Business Times - 16 Aug 2011
Hock Lock Siew
Stocks: is it really time to buy?
By R SIVANITHY
STOCK markets may have rebounded in the past two sessions from the heavy beating sustained over the past few weeks but there is still plenty to worry investors. In Europe, for example, the authorities in some countries have resorted to banning short-selling - a move which smacks of panic and one which could well make matters worse (more on this later). In the US, pressure has mounted on the Federal Reserve to embark on more money printing or quantitative easing (a QE3), even though the previous two rounds have not had a lasting effect.
Here, heavy losses amid margin calls and forced selling have dragged the Straits Times Index to a 10 per cent loss for the year so far - something of a disaster among observers grown accustomed to annual double-digit gains.
The first thing to note in all of this is that although the Straits Times Index (STI) appears to have crashed in the wake of debt crises in Europe and the US, at above 2,800 it is still just under 100 per cent above its post-Lehman Brothers low. The picture is similar elsewhere: the S&P 500 at last Friday's close of 1,178 is only 6 per cent down for the year while still 75 per cent up in just over two years; and over in Hong Kong, the Hang Seng at yesterday's close of just above 20,000 is still almost 80 per cent above its March 2009 level.
In other words, the 'collapses' of the past few weeks have to be put in their proper perspective; the losses are nowhere as catastrophic as many media reports have made them out to be. Optimists might interpret this as stocks receiving good support because of a rosy economic outlook but, by the same token, it could well be that there is still room for more downside.
For one thing, Europe's debt problems are far from over. The ban on short-selling may appear to help by providing temporary relief but the evidence suggests that such bans will eventually cause more problems. In his paper, Spillover Effects of Counter-cyclical Market Regulation: Evidence from the 2008 Ban on Short Sales, for instance, finance professor Abraham Lioui of EDHEC Business School found that European banning of shorting during the plunges of 2008 did not help ease pressure.
'The ban on short-selling increased the daily volatilities of the markets; the impact of the ban was greater than the impact of the ongoing financial crisis,' said Prof Lioui. (In a separate paper on US efforts to curb short-selling in 2008, EDHEC reached a similar conclusion.)
Another worry is the US, where the economy is much weaker than it was at the outset of recession in December 2007 - jobs, income levels, output and industrial production are worse today than they were back then (the unemployment rate when Lehman went bust was 5 per cent; today, it's 9.1 per cent).
According to The New York Times last week: 'Growth has been so weak that almost no ground has been recouped, even though a recovery technically started in June 2009 . . . making things worse, policymakers used most of the economic tools at their disposal to combat the last recession and have few options available.'
Negative 'feedback loop'
In such a fluid and uncertain environment, it is possible for worry to feed upon worry. Few may have noticed this, but crude oil prices are almost 30 per cent down since April - a clear sign that the market is anticipating an economic slowdown.
US house prices, in the meantime, are still weak and consumer spending is slumping, adding to the negative 'feedback loop' where people hold off spending because they think the economy is weak and the economy weakens because people hold off spending.
Traders should, therefore, be wary of reports that claim the worst to be over or those that urge buying because stocks are 'cheap'.
The prudent thing to do is approach such reports with caution while bearing in mind that preservation of capital is paramount. Stocks may look attractive because they have dropped sharply, but there could still be plenty of downside ahead.
Source/转贴/Extract/Excerpts: www.businesstimes.com.sg
Publish date:16/08/11
Hock Lock Siew
Stocks: is it really time to buy?
By R SIVANITHY
STOCK markets may have rebounded in the past two sessions from the heavy beating sustained over the past few weeks but there is still plenty to worry investors. In Europe, for example, the authorities in some countries have resorted to banning short-selling - a move which smacks of panic and one which could well make matters worse (more on this later). In the US, pressure has mounted on the Federal Reserve to embark on more money printing or quantitative easing (a QE3), even though the previous two rounds have not had a lasting effect.
Here, heavy losses amid margin calls and forced selling have dragged the Straits Times Index to a 10 per cent loss for the year so far - something of a disaster among observers grown accustomed to annual double-digit gains.
The first thing to note in all of this is that although the Straits Times Index (STI) appears to have crashed in the wake of debt crises in Europe and the US, at above 2,800 it is still just under 100 per cent above its post-Lehman Brothers low. The picture is similar elsewhere: the S&P 500 at last Friday's close of 1,178 is only 6 per cent down for the year while still 75 per cent up in just over two years; and over in Hong Kong, the Hang Seng at yesterday's close of just above 20,000 is still almost 80 per cent above its March 2009 level.
In other words, the 'collapses' of the past few weeks have to be put in their proper perspective; the losses are nowhere as catastrophic as many media reports have made them out to be. Optimists might interpret this as stocks receiving good support because of a rosy economic outlook but, by the same token, it could well be that there is still room for more downside.
For one thing, Europe's debt problems are far from over. The ban on short-selling may appear to help by providing temporary relief but the evidence suggests that such bans will eventually cause more problems. In his paper, Spillover Effects of Counter-cyclical Market Regulation: Evidence from the 2008 Ban on Short Sales, for instance, finance professor Abraham Lioui of EDHEC Business School found that European banning of shorting during the plunges of 2008 did not help ease pressure.
'The ban on short-selling increased the daily volatilities of the markets; the impact of the ban was greater than the impact of the ongoing financial crisis,' said Prof Lioui. (In a separate paper on US efforts to curb short-selling in 2008, EDHEC reached a similar conclusion.)
Another worry is the US, where the economy is much weaker than it was at the outset of recession in December 2007 - jobs, income levels, output and industrial production are worse today than they were back then (the unemployment rate when Lehman went bust was 5 per cent; today, it's 9.1 per cent).
According to The New York Times last week: 'Growth has been so weak that almost no ground has been recouped, even though a recovery technically started in June 2009 . . . making things worse, policymakers used most of the economic tools at their disposal to combat the last recession and have few options available.'
Negative 'feedback loop'
In such a fluid and uncertain environment, it is possible for worry to feed upon worry. Few may have noticed this, but crude oil prices are almost 30 per cent down since April - a clear sign that the market is anticipating an economic slowdown.
US house prices, in the meantime, are still weak and consumer spending is slumping, adding to the negative 'feedback loop' where people hold off spending because they think the economy is weak and the economy weakens because people hold off spending.
Traders should, therefore, be wary of reports that claim the worst to be over or those that urge buying because stocks are 'cheap'.
The prudent thing to do is approach such reports with caution while bearing in mind that preservation of capital is paramount. Stocks may look attractive because they have dropped sharply, but there could still be plenty of downside ahead.
Source/转贴/Extract/Excerpts: www.businesstimes.com.sg
Publish date:16/08/11
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