Indicators?

Someone asked me today why I have a pariah dog pic on my blog. I have to admit, I am a self confessed dog lover and there is just something in me that makes me love every dog I see, big or small. So that is why a pic of a dog is here for all my readers to enjoy while they are reading my posts. I do hope that you enjoy them as much as I do.

One of the readers posted a comment on my last posting asking what indicators should we look for to determine when to re-enter the market. That is a very good question and also the million dollar question. Actually, I did not intend to reply it so quickly, but once again my head is acting up and here I am, at home, feeling like a sorry loser on a friday night.

Now let me try to make sense of things for you, hope my head holds up for this. Lets do this point by point.

1) The market has had a great run and since last March, it has not experienced a meaningful correction till now.

So is this the correction that will bring prices to a more sensible level? Only time will tell. However with global markets trading at the upper band of their historical price earnings ratio, a correction of this magnitude is not at all unexpected.

In the case of a bull market, all news flow will be interpreted as good news while optimism flows through the veins of the market. It is easy to get carried away. Vice versa, in the bear market, all news flow will be interpreted as bad news and it can sometimes be a self fulfilling prophecy.

To be a great investor, it takes a lot more than just ability to interpret financial statements, there is also an element of keeping your rationality and sensibility to try to make sense of the news and information that is made available to you. As the great Warren Buffett said "the daily gyrations of the market is just noise" and it is important for us to keep ourselves focused on our principles.

Also the influential asset manager Mohd El Erian said in his book "when markets collide", when there is a change in the market or any change that is affecting it, one has to assess whether this is a fundamental change or is it a temporary setback to the market. For those who have not read this book, I highly recommend it because it has been one of the major influences in my development as an investor.

2) The bad news are piling up.

Obama with his tax and bank reforms, Greece closing in on a possible default, with Spain and Portugal coming in closely. Quantitative easing is ending in February 2010. USD carry trade suffering as the dollar index rising in the face of the weakness in the Euro. The irony of it all, the sovereign default candidates are appearing in the Middle East and Europe, while the largest debtor nation is gaining strength. The Chinese pulling back their lending spree leading to a slowdown in demand in China.

So which are the ones that are possible fundamental game changers? In my view, defaults come and go, Greece, Spain and Portugal are all rather small influences in the global markets and would not make such a big dent and definitely no contagion will result from this. Thus no fundamental issues there.

Quantitative easing ending in February will definitely bring some short term pain to the market, investors will be worrying about the draining of liquidity from the system. So that will lead to a self fulfilling cycle of draining liquidity in the system for the short term. But.............Focus....Focus....The housing sector is no where near recovering. Prices are stabilising but still on thin ice and could fall through if too much liquidity is drained and mortgage rates start to rise. The Fed is definitely aware of this, that is why I am fully expecting new measures to be proposed on how to prop up the housing market and target helping homeowners stay in their homes. This will lead to more confidence in the market. So definitely no fundamental effect on the market.

Tax and banking reforms. I am not in the least worried about the tax on banks. I fully support this as the government should make sure that the banks are punished for their role in causing this crisis in the first place. Now comes the wild card and the one that makes me hesitate in brushing it off.

In my earlier post, I mentioned that if the depository institutions are barred from having proprietary trading desks, private equity and hedge fund arms, could cause the asset markets to re-rate. What does this mean? It means that valuations of assets have to be rated downwards as the major trading players are taken out of the game. This could have a longer term effect on the market and the weakness may be quite pronounced, but I have to quote my favourite book by the late Michael Crichton, Jurassic Park; "Nature will find a way". It is almost as sure as taxes that the geniuses in the banking system will find a loop hole and get back into the market. Also the bank reform bill may just end up like the health care bill, cut up and compromised.

China pulling back loans growth should be viewed as a good development because it has to rein things in before they get out of control. If they continue to allow loans to grow so quickly, there will be a heavy price to pay over the long term in terms of rising NPLs on the Chinese banks books. That would lead to massive hits on the Shanghai and HK markets as the Chinese banks make up a large part of their blue chip indices. This is a good thing!!!!

Thus I conclude that the current retreat in the markets is just a long overdue correction. So how do you decide when to get back into the market? Valuation and comfort. When the valuation is reasonable and you are comfortable with the price. No one can time the market to perfection, so do not put too much hope into it.

Oh yes, when I pick stocks, I am recommending them on the basis of their valuation. So buy it now, buy it later, just as long the price is not too far for the price I have listed down, it should be a good investment in the longer term.

Hope you have a better picture of things now.

Best,

SVI still feeling like a loser to be home on friday.