“What a difference a day makes, twenty-four little hours, brought the sun and the flowers where there used to be rain” – Renee Olstead.

For the not-so-young group of readers, this tune should sound familiar to all for it used to – and still does – occupy airwaves.

Although events that took place during the fortnight took 14 days to unfold – not over a single day or a single night – global investors will remember those days as an integral part of stock market history that will be told over and over again all over the world.

The collapse of Lehman Brothers, an entity that is more than a century old, and the near-collapse of American International Group (AIG) – once thought to be infallible – serve to remind us that no single company in the world is “too big to fall”.

While the US government allowed Lehman Brothers to fail after the private sector refused to rescue the latter from insolvency, the Bush Administration pumped in US$85 billion to pull AIG away from the clutches of bankruptcy. It has been said time and time again that AIG, like Freddie Mac and Fannie Mae, cannot be allowed to fail due to the widespread implications that they collectively would have on the US and global economies.

On hindsight, if the management of Lehman Brothers had accepted takeover offers or if the US Federal Reserve had spent some loose change to prop up Lehman Brothers, Ben Bernanke would not have had to spend hours and hours in front of global viewers pleading the Senate Banking Committee for the astronomical US$700 billion rescue fund.

There is no point apportioning blame for we are only interested in the future of our very fragile financial markets.

Those that deserved and needed to be rescued have been given their reprieve; those that deserve to fail have failed. Should we be expecting more bombshells?

Before And After – The Watershed?
No, this is not the sub-heading of some slimming advertisement but the description of what had led to the sharp rebound in global stock markets.

The collapse of Lehman Brothers led to a huge selloff in global stock markets, which was made worse by AIG’s admission that it would go belly up if it does not raise adequate funds to keep its operations going. To pay for the financial catastrophe, the Dow Jones Industrial Average (DJIA) plunged to a low of 10,459 before the index, alongside global markets, rallied strongly on news that 1) AIG would be rescued by a capital injection of US$85 billion by the Federal Reserve; 2) Global central banks would pump in a liquidity of US$180 billion; and 3) The Chinese government made stock purchases and announced pro-market measures.

Most importantly, the US government announced a US$700 billion package to buy up troubled assets so as to ease the liquidity crunch and credit woes.

Several stages, or modus operandi, normally take place when a bear market starts: 1) Bad news altering the macroeconomic picture surfaces 2) News gets worse and stock market corrects heavily 3) Measures adopted to stop the rot 4) Bad news starts to mitigate and good news surfaces 5) Fresh Bull Run occurs with an unknown catalyst as the driving force.

Fortunately or unfortunately, this unknown catalyst usually leads to the end of the Bull Run i.e. Internet Bubble, over-lending in the case of the Asian Financial Crisis, housing and over-lending in the case of this ongoing bear market.

In my view, we are now at the “third stage” i.e. measures adopted to stop the rot, of the bear market. We do not know if there will be more bombshells along the way but one possible bombshell could arise from the implications of Lehman Brother’s collapse.

Despite the collapse of Lehman Brothers and the ongoing unwinding of assets, we have yet to know the cost of the collapse as well as the identity of the possible victims.

Nevertheless, the continuous rescue of key financial institutions and the mega US$700 billion rescue package can be identified as the watershed of this ongoing crisis, as the enormous efforts will soon bear fruits. By stemming the rot, the US government is actually giving the economy time and space to breathe and to recover.

As mentioned repeatedly in past issues, we must keep looking out for signs of milder inflation figures, stabilizing housing prices and a recovery in the US labour market as well as consumer confidence.

In spite of the fact that we could be at the watershed, it is still unclear if the stock market has found a bottom because sentiment is so weak that the slightest bit of bad news will send global indices plunging.

Better Sentiment, Better Chances Of Sustainable Rally
The short-term direction of the stock market hinges heavily on the outcome of the US$700 billion debate on whether the funds should be used to rescue the troubled US economy.

When news of the rescue package was announced, global stock markets rallied sharply but soon gave up some of its gains as details of the package was unclear. Moreover, it was not known at that point of time whether the proposal would get rubber-stamped by the Congress.

The global effort to keep financial markets alive is also perceived as a sign that every possible action would be taken to rescue the global economy should things go wrong while the moves by the Chinese government, including the stock purchases and pro-stock market policies, are signals that the authorities perceive the Chinese bourses to be at levels that permit some form of boosting.

Looking at the behavior of the stock markets post-AIG, we can now find some comfort to learn that buyers are coming in. Every occasion when the markets dip slightly on bad news or uncertainties, buyers would jump into the market to shore things up.

This phenomenon is poles apart from a couple of weeks ago when sellers overwhelm buyers in a market where rebounds rarely last more than a day.

What a difference a fortnight has made! Things sure look much better although the road ahead is still rough and bumpy. Stick to fundamentals and look out for stocks below five times forward earnings that are trading below their net tangible assets. For a start, take a look at Synear Food and China Hongxing, who are both worth around $0.20 in cash per share.

Even if China’s economy may slow in 2009, it is likely that the bad news have already been factored into current prices.