Chaos in the Financial Markets

Here is an email from one of my readers, Slawek Rogulski:

Hello Mr Wang,

You are no doubt aware of the world financial situation, especially that of the US with the sub-prime mortgages and other exotic instruments starting to lose their value. In your opinion what if any impact on Singapore will this have? Have any funds here had to close or at least temporarily halt withdrawals? And how sound are the local banks? I would appreciate your comments on these issues. Thank you. Regards,

Yes, I am very aware of the current world financial situation. However, for two reasons, I will not comment specifically on the US subprime mortgage situation.

1. There is already an abundance of articles and commentaries in the news and media about the US subprime mortgage situation.

2. No one knows what's going to happen next anyway. That includes Mr Wang.

Me, I'm getting at least 4 jokes per day by email, about Goldman Sachs, Bear Stearns or hedge funds in general. But if you really want to read some serious, and excellent articles on this topic by an anonymous blogger, click here.

Trust that man, he's very good. At the same time, being anonymous, he doesn't have to tailor his commentary to suit any particular vested interest, which he would have to do if he were a known person employed by, say, certain investment banks or hedge funds right now.

As for myself, over the past two months, I've heavily dumped my own fund investments worldwide in the past two months and I'm very long on cash right now. It's been a brilliant bull run, I've made my money over the past two years and I'm out. The party's over, and it sure was fun!

I'm not going bottom fishing yet, because I think we're still a long way from bottom. It is frankly not just about US subprime - it is the market doing a major repricing of credit risk everywhere that credit risk appears. In other words, not just CDOs, but debt in general, and equities too.

Now I'm going to work on my Plan B and Plan C. What shall Mr Wang do, if in three or six months time, his own job (in credit derivatives) vanishes? Poof. Magic, just like a Bear Stearns hedge fund.

Sigh, I may have to become a lawyer again.

Baca Selengkapnya »»

Happy Amnesia

A little bit of psychology to begin our day. The recency bias is our psychological tendency to give more weight to recent data or experience, than to earlier data or experience.

For example, suppose it's the end of the year and your boss is assessing your work performance. His impression of your work performance will probably be much more heavily influenced by what you did in the 2nd half of the year, than what you did in the 1st half of the year. This is despite the fact that what you did in both halves should matter equally.

Recency bias also affects the way people invest money. Suppose for example the stock markets have been in a bull run for the past two years. The masses will tend to forget other, less-recent years when bull runs turned abruptly into market crashes (eg the NASDAQ crash of 2000). Since all the recent data and experience indicates a charging bull, the masses will tend to develop the expectation that the bull will keep on charging on.

You might know this saying - "Those who never remember the past are doomed to repeat its mistakes." It's a neat encapsulation of the recency bias.

In the past two years, the Gods of Money have been very kind to Mr Wang. Thank you, sirs. Today, Mr Wang will start getting out of the markets. He senses mania.

ST May 15, 2007
STI hits high after China eases investment rules
Regional markets also shoot up in anticipation of massive outflow of new money

By Markets Correspondent, Goh Eng Yeow

SINGAPORE'S stock market hit a record yesterday after a landmark decision by China's banking regulators sparked a Manic Monday rally across the region.

Investors piled in to local shares to drive the Straits Times Index up 54.18 points to close at 3,501.1 - a rise this year of 17.3 per cent that has added $77 billion to the market's value.

The bulls were primed to run wild yesterday by a historic decision announced in Beijing last Friday: China's bank customers will be allowed to buy shares in overseas markets - mostly via funds - for the first time.

Such purchases will initially be confined to the Hong Kong market, but bourses from Mumbai to Sydney shot up in jubilant expectation of what could be a massive outflow of new money.

'We are witnessing history in the making - a move that may eventually open the floodgates for some US$2 trillion (S$3 trillion) of Chinese domestic savings (looking) for better opportunities,' said Mr Loh Hoon Sun, Phillip Securities' managing director.

Mr Loh forgot to mention that for starters, the Chinese government is going to allow China's bank customers to invest only US$7 billion overseas, over 12 months.

In terms of global stock markets, US$7 billion over 12 months is quite small peanuts. You can see from the ST article that the Singapore stock exchange itself grew by 11 times more (USD 77 billion) in market capitalisation, in the 1st five months of 2007 alone. And the Singapore stock exchange is quite small, relative to many other stock markets around the world.

Baca Selengkapnya »»

Crazy Bull

Stock markets all around the world have been climbing like rockets. That includes the US, Europe, Japan, China, India, Korea, Australia, Malaysia, Singapore ... The list goes on. One wonders when the bubble will burst again (the last times it popped were in February 2007 and May 2006).

But the thing is - in most countries, the stock market's performance looks genuinely well-supported by fundamentals. It's not just investors' euphoria. Here's an example, from Singapore:

May 7, 2007
S'pore corporate gains jump 25% to $2.7b
Only four of the firms turning in first-quarter results suffer losses

By Arthur Poon

SINGAPORE'S listed companies have turned in a scorching set of first-quarter results, with total profits surging 25.2 per cent to $2.7 billion.

As rampaging bulls take the local stock market to fresh record highs with relentless repetition, these companies' bottom lines proclaim this is no market whim.

The big profit winners include banks, marine firms, property developers and trusts.

Among the 64 listed firms that had posted results up to last Friday evening, for the three months ended March 31, more than half of them, or 37, reported improved profits.

Another 17 recorded lower profits while one firm moved from red ink to black. Another five companies reported earnings similar to those posted in the previous corresponding period. Only four firms posted losses.

Baca Selengkapnya »»