It looks more like the end of the beginning

A PROMINENT businessman recently said of the US$700 billion US Treasury bailout plan that it didn't mark the beginning of the end, but rather the end of the beginning.

He meant, of course, that the US government's plan to buy toxic bank assets announced a fortnight ago marked only the end of the first phase of the bear market and that there was plenty more pain to come. Judging by the way trading went this week, he was probably right.

The Straits Times Index started the week with a two-day, 180-point burst following news of coordinated interest rate cuts, liquidity injections, bank nationalisation programmes and deposit guarantees by European governments/central banks that gave fresh hope that the credit crunch might soon be eased.

The reversal started on Wednesday, possibly because conditions in credit markets have not improved dramatically but also because investors have apparently cottoned on to the fact that a painful recession looms, the full effects of which may not have been priced in yet.

As stated in this column last week, a big reason for this is that Wall Street has probably lagged the rest of the world on the downside all throughout this year, and is only now starting to play catch-up.

Until it does, conditions are likely to stay as volatile as they've been over the past few months, with 3-5 per cent daily moves becoming increasingly frequent.

As a result, the STI promptly lost all of that 180 points gain, its 72.69 points plunge yesterday taking it to 1,878.51 or a nett loss of 70 points or 3.6 per cent for the week.

Among the worst hit of the index stocks was SingTel, whose price has tanked along with the Australian dollar.

Over the course of the week, SingTel lost 27 cents or 10 per cent to finish at $2.50.

China shipyard Cosco Corp was another STI member to bear the brunt of selling pressure because of several concerns, among them the strength of its order book.

However, two houses, JP Morgan and Kim Eng Research, stuck their necks out on Thursday with strong 'buys'.

Cosco yesterday fell six cents to 75.5 cents, bringing its loss to 34.5 cents or 31 per cent for the week.

Bank stocks held up reasonably well yesterday after news that the government will guarantee all deposits.

However, they were heavily sold off in the final hour - DBS lost 84 cents at $13, UOB 24 cents at $14.76 and OCBC 22 cents at $6.10.

Citi Investment Research said earlier in the week that it is time to sell the banks because Singapore's bear market is likely to continue until the point of maximum GDP contraction, projected to be in mid-2009. 'We see 20-25 per cent downside to consensus 2009/10 estimates,' said Citi.

Elsewhere within the finance sector is the Singapore Exchange, which reported a 35 per cent first quarter profit drop mid-week that, predictably, led to 'sell' reports being issued. The stock yesterday lost 23 cents to $5.31.

On the state of the US economy, BCA Research said that 'the worsening economic outlook is sustaining a high level of risk aversion on the part of lenders and investors'.

'Of course, this creates a self-fulfilling outcome as frozen credit markets and falling equity prices directly undermine the economy. The authorities fully understand that they must break this vicious circle. For its part, the Fed has begun to rapidly expand its balance sheet, and it is under pressure to cut interest rates again soon.' it said.

Source: Singapore Business Times - 18 Oct 2008

When silence was not golden
By WONG WEI KONG
Singapore Business Times - 16 Oct 2008

COSCO Corp Singapore truly became a penny stock yesterday, with another tumble in its share price in what was an acute crisis of confidence.

The stock fell 20.5 per cent or 20.5 cents to 79.5 cents yesterday - this coming after it crashed almost 17 per cent on Tuesday.

That slide will likely be checked, now that Cosco has come out to address some of the concerns the market had over the company.

But the question remains why the company waited so long to clear the air, and did so only after it was queried by the Singapore Exchange.

Tuesday's fall was attributed to a downgrade in Cosco's target price by Credit Suisse to 55 cents from $1.20, with an 'underperform' rating. Credit Suisse said in a report that it expects Cosco shares to drift lower on concerns over shipbuilding demand, risk of order cancellations and delivery delays.

The view that the current credit condition could squeeze demand for new shipbuilding and lead to order cancellations by clients hit by tighter credit lines is one that was widely held, especially after news of Cosco's Norwegian client MPF filing for bankruptcy.

Cosco declined, however, to address these issues when presented with the chance on Tuesday, when the media asked the company to comment on the market's concerns. It was an opportunity missed, and one with costly consequences for its shareholders. Not surprisingly, given the lack of any assurances from the company, the stock continued its slide yesterday on heavy volumes, as more joined in the downgrades.

Why was it so difficult for Cosco to provide timely assurances to the market? Other companies had provided updates and assurances on their businesses when there was a need to. When the tainted milk scandal broke out in China, Chinese food-related companies here issued statements to tell investors what the impact, if any, was on their operations. Similarly, when the Sichuan earthquake took place, listed companies with operations in the region all issued statements to update shareholders. So too when hurricanes struck the US.

In sharp contrast, FSL Trust Management Pte Ltd, the trustee-manager of First Ship Lease Trust (FSL Trust), took the initiative to assure investors after its units also fell in heavy trade. It said yesterday that FSL Trust continues to receive steady lease rental payments from its eight lessees, has a robust set of risk management protocols and is in regular dialogue with its lessees with regard to their credit-worthiness, and reaffirmed its earlier distribution per unit guidance.

Cosco's reticence is all the more surprising given that the lack of communication from the company was cited as a key factor for the market's loss in confidence. Said Credit Suisse in its report: 'Inadequate disclosure on dry bulk newbuild schedule and no announcements on successful delivery of dry bulk vessel to customer to-date (against 10 planned deliveries in 2008 and 41 vessels in 2009) heighten our concerns on execution risk.'

There was clearly an information gap regarding Cosco. As one investor noted in an email to BT, CIMB also made a call on Cosco on Tuesday, the same day Credit Suisse issued its downgrade. But the two calls were poles apart. In opposition to Credit Suisse, CIMB said: 'Key catalysts for Cosco include better-than-expected offshore and conversion orders coupled with falling steel prices. We maintain a 'buy' call with a target price of $2.89.'

The sharply contrasting calls indicated that Cosco had given little guidance to the market, leaving analysts to make their best or worst assumptions. The company's silence simply fanned speculation that bad news may lie just around the corner.

Cosco's statement last night may arrest the fall in its share price. But it may have come too late. Two days of fear-driven selling have destroyed a huge chunk of shareholder value, and more importantly, shattered trust in the company. Rebuilding credibility may prove a major challenge for Cosco.

Another good article by R Sivanithy.....

SGX has the right approach to short-selling

NEWS that the ban on naked short-selling in the US stock market will be lifted with effect from yesterday will surely be greeted with relief by many quarters of the financial community, and the move should, hopefully, be followed by all other markets which were too overly eager to follow the United States' example over a fortnight ago.

This is because the Sept 19 ban was ill-conceived in the first place, serving little purpose other than to tell the market that regulators had run out of ideas of how to prop up sagging markets and were in panic mode.

Instead of having the desired effect of halting the bleeding, it ended up robbing markets of liquidity, efficient price discovery and possibly even support that the ban was intended to achieve.

Take for example the fate of Wall Street. The ban kicked in when the Dow Jones Industrial Average stood at 11,388 and the S&P 500 was at 1,255. After Tuesday's collapse and after 11 trading days with the ban in place, the Dow was at 9,447 for a loss of 1,941 points or 17 per cent, while the S&P at 996 has suffered a loss of 259 points or 20 per cent.

The story is the same elsewhere - the UK market, for example, has lost more than 15 per cent since banning shorting while similar losses have been encountered across Europe.

Here's a thought: Could banning shorting actually have worsened the downside?

Possibly - observers have noted a spike-up in volume in futures markets worldwide since Sept 19 because short-sellers, unable to trade in the underlying markets, probably turned their energies to the futures markets instead. And, as most market watchers know, steep falls in futures contracts could, in turn, have placed undue pressure on the spot markets, thus driving prices in the latter down.

Whatever the case, it is illogical to temporarily interfere with the workings in any market or, as some have described it, to shift the goalposts after the game has started, especially if there is an associated derivatives market.

Both depend on each other to properly reflect prevailing sentiment and expectations, so to artificially obstruct arbitrageurs and free trading in one and not the other introduces undue distortions that lead to sub-optimal investment decisions.

To be fair, the selling of something not originally owned has always raised ethical issues, while the sight of crashing prices stirs many negative emotions, often leading to fingers being pointed at short-sellers and a clamour for some sort of official intervention.

Faced with tremendous public pressure to stem the bleeding, it is perhaps understandable - and possibly forgivable - for regulators to cave in and impose poorly thought out measures as was the case a fortnight ago.

Furthermore, US officialdom often finds itself burdened with the expectations not just of its own market, but also the world. For this reason it has a whole host of circuit-breakers in place which are not found in most other markets, measures aimed at preventing a full-scale crash that if left unchecked could wreak havoc around the globe.

However, as many have pointed out, short-sellers did not cause the sub-prime meltdown, nor were they in any way responsible for the inflation of the massive US housing bubble between 2001-2007 and the simultaneous enormous expansion of credit that lay behind it. (The real culprit may have been previous Federal Reserve chairman Alan Greenspan and the Bush administration, but we'll leave the blame game aside for now).

Furthermore, academic studies have shown that short-sellers do not earn abnormal profits by artificially driving prices down and instead provide liquidity and stability by buying into down markets.

So there is no real evidence that short-selling causes, aggravates or leads to stock market crashes; in fact, under rigorous scrutiny, all accusations levelled at the activity can be found to be mainly anecdotal.

Fortunately for local investors, officials here recognise that the less interference there is with the market mechanism, the better. Moreover, all the naked short-selling data provided by the Singapore Exchange (SGX) in the past week or so clearly shows that naked short-selling is not a major factor and SGX has sensibly adopted a disclosure-based approach to addressing short-selling concerns. If only other regulators were similarly predisposed, the selloff of the past fortnight might well have been less severe.

I have come across many people half understood the term “long” and “short”.
Most people know going long is equivalent to buying while going short is equivalent to selling.
But that is only half true.

Why use the term “long” and “short”?
Why not just use “buy” and “sell”?

The difference is here…

BUY vs LONG
When a trader buys into a counter, he could mean:

1. he is opening (entering/taking) a new long position
(he did not have any position before this);

or

2. he is closing a short position that he sold (opened/entered) earlier
i.e., he is buying back the counter that he sold earlier.

However, if the trader goes long on a counter, it is very clear he is opening (entering/taking) a new long position.
He is for sure not closing a short position.

SELL vs SHORT
When a trader sells a counter, he could mean:

1. he is opening (entering/taking) a new short position
(he did not have any position before this);

or

2. he is closing a long position that he bought (opened/entered) earlier
i.e., he is selling the counter that he bought earlier.

However, if the trader sells short a counter, it is very clear that he is opening (entering/taking) a new short position.
He is for sure not closing a long position.

Therefore, buy or sell would have 2 possible meanings whereas long or short has only 1 definite meaning.

A good article by R Sivanithy......

Time to buy? No - patience is a virtue

WHENEVER stock markets behave as they are now, it's tempting to ask whether it's time to 'bargain hunt'. Indeed, as each passing day brings a new low - be it 24, 25 or 26 months for the Straits Times Index - the temptation to buy probably grows stronger, aided no doubt by a steady stream of 'buy' calls from brokers, all and sundry.

So will it soon be time to buy? Maybe it will? And perhaps for the Straits Times Index, the fact that the 2,300 level has held twice in the past fortnight suggests this may be where there is strong support?

Our take, though, is that there is no need to rush and that patience is a virtue. Brokers and independent researchers have consistently under-estimated risks to the downside for the past year, so their 'buy' calls should be taken not with a pinch of salt but a bucket (LOL).

Analyst credibility aside, a major reason for saying this is that despite America's woes, and despite it triggering the biggest financial meltdown ever, US stocks have not capitulated yet. Even after Monday's 7 per cent collapse, the Dow Jones Industrial Average was down only 22 per cent this year and the S&P 500 down 25 per cent - much less than the 35-50 per cent falls suffered by other markets.

From its all-time high, the Dow's loss to 10,365 was 27 per cent and the S&P's loss 28 per cent - over almost a year, compared with the 20 per cent crash in one day on 'Black Monday' Oct 19, 1987.

Seen in this light, the current losses on Wall Street could justifiably be taken to be part and parcel of a normal bear market and not really that much cause for concern.

Why has Wall Street not fallen as much as other markets? One possibility is the huge amount of liquidity the US Federal Reserve has pumped into the system. But more likely, it's the still-lingering hope of a government-led bailout, despite the initial proposal being rejected.

If a modified proposal is cobbled together before the end of this week and if this is again rejected, the full-scale removal of a 'bailout premium' will see US stocks start to reflect their true fundamental values.

Furthermore, it is debatable whether any US Treasury-led bailout would have any effect at all. Recall that on Monday, markets went into a tailspin many hours before the US Congress voted on the plan. So, even if a second plan is pushed through and even if this does push stocks up, it can only be a matter of time before reality sets in with regard to the US market and its fundamentals. And once this happens, investors might just cotton on to the fact that US stocks are grossly over-valued.

Bloomberg's analytic service gives the S&P 500 as trading at a historic earnings per share consensus analyst estimate of US$51 and a forecast figure of US$83. With banks disappearing, unemployment rising, consumer spending shrinking, no growth to look forward to, no bottom yet in housing and a possibly vicious recession just around the corner, how likely is it that US corporations will report such a big jump in earnings?

As for the local market, Citi Investment Research warned last week that it is possible for the STI to fall to 1,800 - a warning many investors reckon is too pessimistic. But if the index were to drop to 1,800, that would only take it to a four-year low which, given the huge risks to growth posed by America's problems and the unprecedented nature of the present bank failures, is arguably within reason.

The upshot of all this is that risks are still tremendously high and that Wall Street is still heavily exposed to the downside.

Investors should also realise that even if the STI's bottom does lie at 2,300, this does not automatically mean the start of a new bull market - stocks can drift for years within narrow bands before embarking on any uptrend. As such, it is clearly not time to buy yet.

Source: Singapore Business Times - 02 Oct 2008

The uncertainty of the outcome of the biggest bailout in history caused so much volatility in all markets. Too much volatility is not welcomed by trend traders. The days of trending market will arrive. Trend traders just have to be patient, after all no position is also a position.

SGX ENHANCES TRANSPARENCY AND DETERS FAILED SHARE DELIVERY

22 Sept 2008 - Despite current market turbulence and global financial uncertainties, trading of securities listed on Singapore Exchange (SGX) has been orderly and settlement has been timely. Nevertheless, SGX would like to enhance existing transparency in the market and to deter failed deliveries.

Information about naked short positions which result in failure of delivery to CDP would be useful to market participants. Furthermore, cumulative short-selling of individual share securities without the discipline of borrowing to cover delivery obligations, may threaten the orderliness of our market with implications for the integrity of the clearing system. In Singapore, naked short selling which results in failed delivery to CDP are closed-out by buying-in from the market. Buying-in takes place from 11.30am every day.

With immediate effect, SGX will publish the list of buying-in securities and the volume of shares sought, at 11am every day.

After completion of buying-in, SGX will publish the list of securities bought-in (which includes individual counters), the volume and dollar-value at 8:30 am the following business day.

In addition to the current processing fee for buying-in of $30 per contract, there will be a penalty of 5% of the value of the failed trade subject to a minimum of $1,000. This penalty will take effect for trades executed from Thursday 25 September 2008 onwards. The fee will be reviewed from time to time to assess its effectiveness.

Market participants must not short-sell in the buying-in market as it runs counter to the objective of buying-in. Accordingly, any failure to deliver shares in the buying-in market may be liable to penalty of $50,000 and/or disbarment from participating in the buying-in market. This will take effect from Thursday, 25 September 2008.

The measures introduced today will be reviewed after a month. SGX remains vigilant in maintaining the orderly functioning of the market and safe efficient clearing.

Nobody can accurately predict the tops and bottoms of stocks. If a trader is trying to do that, he is just trying his luck. Trying one’s luck in trading is an EXTREMELY RISKY business. In the long term, the odds are against one who does that.

True Traders do not attempt to buy at bottoms and sell at tops. They will sacrifice part of the move as insurance premium, in exchange for an increased probability of success. They will not risk their capital for trying to make/save that extra premium/gain.