Wednesday, June 13, 2007

Reduce the gearing

Just like in any trade, there are good times and there are bad times, and business can be quiet as well. If you have realized some gains during the recent short rally on low liners and the second board counters in the KLSE, well and good. If not, then you may have to wait a bit longer. However for those who have overbought recently, it would be advisable to sell into rallies or trim your positions since the timing is not quite right.

Expectancy of an interest rate hike in the US and/or in other countries to contain rising inflation could be ‘the talk of the town’ for the next couple of weeks. So will higher defaults in sub prime housing loans if US interest rates unexpectedly rise instead of fall. The huge increase in May home foreclosures in the US already looks frightening – a 350% rise in California and an overall 90% rise in the US, year on year.

While the ‘Sell in May’ phenomenon did not materialize (unlike in 2006 I made no mention of it this year); hedge funds had been selling down their stock holdings in the KLSE. If we look at the last few days appreciation of the USD against Asian currencies, the ‘carry trades’ funds could be switching the money to the US to buy into treasury bonds since they yield better interest rates and provide realized foreign currency gains, to cover their yen denominated loans (Yen – Ringgit / Asian currencies – USD). Remember these hedge funds have huge financial muscle, usually backed up with ‘ridiculous’ finance gearing from global banks, therefore they can move markets.

By coincidence, the Yi chart depicts some big obstacles to cross which indicate that falls may lie ahead. The reason why I recently fret on the shortened May rally! These are the times when we cannot make much even if we can see forthcoming rises and falls in the share market. It is wiser to play safe.

Therefore it is time to under weigh your stock holdings (try to hold on to good stocks and some second board counters) to preserve capital or reduce your financial gearing in case of falls caused by uncertainties. No investor, no matter how big, really likes uncertainties.

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