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8:45 am  Monday  26 September 2011

All of us watching the stock markets worldwide are likely facing a lot of discouragement right now.  Practically everyone is expecting the markets to be more volatile in the coming week.  Consequently, risk averse people will keep out lest they implode from nervousness.

Last week, what spooked the market into the disarray we now see was not so much Europe but the actions of the U.S. Federal Reserve.  People were expecting a liquidity injection by the U.S. central bank which did not appear forthcoming.  The FED will simply buy short maturity government bonds and sell the very long maturities. In effect, there will be no liquidity infusion forthcoming; and given that Europe is already suffering from dollar liquidity, everybody who wanted to get out of positions that required liquidity was out the door.  No wonder gold, silver and copper futures started tumbling down in record losses.  Oil futures also crumbled under the weight of hedge funds unwinding long oil contracts both in the commodities and options markets.

It is really an exodus to the very safe refuge of cash by all kinds of investors.  The biggest fear is that the U.S. economy will be headed nowhere else but to the second dip.  The biggest fear factor: unemployment.  Around 15 million Americans are out of a job.  Also, 65% of Americans aged 21 to 29 have moved back with their parents.  The aggregate result is a downward spiral in demand for housing and durable goods which are essentially the backbone of the U.S. industry.

Nevertheless, it appears that the bearish sentiment in the U.S. has little to do with economic activity.  Railroad shipments, according to data from the Association of American Railroads in Washington are at their highest in 3 years.  Total rail volume averaged 381,831 carloads in August, the highest since October 2008 when the downturn due to the global financial crisis accelerated.  The U.S. economy  may be in a slow growth environment, but shipment of goods data do not indicate that a recession has taken hold.  What the market is doing is anticipating a recession down the road.  For investors, all bets are off at the moment.  The mood is just too scary to jump back in.

In our stock market, the same sentiment holds true; the economy is chugging along quite well, but global sentiment is weighing down on everything.  In spite of compelling valuations, people are sitting on their hands.  I cannot blame them.  It is pointless to be the hero in a market such as this.  The best thing to do is to sit and wait rather than outguess the market.   It would be wise to keep an eye on the cheap ones like EDC, DMC and SCC because they will surely attract serious portfolios when all the dust clears.  I will be thinking over the mining story while I watch the commodities markets.  I looks to me that hedge funds are unwinding long commodities positions which removes the speculative premium over metals prices.  We have to see where it settles before making any more commitments.

Anyway, we cannot leave caution to the wind, but, it is not a time to give up.  Remember, the Chinese character for crisis is a combination of danger and opportunity.

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