Tuesday, May 16, 2006

KLSE Closing Comments
Tuesday 16 May

Well, it was close, if Iris did not see support coming in, we could be in for the longest haul. The fact that support came is a lifeline, and everyone can breathe a sigh of relief. It does not matter whether Iris drops some more, all that matters is that it continues to trade. Another lesson when stocks get designated. Allowing it to trade and to see support even though cash has to paid upfront are important developments, it ensures that the entire system does not get constipated.

40 million shares is decent for the last hour of trading, though still nowhere near my estimated 100 million that needs to be traded. Is the worst over? Yes and no. Yes, in that the main players are still liquid enough. Support has to come from main players, smaller syndicates and other unrelated players would not be so dumb as to pour funds after something they do not control. Herein lies the danger, there is one main group of players - if the main group gets into further financial difficulties, the whole thing goes up in smoke (remember Fountain View). If things are still trading, no red signal is up (yet), at least no broker has not announced that they cannot meet settlement. Chances are high that a large portion of Iris is cornered which can lead to a nasty end - not there yet but the signs are there. Not easy to hold up a RM1 billion valuation company.

Yet, these events happen too frequently, designation and rumours of a smaller broker holding too many shares of designated counters. While all brokers have clearly laid out rules on margin facilities, sometimes these rules get bent when very big players are involved. The SC and Bursa must have some form of regular audit and reporting on these level of margin for one share exposure in order to calm the market. Investors need not and should not have to worry that one or two radical brokers have flouted the rules and put everybody's investments at jeopardy. Brokers who have been flouting the rules must be severely reprimanded and failure to adhere should result in suspension of license.

While Iris is still trading, it is still early days yet, we may still have to watch for a few days to see that all pending settlements are being properly settled. So, it is not all clear yet. Having said that, players with a higher risk appetite may want to re-enter the market. Sometimes we have to say to ourselves that there are certain type of money you cannot / should not try to make. To bet now is too high a risk compared to the rewards. It may be better to forsake the potential gains during "troubling periods" like these. Giving up the 5% may save you a lot of headache and sleepless nights. The markets WILL ALWAYS be there, your money may not! There will always be another stock, another bull phase to look for, this one is not the last one, no one is.

Markets will not run far even if Iris stays healthy as the markets needed a breather. The pullback will need to find a consolidation phase (they always do). The good thing is that Asian equities is still looking good, thanks largely to bullish currencies. The only thing is we want a gradually weaker dollar and not a collapsing dollar - a collapsing dollar may force Bernanke to up rates aggresively (like 100 or even 200 basis points) which spells a temporary doom and gloom in global equities.

3 comments:

Rohan_888 said...

http://www.financialsense.com/editorials/weiss/2006/0515.html

Reminder that interest rates zoomed from 6% to 16% in just 4 months time in 1980.

Holders of long-term USD Bonds are not too happy since the middle of 2005, they dropped from 119 to 106, not taking into account the slide of the USD.

Exciting times for global investors. Stephen Roach's sudden flip-flop from the bears to the bulls might be a bit premature.

Rohan_888 said...

www.financialsense.com/editorials/weiss/2006/0515.html

Salvatore_Dali said...

rohan,

ty for yr comments and the links... yes, holders of us bonds have lost buckets (if they did not hedge) and thats the crux, will central banks stop buying... then bernanke will have to raise rates further... what a baptism of fire... and he earns less than 200k usd... compare that to singapore politicos... volcker's regime in the 80s should not be repeated as all countries ganged up on the us as they did not agree to us foreign policy... but we cannot rule out another 100 to 200 basis points and a sliding dollar ahead