Financial Meltdown2 Oct 2008

As we come to the end of a volatile month of Oct 2008, we are witnessing more financial problems and expecting things to get worse. No amount of government intervention (pumping of new money into the banking system, lowering of interest rates, cajoling banks to on-lend and pass lower interest to borrowers) could stabilise the economy and the financial markets. It just continued to fluatuate wildly amidst uncertainties dragging the poorer nations into near bankruptcies along the way. Two weeks ago the Nikkei and the Wall Street stayed above the 9000 level; today Nikkei briefly fall below 7000 ( a 26 year low before the government banned naked short-selling) and Dow Jones opened at just over 8000 before ending the day 11% up back to 9000! In Australia, the index hit a new 4 year low, finishing @ 3794, off its morning low of 3724 against 6900 a year ago. We are seeing some of the most turbulent times ever on the world stock markets (GLOBAL stock markets suffered their worst month in history in October, losing a whopping US$5.79 trillion (S$8.6 trillion), Standard & Poor’s reported on Monday). The turmoil has led to coordinated government intervention into the financial systems of many countries at a level not seen before in my lifetime.

Crude oil dropped to a 17 month low of US$62 per barrel. Yen and US$ continued its upward climb caused by panic demand for cash. All across Aisa and Europe, double digit falls in the stock indexes were common and the free market theory of self-regulation has not been seen to work. In fact Alan Greenspan, the previous Fed Reserve Chairman who was a firm proponent of free market (an influential economist who in time past swayed market just by voicing his views) was earlier quoted as saying the property market bubble was little cause for concern but subsequent events had caused him to rethink, expressing shock of a flaw in the free market theory – in being unable to regulate itself. The frenzy of greed and fear feeds on itself thus causing further damage to self-regulation.

Malaysia too is beginning to feel the effect of the global crisis. MIER is adjusting its forecast downward. Index-wise, the KLSE is treading close to the 800 level and doomsayers are predicting it to go down further. Individual stocks performed badly; IOI, Gamuda and KNM all one-time darlings of investment houses came tumbling down. There is concern that when local investors finally panicked and redeemed their unit trusts and sell whatever stocks they are keeping irrespective of prices or when force selling takes place, the index will go even further south. The government announced an injection of RM5 billion into Valuecap, the company owned by Khazanah to purchase beaten-down stocks but this may not be able to stop the slide. It is a worldwide phenomenon and confidence has been shakened. My analyst friend advised nibbling but remained bearish over the short term. Market today is very volatile and changes direction like the wind. The important thing is not to be blown off course.

Last Sunday, a friend (an entrepreneur who is an OEM supplier to the Japanese electronic industry eg Panasonic/Sony) mentioned that his main customer is reducing the number of working days to 3 from the present 5 and employees will take home a lower pay. This appears to be the beginning. Today we read that Thailand may lose 1 million jobs as a result of the impending economic slowdown.

CPO prices last week went limit down to RM1370. IOI was reported as losing heavily (up to RM100 million in Q1) on FOREX position and many companies with loans denominated in USD and Yen are impacted adversely. We also see high volumes of share being transacted as prices plunged perhaps signalling heavy selling by foreign investment houses and buying by the main shareholders and local investment houses.

So continue to stay disciplined in spending and work hard to keep your jobs.

Financial Meltdown1 Oct 2008

Over the last two weeks, I have witnessed what can be considered the worst financial crisis in my lifetime. Two previous crises, one in Oct 1987 called ‘Black Monday’ and another in 1997 called the ‘Asian Financial Crisis’ when Soros and other speculators sold down the Asian currencies and stock market, paled in comparison with what we experienced this time around. It has the world in tears with massive write-offs from credit defaults and losses ran into tens of trillions; pensioners are left wondering whether there are any funds left in their retirement funds. Everyone was stumped.

Malaysia’s decline has been rather muted thanks in part to the relatively small exposure of our investment in the international market as well as the largely sold down position prior to the meltdown by international houses (led in part by political uncertainties); even so a massive RM57 billion was wiped our from the local bourse this week. Many reasons were given for the collapse of the investment banks in US and Europe that were the worst hit followed by insurance companies and fund houses. Governments round the world rushed in to bail out some of the institutions for fear that the domino effect of their failures will lead to further erosion of confidence and their economies at large. Even with these measures we saw the stock market heading southwards and major currencies of the world falling like never before. Within days trillion of $ were wiped off from double digit % decline in stock values. Interest rates cut did not stem the decline and credits remain tight. Commodity prices too declined substantially contributed by anticipated decline in demand. It was just a couple of months ago that oil prices were above USD140 per barrel and CPO at RM4500 per ton. Now it is about USD78 per barrel and RM1750 per ton respectively. What happened? Was it a 10-year cycle that was overdue? Was it human greed that drove prices to unexpected levels? Was it speculation that caused the upheavals? Was it the mistake of regulators who ignored the signs and plea for caution? Could it have been averted when the sub-prime crisis hit last year (tell-tale sign of the beginning of another correction 10 years on)? One never knows, perhaps it was a combination of all these.

What it means for many today is that the future will be filled with uncertainties. Rising food prices and unemployment mean that many will have to struggle to make ends meet. We are beginning to read once again of suicides caused by individual’s imprudent financial management and inability to accept the resulting fate. As the world adjust to this new awakening, residual fallouts from the failures of major financial institutions and economy from now till the dust settles may translate into many years of hardship not just for the rich but also for the poor. Charity organizations will see more people seeking aid but find that funds from benevolence will decline.
What can we do but just wait patiently and to manage the best we can under the circumstances. Keep our jobs, spend wisely, and pray for God’s comfort and protection. Like all difficulties and tribulations, this too will come to pass. Hopefully a new world order will emerge brought about by wisdom, prudence and better regulation; or is this wishful thinking?