1932 or 1974? Not 4D numbers. They are possible scenarios for the markets.

Took some leave to stay home and relax over the long weekend. Guess what happened? The direct opposite. Conference calls, frantic smses, private calls etc. This is the life of an investment professional in today's world. Who said we were overpaid?

Markets have been hammered today, oops I meant the last 12 days. What happens now? Panic? As investors scramble to sell out of their positions in anticipation of a market meltdown. Whispers of history repeating itself. Some even mentioned deja vu. I cannot help but feel the same way. The question I have been asked most the past week has been, "what positions can we take to be defensive?". I guess the answer depends on the extent of this sell down. Why? If this is just considered a mid cycle correction, I would say to move in defensive sectors and high yield stocks. But is it really just a mid cycle correction? If this is the situation of a global contagion stemming from the European debt crisis, there is only gold and silver. When a global meltdown occurs, correlation analysis and diversification goes straight into the crapper. In the 2008 crisis, we still had the US treasuries to run into. Now that they are not even considered safe, investors are really running out of places to hide.

Over the weekend, I read some reports by well known strategists and they were all suggesting for investors to move into high dividend yield stocks and Reits. Immediately, it occurred to me how many silly people are in our industry. The S&P has just downgraded US debt and long term interest rates may start to move up. What that means is that the interest burden for real estate related plays are all going to get hit, esp Reits. These are vehicles that hold close to 40% gearing levels and they are all going to have to pay more financing charges going forward. What happens to their yields? Down of course! It is perfectly illustrated in the Singapore market today with Reits like Suntec and Capcomm falling more than 5%. There goes your yield!

Idiots.

Some strategists were citing valuations and how S&P500 stocks have outperformed consensus expectations during this current earnings season. No doubt they are right about the facts but they are using backward looking indicators to judge the market. Remember, p/e ratios can change drastically and valuations go up into smoke when there is panic. Sentiment is key and if it is negative enough, p/e ratios can trade at ridiculous levels for some time. Markets are dynamic, thus backward looking indicators are useless in this markets.

Yes yes, I know what you are thinking. Employment numbers are positive and unemployment rate in the US has fallen last month. Utter rubbish. This is still too small a change and the reliability of these numbers are questionable. Do not expect this number to be anything but a passing thought in this market.

In my previous post, it was mentioned that the ECB backstopping Italian and Spanish bonds would help. This is exactly what the ECB has indicated they will do. However, there must be strong conviction behind this move or else we will fall back into the spiral very quickly. As I write this post, Italian bond yields are falling. Lets hope this will bring some relief to the markets which are badly in need of one.

Of course, there is also the Bernanke statement tomorrow. Expect dovish comments and he is definitely going talk about how the Fed still has plenty of bullets left to boost the economy. QE3 hopes will also help to prop up the markets, but it is going to be short lived because more details will be needed to really bring hope to investors hearts.

Personally, I think we will test bear market levels eventually but it will not fall in a straight line. I believe in the Bernanke put and probably some Merkel put too. But it is obvious that intervention by central banks and govts have only short term effects with no long term solutions. After more than 100 years, Adam Smith's invisible hand theorem still looks like the correct thesis. Bear in mind, the psyche of investors are still weak and vulnerable. "Fond" memories of 2008 still remain fresh in their minds.

If we fall into another meltdown similar to 2008, I am afraid that we will be in a similar position to 1932 during the Great Depression where the market recovered momentarily before crashing to new lows. How long did it take for the Dow Jones Industrials to recover to its pre-depression highs? 25, but that was because deflation came into play? In our case, there is a higher chance of a money supply driven inflation with low to negative growth. Not trying to scare you guys but if we enter into a stagflationary phase, which is a very likely scenario, it could take more like 8 years for the markets to recover. This is taking the experience from the 1974 stagflation crisis.

So lets hope I am wrong. I hope so. However, I would like to state that I have already protected my gains for the year by moving into 70% cash. Also if you were looking to buy into any stocks, look for cash rich companies with no gearing....literally no gearing.

Ok gotta go relax a little by watching some comic relief on CNBC.

Have a good week ahead....if you can.

Best,

SVI