Wednesday, April 28, 2010

Market in panic and the real dangers ahead.....

UPDATE 29 April 2010 6:08AM: I will get back to writing about Singapore politics in my next posting after I quickly go over a selected number of observations to explain who our bourse is about to have the next leg up over the next 2 weeks. The DOW Jones Index rose 53 points yesterday despite the fears surrounding the European sovereign debt crisis. Not only that, during the trading session a third European country, Spain, was downgraded but that didn't cause the DOW to move down - the triumph of liquidity over fear?. The US Fed also gave assurance in its latest statement that its easy money policy is here to stay. In addition, if you look at yield curves, they are shaped such that US banks will be able to generate good profits going ahead so they are likely to rebound after they were sold off due to Goldman's fraud charges and regulatory changes. In Asia, Chinese stocks hit a 6 month low due to continuous and heavy handed govt actions. This pulled down the Hong Kong HSI (Hang Seng Index) for the last 2 weeks - if I'm not wrong, the HSI should recover as soon as today given the tremendous pressures it faced over the past 2 weeks has been dissipated and I believe that will further add to favorable factors that will move our markets up. Remember... after fear, comes euphoria and after euphoria comes the hang over....we will be seeing some euphoria in the coming days after the fear of the last few days/weeks following that perhaps a hangover.

UPDATE 28 April 2010 5:06PM: I took a quick look and saw that the European STOXX 50 has fallen at this point in time by another 2.6% that is in addition to the 3% fall yesterday. Terrifying isn't it? Will the market rebound quickly within 1-2 days like I predicted or is this the start of something sinister? We will know very soon.

When I woke up early this morning, I turned on the TV and saw the DOW Jones Index has dropped 213 points due to the problems with the debt of european countries. While the market has been wary of these problems, the Standard & Poor ratings agency cut the debt of Greece to junk causing a panic in the markets. These ratings agencies have a way of creating self-fulfilling prophesies - this downgrade has badly affected Greece's ability to service its debt as it causes borrowing costs to escalate. While Greece is just a small economy with 11M people, other countries in PIGS (Portugal, Ireland, Greece & Spain) have similar problems with their sovereign debt and Greece threatens to be the start of another major financial contagion. Before I discuss Greece further and the near term direction of the markets, I want to talk about a few other problems in the global economy.

In a posting in March 2010[Link], I wrote about the global economic problems being masked by the efforts of central banks around the world that pumped money into the system to stimulate it and low interest rate that has inflated assets around the world. The heart of the problem is too much debt and that problem has not disappeared. Greece is just one facet of the real problem. Many companies around the world are highly leveraged but stayed afloat because it became easy to borrow again after the easing by the Fed. The low interest rates also drove many Singaporeans to take on debt to purchase private property. To see the effects of liquidity and credit withdrawn, we only need to look to China which as in recent weeks imposed curbs on bank lending for property and a whole host of anti-speculative measures. The red hot property market there corrected sharply overnight.

In another post in March 2010[Link], I said I believe the market which is driven by liquidity will peaked when liquidity wanes regardless of the economic recovery. You just have to look at the Chinese market that peaked in July 2009 to understand why this is the case - that was when the liquidity peaked and the Chinese started to withdraw their stimulus so while the global economy picked up and Chinese GDP growth and exports recovered, the Chinese stock market never gained traction.

So where are the markets headed? My earlier post talked about a peak in May 2010 (best estimate 12 May 2010) based a number of models I use to track liquidity. The Greek problems was the focus of markets in Feb 2010 causing a correction. Because the system is flush with liquidity the market snapped back and we saw the DOW hitting new highs. The question is what we are going to see in the days ahead.

Before I go ahead to describe what I think will happen, I have to remind everyone that I'm not a professional in the financial industry so take what I say with a pinch of salt. The situation is clearly a very dangerous one with non-negligible possibility of a serious contagion so you can expect investors to reduce their exposure which might turn out to be the best thing to do given markets are not too far from their recent highs.

I will stick my neck out again to peek into the future and for sure, one day I'll get it wrong and my neck will get chopped but my job don't depend on this and it is all for fun...and like I said in my previous posting, markets are unpredicatable most of the time but we are not in 'normal' times .We can discuss how it is done later:

1. Despite the shock and panic in the markets at the downgrading of Greece, there were earlier expectations that it will downgraded as part of the unfolding saga of events surrounding its massive sovereign debt (US$300B). Recall we already had a correction in Feb 2010, do you remember what it was about? It was about Greece and fears that it might default....Greece's immediate problem is US$16B of debt that it needs to restructure in 19 May 2010. As markets rose in March 2010, the Greek problem fell into the background as Greece negotiated with IMF and EU partners for a rescue...along the way there were protesst in Greece, standoff between govt and unions and so on...messy.

2. Many investors and fund managers keeping an eye on Europe probably stayed out of the market since Feb 2010 fearing events like the downgrade of Greek debt.

3. The downgrade of Greece takes the problem from 10 to 100 on the minds of investors. There is little doubt that Asian markets will open down. ADRs and ETFs indicate they will drop between 2% to 3%.

4. Note that Greece's problem was massive all along (US$300B) and could never have been solved without external help. So did it matter if it was downgraded? Greece clearly wasn't going to hold up its original debt grading of BBB+. Because the Euro fell sharply in reaction to the downgrade, EU countries will act with greater urgency to get this resolved.

5. While the market panic is intense, markets will find the bottom quickly. There is enough liquidity for this market will rebound within days (or even after 1 day of drop). My belief is this one is different from what happened in Feb 2010 when the market fell and stayed down over several weeks. Because this is the 2nd round, market participants are wary and have already understood the Greek debt issue ...this will not drag on for weeks by uncertainty.

6. Going through my models and all the data I have, my prediction is the market will rebound very quickly (next day?) despite the heavy selling that we will see today. If it drags on for more than 3-4 days and the DOW goes down another 2-3%, I'm probably wrong this time and we are headed for something more sinister and painful.

7. If all goes according to (6), we should see a peak in May 2010.


Anonymous said...

It is interesting to note that the last 3 major financial crisis to hit Spore happens to fall in the year of the Tiger. The last big one was in 1998 (Asian Financial crisis). Prior to that, in 1986 was the Pan-El crisis. Than in 1974, the oil crisis. So going by history, we may be facing another financial crisis soon!

Observers said...

Doomsday will not happen lah.
In many analyst's vocab, doomsday means 3% tp 5% drop in indexes, which ever one you choose.

My definition of doomsday will be anything above 15% drop, and this will not happen.

Why? the Gov around the world are very committed to ensure a world wide recession takes root. They will print even more money. This strategy had distractors and critics ( still ) but see what has evovled in the US, the mother of all debt crisis and printing of money.

It worked. Employment is bouncing back, property prices are stablising, productivity is improving, confidence is strong.
Even our GDP numbers are glowing like the stars.

All the naysayers have been proven wrong.. every crystal ball view of doom and big bang collapse is wrong. It will not happen.
Corrections will come though, and like you said, 2-3%.. but please do not join the chorus of doomsayers.


Anonymous said...

Dear Observers
If governments are so committed to prevent a recession, then why did the 2008 financial crisis take place. You say it will be fine but who knows when the next financial tsunami will come.

Anonymous said...

Read Paul Krugman comments. Maybe it can give us a better idea how things will turn out.

Rialce said...

The US cannot stand another big crisis again... at least before november. I believe the US government will use every means possible to prop up the market, and I believe another opportunity to earn $$ has arrived.:p

Anonymous said...

Nothing can be more worse or more dangerous than in end 2008 to early 2009.

But do you see protests or riots then?

On the contrary things have improved so much since then. Stock, property, COE all up.

So nothing to panic about for many more years to come.

PAP will ensure everything is peaceful and they will still have 98% or even 100% seats at the election. This for sure one.

Anonymous said...

Like to go with Observers.

Money printings solve a lot of problems.

And unless the World agrees to rid this pervert solution, many nations will resort to it.

Anonymous said...

My guess is the peak will happen in June/July. May is a tab bit too early.

Then somewhere from a 10-30% fall.


Anonymous said...

cue music of M1 ad with 3 clowns.

"I love it!!!"

Anonymous said...

Think it will be going down all the wayyyyy. Iceland issue still havnt resolve and with so many countries on steriods, esp usa. Western hemisphere is bound for the pits.

best to be stand on the safe spot and watch the tsunami waves come one after another...

Anonymous said...

Just be very careful. This one could be more severe. Too many fund managers are becoming too complacent. They all think there are plenty of liquidity to prop the whole system up. Weaknesses are mounting. When the financial bill in US is passed, lots of the excess liquity will be tied up in the form of new margin requirement for trading in those exortic stuff. Market may not collapse but it will be depressed for a long time. Inflation will force many countries to rein in their liberal monetary policies. We could well see a two tier world economy.

Anonymous said...

Lets hope they have more money to print when the next recession occur whether in 3, 5 or 10 years.( it will occur since the US have has a recession on average every 4-5 years since the 1980s)
And after the massive money printing the real show can begin. ( i believe th real show will occur 3-5 years from now Haha)

For the bull people like Observers, you might be right but the real problem is what happened after their massive money printing and devaluation of currency. Only then will the views of the bear people might be vindicated.

observer2 said...

If we continue to worry about inflation caused by massive printing of money, we will not solve the current problems.
Inflation will surely come, with or without printing of more money.
How do we deal with it then?

Inflation is usually isolated to assest inflation or price inflation.
we manage them as they come, with tools that have been used before.Interest rates, consumer laws, etc.

Worrying that a big crisis will come, but do not know when, just causes anxiety and inaction... a typical " wait & see " stance.
Well, go ahead and wait & see... for the next 3,5 or 10 years, till all the cash in the bank and under the pillow becomes useless.

Anonymous said...

Corporate profits and hence fundamentals are improving but market is probably going to trade on sentiments.

Sentiments are negative at the moment due to China property bubble and Greece/PIIGS.

Therefore, market will be heading down more although I don't think it's going to meet the definition of a crash at the moment.

Capitailist said...

No worries mate!

Just short the market all the way!

Many are too focused on up! & up!
money can be made from down! & down!

One thing that is guranteed:
There will ALWAYS be a market.
even during wartime... volumes just aren't great.

Every economist, anaylst, banker,
are all trained the US way.. in Harvard etc.. all have the same tools, all have the same books...
there is no counter economics.. unless you want to include Dr Mahathir!

It is Captalism all the way and that means make money with blood (war)or with printing of more money.

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