2007-08-17

Starting with a sunny morning today, the Heng Seng index stood above 20K level only in first two hour and then fell dip down. My fellows fund managers dumped as quick as possible on the back of heightened redemption demands. The star retail fund saw USD50mn redemption in this morning, spurring the fund manager into a full “selling” mode. Look around, every body doing the same… sell and sell… Look at the market, even China mobile posted +26% growth in 1H07 net income, 6% above consensus, the stock has dropped from 93 to 81 since July 23^rd.

One of the victims today is NIKKEI, which lost 5.42% due to the 112.74 strengthened Yen made carry trades unwounded. The magnitude has not been seen since 911 terrorist attacks. The Bank of Japan, which added 1.2 trillion yen ($10.7billion) into the money market today, has conducted daily injections greater than 1 trillion yen a total of 10 times this year to sustain lending in the banking industry. If this is not concerned you, I should add that about a 10th of stock-market capitalization has been wiped out globally since July 23, when the value of listed companies peaked at $59.8 trillion.

The flight from risk has stoked demand for U.S. Treasuries. Yields on 2YUST fell to 4.16,  the lowest in 22 months this week. A measure of six metals traded on the LME slumped 6.1 percent yesterday, the most since January 2005. Copper declined 7.8 percent, nickel fell 5.3 percent, and zinc lost 7.4 percent.

Over all, I think the wealth destruction impact will be even bigger than last time, as one of my HK friends saw its portfolio lost 50% NAV today.  I also clearly remember what the Chief economist of CLSA, Christ wood said the next bubbles burst will make LTCM like a picnic.

What I feel now is this is more a serious problem in the financial markets (overleveraging, financial innovation, risk mispricing etc), instead of fundamentals. However, there does exit a lagging impact to the real economy, as I couldn’t actually understand why individual Hong Kong-listed equity were showing such volatility and the rising real borrowing costs and potential slow-down in US economy will make things worse. Now, who really knows the story? Let us pay attention to tonight’s New York Market and the upcoming US economic data.

Simply put, despite fundamentally attractive valuation opportunities on the stock-basis in both equity and corporate credit market over the longer term, the collective negative sentiment of the credit market overhang, combined with continued equity market volatility, creates an environment with a high probability of further technical driven sell-off.  In fact, historically in a bull market, when there is a market correction, it usually takes three month to recover, if the bull market continues.

I agree that this eventually will correct itself, but when there is a loss of confidence, fears overshadows greed.