Volatility has been the name of the game in the month of July, as there were wild swings in both directions resulting in heart-stopping moments for investors. The Dow Jones Industrial Average (DJIA) dragged global bourses along with the index wherever it goes: When the DJIA rises, global markets rise and fall in the US bourse were greeted with jeers elsewhere in the world.

The volatility can be attributed to oil prices, which hit another new high while the DJIA traded at a two-year low but once oil prices started to fall, the DJIA began its rally.

The previous issue of Shares Investment (Singapore) coincided with the DJIA falling below the all-important support at 11,000 points. High oil prices could certainly be blamed for the plight of the US bourse but of equal importance was the crisis faced by the world’s largest mortgage lenders – Fannie Mae and Freddie Mac – as both units stared at bankruptcy, sending panic waves across financial markets.

Freddie and Fannie accounted for half of America’s mortgage lending, but neither is directly involved in lending straight to homeowners. Freddie and Fannie buy mortgages on the secondary market, pool them, and sell them as mortgage-backed securities to investors on the open market. This secondary mortgage market increases the supply of money available for mortgage lending and increases the money available for new home purchases. These two companies now have a combined debt of some US$5 trillion and many countries which have their foreign reserves invested in the bonds of Fannie and Freddie, could wipe out US$300 billion and US$100 billion off China’s and Japan’s foreign reserves respectively.

If Fannie and Freddie were allowed to go bust, it could throw the global financial system into disarray – a phenomenon that the world cannot take. The US government had no choice but to rescue the two mortgage giants.

Finally, President George Bush announced a rescue package and the Senate readily approved the US$300 billion package to provide a lifeline for Freddie and Fannie. The US government also promised to take over the running of Freddie and Fannie should all else fail, meaning that investors need not fear that their bond investments would go up in smoke because the US government can increase money supply as and when they deem necessary.

With the mortgage crisis more or less over, we are now faced with one important obstacle to clear – high oil prices.

As it is, many analysts are now saying that oil prices, which have been pushed by up speculative forces, are way too high for our liking. Speculators are not confined to industry players but also include hedge funds and hot money flowing into oil futures. Everybody wants to make a quick buck and the oil futures market has become one big casino that has attracted even governments of various countries who want to boost their coffers. The Israelis and the Iranians, just not too long ago, were threatening to grab each other’s throats by issuing provocative statements and even going to the extent of testing live missiles. As a result, oil prices surged to more than US$146 per barrel before retreating big time.

The drop in oil price to around US$120 per barrel seems to suggest that the oil party is over.

The twin terrors that have been haunting global markets are now less forceful in dragging down stock markets. We are now focused on corporate earnings or, in other words, back to the basics of investing in the stock market. Higher profits mean better company fundamentals and, ultimately, stronger share prices. It is time to research into corporate developments for the past half year because those who work hard will be rewarded.