 weeks. Before it ended, there was Middle East crisis heating up when Libya's unrest unwinding into a civil war. Crude oil prices shot past 2-year high and that caused great concerns to the recovery pace of the world economy. About when the oil prices eased a little with OPEC members' commitment to top up supply from Libya's shortfall, there was then a sudden Mother Nature's savage of a wrenching earthquake and treacherous tsunami that destroyed many parts of Japan, the 3rd largest world economy. All three unprecedented events sent the STI index to a double bottom of a 6-month low of 2921 points. I guess that's bad enough for many investors who got caught in a false confidence at the beginning of the new year when everything was painted all so rosy.

For those who held faith in the market, or who had capitalized on bargain hunting, the market always proves to be merciful. It did a spectacular recovery of more than 260 points in a short 3-week span. You would be helping your heart if you had hibernated out of the market for the last 3 months and opening to see your screen now, saving yourself the treacherous ride of the market; now that the STI has come close to last year's end closing of 3190 points. Phew! It was a 5-digit roller-coaster ticket price for me.

Now looking at the global economy, fundamentally is still unchanged. Broad-based economics still show an uptrend in a global recovery. US is still reporting improving sales and employment figures. The Dow Jones and S&P 500 indexes were showing continued uptrend which was momentarily disrupted by the recent crises. The US presidential election is slated to be held near the end of 2012. The government is not expected to do unfavourable measures to upset the market, especially when it is on its third year of running since the last election, as illustrated by previous election cycles. China is poised to contain its inflationary rate between 3-4% this year.

However, in a short to medium term view, there lies several risks which may hamper global economic growth and negative impact to the market.

Japan, suffering from a triple whammy disaster, will spend the next few years rebuilding its nation. As a world supplier of many advanced technologies like microchip and automobile, related industries are going to feel the ripple effect from a serious shortfall of supply. The government has to sort out the urgent need of restoring power back to factories.

The Quantitative Easing 2 (QE2) fund injection of the US Fed is ending by mid of 2011. If there is no deterioration of the US economy, no fresh injection of funds would be expected further. Less hot money would be free flowing in and out of market. Furthermore, the Fed would start to increase the interest rates amid an improved economy. It would then be less attractive for fund managers to borrow from banks and invest into equities.

If crude oil price continues its relentless upward trend, it is certainly going to derail the recovery of the global economy.

Singapore Entrepreneur - Is The Worst Over?

We are experiencing the greatest financial crisis ever in our lifetime. But recent several indications seem to suggest that we are out of the woods; stocks around the world have been rallying furiously, COE for cars have suddenly spiked indicating higher demand, and crowds have been snapping up newly launched private homes. So, is the worst over?

When the credit crisis unfolded in October 2008, Lehman Brothers, one of America's biggest lenders, was the first victim. Its collapse alone rippled through many big banks around the world which amassed losses more than US$1.6 Trillion. Following that, we saw big names like AIG, Merill Lynch and UBS at the brinks of collapse and needed desperate government fundings. Stocks around the globe saw their biggest plunge in 6 years. Even non-banking bigwigs like General Motors, Ford and Chrysler all went into deep financial difficulties. Iceland was the first country to declare bankrupt and had to be bailed out by IMF. Following all this mayhem, all sectors were affected with most 2008 annual reports revealing either losses or sharp drop in profit.

We have seen the worst unfolding before us. Whatever should happen has already happened. General Motors has just officially declared bankrupt after failed attempts in appealing for cash injection into the company. It beats me how many more job losses will follow after this. However, the market seems to shrug off these news and continue its rally. Even the H1N1 scare is not putting investors off. So effectively, we have come to a ground zero and whatever is going to happen, it won't be worse than what has happened. There may be more meaning to the term "Financial Tsunami". Tsunami are big waves that sweep everything on shore to destruction. The incident is momentary but the aftermath is catastrophic. It takes painful years to rebuild houses, for people to go back to their normal lives and overcome the grief over the loss of their love ones. You can liken this analogy to the financial tsunami. The collapse of the financial system in the US caused a tsunami to the global economy which all happened in one go. So you can actually take comfort that the worst is actually over and now we are on a long road to recover and we do not expect any more bad news.

On the other different camp of thought, you may want to consider that Obama's US$787B stimulus package is actually taking an effect to cushion the crisis. Governments around the world, including Singapore's have their own stimulus plans. So, in fact, whatever we are seeing today are just artificial. When people feel that things are not appearing as bad as they seem, they start coming back. The recent stock market rally may be a good indication that people are having a false sense of hope and are picking up bargain counters. Pessimists are saying this is a clear bear rally which has no ground to sustain. There are no good news in the US to report that could suggest the rally. It is just that news are not as bad as expected.

So how do you explain for private home sales being snapped up like in the heydays we saw in 2007? If you look at Asia during this crisis, it actually withstood much better compared to the Asian Financial crisis back in 1997. The banking system was beefed up ever since. It is also said that many people actually earned a lot of money during the heydays from 2004 to 2007. This gives them very much buffer to cushion themselves from the current crisis. Such people are out there today hunting for bargains like houses and cars. Private home prices saw their plunge up to 30% from its peak less than 2 years ago. The deferred payment scheme may have caused this aftermath effect. HDB home prices are closing in on mass market private condominiums which see many HDB folks grabbing the chance to upgrade. As a result, we see a spike in demand on mass market homes. But most are one-time buyers as they cannot afford more houses like other investors. So the demand may be unlikely to sustain. Once this batch of buyers are settled with their new homes, there will be left with no one out there to buy anymore.

In whichever camp of thought you are in, it is always wise to consider carefully before you jump onto the bandwagon. You may miss the boat if the market continues to rally, but at least you do not fall into a trap if all turn out to be a false rally. I have learnt my lessons. I'd rather watch from the sidelines if I have missed the boat. With money on hand, I still feel safer. There is always another time to invest again. However, if you are currently sitting on some gain from the recent rally, you must know when to exit. Warren Buffett had this saying: "You should be scared when everyone else is greedy. And you should be greedy when everyone is scared".