[caption id="attachment_1736" align="alignright" width="150" caption="Photo by kevindooley"][/caption]

...small caps shine but the real value seems to be in

I have noticed that over the last few months market volume has dwindled and until recently there has been little action among the small caps as well. It appears that many funds are sidelined being distracted by sovereign risk concerns (unfounded in my opinion) and also about the rise in US long bond yields from an expectation of interest rate hikes. I think the latter is more important to where stock markets will go this year. On my CNA TV interview yesterday morning, I pointed out that the rise in interest rates is a given its only when and by how much......but the long bond yields seem to suggest sooner rather than later but on the back of better economic and corporate fundamentals for the US rather than EU. This will impact equities negatively in the short term because the "cheap money" from US$ carry trades would have started to evaporate and such trading positions which are naturally centered on big, liquid blue chips would face some selling pressure. But the most important factor, which to me will underpin stock markets this year is corporate earnings. The Dow, and Hang Seng are only trading at about 15 times historic PER and about 12-13 times perspective. This is even cheaper than Singapore which is trading about 15 times historic and perspective which means on current forecasts not much earnings growth. China (Shanghai) is trading on 29 times historic and 18 times prospective, ie about 50% earnings growth for 2010. Read more...