Quiet session ahead of Wall St closure

by R SIVANITHY (28 Nov)

Local stocks likely sold on event after having been bought in anticipation of US Wednesday rally

THERE are two features of interest associated with yesterday's 0.61- point drop in the Straits Times Index (STI) to 1,710.52. First, the strong likelihood that investors 'bought in anticipation and sold on news' - on Wednesday, the Straits Times Index jumped almost 60 points, of which 40 came in the final few minutes because of sudden expectations that Wall Street would rally that day.

Because a rally did materialise and possibly because the US market is closed on Thursday for Thanksgiving, this then provided the cue to sell, with the STI falling at one point almost 20 points into negative territory.

Second, the fact that Wall Street rose on Wednesday as expected confirms a long-held view expressed in this column that program trading targets this part of the world ahead of the US - the correlation between movements in the STI and the Dow Jones Industrial Average on any given day has been near-perfect for several months now.

Whether this is thanks to synchronised short-covering or whether the STI is singled out for special treatment because of the ease with which it can be manipulated are matters for conjecture; suffice to say that there can be little doubt that as an advance indicator of how US stocks might perform later on any day, the STI's movements are possibly an even better indicator than the US futures market.

Turnover continued to hover below the $1 billion mark, a threshold loosely defined as signifying thin trading. Excluding foreign currency issues, 1.1 billion units worth $952 million were done, the low unit value suggesting penny stocks were more in demand than the larger-cap blue chips.

Among the actives was China shipyard Cosco Corp, a company that could do no wrong last year but one that has fallen on tough times lately.

In downgrading Cosco to 'underperform', Merrill Lynch (ML) in a Nov 26 report said the outlook for order cancellations combined with a sharp drop in the Baltic Dry Index are now painting a more negative outlook for the shipping industry than previously anticipated.

'We cut Cosco's order book by 25 per cent to account for potential order cancellations, reduce our order wins assumptions and reduce our freight rates ... and reduce our price objective to 55 cents a share. We have also cut our FY08-10 earnings estimates by an average of 25 per cent,' said ML.

Cosco yesterday was unchanged at 71.5 cents with 25 million shares traded.

The US investment bank also downgraded Keppel Corp from 'buy' to 'neutral'. In a Nov 26 report, it said the risks associated with Keppel's subsidiary and associate earnings will continue to be a drag on its shares.

'ML Singapore property analysts are not ready to call the bottom for property stocks as the economic outlook remains depressed. Valuation metrics are extremely volatile as the economic climate continues to deteriorate, while we see no catalyst to sustain a re-rating in stock prices,' said ML. Keppel yesterday rose six cents to $4.80 with 8.2 million units done.

In its latest assessment of US economic data, Ideaglobal said there have been signs of weakness for some time but recent events in financial markets have made a bad situation significantly worse.

'At this point, there is no debating whether or not we are in a recession, it has now transformed into a question of how deep and painful it will become,' said Ideaglobal.

-Research Report by R SIVANITHY (28 Nov)