The Latest Market Upheaval

when the fed and a few central banks acted in concert to shore up the credit/stock market and those of aig, fannie and freddie in the past few weeks, we started hearing the stock market should be well and going up another 20% on top of friday's close.

even finance officials in hk such as financial secretary, financial services/treasury secretary have stopped issuing warning that the economy ahead is going south and now is the time to unload stocks to conserve cash, instead they act like cheer leaders forgetting the team they are cheering is down more than 20% from the recent top 23000.

i have even heard on the radio that a prominent finance professor suggested that in order to regulate these i-banks, we must employ similar people, otherwise the government would not understand what the banks are dealing with and how risks can be measured. if this is the kind of professors we have in our universities and they act as advisors to the govt, then we are in big trouble. even the inventors of these instruments themselves cannot accurately measure or estimate the ultimate risks involved, otherwise why they are now in such bad shape, so how can the government offer attractive enough salaries to people who would do the ultimate risk management.

the causes for the financial chaos in the usa are very simple:

• low interest rates for too long - which fanned the fire on all kinds of speculation [properties, stocks, commodities etc], read this blog on greenspan and for pointing this out way back in 2004;
• running out of common sense judgment - the fed and us govt officials have ignored common sense judgment for too long on mortgages with no down payment and interest only mortgages [those that have a low fixed interest rate for a few years and then marked way up after the initial concession period]. why would people have interest in paying for mortgages when the houses they own have no equity or negative equity. in allowing zero down payment, the fed and treasury are setting themselves up for trouble ahead. interest only mortgages can be for small amounts only and not for the purchase of a brand new house, why would the banks or FIs think the borrower can afford higher interest rates a few years down the road not to mention then the payment for the principal will also kick in as well?
• ceo overly compensated, the pay scheme encourages undue risk - all ceos in the usa received compensation according to the stock prices and do not have any claw back should profits fall short in the future, thus everyone maximizes stock prices within their own reign to max out their own compensation with no regard to social concerns or their employees. we are actually going back to the old ages of imperialism of landlords and slaves, only that these days, there are few big landlords around, but ceos in their place, other employees being slaves. ceos already enjoy numerious perks like clubs, first class air travel or private jet, almost unlimited budget for entertainment [tyco ceo use public money on art pieces in his own home]. many people argue that ceos do deserve their compensation, but they are gambling other people's money for their own gain. if people do research on ceo's pay and tie it to the company results on a moving 3 years basis, i have doubts they are highly correlated. they brag more on their pluses but never the minuses so they got compensated whichever way it goes. ceo always talk about team spirit, then why should one person be compensated so much while others sacrifice when the results of the company is not highly correlated to his pay.
  

common sense judgement is always necessary in governing the finance of an economy or companies - the dotcom era that companies can be valued on the number of visitors to a website is pure nonsense if it cannot generate revenue enough in the long run to balance their books, then investors would be throwing good money after bad if these companies get their revenue from investor contributions only and not from traditional sales revenue.

we should look beyond the current market rise and what would be happening to lehman's liquidation process, aig's unwinding or unloading of risky assets which would cause a serious drop in profits for a lot of banks thereby hitting investors eventually not to mention the rise in unemployment [due to bank merger or liquidation] will also impair consumption in the states that will have final effects on producers around the world thus affecting the stock prices of these exporters and banks [absorbing bad loans to these cos] esp in asia.

having said that, we should be unloading stocks not buying more.

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

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 - what triggers

The excesses [housing and stock market bubbles] created by Greenspan will take quite some time to clear out. But what would trigger a collapse? - an earthquake hitting Tokyo city.

Historic experience from China indicates that in the event of an earthquake Richter scale 7.8 or above hitting key city of a country, that city would take more than ten years to rebuild. If it is a key financial centre, the impact would extend to the country as a whole.

The San Francisco bay area and LA are both vulnerable cities which would have global impacts if ruined by earthquakes. WHY? It is simply because the roads to eastern USA and ports may be blocked, logistics grind to a halt, consumer demand slackens in the biggest state which impacts USA and beyond. China's economy will run into a standstill because of cancelled orders from the US. Food and grain export will run into severe problems causing at least a short term famine on countries relying heavily on US grains.

If Tokyo and SF/LA got hit within a reasonably short period of time say a few months, then the impact on the global economy would be huge.

Key financial centres such as HK, NY and London must have well thought out plans to handle such contingencies, otherwise a global financial meltdown could occur.

UPDATE released 06 nov 24

usd exch rate

i have maintained in my past updates that usd will not weaken significantly which had been true, but i changed my mind recently on the outlook of usd, it will go south.

reasons?

1. recent movements of many currencies point to a further weakening of usd of 10% plus within a two year or less time frame. the most conspicuous is the aud which formed a round bottom. if it breaks out of 0.78 with follow through, it will hit 0.84.
2. the us m3 money supply is expanding quickly which should not be the case with 17 rate hikes, might be the us govt is printing more money.
3. recent merger & acquisitions volume also suggests there is so much money around probably due to 2 above. the m&a volume is at par with the volume during the era of internet bubbles.
4. stalled [or even -ve] growth in household net worth due to weakening of the housing market does a lot of damage even when stock prices are heading north. most households own a house but not necessarily stocks, the housing market has a stronger effect on consumer demand than the stock market.
5. greenspan evils [23 aug 04 update] - he singlehandedly created the housing bubble which is now leading to a dilemma - control inflation and the bubble bursts which hurts us consumer demand; let inflation off, then usd exch rate dives. it is more likely that the fed has already choosen the later option. us is heading towards a third world mentality, they tried to devalue their currencies to get out of a hole they digged themselves into.

note [for 2] - us federal reserve is not releasing figures on m3 http://www.federalreserve.gov/releases/h6/discm3.htm citing it is not relevant to present monetary policy. recent estimates by finance pros indicate it is expanding at 9%.

goto saxobank.com for exch rates, choose weekly time scale.

UPDATE released 06 jul 19

this is the first update in 2006, kind of late, hey.

real estate

the greenspan era of continuous low interest rates created a pool of hot money stirring up

• real estate;
• stocks;
• commodities.

interest rate hikes will soon or may already have slowed down the real estate market in us real estate. then why is the market not dropping further? when prices tank, speculators got hurt first. us exch rates are now 40% lower than a few years ago, export led growth created strong demand for labor, with employment still growing, mortgage and consumer debt can still be served, thus no widespread foreclosures on residences, it might have happened to properties for speculation only.

however consumer demand is hurt by high gasoline prices and utility bills, the strong growth in us gdp is not translating into consumer demand since national and consumer debt have grown to unseen levels, personal earnings have to plough back into serving mortgage and consumer debt which undoubtedly will affect the export led asian economies.

1-2 years from now, the us economy maybe in a much worse shape since many financial instituions are financing real estate at no down payment [100%], no interest payments [piling interest onto principal not that the FIs absorbed the interest] for the first two years. they will be in for a surprise that the collateral is not worth the P+I two years from now. when they start dumping the properties, widespread decline will occur [usually with unemployment creeping up first and then mortgage payments missed].

oil prices

crude oil hit new highs recently, but not the oil stocks. one of the them is not right:

1. either crude oil has to retreat soon; or
2. price of oil stock will climb higher.

given the current market sentiment and rsi of the oil stocks, option 1 is more likely.

look at bp, 65 is a strong support, if it falls thru this support, oil prices have a lot to fall. the same for exxon at 58.

us exch rate

many economists or forecasters, even warren buffet, argue that us exch rates have to decline. given the already 40% delcine in the past few years against the euro, i doubted that it will go further south and by much. this decline in exch rate increased us competitiveness by a lot and is creating huge demand for labor of export led industries and services, thus the strong employment statistics coming off govt data releases.

it might still go south if the us keep on waging war and building weapons [creating enormous deficits] which is hard to tell given bush policy of favoring oil barrons and the defense industries.

UPDATE released 04 aug 23

if you have received my updates since april, the oil crisis should be no surprise and was anticipated months ago.

greenspan's evils

years ago i was also a fan of mr greenspan, not anymore. his recent mistakes are numerous:

- supporting every bursted bubble

• internet
• ltcm
• russian debt crisis
• property and bond [both markets are about to burst]

- kept interest rates artificially low in order to keep demand high

- kept interest rates low for too long

by not letting the markets correct themselves and playing tricks of god, he created unneeded demand and thus the recent oil crisis.

hongkongers know too well that deflation is a hole difficult to climb out of, however, stagflation hurts all levels especially the very poor - except maybe the oil barrons. since the price of subsistent goods [food and fuel ie bus/train fares] keep on rising, it becomes ever more difficult for the very poor to stand on their feet.

we have to bear in mind that power corrupts and it happens to greenspan too. he enjoys the command and respect attributed to his position as fed chairman and has held on to power for too long. no us president or cabinet posts last longer than two to three terms and greenspan survived more than four presidents. after one has been in power for too long, he just wouldnt quit on his own unless his health cannot afford to.

stock markets

recent trends indicate that both european and us markets are trading lower unless the markets got momentum to rise at least 10% above recent trading ranges ie dow trades above 11,000, hang seng above 13800, i could not see any major uptick in many markets.

gold

watch out this indicator if it trades and stays above 430, then inflation is really picking up and stock investors should panic.