by R SIVANITHY (13 Oct)
HOW does one go about pricing in a recession? Or to be more specific, how should one price in an impending slowdown whose magnitude is completely unknown as the source is a global crisis that has shot confidence in stocks worldwide to bits?
And to top it off, how does one anticipate where stocks might head when Wall Street clearly is in its death throes but may not have bottomed yet?
One good starting point might be to look at the two recessions of the past 10 years and ask oneself, are present conditions better, the same, or worse than those two occasions?
The most recent was in 2003 during the Sars epidemic and the US invasion of Iraq, at which time the Straits Times Index sank to 1,200.
The previous episode was in 1998 during the regional crisis when, almost exactly 10 years ago, the STI bottomed at 800 amidst panic-selling of the baht, rupiah, ringgit and the local dollar.
Adding to the market's problems at that time was a full-scale blowout involving Malaysian shares traded on Clob International when the Malaysian government declared Clob an illegal market and ordered the migration of all shares back to Malaysia.
If you accept that conditions are at least as bad as during Sars, then the STI dropping to the 1,200 region is possible which, if it occurs, represents 38 per cent further downside from Friday's 1,948 closing.
The alternative, which is if you believe that carnage in the world's banking system and a loss of faith in governments to prop markets up is worse than a loss of confidence in South-east Asian currencies, means that the index might even lose the 1,000 level.
Readers are best left to their own devices to decide which of these two admittedly extreme - but yet plausible - scenarios they prefer or even if they think that both are too outrageous to consider. A few pointers however, are in order.
First, charts and fundamentals are of virtually no use in times like these. Chartists last week believed firmly that the STI wouldn't break below the 2,000 mark or that the Dow Jones Industrial Average would be able to hold on to 9,000. Both those targets have now been consigned to the scrap heap.
Similarly, fundamental gauges like price/earnings and price/book offer little insight when only the numerator is visible and the denominator is a blind estimate that might have been based on spurious estimates in the first place.
Second, everyone has underestimated the magnitude of the risks involved. Just three weeks ago for example, analysts were calling a strong buy on China stock Ferrochina with target prices above $2 when the stock was at 64 cents.
No one it seems, realised that heavily-geared companies like Ferrochina might find it difficult to cope with the credit crunch and as a result, might face financial ruin. Ferrochina's admission of its problems will surely lead to worries about how many other companies there are whose future is similarly threatened.
Third, and most important, Wall Street. As pointed out previously, the meltdown there is simply because US stocks are now playing catch-up with the rest of the world, having been artificially supported by implicit and explicit promises from officialdom that if necessary, a government bailout would be at hand.
This point has been repeatedly made throughout the past year in this column, and it is the abrupt removal now of this 'bailout premium' that is sending the US market crashing. The removal of this premium of course, comes because of a sudden, awful realisation that the size of the bailout needed is simply too big, certainly much more than the US$700 billion the US Treasury announced three weeks ago.
As stated on Saturday, a possible bottom for the US market might be a 50 per cent retracement from its all-time high, which would take the Dow Jones Industrial Average to about 7,100 versus Friday's close of 8,450.
We wouldn't however, put too much money into that prediction though.
To borrow an infamous phrase coined by the Bush administrations, the existence of too many 'unknown unknowns' suggests that a lengthy recession (latest estimates are about two years) has not been properly priced in yet. In which case the advice remains the same as it's been for months now - sell into strength at every opportunity because there won't be many of them.
-Editorial Report by R SIVANITHY (13 Oct)
HOW does one go about pricing in a recession? Or to be more specific, how should one price in an impending slowdown whose magnitude is completely unknown as the source is a global crisis that has shot confidence in stocks worldwide to bits?
And to top it off, how does one anticipate where stocks might head when Wall Street clearly is in its death throes but may not have bottomed yet?
One good starting point might be to look at the two recessions of the past 10 years and ask oneself, are present conditions better, the same, or worse than those two occasions?
The most recent was in 2003 during the Sars epidemic and the US invasion of Iraq, at which time the Straits Times Index sank to 1,200.
The previous episode was in 1998 during the regional crisis when, almost exactly 10 years ago, the STI bottomed at 800 amidst panic-selling of the baht, rupiah, ringgit and the local dollar.
Adding to the market's problems at that time was a full-scale blowout involving Malaysian shares traded on Clob International when the Malaysian government declared Clob an illegal market and ordered the migration of all shares back to Malaysia.
If you accept that conditions are at least as bad as during Sars, then the STI dropping to the 1,200 region is possible which, if it occurs, represents 38 per cent further downside from Friday's 1,948 closing.
The alternative, which is if you believe that carnage in the world's banking system and a loss of faith in governments to prop markets up is worse than a loss of confidence in South-east Asian currencies, means that the index might even lose the 1,000 level.
Readers are best left to their own devices to decide which of these two admittedly extreme - but yet plausible - scenarios they prefer or even if they think that both are too outrageous to consider. A few pointers however, are in order.
First, charts and fundamentals are of virtually no use in times like these. Chartists last week believed firmly that the STI wouldn't break below the 2,000 mark or that the Dow Jones Industrial Average would be able to hold on to 9,000. Both those targets have now been consigned to the scrap heap.
Similarly, fundamental gauges like price/earnings and price/book offer little insight when only the numerator is visible and the denominator is a blind estimate that might have been based on spurious estimates in the first place.
Second, everyone has underestimated the magnitude of the risks involved. Just three weeks ago for example, analysts were calling a strong buy on China stock Ferrochina with target prices above $2 when the stock was at 64 cents.
No one it seems, realised that heavily-geared companies like Ferrochina might find it difficult to cope with the credit crunch and as a result, might face financial ruin. Ferrochina's admission of its problems will surely lead to worries about how many other companies there are whose future is similarly threatened.
Third, and most important, Wall Street. As pointed out previously, the meltdown there is simply because US stocks are now playing catch-up with the rest of the world, having been artificially supported by implicit and explicit promises from officialdom that if necessary, a government bailout would be at hand.
This point has been repeatedly made throughout the past year in this column, and it is the abrupt removal now of this 'bailout premium' that is sending the US market crashing. The removal of this premium of course, comes because of a sudden, awful realisation that the size of the bailout needed is simply too big, certainly much more than the US$700 billion the US Treasury announced three weeks ago.
As stated on Saturday, a possible bottom for the US market might be a 50 per cent retracement from its all-time high, which would take the Dow Jones Industrial Average to about 7,100 versus Friday's close of 8,450.
We wouldn't however, put too much money into that prediction though.
To borrow an infamous phrase coined by the Bush administrations, the existence of too many 'unknown unknowns' suggests that a lengthy recession (latest estimates are about two years) has not been properly priced in yet. In which case the advice remains the same as it's been for months now - sell into strength at every opportunity because there won't be many of them.
-Editorial Report by R SIVANITHY (13 Oct)
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