Mr. Bearbull
Chaos theory
By Ron Nathan
Philippine Daily Inquirer
First Posted 04:16:00 08/12/2008
Filed Under: Stock Activity, Markets & Exchanges
Church bells rang out all over the Ortigas business district following the news that Metro Pacific had bought the toll road north of Manila for $278 million from First Philippine Holdings, which has large debts. FPH immediately told its parent company Benpres Holdings, and the company told its chairman, Mr. Lopez. He was delighted and told the church, and the bell ringer rang the bell.
I was Peking at the Olympics and in the 100-meter breaststroke, one girl finished about five minutes behind the rest. The umpire had to explain to her that despite its description, she was allowed to use her arms.
In the hammer-throwing competition, one contestant chewed large chunks of wood from the handle to make it lighter so it would fly further. He was caught and the committee said, “We do not expect this kind of behavior from a professional, maybe from an “ammer chewer.”
The long jump and the high jump were won by an Australian who shattered both world records by a stupendous margin. On examination, it was found to be a kangaroo. The Aussies argued that it was a native of Australia and had a valid passport. Trial by a kangaroo court was rejected and the matter will now go to The Hague.
After 2 years, I managed to get SkyCable Platinum. I came home one afternoon and found my wife playing with her Digibox. She asked me, “What do you like most in me, my pretty face or my sexy body?” I replied, “Your sense of humor.”
* * *
I have been a technical analyst since 1970 and have consistently read the charts well, as documented by my recommendations going back as far as 2001. If you had sold at the top, I had two 12-baggers (TEL and Paxys), three 5-baggers and the rest up 2 to 3 times, a record I am proud of.
But lately, I have become bewildered by the wild and totally unpredictable gyrations of Wall Street, up 200-300 points one day and down 200-300 the next. The chart of the Dow is similar to alternating current, which reverses at 50 cycles a second, not as fast but with a similar pattern.
The oil price drops $4 and Wall Street takes off. Next day, three banks report terrible figures with write-offs up from $392 billion to $482 billion and rising. More job losses, lower consumer confidence and a looming global recession leaves all investors depressed so the market collapses.
The following day, oil drops nearly $5 to $115.20 a barrel and the market takes off again. This yoyo effect is making it impossible to read anything into the charts and for the time being, I am inclined to believe in chaos theory.
We have seen a big recovery, not only in the US but also in almost every country. Even if oil goes down and stays down, which I doubt, the effect on inflation will certainly be beneficial but it will not reverse the decline in house prices and the foreclosures and write-offs will continue.
Alan Greenspan said last week: “House prices are nowhere near the bottom.” He rarely comes out with such a pronouncement and I feel he is right.
Until the price of homes stabilizes, banks and security firms will continue to lose money, write off further losses and possibly ask for new money to sustain their capital adequacy ratio. In such a scenario, I think that the original estimate of UBS that write-offs would total $600 billion is too low.
The Federal Reserve recently rescued two banks and has another 125 on their watch list. Do they and the Treasury have inexhaustible funds with which to bail out everyone and what happens after the Fed closes its window on Jan. 1? Fannie Mae announced a loss of $2.3 billion, after making provision for credit losses in the quarter and cut its dividend. Freddie Mac did even worse with a quarterly loss three times bigger than expected and an 80-percent cut in its dividend.
The Treasury may be forced to buy $30 billion of preferred shares to cover their losses. Morgan Stanley told thousands of clients that they won’t be allowed to draw money on their home-equity credit lines.
Insurer AIG posted a steeper-than-expected loss of $5.36 billion due to massive write-downs related to the credit collapse. Citigroup agreed to buy back $7 billion of auction-rate securities after the New York attorney general said the company misled investors.
In May, individual incomes jumped 1.8 percent due to the $79 billion worth of stimulus package checks sent out. But in June, the figure had dropped to 0.1 percent and in future will probably turn negative.
On the labor front, employers announced that they planned 26 percent more job cuts in July so the job losses will continue at least to the end of 2008. Homebuilders are facing record foreclosures and there are 3.9 million unsold homes, the most since 1982. “It is going to take several years to get rid of all this inventory and homebuilders have no choice but to sell at discounted prices.”
UBS wrote, “The world economy is precariously close to a recession in 2009 and cut GDP from 3.1 percent to 2.9 percent. A growth rate of 2.5 percent is considered consistent with a recession. A global recession would be the first since 2001/2 and might ease inflation, projected by the IMF to be the fastest in 9 years.”
Julius Baer, a Swiss bank trading internationally predicted, “The world is underestimating the extent of a synchronized economic slowdown that is going to happen. 2009 will be worse than 2008.”
The global slowdown has already affected the profits of HSBC, which has large interests in the US. Mitsubishi Financial is another casualty and the Japanese economy is tottering on the verge of a recession with wages falling as well as household spending. Europe is now feeling the heat, particularly the UK where there is no Fannie Mae to rescue people from foreclosures.
The growth rate in China has slowed steadily from 11.4 percent last year to 10.1 percent last quarter, partly due to the appreciation of the renminbi. It looks set for a soft landing with sustainable growth at 8 percent to 9 percent.
Commodities have been badly hit with gold down from $1,000 to $858 and other hard and soft commodities are following the downtrend. Oil is the most important commodity and wherever it goes, the others will follow. Speculators are moving out of oil and back into stocks but the oil price is highly unpredictable and therefore, so is the stock market.
The Philippine Stock Exchange index has completely ignored Wall Street, rising steadily and ignoring inflation at 12.2 percent, a figure higher than anyone expected. Nevertheless, foreign brokers continue to sell our stocks every day.
Previous columns:
US loses more jobs– 2008/08/05
Central bank fights inflation – 2008/07/22
Paulson to the rescue– 2008/07/15
US in Bear Nanke market – 2008/07/08
Bear market in Dow is imminent – 2008/07/01
Are we in a panda market?– 2008/06/24
|
