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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Greece Screws the World!

 Just when the world think that they have a few months of respite from the Euro crisis, our antagonist strikes again! With a twist worthy of a Hollywood movie, Greece has decided to pull out a fast one on the Euro community just days after a new bailout agreement has been hammered together. The Greece prime minister George Papandreou decided to call on a referendum in which Greek voters will either approve or reject, the latest Euro zone bailout plans. If the Greek citizens reject the vote, Geek will probably be forced to leave Euro and financial mayhem will prevail. We may well see a real double dip recession should that happen

The move blindsided European leaders who have worked for weeks to cobble the recent deal together. Global markets, especially those in the Eurozone dropped drastically on the news. The country that invented democracy is now asking the citizens to make the most important decision in their entire lives. Politically, Papandreou hopes to use this referendum to consolidate his political power and get a strong mandate by the citizens to see the country through this difficult time. He is also trying to hold the Eurozone hostage by using the referendum to bargain for a better bailout plan.

Essentially, Europe’s latest bailout plan, although has been a vast improvement since the last one, is still short of what is really needed. Just to recap on what the bailout consist of: A 50% reduction of Greece debt and a larger EU bailout fund to 1 trillion euros from 400 billion euros. According to some estimates, the writedowns of Greece’s sovereign debt should be much steeper. The reduction should be increased to 70 percent to make Greece’s debt burden bearable. On top of the, the Euro zone needs at least 3 trillion euros to ensure that Europe’s banks are well funded and at the same time, help out Italy should they need the funding. Most Greeks are unfavorable towards the latest bailout proposal as it comes with many strings attached. 58% of the citizens polled are negative against the Euro deal, creating a possibility that the Greek Referendum will fail. However, on the other hand, 70% of the Greek polled said that they want to keep the euro. Well, you get the picture. The Greek wants both their cake and ice-cream without suffering any from any health problems. Papandreou cunningly avoided stating an exact date for the referendum to take place, allowing the European leaders time to sweeten the deal.

From here, 2 scenario will happen:

1)      The Greeks voted yes. Papandreou will win the mandate to continue with the unpopular measures and weaken the power of the opposition parties. It might calm the street protests and unending strikes and bring some political stability to Greece. This will also calm global markets and bring stability throughout Europe.

2)      The Greeks  voted no. Greece will probably be kicked out of the Eurozone and reverts back to Drachma. The economy will be kicked back a decade but they can now default on their debts and have more flexibility in managing the economy. The Euro zone meanwhile will be thrown into turmoil and global economy may well dip into another recession. It will be an extremely painful process, but that will probably purge most of the excesses enjoyed by the western economy for the last decade.

The Market Did not React As Badly… As I Feared

When the news broke, I was expecting a massive sell-down in Asia this morning. Given that most European markets fell more than 4% and the USA market fell more than 2% overnight, I was prepared for the worst this morning. However, the good thing is that things did not play out as what I expected. Asian markets actually staged a massive rally on news that China may be considering loosening their economy given the headwinds faced by the global economy. The European markets are rallying as the time I am composing this newsletter. My consideration now is that we are back to square one, in the almost exact situation as before the bailout, should I take some profits off the table from Korea and BRIC funds in anticipation of the coming referendum. After today’s market action, it seems like I do not need to make a decision so soon as of now as the market seems to be calm despite the shocking news. I will probably observe market movement till the end of this week to make a decision. Meanwhile, the switch to America should still go on as the USD and American market is still a safe haven compared to European and Asian markets. Stay tuned!