After a turbulent August 2007, both Bernanke and Bush threw lifelines to starve off a potentially contagious 'financial plague' that threatens to undermine the world financial order; nonetheless both emphasized that their actions were not aimed at bailing out investors who had made bad decisions.
President Bush went further to say that its "a repricing of risks"."It's not the government's job to bail out speculators or those who made the decision to buy a home they knew they could never afford," Bush said in the Rose Garden (30/8/07).
Subprime is by all definitions not subnormal - the extent of potential damage is still being assessed. Interest rates were lowered to cushion and stabilize the slide in the stockmarket whilst Sovereign Wealth Fund (SWF) were allowed to take equity stakes in some established financial groups affected by the Subprime debacle.
By last quarter 2007, Sovereign Wealth Fund (SWF) from Singapore, United Arab Emirates, Russia, Saudi Arabia and China bought *stakes in Citibank, Merrill Lynch, Barclays, Blackstone, Morgan Stanley, UBS; just to name afew.
*not all are results of subprime
SWF is expected to reach US$8 trillion by 2011. Interestingly, about 50% of London Stock Exchange is owned by Qatar and Dubai today.
Was the stockmarket fall a technical correction or the worst is yet to be?
Lets revisit some issues;
i) Any increase in interest rate in Japan is likely to raise anxieties of Yen carry trades
Unwinding of Yen carry trades require the delicate balance of interest and (currencies) exchange rates. The inherent weakness of the US$ is uneasy subset of the unwinding process.
ii) US Subprime mortgage loans 'bubble' were pricked, the exact figure is still unknown
The full blown subprime effect is yet to be felt and the numbers has yet to be fully quantified. Piecemeal solutions, like lowering of interest rate, bailouts and fixing of interest rates by FannieMae and MannieMae will only slow the impact but not resolve the real issues.
Of course, there is a harboured hope that such actions will inject some sanity and stability into the debacle and restore confidence.
Will history gives us any leads?
The U.S. economy after the 1920s and that of Japan in the 1990s were instances where the period of credit expansion lasted several years, largely involving real estate speculation, and came to involve much of the population, whether that meant plunging into American stocks with borrowed money in 1929 or buying Tokyo condos with 100-year mortgages in the late 1980s.
iii) Oil nears US$100
In absolute terms, oil looks expensive at current price but it is not that threatening if we factor in inflation and a weakened US$ (exchange rate)
iv) Emergence of China and India in the world market order
China is the workshop of the world while India provides the technical support & knowledge. Both had provided fairly cheap solutions and products over the years. However, costs had crept up in recent years. Vis-a-vis qualititative expectations, they are no longer cheap producers.
Consumers will have to pay higher prices to continue enjoying their current consumption patterns or demand will fall due to rising prices. As such profits, if any, will fall with a rise in the cost of production and current Price Earning (P/E) floats upwards making the investee companies less attractive
v) Uneven and unexpected flows of 'Hot money' or 'Liquidity flush funds'
The love-hate relationship of US$ vis-a-vis other currencies lends further uncertainties to the world market.Will the smart money flows to safe-haven Euro or Asian Markets (where their currencies is expected to appreciate against the US$) whose cost efficient companies outperform their US counterparts? If so, it will be double whammy to US; a selldown on US stocks will affect US. Coupled with properties loans defaults, unemployment rises and consumption drops ... the vicious cycle will push US into a recession! Alas! the world is ever so dependent on US as the lead consumer nation.
vi) Social orderThe widening rich-poor gap threatens social order and is potentially a destabilizing factor to market at large. This is further exacerbated by increase costs of living; it will be an ultimate nightmare it the world hits stagflation in the interim.
I belief the market is experiencing a readjustment from the excessive consumption pattern and an inflated price situation boosted by cheap and easy credit. The earlier the disarrange demand and supply is restored to order, the earlier the market will enjoy an equilibrium and confidence restored.
There is no prize for guessing the correct number in the indices. The following are my 'guesswork':
Current Support LongTerm Support Remarks
STIC 3437 3200 2800 Sell into strength
HangSeng 27519 26000 20000 =same=
KLSE 1466 1250 1000 =same=
DJIA 12800 12500 11300 =same=
2008 is a volatile year for index traders.
The Stockmarket, the Sun & the Moon
There is an uncanny correlationship between the Solar Eclipse (market has a tendency to move up) and the Lunar Eclipse (market has a tendency to fall) - especially if the eclipse is total - as can be seen in the recent Lunar Eclipses in March & August 2007 (its been fairly similar since I began tracking eclipses in 1980s).
In year 2008, the following are interesting dates to watch:
7/2/08 Annular Solar Eclipse
21/2/08 Total Lunar Eclipse
1/8/08 Total Solar Eclipse
16/8/08 Partial Lunar Eclipse
Given a chance, exiting the market in any rally this year (probable occurrence during the Capricon Effect - typically beginning of the year) looks like the 'soundest' decision.
The bull, the bear and the sheep
The bulls ride the market to wealth; the bears short the indices to richness. And the sheep pay and watch the bulls and bears enrich themselves.
What do you think 2008 holds? Do share your opinions with me.
(THIS IS NOT AN INVESTMENT ADVISE NOR ANY ATTEMPTS TO SWAY DECISIONS. IT SHOULD NOT, AND CANNOT, BE RELIED ON FOR MAKING ANY INVESTMENTS. IF IN DOUBTS, CONSULT YOUR OWN PROFESSIONALS FOR ADVISES; ITS FOR READING PLEASURE ONLY . ALL ABOVE INFORMATION & CONTENTS ARE WITHOUT PREJUDICE, UNLESS OTHERWISE STATED)
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