Revisiting the Stock Market Crash Of 2008

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The Financial Crisis of 2008 was an economic bubble that reached its limits and exploded. A bubble is simply where prices continue to rise beyond the true value. People buy, simply because they believe everybody else is going to buy. A bubble is based on speculation, expectation and ignorance. When these three elements collide it creates a crisis, which is often defined by irrational financial exuberance.

The causes of the economic crisis of 2008 are related to the Bush administration's attempt to finance the war in Iraq with, basically, inflation. The Federal Reserve cooperated by financing the Iraqi war, by essentially lending money to the American state. But printing new money out of thin air, actually devalues the national currency, this is called inflation. This cheap money went straight into the economy, particularly the residential housing market. As a consequence the demand for houses rose; and housing prices took off like a rocket in 2001. Thanks to inflation the prices further accelerated in 2004. More and more people took on mortgages based on cheap currency. The lenders then sold the mortgages as bundles to secondary investors, such as American banks. The American banks then sold their bundles to banks in other countries. This is how American debt spread around the world and became a real international financial crisis. European banks were selling and buying American mortgage as bundles. And all the while all of this was based on cheap money, with no value whatsoever behind it.

People expected housing prices to continue to rise, but the opposite happened. The steady decline began in 2005 and by 2007 the panic kicked in and house prices were crashing down. The collapse of the housing bubble dragged the secondary investors along with it. US debt had spread all around the world and the damage was truly on a global scale.

Finding Opportunities Amidst Volatile Markets

Finding Opportunities Amidst Volatile Markets by
Wong Sui Jau, General Manager
Fundsupermart

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This talk was delivered on 18th October 2008
Below are the 'printed' notes of the slides.


Markets Year to Date
Market ... Indices ... YTD as at 10th Oct 2008
China ... HSMCI Index ... -54.10%
Emerging Markets ... MXEF ...-52.5%
Asia ex-Japan ... MXASJ Index ... -51.80%
India ...SENSEX Index ... -48.60%
Hong Kong ... HSI Index ... -46.80%
Nikkei 225 ... NKY Index ... -45.90%
Singapore ... STI Index ... -43.80%
Europe ...SX5P Index ... -43.70%
Taiwan ... TWSE Index ... -39.70%
US ... SPX Index ... -38.80%
Malaysia ... KLCI Index ... -35.40%
Korea ... KOSPI Index ... -34.60%

Source:  Bloomberg



Bad News Abound

• More losses expected from the ongoing US financial crisis there.
• US likely to fall into recession.
• Europe and Japan economies now also facing a slump.
• Asia will be affected as well.

How to handle all the Turbulence?

• With the large movements in markets so far this year, many investors may be considering going all cash.
• Is cash the best alternative for investors?
• Inflation levels in Malaysia is high, likely to be at least above 6% in 2008 with food prices going up.
• Negative real short term interest rates very possible this 2008
• Trying to time the market too closely and selling out when faced with a flood of bad news and sentiment is often not the best move.
• Why?

Some of the worst bears and best bulls
HK
Market Crashes:  Sept 87 to Nov 87 -45.8%
Market Recoveries:  Nov 87 to Dec 93 +281.5%

HK 

Market Crashes:  Jul 81 to Nov 82 -59.1%

Market Recoveries:  Nov 82 to Dec 86 +264.8%

Korea

Market Crashes:  Apr 96 to Jun 98  -69.6%

Market Recoveries:  Jun 98 to Dec 99  +245.1%

Singapore 

Market Crashes:  Feb 97 to Aug 98  -58.4%

Market Recoveries:  Aug 98 to Dec 99  +189.5%

HK 

Market Crashes:  Feb 73 to Dec 74  -89.5%

Market Recoveries:  Dec 74 to Mar 76  +166.4%

US 

Market Crashes:  Mar 37 to Apr 42  -57.3%

Market Recoveries:  Apr 42 to May 46  +150.4%

US 

Market Crashes:  Aug 29 to Jun 32  -86.0%

Market Recoveries:  Jun 32 to Jun 33  +146.3%

Singapore 

Market Crashes:  Jul 90 to Sep 90   -33.2%

Market Recoveries:  Sep 90 to Dec 93  +141.6%

Some observations

• Bear markets do not last forever.  Market crashes have ranged anywhere from a few months to a few years in length.  (Most tend to last just a few months to one year though).
• The best rebounds happen after the market crashes (can be as much as 100% or more).
• Missing out on these rebounds can affect one's overall return significantly.

Dealing with our emotions

• The main culprit that affects our returns from volatility is that our emotions often cause us to buy high and sell low.
• Right now, with many Asian markets had already slumped 40% to over 50% from their peak, some markets are priced very attractively - is this the right time to lose your confidence?
• Choosing to sell out of markets now only make it that much harder emotionally to re-enter markets again even when they have truly bottomed out.

Bad news is not always bad

• Interestingly, a time when bad news abound is not necessarily bad.
• Historically, it is when everything looks rosy, when there is no black cloud at all, when markets are expensive.
• Historically, it is when everything looks bleak, with little to be positive about when markets are cheap.

Don't wait for bad news to end

• Markets are forward looking.  When they are see some signs of improvement, they will rebound.
• By the time the recovery actually takes place, they would be up already.
• At near to market bottoms, everything looks bad.
• When did the US market bottom during the period of the second world war?  (It started in 1939 and ended in 1945).

Past bottoms

• The bottom of the US market during the second world war was in April 1942.  (The war ended in 1945)
• The bottom of the US market, during the saving and loans crisis was in Sep 1990.  (Banks were still going bankrupt all the way up till 1993).

Now is a good time for making money

• Money is made by buying low and selling high.
• Good news abound during times of market highs, and bad news abound during times of market lows.
• So, the prevalent bad news all around now, is a signal that markets are low.
• Another signal is low valuations of markets in general.

Our views on various issues

• US in a recession and the ongoing US financial Crisis.
• Where we find bargains and value at this point in time.

US is likely already in Recession

• US property market slump continues.
• Financial sector in turmoil due to subprime woes, further losses expected.
• Consumer sentiment is going to be hit and large portion of these consumers are spending on credit and paying mortgages at the same time.
• Federal Reserves efforts won't prevent this.
• US is already in a recession.

Where we see bargains

Asian Equities

• Asian markets are oversold.
• Asian valuations are currently at very attractive levels.
• Asian remains a high growth region.
• Asian financials have very little exposure to the toxic sub prime related mortgages.

Valuations have come down.

MSCI Asia Excluding Japan and Estimated PE

In Jun 1997:  

Index level was 400

Estimated P/E was 20

In May 2000

Index level was 300+

Estimated P/E was 37

In Dec 2001  

Index level was 160

Estimated P/E was 12

In Nov 2007:  

Index level was 700

Estimated P/E was 20

(see graph)

Source: Bloomberg

Some tips on handling volatility

• Try not to focus so much on the bad news.  Markets cannot drop 5 to 10% every day.
• Have faith that markets and economies are self correcting, they won't go down forever.
• Is the correction really all negative?  Falling markets can prevent buying opportunities.
• Long term investing is less stressful and has a higher probability of making gains.
• Diversify, diversity, diversify!

Yearly Return of MSCI World

1970 to 2007

(graph)

Source:  MSCI Bloomberg

Of these 38 years, the yearly returns of MSCI World were 

• negative for 11 years, and
• positive for 27 years.

Years with Negative Return:

1970

1973

1974

1977

1981

1989

1992

1994

2000

2001

2002

Cumulative 10 years are usuallly Positive

10 year Cumulative Returns of MSCI World Index

(graph)

Source:  MSCI Bloomberg

Diversify!

• Diversification also forms a key part of lowering ones risk and easing the burden our emotions place on us during turbulent times.
• Diversification prevents us from putting everything into just one market or asset and is a key part in how we form our portfolios.

Conclusion

• Bad news abound, but that is not necessarily a bad thing.  It is a signal that markets are low.
• We like - Asia ex Japan equities.
• Stay invested, have a diversified portfolio and most importantly, keep calm!

http://www.investorexpo.com.my/webcast/webcast_flash_fundsupermart_20081018/

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Fundsupermart

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Columbus Circle Governance Sdn Bhd

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Chong Sui San, Chief Investment Officer
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Tempting But Investors Resisting Lure Of Cheap Stocks

PERSPECTIVE | 06 MARCH 2009

Tempting But Investors Resisting Lure Of Cheap Stocks

By Gabriel Gan 

It is easy to forget about valuations especially in a super bear market where fear overwhelms common sense and logic. It is funny how we all chase after things that are expensive but shunning the same thing when it is cheap, and this can only be explained by the simple reason that we fear today’s seemingly low price will become even lower the next day.

Fear is such a powerful weapon so much so that it can totally knock all sense out of us: We buy and sell at the wrong time and mistakes are often painful.

I remember writing about sentiment being a far important factor than fundamental analysis and/or technical analysis whenever fear grips investors. At this moment, although fear factor is not as high as it was back in October/November, investors have turned despondent and have almost given up hope with some even not bothering to watch the stock market because bad news and more bad news are being reported by the media on a daily and hourly basis.

Nightmare On Wall Street

Watching the DJIA in action was better than watching the famous horror epic “Nightmare on Elm Street”, as Wall Street played out its own version of a horror show.

During the fortnight, the Dow Jones Industrial Average (DJIA) shed about 800 points from 7,555 to 6,726, breaking the October low of 7,449 with the utmost ease and traded to a 12-year low. While there was no fresh spark that triggered the selling, investors just cannot wait to get out of the market – a sign of desperation and exasperation rolled into one.

At the same time, the Straits Times Index (STI) was a battlefield for the bulls and the bears who tried to slug it out in search of a direction. For most part of early-to-mid February, the STI traded sideways refusing to budge even when the US and regional bourses rallied or tanked, with the bears securing a decisive victory on 16 February when the STI went below 1,650 and then tested the next support at 1,570.

In the previous issue of Shares Investment, I mentioned that the STI could test 1,570 and may even overshoot this support if the DJIA were to fall below 7,450. On the other hand, I also mentioned that the STI could move to 1,750 if the DJIA were to go above 8,000 in the most bullish scenario. We were unfortunate that the former came true and the STI had indeed gone as low as 1,502 but had since rebounded on the same day to close at 1,544 on 4 March.

As a matter of fact, all the major regional indices including the Hang Seng Index, the Nikkei 225, the STI and the Shanghai Composite Index did not revisit the October lows while the US indices, the European indices as well as the Australian and Kiwi indices all fell below October levels.

Of all the indices, the Chinese stock market fared the best with a blockbuster 700-point gain from 1,700 to 2,400 from October to February. This phenomenon tells a tale, as it clearly highlights what the world thinks of the Chinese economy and, to a smaller extent, the Asian economies.

Can We Pin Our Hopes On China?

Most people hope that China can help us out of this rut, with the exception of a handful who thinks that their respective economies have the divine right to be the messiah that we have all been crying out for.

No matter who the messiah is, the sooner we get out of this rut, the better it is for everybody.

China is the only major growing economy and with a reserve of some US$1.45 trillion, has the ability to spend its way out of trouble while helping others along the way. Some signs of China being the first to get out of trouble have appeared in the form of the February Purchasing Manager’s Index rising to 49 from 45.3 a month ago. At its worst month in November, the PMI read just 38.8. This is a sign that its US$585 billion stimulus package may be working.

Also, Premier Wen’s remarks that surging loans, growth in retail sales in January, and an increase in electricity output and consumption from the middle of February are signs that government measures are working, which may aid in the first-half recovery of China’s economy.

Most importantly, export orders, which make up a huge chunk of China’s Gross Domestic Product (GDP), rose to 43.4 from 33.7 while employment rose for the first time in six months from 43 to 46.1.

According to reports, government officials have indicated that the authorities may pump in RMB8-10 trillion of “government-sponsored investment” while an expanded stimulus package has been rumoured to be on its way to speed up the recovery.

All these measures, together with the “encouragement” of more lending by banks to unfreeze the credit market, will to a big extent boost an economy that is already strong, in relative terms.

To Shun Or To Buy?

Stocks across the board are looking cheap but buyers do not seem to be suitors as yet. If we were to talk about financial stocks, investors are worried that the contagion effect of a weak US financial system coupled with a weakening global economy may hit the three local banks even further in the next few quarters when non-performing loans start to grow. This is the main reason for the share price of the three banks being hammered.

If stocks were trading at 2X historical earnings, way below the net asset value, then what is stopping investors from jumping at this opportunity?

Flipping through Shares Investment has revealed that former darlings such as Celestial Nutrifoods (CEL) and China Hongxing (CHX) are both trading at 1.6X and 4X FY08 earnings, respectively. On a price to book basis, CEL is now trading 0.17X ($0.125 versus $0.732) while CHX trades at 0.34X ($0.10 versus $0.34).

Ridiculous? There are more such examples but these two companies deserve a closer look despite the troubles that investors believe they are in.

CEL continued to report growth in its net profit for FY08 but 4Q08 showed a profit decline primarily due to higher soybean prices despite higher selling prices. The point of contention now lies in the fact that its cash position (RMB811m) is lower than its debt (RMB1,225m) – a taboo in today’s market – arising from its convertible bonds that could be redeemed as early as 19 June this year. The market now speculates that CEL could follow in the footsteps of Ferrochina and become insolvent in the event that it fails to source for the funds that could allow the company to face redemption.

The more the share price falls, the higher the fear factor will become despite the management reassuring investors that it has several proposals on the table regarding the refinancing on the convertible bonds.

In the case of CHX, and also CEL, the failure to declare dividends for FY08 has also raised fears that both companies are in financial trouble. Although CHX also reported net profit growth for FY08 despite a profit decline in 4Q08, investors are concerned about its business model of providing advances to its distributors for running stores. The amount of RMB1.15b advanced to these distributors is feared to have been “lost” or “uncollectable” and hence the selloff in the share price of CHX.

The RMB1.15b aside, CHX still has RMB1.98b in cash, which translates into about a cash value of $0.149 per share – a premium of almost $0.05 per share over its last done price of $0.10. If an investor were to buy into this stock at $0.10, he would be covered by almost $0.15 in cash and getting the entire shoe/sports operation of CHX for nothing!

Of course the risks involved in buying these two stocks are high, especially if we were to consider the worst-case scenario. But if both companies were to pull through, the rewards could be high especially when CEL owns the hi-tech soybean zone in Daqing City as well as a biodiesel fuel ready for production in 1Q09 while CHX is one of the top five sports shoe brands in China.

Where Do We Go From Here?

A short-term rebound looks likely at the time of writing with the DJIA up more than 100 points 6,830 on 4 March. Should the DJIA not falter for the next two trading days, it is likely to test the resistance at 7,100 before it meets 7,450. While the former looks possible, the resistance at 7,450 looks quite out of reach for now.

Rallies for the past few weeks have been a flash in the pan and nothing more than that. The short-term target for the STI is at 1,570 followed by 1,600 and 1,650. Nothing has changed fundamentally and rebounds are still very much technical in nature and, thus, weakness should follow almost immediately.

Stay nimble and sell into rallies for now.

http://www.sharesinv.com/articles/2009/03/06/investors-resisting-lure/

Comment:  Very good article except for the final sentence asking to "stay nimble and sell into rallies for now."  We all know what happened to the market after March 2009.

Strategy during crisis investment: Revisiting the recent 2008 bear market

Although we may not know where the bear bottom is, buying in a down market may still lead to losing money. This is definitely true. As long as the purchase is not at market bottom, it may still result in losses for the time being. This is likely to be a short-term loss but compensated by a probable long-term gain. Even if we cannot time the market perfectly, we are definitely better off to “buy low and sell high” then to “buy high and sell low”.

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Prices fell but value intact

Presently stock prices have fallen sharply. 

• Banks are trading at 1x book value, 
• property stocks sold at 50% discount from net asset value, 
• utility stocks trading at single-digit price-earnings ratio providing an earnings yield of more than 10% net of tax and 
• there are many good stocks trading at dividend yield of 2x bank interest rates. 

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Warren Buffett, the second richest man in the world who makes his fortune from stock investment, is busy buying undervalued companies. He sees the value and he also sees prices detaching away from the intrinsic values. He said: “I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turn up.”  

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Catching a falling knife

Some may argue that buying now is like catching a falling knife. If you are not careful, you may be hurt and suffer more losses from falling stock prices. There is no doubt that we may incur short-term losses as long as we do not buy at the bottom. On the other hand, who can determine where and when is the bottom. As long as there are still unknown events or hidden problems, an apparent bottom now may not be the eventual bottom. Since we do not have all the information in the market, it is almost impossible to guess where the bottom will be.

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In most cases, we only realise the bottom after it is over and by that time stock prices are running high with much improved market confidence. Market bottom could be there only for a short period. In most cases, market did not stay at the bottom waiting for investors. It will just move on.

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Since market moves ahead of the economy by about six months, the market bottoms out when the economy is still gloomy, news are still negative, analysts are still calling underweights and most investors are staying at the sidelines. 

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Handling something we know is definitely much easier than dealing with the unknown risks, something which hits from behind without warning. When we invest during a crisis we actually go in with our eyes open. We know it is definitely risky but we also know it could also be very profitable. If we can handle the risk, the risk-reward trade-off will be very rewarding.

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Emphasise strategies

What we need is to buy near the bottom, not right at the bottom. Investors’ frequent question now is when to buy, that is where is the bottom? Perhaps it is more intelligent to ask how much to buy now since nobody will be able to guess where is the market bottom.

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Staggered buying is preferred over bullet purchase which is taking the risk of timing the market bottom. In staggered buying, a pre-determined amount will be set aside for investment over time, say in 10 equal portions.

One common method of staggered investment is dollar cost averaging, an investment scheme made in equal portions periodically, either by a small amount monthly or larger amount quarterly. There are also several variations of staggered investment.

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Anyway, staggered purchase is a preferred method to avoid the anxiety of market timing and the mixed feeling of fear of further downside and worry of missing the market rebound. As long as the market is undervalued, the strategy of staggered investment ensures that investors are in and are benefiting from the undervalued market. 

http://klsecounters.blogspot.com/2008/11/strategy-during-crisis-investment.html