Thursday, August 16, 2007

What I felt about this whole thing

What an ugly day today.

Dow broke 13,000 support and closed at 12,861 (-1.29%). A lot of people are thinking whether Dow will sink into recession as a result. I think not. The stock precedes the economy by half a year at least, so the seeds of recession must have already been grown. The stock market just reflects it. Did Bernanke screw up by refusing to cut rates and insisting that inflation is a more serious concern? He would have to answer to that himself.

It's a vicious cycle actually. US had been too easy to lend out money to people. For those without the ability to pay or with bad credit history, loans lent to them are called subprime loans. As the risks of default is higher, the interest rates charged for them is higher than normal loans too. Around the start of the year, FED raised interest rates to 5.25%, causing worldwide correction. Eventually the stock market rose to greater heights but the beginning of the problems we face currently had just begun.

With rising interest rates, those subprime loan borrowers faced greater difficulty in repaying them loans. Signs of default are shown around Feb 2007, but it wasn't as full blown as now. The problem is spread globally because of the funny things you can do in business - selling debts. Yup, debts can be sold in the form of collaterised debts obligations (CDO). Why would people want to buy debts? Assuming that people would ALWAYS pay their debts back, then buyers of these debts would get a payment that works somewhat like coupons for bonds or dividends for stocks. You must be questioning what happens if people don't pay back their debts.

If people do not pay their debts (that is, defaulting), buyers of such debt instrument would have to bear the losses. Global funds that have exposure to subprime loans are selling their stocks to raise liquidity because investors would want to cut their losses and protect their profit if any. THAT is what happens now. Even SGX starts to liquidate its funds (announced yesterday) in case investors want to cash out their positions.

Really, what goes around comes around...everything springs from the fact that US started easy lending. Isn't it very similar to the market crashes articles I posted periodically? Mississippi saga, South Sea bubble....

And we haven't even talked about yen carry trade (yct). Bank of Japan (BOJ) had in the past lent out yen at very very low interest rates. This cheap money is borrowed by funds globally and partly contributed to a huge influx of liquidity that swirls around the market. Singapore is one major beneficiary to this influx of foreign funds. Chances of BOJ continuing to lend out money at this low interest rates is getting slimmer and hence those funds that borrowed yen to invest might have to sell their holdings to return the yen back to BOJ, otherwise they might incur foreign exchange losses. Cheap money is no longer that cheap. It's already happening, take a look at Straits time money section today.

It's very interesting that before this issue begins to emerge, everybody is worried about the bubble that is bursting over at China. Everyone is talking about how the PE value of china stocks are super inflated, so the moment it burst, it would send waves of selling across the globe? Little would anyone expect that the problem would come from US itself. Interesting is the financial world huh?

How do we protect ourselves from the financial weather that erodes our portfolio? I have no ready answers for that. I myself is at the mercy of global winds of change. In such times, there is no point wallowing in sorrow and self pity. Two actions I would advocate: sell out or hold out. Buying now is a big no-no because as of now, STI had broken 200 ema support, so that's a big bad sign. STI is like a pond of water. You stir it vigorously and everything because muddy and unclear, so don't go bottom fishing now. You might lose your bait, your stick and most importantly your confidence. Why not wait till the mud settles (yes, it will take a long time) before jumping in? For me? My lines are already in, so I'll just wait.

Now is the best time to concentrate on other things in your life that you always wanted to do but have no time. With such bad market sentiment, no point staring at the watchlist all day. I'll rather read up more on fundamental analysis and learn a few more songs on my guitar. Oh, and that very irritatingly addictive game that cheemie introduced to me, 9dragons.

As I blogged, STI rebounded upon reaching 3100. Short term recovery (technical rebound) happening.