Monday, October 27, 2008

Thoughts on recent stock plunge

Stock markets are suffering due to large institutions and hedge funds redemptions from the western countries. The selling originates from financial institutions who want to shore up their balance sheets and cope with redemptions from investors. These firms have massive CDOs that have no market value (no secondary market to trade) and hence, they can only sell other liquid assets such as gold, silver, commodities, stocks, currencies and bonds.

This really explains why even gold and bonds are taking a harsh beating when these safe heavens should theoretically be inversely related to stocks movements.

We also know that hedge funds are de-leveraging by selling assets to pay Japanese banks in YEN. They have previously borrowed YEN as it has very low interest rates and invested in high yielding assets such as Aussie and Kiwi dollars. Stocks and bonds are also not spared in the massive de-leveraging exercise.

Due to the sudden market plunge, many retail investors are forced to sell their holdings in panic and fear. I just checked with my broker and he lamented that many of his clients have sold everything they have and do not wish to visit the market until things “brighten up”. This worldwide phenomenon has toppled the stock prices even lower affecting the confidence of all investors.

Confidence is a powerful emotion that can actualise a self-fulfilling prophecy. For instance, if everyone feels confident that the economy will be good and prosperous, many will start to spend, take up loans and splurge on luxuries. This will translate to higher consumption and GDP growth. The reverse will be true when people start to feel down and stop spending.

As we can see, the above has little to do with the fundamentals of the stock. For instance, DBS earned $2B net profits last year and its share price has retreated by more than 50%. Is the market expecting DBS to have a 50% drop in its net profit next year? The $80M compensation to High Notes investors is less than 10% of its FY 07 earnings.

Keppel Corp has reported higher 3Q (YOY) earnings and FY 08 earnings are likely to be close or higher than last year record $1B net profits. Yet its share prices have come down by 70% this year. Again, this is irrational.

Hence, for investors who are contemplating to sell, I would advise you not to or you are joining the ranks of irrationalism.

How long the selling will last is anybody’s guess. STI seems likely to retract towards 1000 points before the carnage will stop (my guess). In my opinion, it seems to be an opportunity of a lifetime to accumulate excellent blue chips and hold for the long term. How many times in our life can we invest when STI hits 1000 points? It may be the one and only time!

Currently, I save about 50% of my take home pay and save the rest. I do not spend a lot mainly because my hobbies and lifestyle (jogging, reading, playing bridge, watching DVDs and cable tv, Starbucks green tea, weekly restaurants visits with friends etc) are modest and cheap.

I also do not have loans commitment nor marriage plans within the next 3 years. At my current rate of expenditure, I can continue to lead a modest lifestyle while saving for retirement. In fact, I am willing to take a 50% pay cut when I begin a new career next year. I do hope I can continue to save at least 20% of my pay to plan for retirement then.

In case nobody wants sgbluechip as an employee, I guess I will also have to prepare being stuck in my current job until the economy turns for the better. I do hope it will not happen though!

1 comment:

nhyone said...

There's nothing wrong about selling now to wait until the situation becomes clearer.

Not to forget that after the crisis is over, we still have the recession. The stock market will not recover in a matter of weeks.

In times like this, it's better not to swim against the current.

I wonder how long will the deleveraging go on?

There will be some good news in the next few weeks, however, it is not clear if they will be the turning point, or just cause the next bear rally for the funds to sell into strength.