Thursday, September 17, 2009

Double Dip Economy

Recently many economists have warned that the global economy may suffer a double dip economy in the near future. There are reasons for their worry. Firstly, governments around the world have been pumping billions of dollars into their economies for fear that their economies will undergo a prolonged recession like the 1929 "Great Depression". The aggressive fiscal stimulus policies have been doing the wonders of a speedy V-shaped recovery for most of the economies in the world, especially the Asian countires.

Secondly, the "Fear and Greed" factor in human's emotion has started to build bubbles in the stock markets and property markets around the world. Since the subprime crisis, Singapore STI up 77%, Hong Kong HSI up 65%, Indonesia JKSE up 100%, Bursa Malaysia up 50%. And property market in Singapore also see sales volume reaching its pre-crisis level. Its 2Q 2009 almost doubled 1Q 2009’s level to reach an eight-quarter high of 4,714 units. A year ago, "fear" has caused many investors to dumped their shares at cheap sale, now "greed" has taken over control and everyone is in for a quick profit.

Third is the threat of the commodity prices. With speedy recovery in the Asian economies, the demand for commodities is rising. Most likely we are going to see another round of cost push inflation, like the one in 2007.

And finally, the interest rates. With rising oil prices and overheated economy, very soon we will see rates hikes which will drag down the stock markets and the property markets. And when all these happen, we'll see a "W" formation for our GDP which is also known as the "double dip" economy.

As an investor, we do not need to feel fearful about this situation. We should treat it as part of the economic cycle, there are bounds to be ups and downs. The important lesson here is cash management: (1) Do not invest with borrowed money and (2) Do not invest all your funds at one time. Space out your investment, if its a down market, you're practicing lower cost averaging; if its an uptrend, you're averaging up. And remember to take profits when you're happy with your gains.

Friday, September 11, 2009

Consumer Confidence Index

Warren Buffett said:"Be fearful when others are greedy; and to be greedy only when others are fearful." We know the idiom very well but how many of us know how to apply this classic idiom in the stock market?

There are many indicators that track the market sentiment such as the GDP, unemployment rate, volatility index, put-call ratio and so on. Today I want to talk about one particular indicator which I think is a good representation of the sentiment of the economy as well as the stock markets - The Consumer Confidence Index (CCI).
Consumer Confidence Index is an American indicator but it definitely affects the rest of the world. From the CCI we can tell whether the public sentiment is bullish or bearish. This is important because we want to know when the majority people are greedy and when they are fearful. Here's a look at the current CCI, as at August 2009 the CCI stood at 54.1, while the base year was 1985 with 100 index. The dip we saw in the chart above was registered in February this year at 25.3, which is its 42-year low in the American history.

In order to know how low or high is this figure, let's take a look at another chart, the past trend. We can see from the chart below that the average was 102.9 which almost double the current August'09 CCI.

The virtue of the Consumer Confidence Index is that it gives you a big picture of the economy. And if you see that the index dip to the historical low level like the one in February, you should be smiling instead of feeling fearful.
Hence, if you were to ask me whether I'm buying into the stock market, my answer is 'Yes"!