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Tuesday, 29 April 2008

MUST READ: BEAR INTACT. STI LOOKS AT TESTING THE 3000/2800

Courtesy of CNA forummer: ian_ow

DOW and SG indexes at major turning points.

My view:

S&P and DOW will not have a sustain break above 1400 and 13,000 respectively.

STI has no strength pushing past the 3200 and could possibly sell down from here if a strong resistance forms.

For the optimists - The recent global economic problems have only started and the calls for a sustained rally or a bull run is ridiculous.

Some important headlines:

April 28 (Bloomberg) -- Former World Bank President James Wolfensohn said he's ``pessimistic'' on the outlook for financial markets and predicted losses from the global credit turmoil may climb to $1 trillion.

NEW YORK (Reuters) - Warren Buffett, the world's richest person, said on Monday the U.S. economy is in a recession that will be more severe than most people expect.

"This is not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think," Buffett said. "This will not be short and shallow.

"I think consumers are feeling gas and food prices," he added, "and not feeling they've got a lot of money for other things."

"NTUC chief says retrenchments in 2008 could be higher than last year"

"Act fast or face deep recession: Tony Tan"
(I have read the clarifications before posting this and the thing to note is that : "However, in light of the current fluid and uncertain times, the probability of the pessimistic scenario, while not the highest, has risen to a level that warrants serious consideration by GIC."

Major Institutional players might sell to cash out from the recent rally and might even short if the markets do not break up and sustain above the mentioned points.

For the STI. there is reduced volume and market is up but losers outnumber gainers for now, a sign the recent rally is running out of steam and the gains in the STI are currently concentrated on a few stocks.


Just some of the component stocks' performance today, please exercise caution.

Kep Corp 10.760 -0.900 -7.7%
SPC 7.000 -0.740 -9.6%
CoscoCorp 3.360 -0.140 -4.0%
STX PO 3.520 -0.120 -3.3%
Venture 11.080 -0.320 -2.8%

* A partial paste out of my analysis below


To the bulls and optimism, or is it?

In recent times, stock markets have declined 20% from their cyclical highs and this is one of the factors that indicate a bear trend.

Singapore

STI
52 week range (2745.96 - 3906.16)

HIGH @ 3875.77 on Oct 11th 2007
LOW @ 2792.75 on Mar 17th 2008

Last Close @ 3124.87 on Apr 18th 2008

Support1 @ 3000.18 on Mar 25th 2008
Support2 @ 2792.75 on Mar 17th 2008

Resistance1 @ 3046.54 on April 1st 2008
Resistance2 @ 3344.53 on Jan 9th 2008

Will history repeat itself?

These are the figures I've pulled out from charts for the STI from 1987. When established as the peaks at that time, the movements are as such:


High in Mar 1990 - 1581.10
Low in Sep 1990 - 1098.70
Change : (-30%)

High in Jan 1996 - 2449.20
Low in Aug 1998 - 856.43
Change : (-65%)

High in Dec 1999 - 2479.58
Low in Mar 2003 - 1267.81
Change : (-48%)

Average Decline from Highs: (-47.6%)

Historically based:

If this is the current high and STI declines from HIGH @ 3875.77 on Oct 11th 2007, we could see a few possible scenarios:

Optimistically (-30%): 2713.03

Average (-47.6%): 2030.90

Pessimistically (-65%): 1356.51



*Applying the above calculations, my predicted low of 2713.03 on an optimistic view, differs slightly, but coincides with our current trend low of 2793.75 on Mar 17th 2008. The STI might look at testing the 2793.75 low and if broken, we could probably see the 2500 levels.






US

Total Current Writedowns - approximately US$290 Billion
Estimated writedowns - US$900B to 1 Trillion
Only approximately 30% done.

These are historical figures from 3 major banks listed on the DJIA:

BOA
Price:
High @ $53.87 in Oct 2006
Low @ $38.56 in April 2008
Market Cap:
@ High: US$239.29 Billion
@ Low: US$171.29 Billion
Percentage writedown: -28.41%
Amount of writedown: -US$68 Billion

CITI
Price:
High @ $58.39 in Aug 2000
High @ $25.11 in April 2008
Market Cap:
@ High: US$303.99 Billion
@ Low: US$130.73 Billion
Percentage Writedown: -56.99%
Amount Writedown: -US$173.26 Billion

JPM
Price:
High @ $58.12 in Mar 2000
Low @ $45.76 in April 2008
Market Cap:
@ High: US$197.65 Billion
@ Low: US$155.62 Billion
Percentage Writedown: -21.26%
Amount Writedown: -US$42.03 Billion

Average writedowns on banks' market cap from all time highs are approximately 35.55%.

*It is very important to note that at the highs for price/market cap of these banks, the prices/market caps have taken into account a very optimistic view of the future and further upside, HOWEVER, the current situation is not only gloomy but is looking at deteriorating further as shown by, just to name a few, :

- declining housing prices and home sales which has yet to show any signs of abating
- drastic reduction in consumer and producer sentiments
- sharp increases in unemployment and people on unemployment benefits (we have all seen recent reports of increasing retrenchments for companies all over the world with announcements quoting numbers in the thousands)

Thus it is not justified for prices/market caps to go back to their previous high and in fact if we had mitigated the situational difference and the price/market cap differences, there is definately more downside to come.




Government Intervention

Rebate checks:

In both 2001 and 2003, the government gave out tax rebates similar to the recently proposed one, albeit smaller in proportion. According to various studies done on previous handouts, it was found that the marginal propensity to spend the rebates is about 25% and this coincides with a recent survey sponsered by UBS which polled 1,000 Americans asking how they'd use the money if the fiscal stimulus package was signed into law - 43% of respondents said they would use the money to pay down debt, 26% would put in into savings, and 24% would spend it. With the above findings, should the people respond the same way with the rebate check they're about to receive, only US$37 Billion (25% of the US$148 Billion) would be spent - resulting in a paltry increase to GDP growth of about 0.25%, or maybe not.

Current CPI numbers for March 2008 at 0.3% (4% YOY) and 0.2% core (2.4% YOY) would have outrightly negated the supposed 0.25% increase in GDP growth and there is still an additional 2.15% of core YOY inflation to be accounted for from GDP growth (or the lack thereof) for this year (with oil hitting above $115, other commodities hitting all time highs along with decreasing fed rates currently at 2.25%, an inflation beast is hiding in the woods, growing rapidly, yet to be acknowledged).





Commentary:

The US still remains a key export destination for Singapore accounting for 10-20% of export share. One recent example of US companies feeling the heat is Motorola. Hurt by its handset business and in a cost cutting initiative, Motorola said it will stop manufacturing in Singapore by the end of 2008 and will lay-off 700 workers. This is a stark awakening for some who are convinced that the world will decouple from the slowdown/recession in the US due to growth in Asia (China has already revised its growth rate down a little and so has Singapore). Should US GDP growth continue to be revised downwards with soaring inflation rates, 2008 could very well see the US economy at little/zero growth or quite possibly, negative growth. Singapore has taken the right path by trying to attract more investments in the energy sector and most recently a project worth billions of dollars in a petrochemical complex in Singapore, Bukom Island. Temasek has also ventured into the oil and gas sector through its new subsidary Orchard Energy and their plans might tell us, other than for the sake of diversifying, which sectors they might have growing confidence in. These moves would help to offset the declines in the other industries and sectors but not by much I feel. With ailing consumer sentiments around the world, especially in the US, I do not see a sharp reverse or a V shape recovery from the current downtrend, in fact, I believe we're only in the midst of the problem and this brief rally might very well be coming to and end.

Caution: Stock markets have recently reversed their losses but this could be a relief rally in a bear trap
Some questions to note:

Do we expect to see stock markets going back to their Oct 2007 highs anytime soon and if not, where do we see it?

Do we think the current downtrend is actually reversing when global economies have only started showing signs of a slowdown?

Even if the credit crisis is resolved, how much would that change consumers' sentiments amid a slowing economy, uncomfortably high inflation rates and a deflated housing bubble (which will probably not see a sharp recovery anytime soon)?

I do not rule out a turnaround of the stock markets and the global economy from here but at least from my point of view, I would say that it is highly unlikely. This might be a good time to sell into market strength and look into the many other investment opportunities available at this point of time or in time to come. The end of this global economic crisis (not just credit) is nowhere in sight and any signs of a recovery might take at least 12 to 18months from here.




Best Regards,

Ian Ow


*This is not the complete research i've done but i will try to post up the rest when i have time. Check back for updates.

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