UPDATE - UBS

only just one week ago, you read subprime is going to get worse and fast. now look at ubs who just announced how bad it is hit by subprime.

also look carefully at this chart. the first double top neckline is at 55, it fell through and reached the 45 mark as predicted by this kind of chart type. however, look further, you will find it just didnt end there, it now has a multi-top chart and neckline at 50, this is getting worrisome. it did fall through the 50 line, the magnitude south is min 35 ie a fall of 30% more from here.

if you look at banks on their reporting, they didnt come honest with their exposures to SP. therefore i am almost 100% sure that

• HSBC will reach 110 target within the time frame i mentioned in the earlier update about it.
• the interest rate drop by fed will reach at least 1.5% by end08.
• oil will indeed fall back close to 80.
  

SUBPRIME, OIL PRICE and DJ

Many of us are confused about how the subprime woes will play out and also the direction of DJ, interest rates and oil price.

Simple - subprime woes will only get worse and fast, why?

1. A broad base housing market decline rarely ends in 2-3 years, so dont believe that subprime woes can end mid08 though it peaked in early 05. It will take minimum 6 years to recover if not more. The Japanese one lasted 16 years with false alarms of bottoming out all the way.
   
2. Foreclosures are going up
3. Layoffs are on the way - Citigp announced to layoff 50,000 already. 3-5 months after being laid off, if people still cant find employment, they cant finance their mortgages thus further pressuring banks to foreclose which will make the housing market even weaker
   
4. Banks will layoff before xmas to cut overhead
   
5. Finance sector on cutting costs will delay all capital outlays including IT this is why Nasdaq index gets hit even harder
6. Delinquent loans whether they be mortgage or credit card related are already going up fast
   
7. Once consumers stop spending the contraction will accelerate
8. Two charts base on FDIC data indicate how serious the problem is. The magnitude this time is more serious than any of the past corrections of the housing market for the past 30 years or even since 1933.
   
9. DJ Transportation is known to reflect the economy ahead better than DJIA, its performance can be seen deterioratiing faster than DJIA from July07, not until you see a turnaround in DJT ahead of DJIA, the general direction is south.
   

Check out this link and read carefully the full extent of the problem:
http://news.bbc.co.uk/2/hi/business/7073131.stm
The city of Cleveland [Ohio] alone is hard hitted, you can imagine how bad it can be with the rest of the US counted in.

Expect 1 - 1.5% or even 2% cut in interest rates by end08 starting from the next Fed meeting in mid Dec.

It is already in the press that help is on the way from govt, banks, FIs to avoid further upsets when interest rates reset for variable rate mortgages as they fall due shortly. Many FIs will use the news to squeeze short stock positions for a while and also to boost performance for qtr/year end investment positions.

DJ would not have been this high if not for the oil stocks fast and substantial rise, but lately when oil is hitting new high, oil stocks such as Exxon lanquish below their highs reached earlier, this indicates oil has reached a short term peak already. Read my update released 06Jul19 which forecasted the outcome of a similar situation. The crude correction lasted 6 months, how long it will last this time round is anybody's guess, but the faster it corrects, the sharper the rally.

So, couple with subprime woes, expect DJ to fall further subsequent to a rebound after the help on interest rates reset is announced, in short after yearend.

UPDATE - HSBC

look carefully at this chart, this is a classic multiple top with neckline around 132, reached 152 top in nov06 dropped to 132 in apr07, hit it again in aug07 retried 154 top but didnt manage to stay there for long.

if you try to track the sequence of events that hsbc came out to announce the bad news back in mar07, messages had already circulated on the web that hsbc was a strong sell as early as 25feb07 when its price was still at 140 and even further back in 4jan07. check here for more details :
http://messages.finance.yahoo.com/Business_%26_Finance/
Investments/Stocks_%28A_to_Z%29/Stocks_H/
threadview?bn=8317&tid=5901&mid=5905
http://messages.finance.yahoo.com/Business_%26_Finance/
Investments/Stocks_%28A_to_Z%29/Stocks_H/
threadview?bn=8317&tid=5629&mid=5639

you will have to cut and paste to connect the three lines to get the url since the blog site truncate the url if it is too long.

mr greenspan said he was not aware of the size of the subprime problem until very late, but everyone knew greenspan is a figures maniac ie he read a lot of statistics and the mortgage bankers association publish semi annual reports and had in their reports disclose that interest only and payment options home loan were growing like hell, so he just excused himself for his oversight. read greenspan evils in my earlier updates.
read also 11dec06 article titled Exotic, Non-Traditional, or Risky at following url: http://www.creditslips.org/creditslips/
mortgage_debt_home_equity/index.html

now it is entering a crucial phase, if it drops below 132 say hitting 126, then we will see a new low at 110 - unimaginable for hsbc fans, but probable. check my earlier forecast on hsbc. it may still bump around this area for a while before retreating below this level, the number of months it was above 132 is 16, so it would take roughly 5-8 months to reach this low if it ever would.

so watch closely this level - 132, and take particular attention to the months apr - jul in 2008.

UPDATE

CitiGroup and Dow Jones
look at citigroup's chart, a very clear double top is formed neckline at 48, broken downward, already retraced the neckline and starts falling again, it will reach no less than 41. dow also happened to be forming a high low top neckline at 12800, failing which a 1200 points [14000-12800] fall is in the cards.
a lot of people always ask about timing, take the time it took to form the double top and the fall usually takes about 1/2 to 1/3 of that time or shorter to reach the target. take citi as an example, it should take between 2.5-4 months to get there.
read my earlier update on hsbc, it happened all within one day to reach 132.

Hang Seng
hang seng is more tricky as the chart offers no conclusive evidence of double top, but look carefully at the volume, it falls steadily with the steep rise in the index from slightly below 20000 all the way up to 24000 with the formation of a rising wedge, this indicates it will fall back to below 20000 pretty fast. another indication that it has reached a top is because government usually buys at the top, with the hk govt increasing its stake in the hk stock exchange, it must have reached a top, at least for the short term.

HK economy

China has opened up for almost 30 years and HK is always on the receiving end for quite some benefits economically, herebelow categorize this era of openness of China and how HK has benefited from it:
1978-1988 - this was a time when HK acted mainly as a tradesman to the import of all kinds of consumer goods into China because of the shortage of such goods due to the cultural revolution which affected production and innovation of all kinds of consumer and industrial goods. HK reaped extraordinary margins because China did not have info on the pricing of such goods, as long as demand existed, they would import. China also relied a lot from HK for the foreign exchange generated from food/other supplies to purchase necessary goods for the state and its people.
1989 - 1991 - China factor to HK was still positive even though the Tianmen incident caused a drastic drop in confidence for the middle class and had prompted an immigration wave among them. Desert storm of Kuwait also interrupted enconomic activity for a while.
1992 -97 - HK acted, for the first time, as the financial middleman for China first batch of SOEs to list on HK's stock exchange thus reaping unseen gains for the management of these companies who then started to invest such proceeds in all sorts of investment - listed companies, properties in HK/Macau/China. This led to total loss of confidence by overseas investors during the Asian crisis and such activities ground to a halt and these listed companies incurring heavy losses. The GITIC, Guangdong Investment, Guangnan all fell under heavy debt incurred by such blind investments. A lot of enterpreneurs also moved their production base into China during this era after Deng convinced people from HK that China would not revert to old habits of pruning enterpreneurs.
1997 - 2002 China was still suffering from the investment mania of the early 90s, but HK entrepreneurs were moving with lightning speeds their production into China or expanding them due to increased business. Because of retaining the profits here in HK, the slump in property sector was mitigated by such increase in business.
2003 - present - After the SARS epidemic, HK economy hit its lowest point in the cycle and has been up ever since. China's accession into WTO created another round of IPOs that must be listed to shape them up against foreign competition. After having opened up for over two decades, the China SOEs or their own breed of enterpreneurs are encroaching the turf once held by those from HK. Because HK factories mostly fall under preferential tax scheme and also the so called material import processing, they pay limited taxes and have enjoyed a long while special status. The trade war between China and US/EU created undue strains because of ensuing trade surpluses. China has so much exchange reserves these days that they do not need the HK enterpreneurs to generate even more thus straining trade relations further with the west.

What will happen now to HK enterpreneurs in the future years to come as they have been wealth and employment generators for HK in the past 30 years?

The outlook for them is gloomy, in fact some of them have already fallen under because of complacency on competition or because of factors turning against them unnoticed or should we say, they did not pay enough attention to the macro changes after China's accession into WTO.

These enterpreneurs are facing unprecedented adverse factors against them and when they fall under, the wealth generation factor in the past would evaporate and many of them may have to sell their investments in HK in the process, just take a look of the eight prominent factors against them:

1. rising of minimum wages - minimum wages have risen for the past few years, if they keep on rising and they cannot raise prices with the customers, margins will be erased and any goods recall such as the current Mattel episodes, such factories are doomed to fail;
   
2. the rising yuan - pricing with customers have to factor in the rising yuan as export prices are mainly USD and their costs mainly Yuan based, so if their forecast is off a few percentage points, margins can become nil or negative ie the more you produce the more you lose;
   
3. environmental protection - most factories pay little attention in the past, but with more and more toxic materials entering the food chain, China now pays more attention to these issues and would only add further costs to production;
   
4. export policy changes - China recently announced that 1500 type of raw material imports must be supported by deposits paid in advance and to be offset or payback on exports for all material import processing concerns [most HK factories are in this category ie export based].
   
5. tax policy changes - in the past, profits are kept in HK companies although their activity is limited to processing the trades through banking channels, China is challenging this practice via the HK/China tax treaty disclosures and also transfer pricing disclosures.
   
6. labor shortage - because China has been developing the middle and western provinces for a few years already, there are now more opportunities for the peasants and they do not want to travel long distances to work in factories that are like labor camps to them. Some surveys said that in Dongguan, there are 1.5 jobs to 1 job applicant, the labor shortage is serious.
   
7. power shortage - the growth of power supply is slower than the demand for electricity, therefore every factory has to invest in alernative power generation to ensure smooth production, this also increases costs further.
   
8. corruption - there has always been corruption in the past, but never has it been so serious as these officials are more greedy than any time in history since the arrest of the gang of four, but they are also under pressure from the central government not to let loose on labor, environment and tax issues. corruption is like protection money, once you pay you are protected, but not now, you pay yet you are still not protected in any way thus many enterpreneurs are doubly charged.

Enterpreneurs from HK can no longer afford to be complacent about their future any more, the later they react, the more HK will suffer.

UPDATE - HSBC & SHG A

Most HK investors have blind faith in HSBC being the stock that has unbelievable staying power to resist any stock crash and recovers in no time.

Now look carefully at these two charts, the playout in the next 2-3 months is critical.

In the 2 year chart, it hits a high of 152 in Nov 06, but it never manages to get to that price again. Now look further into the 6 month chart, it is obvious that there is a neckline forming at 142. It breached upward through 142 in mid April, hit 142 again at end of June, breached downwards again on 27 Jul and bounced back up. Truly, a multi top with neckline at 142 has been formed. The first high of 148 happened early May and it never reached 147 again since April.

This is a classic case of unloading big chunks of one stock. Usually funds would sell into strength and hold back on weakness to avoid the price crashing thereby forming a double or multi top, thus it takes a 5-8 months to unload without causing major incidence. By mid August, we reach the 5 month danger zone, if it does breach downward and hit 138, stays below 142, you will see a minimum of 132 that takes no more than 2 months to reach this target from the time it breached 142 and stays below.

Watch the playout CLOSELY if you have major holdings in HSBC. It also has -ve implications for the index and other stocks as a whole.

The timing could coincide with a mini crash in SHG A share index [it could easily breach the 5000 mark throwing itself into danger zone as it is in the third leg up phase already]

UPDATE

most of you must be longing for some updates after recent events in the us and a very volatile stock market.

usa
this country is famous not just for democracy [claiming to support human rights etc], but also for a series of economic mishaps that affect the rest of the world. just to quote a few cases within a short span of a century:

1. great depression during 1920-29;
2. sovereign loan problem [of latin america] in the 70s led by citibank;
3. savings and loan crisis in the 80s, the rescue of which cost us taxpayers billions of dollars;
4. LTCM crisis in 1998;
5. internet bubble in 2000 when nasdaq reached 5000 only to fall back to 1100 in 2003 and still hadnt fully recover;
6. waging war on afghanistan and iraq costing billions of dollars of govt deficit and indirectly encouraging corruption both at foreign and us govts.
7. housing [the subprime] bubble created by Greenspan ever loose interest rate policies.

even with so much of what they called checks and balances in place, us economy had floundered on one mistake after another because they can afford to since us dollars is a reserve currency and major commodity exchanges are all us based ie they enjoy privy information to act against other speculators to make a profit and a comeback.

how will us markets pan out is anybody's guess? but taking a look at DJ and Nasdaq charts [chart 1 and 2] above will give some insights. the third chart is a monthly chart of aussie, it indicates an inverted head/shoulder chart with good support at 81.

what do the 3 charts tell us?

• chart 3 indicates major corrections before a strong rally of the aussie. since the chart is a monthly one, it will take quite some time for the corrections to reach 81.
• nasdaq also indicates good support at 2150 also with inverted head/shoulder chart reaching a max of 3150.
• dj should also have strong support along the band 10000-11000 [lasted 2 years and more], but it had already reached the minimum magnitude under an inverted chart breakout [at 11000, bottom is 7500 which gives a 3500 points rise above the neckline 11000 reaching 14500 - current peak is 14000, pretty close] which makes it tricky to predict its future.

if you believe that aussie will rise as the chart has shown, then us is likely to lower interest rates to support the economy thus giving nasdaq a new high later, then it would not make sense that dj will fall while nasdaq has room to grow.

should job growth continue, the fallout from subprime [a 20% downturn is likely] can be contained as long as inflation is mild.

china
apparently H shares are always engineered to have 50% profit growth in their first year of ipo, thus the ipo subscription price looks subdue.

if you check out a number of H shares in the past year or two, those that rallied 2 times or more, they either have listed as A shares or have chosen to do so but no announcement yet. china coal [1898] is a good case in point, it got stuck around 8 but rallied to 15 and announced it will list as A shares too. why the rally? - to avoid dilution since the funds from A shares are not needed short term, so they can generate little at the bottom line and would only dilute and drag down EPS, one way to avoid such dilution and foot dragging is to boost the share price to compensate. china mobile shouldnt have rallied to 90 if it choose not to list as A shares, it will soon if it hadnt announced yet.

it is interesting to find out why china allows A and H shares to co-exist. since its capital account is closed and with two class of shares, even talks [with no action yet] in the future about merging the two will introduce arbitrage and shock to markets on both side of the border before the capital account is open.

this kind of uncertainty is unnecessary, A/H is very similar to A/B shares introduced long ago by the china securities authority. now they have to figure how to handle the two - A/B since they are exact duplicate other than the nationality of the owners behind them, but there is a huge gap in their pricing by the markets.

the us fallout could be a gain for china since the effort to suppress speculations in both [stock and housing] markets need not be as heavy handed as it would without a us fallout.

those of you who would like to read what to do should the us fallout turn out to be a major crash this time round can read more about crashes at this website - http://www.stock-market-crash.net/

UPDATE - Shg A

If you are familiar with charts, this one should be easy for you. The chart is that of Shanghai A shares index.

There are two declining tops - 2001.5 and 2004.2 which formed a down line finally broken in 2006.1.

During the uptrend, there were two glitches - one at 2006.6 and 2007.2, this leg up took 8 months, the last leg up will take less than 2/3 or 1/2 the time which means it will hit the peak 4-6 months from 2007.2 ie between 2007.6 - 2007.8 or earlier. So brace yourself for a rough ride soon.

Usually a peak is followed by a sharp drop and then followed by a quick rally which would not hit the peak or only slightly above the peak to dry up the last bit of buying power. This is called a double top which has devastating impact on the economy.

GST

Why do governments push for GST? They said it is to have a broad tax base.

The Hong Kong case is worth investigating. HK govt said we have a narrow tax base relying heavily on salaries/profits tax and also proceeds from sale of land. Without a strong and steady tax base, they cannot deliver quality services year after year to the public. They also quoted we had severe deficits in the past cycle [1997-2004] wiping out almost 1/2 - 2/3 of our reserves. What they did not say is the real estate is down 60-70% from top. How many times in one's lifetime you see a 60-70% drop in real estate over a period of 7-8 years? Maybe only once if you do not have wars, so why worry.

There is reason to worry about the governments' intention as they dont have sense in spending money and they want GST to protect them so they do not have to figure out how to cut costs in down cycles. GST is an indirect tax and raising GST rates has less resistance from the public. Direct tax hikes are overwhelmingly rejected by the public in most cases.

Once GST is installed, the govt has a blank check in their hands, they can raise rates as they wish. History indicates that in 9 out of 10 cases rates are hiked not lowered. In Singapore, they even raised GST rates to subsidize corp tax rates ie lower the corp tax rate by two points. Europe is a good case in point, it started the VAT in the lower teens and raised it all the way up to 20.

Japan and Singapore are late adopters of GST but both raised rates since implementation not lowering them.

GST also tends to eliminate layers of transactions because govt taxes at every turn of a transaction with GST in place. For example, say co A is short 100 units of goods G, co B has excess stocks of G say 100 units, but they dont know each other yet each knows co C. What they can do is C buys from B 100 units of G and sells them to A, you can imagine there is a great difference here with and without GST in place.

Small to medium enterprises would find it hard to survive, manage the costs of implementing GST and deal with GST audits.

In summary, GST is bad because

• rates are mostly hiked not lowered
• gives a blank check to the govt and thus no incentive to lower costs
• hurts SME most
• add costs to enterprises
• govt admin costs on GST are high too
  

Broker commissions/Stamp duty - low or no,

if you read financial posts around the world, i-banks and stock exchanges always demand lower or elimination of stamp duty, negotiable broker commissions for stock investments, WHY?

they said it is for your good, create liquidity and stock exchange excels, more stocks will list so you have more choices and liquidity to get in/out of the market. do you think this sounds right.

yeah, it sounds right for the i-banks and exchanges but not you and me. why? because they had been pushing derivatives mainly stock warrants to the public, with no costs to trade [if no stamp duty and very low commissions], they can manipulate the market as they wish because it does not cost them anything or very low costs.

small individual investors probably encountered one way or the other that they guessed right the trend of the stock [north or south], but when the warrants closed out, the stock managed to stay above or below strike price and falls/rises sharply after the derivatives expired. one sure indication of manipulation.

look at the hong kong market, the turnover is around 40-50 billion, yet a quarter of the turnover are in covered warrants. who eventually bet right - the i-banks.

if you cant beat them, join them, buy i-banks stocks.

Continuous education

If you have read the great divide early on in this blog, this is a dessert or extension to that article.

I would not argue that we do not need further education in our life after university graduation, most that are needed are technical issues, issues related to new inventions or discoveries. But what you find these days in big corps, the internal educations or seminars are mainly social science in nature which you can acquire through job experience, observations and reading in book stores - you do not need to buy such books if you have read 10-20 of them already because most of the books expand on a few main themes only with just too many elaborate examples that occupy the pages.

There are many reasons that contribute to the preaching of continuous education:

1. US MNCs have long been preaching globalization and the tearing down of trade barriers via their govt to improve their businesses. What they did not expect is that the loss of jobs in their own turf is just as serious after both T&T [telecom and transport] costs crash. Once jobs are offshored, they wont come back, thus the need for continuous education - another word for re-education; retraining for another job even though chances are remote to land another job with such training.
2. When a lot of people are in stressful jobs with no escape route or in a desperate state after retrenchment, the only way governments can do is to preach continuous education to this group of citizens so there looks like a slim line of hope ahead although there is really little.
3. Tertiary education institutes [and obviously the vested group of professors] are more than ready to get their share of the pie to secure their jobs if people believe in continuous education throughout their lives.
4. Just a side talk on investor education - options trading: investment banks like to preach that buying options [on index futures, stocks, commodities etc] is the best way for investors to make big money with limited resources, what they do not tell you is that they are the writers [or underwriters] of such options ie they are the sellers and you are the buyers. If options is so great for buyers of it, then why they are sellers most of the time? It is similar to lazik surgery for myopia, all of the surgeons who operate on you say they are great for you, but they themselves wear glasses. Why then do those surgeons stay away from it - because no one knows the long term impact of it, they are on the safe side.

How many government officials go on continuous education on their private budget, very few. Then why do they attend internal courses or govt sponsored ones - they get time off.

In summary

* start with a clear and analytical mind;
* choose your career carefully;
* spend your time enhancing your financial position

than on continuous education.

If you achieve financial independence early on in life, you have more choices than to go through retraining later in life.

Economic myths

In the next few months, you will read some of the economic myths that many governments these days educate their citizens on matters of daily life which they cannot manage, thus dispersing many myths such as follows:

1. Continuous education;
2. Lowering/cancellation of stock broking commission and related stamp duty;
3. VAT or GST
   

The above list will be updated from time to time to cater for new ideas that come across my mind.