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Economics 2012: Off the top of my head.

Saturday, February 4, 2012

I have been doing more thinking. OK, so what's new?

In recent weeks, the stock markets rallied and with the strong closing on Wall Street last night, they look like they could move even higher next week.

The bulls say that the tide has turned and things are moving higher from here and that we should buy stocks on pull backs. The bears say that what we have seen recently is just a bear market rally from oversold positions and that stock markets will see new lows in time.

Both bulls and bears are looking into their crystal balls and coming up with reasons why they are going to be right. My own crystal ball is cloudy and I doubt it works at all.

However, drawing from what I have read in the news, it seems like the eurozone crisis is far from over. Banks in the eurozone are still trying to shore up their capital requirements and being significant lenders in Asia, accounting for some 20% of commercial loans here, negative ramifications could manifest themselves more remarkably in time. Being asked to write off huge chunks of Greek debt has made a difficult situation worse. Now, they are worried about Portugal.

Long-term interest rates of Euro countries, 1993-2011

The eurozone's unemployment rate has hit a new high and in Spain alone, unemployment stands at more than 22%. Recessionary pressure in Europe has already affected Asia as export volumes in China shrank. Smaller companies are experiencing problems with cashflow and a lack of credit. Countries here are all forecasting lower growth in 2012 with a possibility of even negative growth if the eurozone crisis should escalate.

Apparently, the ECB has been providing very low interest rate loans to eurozone banks in recent months. Instead of lending to businesses and individuals, however, the eurozone banks are parking the money in government bonds with higher interest rates. They would have to think twice about such a strategy. If they could be arm twisted into accepting a Greek debt haircut, it could happen with Portugal or even Spain and Italy, couldn't it?

The eurozone is a mess but it is an important part of the global economy. As a bloc, it is the largest trading partner for many countries here in Asia. Its problems are not its own as they will overspill and take on new forms in Asia.

Already, shipping firms are not going to do well due to excess capacity, anaemic demand and higher operating costs. I just learned that the anticipated pick up in demand from China after the holidays did not materialise and this is a cause for worry. Firms which are heavily leveraged could even go into bankruptcy if credit dries up.

Property developers are not going to do well due to government intervention in efforts to subdue runaway prices. This has both social and political considerations as well, of course. In China, the government has expressed its desire to keep measures in place as it feels that home prices should fall another 30% or so. Many investors in various guises will feel the pain and some might even die from it.

Banks have been under pressure as the very low interest rate environment affects their earnings while deteriorating macro economics could see a slow down in demand for banking services in their various forms. Already, investment banking has seen massive retrenchment exercises and it does not look like it is going to stop.

Fundamentally, I find it hard to be optimistic about 2012. Technically, I feel that the stock market could see a test of its lows once more before moving higher. I know I am sticking my neck out and putting it on a chopping block here but it is just how I feel right now.

In case you are wondering, I still believe in being pragmatic and not being bearish or bullish. Hence, although I have been divesting as the stock market rallied, I remain more than 50% invested. Yes, I still believe that 50% is a good number in such uncertain times.

People who have exited the market and are 100% in cash will see their wealth being eroded in time by higher inflation. The longer it drags on, the more detrimental it is going to be. As a prominent banker once said, it is very expensive to be in cash these days.

People who are almost fully invested in the market are shouldering a heavy risk premium too. If things should take an abrupt and powerful turn for the worse, they could lose much of their wealth in a very short time. They would also lack the resources to buy stocks on the cheap.

In the weeks prior to the current market rally, I accumulated various stocks at lower prices including the purchase of LMIR nil paid rights. As prices rose, I divested either wholely or partially to lock in gains.

As prices rose higher, I even cut some losses on some badly timed purchases months ago. As you can imagine, I have been recovering quite a bit of money from the stock market.

So, do I think this is a time to sell and not to buy? Nothing like that. I simply think it is a time to go back to being 50% invested. Since I was more than 70% invested after all the buying I did in the weeks leading to the current market rally, the thing for me to do was to sell. I might sell more next week if prices go higher.

On hindsight, which is always perfect, I started selling a bit too soon. Quite a few counters saw higher prices after I sold at what I thought were strong resistance levels. Do I chase and buy back? Nope. Why?

Buying as prices go higher is similar to selling as prices go lower. I don't do it. I buy at supports and sell at resistance. It is not a perfect strategy, surely, as supports and resistance could give way. However, going against this strategy has proven more damaging than beneficial most of the time. This is true for me, at least.

Now, with my war chest fuller, what do I intend to do? As usual, look ahead and wait for opportunities to buy again at supports. Patience is a virtue and mostly a rewarding one too.

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B said...

50% invested and 50% spare cash is fair. Either way the market goes, you will enjoy the ride :)

Howyuan said...

I take advantage of the recent rally to cut down my stock holdings too.

Still thinking (reluctantly) if i should do the same to unit trust too, as they are still in the red, though better position few months back.

Now i feel very optimistic about the economy and think that the market has more leg to run. Perhaps this is greed?

Howyuan said...

I remembered that economic cycle research institute triggered their recession call in Sept 2011. If their call is correct (the past two calls were spot on), we should see something by March. :S

AK71 said...

Hi B,

Yes, that is the plan and if the market does not go either way and trades sideways instead, I would simply collect regular income from my investments. :)

AK71 said...

Hi Howyuan,

It is always difficult to cut losses for me although cutting as prices rebound and test resistance makes it easier as losses are minimised.

I rationalise that if we buy at supports comfortably, there is no reason why we should not be able to sell at resistance with the same level of comfort. Of course, this is what the mind says. What the heart feels is something else. ;p

It is OK to feel positive about the economy. Why not? You only have to justify your feelings to yourself. You must have some good reasons for such feelings.

As to whether we might see the bottom in March, let us wait and see. Who can say for sure? ;)

INVS 2.0 said...

Hi Ak71,

I beat the inflation by avoiding it. How? Don't buy things that cost more expensive than before (car and house). Thankfully with technological advances, electronic goods are cheaper than before (eg. notebooks and Iphones), thus deflation instead. :D

I am still pessismistic about 2012. Eurozone is one thing, global political instability is another. There might be chance that a mid-east war could break out in the middle of the yr if the tension between Iran and its foes are escalated further. Oil prices will soar to new high and global economy will sink. Well, that's the worst case scenario.

AK71 said...

Hi INVS 2.0,

Haha.. Yes, I guess you could avoid the effects of inflation in some ways now. Once you become a head of household, it might be tougher. ;)

Yes, Dr. Marc Faber keeps saying that we have to be prepared for a large scale war. So, this could possibly throw the global economy off.

Oh well, we do what we can.

Anonymous said...

The perennial problem of buying too early and selling too early. we only hope at the end of the day it's still $++...

William said...

Extract from The Wall Street Journal on 3 Feb 2012

"Stocks are enjoying their best start to a year in two decades, and the bulls are in firm control here. So forget, for now, the euromess. Forget, for now, the weak profit growth and poor outlooks for the first quarter."

Just enjoy the ride.

Ray said...

Inflation is not as bad as 5% if you don't own a car or try to buy a property as it booms. But inflation is still a good 2% at least if you need to buy clothes, groceries, even eat out at Mc Donalds etc. So we cannot hide from inflation unless we live in a cave.

I believe the market is overdue a correction so I am cutting my exposure. Still abt 20% vested but that's mainly becoz the price aren't good enough to sell or I'm happy to wait for their dividends ;)

AK71 said...

Hi Temperament,

Indeed, if we have made the money we hope to make, we should be happy. Broadly speaking, if we meet our objectives in life, there should be no regrets. :)

AK71 said...

Hi William,

That sounds like something a TA practitioner would write. Indeed, enjoy the ride and let us hope the roller coaster has safety features built in. ;)

AK71 said...

Hi Ray,

I would say "unless we live in a cave and do not buy anything with money." ;p

A correction would be a price decline of anything less than 20%. 20% or more would be bear market territory, wouldn't it?

Let us get ready our shopping list and buy with conviction when the time comes. :)

Dividends Warrior said...

Hi AK71,

I think 2012 will be another volatile year. Great for dividend investors like me. Can collect on dips. ^^

I am expecting a dip in March. Then, maybe July and August.

AK71 said...

Hi DW,

Indeed, I read in quite a few websites and blogs that March could see a correction. If that comes to pass, I will be ready. :)

Ray said...

Mr Market woke up this morning and decides he wants to chiong uphill again. Euphoria? haha.

Perhaps I'm just too timid to ride the bulls?

AK71 said...

Hi Ray,

I am still holding on to a couple of money making positions. Will offload as prices rise.

I might also cut losses on a couple of money losing positions by the same token.

I am buying only if there is a correction. I am sticking to my plan. :)

Anonymous said...

Hi AK71,

I am following Uncle Cw8888's idea.

Ride the up trend for whatever it is worth.

Liquidate at first sign of problem.



AK71 said...

Hi Prof V,

I think this is your maiden comment in my blog. Welcome. :)

Are you really a professor? What are you a professor of? Would you care to share?

As for liquidating at the first sign of problem, I think there are signs of it everywhere be it fundamentals or technicals. Of course, it depends on how we define "problem". So, it is going to be quite subjective. Good luck. :)

Ray said...

Is there a stock addict anonymous group out there?
I couldn't tahan watching the bull run with so little vested.
This morning finally couldn't take it and went in for KepLand and Singtel.

With the Dow pushing the an all time record, it seems so silly to be at the sidelines.

hopefully my punt wont go wrong.
or will someone slap some sense into me?

INVS 2.0 said...

Hi Ak71,

Seems like the rally has become stagnant for the past few days. Is it a sign of a reverse in trend?

AK71 said...

Hi Ray,

Well, high could go higher but the risk is also higher especially when price increases have become almost parabolic in many cases.

I would wait for a pull back before loading as prices never go up in a straight line. They climb a wall of worries.

Still, you could make some money. Just need a healthy dose of luck. :)

AK71 said...

Hi INVS 2.0,

I only just looked at the stock market today as I was away the last few days. Really busy as it was a working trip. I am still feeling enervated as I came back in the wee hours of this morning. Will be going back to work in the afternoon...

I am pleasantly surprised that the stock market is extending its overbought condition and prices have pushed higher for some counters such as Capitaland and CapitaMalls Asia.

Momentum oscillators have pushed higher up into overbought territories and prices have broken important resistance levels.

Downtrends are broken and we are likely to see buyers at supports on pull backs. This is conventional wisdom.

So, a slowing down in price increases is not a start of a trend reversal. The market could just be taking a breather.

Listen to Mr. Market but buy insurance as he is known to be treacherous. ;)

INVS 2.0 said...

Hi Ak71,

Back from working trip? I thought you were working OT since gov sector and some private coys are working around the clock to clear last year's outstandings. :)

Like Ray, I am also waiting impatiently for the stocks to fall. I divested much of my portfolio during the recent rally. And I am hoping for a market correction soon. :)

AK71 said...

Hi INVS 2.0,

In very bullish conditions, corrections could be shallow and we might not even see a correction in price. Instead, we might see a correction using time. This is when price simply moves sideways before moving higher.

I too have divested as the market rallied, including partial divestment of my investments in REITs. I could miss my target of S$120k in passive income from REITs this year if there isn't any meaningful pull back in price. ;p

It would be obvious to chartists that most counters have bottomed and any pull backs to supports are likely to see strong buying interest.

Got to go. Duty calls...

INVS 2.0 said...

Hi Ak71,

I believe what goes up must come down. This bullish trend reminds me two years ago when market mood ran high in 2010 before heading for a crash. I made bad losses when I bought in too early at high prices and till today, some of these stocks never go back to the 2010 days despite recent rally. :(

I think it might happen again. Just keep my warchest fully replenished and ready for a major crash this year. Unless global economy finally pulls itself out of recession, else I am still skeptical about how long Mr Market can remain positive. :D

INVS 2.0 said...


Oh well, at least I can finally sell Starhill away w/o incurring losses on this rally. Something which I wanted to do but not able to do so for the past one year plus :) said...

Here is the latest from Europe - Not good:(

AK71 said...

Hi INVS 2.0,

I am trying not to take sides and to stay pragmatic. Past patterns might or might not repeat themselves. Predictability is not a strong characteristic of Mr. Market. ;p

I won't be able to make the most money because I don't take sides. However, I won't lose the most money either.

Technically, the rally has broken downtrends. It has not simply rebounded to retest resistance. So, is there a chance that we have seen the bottom? Perhaps.

However, could it not be a gigantic fake to lure more investors in? It could be too.

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