Since hitting an intra-day bottom on 16th November 2012 at 2,931.60, STI hit an intra-day high of 3,319.19 on 4th February 2013, rallying up a 13.22% in a 4 month periods and with the closed of 3,283.07 on 15th February 2013, STI is up 3.66% for the year. The rally (global markets rally) was not restricted to just the index value but daily volume also. STI hit a new record high daily volume of 10.55 billion on 14th February surpassing the 9 billion mark achieved before the market crashed in 2007.
Not convince this is the last leg of the bull run which started since 2009 ?
Is the market overheating and end of the bull run soon ?
In my early January 2012 market analysis ( Recap 2011 & Looking Ahead 2012 ), I cited adopting a cautiously optimism for 2012 and on a scale of 1 to 10 in which 1 indicates extremely pessimism, 5 being neutral and 10 means extremely optimism, that would be a scale of 6. In my recent January 2013 market analysis ( Recap 2012 & Looking Ahead 2013 ), again I maintained the cautiously optimistic stance and on that scale, that would be represented by a 8. So far, the global markets have proven to be so. There are strong reasons to conclude this current rally is the last leg of the bull run as those major events like the EU debt crisis, US stagnant growth coupling with high unemployment rate and high inflation risk in Asian countries have hit the worst patch in the period from mid 2010 - mid 2012. It is true that the EU debt crisis still ongoing and US still have lot of do to boost its economy and bring down the unemployment rate however, the intervene of the Central Bankers with their printing machine has more or less provided a downside stopper to those problems. With a downside pretty much taken care of, the only thing left is to move up. Why is it last leg of the bull run ? Typical financial cycle lasts 10 years but in the internet era, the period of the financial cycle appears to shorten to 7 years period. From the peak in 2007, it is about time another peak to be hit and the cycle repeats itself. From a more technical and logical perspective, as the global economy rebounded due to artificial means of the Central Bankers intervene, this has slowly building up bubbles and once those bubbles burst, it will be global recession again. Shall look at what are the potential bubbles later on.
Is it end of bull run soon ? If it is looking at short-term answer is a YES as markets always have the tendency to overrun the fundamental and it is under such a case, a pull back or correction will kick in next. This is what happening now and market could be seeing some pull back soon. Furthermore, some ongoing events also are a good excuse for market to correct. US across the board spending cut in March (they managed to kick the can down the road in December 2012, buy some times) and the debate of the debt ceiling in May (which was post-phoned by the Congress), the still weakness in EU economy (EU yet to get out of recession) and Japanese economy (trying to get out of recession). However, from a mid to longer time frame, the answer is a NO as the bull run has yet to run its full course. The above 3 events should not have problem in resolving be it providing a short-term of long-term solutions to it. Once those worries are off, the bull run will resume.
The focus of this analysis is not to debate or second guess when the last leg of the bull run will end but to identify the potential bubbles that could eventually derail this last leg. Was mentioned before now a 8 as assigned on the scale board and should that reading hit a 9, investors should seriously focus on those bubbles if not could end up get caught at the wrong end of the cycle.
So far 4 potential bubbles have been identified, will it have some more, probably !
1. Bond bubble. The yield for US 2 year treasury bill is below 2% and last year both German and Denmark 2-years bond gave negative yield. Bond is actually debt despite being termed as a safer asset. In another word, Government borrowed money by issuing bond and with those so-called more credible bond hitting a depressed yield indicating lot of monies have been invested. Last 2 years already seen bond bubble burst in Greece in which investors have to take partial write-off else will end up default. Italy and Spain also seen their short-term bond yield rocketed up as investors rushing for exit door in fear of default. Recently, the US debt ceiling also threaten the possibility of US treasury bill getting default if nothing is to be done by the Congress. With Central Bankers printing so much monies and those excessive liquidity flowing into the bond market, should there be any raise of interest rate by the Central Bankers (due to inflation), the outcome would only be one thing, that is, bond market crash. On a serious scenario, should any of the country debt getting out of hand resulting in default in the bond, the global economy will not be spared. Central Bankers printed monies, investors taking those excessive liquidity invest in Government bonds (ie Government debt) and Government gets those (borrowed) monies to boost the economy. Should the debt getting too leveraged and economy still sluggish, there will come a time when default will happen and without that money how can a Government boost economy growth ? Japanese Government is launching stimulus to recover from recession in the form of printing money and without doubt, those will be flow into Japanese Government bond, ECB has been given the license to use their balance sheet to buy into Government bond to help stabilize Euro nation debt and China does not want to be left out launching their own Yuan bond (dim sum bond). The whole world is just full of so many bonds and there is no reason not to believe that the bond bubble is getting bigger each day.
2. Technology bubble. This is not something new, the 2001 dot.com bubble that burst get the whole world into recession. The scale of this current technology bubble might not be as big as in 2001 but it is definitely not something to be ignored. Since the 2007 financial crisis, technology sector was one of main driver in helping global economy recovery with smartphones and tablets sale. Probably it has come to a stage in which smartphone and tablet have become a must have in everyday life but the oversupply can kill. Technology is about quality (that changes people life style) and not about quantity. So many companies are in to fight for the market share for smartphones and tablets and that has created fierce competition. In order to outwit each other and kill off competition, the frequency of releasing new model has become shorter and the differences in term of quality features between the new and old release is getting negligible . Companies in order to gain market share even resort to lowering the product sale price but is that really generating good profit for the company ? The wanting to gain market share, trading off quality with quantity will eventually lead to oversupply and cause another technology bubble burst.
3. Inflation bubble. This is again not something new. China has been threaten with hard landing in the past 2 years when its Government putting in hash means to curb its high inflation. Result of that was sharp slow down in economy growth. Where did inflation come from ? The outcome of too much money printing. Slight inflation is good for economy but too high the inflation will result in a viscous cycle in which at the end no one gain. High inflation results in high cost of living, high cost of living causes people to suffer and to overcome that their wage has to increase to cope with it. Increasing the wage will mean increase in expenses of company and that will lead to profit margin squeeze for the company (if the company could not pass on the cost to consumer). Should the company unable to cope and close shop that will lead to people jobless and with no income how do the people cope with the rising cost of living ? Another point is currently the world is enjoying an extremely low interest rate environment (from US to Europe to Japan) and should inflation starting to hit or exceed the target level, Central Bankers will come in to hike interest rate to combat inflation. When that happens, it can lead to bond market crashes and companies facing high borrowing cost to operate their businesses. All these will eventually lead to slowing down of economy activities and if too serious recession. The way to prevent inflation from overheating lies on how Central Bankers time to act. Many a times, they usually behind the curve to act. By the way the global low interest rate could not go any further lower and the only direction it will move next will be up.
4. Currency war. This is the latest and the bubble is yet to getting really build up but if not carefully handle it will get spiral out of control. Japanese Yen has been sharply weaken since December last year mainly due to Japanese Government is ready to put in aggressive stimulus to recovery its economy from recession. That has caused a concern to rest of the world and that topics has been hot on the list for the recent G7 and G20 meeting. Each country has its own currency and the relationship between countries is tied via the foreign exchange rate. For a country who is mainly depended on its export activities will want to have a weak currency so that is cheaper for their companies to export the products out. On the other hand, the country which relies mainly on import will find it more expensive to import should its currency get weaker, resulting in companies profit margin get hit and cost of living rising. To please both the exporter and importer, a balance has to been met so that both can achieve a win-win situation. Japanese likes weaken Yen as they could export their electronic products and cars in a more profitable environment. Europe already in recession also wants the Euro to stay weak so that their luxury brand of fashions and cars can remain attractive, and also attracting more tourists to come and spend with their rich vein of history to help them out of recession. US also wants their currency to get weak so that their electronic products remain attractive to export. China the so-called world factory has no reason not to have their currency weak too as that will help the export activities. If everyone want a weak currency it will eventually end up no one gain. That is the rationale behind the so-called currency war.
Though at the moment can only conclude of potential 4 big bubbles but along the way might be possible of other bubbles developing too that could eventually derail global economies. Keep that option opens.
Like mentioned before, now is the time to identify the potential bubbles and wait till the optimism scale board hitting a read of 9 then should start monitoring of bubbles bursting.
For the last leg of bull run, the most profitable investment will only be those stocks of good fundamental company that are trading at a discount to its NAV (book value), having healthy debt ratio and strong cash flow. They yet to turn up as their earning yet to catch up and once their earning starting to show strong result, it will attract investors coming in. These type of stocks could be ranged from pennies to the blue chips, so keep all option opens.
Last but not least, enjoy and make full use of the last leg of the bull run.
