Friday, December 19, 2008

Market thoughts

Today as I browse through the Straits Times Recruit, it reminds me scarily of the SARS period. Recruit was packed with little jobs’ advertisements, mainly hailing from statutory and government agencies. It is apparent that the private sector has little interest in hiring new employees now. What does it translate to the stock market?

Refer to the below graph:

During the 9/11 and SARS period, STI bottomed around 1200 points. However, the problem we are seeing now is more difficult and perhaps even more prolonged.

Where would the bottom level be then?

Many analysts are calling the situation with conviction that things will turn for the better from 1H 09. Respectable economists (local and overseas) believe that economy will recover in 1Q 2010.

My personal view after reading all the reports and statistics so far is that the downturn has only begun. Recovery for the job market and economy is likely to come earliest in 2010 or 2011.

Stocks being forward looking may only pick up (earliest) from 2H 09 onwards. Hence, if my assumption is right, from now till 2H 09, stocks will experience a bottoming process. Hedge funds still have a lot of redemption orders on their cards. In Jan and March 09, there might be carnage of equity sales.

I still prefer to resume buying blue chips when STI falls to 1400 points or below. There is a strong margin of safety at this level. It might go lower, perhaps even to 900. But I am not betting on such distress.

Take note however, that there are still a lot of uncertainties going on. Will the US motor industry fail, merge or become state owned? What policies will Obama bring to stimulate the economy? How will China tackle the yuan appreciation problem, which has cause many export firms to fold? With US external debt ballooning, and the only way to repay debt is by borrowing, is the US the ultimate Ponzi scam? Will Madoff cause further deleveraging, massive redemption and demise of hedge funds (Madoff effect)? The deferred payment scheme (DPS) will definitely create some fire sales in the property market. What kind of ripples will be sent down to our local stock market?

With a million uncertainties, it is still better to hold cash and invest when one is prepared to see paper losses of 30% or more. The risk is high, but it might take another 10 years to see another crisis. So, don’t rush into it but don’t waste it either.

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