First, a round of apologies for being late with this issue. I discovered that spending three weeks in an army camp really dull your mind and wits. In fact, I already feel my IQ dropping as soon as I put on my uniform. A few days of recovery is needed to reach full capacity and intelligence to write a good article.
The world has changed somewhat since I last wrote. The swine flu is still spreading quickly but the mortality and threat seems low at the moment. The stress test came and went and it is practically a non event. North Korea threatened to fire a couple of nukes at her neighbors but so far, the market largely ignored the threats. Many people are asking, what is causing the rally? Recently, I polled a group of my friends and clients who are business analysts, directors and professionals. Their feedback to me is that, most of the company outlook remains bleak and fundamental remains horrible for the second quarter. One a closer look, we will realize that main driver is a combination fear, a fear for missing out what may be known as one of the biggest opportunity of the century.
The Rally Unsustainable? - All About Economics!
This is probably one of the most confusing period of the generation. Many people are asking me: Should I jump in now? Will I miss the bull market? Oh No, I better get in before I missed it. I am equally confused a week ago, given my quarantine while serving my time in an army barrack. On a closer examination a week later, I am alarmed by the jump in the stock market and other indicators. Before I go deeper, we have to first understand what is the cause.
Popular belief that the market is running because the market is recovering. Well, that fact is still being contested by many prominent economists. The best reason I can come up with is the need to seek higher yield in this zero interest economy. First we must understand the fact that the "safest" investment in the world is in US Treasuries (Government Bonds). When the market is crashing, investors around the world liquidate their investments and moved their money into US dollar, snapping up US Treasuries. With the sudden influx of foreign money, USD/SGD strengthened suddenly to $1.55 and bond prices simply shot up. As you may have remembered from Economics 101, that when bond prices move up, the interest (yield) will drop. That is good for the world as our companies now make more profit from currency exchange as we export to US. A low yield rate for the US treasuries will ensure cheap loans to companies and home owners, whom the economy relies heavily on to get the nation back on it's feet.
With some confidence restored back into the economy, investors withdrew money from US treasuries in mass exodus and parked the money in, our part of the world, namely China and Asia for higher gains. USD/SGD fell to 1.45 in 3 months. For the export nations of the East, it is a disaster as 10% of your profits are wiped out in one quarter due to currency exchange. Also, when investors sell treasuries, bond yield shot up too fast too quick, adding 100 basis points or 1.0% in a couple of weeks. Imagine how much more mortgage you need to pay with a 1% increase. With the real estate market in US dangling on a thread, it's not hard to see how this unexpected jump may derail the whole recovery process again.
A Page from History
Taking a page from history, it is remarkable to note that sharp spikes in bond yields do lead to sharp drops in the equity markets. The inverse is also true. Sharp drop in yield will lead to big rallies. 
Lets take a look at what we have today. 
The disturbing news is that the yield has spiked tremendously, a magnitude not seen since the troubling times of 1970s and 1980s. With a falling export profit due to a weakening USD in Asia and Europe,a sharp spike in lending rates and exploding oil prices, one wonders how much more the market can run.
A Gradual Rise is Preferred
For a sustainable stock market bull market to occur, things must happen in moderation. Yields and USD will fall inevitably when the market recovers. However, a too quick a drop or rise will create a lot of uncertainty in the market. The one thing markets love is certainty. If the pattern do hold and the global markets correct, US and Europe will be hit the worst, Asian markets will probably not as badly effected, given the optimism we are seeing in this part of the world. Meanwhile, I will continue to move a tiny portion into Asia as part of the tranching in strategy.
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