A Poignant Tribute To All Comrades Who Have Fallen..

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Ignore All Rallies For Now.

As fear stalked global equity markets over the past few days, volatility continued unabated and the CBOE Volatility Index (VIX) again scaled the panic levels of October 10th.

For some perspective on the current stock market
correction, all major stock market corrections (15% loss or greater) of the Dow Jones Industrial Index over the last 108 years.

The bear market that began in 1973 lasted 481 trading days and ended after the Dow declined by 45%.

Since 1900, the Dow has undergone a major correction 26 times or one major correction every 4.2 years. As it stands right now, the current stock market correction (October 2007 peak to most recent low which occurred yesterday) would measure slightly below average in duration but above average in magnitude.

In fact, of the 26 major stock market correction since 1900, the current stock market correction currently ranks as the fourth largest in magnitude (only the corrections beginning in 1906, 1929, and 1937 were greater) and is the most severe stock market correction of the post-World War II era.

Investor sentiment seems to be in panic-crash stage, and the market appears severely oversold with only 1.6% of the S&P 500 stocks trading above their 200-day moving averages. (The 200-day moving average is often viewed as a crude measure of the primary trend.)

It can't get much worse than this! But oversold conditions have so far not produced more than a temporary reprieve, and rallies (which are bound to happen from time to time) are therefore not to be trusted.

I am closely monitoring the surges in the US dollar and Japanese yen - low-yielding currencies previously used for funding risky investments - as a break of the uptrends in these two currencies will be a good indicator of the forced deleveraging selling starting to subside. Once this situation has played itself out, we should see a return to lower volatility levels and a return of confidence.

For a more lasting turnaround to happen, I would like to see more evidence of base formations, a 90% up-day, and relative outperformance by the financial sector.

In The Grip Of The Bear.

Yesterday was another ugly day for stocks, with bourses around the globe falling victim to strong selling pressure. Fueling the sell-off were concerns that the economic recession could not only be deeper and longer than previously feared, but could also fall into a corrosive deflationary phase.


The MSCI World Index and the MSCI Emerging Markets Index fell by 4.6% and 2.2% respectively, tallying declines of 51.2% and 63.4% since the peaks of these indices in October 2007. Only the Chinese Shanghai Composite Index (+6.0%) and the Russian Trading System Index (+0.7%) bucked yesterday's declines.


As far as the US markets are concerned, the Dow Jones Industrial Index (-5.1%) plunged below the roundophobia 8000 level, resulting in all the major indices now trading below the recent lows of October 10th and 27th. This brings the lows of 2003 (Dow 7,524; S&P 500 801) and 2002 (Dow 7,286; S&P 500 777) into sight. A breach of these levels -- frightfully close to the current levels of the Dow (7,997) and S&P 500 (807) -- will wipe out the entire 5-year bull market from 2002 to 2007.


Interestingly, only 2.4% of the 500 S&P 500 stocks now trade above their 200-day moving averages. This line is often used as a crude indicator of the primary trend of a market or individual stocks. This often undeniably shows an extremely oversold situation, but bear markets have been known to stay oversold much longer than usual.


One can argue long and hard about valuation levels and earnings forecasts, but the extent to which stocks become undervalued in the grip of this bear is squarely due to the severity of the economic meltdown.


This is clearly shown by the relationship between the Dow Jones World Index and the Baltic Dry Index (graph above) – an assessment of the price of moving the major raw materials, including coal, iron ore and grain, by sea and generally an excellent barometer of economic activity.

The worrisome prospects for economic and earnings growth, together with the threat of deflation, are spooking the financial markets. The extreme level of risk aversion is illustrated by the US 3-month Treasury Bill rate falling to a minuscule 0.065% -- a clear sign of distress and fear -- and the yields on long-dated government bonds falling significantly in most parts of the world.


Next year there'll be a huge problem of unemployment, job openings will have disappeared, and every business will be going over its personal thinking in terms of who the business can do without.


Oversold conditions have so far not produced more than a temporary reprieve, and nobody knows how far down this bear market will fall. Until we see more signs of base formations being developed, one should tread very cautiously.


And remember the old Boy Scout adage: “Be prepared.”

Short Term Tradable Rallies Could Be Around The Corner.

Sometimes having the facts about the market environment in which investors operate can be very beneficial. Looking back at history, here are some findings from Sam Stovall, Chief Investment Strategist at Standard and Poor's Equity Research, there were more than a few pertinent items that investors should consider.

Since 1945:
-Fourth quarter of a US presidential year +3.5%
-First year of new Democratic administration +14.2%
-One-party rule +10.4%

-Nov through April apprx +7%

While history offers no guarantees on future results, the above data, along with my technical analysis work (recent across the board non-confirmation lows), suggest a good tradable rally is the higher probability for stocks over the near term -for S&P.

Moreover, the high degree of investor pessimism and fear, along with the mountain of cash sitting on the sidelines ($3.3 trillion, approx. 40% of the S&P 500), is also supportive of higher equity prices. Lastly, there’s the valuation argument led by none other than Warren Buffett. All together, it’s hard to be overly bearish at current market levels.

Now, some actionable ideas: Because global growth in emerging economies will withstand (within reason) the significant slowdown in developed economies, I believe most emerging markets’ prices look especially attractive at current levels. They're among the very best babies thrown out with the bathwater, courtesy of mutual and hedge funds’ indiscriminate selling induced by forced liquidations last month.

Indons Moving Forward With Time.

This is an inspiring news that I picked up in The Jakarta Post, a progressive example of nation building. Indonesia, an nation which has always been perceived as "backward" when comparing to Malaysia has just last week passed a groundbreaking law to legislate against racial discrimination.

The Jakarta Post Wed, 10/29/2008 10:55 AM

The House of Representatives has unanimously passed a bill that terms ethnic and racial discrimination as serious crimes.

Deputy Speaker Muhaimin Iskandar, who presided over the House's plenary session to approve the draft law, said Indonesia no longer had any room for any form of racial or ethnic discrimination.

Chairman of the House's special committee deliberating the bill, Murdaya Poo, said the endorsement of the bill should put an end to the long-standing dichotomy between indigenous and non-indigenous people in the country.

"A man cannot choose to be born as part of a certain race or ethnic group, and therefore discrimination must cease to exist," said Murdaya, who is Indonesian-Chinese.

He said the House proposed the bill as part of its effort to ratify the International Convention on the Elimination of All Forms of Discrimination, which has been enacted since 1999.

Under the new law, leaders of public institutions found guilty of adopting discriminatory policies would face jail terms one-third more severe than those stipulated in the Criminal Code.
Citing an example, Murdaya said the governor or government of Aceh could not ban a gathering held by Javanese ethnics in the province.

He said the deliberation process had been delayed by a disagreement on whether imprisonment should be made the minimum punishment.

Jail as a minimum sentence is typically sought for serious crimes, such as corruption, terrorism, money laundering or drug abuse.

"We decided to set prison as the minimum sentence to deter people from committing racial or ethnic discrimination," said Murdaya, a member of the Indonesian Democratic Party of Struggle (PDI-P).

The bill was passed on the same day Indonesia celebrated the 100th anniversary of Youth Pledge, which Murdaya said should encourage Indonesians to uphold the diverse nature of the nation. -- JP

Misleading ValueCAP.

This is an article lifted from DAP MP Tony Pua's blog:

The New Finance Minister Should Stop Misleading Malaysians with Half-Truths.

Two days ago, in a shocking expose by TheMalaysianInsider.com, it appears that the RM5 billion injection into ValueCap Sdn Bhd was not intended as “additional” investment to support the flailing stock market as suggested by the new Finance Minister – but instead it's a rescue package designed for ValueCap Sdn Bhd to repay its RM5.1 billion debt which is due in a few months.

We are now in possession of documents which are publicly available from the Securities Commission website, which include the Term Sheet as well as the Principal Terms & Conditions of the RM5.1 billion bond issued by ValueCap Sdn Bhd on 28 February 2003.

The Malaysian Insider : http://www.themalaysianinsider.com/index.php/malaysia/11694-question-marks-over-valuecap-debt