Saturday, January 26, 2008

Mr. Market gets Manic! this is what a Golden Period looks like!
Last week was a time when investors wondered what they have gotten themselves into. They thought they were invested in good sound businesses not casino chips (you every wonder why DBS bank is called a "blue chip" company?) but the recent wild fluctuation on the market makes a rollercoaster ride at Magic Mountain look like a walk in the park.
Strangely just when investors thought the stock market was about to collapse on Tuesday, it staged a sharp rebound after the Fed decided to cut rates by 0.75%. Markets panic, Federal Reserve panic....oh my is the global economy as we know it coming to an end.
It was explained in the media that the recent turmoil is due to investors' worry about a US recession. However, if you have been reading the financial news you will know that the US recession is one of the most talked about recession - there was talk about a US slowdown since the end-2006 and in early 2007 Greenspan warned of a recession...and so on. Also, my own monitoring of US fund managers have been doing show they have been preparing for a consumer slowdown by moving to defensive stocks such consumer staples and away from discretionaries. Home builders and banks whose earnings are expected to fall have been sold down. Why would markets panic about an event that is well anticipated?
The market might be higher or lower by the end of the year depending on the length and depth of the US slowdown/recession and its effect on the global economy. The jury is still out and the markets are suppose to adjust as more economic data comes out. My belief is the instability in the market is actually built-in - there were several such sharp selloffs in the past when the economic outlook was alot better - end 2006, Feb/March 2007, Aug 2007 ...and the market recovered from each of them with or without intervention from the Fed.

What is the source of inherent instability in the market?

1. Derivatives. Futures, options, etc. These were supposed to be used for hedging your equity positions but only a small % of the contracts are used for this purpose. These products allow hot (and fast) money to make big bets on the direction of the markets. The notional amount that is traded in derivatives is U$510 trillion. This is the equivalent of millions of dollars betting on the earnings of a lemonade stall. One example of how the derivatives market can add to volatility of the underlying assets goes like this : issuers of Hang Seng put warrants were forced to short the futures contract after the Hang Seng took a sharp plunge to limited their losses - that cause the Hang Seng to fall further. On the rebound, call warrant issuers are forced to limit their losses by buying HSI futures causing the HSI to rise further.

2, Leverage. An important source of liquidity that fuel the rise in almost all markets - commodities, oil, gold, stocks ...etc is the Yen. The Yen can be borrowed cheaply and used to speculate on the markets. Whenever the Yen rises, it forces the speculators to selloff assets to pay back their Yen denominated loans. The other form of leverage is margin trading which is now more widespread than before due to aggressive promotion by brokerages. When the underlying assets fall, traders are forced to sell to meet margin calls...On Tuesday the Bombay stock exchange shut down after plunging 10% at the open because brokerages were dumping stocks due to margin calls, in Australia margin calls reached a record high on other words, there is a whole lot of selling that has nothing to do with the US recession, traders were selling because they were forced to do it.
The recent market panic caused the Fed to panic and cut rates by a huge 0.75%. The market is again "threatening convulsion" if the Fed does not cut by 0.5% in its coming meeting. The problem with these "emergency" rate cuts to calm the market is they will add to instability later on. The Fed is suppose to act on the best evidence about the economy is now forced to react to the market. Too many rate cuts and we might get another bubble, more instability and so on. We are definitely in for more volatility, more hair raising who is in charge of this place?...I'm afraid nobody...


Anonymous said...

I love your last comment. Who is in charge? Nobody. If GIC and Temasek holding melt down - who is in charge? Nobody. Not the finance minister, not LKY, not Ho Ching, not LHL. Really amazing.

Bart JP said...

There is also the concern that the Fed is running out of options. With interest rate so low, there isn't a lot more the Fed can do anymore.

Anonymous said...

Dow Jones fell today - it's still Friday in NY - and so I suppose the world's bourses are again waiting to commit harakiri again on Monday :-).

But really all the panicky waves of sell-offs - and subsequent massive buying-backs - over the last week were created by the big market movers. Hedge funds.

What so surprising? No need for conspiracy thinking really.

Put in the same position with billions $ to play with, one would do the same to make profit.

The Fed rate is used just as a common trigger; how much that rate is irrelevant for these market movers.

Some excuse has to be found to create the turbulence without which where is the opportunity to scoop up cheap stocks?

So what are governments and stock market regulators - including our own beloved PM and MM - doing right now?

Probably sipping wine in Davos and talking about other less urgent issues like climate change.

Except China. It is returning blow for blow. In the last few days, it has allowed mainlanders - with massive savings and hitherto restricted only to put in domestic banks and stocks - to now invest in Singapore and Hongkong stockmarkets.

China stocks listed in Singapore bourse have already shot up 10% because of this. And the strong rebound of Hang Seng and Strait Times indices can only be attributed to this China's move.

And by the way, China is not so dependent on export to the US as it has been made up to be. This recent report by the Economist debunks the myth that China's economy is highly dependent on exports and will be badly affected by a US recession.

It said that "And even if the contribution from net exports fell to zero, China's GDP growth would still be close to 9% thanks to strong domestic demand."

Experts at FundSuperMart Seminar on 24 Jan at Swissotel attended by thousands also reported that even with a US recession, China's growth for 2008 will still be 8%.

This is a historical moment. Hold your breath. Asia will either fall or rise at this juncture. China and hopefully also India are leading the way in stabilising the regional stock markets. They have enough financial and economic clout to do so.

LuckySingaporean said...

Bart, is estimated to compensate for the housing and consumer slowdown, the Fed needs to get the funds rate down to 1%. However, with the US$ fast losing its value they risk spooking investors... if you invested in US equities on average you probably gained nothing or lost money due to the fall in the US$ over the past few years.

I was watching the US$ when the markets were facing meltdown on Monday & Tuesday, it was heading towards 105 yen. But when the Fed slash rates on Wednesday it actually spiked up to 107.5 because the market felt better for a while. I think the main problem confidence in the US economy - it is disappearing fast.

I'm surprised the ECB guys don't look like they are working too closely with the US Fed, co-ordinated interest rate cuts and sending the right signals can help alot. The TAF thing they did across central banks worked quite well...and they should extend their coorperation to get the global economy going. The SG rogue trader case, they didn't even inform the US Fed until Wednesday and they were dumping $95B worth of index futures on Monday & Tuesday. Now that really makes the US Fed look like reacted to the wrong signal - my belief is that the market was going to fall quite heavily anyway even without that rogue trader.

I wonder what will happen next week when the Fed is suppose to cut rates one more time to 3%....and Wednesday they have GDP report which will show whether the Fed has gone too far with those cuts. Looks like another rollercoaster ride.

LuckySingaporean said...
This comment has been removed by the author.
LuckySingaporean said...


I like the chinese stocks I bought them near the Aug 07 bottom and still got burnt in the recent rout. I'm obviously not too happy or LUCKY....I actually watch some of them double and then get slashed 60%. I'm keeping some "firepower" and will be leaving the bargains this time to others.

The Indian economy which is fuel mainly by infrastructure projects and has little exports appear to be most immune to a US slowdown. The chinese economy which is fuelled in part by 9 million people moving from the rural to urban areas per month should be able to grow....their export sector will see a slowdown. But I read somewhere that a US recession will only knock off 2% from its 11% growth and will help to cool its overheated economy.

As for the 170pt drop on the DOW on Friday, ...every day it either has triple digit gains or losses, I thought by now Asian investors would be numb to it could well rise 100+pts on Monday and so on. Given the 800pts rise from Wednesday's intraday bottom, the fall might be due to traders closing their position ahead of the weekend.

Merlot said...

I am not fearful.. our insightful MM has predicted that SG would not be affected by the US recession.... I mean, why care what is happening to the rest of the world?

"I do not believe the Chinese economy is immune to a US slowdown, nor is the Indian economy. But I believe they are now much less... influenced by US recession because they’ve got enough going in their own internal economy. They can increase investments in infrastructure; they can increase consumption; they can increase all their projects and keep the economy buoyant," he said.

Wrapping up his five—day visit to Saudi Arabia, Mr Lee said if China can maintain economic growth at around eight to nine per cent a year, then it could weather the economic storm well.

How well Singapore does, he said, will depend on how other economies fare, though he feels Singapore should be able to ride on the healthy performance of China and India.

"Our total trade is 300 per cent of our GDP (gross domestic product). So when the external trade goes down, you tell me how we buffer ourselves. But the external trade may not go down so dramatically because of India and China," he said.

Mr Lee said the current situation is unlike the Asian financial crisis in 1997, when China and India were almost immediately affected. — CNA/ac

Bart JP said...


It might well be hedge-funds, it might well be the excess of liquidity that is causing all the dramatic swings in the market. But a good investor must learn to block out all these. Back in Jul, Aug 07, it was already clear sub-prime will cause serious damage to the US economy. The fundamentals were deteriorating - rising inflation, slowing growth, liquidity crunch. I suggested then that STI 3600 was a good time to bail.

A good investor should have a strong grip on the fundamentals rather than trying to time the market, or worry too much about these market swings. What is worrying is that fundamentals are still worsening today. And the Fed may have cut interest rates too aggressively, too impulsively, pushing monetary policies towards liquidity trap.

21st dec 2012 said...

Mental Turmoil? Don't worry! A 'prescription' from our mental minister will rid us of all mental stress. It is more effective than seeing a doctor.

Anonymous said...

As is clear in the name, I am a moron when it comes to big business, but I see geomancers are quoted in National Newspaper. So I see no harm quoting myself here.

Ex Indonesian President Suharto was able to take a piece of biscuit orally just a day or so before he passed away.There is a Chinese Saying: 'Fan Guang Hui Zhao'; meaning 'a reflection' of light. A short return of life when applied to describe something/one about to end.

The strong recoveries into the posiitve in the last three trading days(23/24/25 Jan 08) at the Singapore Stock Exchange seem to show spectre the so-called reflection. Like geomancer, I could go wrong too.

Anonymous said...

I am a junior doctor in one of the "restructured" healthcare clusters in sg. Not only are more and more of my colleagues going into Psychiatry training (used to be very unpopular) which seems lucrative nowadays looking at the way our country is run, but also the rising levels of stress and depression amongst junior doctors aka slaves in an increasingly understaffed and profit driven public health system. But the government is unfazed, because there is always an increasingly available supply of foreigners eager to replace those lost to the private sector and emigration. They will always maintain their profit margin in an increasingly Medieval environment.

Unfortunate Singaporean said...

Hello Lucky Singaporean

Quite frankly, i feel the whole stock market is one big fairy tale (only a few actually live happily ever after).

Any move in the mkt can be rationalized away either by sentiments or fundamentals. But you point out a factor often overlooked.... the technical variable (nothing to do with sentiment or fundamentals).

(from your opposite in Bizarro world)

Anonymous said...

hi, jus wondering.. wat do u do really? r u an actuary?