I have been bullish about stocks despite the Euro debt crisis mainly because I felt the Euro problems were mainly confined to the PIGs which were small countries and the largest among them, Spain, had no problems with its recent Government bond auctions.  The recent strength in the Euro probably signals that this view is growing that while we may have austerity cuts, the weaker Euro will promote services and exports which should offset some of the public sector spending cuts.

But economic growth in some of the major economies has started to falter.....as fiscal and monetary packages started to end.  The biggest concern was from the US where a recent comment by Fed Chairman Bernanke in his semi-annual briefing of the Senate Banking activity, signalled a weaker than expected US economy but NO remedial action yet.  There were two Bernanke comments which spooked investors: a) "somewhat weaker outlook for the economy" ; b)  "unusually uncertain" economic outlook.  While he did acknowledge that the FED would take action if the economy started to falter......he added that no action was required now !.   This to me means more moderate growth but not negative growth.......which is why I am bullish because it means that the Fed and other Global Central Banks would need to keep interest rates at near zero levels for at least another year.  This is good for stocks who are all now trading at earnings yields in excess of 8% and on historically low PERs.

But market Guru Roubini remains very bearish and talks about a "double dip" in a recent posting.   He ends off by saying that we should fasten our seat belts for a bumpy ride.  Maybe he is right.....I think the uncertainty from the Euro crisis should continue until the end of Q3-2010.  That gives sufficient time for governments, investors to come to grips with the extent of the problem and to come out with a strategy. 

The key remains corporate earnings and if they come in strong, as I expect they will, this will be a catalyst for that liquidity to come back into equities.  Meanwhile the money seems to have gone into US Treasuries but long yields are still around 3% and no where near the 2% when this crisis first started.

I have been asking investors to use the VIX index as a measure of uncertainty and risks and suggested that a stabilisation below 30 is a signal to start coming back into equities.  Despite Bernanke's and Roubini's recent comments - the VIX remains around the 25 level (see chart below).

Risk Averse ?!

If you are risk averse but dont want to put your money in the bank and earn less that 0.5% interest with domestic inflation at 2-3%, you may want to consider looking at some of the stocks in My Dividend Yield portfolio - these companies with strong balance sheets should give you a range of 5-10% but look out for liquidity and dont expect much capital gain - you are there for the yield and the strong balance sheet provides some downside protection to the stock price.

Prepared to take more risk ?!

I am in the group that is prepared to take more risk because i believe we will be in an extended low interest rate environment, a confirmation that the earnings recovery is ontrack will validate that stocks are "cheap" in PER and earnings yield terms.  This means that once stability and volumes return - stocks could see another liquidity driven volume rally - maybe into Q4-2010.  This is why I said in a recent newspaper/TV interview that I felt that the STI Index could hit 3500 before the end of 2010.  Just on pure PER terms (and subject to no major earnings surprises by index heavy weights), I expect the current earnings season will be the catalyst for the rally.

I have been receiving many comments that the "resident bear" seems to be very bullish.   If you think I am right and are prepared to take some risks - you can start to nibble at the stocs in My Stock Picks - watching carefully for their earnings reports and forward guidance plus our updated views as and when they are released.