Chaos in the Market. The Market Turned Positive Month End

August has been such an eventful month that I sent out an emergency report. The situation has turned visibly brighter since then. I mentioned a potential insider trading job in the S&P and the could be news leak before they announce the US credit cut. It seems like the US government has similar suspicions too and they have initiated an insider trading probe. Here are some of the events since the last update:

1)   Ben Bernanke, the Federal Reserve Chairman announces no new measures and foresee that the low interest rates will move the economy in the right direction sooner or later. He also announced that the Fed will keep interest rates low until 2013

2)   Warren Buffet took a stake in Bank of America, boosting confidence in banking stocks in US. The market rallied on the news

3)   Economic data from US are mixed with surprising and depressing data every other day. The market is rocked from the opposing views and remains volatile into the last few days of August.

4)     Greece second and third largest banks merged to create the largest lender in Greece. The merger ignites the hope that it will help to stabilize the credit crisis as the banking system in Greece will become more liquid.

5) The Chinese government continues to tighten the economy but with a much more moderate stand by increasing the liquidity reserves for banks. The Chinese government has halted the rise of interest rates due to the recent economic troubles

6)      6)Gold prices tumbled as the world economic situation is not as bad as it seems while oil prices rallied.

The Condition For a Recession

There has been much fear recently that the world economies will be heading for a double dip recession. Even our president elect Tony Tan claims that his expertise is needed to navigate the possible recession ahead. My position is that a double dip recession will not be likely and any recession will probably be quick and short. Financial history is always useful when it comes to analysing the economy. Although many has claimed that the world has changed and past economics will probably not work, but certain principles still holds true till this date. There are 3 factors which I use to ascertain whether the economy is about to go into a tailspin:

1)       Relatively high interest rates

2)      Complacent government and market

3)      There is a bubble formed

For example, during the 2000 – 2003 dot com crisis, the US economy has underwent unprecedented growth thanks to the internet revolution and dot com stocks are creating a huge bubble. Interest rates has risen to a high since the early 90s and the government is confident about the future and Boom, the economy is sent into a tailspin. If you observed during the 2007-2009 great recession, you will see similar trends. In today’s context, most of the factors are not in place for a recession. Interest rates are low around the world. The government is cautious and ready to take action, although major governments around the world are paralyzed by partisan politics. There are 2 bubbles formed around the world: The European debt crisis, which is actively being managed now and should deflate with control. The other bubble I am more worried about is the China property bubble, which has a more direct impact to us than the European debt bubble. However, with the Chinese government trying to minimize any future damage using Draconian measures, the bubble is not in immediate risk of bursting too quickly.

Which is why, I am still confident of the global markets despite mass panic and fear around the world.

The Panic Subsides

The recent Libya civil war, Hurricane Irene and Presidential Election have distracted much attention from the worries of the markets. The news paper no longer splash dark depressing news on the front page, although there are still many analysis who are still predicting negative scenario. The global market had rallied consecutively for 3 days on bargain hunting and positive news from Greece. From a technical analysis point of view, the recent movements points to a positive trend and from a value investing point of view, stocks has never been cheaper since 2008. Given all these strong signals, I wondered sometimes why some investors are still cowering in fear.

The Strategy

Gold did tremendously well in the last month while the worst performer was the best performer for the past 5-6 months before the panic strikes. Gold hedge funds, with their ability to buy in gold futures and leveraged on margins did extremely well as compared to gold mining stocks which conventional unit trust are exposed to.  The problem with gold hedge funds is that you need to be a accredited investor in order to qualify. In any case, it is too late to get into gold as it is severely overbought. Right now, the attractive country is Korea with the market down more than 20% since the crisis. To capitalize on this major correction, I will be moving from either Aberdeen Emerging Market and Aberdeen Pacific Fund to Korea. Take note that only SRS and cash clients will be able to do the switch.

Attached is the fund performance below. As usual, the best performer is right at the top and the worst performer is right at the bottom.