Dr Chan\'s thoughts on the market

Dr Chan Yan Chong\'s monthly letter ( www.ycchan.net ) Dear Friends August is another month of falling market. The fall during the 3 months since the market rebounced hit the top in May has been gradual. This falling mode is alarming, as quick fall would have quick rebounce, and slow fall would have slow rebounce. The good news is: the stock market has fallen to lower than the reasonable price level. Reasonable price means the price at the mid point of the long term trend line which can be seen from the STI converted log. The current STI is already below the linear regression line of the long term trend (please refer to the middle straight line on the attached diagram). Looking at the long term trend line, current stock prices on the whole are at the low level. In other word, the bear market has passed the medium term. The bear market has been for 9 months since it began in November last year, another 9 months the bear market might come to an end. We should bear with it; there is no point selling your stocks now. International macro economy is still unclear. US Dow Jones Index rebounced after falling below 11,000 points. US currency also rebounced substantially against other major currencies. In July, some people predicted that the oil price would escalate to US$200 a barrel; now some people are predicting oil price would fall below US$80 a barrel. Not only oil, metals, natural resources, and commodities prices are showing sign of coming down drastically. It looks like the bubble of manipulated commodity prices is going to burst. Once the bubble of commodity futures bursts, exchange rates of other currencies would fall, big portion of hot monies would flow back to US, pushing US currency upward, and US stocks would rebounce. If you have the gut, you may want to invest a small sum to gamble on it. A reasonable rise in US stock market will lead to Singapore market going up. Lately, the stock market moves up and down like yoyo; it is not easy to buy stocks at perceived low level under the current complex scenario. You may have to rely on your gut feeling to wait until one day the market crash due to panicky sentiment, then gamble on rebounce opportunity. Property market, which is vital to Singapore economic well being has fallen for sometime. Rising or falling too fast will not be good for national development. Authorities have begun taking measure to lower building site development levy by 6%. This reduction should stimulate developers’ desire to build and revitalize the construction industry, benefiting construction and related materials stocks. Reduction in levy will alleviate developers’ burden, but not necessary will push up property prices. Now is not the time to buy property shares. Situation in Europe may be even worse than in US. Since sub-prime issue deteriorated last year, US kept lowering the interest rate. Current Fed rate is 2%, and low interest rate is good for economic recovery. Interest rate in Europe remains quite high, as countering inflation is still the prime objective of the European central banks. High interest rate leads to economic recession. Europe may reduce interest rate to counter recession in the foreseeable future. Situation is china is even more peculiar. Economic growth rate in China is still high; GDP growth remains above10%. With better profits, 80% of the announced corporate results are not bad. Yet Shanghai and Shenzhen stocks have fallen heavily. Shanghai combined index fell more than 60%, from 6,000 high to 2,300 last year. Every day, punters and investors are calling the government to rescue the market. Some big foreign brokering firms even reported that the Central Bank would fork out rmb400 billion to rescue the market. I believe the Central Bank will rescue the market, but not through direct buying stocks from the market, but deploy other methods to ensure listed companies can make profit. From long term point of view, as long as corporate results are good, their share prices will reflect as such. 2/9/2008

Dr chan\'s latest letter: Dear friends STI on 28 October dropped to the lowest point at 1,473. On that day, STI was at 95% pessimistic line of the linear regression chart, suggesting that the pessimistic sentiment had reached its lowest level. For the past 10 years, whenever STI fell to 95% pessimistic line of the linear regression chart, market began to turn around, as happened in 1998 and 2000. Similarly, when the trend line was at 95% optimistic line, market also turned around, as in 1997, 2000, and 2003. Up to now however, I find out that they are coincidental occurrences which I do not have any theoretical explanation to prove the certainty of the accuracy of the chart. Nevertheless, I believe the chart is definitely worthwhile for reference purposes. STI in a short span of 3 days rebounded approximately 25%. The rebound velocity was too traumatic. We could expect volatile fluctuations in the near term. The financial tsunami is terrifying. I have never seen it before in my life. Cautious navigation gives you safe voyages for many years to come. I would not suggest you put your stake with what you have, but keep at least 50% cash with you until mid year next and to observe how the market trend develops. The post financial tsunami effects will be traumatic. Rebuilding devastated properties after tsunami takes a long time. Many people puzzle over how the United States, the country that causes the financial tsunami, the government that prints currency notes to save the market could lead to US$ appreciates so much. This has upset the financial system worldwide. Beside US$, Japanese yen also appreciates. The appreciation of US$ and Japanese yen induce many people to dispose of stocks and convert other currencies to US$, and deposit monies into American banks. The American banks however, dare not lend out monies, and US remains short of funds. 3 months ago everybody thought US would wantonly print paper money, and US$ would devalue; everybody sold US$. When US$ strengthens, the scenario turns around; people rush to buy up US$, upsetting the worldwide market to such an extent that no traditional analytical explanation is feasible. The only explanation is: the market has become a big gambling den. Governments worldwide have come out to rescue the market. I am thus basically optimistic. The only worry is the collapse of market confidence which would take a long time to recover. On top of it, there are many gamblers playing the market everyday, making it so much irrationale. For now you must try to curb your greed and fear sentiment. Fear on account of stock holdings that see the market’s dip; greed on account of chasing stocks on market’s rise. Share prices have dropped to relatively cheap level. The appropriate stock holding and cash ratio should be 70% to 50% cash, or 30% to 50% stock holding. It all depends on your own risk tolerance. Never borrow money to buy shares.

My humble opinion, the past few days are great opportunities to dispose of the junk stocks that you have. Markets are rising in anticipation of a US election rally. I think US market will start to slide once the election is over. The new President has to deal with the rubbish that George, the Terrible has left behind. Probably slide back to 1,400 again. My 2 cent view.

I hate to do this but I have to really agree with the above views. My banker was just telling me how estatic they were seeing the markets bounce across the region and I ask him bouncing into what? A recovery of earnings? He must be reading end 2006 news. The unfortunate part is that the forward PE estimates of the S&P 500 and the SGX is too optimistic. It is not the P that is the problem as the P has drop substantially but the E has not been revised downwards to an equal amount. As such many investors and analyst alike are saying that the regional markets look cheap...of course they are the E is overstated. The problem right now is that it takes time for main-street to adjust their spending with the onset of economics blows and mind you that the unemployment is set to rise significantly. The numbers reported so far is based on data collected 3-6 months back when things look much better and confidence then wasn\'t as bad. Once you have a combination of main-street financial woes, it will turn a vicious circle and hit Wall Street again with vengence. Allthe vicious circle will eventually come to an end when corporations are allow to operate in a free market without bailouts (something like the Wachovia/ Wells Fargo deal) and walking dead institutions like AIG, GM, Ford are allowed to fail or taken over by Nissan, VW or Toyota. It is simple free market economics and the strong should deserve to survive.

Looks like the STI is pretty stubborn... refusing to complete the 4th wave down. :laugh: