Sunday, November 1, 2009

Market Outlook: Where is the Bear?Hibernating?

Dow Jones index has touched the 10000 mark for the first time last 2 weeks ago since the meltdown of worldwide financial system. The market has never been so bullish and the sentiment is at all time high. We have seen the US housing market rebound from the lowest point in March as the stimulus effect starts to kick in at 2Q2009. We also witness the remarkable rebound of stock market since March 2009, especially at the bank sector where the top US bank earning result constantly beating the expectations (imagine that 1 year ago, all of this too large to fail bank need government bailout to survive!).

How does this miracle happen considering the magnitude of the crisis last year? Warren Buffett has described it as the economic Pearl Harbour – “A perfect suicide”. The government from around the world have pulled out an unprecedented effort of pumping in trillions of stimulus dollar into the system. By doing that, I am afraid we have just actually planted the seed for next financial crisis. The main problem of the banking system is that too many toxic assets in the “crestfallen” bank’s balance sheet. The Fed is trying to make a market for all these toxic assets where theoretically there is virtually none exist! Consequently, the banks will not have to mark down their balance sheet; hence, they don’t need to scramble for liquidity to shore up their capital ratio. Meantime, Fed is pumping in billions of dollar into the system to encourage banks to continue lending, in order to thaw the credit freeze.

With so much cheap liquidity in the system, the stock market has found its perfect catalyst to power ahead non-stop since early March this year. However, the question that lingering in everyone mind now is when is the correction coming?

It is very interesting to look at Euro-Dollar currency vs Dow Jones chart. We saw the depreciation of Euro to the lowest level in 2008 at around 1.25 when the Lehman Brothers collapsed at September 2008. Subsequently, the rebound at the end of 2008, follow by another dropped to 1.25 level at March 2009. Since then, the Euro has strengthened against the US dollar to around 1.50. This gives you some hints on the market direction.

We can’t predict the market movement and my prediction so far has proved to be way off the mark. However, we can focus on re-balancing our portfolio instead of trying to time the market.

There are still some bargain stocks in the market where the share price has lost the correlation with the market, due to unfavourable outlook. Nonetheless, there is still some value left in the stock, as it offers quite a decent dividend yield. At this moment, the best strategy is to play it safe by investing into business which is resilient so far.



Maybe the bears will win or maybe the bulls who knows.

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