Sunday, July 13, 2008

Overwhelmed by mounting problems

As of Friday, the US Fed and the US Treasury seems overwhelmed by the potential collapse of US banks and of the two national mortgage companies caused by the tumble of house prices and the credit crunch. Risks of an impending economic downturn, a devaluing dollar which helped raised global food and oil prices – inflation, and a technical bear market, add to the dilemma of which fires to fight first.

According to Yahoo Finance, the US government shut down a thrifts bank, IndyMac Bank on Friday July 11, 2008 after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures. There was also a run on the bank which prompted the shut down.

This came on the back of concerns (read rumors), Friday, that the two national mortgage companies – Fannie Mae and Freddie Mac – which lent out or guarantee housing loans of Americans to the tune of US $5.3 trillion could face some trouble in capital adequacy requirements because of huge expected write downs. Stocks of financials swooned on those rumors amid concerns of further bank failures.

Back in Malaysia, it was reported by the New Straits Times that all police leave have been suspended because an opposition party intends to call for another round of protest against the recent petrol (gas) and diesel price hikes by the government. Together with the recent upheaval in Malaysian politics, and the various unsubstantiated accusations of corruption, cover-ups and involvement in a particular murder thrown at top government officials, the ruling party of the country seemed to be overwhelmed by mounting problems within and without.

Meanwhile, if we look at the monthly charts of stock indices of the US (Dow Jones), UK (FT), Hong Kong (Hang Seng), Australia (Ords), Malaysia (KLCI) and Singapore (STI), these stock markets had started their recent plunges in the month of May 2008 – after a meaningful rebound from the tumble of the global stock markets in the first quarter of 2008.

It seems that Mr. Market has regularly tuned in to this blog for the past year or so. With the many right calls on the stock market(s), it looks more like prescient (having foreknowledge or foresight) than coincidences.

If you reread my entry on ‘Raising cash levels’ dated May 13, 2008 and the subsequent entry on the stock market(s), you may understand why prescient is important in preserving capital.

The stocks that I have sold in early May have subsequently fallen by between 41% and 70% before a small rebound over the past few days.

If investors have had held onto stocks since May or earlier, their capital would slowly but surely dwindle by now.

Warren Buffet, the Oracle of Omaha, had mentioned the importance of preservation of capital. Since without capital, investors can do nothing else except twiddle their thumbs, even where a great opportunity for investment arises. His investment company held more than US $40 billion in cash by the end of June, ready for any good investment opportunities.

This highlights the difference between those who have foresight and those who rely on hindsight. Those who can foresee could plan ahead, while those who rely on hindsight would have to constantly fire fight or be overwhelmed by insurmountable problems.

Meanwhile the dangers creep closer as the weeks go by.

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