by R SIVANITHY (22 Sept)
TWO weeks ago, this column discussed the claim that this bear market is the worst since the Asian regional crisis of 1997. The claim was dismissed, because prices now are nowhere near what they were during the crisis. But we also spoke of where a bottom might lie for the Straits Times Index - and hazarded an educated guess that the 2,300 mark, which represents a 40 per cent loss from last October's all-time high of 3,831, might just be it.
As it turned out, 2,300 was indeed where the support lay - at least during the most recent sell-off last week, when the index touched 2,306 on Thursday but recovered on news of central bank intervention.
The interesting question now, of course, is whether this level will be tested again in the weeks ahead. Despite all the euphoric headlines and Wall Street razzmatazz, the answer is probably yes.
There's no doubt, though, that a window of opportunity has opened for traders in the next few days, helped in no small part by a ludicrous and ill-conceived ban on short-selling in the US and UK.
But we suspect that a significant part of the bounces last Thursday and Friday were due to unwinding of massive short positions - which admittedly could continue for a while more - than any genuine endorsement of faith in the markets.
This applies particularly to Wall Street, which faltered on Friday despite news of the Fed's money market guarantees and plans to absorb toxic mortgage instruments.
Amid all the cheer, a few wary and savvy observers have tried to point out that the worst is far from over, with research outfit Ideaglobal delivering probably the best headline in its latest report: 'Bigger bailing bucket, but the boat still leaks.'
'The markets have yet to feel anything near the full fury of a long-percolating high-yield default cycle, with the default rate expected to reach 5 per cent by the end of the year and potentially double-digit by 1H09 . . . ,' the report said.
'At the end of the day, a lifeline for the financial system is an unambiguous positive in terms of changing the story and reducing near-term fear but when the smoke clears, the markets will still be faced with a contracting global economy, an exploding federal deficit, eroding corporate credit metrics and poor business prospects for banks and brokers. The credit cycle downturn remains in the very early stages.'
BCA Research, while welcoming the latest rescue moves, pointed out that the latest US leading economic indicator was dismal. 'As the LEI indicates, the US economy is already in recession and is likely to grow at a sub-potential pace for some time.
Housing is an ongoing drag for consumers and will not reverse quickly, especially since employment conditions are quickly deteriorating. Both the consumer and corporate sectors will be very cautious for a long time and a prolonged period of retrenchment is underway . . . do not expect a quick turnaround in economic growth.'
Finally, Breakingviews.com's Edward Hadas and Hugh Dixon, in an insightful report entitled The Perils of a Toxic Relief Fund, said that the total debt of the US financial system is US$15 trillion, and if the 'few hundred billion' promised by the Fed turns out to be insufficient, the bailout will have to become even bigger.
One very likely consequence of all this is that the US dollar will suffer renewed weakness, not just because the economy is too weak to support it, but also because the US authorities will have to run its money printing presses into overdrive to meet the obligations which it is taking on.
It's unlikely that the STI's bounce will extend for much longer. Once investors start to focus on earnings and the grim economic outlook again, weakness will probably set in again. A re-test of 2,300 is likely, possibly within the next 2-4 weeks. So the advice remains the same as it has been for several months now, which is to sell into strength at every opportunity.
-Editorial Report by R SIVANITHY (22 Sept)
TWO weeks ago, this column discussed the claim that this bear market is the worst since the Asian regional crisis of 1997. The claim was dismissed, because prices now are nowhere near what they were during the crisis. But we also spoke of where a bottom might lie for the Straits Times Index - and hazarded an educated guess that the 2,300 mark, which represents a 40 per cent loss from last October's all-time high of 3,831, might just be it.
As it turned out, 2,300 was indeed where the support lay - at least during the most recent sell-off last week, when the index touched 2,306 on Thursday but recovered on news of central bank intervention.
The interesting question now, of course, is whether this level will be tested again in the weeks ahead. Despite all the euphoric headlines and Wall Street razzmatazz, the answer is probably yes.
There's no doubt, though, that a window of opportunity has opened for traders in the next few days, helped in no small part by a ludicrous and ill-conceived ban on short-selling in the US and UK.
But we suspect that a significant part of the bounces last Thursday and Friday were due to unwinding of massive short positions - which admittedly could continue for a while more - than any genuine endorsement of faith in the markets.
This applies particularly to Wall Street, which faltered on Friday despite news of the Fed's money market guarantees and plans to absorb toxic mortgage instruments.
Amid all the cheer, a few wary and savvy observers have tried to point out that the worst is far from over, with research outfit Ideaglobal delivering probably the best headline in its latest report: 'Bigger bailing bucket, but the boat still leaks.'
'The markets have yet to feel anything near the full fury of a long-percolating high-yield default cycle, with the default rate expected to reach 5 per cent by the end of the year and potentially double-digit by 1H09 . . . ,' the report said.
'At the end of the day, a lifeline for the financial system is an unambiguous positive in terms of changing the story and reducing near-term fear but when the smoke clears, the markets will still be faced with a contracting global economy, an exploding federal deficit, eroding corporate credit metrics and poor business prospects for banks and brokers. The credit cycle downturn remains in the very early stages.'
BCA Research, while welcoming the latest rescue moves, pointed out that the latest US leading economic indicator was dismal. 'As the LEI indicates, the US economy is already in recession and is likely to grow at a sub-potential pace for some time.
Housing is an ongoing drag for consumers and will not reverse quickly, especially since employment conditions are quickly deteriorating. Both the consumer and corporate sectors will be very cautious for a long time and a prolonged period of retrenchment is underway . . . do not expect a quick turnaround in economic growth.'
Finally, Breakingviews.com's Edward Hadas and Hugh Dixon, in an insightful report entitled The Perils of a Toxic Relief Fund, said that the total debt of the US financial system is US$15 trillion, and if the 'few hundred billion' promised by the Fed turns out to be insufficient, the bailout will have to become even bigger.
One very likely consequence of all this is that the US dollar will suffer renewed weakness, not just because the economy is too weak to support it, but also because the US authorities will have to run its money printing presses into overdrive to meet the obligations which it is taking on.
It's unlikely that the STI's bounce will extend for much longer. Once investors start to focus on earnings and the grim economic outlook again, weakness will probably set in again. A re-test of 2,300 is likely, possibly within the next 2-4 weeks. So the advice remains the same as it has been for several months now, which is to sell into strength at every opportunity.
-Editorial Report by R SIVANITHY (22 Sept)
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