Mike Wright asked:


Markets endured another volatile week, with US markets had a better time of it than their European counterparts. There were some clear psychological levels in play last week, as markets fell to fresh multi year lows, before recovering in the second half of the week. The Dow hit 11,000 for the first time since July 2006, and the S&P 500 hit 1,200 for the first time since October 2005. The CAC came close to hitting 4,000 for the first time since May 2005, the Dax hit 6000 for the first time since October 2006, and the FTSE reached its lowest point for over three years.

Markets started the week in promising fashion. News of a bailout for embattled US Government sponsored banks Freddie Mac and Fannie Mae, hit the wires on Sunday, buoying the financial sector throughout Europe and the US. Alliance & Leicester also added cheer when Santander confirmed a takeover proposal, sending the shares up around 50% on the day. However, the sellers soon gained traction. A run on regional bank IndyMac Bancorp spurred its collapse over the previous weekend, and a takeover by the Federal Deposit Insurance Corporation. Both clients and speculators are pulling their money out of other regional banks, as panic spreads over the prospect of runs on other regional banks.

The FTSE 100 was still one of the worst performers of the main global indices last week. The problem for the UK benchmark index is that it has one of the heaviest weightings of financial and energy stocks of all the major stock markets. Oil stocks have come under pressure over the last couple of days and financial stocks endured a tortuous week. Financial stocks such as Barlcays and RBS were trampled on as investors fled out of banking stocks and equities in general. The RBS share price at one point fell below the level it was at around the time of the much trumpeted takeover of Natwest. At one stage RBS fell 50 pence below its rights issue and Barclays 40 pence below its share offering. Investors punished UK banks with the highest exposure to the US.

Towards the end of the week, financial stocks recovered strongly. Traders bought into the banks, believing they were pushed down too hard too fast. In the short term at least it looks as though investors are confident that banks have been beaten down well below fair value, and were stepping in to pick up some bargains. Better than expected earnings from JP Morgan, Coca Cola, and United Technologies helped fuel the Wednesday/ Thursday rally further. Friday’s better than expected results from Citi Group helped counter balance some disappointing results from Merrill Lynch, Google, and Microsoft. The search giant Google saw Pay Per Click growth slow slightly, but stated that they were well positioned for a down turn, as consumers go online in search of bargains.

After the volatility of the last seven days, thankfully the coming week is much quieter in comparison. The first top tier announcement of note is BOE governor Mervyn King speaking in the morning on Tuesday, followed by FOMC member Plosser speaking around Midday. These speeches come ahead of the release of the minutes from the last FOMC meeting on Wednesday morning. UK rates policy is stuck between fighting inflation and helping the economy in difficult times. The minutes will be analysed extremely closely. Thursday brings UK retail sales, and US existing home sales. Friday is perhaps the busiest day of the week, with UK GDP figures, followed by US Core durable goods orders and new home sales in the afternoon.

Despite the late rally off technical lows of many indices, conditions are still fragile for the global economy. The US Housing Market Index fell to new lows for July, as the US housing collapse continues to show no signs of recovery. US CPI figures rose 9.2% year on year. Consumer prices surged the most since 1982, a time when interest rates were at 15.5%. Such inflation readings strongly counter the argument for a further rate cut from the US Government. The stagflation scenario seems to be taking one step closer to reality, as inflation rockets, and US retail sales growth slows to just 0.1%.

The UK is certainly not immune from this, with public sector workers striking over below inflation wage increases. Jim Rogers of the hedge fund Rogers Holdings is famous for accurately predicting that Gold would reach $1,000 and oil $100. He was less than sanguine about the state of the UK economy. He recently said “The UK economy has the highest rate of inflation since 1986” He implied that the UK government had the tendency to massage the figures, so if they are admitting it’s bad “You know it’s real bad”.

Traders at BetOnMarkets believes that Last week’s late recovery could be a useful point to enter trades predicting the sell off will continue. A No Touch trade predicting that the FTSE 100 won’t touch 6200 at any time during the next 6 months could return 21%.



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PS Thoo asked:


When the market is on a bull run, as it was in the earlier part of the year, or during the first half of 2007, investors tend to neglect risks. However recent events (triggered by US subprime and financial meltdown) demonstrated that investing in stock markets isn’t for the faint of heart. A case in point is that for the past few months, wild swings of daily stock market indexes by few percentage points were common. How does one manage his or her portfolio in such volatility? For some, unloading all their stocks and keep all their CASH safely in the bank may sound the safest option. Others may switch part or entire portfolio to other safer instruments such as gold or commodities, or cash instruments.

Getting It Right At The Start

While timing everything right seems impossible, there are better ways to manage one’s portfolio. Essentially, getting it right at the start is important. One will worry less if one’s portfolio is structured right to start off with, that is, maintain an asset allocation strategy based on one’s personal risk profile at the very first place. With asset allocation, diversify one’s portfolio is the key, in order to reduce over dependence of a specific asset class, that is.

Diversify

One such method is to consider various instruments that have low correlation to one another. For example, while directly investing in individual stocks has good direct exposure, consider investing in unit trusts or ETFs, where typically the funds will be invested in a basket of stocks instead of one individual stock. In principal, stocks tend to be a lot more volatile than equity unit trusts for the reason that funds tend to be more diversified because they are invested in multiple stocks.

Other low correlation asset classes include bonds, commodities (gold, metals) and real estate properties. Gold is a perfect case in point, where prices have escalated by around 50% from 2007 to-date due to sky rocketing crude oil prices and perception of safe-heaven characteristic.

Adopt Mid to Long Term Horizon

The longer the time horizon is, the more volatility one can tolerate as one has more time to recover from short term volatility. Putting a mid to long term strategy in place will certainly allow an investor to take into consideration factors that will affect one’s portfolio, such as market cycles, political stability and economic swings.

Stay Objective

While i agree that investing in general should be taken with a long term perspective, it is not a hard and fast rule as it is also important to stay objective and be alert to potential major changes in business or economic environment from both local and global perspective. For example, while investing in China equity at one point (prior to 2007) may be a great idea tapping into the explosive growth of Chinese companies, an investor should consider unloading some or all of the funds invested to else where when Chinese stocks were trading at lofty and unrealistic valuations. Another example is when subprime issues first surfaced, it is wise to find out from the brokers or agents immediately where their property trust funds were invested. It is wise to liquidate such investments when the stakes are high!

Invest Regularly

Invest regularly is also a good way to manage periodic market volatility. For many this could be in the form of monthly investment, directly from their monthly income or retirement fund savings. In essence one will continue to invest a particular sum of money regardless of whether the market rises or falls. This method is also commonly termed as Dollar Cost Averaging.

One may choose to invest more regularly during the bull market and less regularly during the bear market. However, again there is really no hard and fast rule, it all depends on each individual’s risk profile and preference.



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