Until Wall St capitulates, best to stay nimble

Weekly Report by R SIVANITHY (7 Dec)

SINGAPORE - Last week's column advised investors to be careful buying into what was most probably yet another bear trap. As it turned out, the Straits Times Index, which clearly enjoys support from the thinly-traded Jardine group, gave up the 70 points it had gained the previous week through month-end window-dressing when it lost 73 last week.

Jardine's inclusion aside, the advice this week cannot be much different, notwithstanding Friday's rise on Wall Street which was founded on the perverse logic that because the November jobs report was so awful, the automakers will surely have to be bailed out by a government who cannot risk making things worse by not doing anything.

In other words, as long as the economic data is terrible, this increases the chances of a government bailout and so the market must go up. This means that the worse the economic figures the better the market will react - a warped way of thinking indicative of a desperately sinking Wall Street seeking any straw to clutch to stay afloat but knowing at the back of its mind that it is only delaying the inevitable.

There is a growing realisation among investors that the downturn may be worse and more prolonged than previously thought and that markets have not yet displayed the necessary capitulation that could signal a trough.

This is a point made several times before in this column but bears repeating - the US market is still too overly optimistic and overvalued relative to its economic and earnings prospects, even with massive government help.

Investors - those with pockets deep enough to do any meaningful buying during these difficult times - would do well to take note of this.

In its Asia Insights titled 'Cautious but looking for ideas', HSBC said it spent two weeks recently visiting more than 60 investment institutions in eight cities, a trip that gave it a reasonably good feel for the range of opinions among fund managers, most of whom were bearish.

'But, while few investors are convinced that Asian markets have definitely bottomed, we found less ultra-bearishness than we expected. Most investors feel that the monetary and fiscal stimulus dealt out by national authorities everywhere will cause growth to pick up in H2 2009, and that the bail-out of Citigroup means that all the large troubled US banks have now been rescued.'

'On China, there is a particularly widespread consensus that growth will be strong again by the second half of next year. Consequently, we found many investors keen to discuss where to invest next year: deep value stocks versus blue-chips, China or Korea, deep cyclicals or financials, how about Thailand, is it too early for small caps?

We have some sympathy with these views but, since sentiment has not yet reached capitulation (or indifference) point, we suspect that the worst may not be over.'

To this we'd like to add that there is growing irrational optimism that China will come good after all its problems in 2008 and that this turnaround will fuel Asian growth and cause Asian economies to decouple from the US.

Like the perverse Wall St logic earlier, this is a highly dubious line of reasoning from a battered investment community desperately seeking to redeem itself after a year of failure by rehashing an old, disproven theme that should by now have outlived its usefulness.

Not all is gloom however and there is some hope later next year - in its Dec 4 Asian Market Strategy for example, Credit Suisse said it believes Asian markets have already priced in a long and deep recession and that its Six Factor Valuation Indicator shows Asian markets to be 50 per cent undervalued.

However, it called an 'underweight' on Singapore saying 'driven by expected declines in consumer and corporate spending, domestic demand which has held up well is expected to weaken going into 2009. Credit Suisse said banks were its biggest underweight while it is overweight telcos and transport.

In the meantime, investors with poor timing skills should dismiss urgings to buy now because markets are 'oversold' since the word had no precise meaning in the investment vocabulary and is not a viable basis on which to make an investment. Best to wait until Wall St capitulates before doing anything - and that could be weeks or months away yet.

-Weekly Report by R SIVANITHY (7 Dec)

Week when selling holds sway

by R SIVANITHY (6 Dec)

SHOCKING news that the US economy has been in a recession - defined as a general contraction in economic activity rather than two consecutive quarters of declines - for a year now, the failure of US carmakers to convince the government to bail them out and a sharp drop in trading volume were three of the main features of the past week.

The fourth was the 'buy the index in the morning, and sell in the afternoon' trading pattern that was evident in the final three days of the week, each time because of expectations that Wall Street would tank later that evening.

As it turned out, though, the selling outweighed the buying, insofar as the STI was concerned, the benchmark ending the week 15.49 points higher yesterday but losing 73 points or 4.2 per cent over the five days to 1,659.17.

This wiped out the 70 points gained over the previous week, which was mostly likely through month-end window-dressing.

Blue chips in play throughout this week included SingTel following an Investor Day, the banks and the thinly traded Jardine group. In yesterday's session, for example, Jardine Matheson's US$0.44 rise to US$16.24 came with just 258,000 shares traded but added 2.2 points to the STI.

Property stocks had a poor five days, the FT Real Estate Index losing almost 6 per cent. Financials were not far behind with the FT Financials Index dropping about 5 per cent.

Other than commodities, the main sector in play was a heavily battered China segment led by an oddly resurgent Cosco Corp that gained 16 cents or 23 per cent over the week to 87 cents despite a slew of 'sell' calls following a large order cancellation.

The bulk of daily volume was generated by brokers and house traders, with general public participation virtually zero. Yesterday's turnover of 867 million units worth $747 million was roughly in line with the week's average and low enough to suggest that any investor with money to invest has probably already gone on holiday.

More sobering outlook reports were issued over the week, among them Goldman Sachs' (GS) 'Many Rivers to Cross' and UBS Investment Research's (UBSIR) 'Navigating a Recession'.

The former said risks to growth are to the downside, notwithstanding countervailing policy actions, and this will increase risks to earnings. 'We expect a global recession in 2009 . . . we feel there are sufficient reasons to examine the possibility that this downturn will be more prolonged than currently expected.

These include (a) the negative momentum of consensus forecasts, (b) the size of the debt burden in the US and (c) the deleveraging experiences of Japan and Sweden in the 1990s,' said GS.

UBSIR said it thinks a rally of 15-20 per cent in Q1 '09 is possible purely because markets are oversold but its central thesis is for a 'grim economic outlook and high risk aversion'.

It said the market has not priced in the success of the two integrated resorts but, on the downside, investors should watch the job market - where UBSIR expects 30,000 jobs to be lost during the year.

On a more positive note, the broker said it has a fair value of 2,100 for the STI at year-end.

-Research Report by R SIVANITHY (6 Dec)

STI pulls back as Dow futures fall

by R SIVANITHY (4 Dec)

Straits Times Index sheds early gains in anticipation of Wall Street drop; index propped up by SingTel

So judging by the Straits Times Index's late dive, US stocks were expected to turn in a weak session yesterday. After rising as much as 30 points in the morning to 1,670, the Straits Times Index (STI) ended just 1.39 points up at 1,640.57.

A 150-point loss in the December futures contract on the Dow Jones Industrial Average and Europe opening an average of 2 per cent weaker accounted for the late nervousness, though the broad market clearly did not have time to react to the sell-off in the index - excluding index stocks and warrants, there were still 185 rises versus 120 falls in the rest of the market.

Hong Kong's Hang Seng Index continued to set the pace throughout the day, penny commodity and China stocks continued to soak up what little liquidity there was and as far as the Straits Times Index was concerned, it was almost entirely propped up by SingTel, possibly because it appeared as top pick in Merrill Lynch's 'most preferred' list. SingTel's eight-cent rise to $2.50 added 8.3 points to the STI.

None of this should come as any surprise. For one, anecdotal evidence is that many fund managers have closed their books early for the year and gone on holiday, a major factor behind the poor volume of the past few weeks.

In yesterday's session, a weak one billion units, excluding foreign currency issues, worth $744 million were traded.

Economic news coming out of the US has mainly been negative, with the worst manufacturing number since 1982 released on Monday. The latest jobs report is due on Friday. Analysts too are now increasingly bracing themselves for a weak 2009.

In its Dec 2 Emerging Markets Daily, for instance, Citigroup Global Markets said of Singapore that near-term growth prospects are grim with the economy unlikely to escape a contraction next year.

'The current recession is likely to continue for at least the next two to three quarters with GDP expected to contract in y-o-y terms, at least through 1H09,' said Citi. It said its GDP forecast is well below consensus or government forecasts and added that any uncertainty with forecasts relates to the magnitude rather than the likelihood of a contraction.

UBS Investment Research (UBSIR) issued its 2009 Outlook report yesterday titled Navigating a recession. It said there could be a rally of 15-20 per cent in the first quarter because markets are deeply oversold but its central thesis is for a grim economic outlook and high risk aversion.

UBSIR is expecting 30,000 job losses in 2009 - the worst on record for a single year but less severe than the cumulative 42,000 lost during the Asian financial crisis and the 79,500 lost during the two years when the tech bubble burst and Sars struck.

'We forecast a fair value of 2,100 for the STI at end-2009, assuming 12x trailing PE and a 33 per cent decline in earnings. We see a firmer uptrend mostly at the tail end of 2009 when the worst of the economic conditions are likely to have passed,' said UBSIR.

In a property wrap titled Buy another day, JPMorgan said with financing as uncertain as it is, the fundamental value of properties cannot be reliably determined. It noted that in previous cycles it took 11-13 quarters between peak and trough prices and that if the most recent peak was mid-2007, the next trough should be mid-2010.

-Research Report by R SIVANITHY (4 Dec)

No surprise again as STI reacts to US dive

by R SIVANITHY (3 Dec)

ONCE again, there was no surprise in trading yesterday as Wall Street's already-anticipated - at least in this column - Monday crash reverberated around this part of the world.

With Japan caving in by 6 per cent, Hong Kong's Hang Seng Index losing 5 per cent, Australia 4 per cent and Europe opening an average 1.5 per cent weaker, the Straits Times Index stood little chance, though there was some consolation in the fact that it fell by only 51.05 points or 3 per cent to 1,639.18 and that trading was thin and listless.

Wall Street's loss of almost 9 per cent on Monday should not have surprised anyone, given that its major indices had been clearly window-dressed last week for the November month-end.

Still, news reports attributed the fall to official confirmation from the National Bureau of Economic Research that the US has been in recession for 12 months now, as well as a poor reading for the November Institute for Supply Management's index of manufacturing conditions. The latter figure came in at 36.2, below the consensus of 37, and was the weakest since 1982.

Independent research outfit Ideaglobal said in its Financial Markets Today that 'although the manufacturing landscape has been weak for some time now, this could mark the next leg down for prospects for the sector for months to come as conditions are unlikely to improve any time soon'.

Ideaglobal added the data confirms that domestic US weakness is now complementing deteriorating global conditions and that this should enhance the case for a 50-basis-point interest rate cut at the Dec 16 Federal Open Market Committee meeting.

Brokers attributed the subdued conditions here to the absence of many players either due to the holiday season and/or their losses over the past year, which by now would have reached extreme proportions.

Turnover, excluding foreign currency issues, was a poor 750 million units worth $770 million, with volume concentrated on commodity stocks like Golden Agri, Indofood Agri and Noble Group, and battered China stocks like Yangzijiang, China Hongxing and Cosco Corp.

Virtually the entire list of top 20 rises were structured put warrants on various indices, mainly the Hang Seng. DBS stood out among the banks as the only gainer, while after outperforming on the way up last week, UOB looks to be now doing the same on the way down - it dropped 48 cents on Monday and 70 cents yesterday to end at $12.

Credit Suisse (CS) maintained its 'underweight' on the property sector. In its Asian Daily yesterday, CS said it expects news flows from the sector to remain negative as default/credit risks rise in a recessionary environment. Its bear-case RNAV for CapitaLand is $1.70 and for City Developments is $4.51.

Merrill Lynch, in the meantime, on Monday maintained a 'neutral' view on City Dev with a $5.86 target price, following news that the latter's hotel subsidiary has not been able to sell the Millennium Seoul Hilton in Korea.

CapitaLand yesterday fell 10 cents to $2.49 with 14 million traded, while City Dev lost 13 cents at $5.25 with 2.5 million done.

-Research Report by R SIVANITHY (3 Dec)

No surprise as STI falls in thin volume

by R SIVANITHY (2 Dec)

Index loses 2.4 per cent after last week's late, narrowly focused window-dressing push

PERHAPS not surprisingly, the Straits Times Index (STI) yesterday failed to follow through from last week's late window-dressing push, instead dropping 42.34 points or 2.4 per cent to 1,690.23 in extremely thin trading totalling 945 million units worth $745 million, excluding foreign currency issues.

Commodity stocks soaked up the bulk of what little volume there was, while among blue chips it was banks and property stocks that came under pressure.

The STI last week gained 70 points, in what was most probably an attempt to window-dress the month's performance using the mid-week announcement of a new US$800 billion lifeline by the US Federal Reserve for distressed US consumer debt markets as a launchpad.

However, the push was narrowly focused, centred mainly on index stocks and came with low volume - all of which suggested that it would not last.

This point was made by DMG & Partners in a technical view yesterday, where it said that although the index rose last week, any upside this week is expected to be short-lived.

'The mini-rally currently in play has not been accompanied by a significant increase in trading volume, an indication that buying momentum is not strong,' said the broker.

DMG noted that selling pressure would also probably be similarly contained because of low volume and set resistance at 1,760-1,770 and support at 1,570-1,580.

All three banks closed weaker, led by last week's top performer UOB which dropped 48 cents or 3.6 per cent to $12.70 with three million shares traded.

In a Nov 28 report on the sector, Macquarie Research said these are its operational expectations for the sector going forward: margins are expected to contract mildly, loan growth momentum to slow, non-interest income to soften on weak capital market conditions, and asset quality to progressively deteriorate.

Notwithstanding these, Macquarie recommended an 'overweight' on all three, with DBS and OCBC the top picks.

In the property sector, City Developments' (City Dev) 40-cent or 7 per cent plunge to $5.38 stood out after news that its hotel subsidiary M&C has been unable to finalise the sale of Millennium Seoul Hilton. In a 'hold' on City Dev, Deutsche Bank yesterday said this is negative for sentiment but there would be no impact on earnings.

In its 2009 Asia Pacific Portfolio Strategy dated Nov 29 and titled '2009 Outlook: Many rivers to cross', Goldman Sachs said investors should brace themselves for more risk than return.

'The investment outlook for Asian equities is probably one of low returns overall but with wide ranges ... the bottom line is that we think risks to growth remain on the downside notwithstanding countervailing policy actions. In turn, this is likely to increase the risks to corporate earnings and may keep valuations low.'

It added 'there are sufficient reasons to examine the possibility that the global downturn will be more prolonged than currently expected. These include a) negative momentum of consensus forecasts, b) the size of the debt burden in the US and c) the de-leveraging experiences of Japan and Sweden in the 1990s'.

Goldman also said it expects 15-35 per cent earnings declines in Asia for 2009 versus consensus of 5 per cent growth and that existing forecasts are unduly optimistic. China is its only 'overweight'; Korea, Taiwan and Australia were downgraded to 'underweight'; while Hong Kong and Singapore were classed as 'market weight'.

-Research Report by R SIVANITHY (2 Dec)

A week spent tracking Wall Street, Citigroup

by R SIVANITHY (29 Nov)

A WEEK spent anticipating how Wall Street might perform later each day as well as wondering what Citigroup's fate might be. These in a nutshell are the major themes of the week just past, the other being that prices here may actually tend to lead Wall Street, rendering the Straits Times Index as possibly a better indicator of how the US market might move than even the US futures market.

Underpinning sentiment was mid-week news that the US Federal Reserve, which can basically print money if it sees fit, will extend a US$800 billion lifeline to distressed consumer debt markets to try and shore up the economy, and that the US government will essentially bail out Citigroup.

So far, Wall Street appears determined to take this as good news with its major indices responding positively, though it has to be stressed that bear rallies can appear deceivingly strong as many have turned out to be this year and there is no reason to expect this time to be any different.

Here, the Straits Times Index firmed by 70 points or 4.2 per cent over the course of the week to 1,732.57 with yesterday's session contributing 22.05 points.

Much of yesterday's gain could be attributed to month-end - and for some fund managers possibly even year-end - window dressing, while the same can possibly be said of markets everywhere.

All three banks benefited from this propping-up exercise, though DBS, despite being pushed up by 33 cents yesterday, still lost a nett 20 cents over the week at $9.40.

In a Thursday overview on Asia-Pacific banks, Merrill Lynch said it is cautious on Singapore banks because of potential negatives such as 1) slowing loan growth 2) a drop in market-related fees and 3) a cyclical rise in credit costs, all of which could depress 2009 earnings.

'The sector trades at mid-cycle valuations - 1.4x book - but that is not 'cheap' in our view given we are entering a down cycle,' said ML. It rates DBS and OCBC as 'underperform' and UOB as 'neutral'.

Keppel Corp, however, yesterday collapsed 60 cents or 12.5 per cent to $4.20 with 27 million shares traded following news that its customers are reviewing their options for $1.2 billion worth of orders.Possibly also a factor was a Wednesday downgrade by Merrill Lynch, which cited concerns about Keppel's exposure to property, oil refining and telecoms.

In a Thursday update, ML said although the impact on earnings is minimal, the news is likely to put a dent on investor confidence in the security of Keppel's current order book. 'If the sector experiences a deep and prolonged slowdown, (Thursday's) announcement is likely to be a sign of future order cancellations,' said ML. For the week, Keppel lost a nett 40 cents or 8.7 per cent.

In his weekly roundup, AMP Capital's head of investment strategy Shane Oliver, said 'while all the activity by governments around the world to get their financial markets working again and stimulate their economies won't head off the recession which is already in train, it does provide confidence that there will be an eventual economic recovery . . . While it's too early to say whether the bear market is over, there is still a good chance shares will rally into year end.'

-Research Report by R SIVANITHY (29 Nov)

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)

Late surge in anticipation of US rally

by R SIVANITHY (27 Nov)

ST Index closes 58 points higher, but broad market shows only 159 rises versus 137 falls

JUDGING by the Straits Times Index's (STI) 57.88- point rise to 1,711.13 yesterday - the bulk of which came in the final five minutes - program traders were positioning themselves for an expected Wall Street rally later in the day.

The broad market, however, did not fare as well as the index. Excluding STI components and warrants, there were only 159 rises versus 137 falls in the wider market.

The STI owed much of its last-minute gain to a 16-cent rise in SingTel that accounted for 17 points. Of this, 10 cents came in the post-closing adjustment period between 5-5.05pm.

Brokers continued to speak of caution among clients and this was reflected in low volume. Excluding foreign currency issues, only 864 million units worth $931 million were traded.

Among banks, DBS first fell to $9.01 but ended unchanged at $9.20, while UOB's 70-cent jump to $12.60 added 11 points to the index. Brokers speculated that investors were switching from one to the other, possibly because of fears that DBS might call for a rights issue, worries that have arisen because Standard Chartered Bank recently announced a rights issue.

In the second line, Jade Technologies' shares, which cost 30 cents this time last year, closed half a cent lower at 1.5 cents. The company on Tuesday reported a $39 million loss for the full year ended Sept 30. At 1.5 cents a share, Jade's market capitalisation is about $17 million.

Most trading activity was focused on battered commodity plays like Golden Agri, Indofood Agri and Olam International, as well as China stocks that have collapsed significantly from their highs such as China Hongxing, Cosco and Yanlord.

Elsewhere, Bright World's shares lost three cents to 24.5 cents after news that the Monetary Authority of Singapore has written to the company about a possible breach of the Securities and Futures Act.

In a report on the telco sector, OCBC Investment Research said: 'Going into 2009, the whole stock market will continue to face many challenges, most of them coming from the macroeconomic front.

In such a highly unpredictable climate, we believe that a flight to quality is not enough - investors should also focus on defensiveness of earnings as well as sustainable dividend payout abilities and Singapore's telcos meet these criteria. As such, we continue to maintain our 'overweight' rating on the sector.

'While earnings are expected to take a slight knock next year due to the recession, we do not expect the slowdown to have much of an impact, if any, on the telcos' healthy operating cashflows. If anything, we expect more prudent capex spending and other cost-reduction measures to further improve operating cashflows and, in turn, sustain the already attractive dividend policies.'

In its 2009 Outlook report, ratings agency Standard & Poor's (S&P) said that for Asia-Pacific equity markets, a rebound is likely in 2009.

Its director of research Lorraine Tan believes markets are in the process of bottoming. 'Although the economic and corporate news is likely to remain negative - and uncertainty still pervades the global financial system - we see that markets will have retraced in line with, and in some cases exceeded, movements in previous bear markets in terms of both value and time frame,' said Ms Tan.

S&P also said 'ongoing market dislocation will significantly impact Asia-Pacific in 2009, but factors such as intra-regional trade, supportive policy-making, and still-robust forecasts for China and India will help the region navigate the global storm'.

-Research Report by R SIVANITHY (27 Nov)

Investors continue to sell into strength

by R SIVANITHY (26 Nov)


SELLING into strength has been the preferred strategy over the past year and so it was again yesterday - the Straits Times Index first shot up 70 points in response to Monday's Wall Street rally but eventually closed just 32.96 points up at 1,653.25. It stood at 1,640 at 5pm but gained about 12 points in the post-closing adjustment period, mainly through a last-minute push on DBS and Keppel Corp.

The broad market was much more mixed than the index's reading would suggest - excluding foreign currency stocks, warrants and STI components, there were only 150 rises versus 148 falls.

Talk to dealers and the picture they would paint about the state of the local stock market remains the same as it has been for months now - stocks remain trapped within narrow bands with rallies viewed as bear traps and volume dwindling as a result.

Further afield there was worry that although the US government is bailing out Citigroup - news of which propelled Wall Street on Monday - there may be more large-scale failures yet to come in both the financial and motor industries.

As always, the local index's fortunes were dictated by Hong Kong, where the Hang Seng was firm throughout the day but was unable to add significantly to its 4 per cent gain that was attained early in the morning.

Among blue chips it was the banks which led the way, though all were off their highs. Similarly, SingTel rose 7 cents to $2.55 in the morning but finished one cent weaker at $2.47.

DMG Research said in a chart view on the STI that it believes a break below the 1,600-1,717 region implies the the index is headed for the 1,391 level by January. 'As for our weekly short-term view for the STI, we believe any rebounds should be short-lived. . .additionally, the 14-day RSI (relative strength index) still hovering above the 30 level also suggests that the STI is not yet oversold. Support is set at the 1,570-1,580 area. . .' said DMG.

In its Weekly Flow Investment Strategy Update dated Nov 20, Merrill Lynch said cash is king for now. 'But it's getting cheaper and cheaper: a typical US money market fund yields 0.73 per cent, meaning it would now take 95 years to double your money in it.'

It says it believes that among the catalysts cash-heavy investors are waiting for are lower volatility and spreads and the completion of big EPS downgrades. February is the earliest one can envisage all of them coinciding.

Meantime, investors were urged to watch credit spreads, for signs of credit-crunch easing, inventories for signs that the violent collapse in economic momentum is ending and A-shares, for signs that Chinese policy stimulus is working.

In its latest Economics & Strategy report dated Monday, Henderson Global Investors said that it is inherently difficult to call market bottoms but one signal is to look for the trend in leading economic indicators (LEIs).

'Plunging business and consumer confidence suggest the US, UK, Euro-zone and Japanese economies will experience a severe recession. . .the rapid deterioration in the economic outlook for Europe and the UK is likely to lead to more interest rate cuts in the coming months.'

Henderson also said recessions and periods of de-leveraging are almost always associated with falling inflation. However, the risk of headline deflation has increased substantially, said Henderson.

-Research Report by R SIVANITHY (26 Nov)

Market starts week on weak note

by CONRAD TAN (25 Nov)

UOB and DBS are main drags on STI; gains by heavyweights SingTel and KepCorp help limit index's losses

STOCKS here started the week on a sour note yesterday as two of the world's biggest banks scrambled to raise capital, adding to fears that the unfolding economic crisis worldwide is taking its toll on even the biggest names.

The Straits Times Index (STI) finished 41.81 points or 2.5 per cent lower at 1,620.29, after slumping 2.6 per cent earlier in the day. United Overseas Bank (UOB) and DBS Group were the main drags on the index.

Around the region, bank stocks suffered after Standard Chartered Bank said it would raise £1.8 billion (S$4.1 billion) through a rights issue to boost its capital base and the US government agreed to bail out Citigroup by injecting US$20 billion into it and insuring up to US$306 billion of its troubled assets.

Here, UOB finished 3.8 per cent lower at $11.26, DBS fell 3.4 per cent to $9.27 and OCBC Bank ended 1.1 per cent down at $4.55.

In a report yesterday, DBS analysts said they remain 'cautious' on the local banking sector, despite the boost from the government's initiative announced last week to support lending to small and medium-size enterprises (SMEs).

'We believe this move by the government will ease credit worries, alleviate default risk of SMEs and restore confidence in the availability of credit to SMEs,' they said. Still, 'the key concerns ahead would be the extent of asset quality weakness the banks might face'.

Olam International, a supplier of agricultural commodities worldwide, led yesterday's blue-chip declines in percentage terms. It fell 7 per cent to 93 cents, revisiting last Wednesday's low. The stock has slumped 66.9 per cent this year amid a broader slide in commodity-related stocks, as the world's biggest economies tip into recession, hurting demand for a range of commodities.

But Hong Kong-based Noble Group, which manages global supply chains in food, energy and metals, defied the broader market yesterday, rising 0.7 per cent to 74.5 cents after slumping badly last week. For the year, the stock is still down 63.2 per cent.

Chinese shipyard operator Cosco Corp was the second-biggest loser in percentage terms among STI members, falling 6.8 per cent to 68 cents.

Of the STI's 30 component stocks, 25 fell, four rose and one finished unchanged. Index heavyweights SingTel and Keppel Corp were among the gainers, which helped limit the STI's losses. SingTel rose 1.2 per cent to $2.48 and KepCorp finished 0.2 per cent higher at $4.61.

Outside the STI, the broader market was also weak. Losing counters outnumbered gainers 284-108 overall, with 930 counters unchanged, excluding warrants and bonds. Trading volume was abysmally low.

Just 790.4 million units worth $650.3 million changed hands, compared with Friday's volume of 1.17 billion units worth $971.6 million. That includes warrants and bonds but excludes shares traded in foreign currencies.

CapitaCommercial Trust fell 8.2 per cent to 73 cents after the property trust said on Friday it was pursuing its refinancing needs with several financial institutions. A Reuters report that day suggested the trust had asked four banks to arrange $580 million in refinancing.

The FTSE ST All-Share index, which tracks 268 of the most liquid stocks listed here, fell 2.5 per cent yesterday, while the UOB Catalist index of stocks on the second board dipped 1.5 per cent.

Elsewhere in the region, most stock indices also ended lower, except in Japan where markets were closed for a public holiday. Hong Kong's Hang Seng Index slid 1.6 per cent.

-Research Report by CONRAD TAN (25 Nov)

STI likely to consolidate further

by Ken Tai Chee Ming, CMT senior technical strategist, KELIVE RESEARCH (25 Nov)

BASED on Elliot Wave theorem, the Straits Times Index is currently trending in Wave-B downtrend of its Wave-4 cycle. At the macro front, the decline in commodity and oil prices is making a positive impact on the US external deficit and US dollar strength.


Coupled with the rising aversion to global risk, there is anecdotal evidence to suggest that US capital outflow to Asia is slowing down somewhat as funds re-balance their weightings in favour of US dollar assets.

If this prognosis is accurate, then Asian markets will likely consolidate further as the US dollar strengthens. For Singapore, MAS's shift towards a zero appreciation policy for the Sing dollar on Oct 9 had led to speculative shorts on the Sing dollar.

To date, the Sing dollar/US dollar exchange rate has depreciated from $1.47 to $1.53; the next resistance to watch is $1.543, followed by $1.592. We believe currency exchange levels will have a deterministic role in this phase of the STI's consolidation with index support at 1,570.

While it could be a wait before the Wave-C rebound arrives, potentially, a breakout of the recent 1,933 high achieved this October is plausible.

-Research Report by Ken Tai Chee Ming, CMT senior technical strategist, KELIVE RESEARCH (25 Nov)

Technical view on ST Index

by DMG AND PARTNERS SECURITIES (25 Nov)

STRAITS Times Index (STI): Edging closer to the 1,391 level.

We have previously noted that the STI is set to fall due to the Symmetrical Triangle pattern that had formed. While the STI did eventually drop 10.7 per cent to its intraday low of 1,570 during the previous week, we had underestimated the magnitude of the decline as we had expected the index to 'consolidate with a bearish tone' - the breakout move out of the Triangle had taken place slightly earlier than we have anticipated.

We had also mentioned that the break below the 1,600-1,717 region would imply that the index is set to target the 1,391 mark to complete the 161.8 per cent move of Wave A. While this view remains and with the STI still in the midst of a Wave C, we now note that this level should be attained by January.

As for our weekly short-term view for the STI, we believe that any rebounds should be shortlived. With the potential bearish moving average crossover on the MACD chart looming, the breakout move from the Triangle looks poised to continue. Additionally, the 14-day RSI is still hovering above the 30 level, suggesting that the STI is not yet oversold.

Support is set at the 1,570-1,580 area which is in line with the lower bollinger band while resistance is derived at the 1,760-1,770 range as depicted by the confluence of the 14- and 21-day moving averages.

-Research Report by DMG AND PARTNERS SECURITIES (25 Nov)

Week shows the worst not over

by R SIVANITHY (20 Nov)

NOTWITHSTANDING yesterday's short - covering bounce, the week just passed has served as a grim reminder to investors everywhere that the worst is not yet over for equities.

Wall Street's collapse throughout the week on deflationary worries as oil prices continued to crash, Citibank's plummet to US$4.71 per share on Thursday on worries about its future, the likelihood that General Motors might go bust, the awful US jobless and housing numbers, the US Treasury abandoning its supposedly crucial US$700 billion bailout plan - the list goes ever on.

Whatever the case, few observers placed any faith in yesterday's 48.15-point gain for the Straits Times Index (STI), most probably taking the opportunity to sell into short-covering strength.

For the week, the STI lost 97 points or 5.5 per cent to 1,662.10, falling continuously between Monday and Thursday. Not surprisingly, banks were hit again - DBS started the week at $10.34 but ended at $9.60 for a loss of more than 7 per cent, UOB's loss was one per cent and OCBC's 6 per cent.

Daiwa Institute of Research's Nov 19 report on the banks probably summed it up best when it said there is no reason to change its negative view on the sector after the Q3 results. 'We believe the quarterly net profit declines (average of 23 per cent) experienced by all banks for Q3 are a precursor of the weak operating conditions they face in 2009 and 2010,' said Daiwa.

Morgan Stanley (MS), in the meantime, said in its Nov 19 Asia Pacific Banks report that it has identified 39 banks in its regional coverage that may require some form of equity raising (ordinary equity issuance, dividend policy change, divestment, etc), to just increase their core equity tier one ratio to at least 9 per cent which amounts to about US$80 billion in new equity.

'The US$80 billion does not include capital strain/destruction from the emerging credit cycle and macro slowdown. At this stage, we have no clear view on the likely depth and breadth of these cycles, but suffice to say US$80 billion is unlikely to be enough.

Moreover, as the developed world moves to higher levels of absolute capital adequacy, will rating agencies and capital providers require Asia to maintain the previous relative gap ... ie, is even 9 per cent core equity tier one enough?' asked MS.

In his weekly roundup, AMP Capital's strategy head Shane Oliver said with the US's leading indicator of economic growth at its lowest reading in over 15 years, the worsening outlook means the US Federal Reserve will have to cut its short-term interest rates again at next month's meeting.

Next week, Wall Street will be closed on Thursday for Thanksgiving but will have to deal with a barrage of economic reports such as home sales, house prices, consumer confidence and durable goods orders.

As for the local market, DBS Vickers yesterday released a Singapore Market Focus entitled 'Cautious' in which it said with earnings deteriorating and assuming a recession with -2 per cent GDP growth, the STI could test 1,250.

-Research Report by R SIVANITHY (20 Nov)

More selling as recession fears mount

by R SIVANITHY (20 Nov)

ST Index sheds 3 per cent as part of region-wide stocks hammering after Wall Street dives

WALL Street's 5 per cent plunge to a five-and- a-half-year low on Wednesday sent stocks in this part of the world tumbling yesterday, serving a grim reminder to investors everywhere that the worst is not over for equities.

The US market's rout came after the release of more poor economic numbers, including thin housing starts and low consumer prices - with both figures fuelling deflationary worries.

Adding to the gloom yesterday was news that Japan's exports fell the most in six years, confirming that the global slowdown is taking a firm grip.

The result was a 4 per cent slump in Hong Kong's Hang Seng Index and a 51.64-point or 3.1 per cent loss for the Straits Times Index to 1,613.95, taking it about 13 points above its most recent low of 1,600.28, reached on Oct 24.

Banks were again hit. All three closed weaker, led by DBS's 34-cent slide to $9.16. Daiwa Institute of Research said in a Wednesday report on Singapore banks that it sees no reason to change a previous 'negative' view of the sector.

'We believe the quarterly net profit decreases (an average of 23 per cent) experienced by all banks for Q308 are a precursor of the weak operating conditions they will face in 2009 and 2010,' Daiwa said.

'We believe the sector is set for another depressing industry-wide decline of 8.2 per cent year-on-year for 2009, led by further year-on-year declines in fees and other income and a flare-up of loan-related allowances.' It maintained its 'underperform' ratings on UOB and OCBC, and a 'hold' on DBS.

Government-linked conglomerates continued to be sold down yesterday, though Keppel Corp managed to close unchanged at $4.49 after touching $4.30. Sembcorp Industries (SCI) dropped 12 cents to $2.03, while Sembcorp Marine (SMM) fell 15 cents to $1.65.

In a Nov 18 report, Deutsche Bank maintained a 'buy' on all the three stocks, with price targets of $7.80, $3.55 and $2.45 for Keppel, SCI and SMM respectively.

'While near-term uncertainties remain due to the global financial and economic turmoil, we believe long-term trends remain intact for the offshore and marine sector and through a flight to quality, may likely see future orders gravitate towards the more established players,' said Deutsche.

Credit Suisse maintained its 'underweight' rating on Singapore in a Nov 19 strategy report, saying 'low solvency risk does not mean no risk'. It did state, however, that Singapore Inc is well-placed to weather the storm because corporate debt at 32 per cent for FY08 is easily manageable.

In his latest Insights, AMP Capital's strategy head Shane Oliver said recession is now advanced in key developed economies such as Japan and Europe, and it is only a matter of time before the US officially declares that it too is in recession.

He also said that although there are some common features, this is not a normal slump that typically comes as part of a boom-bust cycle.

'Two considerations make this global slump potentially more serious and hence add to the level of uncertainty,' he said. 'First, we are faced with significant systemic risk as the flow of credit has been radically impaired. On top of this, most countries are weakening at the same time. The synchronisation in economic downturns in the US, Japan and Europe is now making the global downturn worse.'

-Research Report by R SIVANITHY (20 Nov)

3-day selling spree cuts 5% off STI

by R SIVANITHY (19 Nov)

Weak global economy, shaky Wall Street and poor earnings visibility weigh on index

THE fortunes of the Straits Times Index (STI) were almost entirely dictated yesterday by Hong Kong's Hang Seng Index. The local index exhibited a near-perfect correlation on a minute to minute basis with the former British colony's main benchmark throughout the day. As a result, it registered the same volatility as the Hang Seng, eventually finishing a net 26.96 points down at 1,665.59.

The Hang Seng, which spiked higher at mid-afternoon, closed with a net loss of 0.8 per cent. At 5pm, the December futures on the Dow Jones Industrial Average had lost 105 points, suggesting a weak Wednesday opening for Wall Street.

It was the STI's third consecutive fall, for a loss of 94 points or 5.3 per cent since the start of the week. The sick global economy, the shaky and probably overvalued Wall Street and poor earnings visibility in the wake of the US sub-prime crisis are the main reasons for the slide.

Brokers say sentiment continues to be influenced by a seemingly never-ending stream of bad news.

Coal mining firm Straits Asia Resources' (SAR) shares stood out in terms of weakness yesterday, by virtue of a 14.5-cent or 19 per cent crash to 60.5 cents on volume of 66 million.

OCBC Investment Research called a 'buy' on SAR. 'Its Q308 earnings have surged 707 per cent year on year and we expect FY09 to be even stronger, driven by record coal prices locked in during the commodity boom in 2008, coupled with easing production costs and retreating fuel prices.

Its 60 per cent dividend payout offers an attractive year-to-date yield of 9.5 per cent. Following our chat with management, we have tweaked our FY08 and FY09 estimates by -9 to +7 per cent. This raises our fair-value estimate to $1.35 from $1.25.'

Kim Eng Research said yesterday its top pick among conglomerates is ST Engineering (ST Engg). 'While having fallen 24 per cent since the onset of the global financial meltdown, ST Engg has been a relative outperformer in the current market, with the STI down 38 per cent over the same period.

ST Engg has also stabilised at its current level, making it an attractive pick in a volatile market, crucially backed by its FY09 dividend yield of 8.4 per cent.' ST Engg fell one cent yesterday to $2.13.

DMG & Partners said it has spent the past few weeks reviewing the financial forecasts and price targets for all the stocks under its coverage. 'With the cuts in price targets, we now arrive at a fair STI target of 2,080 over the next 12 months,' it said.

'However, in the short term we see further weakness that could take the STI to as low as 0.95 times P/B, or a 1,560 level. With the downside of about 10 per cent from the current STI level and difficulty in pinpointing the exact bottom, we recommend investors start nibbling at stocks that will survive this crisis.' The broker recommended companies with strong balance sheets.

In a Hong Kong Economics report dated Tuesday, Merrill Lynch said the unemployment rate there rose to 3.5 per cent in August-September, from 3.4 per cent in July-September.

'Given this is a lagging indicator, the already-worsened labour market is yet to be seen,' it said. 'We expect unemployment to hit 5 per cent in 2009. The weakening employment market once again lends support to our view that the economy has fallen into a recession. We continue to expect Hong Kong to post negative year-on-year GDP growth for the next two quarters and eventually finish the year with zero growth.'

-Research Report by R SIVANITHY (19 Nov)

Singapore Strategy

by DMG & Partners Securities (19 Nov)

TARGETING survivors: Some corporates may not have banks' support through this rough patch. The market remains concerned about the impact of global economic deterioration on corporate earnings.

Investors are closely scrutinising companies that have overstretched via massive borrowings to fund their growth, or have yet to generate sufficient operating cash flow, as these corporates are at the highest risk of breaching bank covenants if business conditions worsen further.

On the other hand, there are corporates whose balance sheets are strong. Even with the deterioration in business conditions, banks will continue to support these corporates for their working capital and capital expenditure needs.

These are the companies that are seen to survive this downturn. When economic conditions eventually improve, these companies could return to similar levels of profit or even exceed their previous peak profit levels.

Over the past few weeks, we have reviewed the financial forecasts and TPs for all the stocks under our coverage. With the cuts in TPs, we now arrive at a fair Straits Times Index (STI) target of 2,080 over the next 12 months.

However, in the short term, we see further weakness which could bring the STI to as low as 0.95 times P/B, or a 1,560 level. With the downside of about 10 per cent from the current STI level and difficulty in pinpointing the exact bottom, we recommend investors to start nibbling at stocks that will survive this crisis.

We have identified the following big-cap stocks which we believe will ride through the crisis and emerge stronger:

CapitaLand ('buy', TP: $3.05): At current levels, CapitaLand is trading at a 24.4 per cent discount to its end-Q3 2008 NAV of $3.60. During past crises, CapitaLand has been trading at 40-60 per cent discount to NAV. Taking the view that CapitaLand is now of a different stead compared to then, we have pegged our RNAV base-case value of $5.05 to a 40 per cent discount, implying end-2009 fair value of $3.05.

Risks include further tightening of credit markets and more macroeconomic dampeners. Catalysts include more government measures to prop up domestic residential property markets and further timely divestments or acquisitions.

ComfortDelGro ('buy', TP: $1.63): Plunging crude oil prices will stimulate earnings.

Sembcorp Marine ('buy', TP: $2.49): Sustainable amid challenging conditions. Our earnings forecasts have factored in slowing new order momentum.

Singapore Press Holdings ('buy', TP: $4.35): Over the years, SPH has successfully diversified its business, moving into magazines, property and the Internet. Recurring income in the current two financial years should be aided by the property segment, thanks to high rentals for its flagship Paragon mall as well as its sold-out Sky@eleven project.

StarHub ('buy', TP: $2.68): There have been some concerns over its gearing, but a closer look at its financials would bring comfort to investors. Net gearing for the company stood at 7.6 times in Q3 2008, which ranks it among the highest in the market.

However, there was a capital repayment of $1.1 billion, which resulted in shareholders' equity shrinking to a mere $103 million. If not for this, the net gearing would have only been 0.7 times - a decent figure, given that StarHub paid out dividends of $621 million in 2005-07, and declared another $230 million this year. The cash it generates is also more than sufficient to repay its debts.

ST Engineering ('buy', TP: $2.83): Robust financials, good cash flows from operations, long-term prospects still bullish, and orders remain strong.

United Overseas Bank ('buy', TP: $16.00): Conservative loan expansion over the past four years will keep non-performing loans contained. Our earnings forecasts have factored in huge loan provisions. Interest income should be cushioned by its relatively high loan-to-deposit ratio.

Other mid-cap stocks that also deserve attention are:

Ascendas Reit ('buy', TP: $1.75): Its present price presents a good entry point for investors to buy into a strong sponsor-backed industrial Reit with quality assets and an established track record, as well as stable income backed by long lease tenures.

China Milk ('buy', TP: $0.52): The company is able to generate consistent free cash flows over the years. We believe China Milk can ride through this crisis well.

Indofood Agri Resources ('buy', TP: $1.12): Indofood Agri has the ability to obtain refinancing for its short-term debt, despite the current credit tightening environment. While lower crude palm oil prices will affect earnings, this is partially mitigated by Indofood Agri's growing cooking oil & fats segment.

Li Heng Chemical Fibre ('buy', TP: $0.685): With capital expenses fully budgeted for, and at least another one billion yuan ($224 million) worth of operating cash inflow from H2 2008 to FY2009, the group should be able to withstand any further repercussions from the credit crisis and a slowdown in its business environment.

Raffles Medical Group ('buy', TP: $0.77): Strong operating cash flows should help it face challenges ahead. It has a healthy patient load, a diversified patient base, and a healthy balance sheet.

Venture Corp ('buy', TP: $7.40): Venture has managed to generate quarterly revenue and core operating profit exceeding $900 million and $66 million, respectively, since Q1 2007. While the prospects for Venture may have taken a step back in recent times due to the global economic downturn, we do believe that the present selldown in its share price appears over-extended.

-Research Report by DMG & Partners Securities (19 Nov)

Wave of heavy selling hits bourses

by R SIVANITHY (19 Nov)

Worries that Wall Street might tank send STI below 1,700; one billion units worth $863 million traded

THE region's stock markets were engulfed by a wave of heavy selling yesterday afternoon, resulting in the Straits Times Index (STI) losing the 1,700 mark when it plunged 57.12 points or 3.3 per cent to 1,692.55.

As always, expectations of how Wall Street might perform later in the day provided the main impetus, which means that going by yesterday's loss, the US market could tank when it opens.

Hong Kong's Hang Seng Index was also instrumental in setting the tone, with a 4.5 per cent loss. In addition, China's indices collapsed almost 7 per cent and Europe opened with an average loss of 1.5 per cent.

Turnover, which was poor before lunch, picked up in the afternoon. Excluding foreign currency issues, one billion units worth $863 million were traded, up from Monday's weak $638 million but still below last week's low average of $950 million.

Brokers said news that Citigroup plans to lay off 50,000 staff worldwide provided a sobering reminder to many investors that the downturn is only just starting.

In a Nov 14 report on Asia-Pacific banks, Morgan Stanley analyst Matthew Wilson said that in the current environment, earnings visibility is very poor and using book value as a gauge of value can be a problem.

'At this stage we have no clear view on the likely depth and breadth of the credit and macro cycle,' he said. 'Book value is a function of accounting. Consequently, it usually differs materially from economic value.'

In particular, Mr Wilson said goodwill impairment is a risk, and he sees no fundamental reason why investors should pay a multiple on goodwill. Nine Asian banks were identified for which goodwill accounts for more than 25 per cent of book value, among them DBS. The stock dropped 20 cents to $9.90 yesterday with 8.1 million done.

The property sector took a hit after news that a record low 112 units were sold in October and that some buyers were returning units. Goldman Sachs said yesterday it is cautious on developers, with a 'sell' on City Developments and Wing Tai because of their exposure to the prime residential segment.

The broker said that even though developer stocks are trading at an average 46 per cent discount to net asset values, it still prefers selected commercial real estate investment trusts. CityDev plunged 50 cents or 8 per cent yesterday to $5.75.

Elsewhere, commodities play Olam International was the subject of differing broker recommendations. JP Morgan, for example, in a Nov 14 report called an 'overweight' on Olam with a $1.19 price target, describing the company's first-quarter 2009 results as encouraging.

Merrill Lynch, on the other hand, on Monday rated Olam an 'underperform', down from 'neutral' and with a $1 price target. 'Our price objective is based on the Gordon growth model and implied 1.5x book.

We have cut our FY09/10 estimates by 10-18 per cent and expect lower sustainable ROE (return on equity) of 16-17 per cent as the company adopts a less geared capital structure,' said Merrill Lynch. Olam dropped 16 cents to $1.06 yesterday.

The US investment bank also downgraded another commodity firm, the Noble Group, setting a 70-cent price target compared with $3.15 previously. 'We acknowledge the stock is down 50 per cent since September but believe there is more downside risk given our prognosis that the slowdown in commodity trade will stretch into 2009,'

Merrill Lynch said. 'The stock traded at 0.6-0.7x in the 1999/2000 post-Asian crisis period and 0.8x during Sars and 9/11. We think it could trade at those levels again.' Noble ended 9.5 cents down at 87 cents yesterday.

-Research Report by R SIVANITHY (19 Nov)

Until Wall St capitulates, best to sell into strength

by R SIVANITHY (16 Nov)

SINGAPORE - The Encarta World English Dictionary defines 'capitulate' as 'surrender, especially under specified conditions; consent or yield: to give in to an argument, request, pressure or something unavoidable'. It also defines 'capitulation' as 'a giving up of resistance'.

Much has been made of the selling of the past year, with some observers believing that markets have capitulated and that a bottom has been reached which, for the Dow Jones Industrial Average is around the 8,000 level, for the Hang Seng Index is around 12,000 and for the Straits Times Index (STI) is around 1,600. How plausible is this?

For the STI, the 1,600 level represents a loss of about 2,200 points or just under 60 per cent from all-time high, roughly equal to its fall during the regional crisis of 1997-98.

If you believe the present crisis presents conditions that are no worse than they were ten years ago because Asia is relatively well-insulated from events in Europe and the US, then there is a good chance that the local market is close to a bottom and that further downside, although still very likely, is limited from here on.

We're not really qualified to pass judgement on the Hang Seng; suffice to say that its loss from an all-time high of about 31,600 to 12,000 is 62 per cent - not dissimilar to the STI's fall over the same period. So again, although downside is still likely, chances are good that it would be limited.

However, while it is possible to argue that stocks in Singapore and Hong Kong (and most of Asia) may have capitulated as per the definition above, the same cannot be said of Wall Street, which, as the source of the world's problems, remains overly optimistic, stubbornly reliant on the same investment bank model that has failed spectacularly over the past year and is very possibly still overvalued.

At 8,000, the Dow's fall from an all-time high of 14,100 is only 43 per cent (its present loss at Friday's close of 8,500 is under 40 per cent), which is significantly less than any of the world's other major markets.

Consider for instance, that Japan, which has grappled unsuccessfully with deflation for almost 20 years, has seen its Nikkei lose almost 80 per cent from its own pre-housing crash all-time high of about 39,000.

As we have pointed out many times before in this and other columns, earnings estimates are still way too high in the US - Bloomberg's summary gives the S&P 500 as trading at a historic earnings per share of US$47 and a forward figure of US$76. How likely is it that Corporate America will report such amazing earnings growth in the months ahead when the economic numbers are only expected to worsen?

On this note, research outfit Ideaglobal said of Friday's US October retail sales fall - which was the worst monthly fall on record - that it reveals a terribly weak picture of the consumer, signalling a weak holiday season.

'This is admittedly significantly worse than we anticipated which was for a more gradual decline in the wake of weakness posted in September..it remains difficult to assume that consumer spending will be supportive in the coming quarters. The combination of job concerns on behalf of many, the debilitating credit crunch and the multiyear correction in housing has helped bring the economy to a halt. Personal consumption should remain weak in the months ahead as consumers rein in on discretionary spending. This could be only the early stages of considerable declines in the months ahead'.

The bottom line is that that although markets everywhere may be close to capitulation, the same cannot be said of the source of the world's problems, Wall Street.

Even if the US market does not correct by as much as others like say Hong Kong or Singapore, it would be reasonable to expect at least a 50 per cent loss from all-time high, given the magnitude of the country's problems. If this does occur, the Dow would fall to just above 7,000.

So until investors see definite signs of Wall Street capitulating - or valuations coming down to more realistic levels - the advice would remain the same it's been for this entire year - sell into strength and be selective about buying the dips.

-Editorial Report by R SIVANITHY (16 Nov)

A bipolar, volatile trading week

by R SIVANITHY (15 Nov)

Despite the volatility and notwithstanding Wall Street's generous Thursday bounce, the general trend appears to be down

THERE was no let-up in volatility this week, particularly for the major indices. Benchmarks in the US, Japan and Hong Kong rose and fell as much as 5 per cent per day, confounding anyone who thought markets would have settled down by now to the business of earnings and the economy.

Then again, maybe the volatility is conveying a message - to the effect that things are shockingly bad, and that the extraordinary bailout efforts by governments won't fix them overnight.

Adding to an already-confused state of affairs, the US Treasury said this week that it was abandoning the US$700 billion Toxic Assets Rescue Plan (TARP) or Bank Assets Rescue Fund (BARF) announced last month to help clean up banks' balance sheets and return them to solvency. Instead, it is looking at direct capital injections.

You don't need to be a genius to realise how negative a signal this is.

In effect, the US government has admitted that its best plan to save the financial system - one that was conceived after months of study - is flawed and has to be scrapped.

Predictably, this sort of signal sent the US stock market - and others with it - into a tailspin on Wednesday, although for some inexplicable reason, Thursday brought an equally large rebound.

As for local trading, a familiar bipolar pattern emerged during the week, with attention focused on a handful of big-caps on the one hand, penny stocks on the other - and little else in between.

This split - into the very big and very small - is a common occurrence in the local market and regular traders would easily recognise it. Hedge funds and institutions desperate to shore up flagging performance concentrate on blue chips, while syndicates and house traders gravitate to the pennies whenever there is any sign of strength.

Small-caps in focus this week included battered China plays China Hongxing Sports, Cosco Corp and Yangzijiang - apparently because they have been sold down hugely. Indonesian commodity plays Indofood Agri and Golden Agri also saw action after they released results.

Having just reported their Q3 earnings, the three local banks were in focus throughout the week, though the resulting downward revisions meant they all traded to the downside. DBS started the week at $11.40 but ended it at $10.34 yesterday, for a loss of $1.06 or 9.3 per cent. UOB's fall was $1.02 or 7.8 per cent, while OCBC's was 34 cents or 6.5 per cent.

SingTel was another big-cap to release its results - a 12 per cent drop in Q2 profit to $868 million. The stock fell 12 cents or 4.8 per cent over the week to $2.40.

Despite the volatility and notwithstanding Wall Street's generous Thursday bounce, the general trend appears to be down. The Straits Times Index yesterday ran up to an intraday high of 1,817 but ended at 1,759.14 for a net gain of a paltry 3.67 points.

Over the week, the index narrowly avoided a triple-digit loss, falling 98 points or 5.3 per cent. Every day, it tailed Hong Kong's Hang Seng Index closely, providing investors with a first-rate advance indicator of how Wall Street might perform later each day

-Editorial Report by R SIVANITHY (15 Nov)

Be wary of rising complacency

by R SIVANITHY (12 Nov)

SIX weeks ago, just after the Straits Times Index (STI) had successfully tested the seemingly firm support level of 2,300 for the second time, this column recommended investors to exercise patience before buying because the worst of the bear market was in all likelihood yet to be seen.

Since then the STI has crashed by an astounding 30 per cent, led lower by large- scale collapses in Hong Kong and the US where fund redemptions and panic selling have swept the floor out from under stocks.

However, now that prices around the world have fallen to multi-year lows (most markets are at their lowest in about 4-5 years) and governments everywhere have desperately pumped in as much cash as they can spare to shore up the financial system, there seems to be a sense of relief and maybe even complacency creeping back into the markets.

A large part of this complacency stems from bailouts because of the explicit guarantee they provide. The bailouts have even prompted some research houses and investment advisers to start calling a 'buy' on equities on the premise that the worst could be over.

It's likely that stocks are closer to a bottom now than they were six weeks ago before the coordinated rate cuts by central banks, before the UK's bank nationalisation efforts and before the huge international pump- priming packages were announced.

But the arrival of a bottom does not automatically herald the start of a new bull market - stocks can drift for months within narrow channels before any permanent change in direction takes hold. So before investors get carried away by the bullish camp which seems to be finding its voice again, it's worth pointing out a few things.

First is that many 'buy' calls are coming from the same bullish brigade that have got it wrong throughout 2008. There is an old adage that if you keep calling a 'buy' long enough, you'll eventually be proven right.

Second is the argument used by the 'buy' brigade that much of the bad news has already been factored into the price, a mantra that was chanted in March when US investment bank Bear Stearns had to be bailed out and has continued to be chanted even as stocks continued to crash over the past seven months.

As the events of the past year have demonstrated, markets are highly inefficient - or at least they are not efficient enough to be able to factor in all that needs to be factored in. All throughout 2008's crash, one thing was painfully obvious: heightened risk was never properly taken into account because of complacency and an over-reliance on over-optimistic valuation models.

Third is that urgings for clients to buy are often tantamount to the selling of hope. The problem is, hope is not an investment philosophy. This is not the time to be telling clients to start buying stocks just because prices have plunged. Recommendations need to take into consideration financial discipline, prudent spending and increased savings.

Given the failure of the traditional investment banking/stockbro- king model, what is needed is a large dose of scepticism about all aspects of the financial market, particularly with 'buy' recommendations.

Fourth, and perhaps most important, is the state of the US economy. The fall in oil and commodity prices means that it probably isn't inflation or stagflation that investors have to worry about now; instead, the collapse in housing, credit, labour, banks and stocks means that the incoming Democratic administration will have to grapple with deflation, possibly on the scale that Japan has had to worry about for almost 20 years.

Still, there is one glimmer of hope. Federal Reserve chairman Ben Bernanke has studied deflation in depth and in a lecture six years ago to the National Economists Club said that if deflation were to ever rear its ugly head in the US, the government should place its faith in the power of the printing press and churn out US dollars to reflate or inflate the economy.

So it could be that the US central bank has the right man for the job at the helm, one who is familiar with the economic conundrums posed in a deflationary environment.

Then again, Mr Bernanke did say at the time that deflation was not likely because the US economy was so strong and shockproof, the banking system so robust and well-regulated, and household balance sheets were in such good shape.

-Editorial Report by R SIVANITHY (12 Nov)