Turmoil in Europe

November is a chaotic month for Europe. There are so many twists and turns in the current Euro saga that makes it almost impossible to predict what comes next. On the bright side, the global stock markets did not collapse as what it did in August 2011 or like Sept 2009. 4 years on since the start of the financial crisis, the end of the road to a global recovery seems to be further and further away. There are still bright sparks in the gloomy global economy.

Here is the summary of the events in November:

-          Greece prime minister Papandreou wanted to hold a referendum to get support from the Greece citizen on the EU bailout. That resulted in a tremendous backlash as the world and the Greek citizens were horrified. Germany and France threatened to kick Greece out of EU and Papandreou withdrew his request for a referendum. He was asked to step down due to this blunder and a technocrat government is formed with Lukas Papademos as the head of the new government.

Silvio Berlusconi Resigns as Italy Prime Minister

-          Italy came into the spotlight as Greece set about to form the new government. Silvio Berlusconi, the prime minister of Italy than, was pressured by the public  to resign. Italy 10 years bond yield surged to a record high above 7%. This is the range which other European countries such as Portugal and Ireland asking for a bailout. Following Berlusconi's resignation, Mario Monti formed a new government that would remain in office. Global markets fell fearing that a Italy default will spark off a new global recession.

-          France and Germany, the backbone of the EU, came under attack. Yield of 10 years French bonds spiked and rating companies threatened to downgrade France AAA rating. Germany recent bond auction was disappointing as less than expected amount was sold. Fears that the strongest economies of the EU are also infected by the crisis leads to further sell-offs.

-          US Super-committee, made up of 6 Republicans and 6 Democrats, failed to come up with a plan to reduce the US deficit. The members of the committee could not see eye to eye on the usual issues. Republicans want to slash spending and are targeting the healthcare benefits while Democrats want to raise tax for the wealthy. The US market lost 2% that day. Compounded with problems from Germany and France, the market seems to have factor in the expectation that the Super-committee will be Super-Useless.

Members of the US Super Committee

-          The property situation in China is starting to worsen, and exports are expected to fall as China’s largest market, Europe, is still in turmoil. Fears that the thin support which is holding up the global economy at this point of time, may collapse and lead to a new recession in the developing countries. China started to loosen their grip on banks and ordered the banks to increase lending to SME around the country. The China government is still hold on to the curbs on the property market, trying to guide it to a soft landing.

-          One of the better news of the month came from US. The black Friday sale, the busiest shopping day of the year for US retailers, clocked 7% increase in in-store sales. This is one of the largest rise since the Great Recession. Cyber Monday, the day when online retailers give big discount, reported a 33% jump in sales. Other than telling us that online shopping is becoming the latest growth area in retailing, it also gave the assurance that the American Consumers are coming back online after a 4 years hiatus.

-           6 major central banks around the world eases their monetary policies in a coordinated motion to calm the markets. China also eases banks reserves to stimulate growth in the face of an impending global slowdown. Major markets around the world soar with the  Dow Jones Industrial index gaining the most since 2009.

The Strategy Forward

I am sorry that the summary.. is too long to be called a summary but many things happened in November. I have been debating whether to lock in profits for US, Korea and BRIC funds throughout the month as the situation becomes more and more uneasy. I was once asked by a friend, on what are my thoughts on Germany failure to auction their bonds in the market. My reply is: Good and Bad. It is bad because it shows how far the contagion has spread and EU may topple anytime. The good is that politicians will have little choice but to implement unpopular policies to save the country. The major rally on the 30^th of November essentially help me made the decision to hold on to the current portfolio allocation. The main reason is due to the major rally may have  turned the sentiments around and based on technical analysis right now, actually looks bullish. This will become a self fulfilling prophecy and drives the market up further, at least till the end of the month. The long term effect of the austerity measures around the world will lead to slow growth around the world. The stock market may behave like the 1970s when the market has been stagnant for a decade before climbing higher. In this case, buy and hold for long term will not work well, because 12 years, by most investors standard, is too long a wait to see any returns. A more nimble wave riding strategy must be employed and lock in profit whenever the run is waning.

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