It is interesting to observe that the Dow had a secular bull run for 15 years. It started from a base of mere 2000 points in mid 1985 and peaked at 12,000 point in the eve of 2nd millennium. It is a superb growth of 6 fold from its base. Assuming a stock in Dow has beta of 4 times would have achieved a growth of 24 fold in mere 15 years. This was the glory days in US stock markets due to the boom in the technology sectors and consumerism boom. The tech boom phase has seen alternative bourse for high growth tech companies to be listed proliferated all over the world. The most well known would be the NASDAQ.
The Y2k bugs has cursed the market for a recession at the inception of the new millennium. The curse sent the market to long spell of 3 years down trend from 2000 to 2003. The down trend was also mainly due to the well known tech bust in Silicon Valley as the tech sector was overly speculated. From the economic point of view, this recession is deemed necessary evil to wash out tech companies built on hype rather than real fundamental business supported with genuine R&D. One major characteristic of tech companies was high spending on R&D. Hence, the down trend was deemed a correction in the long term trend of the market which is healthy.
The market sentiment was rebuilt in 2004 where tonnes of fresh capital was poured into the market. This 2nd phase of secular bull run of 4 1/2 years has escalated the market from 8000 to 14000 points - a new high! This bull run also a help emerging market all over world chartering to new high which was not seen before. As the continuation of consumerism boom in the US and lead strong growth of export from emerging economy to the US. The fast expansion and sustaining of GDP in emerging economy has resulted huge foreign hedge funds pouring billions of dollars into these markets and sending these equity markets into new high. Shanghai Stock Exchange experienced a phenomenal growth of 6 fold from a mere 1,000 point in 2006 to 6,000 points at the peak in 2007.
As a Chinese proverb says: "Neither the scenery is always flourishing nor the roses are forever rosy". In mid 2007, Bear Stearn sent a shocking news to the market with the announcement that some of it funds built on sub prime loans were facing bankruptcy. When the negative news spread in lightning speed, the market all over the world were in tail spin mode. The fears heighten with least control features as most to the participants were caught off-guarded. Who has predicted that the biggest and strongest market in the world would have collapsed? As this financial crisis was affecting the most important component of US GDP - Consumption, the real economy has also shrunk rapidly. It only took 1 and half year for the market to bottom 8000 point level.
As the dust settled, US Government intervened by bailed out the US credit market, the market started to calm down and the selling momentum also receded. Although the bad loans was absorbed by the Government, the US was facing high unemployment rate of 10% due to shrinkage of real economy. US being the most advanced financial market supported by the economy noble laureates, remedied it economy with a drug by the name of "Quantitative Easing" (QE). The QE is a monetary policy tool used by the Government to print money without underlying assets/security/collateral. The paper money printed is handed free to consumer hoping that it will spur consumer spending pulling the real economy out from negative territory.
The first round of QE began in March 2009 and concluded in March 2010. One of the primary goals was to increase the availability of credit in private markets to help revitalize mortgage lending and support the housing market. To accomplish this goal, the Fed purchased $1.25 trillion in mortgage-backed securities and $200 billion in federal agency debt (i.e., debt issued by Fannie Mae, Freddie Mac, and Ginnie Mae to fund the purchase of mortgage loans). To help lower interest rates in general (and thaw the frozen private
credit market), the Fed also purchased $300 billion in long-term Treasury securities.
The second round of QE, widely called QE2, began in November 2010 and is scheduled to conclude by the end of the second quarter of 2011. Its goal is to strengthen the economic recovery and combat a possible Japanese-style deflationary outcome. QE2 works toward both of these objectives by fostering economic growth through lower interest rates intended to spur consumer spending and business investment. During QE2, the Fed will purchase up to $600 billion in long-term Treasury securities.
As the dust settled, US Government intervened by bailed out the US credit market, the market started to calm down and the selling momentum also receded. Although the bad loans was absorbed by the Government, the US was facing high unemployment rate of 10% due to shrinkage of real economy. US being the most advanced financial market supported by the economy noble laureates, remedied it economy with a drug by the name of "Quantitative Easing" (QE). The QE is a monetary policy tool used by the Government to print money without underlying assets/security/collateral. The paper money printed is handed free to consumer hoping that it will spur consumer spending pulling the real economy out from negative territory.
The first round of QE began in March 2009 and concluded in March 2010. One of the primary goals was to increase the availability of credit in private markets to help revitalize mortgage lending and support the housing market. To accomplish this goal, the Fed purchased $1.25 trillion in mortgage-backed securities and $200 billion in federal agency debt (i.e., debt issued by Fannie Mae, Freddie Mac, and Ginnie Mae to fund the purchase of mortgage loans). To help lower interest rates in general (and thaw the frozen private
credit market), the Fed also purchased $300 billion in long-term Treasury securities.
The second round of QE, widely called QE2, began in November 2010 and is scheduled to conclude by the end of the second quarter of 2011. Its goal is to strengthen the economic recovery and combat a possible Japanese-style deflationary outcome. QE2 works toward both of these objectives by fostering economic growth through lower interest rates intended to spur consumer spending and business investment. During QE2, the Fed will purchase up to $600 billion in long-term Treasury securities.
In summary, QE1 - USD1.75 trillion and QE2 - USD0.6 trillion with a total USD2.35 trillion. How huge is this amount? It was 11.75x of Malaysian 2010 USD200 billion GDP. It simply means US has the ability to create almost 12 economy of Malaysian size out of thin air. Scary!
It is really interesting to see Dow's directions for the last two year was highly correlated with the timing of QE. Dow has achieved a new high at 12,900 in April and corrected to 12,000 level just before QE2 ended in June 2011. With the anticipation of QE3, rallied again for one month followed by a blood shed sell down started in July 2011. The sell down mainly due to the European debt crisis.
Now it reached the climax of this article on how will the Dow move from here. The two major observations are as follows:
1. Timing
2. how severe will the sell down be?
1st bull run (1985 to 2000) last for 15 years.
2nd bull run (2003 to 2007) last for 4 1/2 years
3rd bull run (2009 to 2011 last for 2 years.
1st bear market (2000 to 2003) last for 3 years
2nd bear market (2007/8 to 2009) last for 1 1/2 years.
if the peak and through trend persist, the 3rd bear market shall be less than a less year, probably 9 months. Theoretically, the market should rebound in Q2 2012 provided QE3 will be implemented and European Debt Crisis is temporarily resolve. The short 9 months of sell down will also mean it will be most fast and furious down trend ever in US history. It is understandable as rally in 3rd bull run was built without real fundamental change in the US economy structure - unemployment remain high and net import remain high and the economy remain highly geared.
Should the Fed is unable to implement QE3, the second observation will be answered by itself. Should the market does not rally from the rebound at 8,000 level, it could spell the end of US economy super-power history in the last 30 years. It will also complete the long term H&S on the last leg down.
It is really interesting to see Dow's directions for the last two year was highly correlated with the timing of QE. Dow has achieved a new high at 12,900 in April and corrected to 12,000 level just before QE2 ended in June 2011. With the anticipation of QE3, rallied again for one month followed by a blood shed sell down started in July 2011. The sell down mainly due to the European debt crisis.
Now it reached the climax of this article on how will the Dow move from here. The two major observations are as follows:
1. Timing
2. how severe will the sell down be?
1st bull run (1985 to 2000) last for 15 years.
2nd bull run (2003 to 2007) last for 4 1/2 years
3rd bull run (2009 to 2011 last for 2 years.
1st bear market (2000 to 2003) last for 3 years
2nd bear market (2007/8 to 2009) last for 1 1/2 years.
if the peak and through trend persist, the 3rd bear market shall be less than a less year, probably 9 months. Theoretically, the market should rebound in Q2 2012 provided QE3 will be implemented and European Debt Crisis is temporarily resolve. The short 9 months of sell down will also mean it will be most fast and furious down trend ever in US history. It is understandable as rally in 3rd bull run was built without real fundamental change in the US economy structure - unemployment remain high and net import remain high and the economy remain highly geared.
Should the Fed is unable to implement QE3, the second observation will be answered by itself. Should the market does not rally from the rebound at 8,000 level, it could spell the end of US economy super-power history in the last 30 years. It will also complete the long term H&S on the last leg down.
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