Wishful thinking

The analysts are still at it. Some recommend buying shares since the stock markets have fallen so much and seemed cheap while others argue it is time to sell to preserve capital from further deterioration. We cannot begrudge analysts because it is their job, their profession, to recommend the buying or selling of investments. They have to make a living too. It is always up to investors to follow their recommendations or not.

However if investors do not do their own homework before investing or divesting, it amounts to wishful thinking especially in times of a financial crisis. It tantamount to holding onto false hopes if investors continue to ignore the current implosion of stock markets, the continual freefall of the US dollar, and various warnings by established institutions of further turmoil up ahead.

According to Bloomberg this week, Japan was the first major stock market to turn into a bear market in 2007. Her Topix Index has fallen by more than 20% from its high this year.

The Chinese stock markets (Shanghai and Hong Kong) could be next as they have plunged and are hovering just above the 20% drop level where they will technically turn into bear markets if crossed. The Shanghai Stock Exchange Index hit a record high of 6,124.04 points on October 16th while the Hang Seng Index reached its highest ever 31,958.41 points on October 30th. If the SSEI and the HSI fall below 4,899 and 25,566 points respectively, these Chinese stock markets will be called 'bear markets'.

Meanwhile the Dow Jones Index has fallen below the 12,845.78 points reached on August 16 when the credit crunch hit before the US Federal Reserve reduced both the discount and bank lending rates twice. According to those who subscribed to the Dow Theory, if the DJI close below that figure again, it signals a bear market. On Wednesday November 21 the DJI ended at 12,799.04, its lowest close since April.

In Malaysia if investors have not noticed, many low liners are hovering just above and some had gone below the prices reached on August 17th, the day of the huge panic in the KLSE and the Asian stock markets. It is wishful thinking if investors believe that the KLSE will not be affected by the prevailing havoc in global financial markets. Like a good mare, the KLSE follow leading stock markets, especially in plunges. Look at the money traded, just over RM 1 billion on Friday.

Also like good mares following the lead of Deutsche Bank, analysts have been emboldened to estimate the huge losses that global banks (commercial and investment) may write off going forward. The DB analysts opened the floodgates with estimated losses of USD 250 to 500 billion, quickly followed by others (including the US Fed Chairman) who predicted losses ranging from USD 100 billion to 200 billion. According to the Organisation for Economic Cooperation and Development (OECD) this week, losses from US subprime mortgage foreclosures, coupled with slowing economic growth and falling house prices could reach as much as USD 300 billion. OECD estimated a fifth of subprime mortgages are at risk.

Frankly speaking, all these estimates including those figures provided by the OECD sound rather optimistic.

Global banks that overtraded by financing long term loans with short term money are floundering. If you ask any insolvency expert, they will tell you the main cause for bankruptcy of once profitable businesses is overtrading. The banks knew that it was wrong to overtrade, but bankers too have their own frailties. Who do not want to make more money?

My prudent estimate of losses arising from CDOs and mortgage defaults amount to USD 900 billion or more. (According to the US mortgage association, outstanding housing mortgages total USD 10.9 trillion. CDOs and related derivatives amount to USD 6 trillion. Source: Bloomberg)

If this worst case scenario ever happens, expect some global banks (commercial and investment) to go under next year or the year after. What then would happen to global financial markets is anyone’s guess.

If regular readers who invest in Asian stock markets did not heed my recent advices to hold more cash rather than shares since early October and preferred to stand in the middle of the mountain at the end of October, hope they are well prepared for the freefalls down the chasm of Kun / The Receptive Earth since the mountain has imploded this November just like in 1997.

If some readers think that one knows more than the ShenXian, one was just following the ancients by reading the past to foreknow the future. In truth, the final quarter of my Yi chart for 1997 depicts what would and is currently happening to Asian stock markets. The reason for my forewarnings on the Chinese stock markets which include Hong Kong and lately the South Korean stock market. (Foreign funds were net sellers of Korean stocks for the entire week ending November 23rd.)

Hopefully, investors will stop listening to the Xiao Ren, whose influences have waned; wishful thinking, perhaps? Since fate and luck continue to play a part in determining with whom, when, or where the buck and music will finally stop.