Tuesday, May 23, 2006

Events Searching For Reasons
The Poor Man's Analyst

The markets' slide yesterday in the afternoon confounded everyone. What was so bad that caused some panic selling? Nobody could tell really. When things happen that is out of the ordinary, we go searching for reasons... sometimes there isn't any. Sometimes there is but it is something we already knew. If there were no new information, then the fall yesterday is not justifiable, right? When a girl gets dumped by a guy, we can safely say she might cry and be bothered for a couple of weeks, but she might also go and kill herself or go to a singles bar - many things happen for the same reasons... when there were no new information that caused her to do so many things. We can only predict the first few things but we cannot estimate the length, gravity of the reverberations correctly.

The following were the cited reasons, and I have market their credibility out of ten points (the higher, the more credible the reason for yesterday's demise):

1) Hedge funds selling stocks to cover their magnified losses in commodities exposure / cut-loss operations (7/10)
2) Continued declines in commodity prices from last week's bust, further deflated wealth (8/10)
3) US funds repatriating their capital due to a stronger US dollar, triggering a region-wide sell-off (2/10 or basically learned BS)
4) Markets fell in sympathy with the sharp correction in commodities-heavy bourses: Australia -1.3%; India -4.2%; Indonesia -6% (6/10)
5) HK was doubly affected by funds tied up in big IPOs. The Hang Seng index was down 3.11% yesterday (9/10)
6) Other markets were less affected as they had less foreign fund buying activity over the last 2 months: Malaysia -2%; Singapore -3.1%; Seoul -2.4%; Tapei -1.9%; Tokyo -1.9%; Bangkok -2.9% (4/10)
7) Iran stated that they will continue to use uranium for power generation, not nuclear bomb making - causing further escalation in tension (3/10)

In HK, Bank of China's IPO has tied up a lot of funds. The IPO is valued at HK$76.8 billion and will commence to trade on 1 June. Total funds tied up to apply for the shares amounted to a staggering HK$655 billion (US$84 billion). That is a lot of funds doing nothing in the bank for a few weeks. The brokers had new applications of nearly HK$30 billion for margin lending from retail to subscribe for the IPO. Besides the Bank of China IPO, there are a couple of attractive smaller China-related IPOs: port operator Tianjin Port Development and Champion REIT (combined they raised HK$7.4 billion).

When someone gets hammered we don't know how long it will take to recover, or were there any internal injuries. All said, a large portion of yesterday's sell-off was the unwinding and cut-loss activity perpetrated by commodity price slide and hedge fund trading. Unless commodity prices slide further, the blood-letting should cease. No big cause for worry.

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