"Bulls, unable to bear more bad news, may be ready to charge
" is the average HK view of the state of money:
columns.scmp.com
Monday, October 14, 2002
Bulls, unable to bear more bad news, may be ready to charge
LIM SAY BOON
Investors may soon face the exquisite dilemma of a powerful rally in global equities even as the world is poised on the brink of economic implosion.
On our side of the world, the Nikkei last week closed below 8,500 points for the first time in 19 years; Japan's economic recovery appears to be petering out; and its government bonds were snubbed by investors for the first time in history.
In Europe, there has been a meltdown in the share prices of banks; confidence is declining in the midst of rising unemployment; but policymakers continue to focus on inflation and budget deficits. And as lousy as things are in the United States, it is still the brightest star on a very dark night. Well, that kind of tells you how bad things are.
But ironically, we could see against all this misery a powerful rally in global equities very soon. Indeed, an overwhelming number of technical signals suggest we are either at or very close to a bottom for US equities.
The Dow last week entered a critical support zone of 7,150-7,300 points. It fell big time on huge volumes. Then overnight, the US market staged a huge rebound - again on very heavy volumes. The Big Board, where typically 1.2 billion to 1.3 billion shares changes hands per day, recorded volume of over 2 billion!
It was supposed to have been Yahoo! that caused the shift in sentiment when it came out with stronger than expected earnings for the third quarter. But I don't pay a lot of attention to that. The markets have been building up towards a peak in pessimism for some time now, and we appear pretty close to that peak - if we are not already there. The Chicago Board Options Exchange's Market Volatility Index (VIX) popped above the 50 points mark on Thursday, indicating extreme pessimism. The VIX had previously been above 50 only twice in the past year or so.
The first time was after September 11, and the second was in July this year. Both times, the equities markets staged strong countertrend rallies. I strongly suspect the same is going to occur again this time. And also bear in mind that as the S&P 500 approaches 50 per cent of its all-time high value from early 2000, the bulls will stage a fight back. They did that the last time the index approached the 50 per cent level, last July.
However, the exact timing of such a rebound is difficult to determine. It is difficult enough reading approximate bottoms. For the more specific stuff, you may want to consult a clairvoyant, if you believe in them.
Indeed, I note that the Nasdaq did not hit the target/support level of 1,050, and the index did not see the massive declines on huge volumes that we saw on the Dow. So there is a question mark on whether the Nasdaq has "capitulated". Yes, there is a 50-50 chance of a further retreat after a minor upward wave for the US markets, in particular the Nasdaq. But my point is simply that we are very close to that bottom.
We have already seen the markets factoring in so much of the bad news, including the possibility of a double-dip recession and war with Iraq - that there could be a major rebound before war starts, much as we saw in the lead up to the Gulf War of 1991. Indeed, I noted in an earlier column that the US markets bottomed in October 1990 - months before the US commenced Operation Desert Storm.
But I am under no illusion that the next equities rally, and there is a strong possibility that it may be even more powerful than the July-August affair, is yet another counter-trend rally. It will be, if you like, a cyclical bull under the shadow of a secular bear.
In our region, the International Monetary Fund's radical recommendations for Japan, that is, the call on the central bank to monetise its way out of its problems, is a reflection of the severity of the deflationary threat. The suggestion was effectively to flood the system with money, and deal with the inflation later. It's the "you don't worry about flooding the basement if your house is on fire" argument.
But so severe is the grip of deflation, that for Japanese policymakers it's a case of damned if you do and damned if you don't.
The equities market has been spiralling lower on deepening concerns about Japanese banks' bad debt problems, the deep domestic crisis of confidence, and unconvincing recoveries followed by more recessions. But yet, when the Japanese government talked tough about forcing the issue of banks' bad debts, stock prices fell even deeper. That is, forcing the issue of bad debts with the banks will push troubled companies to the wall, put more Japanese out of work, and aggravate the deflation.
In Europe, bank shares, reflecting growing pessimism, have been hammered over the past week. On average, European bank shares have fallen something like 20 per cent in two weeks. Commerzbank shares hit an 18-year low on, unfounded and since denied, rumours of insolvency.
Meanwhile, the earnings picture on the US has turned decidedly nastier, with growing numbers of US companies with negative earnings warnings. And the real economy continued to flatten out, suggesting either a double-dip or a tepid recovery unable to deliver earnings growth. Yet this is the main, no, only, source of growth for the global economy.
What about China, you say, well, that's part of the problem. China's growth is actually adding to the global gloom. With its apparently bottomless pool of cheap labour, China is exporting deflation. Don't count on the bear disappearing for too long, just because of a counter trend rally. |
