On Monday, we had a fantastic stock market rally after the US Treasury engineered a takeover of troubled mortgage giants Fannie Mae and Freddie Mac. Regardless of it being the costliest bailout in US financial history, investors’ confidence were restored… for a while.
Suckers, er, investors rushed into the stock market again, picking up oversold stocks as they anticipated a sustained rally, like what happened in March this year, when the US government arranged the Bear Stearns bailout.
However, the mood quickly turned sour as the great fanfare was interrupted by a harsh reality check. A massive stampede through the exit worsened the already shaky sentiment. This melodrama played out in the space of a few days which left me wondering over our obsession in restoring false confidence where there is none.
According to Adam Smith, the market operates by an “invisible hand,” and when governments tried to intervene, they are usually met with undesirable results. Haven’t we had enough of over-exuberance during the bull run? Why can’t we make do with a healthy dose of pessimism and fear?
Speaking of fear, stark naked fear has descended on stock markets everywhere. Wall Street is in a bloodbath and Asian markets are not having an easy time either. The Straits Times Index dropped over 30% from its zenith and Shanghai ‘A’ index tumbled over 65%. Seen from a positive lens, it is a sign that we are closer to bottoming out though.
For me, I am trying to stay calm in this bear market. Yes, I am out of the money but the reasons for which I bought my portfolio of bluechips had not changed fundamentally. Dumping everything and deserting the ship now is really ill-advised.
Neither am I risking money at the moment. Of late, the stock market only exhibited two behaviors, high volatility and narrow range fluctuations. Not the kind of battlegrounds recommended for retail investors.
I have some gold holdings which I accumulated over the years. While there is a major fall to $745 from over $1000, it only serves to confirm gold is no longer the flavor of the month. Instead, the US dollar has become the new poster girl.
Gold (our ever-faithful old maid) is trying to find support at $745 but it is likely to fall below $700 before stabilizing, especially if large funds heavily involved in commodities continue their selling frenzy with little regard to underlying fundamentals. Can’t blame them… the recent collapse of commoditiy giants, Semgroup and Ospraie Fund, must have chilled their hearts.
Nevertheless, wide-spread credit squeeze and massive bailouts will require the money printing machines to be turned on full-time, and this makes gold an attractive investment.
In the short to mid-term, gold prices is intertwined to the fate of crude oil which is trying its utmost to stay above $100. There is hope as Hurricane Ike may curtail major supply and refinery capacity in Texas Gulf Coast. OPEC, the influential oil cartel, also threw their weight behind slackening oil prices. In an official statement issued after this week’s meeting, a decision was made to reduce crude output: “We will order production cutbacks to align supply and demand.”
I will discuss more about financial turmoil over the weekend. Meanwhile, my advice is that no matter how heavy the storm is, it will blow over. Now is a good time to examine our portfolio and ask a few critical questions. If you are comfortable, then hang onto your core holdings of stocks, gold or bonds. Don’t throw the babies out with the grimy water.
When the big boys (mutual funds, hedge funds, pension funds, etc.) stop selling and closing down, they will be in the mood to buy again. After all, they can’t have cash lying around and in a volatile market, they will seek the safe haven of blue chips.