Today, market is down again. Everybody feels like it is end of the world. Damn. It feels like early 2009 again. Call me sadist if you like. But, all of us may be given a second chance to collect value stocks at early 2009 prices soon. Twice in 3 years. Will most shares fall to single P/E level? Will some good stocks fall below their intrinsic values or even below their cash values? Not sure. But, it is worthed waiting.
The Greed index is now 26 or so. It was close to 70 early this year and it fell to 15 or so during the last great financial crisis in 2008-9. We are not there yet but we are close.
It feels like fishing. Throw in the bait and wait for the fish to bite. Patience and I think we need lots of it.
Disclaimer: The content in this blog contains purely my personal opinion and it is in no way a substitute for professional financial advice. You should seek advice from a professional financial advisor with any question regarding your financial matters.
Tuesday, May 25, 2010
Thursday, May 20, 2010
Food for thought: What will happen if EUR were to collapse
There is a lot of speculation regarding the collapse of EUR. My guess is that it will not happen because of the great economic impact to the world if this were to happen. In a way, I think it is too big to fail.
There is a saying that the PIIGS countries will be better off if they are not tied to EUR. Personally, I think these countries will be worse off if they were to transform themselves out of EUR. This is because the root cause of their problem is their ability to repay their debts. It is never about EUR. Getting out of EUR may return the monetary control to these central banks. But, the loss of confidence in these countries will still be there. In fact, without EUR and the support of EU, it will just expedite the eventual collapse of these economies and their financial systems.
If these countries were to default on their debts, the banks and financial institutions in Germany and the rest of EU countries will definitely face huge losses. It will cause some of these banks and financial institutions to fail. The consequences will be deadly to the economies round the world and the domino effect will eventually pull the rest of the world back into the global crisis that we have witnessed in 2008. This time round, I do not believe quantitive easing monetary policies will be able to pull us out of this mess so easily.
The snowball effect of this crisis is too huge and I doubt anybody will want to see this happen.
There is a saying that the PIIGS countries will be better off if they are not tied to EUR. Personally, I think these countries will be worse off if they were to transform themselves out of EUR. This is because the root cause of their problem is their ability to repay their debts. It is never about EUR. Getting out of EUR may return the monetary control to these central banks. But, the loss of confidence in these countries will still be there. In fact, without EUR and the support of EU, it will just expedite the eventual collapse of these economies and their financial systems.
If these countries were to default on their debts, the banks and financial institutions in Germany and the rest of EU countries will definitely face huge losses. It will cause some of these banks and financial institutions to fail. The consequences will be deadly to the economies round the world and the domino effect will eventually pull the rest of the world back into the global crisis that we have witnessed in 2008. This time round, I do not believe quantitive easing monetary policies will be able to pull us out of this mess so easily.
The snowball effect of this crisis is too huge and I doubt anybody will want to see this happen.
Wednesday, May 19, 2010
Food for thought: Worst case scenario
We are now in May 2010. Europe is having its worst crisis since WWII. Though the European Union has pumped in almost SGD 1 trillion in rescue package, it fails to calm the market. Market is expecting worse days to come because the package does not address future growth plan. So, stock market starts to plunge again. Many start to wonder whether Euro will be able to survive as a currency.
As usual, out of curiosity, I start to dream wilder and think deeper about this crisis. You may call this mad economist but I think there is no harm thinking of what would be the worst case scenario if everything (i.e. currency, equity, bonds, etc) in this world were to collapse. It is quite scary and please be warned that you should not continue reading if you have any health problem such as heart problem, respiratory problem, etc. It may be worse than your worst nightmare.
Now, let's assume Greece decides to pull out from EU and drops Euro out of desperation. Market will start to punish the EU countries deadly because everybody will be worried about the future of Euro and the ability of these countries to survive this crisis. One by one, the EU country starts to pull out from European Union. For sure, Euro will start to collapse and cease to be a currency. Many banks and companies in EU will start collapsing and the whole EU will plunge into darkness.
With the collapse of the EU, people start to wonder the ability of US in surviving this crisis as well sustaining its ever growing deficit. If EU can collapse, why not US? Now, people start to punish US market in bonds, equity, currency, etc. Credit default swaps on US sovereign bonds will begin to raise and USD may even collapse. China, being its biggest trading partner, will now begin to feel the pressure. The whole world including Asia Pacific and Middle East will panick and everybody will start to sell and sell from stocks to bonds.
Though gold may boom when volatility is high, its price will also collapse because the fund manager needs to sell something to cover losses in other places. And, of course, property prices will drop to the bottom. Who are you going to find to take over your property? Banks will start to foreclose these properties to cover losses.
Worse still, we will be seeing bank runs. How do you expect anybody to trust the banks if they could not even trust their government? People will start withdrawing money and save it under their pillows. But, so what? Paper money will start to devalue because people begin to lose confidence in the government.
Finally, the world will plunge into a depression that may last 20 to 30 years or maybe more than you ever know. There will be no more stock market, no more bond market, no more CDS market, no more currency market, no more gold market, etc, etc. Basically, we will be back to stone age.
Do you think the above will ever happen? In my opinion, ZERO percent chance that this will happen. But, this is something interesting and scary enough for deep thoughts.
As usual, out of curiosity, I start to dream wilder and think deeper about this crisis. You may call this mad economist but I think there is no harm thinking of what would be the worst case scenario if everything (i.e. currency, equity, bonds, etc) in this world were to collapse. It is quite scary and please be warned that you should not continue reading if you have any health problem such as heart problem, respiratory problem, etc. It may be worse than your worst nightmare.
Now, let's assume Greece decides to pull out from EU and drops Euro out of desperation. Market will start to punish the EU countries deadly because everybody will be worried about the future of Euro and the ability of these countries to survive this crisis. One by one, the EU country starts to pull out from European Union. For sure, Euro will start to collapse and cease to be a currency. Many banks and companies in EU will start collapsing and the whole EU will plunge into darkness.
With the collapse of the EU, people start to wonder the ability of US in surviving this crisis as well sustaining its ever growing deficit. If EU can collapse, why not US? Now, people start to punish US market in bonds, equity, currency, etc. Credit default swaps on US sovereign bonds will begin to raise and USD may even collapse. China, being its biggest trading partner, will now begin to feel the pressure. The whole world including Asia Pacific and Middle East will panick and everybody will start to sell and sell from stocks to bonds.
Though gold may boom when volatility is high, its price will also collapse because the fund manager needs to sell something to cover losses in other places. And, of course, property prices will drop to the bottom. Who are you going to find to take over your property? Banks will start to foreclose these properties to cover losses.
Worse still, we will be seeing bank runs. How do you expect anybody to trust the banks if they could not even trust their government? People will start withdrawing money and save it under their pillows. But, so what? Paper money will start to devalue because people begin to lose confidence in the government.
Finally, the world will plunge into a depression that may last 20 to 30 years or maybe more than you ever know. There will be no more stock market, no more bond market, no more CDS market, no more currency market, no more gold market, etc, etc. Basically, we will be back to stone age.
Do you think the above will ever happen? In my opinion, ZERO percent chance that this will happen. But, this is something interesting and scary enough for deep thoughts.
Monday, May 10, 2010
WOW again: What a rebound!
Check all the European stock indices now. All have rebounded; some as much as 8 percent. Like I have said in my earlier posting last week, the market is always irrational. I am not surprised that this strong rebound will come. When market is down so badly, it is natural for it to rebound sooner or later. There is no rocket science to this. Anyway, a lot of shortists will try to cover their positions now. So, this strong rebound is inevitable.
What is important is what will happen after this. My advice stays the same - stay rational and invest prudently. Nobody can tell you what will happen tomorrow. Invest the money you can afford and the companies you can trust.
What is important is what will happen after this. My advice stays the same - stay rational and invest prudently. Nobody can tell you what will happen tomorrow. Invest the money you can afford and the companies you can trust.
Friday, May 7, 2010
WOW: What happened!
Yesterday, DOW plunged 998 points in a matter of half an hour. What a fear? Market is telling us that problems in Greece, Spain, Portugal and Ireland will cause the global economy to collapse within weeks or even days. The whole world will once again enter into a recession worse than the 2008 global financial crisis. Do you believe this? I don't. Why? This is because these countries are not big enough in terms of the economic impact. Nevertheless, market is always irrational and nobody can control the market that builds its fear from thousands and thousands of investors.
At this moment, VIX is shooting up really fast. As noted in my posting one month ago, there was too much complacency in the market then. Now, there is too much fear. No matter what happens, we should always stay rational. Always remember what Warren Buffet says - Be greedy when the market is fearful and be fearful when the market is greedy.
Now, the market is entering into a panic mode. Soon, we can do some serious fishing.
At this moment, VIX is shooting up really fast. As noted in my posting one month ago, there was too much complacency in the market then. Now, there is too much fear. No matter what happens, we should always stay rational. Always remember what Warren Buffet says - Be greedy when the market is fearful and be fearful when the market is greedy.
Now, the market is entering into a panic mode. Soon, we can do some serious fishing.
Wednesday, May 5, 2010
Stock: Dollar Averaging
Market's down. Greed index is down and fear index is up. These are part and parcel of stock investment. If you have a proper risk management program in your investment strategy and have invested in companies that are built to last, there is little to worry. In the stock market, there is always a time to buy, a time to sell and a time to go fishing (meaning wait and see). Anyway, all of us do not have a crystal ball to see what will happen in the future. So, let's do what is within our control - invest prudently.
In stock investing, there is a strategy called dollar averaging. As nobody is able to time the market accurately, dollar averaging allows you to spread your investment over a period of time to reduce the risk of overpaying for a particular investment at any particular time. For example, if you want to purchase 50,000 shares of a stock, you may want to spread your purchases over 5 months, buying 10,000 shares per month. Let's say the stock price is $1 on month 1, $2 on month 1, $3 on month 3, $4 on month 4 and $5 on month 5. Your total cost of investment excluding trading cost will be $150k if you purchase 10,000 shares per month over 5 months. This will be $100k cheaper than to purchase all 50,000 shares at $5 each on month 5.
Is this really a good strategy? It depends. If you are a stock trader (i.e. not investor) and your holding period is a few days to a few months, then this strategy is suicidal in a falling market. It is especially so when both the company of that stock and your holding power are weak.
What would be a good time to use this strategy? It depends. Personally, I think this is a good strategy if you are investing in stock of a company that is well managed or stock index of a country that you believe to be financially stable. It could even be a ETF.
Try a simulation run of this dollar averaging strategy on STI ETF over a period of past few years and you will know whether this strategy works.
Disclaimer: The content in this blog contains purely my personal opinion and it is in no way a substitute for professional financial advice. You should seek advice from a professional financial advisor with any question regarding your financial matters.
In stock investing, there is a strategy called dollar averaging. As nobody is able to time the market accurately, dollar averaging allows you to spread your investment over a period of time to reduce the risk of overpaying for a particular investment at any particular time. For example, if you want to purchase 50,000 shares of a stock, you may want to spread your purchases over 5 months, buying 10,000 shares per month. Let's say the stock price is $1 on month 1, $2 on month 1, $3 on month 3, $4 on month 4 and $5 on month 5. Your total cost of investment excluding trading cost will be $150k if you purchase 10,000 shares per month over 5 months. This will be $100k cheaper than to purchase all 50,000 shares at $5 each on month 5.
Is this really a good strategy? It depends. If you are a stock trader (i.e. not investor) and your holding period is a few days to a few months, then this strategy is suicidal in a falling market. It is especially so when both the company of that stock and your holding power are weak.
What would be a good time to use this strategy? It depends. Personally, I think this is a good strategy if you are investing in stock of a company that is well managed or stock index of a country that you believe to be financially stable. It could even be a ETF.
Try a simulation run of this dollar averaging strategy on STI ETF over a period of past few years and you will know whether this strategy works.
Disclaimer: The content in this blog contains purely my personal opinion and it is in no way a substitute for professional financial advice. You should seek advice from a professional financial advisor with any question regarding your financial matters.
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