by R SIVANITHY (28 Sept)
Last week's column advised investors to sell into strength because there was every likelihood that the Straits Times Index, having come close to falling below the 2,300 on Thursday Sept 18, would surely retest that level again in the near future.
Since then, the index has lost 148 points or almost six per cent as markets everywhere continue to come under pressure - this time without short-selling and the support that it must inevitably provide.
The main reason for this is that any good news relating to a proposed US government bailout of American banks has been tempered by a growing realisation of the enormity of the problem that lies ahead, both in terms of the actual bailout and the economic woes.
For example, BCA Research reported last week that after narrowing sharply late the previous week, key credit spreads are drifting wider again.
'The 3-month Libor spread has increased (last) week, reflecting an ongoing shortage of liquidity in the interbank market, despite repeated injections by major central banks. End of quarter funding requirements may be a factor, but banks' reluctance to lend to one another underscores how deep-rooted the problems are'.
Ideaglobal over this weekend ('Bailing Out a Sinking Ship: Where We Stand') said although it appears unlikely that the political wrangling in Washington over the bailout plan will prevent it from being passed, it is equally unlikely that this move will save the US economy from a nasty recession.
'In this environment, bailing out the financial industry in an effort to avoid further implosion is like trying to save the main sail in a sinking ship' said Ideaglobal. 'Political negotiations aside, the current bailout package is hardly a fix-all solution to current problems'.
'Granted, it solves a very big problem in financial market exposure to housing weakness, but broad exposure still remains. On the data side, macro data stands to weaken further in the coming quarters, even if credit markets improve...recent data has already shown signs of considerable slowing in recent months despite the supposed spillover effect from the fiscal stimulus package' said Ideaglobal, adding that unless businesses can borrow in order to spend and grow, everything remains stuck, mired in a recession.
Speaking of recessions, Citi Investment Research last week said it is now factoring a 'prolonged downturn' for the local economy which it sees as 'slipping into a recession', with the result that the STI could sink to 1,800. (If this did occur, this would take it to a four-year low).
Finally, should US Congress even consider the bailout plan? According to US newspaper Barron's editor Thomas Donlan, the answer is an emphatic NO: 'The federal government is usurping the legitimate functions of its own bankruptcy judges. If financial companies are insolvent, let the creditors fight over the corpses in court' said Mr Donlan in his Sept 22 editorial.
'The Treasury will borrow to buy mortgages and the Fed will print money to buy Treasuries. The danger is that they are igniting a great inflation to stave off a great depression. If so, then this week will enshrine President Bush with President Carter and Ben Bernanke with G. William Miller'.
(G. William Miller was Treasury Secretary during the Carter administration and before that, Fed chairman in Jan 1978 to Aug 1979. He had an undistinguished career - his failure to cope with spiralling inflation and refusal to raise interest rates saw the US dollar lose 34 per cent in 11 months against the German mark and 40 per cent against the yen).
'Just as the Weimar Republic printed money to pay war reparations that the Germans couldn't afford, the USA is putting its full faith and credit - until neither remains - behind mortgages that its citizens can't afford. All investors can do is hope that the ultimate sacrifice of capital destruction won't be necessary' said Mr Donlan.
Bottom line? The advice given last week remains the same: it's best to sell into strength at every opportunity and not get caught in what could be the mother of all bear traps.
-Editorial Report by R SIVANITHY (28 Sept)
Last week's column advised investors to sell into strength because there was every likelihood that the Straits Times Index, having come close to falling below the 2,300 on Thursday Sept 18, would surely retest that level again in the near future.
Since then, the index has lost 148 points or almost six per cent as markets everywhere continue to come under pressure - this time without short-selling and the support that it must inevitably provide.
The main reason for this is that any good news relating to a proposed US government bailout of American banks has been tempered by a growing realisation of the enormity of the problem that lies ahead, both in terms of the actual bailout and the economic woes.
For example, BCA Research reported last week that after narrowing sharply late the previous week, key credit spreads are drifting wider again.
'The 3-month Libor spread has increased (last) week, reflecting an ongoing shortage of liquidity in the interbank market, despite repeated injections by major central banks. End of quarter funding requirements may be a factor, but banks' reluctance to lend to one another underscores how deep-rooted the problems are'.
Ideaglobal over this weekend ('Bailing Out a Sinking Ship: Where We Stand') said although it appears unlikely that the political wrangling in Washington over the bailout plan will prevent it from being passed, it is equally unlikely that this move will save the US economy from a nasty recession.
'In this environment, bailing out the financial industry in an effort to avoid further implosion is like trying to save the main sail in a sinking ship' said Ideaglobal. 'Political negotiations aside, the current bailout package is hardly a fix-all solution to current problems'.
'Granted, it solves a very big problem in financial market exposure to housing weakness, but broad exposure still remains. On the data side, macro data stands to weaken further in the coming quarters, even if credit markets improve...recent data has already shown signs of considerable slowing in recent months despite the supposed spillover effect from the fiscal stimulus package' said Ideaglobal, adding that unless businesses can borrow in order to spend and grow, everything remains stuck, mired in a recession.
Speaking of recessions, Citi Investment Research last week said it is now factoring a 'prolonged downturn' for the local economy which it sees as 'slipping into a recession', with the result that the STI could sink to 1,800. (If this did occur, this would take it to a four-year low).
Finally, should US Congress even consider the bailout plan? According to US newspaper Barron's editor Thomas Donlan, the answer is an emphatic NO: 'The federal government is usurping the legitimate functions of its own bankruptcy judges. If financial companies are insolvent, let the creditors fight over the corpses in court' said Mr Donlan in his Sept 22 editorial.
'The Treasury will borrow to buy mortgages and the Fed will print money to buy Treasuries. The danger is that they are igniting a great inflation to stave off a great depression. If so, then this week will enshrine President Bush with President Carter and Ben Bernanke with G. William Miller'.
(G. William Miller was Treasury Secretary during the Carter administration and before that, Fed chairman in Jan 1978 to Aug 1979. He had an undistinguished career - his failure to cope with spiralling inflation and refusal to raise interest rates saw the US dollar lose 34 per cent in 11 months against the German mark and 40 per cent against the yen).
'Just as the Weimar Republic printed money to pay war reparations that the Germans couldn't afford, the USA is putting its full faith and credit - until neither remains - behind mortgages that its citizens can't afford. All investors can do is hope that the ultimate sacrifice of capital destruction won't be necessary' said Mr Donlan.
Bottom line? The advice given last week remains the same: it's best to sell into strength at every opportunity and not get caught in what could be the mother of all bear traps.
-Editorial Report by R SIVANITHY (28 Sept)
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