Times when cash is king

Investors in the Kuala Lumpur Stock Exchange over the past few decades may still remember the times when cash is king. A time when share prices tumbled, because of an internal or external crisis and/or an exodus of foreign funds, rebounded and thereafter drifted ever lower the longer one held onto the investments while market liquidity slowly fizzled out.

Perhaps those adversedly affected may remember the hardships endured during the Pan El crisis in late 1985, the subsequent severe recession in 1986 / 87, the exodus of foreign funds in January 1994 and in August 1997, or the Asian financial crisis in 1997/ 98?

On hindsight, we often reminisced and wished that we had sold the shares earlier and held onto cash in order to buyback the same shares at distressed prices. But at the time, our decisions were clouded by false hopes that share prices could continue to rebound after the plunge(s). Those who have suffered the severe recessions in 1986 / 87 and in 1997/ 98 will understand what it meant to have cash.

Stockbrokers’ agents left the industry in droves in 1995 since shares transactions dwindled to a trickle. The KLSE rebounded in 1996 because of easy credit where tons of money were lent out by banks to small second board companies for real or fictitious huge projects. When the Asian financial crisis hit in 1997, shares of those companies became literally worthless (what with six limit downs of 30% each) and the lender banks had to write off most of the loans given out. Some smaller financial institutions had to be rescued by the Government or absorbed by bigger banks.

If we had cash in late 1998, we could be ‘king’ since bank deposits were paying 10% interest per annum and by then the KLCI had already fallen 1,000+ points from its record high of 1330+ reached in early 1994. (This explains my skepticism about stock market charts and fundamentals analysis, analysts’ and fund managers’ reports, and why I continue to follow the Yi.)

Ten years on and in September 2007, we face a similar scenario. The KLSE has gone up almost 40 % since November last year because of good fundamentals amidst some foreign buying, before the subprime mortgage crisis in the US and the sudden reversal of the yen carry trades in August panicked global stock and financial markets.

Global banks are hurt and paying penalties for their past risky lending practices; the big US investment banks have made several wrong calls this year and continue to bleed from their investments in hedge funds specializing in collateralized debts obligations (CDO) comprising mainly of subprime mortgages. The subprime loans, easy money spinning machines for those involved in the housing and finance industries before the huge defaults in loan repayments, had been designed to fail.

As indicated by CNN.com, how a (non English speaking) fruit picker in the US can be expected to keep up with regular monthly installments of USD 12,000 to the subprime lender or the holder of the CDO is beyond sanity and prudence? Greed, fear, panic, call it what you will, such housing loans, their finesse repackaging and the subsequent ‘collusions’ certainly look like a perfect con game to me. But, how would I know?

A few days ago, global banks have started borrowing heavily from lenders of last resort (Central Banks) at punitive rates, since no one else wanted their assets-backed IOUs (Commercial papers). They had played coy earlier – in taking token sums from the US Fed.

Central banks in the West are now pressurized into making ‘damn if you do and damn if you don’t’ decisions to either reduce interest rates or staying pat. If the central banks made wrong calls on their own monetary policies and allow inflation to rear its ugly head then more hell can break loose. Remember the US dollar deposit rates of 20+% in 1980 / 81?

Senior accountants may recall the difficult theoretical inflation accounting studies in the US and in the UK back in the 1970s, where lecturers and professors seemed not to know how to handle the subject? US economists appeared flustered by their wrong collective calls on the latest US employment figures – a consensus prediction of 100,000+ new payrolls which turned into an actual minus 4,000 jobs. What is new, when things have gone into total disarray?

Back in Malaysia, the daily trade values in the KLSE have dwindled to figures last seen in 2006. September is usually a quiet month. The onset of the fasting month of Ramadan may lower market trades even further. That is the good news – not much harm done in not ‘following the money’, since there are still some small rallies. (Possible bear traps and syndicates trying to cash out of the market. There are still sharks out there, remember?)

The bad news is that there had been a huge net outflow of 5.6 billion ringgit from the country during the second half of August. A large part of the outflow could be money taken out by foreign or hedge funds who sold down their share investments, which helped explain the huge falls of the KLCI by mid August. If investors follow the local financial news and read the market closely, owners have started to reduce their stake holdings. It is also quite obvious that stock market syndicates (the sharks) are caught at higher prices before the recent rout in mid August took its toll.

The questions in my mind now are:

‘What if the banks and stockbrokers because of some internal or external shocks suddenly turn jittery and start to recall financing of warehoused stocks and syndicates’ holdings?

What if the omen on natural disaster(s) in 2007 really unfolds?

What if the Dow Jones Index crash this October – on the back of bad news of huge bank losses?’
(The global banks will file their financial statements to Central Banks in October and November.)

The plunge(s) that would follow could be the worst case scenario for those still with heavy borrowings or huge unpaid stock market losses. Perhaps for some, bankruptcy could be the only way out.

But as readers are aware, ‘old fools never learn’.

The Government has recently started to publicize their guarantee of a maximum sum of RM 60,000 held in any bank account, if fellow Malaysians have not noticed. Those still holding large cash positions in their equity margins should withdraw some money and deposit the funds with bank(s).

There must be a good reason why a large global investment fund of Goldman Sachs is currently holding a huge cash position (about 70% of remaining funds) after suffering a 22% + realized loss in August.

Unless investors want to ‘die standing’ or ‘shit bricks’ later, the old Chinese saying of ‘On Bin Bu Dong’ or ‘Pacify the soldiers and not move’ certainly applies in such times of uncertainty – that is if we still have an army intact and not left with the ‘walking wounded’ or relying on ‘old and weak soldiers’ after the recent rout and panic, to fight another battle.

Writing this entry encourages me to try to get out of the ‘old fools’ mode and to hold cash. Hope readers, friends and kin could also try to.

Meanwhile as I write, time is ticking towards the unfolding of the omen on natural disaster(s) in 2007.

Cheerio!