Wednesday, October 22, 2008

Why there COULD be a bottom for the market today or tomorrow or Friday......

UPDATE: Dow plunges 500pts, oil plunges t0 $67 per barrel. Lets see if the DOW can make a bottom by Friday 24.10.2008. I found a Jim Jubak video explaining what I was theorizing :
http://www.youtube.com/watch?v=l8xqYDWeYa0 . This short term selloff is about raising cash and redemptions rather than discounting a deflationary recession which I believe will come. In the longer term things are not so sanguine. A few months ago I highlighted the work of Nouriel Roubini in particular his "12 steps to financial disaster". To get out of this mess and break out of the 12 step there are more things the US govt must to and Roubini outlines it in this video: http://www.youtube.com/watch?v=JbDDJeQXob8&feature=related. The global economy is pretty much doomed if govts stop here and do nothing more - they really have to jump ahead of the curve and do much much more.

First of all, just let me qualify that I'm not an analyst or a financial expert. I invest for the long term and don't recommend anyone invest for short term because it is 'usually' unpredictable. I do scan through various markets surh as gold, oil, copper etc as part of my daily routine and read voraciously about what goes on around me - that includes going through most of the business news to know what goes on in the financial markets. What I'm going to say is based on what I observe and you shouldn't act on it - it is just for fun...and for you to flame me should I be wrong about this.

Here are a few of things I noticed in the markets:

1. Our STI & Hong Kong's HSI are actually leading the DOW. ...and that includes the DOW Futures. For a number of days, I noticed that the STI fell for no apparent reason and the DOW followed. The pattern recurred and is happening too often to be coincidence. It looks like funds are collectively selling Hong Kong then Singapore then New York.

2. Commodities are falling in tandem with each other including the safe haven gold. This tells me something about the selloff. People are selling for a reason and it is not fear.

3. In markets where foreign funds are not so active due to controls such as Malaysia, the falls are much smaller.

4. The US$ is rising against everything except the Yen.

5. This pattern of selling occurred after Lehman's collapse.

I've seen the above pattern occuring almost every other day for a number of weeks. What is going on???? Many analysts cited deleveraging as the reason. However, we have had almost one whole year of deleveraging already. The best explanation and the one I agree the most with is by Jim Jubak. Remember the Friday before Lehman Brothers' collapse? AIG was looking for $20B. After Lehman's collapse, AIG needed $85B urgently. $20B---->$85B in a few days. What happened when Lehman collapsed was it left a black hole in the books of AIG and they needed to raise cash immediately to patch it up. $85B was too big and the govt had step in to give AIG more time to sell assets. But AIG was not the only company with links to Lehman. Lehman's collapse resulted in hundreds of black holes in the balance sheet of many companies, hedge funds etc in US & Japan where Lehman was most active. All of them had to sell assets and close positions in commodities, equities and foreign currencies.
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Why do I think the market will find a near term bottom soon? Much of the derivatives associated with Lehman expires by this Friday. According to Jubak, the losses associated with Lehman's collapse will become clear and companies do not need to raise more cash once that happens. We can expect to see a near term bottom today or tomorrow in the DOW and Asian stock exchanges. This is a short term rally that may last for a few weeks before concerns about the recession creep in.
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11 comments:

Onlooker said...

Then it should follow that the commodities that are speculate by the ultra rich will return to the normal level just a thought.
IE thing would go back to normal price.

Anonymous said...

Dear Mr Lucky,

I have been reading your blog for more than a year; most for its political content. Honestly, I have high regards for your views as being a fellow Singaporean, our feeling is common.

From time to time, you also share with us your knowledge in finance and investment. I find them valuable and really appreciate the fact that you took pain to share your expertise with the readers.

Thank you very much.

AlphavilleSG said...

Lucky, although I am as optimistic, the other sign is the Libor spread is down (not as fast as it could go up) and T-bills yield remain above 1%, but a little voice tells me not, the next unwinding may be those CDS, as you know, the repackaging of derivative, essentially no one know what went where, who owns what, where the trail ends (basically losses aren't written off on balance sheets), this is where the pundits are saying, Lehman's collapse really exacerbate this rout (As with the fiasco of minibonds). And what are those worth $6 trillion or something?

Plus the deflationary outlook, with double whammy in equity and housing bust, more business will go bankrupt. We just hope that govts. can spend their way out of this, on top of the expected record deficit.

So even the most cautious could take a hit, I am thinking sector ETFs and averaging the buy-in might be a better idea.

AlphavilleSG said...

You're really good at this, wonder why haven't tried a stint with hedge funds. You can be a fat cat too! Why pissed about with peasants! :D

500pts? No sweat! What's shocking these days? LHL showing face in parliament?

From what I gather, most are leaning that credit default insurance isn't a bad deal, the problem is the lack of transparency in transaction and regulatory oversight, currently it seems more like pals helping extra servings onto each others plate.

When Lehman went under, AIG bearing the default risk saw its credit ratings cut, which meant it has to back its business with more collateral...

So, if the Jubak's call on a bear rally came true, I guess the next event to watch would be regulatory structure that will be put in place reinstating some trust, past election, Obama's number one priority maybe?

This totally suck when is it going to end!!!!

LuckySingaporean said...

AlphavilleSG,

Like I said all this divining the future is for fun...please don't put any real money into it.

I hate hedge funds and don't believe these people deserve to be paid so much. What purpose do they serve in this world?

laucheow said...

Hi Lucky

Stumbled onto your blog recently thanks to your insightful coverage of the Lehman Minibonds saga. Interesting that you also think a short-term tradable bottom might be in, and we might be due for a bear rally, however it's hard to know for sure. Some think a US election rally is due, they say that the market is pricing in an Obama victory, and once that becomes certain, it will bounce since markets hate uncertainty. Two more weeks to go...

As for Asian mkts leading the Dow, that's an interesting speculation. I've tried plotting the Nikkei closes vs Dow since 9/11 this year, and I can't seem to find any correlation except for a couple of anomalous days e.g. 10/17-10/21 (and given that Asian mkts were closed several days during this period) - it's more likely that the Dow is sensitive to major news first, and this is then reflected in the Nikkei the next day, in fact the Nikkei tends to overreact to the Dow.

But please lets discuss this more. I'm not too hopeful about the near future as well as earnings season is likely to suck quite bad and will be worse next quarter. The end of the next bear rally might be an ideal time to go short again...

LuckySingaporean said...

Take a closer look at this week. STI fell after the 400+pts jump in the DOW...that same night the DOW fell by a hefty amount.

We should bottom this week because the shock waves from Lehman would have ended. There should be a rally before the market react to the direction of the economy.

My belief is players are discounting different time horizons at the same time. That causes certain types of gyrations. In the short term, for example, SingTel's revenue will decline because people will be less likely to sign up for more expensive plans. Players with short term considerations will sell it down. Some people will sell because they saw the DOW plunging 400pts the day before. Very short term considerations - people sell because they are afraid others would sell. But longer term, SingTel is a defensive stock with a limited downside in revenues because handphones are a necessity these days. I notice in past crisis, the wave of selling cascade upon itself, continues for days and days. Then when this short term selling pressure is lifted, stocks rally until the demand from longer term investors diminished because most longer term investors are value investors don't like paying too much for their stocks. Then short term considerations come back again to push the stocks down.

I believe we are seeing the interplay between these 2 forces again. While Buffett buys, short term hedge funds dump....and they keep dumping to raise cash for redemption and due to Lehman. The moment this short term pressure is gone, we will jump up with a sharp rally. ...and as long the economy is weak or deteriorating, we will have another round of short term worries and selldown....this repeats until we get ourselves out of recession and go into a secular uptrend. People like Buffett who have bought for the long term will just ride this long term trend up. That is why I believe you can't be too wrong when you buy during recessions - unless it is a recession that the world does not recover from for decades....

Anonymous said...

De-regulation have left the Dow vulnerable to manipulation. Hence the daily wild swings.

Much like meritocracy in SG. No more level playing field.

laucheow said...

Hmm, Lucky, you are right abt the most recent STI vs. Dow. I was looking at Nikkei vs Dow instead. Sorry to say this, but most people in the US tend to write off the SGX as irrelevant. In the larger scheme of things maybe that's true, but there could be something to this short-term correlation. Need to plot more historical data. Then again, it could just be statistical noise, or due to some other random events. My take is the SGX is too small a player in world markets and these moves could be just coincidence unless we see a pattern over time.

As for a near-term bottom, I agree that once all the sellers are gone, we will see a rally. The question is when will they be gone? This article argues that we may yet revisit the lows before we rally: http://www.minyanville.com/articles/spx-charts-TD-technicians/index/a/19550

This article uses DeMark, and his reasoning that to find a real bottom, look for exhaustion of all sellers and that's what the TD-sequential indicator does. Very well too.

As for manipulation of the Dow... you better believe it. But that's not the reason for the volatility. Just google for PPT and read up on it. They do it via the futures market all the time. We even know when they try to do it. Unfortunately these days the selling pressure is too extreme and the Fed has not much ammo left.

Anonymous said...

Goldman is part of the PPT. enuff said.

Btw, USDJPY @ 91 ... oil at usd$64.

I hope no WW3.

Anonymous said...

Those who won money ... good for you. but you may want to read this before calling others pigs\stupid.

http://www.marketwatch.com/news/story/real-tragedy-financial-crisis-people/story.aspx?guid=%7BA02D915A%2DE3DB%2D4E24%2DAAC7%2DE5F8EA18DA75%7D&dist=TNMostRead