It means that you are still interested in the stock market and have yet to give up despite the anemic state of global markets. It also means that you are more likely than the others to reap good profits when the stock market rebounds; it could also mean that you will lose more than the others.

It is important to stay healthy and optimistic because profits and losses are not more important than our lives.

Is the situation so bad that we have to resort to self-consolation? If it means anything to you, most of my colleagues – stockbrokers, dealers and remisiers – have become online gaming experts, chess masters and coffee addicts. Our bosses will flip upon reading these revelations, but I do hope that some of you will find this ticklish.

I apologize if it does not make you smile.

Of course, I am exaggerating when I say that stockbrokers are spending a lot of time doing nothing. But when compared to the good times last year, trading volume has indeed been dwindling despite the healthy volume traded on the local bourse.

If business volume has fallen, then who are the people responsible for the one-two billion shares traded on the Singapore Exchange on a daily basis?

It is very clear that retail investors have been staying out for most part of the last few months when the stock markets have been falling. However, it is not a one-way traffic as there are short-lived rebounds along the way and this trend has been the most evident since the start of the month where stock prices fall one day and rise the very next day. But with every rebound, the fall gets worse in the case of some stocks.

Traders are the ones responsible for the trading volume, as they have been the ones who are long and also short in the stock market. This has created a lot of volatility and opportunities for those who dare to venture into the deep blue sea where sharks swim.

Trading has been largely confined to the blue chips and several other mid-caps with high beta. These stocks tend to have a range of around ten cents on each day and, thus, this generates interest among the brave-hearted who do not hold overnight positions.

Bad News Scaring Retail Investors

In the previous issue of Shares Investment (Singapore), I mentioned that fear and pessimism are at a peak and, evidently, the sell-off in the US stock market has justified my belief. Compared to the US market, Asian bourses are holding up much better and there are short-lived rebounds along the way unlike the US market where intraday rebounds were hammered down almost immediately.

We hear and read that inflation figures all over the world are at multi-year highs; we learn from Fed Chairman Ben Bernanke that the US economic outlook is bleak; and we fear that Israel will soon fire a few missiles into Iranian territory.

Recently, we hear that Freddie Mac and Fannie Mae may go bust and, in the process, drag the entire world along with it. Freddie who? Fannie who?

According to WIKIPEDIA, the free encyclopedia, “The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a government-sponsored enterprise (GSE) of the United States federal government. It is a stockholder-owned corporation authorized to make loans and loan guarantees. The FHLMC was created in 1970 to expand the secondary market for mortgages in the US. Along with other GSEs, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market. This secondary mortgage market increases the supply of money available for mortgages lending and increases the money available for new home purchases. The name “Freddie Mac” is a creative acronym of the company’s full name that has been adopted officially for ease of identification”.

“From 1938 to 1968, the secondary mortgage market in the United States was monopolized by the Federal National Mortgage Association (Fannie Mae), which was a government agency during that period. In 1968, to help balance the federal budget, part of Fannie Mae was converted to a private corporation. To provide competition in the secondary mortgage market, and to end Fannie Mae’s monopoly, Congress chartered Freddie Mac as a private corporation”.

“Freddie Mac’s primary method of making money is by charging a guarantee fee on loans that it has purchased and securitized into mortgage-backed security bonds. Investors, or purchasers of Freddie Mac MBS, are willing to let Freddie Mac keep this fee in exchange for assuming the credit risk, that is, Freddie Mac’s guarantee that the principal and interest on the underlying loan will be paid back regardless of whether the borrower actually repays”.

If Freddie and Fannie go bust, it will suck away more than US$5.4 trillion in investors’ money – which include the Chinese and Japanese government, not to mention major banks all over the world. As at today, US$5.4 trillion will wipe out three times the foreign reserve that cash-rich China have amassed all this while.

When US Treasury Secretary Henry Paulson said that the US government will not nationalize Freddie Mac and Fannie Mae, it led to a sell-off in these two stocks only to rebound when he reassured almost immediately that the US government will provide liquidity so as to keep the two organizations going. An angry Senator, who was incensed by what he has been seeing so far, then demanded to know where would the money be used to help Freddie and Fannie be coming from.

He got the answer. The money would come from US taxpayers.

To the layman, the rescue of Bear Sterns, which was necessary back then to avoid a collapse of the financial market, seemed like getting a wayward child out of trouble. The latest Freddie and Fannie incident resembles a doting parent saying that he realizes that his children have committed a crime but he will not allow them to go into jail.

Enough Of The Bad News

Have we all forgotten that Asian economies are still growing at a more-than-reasonable pace despite a US slowdown?

Have we all forgotten about fundamental analysis where valuations form the basis of this principle?

When things get rough, investors tend to focus on the sentiment – fear and pessimism – instead of fundamentals. As a market on the whole, most bourses are now trading at price earnings ratio that will soon hit single-digit if they are not already there. Individual stocks are trading at four to seven times price earnings ratio although they are growing at an exponential rate.

Lately, we know that the number of people going for jobless claims in the US have fallen while consumer sentiment have climbed in the month of June. Although inflation reared its ugly head in the month of June by jumping 5% year-on-year, which is the worst in 17 years, oil prices have started to descend while corn and soybean prices have retreated due to better-than-expected weather conditions that will yield more crops.

Now that oil prices have fallen from US$147 to US$134 per barrel, this should help improve sentiment and mitigate the effects that high oil prices would have on inflation.
Are we ready for a long-awaited rally? I mentioned in the previous issue that a rebound is just around the corner. Although there were some short spike-ups throughout the last fortnight, those rallies do not qualify as a rebound.

Let us see if a fall in oil price can help start a rally.