Are Rabbit years good for the market? I do not know. But inflation is definitely not helping the situation.

As we all prepare for the upcoming Chinese New Year festivities, it is good to take a little step back before we welcome the year of the rabbit. Interestingly, I bumped into a remisier friend at a bar last night and we got into a chat on the market. He is one of the most experienced remisiers I know personally. With more than 20 years under his belt, he sighed when we spoke on the market. He said he had gone through 2 zodiac cycles for the market and rabbit years have never been good years for the market. Of course there is absolutely no scientific evidence on his statement but I have to say, he sounded convincing. Haha.

Another person whom I respect to a great extent is my good friend FSM whom I had dinner with earlier in the week. He on the other hand, gave a pretty good story on the market. Being a Feng Shui Master, he gave me an interesting perspective. He said he believed the market movements of 2011 will mirror that of 1951 because markets move in 60 year cycles and overall the market will perform fine this year. (FSM do correct me if I am wrong because I got pretty drunk last night and many things have slipped out of my mind). FSM's words should not be taken too lightly because this is the man who was responsible for a 400 point drop on the STI index 4 odd years ago. For those who witnessed it with me, will know that this is the truth. How much did DBS drop that morning? Someone please fill in the blanks for me. Trust me, FSM has been pretty accurate about everything since I have known him.

Now that I have warmed up, its time for my opinion on the current market situation. Since my last economic update post, we have seen a few interesting things. First and foremost, inflation is really here. I told you for some time already, inflation is very real and it is going to be tough to make it go away. In recent weeks, we have seen unrest in Tunisia and Egypt, protests have turned violent and the Tunisian dictatorship was overthrown. There was an interesting article on CNN commenting on how this was a victory for democracy but in actual fact the social unrest was all driven by economic weakness and inflation and the loss in confidence in the current governments. This is just the beginning in my view. It is scary to think if the same situation happens in China if inflation gets away from the central government's policy measures. There was an article I read a couple of years ago, it said China needed to create 20 million jobs a year just to keep its unemployment rate at this level. That is a huge number and no menial task. Believe me, China is watching this situation in the middle east with great interest.

Interest rates WILL definitely be raised in emerging market countries especially after their respective governments watch with great anticipation on how the current situation in Egypt and Tunisia unfolds. Nail biting times for many of the less developed countries facing inflationary pressures. Capital controls, interest rates, food price caps etc are all going to come out this year and trust me, its all not good for the markets. Look at the Asian market performance for this year. India is down 10% for Jan alone! Indo and Philippines are down 5% each. Things do not look good for these markets. Asia has underperformed the developed markets currently and that is something which has made many strategists look stupid recently.

One other consequence of the current unrest in the middle east is the upward pressure on the oil price as investors anticipate supply disruptions from the largest producers in the region. Pay attention to the other kingdoms in the middle east as they start to worry about the stability of their rule. Interesting times for sure. Some how all these events happening within the first month of the year gives me a feeling that we are in for a very interesting year indeed.

When there is fear, there will be opportunity. So not to worry, the market will always provide chances for us to profit, question is whether you have the guts to do so.

As Chinese New Year is just round the corner, many people are asking me whether there will be a nice new year rally after we welcome the year of the Rabbit. I will say that we are at a very unique juncture in the Singapore market. We have the general election coming up so the sentiment on the government linked companies are going to be positive. On the flip side, the US and European markets are due for a correction as they have had a couple of good months. That is why I am leaning towards some prolonged weakness in February. If I were a gambling man, I would put my bets on a better March.

Earnings season in the US is currently in full motion but the results have been some what disappointing. This is due to the overly positive earnings estimates by analysts which is just silly. From a seasoned market watcher point of view, earnings estimates are just a waste of time. Why don't they just keep their mouths shut and let the companies announce their earnings and you can be a judge of how they do and determine whether the results are favorable in your view. Overall I still like what I see in terms of earnings in absolute terms. The companies are still generating positive cashflows and delivering decent earnings growth. With that in mind, I still think stocks are still looking attractive. Of course they are no longer considered cheap but I believe you are still better off holding companies with strong fundamentals than in cash.

Singapore earnings season has started but it will only hit full steam ahead after the CNY celebrations. Keppel Corp has delivered fantastic earnings and given their shareholders a nice surprise in the form of a good dividend and bonus issue. Lets hope there will be more positive surprises like this from other companies. Overall picture should still remain robust but do not expect the market to rally substantially on earnings because most of it has been factored into the stock prices.

A close friend of mine asked for my opinion on the draconian measures placed by the Singapore govt on the property market. 16% stamp duty? My goodness, have you heard of such drastic measures? They might as well just say that no one is allowed to buy a second property unless they can pay all of it in cash. Personally, I disagree with the govt's move because I am a believer of free markets and the only intervening they should do is in the public housing market rather than the private housing. But who am I to say? All I know is, this is going to slow down the market substantially over the short term but whether it will rein in the ultra hot market remains to be seen.

To me the biggest determinant of housing prices is interest rates so until we see housing loan rates reach the levels of 3,4,5 percent, we will not see prices drop drastically. The rental yields are still decent and if loan rates continue to be lower than the forecasted inflation rate of 3%, you are still looking at negative real interest rates and money will still be considered cheap. Thus I will only be really bearish when interest rates see aggressive moves upwards. In the mean time, the market will take some time to digest the new measures and expectations will take some time to adjust, but prices will not plunge. In terms of property developers, I believe a lot of them continue to have plenty of cash sitting on their balance sheets from the past 2 good years, thus they will not be too worried about lowering prices. I am more concerned about the smaller developers that have been aggressively trying to buy land and depleted most of their cash and now they may be hard pressed for liquidity. So if you are an investor of small time developers make sure you look carefully at their balance sheets in their upcoming earnings announcements.

One more thing which I just have to point out that S&P downgraded Japanese debt rating to AA- during the week. Talk about being pretentious. An american ratings company downgrading an Asian country, a classic example of the pot calling the kettle black. This could be the turning point of the Jap Yen and I believe this could be the year when we see weakness in the Yen after so many years of gravity defying moves up. What does that mean? A good year for Japanese stocks. Therefore for those who are looking to diversify out of Singapore stocks, this could be a good option.

As per what I always say, if the market pulls back, take it as a chance to buy more because we will continue to thread upwards albeit at a slower pace. European markets have looked stronger and calmer with Spain being the top performer at 9% returns since the start of the year. Gold as a safe haven asset has fallen close to US$1300 per ounce due to the stronger conviction that the global economy is on the right track. The longer term yields on government bonds have risen substantially over the past couple of months creating some buying interest as investors get lured by the higher yields but this is a mistake as inflation chips away all the yield that they may get over 10-30 years offered by government bonds.

The theme for the first half of this year will revolve all around inflation and how governments deal with it. So while you are investing, you may want to keep this on top of your decision making process. Companies that are able to transfer their costs to the final customer easily will come out of this period relatively unscathed. Bear that in mind. That is all I have for this week.

Have a great CNY and prosperous returns to all of you!

Best,

SVI