Monday 15 June 2009
Be aware of what could cause the trend to bend
The view for the week ahead therefore remains the same as it’s been for many weeks now - liquidity and momentum are in the bulls’ favour, but investors should stay alert for signs that could cause the trend to bend because there are actually many if you look hard enough.
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Be aware of what could cause the trend to bend
By R SIVANITHY
15 June 2009
Two weeks ago, this column was headlined ‘The trend is your friend - until it bends’ in which the view expressed was that there was still scope to play the market as if the recovery would be ‘V-shaped’, that is punters should expect Wall Street and related markets to continue reacting positively because the economic data would, in all likelihood, support the ‘green shoots’ view of the world.
As a result, staying long was probably the right thing to do, but it was advisable to keep in mind that there were mounting reasons to remain sceptical of the benign world-view that the markets were buying into.
The reasoning was simple - liquidity, momentum and US economic data were all in favour of a continued upswing, but the day of reckoning would come sooner or later, especially since all that’s occurred US data-wise is that the pace of the declines has tapered off.
As noted in last Saturday’s column, markets are for now buying into the ‘less bad is good’ scenario and should continue to do so for the immediate future.
Interestingly, last Thursday and Friday’s sessions saw both liquidity and momentum take a turn for the worse, and given the Straits Times Index’s inability to pierce convincingly through 2,400 despite repeated attempts, you’d have to wonder if the trend is now starting to bend.
As always, much depends on Wall Street where investors appear to believe that because the pace of declines has moderated, then the only direction forthwith is up.
In this regard, it’s interesting to note that the source of the world’s problems, the collapsing US property market, shows no signs of bottoming yet, notwithstanding what the bulls would have everyone believe.
According to data from the Mortgage Bankers Association, overall mortgage delinquency for the first quarter rose to a new high of 9.12 per cent from 7.88 per cent in Q4 2008, sub-prime delinquencies rose to 24.95 per cent from 21.88 per cent in Q4 2008 and prime deliquencies rose to 6.06 per cent from 5.06 per cent in the previous quarter.
There have also been rumblings that the US commercial property market has only just started to slide while US mid to upper residential property has not yet undergone the implosion in the sub-prime arena. So although it’s possible that the US property market is deteriorating less badly than before, it is still deteriorating nonetheless and investors here should take note of this when reading ‘green shoots’ reports.
One of the more interesting reports issued in the past couple of weeks comes courtesy of CLSA Asia-Pacific Markets’ Russell Napier, who in his June Global Macro Strategy said that the current bounce is simply a rally in a long bear market.
‘It is not a bull market: valuations did not reach rock bottom in March and interest in equities remains far too high’, he wrote.
‘Long-term valuations suggest this long-term bear market will not be over until the S&P 500 index nears 400 (versus Friday’s close of 946).
‘There was no revulsion against equities in March needed for a great bottom. Creative destruction was once again halted by the (US) government, so the creative destruction of government credit will be the catalyst for the great bottom.’
He did however, qualify this downbeat view by saying that the uptrend could last for a few years yet.
As far as the local market goes, Credit Suisse ranks among the bulls which have consistently stayed bullish over the past month - a view which has paid off handsomely - when it last week said that if the Straits Times Index was to trade at its five-year average price/book, this translates to almost 2,700. With a third consecutive month of earnings upgrades forecasted, Credit Suisse maintained its ‘overweight’ on Singapore.
The view for the week ahead therefore remains the same as it’s been for many weeks now - liquidity and momentum are in the bulls’ favour, but investors should stay alert for signs that could cause the trend to bend because there are actually many if you look hard enough.
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