Thursday, June 6, 2013

Market Analysis -- 6th Jun 13

Global markets entered the month of June with volatility, great volatility after breaking 5-years high in the past 5 months.  Lot of blame for the fall was on US Fed tapering off stimulus.  The late May testimony in front of Congress by US Fed Chief triggered off the selling.  What US Fed Chief said then was nothing but true hard fact.  The side effect of QE and US currently still need stimulus to sustain the growth in particular the unemployment rate.  However, the triggering point is will US Fed start tapering off.  Tapering off should the economy showing improvement and strength is nothing but good news, at least this is far much better than  suddenly withdraw all stimulus when everything are returned back to good shape.  The underlying of that statement which cause investors to be nervous and fear was mainly because too many cheap monies were borrowed and even with a slight tapering off, it is similar to interest rate hike though physically it is not.

A recap of an analysis dated 19th February 2013 regarding the potential bubbles (After the rally, what's next?) which I gave warning for trying to be overly optimistic, now looking at the current situation, some of the bubbles in particular the currency war has grown bigger and with recent US Fed's action (well there isn't any action yet but all are speculation of a possibilities), it is like bursting the bubbles before they get even bigger.  The tapering if there is will be the act to burst the bubbles before they get out of control.  As a whole it is good.  Global markets sold down sharply simply because with the cheap monies they ran ahead of fundamental.  The pull back or correction which ever way you see it is to bring the stock market back to fair valuation level which is supported by fundamental.

If you are a long-term value and fundamental investors, no need to read or watch any market activities, just sit tight and wait for the next recession (within 2 years time) and you will have lot of choice to really pick good fundamental strong stocks at really dirt cheap price.

This analysis pretty much concern more for short and mid-term investors and traders.  Stock market is a zero sum game or a mirror as whatever it can rally up strongly, it can also crash down sharply.  This is because of majority do not realize what is a fair valuation for the market (with reference to economy).  For the past 5 months the bull enjoyed the ride and now it is time for the bear to bring everything back to reality. However, do not get pessimistic yet, once the stock market hit the fair valuation point, it will attract buyers to come in.  Funds that have sold in May will return once prices are cheap again.

During this current selling down, high-yield and defensive stocks like S-Reits were the main victim given their strong run up since last June as funds rushing in to chase for yield.  Some of the prices have hit all time high last month and at those price level, they have run ahead of fundamental.  A company share price reflect its ability to profit and in order to generate profit it have to look at several things like revenue, cost of sales, expenses, debt level and free cash on hand.  Most of the companies either borrowed from banks or raise monies through cash call (issuing bonds, doing right issue or placement of shares) as they needed the cash to expand their business.  This is where the danger comes in, should a hike in interest rate (global Central Banks in coordination to do it together) this will be like whack a hammer down the company's balance sheet.  This is also one of the reason why those shares are being sold down now.  There is nothing new about it, it is all about micro and macroeconomic concept (for those who has knowledge of micro or macroeconomics will know that).

Now for short and mid term investors, when the prices hit cheap it is a bargain opportunity but must remember when to sell off for profit and hoping that price can move up even higher than their recent high is a high risk.  We are at the last leg of the bull, without strict risk management like cut loss will have serious consequences. Before you decide to put your money in you have to think about the following situation.

In Singapore, MAS guaranty every bank savers a sum of money (if I am not wrong it is $20k), that is should the bank folds and you have money inside, the first $20k is guarantied will not be gone.  Now take the scenario you have $20k you have a choice to put the money in the bank and get really peanut interest rate or put in stock and getting a higher return ( 0.5% interest in bank saving vs 5% in yield stock).  Most of the people will put their money into stock but they have not factored in the possible risk.  Should recession come next, the $20k you put in the bank is still $20k plus some token of interest while whatever you have put in stock could have became just $10k in value only despite those dividend collected.

One must take the above situation seriously into consideration when putting in money in stock market now and thinking of investing given that majority of the analysts are saying stocks are still cheap.

Lastly, this is a trader market and not investment market, know when to buy and when to sell (do not hold on to a stock for more than 6 months) and holding cash to wait for recession to bargain hunt dirt cheap stocks should be the way.  We are not far from a bottom and rebound, probably in 2 weeks time.

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