HSI & Others

many readers have been asking whether this is a new bull market or just a rebound. if it is just a rebound why is it so strong.

in fact, i have no clues. it is like asking why this fall [dow from 14000 to 6500, hsi from 32000 to 10600] is so drastic. because the fall is so drastic, the rebound has to be too couple with the fact that usa is printing money.

sometimes i tell from my hunch but most of the time i tell from charts.

my hunch this time is that even if this is a new bull run, it will encounter a major correction before a nice bull market can really starts.

HSI
earlier the chart indicates it would reach 16700. after breaking out of 16000, it formed another bottom indicating it would reach 20000. this is very much like when hsbc falls from the top, it formed many head and shoulder tops as it fell each indicating a further low while this time around, hsi has a similar situation forming many [inverted h&s] bottoms when it goes up.

China
it may be false dawn to conclude that china's stimulus can lead world commodities to rally, rather it is the usa who is now printing money fast enough to push money sitting on the sidelines to move back into commodities, stocks, corp bonds and real estate.

HK
real estate in hk is pretty precarious as it has shot up quite a bit. the fact is money in banks gets no interest, so people move into real estate to get some yields. but people who borrows heavily [70%] could be setting themselves up for trouble as interest rates for mortgage at present are about 2.5-3%, any hike in interest rates will cause mortgage instalments to balloon, if wage rate increase cannot catch up with the increase in mortgage amounts it would put extreme pressure on real estate.
while this worry is not imminent, it may still happen. even so, such incident may not come so soon and bubble can keep on going for a while without bursting as deflation may set in before the arrival of inflation since economy activity is still at a low point and may not turn around so fast. current events in the usa of contraction easing is because of inventory rebuilding not because of return of real consumer demand.

i posted two charts - dow in 1930s and nikkei from 1990s, in both periods the indexes encountered depression or severe recession. it took many years to recover part of the losses but not all. obviously the printing of money helps, but when us govt has to exit their positions, the interest rate increases could be tremendous and could block any recovery to its fullest.

to view the charts more clearly, do one of the following:

• double click the picture, it should enlarge or
• place curosr on the image, right click to copy and paste it onto a blank word doc or paint, then enlarge for easy viewing.
  

DOW, Banking and HSBC

dow
dow jones hit new low just last nite around 6600 which is now closer to my predicted short term low of 6000 earlier [read earlier blogs]

dow had recently fallen two 250+ points sessions, a third one would mean almost 12% decline in a matter of a few days which is surely too much, expect a rebound very soon.

banking
plain vanilla banking in hk and overseas will be very different after this once in a life time credit crunch is over. there are just too many such banks and assets valuation would be much lower then, therefore dont expect a huge rebound in profits of this sector as aging factor will also kick in after 3-5 years in the slumps.

hsbc
given the above, there is no need to subscribe to the rights issue although the i-banks involved undoubtedly will try to maintain some order in hsbc trading prior to book close of the rights.

HSBC

This is the most favored bank and listed company here in HK and probably UK/USA for the past year or two since the subprime problems surfaced. But no more illusion should be placed on this bank for the future, why?

A number of factors have changed and its management had been slow in reacting to the current environment, here below are the facts:

• blanket deposit protection in HK - this raises cost of funds as depositors switch to higher rates at smaller banks;
• capital injection by UK authorities - it is one of the few banks that refused to accept capital from the UK govt, depositors may choose a govt sponsored bank over a totally independent one given the seriousness of the current crisis;
  
• fund raising - missed the opportunity to raise funds though a few UK banks raised capital with the current rally;
• faced downgrades on its outlook and possibly its debt as well;
• economies of the key regions where it operates deteriorate sharply which means heavy loan loss provisions on the loans or investments it made are on the horizon when it reports results for Dec08 and Mar09.
• limited avenue for new revenue - the contribution from retail wealth management sector has all but disappeared, now it has to rely on the bread and butter of interest spreads on conventional loans and the fees or interest it charged on below min balances. Given the zero interest rates environment, there is not a lot to earn even from interbank markets.
  

HSBC got herself in a quagmire after current price declines as the costs of raising capital have skyrocketed - capital raised at a lower price will have a more dilutive effect on current shareholders and even more so with the dividend. Any cut in dividend will drive its price even lower so it becomes a vicious circle. If you cut dividend before a rights issue, the dilution becomes even more severe. If you raise capital and do not cut dividend then the cash drain is huge. If you do both at the same time, then the impact is devastating. Look at Standard Chartered, the rights issue price is a discount of 40%+ of the current price before announcement.

HSBC may not have to use such deep discount as enticement for her shareholders, but its future price may be a total disappointment for her fans.

LB-BK-MA, PDE & FORWARD THINKING

LB-BK-MA
What do you recognize from the symbols above?

Well, this represents the relationship on some of the products

• sold by banks in HK, which are supervised by the Monetary Authority,
• but issued by Lehman Bros or guaranteed by it.

Some of these products don't even mention LB and it had been marketed like high grade bonds, but they are like CDOs or investments in SIV. HSBC had to take on board its balance sheet two SIV when it knows they will fail so as not to let down investors of the two, then why would banks be marketing these products?

There is a lot of victims who have invested knowingly or unknowingly of the risks involved in these packaged products now that LB is bankrupt, therefore we are seeing a lot of grievances from these depositors [now named as investors]. Finger pointing on whose responsibility should it be for such high risk investments as the subprime crisis had been known since early 2007.

We heard a lot of arguments in the media or from the government but without real common sense.

I must emphasize here that this is linked to the next section which you, after reading, would have no more illusion on whose responsibilty it is.

PDE & FORWARD THINKING
You heard of PDF, but what is PDE - PayDayExecutive.

We have too many PDEs at our government as the only thing they look forward is their payday. The reason - because their pay is exorbitant and their post loaded with perks. In many developed countries [we are a very developed city], compensation for political appointments are minimal, just look at Fed chairman's pay vs our head at HKMA, any head of state's pay in Europe. Here in HK, political appointees have pay well in excess of what they are receiving in the private sector before joining the government though a few who are linked to their family business may be paid above their compensation in govt and only a rare few does have compensation above their govt pay.

You can imagine that every day passed by means payday is one day nearer, thus the pressure to think forward on policies benefiting the public is not high on their agenda as their positions bring in not only excessive pay but also unlimited perks like vip channel at the airport, travel by limo with chauffeur, entertainment budget, personal assitants and secretary etc

CONCLUSION
There is no doubt that HKMA should be highly responsible as the memorandum between SFC and HKMA earlier segregates the responsibility of SFC/HKMA that SFC is not responsible to monitor products sold by banks since HKMA would then be responsible. With these Lehman products, did HKMA warn the banks of their responsibilty when selling these products? Probably yes, but the monitoring is not adequate since the subprime crisis surfaces long ago. They have let greedy i-banks packaged low grade products to sell to the HK public. Common sense has been ignored in its supervision.

Did they ever ask a question or issue a guideline like this? - Sell/market only products you are willing to lend a loan with these products as collateral without recourse for low risk profile customers.

SOLUTION - HKMA should pursue legally against these banks on their sales tactics and misrepresentations on behalf of those whose investment behavior in the past have been mainly bank deposits unless they agree to compensate 30-50% of the amount invested of these victims.

UPDATE

A lot of readers ask questions like when will this or that happen. The truth is I dont know. I only interpret the happenings from the chart given the circumstances. Most of the time they are correct and they happened within the time frame I mentioned. However, there are always exceptions like acts of god - a good case in point is the lengthy snow storm in China. It may disrupt certain chart patterns or delay or accelerate the forecasted happenings.

It is important to be patient in order to bear out the truth especially when you are waiting for a pattern formation. Sometimes a multi top chart takes longer than expected to form and break out. Go back in this blog and check out the chart related to HSBC - it first formed a head/shoulder chart with target to hit 132, but it went back straight up and almost retried the old high then formed another multi top chart with target 110. Both targets got hit but each has a very different outlook right after it was hit.

The reasons that I wrote in detail is to tell layman investors to be patient and when you sense something, wait for a pattern to be formed or about to be formed and take the necessary actions instead of trying to be god to foretell all events coming which is impossible.

Now comes the big part.

There are some strange observations recently, thus I sense something is coming along, but not on very solid grounds so you have to watch carefully the charts to be able to tell whether my hunch is correct.

Observations:

• AUD old high is about 94 to USD, given the USD rate cuts and AUD rate increase, why hasnt it reached new high?
• GBP fell a lot from it's recent high of 199 not to mention that the old high above 2 is very far fetch;
  
• EUR has maintained their rates still it didnt reach it's old high after fed rate cuts;
  
• Crude never even retry 95 or above after hitting 100, it rallies on news that weather will get cold in North Amercia shortly;
  
• GOLD is actually falling [hit 918 fell back to 860] before the rate cuts but reached new high of 933 only to fall back to 890, but it managed to ride high again after crude oil resume a rally up towards 92.

What are all these telling us, my hunch "pure hunch" is that the USD money supply is contracting and fast, so every time some +ve news such as rate cuts and fiscal spending like tax rebates are announced, the currencies above or gold or crude oil reacted on the news but cant reach their old highs.

Therefore my predictions are that, oil rally will falter hitting gold along the way and also currencies will fall against the USD before it can rally back up if it will. GBP is the weakest, EUR will rally back up after hitting 130-135 so will AUD.

The charts will take a little bit longer to confirm the above if they ever will.

UPDATE - Hang Seng

for readers who are familiar with this blog, you should have benefited from staying clear of HSBC. read earlier release for HSBC forecasts.

here comes Hang Seng albeit a bit late since the fallout is faster than predicted. Look at the 6 mth chart, this is clearly a multi top chart with neckline at 26000, the minimum magnitude going south would be 20000 [26000-6000], so brace yourself for a rough ride.

the tricky part is the 2 yr chart, if it does reach 20000, bounces up and falls back again breaching the 20000 mark, then a head and shoulder occurs and the chart looks very ugly.
how will recessions wound up hs index:

1. a recession only causes upset of 25-35% from top,
2. a severe one - 40-50%,
3. a major downturn can chop 70-80% off the top [e.g. taiwan, japan and earlier downturn of china stock markets]
   

it would be extremely hard to tell 2nd from 3rd, so bear this in mind when you make your investments around the 20000 mark.

UPDATE - DJ, Subprime

the dow is looking to form a multi top with neckline at 12800, if it falls through it will hit 10800 - a fall of further 16% from this level and that is the minimum. expect a flurry of fiscal spending [sort of direct money printing] announcements and interest rate cuts.

if you look at the volume, it is increasing after the yearend [avoid clashing with yearend window dressing] while index is falling, so the probability of it falling below 12800 is quite high.

both citigroup and merrill have new ceos, they will book the largest provisions possible [ie their capital base can bear] this fourth quarter to avoid further significant losses after they are in town for two or three quarters. such loss announcement might be coupled with further new investors to these two banks as their capital bases may have shrunk further and cannot bear such heavy losses. this will put pressure on hsbc to announce heavy provisions. read my earlier updates and forecast on its price.

if investments made by new investors to citigroup, ML, UBS are locked in with the spot price at the time of announcements, they would have incurred losses now and further going forward. if the investments are convertible bonds or preference shares with convertible options then they are better off.

the subprime mess will take at least 6 years [for the housing market] to reach a bottom. counting from 2006 after its peak, it takes minimum 2012 to get out of the mess. the japs took more than 16 years [1989-2005] to get out of a hole they digged themselves in.

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.
  

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.

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]