Political Game
He started with the stand that the current situation is a crisis of confidence, and mainly politically driven (80% political and 20% financial). The issue can be resolved by united effort from various nations. Greece and Italy political leaders have paid for their price (losing the leadership) for not able to resolve the crisis on time, and this will help to warn other political leaders (Europe and US) on the consequence for not handling the economy issues well. His conspiracy theory argues that US want to make Europe weaker (since EUR is main competitor of USD), while containing the effect in Europe and prevent the debt contagion from spreading to the rest of the world. Therefore, US would just watch the situation in Europe and will only help to after Europe is in a worsened state. US has been notorious for creating a lost decade for Japan when US encouraged JPY to appreciate. It may seemed like US is currently trying to do it to RMB as well by pressuring China to appreciate her currency.
US will be holding their Presidential Election next year and Obama would want to boost the economy and financial markets to get re-elected. When there is money in people’s pockets and the future looks rosy, people will be happy to support him. This is one of the reasons why QE3 has not been launched yet. Ein55 opined that QE3 or other positive policies, would be introduced to boost the US economy in Q1-Q2 of 2012, before starting the presidential election campaign in Jun 2012. The secret weapon must be used timely, so that the current economy does not fall into deeper recession, but enough to create a major correction or a mini bear market, so that Obama can save the US/world economy again. US as a world financial leader, will help to bring the global stock market out of the valley, with conditions that the property market has to recover first and unemployment rate must be reduced further. Operation Twist with low interest rate would aim to boost the property market.
He reckoned that Greece is not adopting the right policy – austerity measures. Tightening government expenditure would mean loss of jobs and worsening economy. In general, he thinks that QE is good but the money should be used to create jobs for long term economical growth, and not just fuel the short-term stock or property markets. The reason why Europe is in a bad shape is due to their extensive state welfare system, where unemployed live off the government or essentially taxpayers’ money. This sucks money from the government which could have been utilised for economic development.
In addition, Chinese leader would be changing soon and the incumbent will ensure the country is in good shape before handing over to the successor. Hence, any major policy should be pro-market. China took the lead to recover the stock markets at the end of 2008. But SSEC index has been downtrend for the past 2 years, mainly because the government has been controlling the money from the banks flowing to the market, to deal with the high inflation in commodity and property prices. Inflation in China has reduced in the last month and is a sign for possible loosening monetary policy, which will be helpful for stock performance.
A watch area is the bond yield – there is a positive correlation between bond yield and stock price. When bond yield goes up, business’s borrowing costs will go up and less profits for them. This in turn affects the country’s GDP. US GDP has to be above 2-3% to see sustainable longer term growth in stock market.
Market Outlook
Ein55 did a ‘market survey’. The crowd was mostly pessimistic about the market outlook and he said it may be the time to go long if we follow the theory of Warren Buffet. If the same survey is conducted at much later time and if the audience shows optimistic views, then it may be time to go short. In stock market, minority (10%) wins the game, not the majority (90%). When majority confirm the market is uptrend or downtrend, it is usually too late to buy or sell. 50/200 day MA is an useful indicator only during peak or valley of stock market, but not during flat or uncertain market. Shorter pair of MA such as 20/50 day MA will be more useful during this period to reduce the risk. For STI, 20 day MA is above 50 day MA, which is a short/mid term buy signal. Investment strategies should be consisitent, eg. using the same pair of MA for entry and exit.
World major economy regions have different performance, some are out of phase from investment clock point of view. Eg, France CAC40 (representing typical Europe market) is near to valley of last market cycle in Mar 2009, seems to form double bottoms, completing the typical market cycle. At the same time, stocks in emerging markets (including STI) are corrected to level about 1 year ago before QE2, effect of QE2 is proven short term, fully erased. US Dow Jones has been strong especially within this year, performance is the best so far in world stock indices, despite the US credit rating crisis. This is significant support because US is the world stock leader with the most funds, setting the direction of world stock market. Euro debt crisis seems to localise in Europe. It will be interesting if Dow Jones is able to break the 13000 resistance in near future.
STI in the past 1 year is around 75% of 2007′s peak while the small cap index is only around 50% of its last peak (penny stocks have 2x potential in the next rally). The long term trend of stock market may go up or it may go down. If STI continues to trend down (mini bear), it would likely correct to 2,400 (50% between last high and last low = (3200+1600)/2). Otherwise, for major bear market, 2,000 level will be well supported too based on long term support lines of STI in previous market cycles (800 -> 1200 -> 1600 -> 2000), about 400 points higher in each cycle low. If STI goes uptrend, the target is likely to be 4,800 (3 times of last low of 1,600, or it could be 2400 x 2 after the major correction to near 2400 level). STI met strong resistance at 3,200 because there is a “2 times resistance” (1,600 x 2 = 3,200). The market has to absorb sellers before it can go up. It is healthy for market to have a major correction, so that the next peak target will be based on 2x of the new low (eg. 2 times of 2000 or 2400 for STI).
Ein55 always have a caveat: Market can go up or down and no one is able to predict. He does not want to shape your thinking and one must have independent thinking. One must have a consistent investment strategy, each method could be different, depending on the personal preference in trading or investment period. One with stronger holding power will help to increase the winning chances for long term, especially for fundamentally strong stocks.
As long as the world remains uncertain, gold and silver prices will be supported. Ein55 believes that the precious metals are no longer for hedging against inflation as speculative activities have increased.
He went on to show charts of PE ratio of indices, Chan’s Channel, and VIX (Volatility Index, is reduced since the recent crisis). Currently both TA and FA may not be useful reference for daily trading because political games and unpredictable news are controlling the daily market. He also recommends to diversify the portfolio by buying casino related stocks (eg. Genting) when they are undervalued (about the same time when global market is at very low level), keep it as long term investment, possible to pass to future generation. Casino is a sure-win business with very low risk, long term business prospect is good for very long term investors.
Investment Philosophy
You should buy and hold only if you are able to select fundamentally strong stocks. Otherwise, it is safer to buy the entire index as the country is less likely to go bankrupt than a company. The economy prospect of Singapore is good. Both US and Hong Kong HSI was about the same level of STI at 3000 points 20 years ago, and they have gone up to 14000 and 30000 points respectively in the past.
Prof Chan’s philosophy:
Buy low and never sell for fundamentally strong stocks (eg. HSBC stocks is probably over 20 times in value over the years of holding).
Buy stocks during crisis – global market or individual stock
Chan’s Channel – buy at bottom of channel and sell at top of channel (last 1 year’s peak is not yet the peak of Channel yet). Stock market will be “inflated” over the years, average of 6-7% annual growth.
Current market – do not buy or sell as market is too uncertain
Hu Liyang’s philosophy:
1/2 rule (50% projection of next market bottom as explained above)
6 month’s pessimism (stock market will recover in 6 months from the point of market pessimism, if everyone feels the same way – this was the reason survey was conducted earlier for this mentor session audience).
Price is a true reflection of the value of the company
4 seasons of stock market and a rally is expected after 15 nov 11
Current situation is a correction and we are still in a bull trend – because state of euphoria is not reached
Dennis’ philosophy:
Invest when upside > 2x downside – Ask: what if I am wrong, will I be ok?
TA + FA + Common Sense
50/200 day MA for global leading indices
Choose fundamentally strong stocks
Market Cycle Investor, following investment clock – bearish market now, reinvest only when market shows new positive signals
Ein55′s philosophy:
50/50 method
Commit 50% of his capital to stocks at mid-point of bull market – aim for 2nd phase of bull run (if one has already bought at early phase1 of bull market in 2009, the aim is to take the profit before the possible crisis)
If he is wrong (no phase2 bull run), he will use the other 50% capital at market low (must be truly low point, eg. below 2000 for ST, to justify using the remaining capital).
If he is right, he will sell 50% at each new high (eg. 10%, 25%, 50%…) in phase2 bull market for the first 50% capital to take profit and reduce the risk, while preparing for the beginning of next bull market.
Ein55 is still holding his stocks as he bought within the past one year. He felt that selling at STI 2,700 a few months ago may not be useful because even if it is a major bear market, it is likely to be supported above 2000, and 50 day MA will be above 200 day MA only when STI is around 2400, which is little difference from 2,700. If this is only a correction, STI may rise above 3200. Ein55 did a survey again with the audience, and no one agreed to buy when 50 day MA is just above 200 MA when STI is potentially at 3500. It shows that it is not easy to time the stock market, when it is low, no one dare to buy. When it is high, the profit margin is reduced and risk is higher. Using 50/50 method will help to reduce the risk and staying in the game all the time (till bull market is confirmed over), although the return could be reduced to half comparing using total capital. More importantly, the investor will stay in the game regardless market is up or down.
I like the following quote from ein55:
When everything is confirmed, it’s too late!
