By: DanielXX If this overview is written at the end of 2008, it would be much clearer whether 2007marked the decisive turn of the 4-year global bull market or whether the now infamous subprime issue was another wall of worry that the bull market eventually scaled gingerly. As it is, the bull market that reached near-hysteric proportions by July 07 was cut dead in its tracks by the sub-prime crisis that unfolded and the volatility since then has been amazing; market strategists are left equally divided on the likely market direction in the coming year, and the general consensus is that the volatility will continue. Right right..... 1Q07 I had written on 1Q07 earlier (see article). The STI ended 2006 just below 3000, and it breached the psychological 3000-mark decisively in 1Q07. Construction stocks seized the investing public's imagination (I called for construction recovery to be the theme of the year for 2007 in my end-2006 HotTrendsWatch article), with strong price rallies in stocks like Lian Beng, Koh Brothers, Low Keng Huat. This quarter also witnessed a significant correction that brought the STI briefly back below 3000, but by the end of 1Q the equally strong rebound was complete. The correction was partly triggered by some bearish comments by Alan Greenspan on the state of sub-prime debt and its possible effect on the economy; it turned out to be remarkably prescient later in the year. 2Q07 Read my earlier writeup on 2Q07. The key themes had established themselves for the year. Domestic reflation, marked by property, which was marked by en-blocs at increasingly high psf ppr prices, and construction, which was marked by bullish forecasts on demand and orderbooks for the next 5 years; oil & gas, marked by high demand for offshore and onshore infrastructure and support vessels. Stocks linked to these themes rose throughout the quarter. But the hot story for this quarter belonged to the penny stocks. Speculative frenzy built up over this period, and reverse takeover and other sexy stories, albeit sometimes of dubious origin, drove the penny stock market. Examples are Armarda, HLG, Lottvision, Ban Joo. 3Q07 The speculative frenzy on penny stocks continued until late July. That's when the market peaked. And so began the real story of 2007. It started with Merrill Lynch selling off its sub-prime debt at huge discounts, and suddenly the liquidity in the market for these debt dried up, and suddenly Bear Stearns found several of its funds in trouble. Then banks started distrusting each other as they started to realise what was good collateral (the bonds and debt-related derivative instruments they held) might not be that good as huge markdowns on market value continued; they stopped lending to each other and inter-bank rates rocketed. The credit crunch spread to Europe, and to a lesser extent to Asia. By mid-August global markets had swung from extreme optimism to extreme pessimism, with significant negative impact on asset markets (including stocks). The Fed began its rate-cutting cycle and that stabilised the markets, leading to a rally that brought the markets back near to peak towards the end of the quarter. 4Q07 However, that hoped-for stability did not materialise. The market swung back and forth over 4Q, as credit crunch fears kept persisting. Also, fears of a looming US recession started to materialise in popular media. Volatility is seldom resolved on the upside. Hopes of Asia decoupling from the Western economies are also starting to fade, given that even if trade flows can decouple, it is quite impossible to expect financial flows to as well. The end of the quarter was marked by recapitalisation exercises funded by sovereign funds from Asia and the Middle East, in an ironic twist from that of a decade ago, when Asia was at the centre of the storm. It is in this environment that we enter 2008 with some apprehension and plenty of things to hope for but little to expect. Overall This was an extract from my writeup on a summary of 2006: "2007 will be considerably more challenging simply because people's expectations of the stock market have been raised, such that 20% annual return will be considered a failure. Under this kind of circumstances, there is great potential for the greater-fool theory to manifest itself as people keep bidding prices higher in anticipation of other people coming in to take over their line of stock; the challenge will be to exit at the high." Indeed, such greater-fool behaviour did manifest itself, especially in 2Q07 and early 3Q07. However, the rewards were great as well, if one held steady through 1H07. Nobody would have expected such wild gains by the broad market over this period; I myself expected the 2007 environment to be "considerably more challenging". It just shows that the broad relationship between risk and reward to be generally close. For 2008, I find it difficult to make a call. If pressed, I would be contrarian and predict good rewards if one stays invested through 1H08 and then to be careful in 2H08; the consensus opinion appears to be a weak 1H08 but recovery in 2H08. My second view is that the investor might start pulling out his hair if he practises the buy-and-hold philosophy through 2008. Let's see how things pans out. Source: Hot Singapore Stocks — Not