Are we done yet?

Omedeto! Welcome to financial geeks!
I'm financial foorensu.

Before we start, what's foorensu?

It’s actually フレンズ, japanese for the word Friends. Yeah, i know, the actual romanji should read fu-re-n-zu, but what da heck, just gotta give it a slight twist to make it ... more me!

'nuff about the nick. Ok. Let’s see what we have here. Today is 5th of January 2007. In financial terms, today is the 3rd trading day of the year.

As at 5pm, Malaysia KLCI stands at 1,120pts, continue to up 2 points after the strong bull run 2 days ago. not too bad as this is a healthy consolidation.

The investors' sentiments are very positive due to the recent Bull Run. Even the Christmas and New Year eve parties are more happening in KL than before. KLCI was below 900pts back in May 2006, but then it surged past 980, 1000, 1050, 1080, and now, broke through 1100. Omedeto!!!

But hey, wait a minute. Isn't there a saying sounds like this?

"what goes up, must comes down"

If you asked any fundamentalist like the great Warren Buffet or even Sir Isaac Newton who has discovered the law of gravity will agree with the abovementioned statement. What goes up can't go up forever. Similarly, what goes down can't go down forever.

Therefore the million dollar question is this, "Are we done yet???"

Today on Bloomberg TV, Bear Sterns Chief Strategist believes that 2007 will be a bull year for US equity. Similarly, Bill Gross from Pimco also predicted that US Fed Fund Rate will be cut to 4.25% by year end from its current level of 5.25%. (note: rate cut? what the heck? well, we can explore this in more details in my next entry perhaps).

This news is very positive for the stock market. The rationale is that US economy growth is expected to slow, and thus, an easing monetary policy is expected to be in place in order to stimulate the slowing economy.

The key word here is Expectation.

finance #101: Prices Fluctuates based on Expectation.

simple illustration:-

Expectation of slowing economy ---> central bank is expected to cut rates ---> more friendly business environment ---> better earnings ---> increase in firms' values ---> increase in share price.

Thus, one of the key risks going forward that will halt the bull run will be this:

The US growth does not slow as fast as expected.

If this materialises, what will happen?

Expectation of rate cut --- doesn't materialise, as there are no foundation for them to do so.
Expectation of better earnings --- might not materialise.
Share prices? --- fall back to its fair value.

So back to the question of "are we done yet?" The answer is no, not yet. Personally I believe that we could ride on this bull run for awhile more due to the January effect before something happen that turn the investors' sentiment from positive to negative. In Malaysia, we're abit luckier because the 9MP and Mergers talk will continue to keep our market supported for awhile.

Two set of numbers would provide us some clues if we do track it closely.

1) The volume traded on KLCI. Make sure that it is not on a declining trend. If it does, well, first sign of the tapering of investors' confidence.

2) US Growth number - i.e. the GDP (Gross Domestic Product). The magnitude of change would be the key focus.

Till then, will be back for more!

What’s your thought?