by R SIVANITHY (11 Oct)
US market was just waiting to tank, so investors should not be surprised
EXACTLY one year ago to the day on Oct 11, 2007, the Straits Times Index (STI) closed at an all-time high of 3,831, but those heady days are now long-forgotten. After an unforgettable week during which it suffered mind-numbing selling pressure, the STI yesterday crashed through the 2,000 level.
It now stands at 1,948.33, a staggering loss of 349 points or 15 per cent in one week that has taken it to its lowest level in four years. For the year the STI is down 44 per cent, while its loss from its all-time high is 49 per cent.
There seems to be a general sense of bewilderment at the source of this selling, namely Wall Street's crash over the past three weeks despite announcement of a US$700 billion bank bailout plan, a generous emergency interest rate cut, repeated liquidity injections by the Federal Reserve, and the latest announcement that the government will buy into troubled banks along the lines of the UK government's Wednesday pledge.
Europe's meltdown too may have been puzzling to some observers, though the selling there can correctly be attributed to contagion pressure emanating from Wall Street.
Truth is, although the speed with which US stocks have capitulated may be of some surprise, the only real eyebrow-raiser should be that it took this long for investors to latch on to the fact that the US market was hugely overvalued all along and this was - not to put too fine a point on it - an accident waiting to happen. And now that they have, all Wall Street is doing is playing catch-up with the rest of the world, and that until the US market caught up with everywhere else, there could be no bottom for stocks.
Valuations played a big role in our assessment since the earnings growth being priced in at all the various levels in question was, in our view, recklessly optimistic given the enormity of the crisis confronting the US.
A major source of this irrational optimism was explicit and implicit promises by American officialdom that if need be, the stock market would be bailed out at any cost. It was these promises that kept Wall Street afloat and US stock prices from finding their true, intrinsic values.
By the same token, it is the sudden, awful realisation now that the size of the actual bailout required may simply too large to comprehend because officialdom waited too long, that has led to the accelerated selloff of the past three weeks.
Pundits keen on apportioning blame might say this ill-advised complacency in the equity market started with former Fed chief Alan Greenspan who slashed interest rates seven years ago and arguably lit the fire that inflated the housing balloon, a legacy that was continued by incumbent Fed boss Ben Bernanke whose nickname 'Helicopter Ben' was coined after he vowed to fling money out of helicopters if the economy ever needed saving.
Finger-pointing aside, what we are now witnessing is a rapid repricing of the US market, compressing into a few weeks the pain that the rest of the world took many months to suffer. The problem, of course, is that as Wall Street bleeds, so does everyone else.
Since the announcement of the US Treasury bailout plan three weeks ago, the Dow Jones Industrial Average has crashed 2,809 points or 25 per cent to 8,579, while the S&P 500's loss has been 28 per cent at 909. London's FTSE index, in the meantime, lost about 25 per cent despite the authorities banning short-selling (another ill-conceived move), while Hong Kong's Hang Seng has shed 23 per cent.
If Wall Street were to fully catch up with the markets that it has caused to crash, where might it bottom? Since the average loss around the globe so far has been in the region of 50 per cent from all-time high, then it's entirely reasonable to expect Wall Street to follow suit. If so, this would take the Dow to about 7,100 and the S&P 500 to 788 - roughly another 15 or 16 per cent to the downside from Thursday's close.
The American market's catch-up woes have seriously undermined the European governments' moves to shore up confidence and stocks on the European continent are now in sympathetic free-fall. As for the hastily-convened US Treasury bailout, it has faded into a distant memory as investors stampede for the exits.
It's contagion at its worst - thanks in no small part to years of misplaced optimism on Wall Street that has quickly reversed into rampant pessimism. Investors will simply have to sit and wait until the catch-up process runs its course before any stability emerges.
-Editorial Report by R SIVANITHY (11 Oct)
US market was just waiting to tank, so investors should not be surprised
EXACTLY one year ago to the day on Oct 11, 2007, the Straits Times Index (STI) closed at an all-time high of 3,831, but those heady days are now long-forgotten. After an unforgettable week during which it suffered mind-numbing selling pressure, the STI yesterday crashed through the 2,000 level.
It now stands at 1,948.33, a staggering loss of 349 points or 15 per cent in one week that has taken it to its lowest level in four years. For the year the STI is down 44 per cent, while its loss from its all-time high is 49 per cent.
There seems to be a general sense of bewilderment at the source of this selling, namely Wall Street's crash over the past three weeks despite announcement of a US$700 billion bank bailout plan, a generous emergency interest rate cut, repeated liquidity injections by the Federal Reserve, and the latest announcement that the government will buy into troubled banks along the lines of the UK government's Wednesday pledge.
Europe's meltdown too may have been puzzling to some observers, though the selling there can correctly be attributed to contagion pressure emanating from Wall Street.
Truth is, although the speed with which US stocks have capitulated may be of some surprise, the only real eyebrow-raiser should be that it took this long for investors to latch on to the fact that the US market was hugely overvalued all along and this was - not to put too fine a point on it - an accident waiting to happen. And now that they have, all Wall Street is doing is playing catch-up with the rest of the world, and that until the US market caught up with everywhere else, there could be no bottom for stocks.
Valuations played a big role in our assessment since the earnings growth being priced in at all the various levels in question was, in our view, recklessly optimistic given the enormity of the crisis confronting the US.
A major source of this irrational optimism was explicit and implicit promises by American officialdom that if need be, the stock market would be bailed out at any cost. It was these promises that kept Wall Street afloat and US stock prices from finding their true, intrinsic values.
By the same token, it is the sudden, awful realisation now that the size of the actual bailout required may simply too large to comprehend because officialdom waited too long, that has led to the accelerated selloff of the past three weeks.
Pundits keen on apportioning blame might say this ill-advised complacency in the equity market started with former Fed chief Alan Greenspan who slashed interest rates seven years ago and arguably lit the fire that inflated the housing balloon, a legacy that was continued by incumbent Fed boss Ben Bernanke whose nickname 'Helicopter Ben' was coined after he vowed to fling money out of helicopters if the economy ever needed saving.
Finger-pointing aside, what we are now witnessing is a rapid repricing of the US market, compressing into a few weeks the pain that the rest of the world took many months to suffer. The problem, of course, is that as Wall Street bleeds, so does everyone else.
Since the announcement of the US Treasury bailout plan three weeks ago, the Dow Jones Industrial Average has crashed 2,809 points or 25 per cent to 8,579, while the S&P 500's loss has been 28 per cent at 909. London's FTSE index, in the meantime, lost about 25 per cent despite the authorities banning short-selling (another ill-conceived move), while Hong Kong's Hang Seng has shed 23 per cent.
If Wall Street were to fully catch up with the markets that it has caused to crash, where might it bottom? Since the average loss around the globe so far has been in the region of 50 per cent from all-time high, then it's entirely reasonable to expect Wall Street to follow suit. If so, this would take the Dow to about 7,100 and the S&P 500 to 788 - roughly another 15 or 16 per cent to the downside from Thursday's close.
The American market's catch-up woes have seriously undermined the European governments' moves to shore up confidence and stocks on the European continent are now in sympathetic free-fall. As for the hastily-convened US Treasury bailout, it has faded into a distant memory as investors stampede for the exits.
It's contagion at its worst - thanks in no small part to years of misplaced optimism on Wall Street that has quickly reversed into rampant pessimism. Investors will simply have to sit and wait until the catch-up process runs its course before any stability emerges.
-Editorial Report by R SIVANITHY (11 Oct)
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