It has been quite a while since I started contributing to Shares Investment, which is the best investment guide that we can find in Singapore, Malaysia and Shanghai. I would like to congratulate the publication for launching its inaugural issue in Kuala Lumpur on 22 March.

I would also like to thank the publisher for inviting me, as a guest speaker, to attend the launch event - in conjunction with NextView’s Asia Trader & Investor Convention 2008.At the seminar, where I was one of the panelists, views and opinions were exchanged. While there were some bears, bulls were not lacking either. Renowned chartist Daryl Guppy declared himself a bear while Lorraine Tan, Head of Research at Standard & Poor’s, was more bullish than Daryl.

At my end, I have always been a bull - a cautious bull - with my vision focused on the possible impact of the series of US rate cuts. In previous issues of Shares Investment, I have been mentioning that we must wait for the effects of the rate cuts to be felt before we can safely say that we are either out of the woods or deeper into the woods.

I have also said on numerous occasions that DJIA must hold above 11,600 while the STI must stay above 2,746. For a short moment on 17 March, the STI threatened to break below 2,746 (It did but the index soon rebounded) but all was safe when the index closed at 2,792 on that day. I did breathe a huge sigh of relief.

The week starting from 24 March was good for the stock market, as investors shrugged off trouble on Wall Street to rally strongly. The sudden weekend discount-rate cut by the US Federal Reserve earlier on, coupled with the Fed’s decisive move to rescue Bear Stearns through JP Morgan, helped to boost sentiment. It has been quite a long while since we witnessed such strength in the stock markets. The DJIA, rallying from 11,756 on 17 March to a high of 12,622 on 24 March, finally managed to hold on to gains unlike previous rallies that fizzled almost immediately. Likewise, the STI followed suit and did not tank.

Where is the strength coming from?

ADMIT THAT WE ARE IN A RECESSION
Like it or not, we should be in a recession by now although the US government has yet to officially admit that we are already in one. We know that it is election year and the Republican government would want to paint as beautiful a picture as possible.

Take a look at the jobs data, housing data, ISM (Institute for Supply Management) figures and durable goods orders and all points to one thing - a weak US economy that has already contracted.

I believe that it is important for the US government to admit that it is already in a recession because some investors, who are confused and lost, are torn between admitting it is a recession and not. This causes the bulls and bears to be fighting all the time resulting in volatility.

Once we know that we are in a recession, we will fear less for bad news and will be hoping for a recovery.

With all the bad news that is already in the market, I believe that investors have already resigned themselves to the fate that the US economy is in a recession and it cannot get much worse with all the rescue acts that the US government and the Fed have put together.

Investors have started to brace themselves for a recovery and are more willing to buy on dips, which explain why the US stock market is becoming more resilient. Recent trends also suggest that the markets want to rally but still lack a catalyst.

LIQUIDITY STORY STILL AROUND
Did someone say that liquidity has dried up?

Liquidity dries up only when investors refuse to part with their money; liquidity evaporates only when the interest rate environment is high.

The former is true, as the falling market discourages investors from jumping into the stock market. This also means that investors are sitting on the fence and liquidity is waiting to flood the markets once good news start flowing. As for the latter, the falling interest rate in the US will invariably spur spending and investment activities while Asian and Middle East funds are still in abundance.

Have we all forgotten about QDII and the sovereign funds?

VALUATIONS LOW ENOUGH BUT NOT YET DIRT CHEAP
Most markets are now trading at price earnings ratio (PE ratio) of low teens in the face of all the horrible news that we have been hearing.

If we compare the US economy/stock market with its Asian counterparts, why should Asian markets be trading at same PE levels as the US stock market when growth in this part of the world is still “red hot”?

One may argue that the US market should be trading at a premium but after losing some 20%-30% in stock market values, I form the opinion that Asian markets have been overly punished relative to the US market. As at 26 March, the DJIA lost only some 10% of its value from its peak while most, if not all, of the Asian markets have lost at least 20%.

This does not seem to be reasonable but who are we to argue with the market?

There have been suggestions that funds are selling to meet redemption purposes and, thus, funds are selling indiscriminately despite some low and very attractive valuations. Companies that grow at 30%-100% are now trading at single digit PE?

Perhaps it is for this reason that investors mopped up shares of China Hongxing and China XLX during the recent rally because these high growth companies do really look cheap.

STILL WAITING FOR RATE CUT IMPACT
I have yet to pronounce the bull as dead. I would hate to do so, but I will do it if necessary.

As of the time of writing this article, I still believe that this six month correction is a structural correction in the US economy after all the excesses and exotic financial instruments being introduced into the market.

I am still waiting for the effects of the rate cut to be felt and if we do not feel it by June, things will not look good. As a matter of fact, we should be feeling the effects starting from this month. We should now be hoping to hear more good than bad news pertaining to the US economy and see more strong rebounds than sharp falls before we can start to see light beyond the woods.

We should be almost out of the woods unless rate cuts do not work this time. In reality, the problems faced by the US economy have not been solved hence this will be the party pooper.

TECHNICAL PICTURE
In the short-term, technical indicators suggest a pullback (It is already happening while I am writing). This pullback seems to be quite mild, which could only mean better days to come. In the coming weeks, we could see the DJIA retest the 13,000 level while the STI will try to reclaim 3,150.

Be warned that these technical levels are hard to breach unless something really good comes up.

Disclaimer: Opinions expressed in this article are solely those of the author and do not represent the opinions of this publication and/or the opinions of the organisation he represents.