[caption id="attachment_1430" align="alignright" width="216" caption="Photo by jenny downing"][/caption] 2009 has started on a strong note for stock markets with a gain in the STI Index of 68.1 points and a 258 and 55 point rise in the Dow and Nasdaq last Friday, the first day of trading for all these indices. All three indices broke through key resistance levels with the STI, Dow and Nasdaq closing Friday at 1829.7, 9034.7 and 1632.2 respectively. These gains were made despite more bleak economic news/data which continue to reveal a slowing global and Singapore economy. My first thoughts were that the market had already discounted the bad news and that we had bottomed and it could be time for investors to start to bargain hunt. On closer examination, I think the worse is still to come - this is another bear or relief rally and that the best time to bargain hunt will be in Q2-2009. Trading volumes on January 2, 2009 were very thin and many stock markets round the world remained closed for the holiday season. This means that whatever gains indices made - there was NO conviction and we cannot rely on these gains as a sign of a trend reversal. The chart formations however seem to suggest some form of consolidation so maybe we are trying to form a bottom but I am not convinced that we are there yet. The charts of the STI and Dow are very similar but the most important is the Nikkei as Japan has and is still going through a 20-30 year asset deflation cycle....there were many false starts - this gives us room to be cautious that this brief consolidation and rebound in our STI off the 1600 level could be temporary. Why do I think the worse is yet to come ? When Singapore announced its advance GDP estimates for Q4-2008 last Fiday - the number was worse than expected. Forward GDP forecasts for 2009 have been lowered to -2% to +1%. The advance numbers also show the worse QoQ decline in the recent history of Singapore of more than 12%. The quarter GDP charts below for QoQ and YoY show the picture. We are now in a period of transition.....when I speak and meet companies - the outlook and picture reflect what we read in the media. The Global economy is shrinking, the business environment is difficult, order visibililty has collapsed, there is a huge inventory build-up, clients are asking for more credit, suppliers are giving less credit and banks dont want to lend. Yet if you go out on weekends or during the recent holidays, Singaporeans are still shopping and dining as usual. Which group is correct ? I think the companies are feeling the impact of the global downturn and credit crunch immediately. The consumer will only feel it when job security is threatened and unemployment rises. We have seen some of this - starting with the financial sector, and selected pockets of manufacturing but the man in the street is hoping the Government and its packages can insulate them from the level of retrenchments that we saw in 1997. I think, the job retrenchments will come and maybe employers are being kind to wait until after Chinese New Year to reduce head count or they are waiting for the Budget to see if it has any measures that can help them avoid making deep cuts or they are waiting to see if all the stimulus packages around the world can lead to a quick rebound. My feeling is that because the excesses of the Global financial system lasted for ten years - we have a huge misallocation of resources and unrealistic demand from cheap credit....these will have to be worked off through consolidation of industrial capacity and redundancies. When this happens.....the negative mood now felt by corporates will spill over to the man in the street.....the current respite in the selling could be the lull in the storm. For the stock market, I believe the market has discounted negative economic and macro news. Its waiting for the impact of announced stimulus packages and more important what the companies are saying about themselves. Cosco is a good example. Its shares have fallen sharply from S$8.00 near its peak to S$0.60-0.70 level. It then rebounded to the S$1.00 to S$1.10 level. The company has been giving positive guidance until recently.....then the share resumed its fall. The same I think will happen to other stocks.....they have fallen on redemption selling. There is some bargain hunting and investors are waiting for the Q4-2008 and Q1-2009 results to get a better feel of how badly they have been affected by the economic downturn and financial crisis. This is why I am saying we should wait until Q2-2009 to start nibbling or bargain hunting. Source: NRA Capital - Kevin’s Blog