Market Insights Sept 2011

This is a quick update on my views about global markets and my strategy moving forward.

Since the Dow Jones, Straits Times Index and Hang Seng crossed their 400 Day Moving average 2 months ago, all three indices continue to be in a confirmed downtrend. After holding up very strongly for the last 2 months, KLCI and Jakarta CI finally broke their 400 Day MA 3 days ago as well, officially putting ALL INDEXES into a downtrend. As long as these indexes remain below their 400 Day MA, the momentum leans towards the DOWNSIDE. As I have always said, don’t fight the trend. Wait for a reversal of trend before ever deciding to go long on the market.

Stocks Continue to Look Cheap and Attractive But…

As value investors, many stocks look very cheap indeed. In fact, there are many small caps like Xtep, Breadtalk, Goodpack, China Minzhong and large caps like UOB, Capitaland, SMRT that are selling way below their intrinsic values. In times of fear, fundamentals and valuations tend to get thrown out the window. For example, despite growing profits at over 50% YOY and having relatively low debt, China Minzhong is selling at a PE of 5.

Pure value investors (who do not bother with studying charts and trends) would start buying at this stage. If you have been following the news, Warren Buffett has been aggressively buying stocks in Bank of America, MasterCard, Verisk Analytics and Tesco since August 2011. While there is nothing wrong with this approach, I believe you can minimize short term paper losses and maximize your returns by waiting for the downtrend to reverse into an uptrend. No point buying now and ‘constipating through the volatility and more potential downside’.

Those of you who have been following my emails would know that I have sold more than half my stocks in August and holding just some small positions in Singapore stocks. My short term strategy is to just HOLD at this point. I will start to add and buy when I start seeing the 2 week EMA crossing over the 5 week EMA for individual stocks and adding more when they cross the 200 Day MA. I am also waiting to go short on Gold if it continues its decline and breaks its long term trendline and when the Moving averages confirm a downtrend signal. I have been waiting to short the gold bubble for a long time.

How Much Lower Can Stocks Go?

Last quarter’s earnings reports from companies have been strong. Many companies are still delivering double digit growth year on year. This strong earnings and low stock prices have pushed the PE of the indexes to very attractive levels. The PE of the STI is now 7.8, the PE of Hang Seng is 8.6 and the PE of the S&P 500 is 11.8. Eventually, when confidence returns, PE’s will adjust back to the 15-20 x level.

What is holding investors back is the fear that if European leaders are unable to contain the sovereign debt crisis, it could trigger a second financial crisis and the collapse of European banks, which would in turn drag down International banks with European exposure. This would in turn lead to a global recession. In this worse case scenario, stocks could fall another 30% before bottoming. So if you are holding stocks right now, do be psychologically prepared for this.

Earnings seasons (October) is starting again so we have to see if companies can continue to deliver earnings growth, against the backdrop of global economic uncertainty. The good news is that over the last 3 months, company directors have been buying back shares and companies have been buying back shares, a sign that insiders believe that their companies are worth a lot more than what the market is pricing in. Berkshire Hathway (Buffett’s company) has juts announced a share buy back programme for the first time since 1965. In Singapore, companies like Capitaland have also initiated buy backs for the first time in history.

Recessions Create Millionaires

Some people will end up benefiting from this crisis while many will end up as losers. Those that sell at low prices, make losses and fear ever going back in will be the biggest losers. Those that look to the future and can look beyond this crisis will realize that what goes down, MUST GO UP eventually will be the big winners.

Always remember that every crisis will end. Fear cannot last forever. When confidence comes back, stocks of good companies will return to their former highs and climb even higher. Capitaland (selling at $2.50 today) will return to $4.50 and beyond. Goodpack (selling at $1.55 today) will return to $2.20 and beyond. The Straits Times Index (at 2,700 points today) will eventually climb to 3,300 points and beyond etc… You have to be patient and BE IN THE GAME when the market starts its recovery and rally. If you are in the right stocks at that time, you will see 50%-200% gains in your portfolio. More experienced investors who know how to leverage with CFDs, can achieve 500% on their positions. Don’t attempt to predict when this will happen. No one knows. Just keep watching the charts and let the Moving averages and trends confirm your entry!