Report on the recent Correction Nov 2011

Thank you for all the concerns that you have shown over my recent bout of unfortunate viral fever. I am much better now. The evening fevers have stopped and my knees doesn’t hurt as much now. Therefore, my work efficiency has restored to its previous level. After this unpleasant episode, I have made health as the number one priority. Not much you can do without your health. I will be going on a short reservist trip from 23^rd Nov to 30^th Nov. So if you need any help, do call me direct as internet access will be scarce in-camp.

Here is a breakdown of the events of the past month:

• The euro economies shuddered to another stop as Ireland requested for a bailout, shaking the confidence of Euro and Euro economies. 2 of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) have already been bailed out from the European Union. Euro will remain weak as long as EU cannot assure investors that the rest of the PIIGS nations will not get into trouble.

• US Federal reserved approved Quantity Easing 2 (QE2) to kick start the buying of bonds to stimulate the US economy. Asian governments protests against the wanton “printing of money” by US as their  currency rise and export profits drop across all Asian economies. Asian governments are taking measures to prevent the flood of money flowing into emerging markets by raising interest rates or tightening monetary requirements. Government intervention will take time to realize in the market. Therefore, the Asian market will continue to rise until the real effect of the tightening monetary policies kick in.  

•  China Shanghai Stock Index had a sharp fall of 10% due to the expected tightening measures by the China government. World stock market corrected as the result of this unwelcome news. Along with the Irish bailout crisis, global market took a breather to rest after the breathtaking run. Most of the global markets fell by around 4-5% during last week.

I have mentioned during my newsletter last month that the market will take a breather and here it comes nice and strong. However, the correction is not as deep as to my liking. As of today, the market is showing signs of turning around from the correction with positive news coming from US and the Irish bailout being resolved. In any case, during bull runs, corrections can be fast and short lasting from 1 week to 1 month. Typically, corrections in the early part of the bull run tend to be small and short. The good news is that the world growth is very uneven now, with Asia leading the pack in terms of economic cycle with western Europe trailing right behind. There is still one good push of funds that is untapped yet in US. In the last few months, Americans have been buying bond and fix income related funds in record numbers even though interest rates are still weak. This is a typically short term fear psychology as the US employment market and general economy is still in the pits. Once the cash from the US money printing machine reach the mass market and unemployment starts to drop, the fund flow will reverse back to more risky assets and we will see the 2^nd flood of cash from US. We will see that in 2012 so I can confidently say that the bull market will last till 2012 unless N Korea start nuking her neighbors.  

I will tweak the current portfolio by a bit by lowering the weightage of China in the portfolio, reducing the proportion of the China  focus fund. My initial hypothesis is that China tightening curve will be over by end of this year. Once the investors are certain that the government is not tightening anymore, the China stock market will do well. And probably give very good returns given its dismayed performance for this year. My hypothesis was wrong and the China government shows no halt in the tightening process. I will reallocate that portion to SEA especially Indonesia.

Why Indonesia? One of the important criteria which I use to evaluate countries is the rate of fall for the market during corrections and the past performance. If a fund did 20% during last 6 months but only fell 2% during a 4-5% worldwide correction, it shows the resilience of the market and the continued faith of the investor and hot money which remain invested.

A Xmas rally is still in the making judging from things. Enjoy the ride!

Cheers

Xeo Lye

Attached is the fund performance for the month of Nov