Stock markets stay firm despite multiple concerns
Updated: 2010-12-11 08:19
(HK Edition)
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The ongoing bull market is now entering a stronger phase and the next several months should be rewarding for the holders of common stocks. Despite concerns about a double dip recession and worries over Europe's debt problems, the majority of stock markets are staying firm.
The bull market is climbing the proverbial "wall of worry" and as long as skepticism abounds, the primary uptrend will continue. Bull markets usually end amidst widespread euphoria and monetary tightening is the straw which breaks the camel's back.
Today, the monetary policy is accommodative in most nations and the US yield curve is extremely steep. Therefore, I believe we are still early in this bull market.
In terms of technicals, a variety of indicators are favorably aligned and this supports the bull market hypothesis. For instance, the market's breadth is extremely strong, new 52-week highs are comfortably above new 52-week lows, credit spreads are behaving themselves and the volatility index has declined to a multi-month low. Last but not least, valuations (especially in the developing markets) are still attractive, therefore one can still find reasonably priced securities.
In terms of specific markets, both China and Vietnam are currently on the bargain table. Although these markets have been laggards this year, the ongoing consolidation has made them even more attractive. It is worth remembering that uncertainty and periods of price weakness are friends of buyers of long term values. In terms of sectors, energy, precious metals and domestic Chinese consumption plays still deserve an "overweight" rating.
Over in the energy patch, the price of crude is flirting with the $90 per barrel level. The crude price will likely surge and climb to a record high over the course of this business cycle. The days of cheap oil are over and the ongoing depletion will ensure that crude will trade well into the triple digits.
In the metals area, it is notable that the price of copper has climbed to an all-time high. A recent media story reported that JP Morgan was trying to corner the copper market, so its buying may be responsible for this move. If the metal can stay above $4 per pound, it could set the stage for a new rally. Both gold and silver are currently in consolidation/correction mode and the best near-term outcome will be a high trading range. Conversely, if the US dollar continues to advance, it is possible that a deeper correction will follow. In any event, the precious metals are likely in a secular bull market.
As far as currencies are concerned, the US dollar has been strengthening and this is largely due to the ongoing malaise in Europe. In the absence of better choices, the Australian, Canadian and Singaporean dollars are considered the least flawed paper currencies in the developed world. Amongst the currencies of the developing world, both the yuan and the Indian rupee could be undervalued and offer long-term potential.
Finally, over in the government debt markets, yields have risen sharply and the trend is still up. It is worth mentioning that despite US Federal Reserve Chairman Ben Bernanke's "quantitative easing" efforts to keep interest-rates low, bond yields are not complying. Most of the developed economies of the world are broke and you should not lend your money to insolvent governments. Various government bond markets could be in a bubble.
(HK Edition 12/11/2010 page2)