How Bad

Datuk has left a new comment on your post "Morgan Stanley Asia Not So Bearish":

I think KLSE has dropped more than 45% today compared if peak point. Do you think 45% of down turn in index is not enough for us to consider collapse ? In fact, KLSE is in line with other bourses in the region ...virtually in collapsing situation! The only difference is the dropped in the KLSE index is less severe compared its peers.

Obviously, there were several factors for that:

i)In the most recent bull cycle, the performance of KLSE has been well below its peers in Asia region. Hence, it's within our circle of expectation that the down turn in KLSE will be less severe compared other region.

ii)KLSE is supported by two of our natural endowments, petrol and palm oil. The prospect for these commodities only changed negatively and drastically in August-September period. Thus, the negative impact for big cap in KLSE is less clear to most of the investors and research houses.

iii) The petrol hike in June this year and its hyper inflationary impact across all sectors had destroyed the market demands among the middle class and damanged the consumer sentiment. The sudden changes in the macro and micro economy climate caused, small investors and local institutional buyers will shy away from the equity market. Thus, foreign funds are not be able to liquidate their investment timely. Otherwise, it would incur hugh losses. That's the explanation of foreign stake in bursa is lingering in the range of 19-20%. (I think foreign funds have liquidated Malaysian stocks way earlier than other Asian markets such as Singapore, HK, Thailand, Japan and Indonesia. The only other one which fell earlier like Malaysia was South Korea - in hindsight, Malaysia was sold down on heightened political uncertainty, which now looked like a blessing in disguise. Korea had other fundamental issues which brought the market there down earlier. The current foreign shareholding level in KLSE is pretty low, only long term funds are in. To say that foreign funds did not have a chance to sell is flawed. If they want to sell, they will sell regardless what the price is. Sell IOI at 6, np... how about 5, still ok, 4... hmmm just do it... errr 3... I SAID SELL...)

Having said that.....in my opinion, KLSE will be in down south direction in the next 2 years when corporate earnings are heading in the similar direction.

Thus, when the dropping momentum in index is slow, the recovery momemtum in index is expecte to be slow.

Hence,it's not easy for the small investors to timing for good entry point as the future direction is not clear and the tendency to compare prices by using the previous peak point which is no longer relevent as the earning equation is less visible.

Stay out from the market is more pragmatic as i don't believe anybody can spot the recovery at this juncture. Worse is yet to come. (Agreed, there is absolutely no hurry to buy stocks. Many still are oblivious to the coming down trend. Ask any real estate agent... give the seller a 15% lower price as a bid, the seller will say they can still make payments, and will hold out for the price when things are better in 3 months... if that is not ignorance, I don't know what is. The slowdown may not cripple Malaysia, will see its usual cascading effects. Stock markets have lost 40% from its high.

The usual yardstick is property will see a 6 month delayed effect. Its usually the last thing to go. Finances are structured this way:
1) New loans shrinked considerably (happening already).
2) Reduced wealth effects from stock market.
3) Spending curtailed. Nice to have items first to go such as overseas holidays (happening already), and new car purchase.
4) Our biggest sector is electronics, not oil and gas or palm oil, guess the impact on jobs there.
5) Credit card defaults rise, go ask your banker friend of the trend there.
6) Next to go will be car payments, look for repossessed cars, ask your repossesor friend of the trend there.
7) Jobs stagnant or being cut, we must also remember that every day there are new graduates entering the workforce.

I am not saying that we will see a 30% price correction in properties, but at least 15%-20% in most areas and some sub sectors will see 30%. The worst hit is likely to be the high end condos and unoccupied high end bungalows. Yes, they are rich people but a lot of these have been bought by HKers, S'poreans and Indonesians... and not one or two lots, but a few lots. The leasehold types over RM2m will go down first. Things are going to go down 20% at least in Singapore and HK, Malaysia will feel those effects. Beng able to afford repayments is only one part of the equation. People will hold or maintain their leverage when the assets are steady or going to go up. If things are not going up, they will go down. Even if those people can afford these properties, they will be sold just like stocks. Many of these are ready for occupancy now. Try and rent out the RM2m condos at RM5,000... good luck, and thats just a gross yield of 3%... Buyers of any property above RM1.5m will at least have 2 or 4 more somewhere else. You do the math. Properties below RM1 may see a more subdued loss of 10%-15% and may be able to ride them out better.

Just imagine even when you want to sell, how much harder is it now for people to commit to a RM500,000 or RM1m housing loan... and don't you think the banks will make lending that sum a lot harder now).

p/s photos: Haruna Yabuki

Short Selling In KLSE

Wise, Farsighted Or A Mistake

The government introduced several measures to enhance the local bourse including allowing large Malaysian companies with foreign operations and foreign owned companies with foreign assets of at least RM1 billion in market capitalisation to seek listing on Bursa Malaysia, enabling dual listings and reintroducing short selling. The government said the measures were aimed at bolstering the stock market to be a world class capital market. Other than that, to realign the regulatory framework, the securities and futures laws are to be reconsolidated into a single omnibus legislation.The consolidation of these two laws would enable the introduction of a single licensing framework for market participants.

Besides that, regulated short selling (RSS) and securities borrowing and lending (SBL) will be reintroduced, the government said. To attract global talent, the processing of visas and work permits for foreign individuals in all aspects of the financial services sector would be centralised at the respective regulators, namely, Bank Negara Malaysia and the Securities Commission.

RSS is a big decision and will be applauded and criticised by many. The naysayers will be highlighting that the market may not be deep enough. Participants may not be sophisticated enough. When authorities are claiming that GLCs are cheap, why would they go and derail that - as when shorting, most foreign institutions will be aiming for GLCs anyway. The timing is bad as we are trying to entice more buying not selling activity. Will result in more manipulation.

I am very much for RSS. My reasons:

1) Better valuation - You cannot keep a market artificial. By having RSS, you have a market that rewards and punishes good fundamentals and bad valuation. Valuation will be clearer and more transparent.
2) More activity - Right now, you can only participate in the market provided you have ONE view, you must be bullish. In general, markets will only have two to three mini bullish phases a year. In total, you would be happy to get 3 months of bullish activity - you can kiss goodbye the other 9 months. Remisers and dealers would now be more open to having two views instead of just one.
3) Restrict over-manipulation - Syndicates will have to do more legwork when ramping stocks. Last couple of weeks could have been a great opportunity to short sell the poultry stocks, or even some questionable highly traded Mesdaq stocks.
4) Investors can hedge and have more strategies - Now even the individual investor can act like a hedge fund. Say, I like property stocks ahead of the 9MP, but think that the activity is overdone in poultry. Go long on one side and borrow to short the other. This gives more choices and strategies, and can reduce risk. Of course if you are an idiot and go the other way, you would double your losses - but there are more choices now... or is it more ways to hang yourself?! But if you are a poor investor, you will eventually lose all your money anyway with or without RSS - RSS will be good for the good investor.
5) Investors' intelligence - This will propel the public to learn more and study more about stocks in general. You have to form real opinions and not just rely on hearsay. As it is more exciting, investors will indulge more. Just as in horse racing, if you only have WIN bets, its dull. But if you have QUINELLAS (forecasting the first 2 horses) or TRIFECTAS (forecasting the first 3 horse in the same order), you get more activity. The cynics who say that RSS is just for institutions because the man on the street would not be savvy enough is wrong. Yes, they may have to learn, but they will. If we stop introducing new things to the market for fear of ignorance - then nothing new will be added, its a myopic view. Then, warrants or futures would never be introduced in the first place. We just have to make sure there is sufficient information out there - know what free float is, what open shorts' balance (open interest) is, know what is squeezing the shorts, understand that you need to incur interest and related cost to borrow stocks to short, know what breakeven is in a trade, etc...
6) GLCs - It will put the GLCs on the backfoot. As Khazanah is still in the initial stages of reviving the GLCs, having RSS will delay any plans Khazanah might have to sell down their stakes. Only until GLCs are performing well will Khazanah have the luxury option to sell down some stakes. Increasing the free float at a time when a company is still struggling is an invitation to shoot oneself in the foot. (As argued before in my previous blogs, I am a big believer in Khazanah selling down their stakes to improve liquidity).
7) Bad timing? - Well, there can never be an excellent time, can it? Just do it already. Just make sure the lending procedures and interest charges are competitive and attractive for both side. For stock owners, they could make some money by depositing shares to lend.
8) Hedge funds - If all parties work well, we could see more hedge funds being very active in the KLSE. In fact, this move will put a lot of pressure on the neighbouring bourses to do likewise.

For those who think that share prices should be encouraged to go up, not down - that is a naive and shallow opinion. Stocks do not just serve to make you money. You participate in the growth potential of each stock. Stock markets DO NOT OWE US A LIVING. When you get it wrong, you get it wrong. Already without RSS, investors still lose so much money, why not give this a chance. Prices go up and down, now at least you can profit when you bet it on the way down correctly.