Morning Market Notes: 11th March 2008

Santana Featuring Chad Kroeger - Into The Night
The US Markets closed much lower again: Stocks stumble on recession fears

• NEW YORK (CNNMoney.com) -- Stocks closed lower Monday, the third day in a row, amid signs that the financial services sector could see more writedowns and concern that upcoming economic reports will point to recession.
  
  The Dow Jones industrial average (INDU) fell nearly 1.3%, falling to its lowest level since Oct. 3, 2006.
  
  The broader Standard & Poor's 500 (SPX) index lost 1.55%, putting it at its lowest level since Aug. 14, 2006. The Nasdaq composite (COMP) was nearly 2% lower, its worst level since Sept. 8, 2006.
  
  Stock losses were broad based Monday with 26 of the Dow 30 declining. McDonald's Corp led gainers while banking giant Citigroup (C, Fortune 500) led decliners.
  
  Meanwhile, oil prices surged Monday setting a new closing record of $107.90 a barrel and gas prices appeared set to break their previous record of $3.227 a gallon at the pump.

And market strategist doesn't reckon the bottom as been seen yet. Here are some reasons posted in a CNBC article.

• "Even statistically, we're knocking on the door of a bear market," Putnam's Jeff Knight said. "I think that's probably the right frame of mind, frankly, to approach portfolio strategy for the near term."
  
  "We're in a bear market, you bet, because the credit markets are in disarray, and until the credit markets get some smblance of normalcy, I don't see how the stock market can have any kind of sustained rally," Rich Bern of Performance Trust Capital said.
  
  "My biggest fear is that credit is not going to be available to worthy borrowers," Scott Wren of A.G. Edwards told CNBC.
  
  James Paulsen of Wells Capital Management is already looking past the near term.
  
  "I just think the downside from here is getting more and more limited," he said. "We've had a lot of discounting already in the price of the stock market."
  
  He encouraged investors to look ahead 12 to 18 months.
  
  Berg indicated that's not a popular view, especially among the experts.
  "The major risk takers don't want to take risks," he said. "You can throw all your rational market strategy out the window right now."
  
  Wren doesn't expect to have to wait a year or a year and a half.
  
  "We're expecting some easing in the tightness of this credit over the next four to six months," he said. "We're expecting the market to anticipate growth in the second half and a better `09. The market's going to turn higher long before this slowdown...is over, and I think you're going to see the results of that in a pretty big way by the end of 2008."
  
  He urged investors to change their portfolios to a more cyclical orientation over the next few months.
  
  Knight doesn't even see conditions right for investors to go "bottom fishing."
  
  "There's a lot of capitulation to go," he said.
  
  He encouraged investors to be diversified, even if it means "defying the normal cyclical playbook."
  
  "In the really big picture, we've had wealth in terms of real estate and financial markets outpace GDP for a long time, and I think those things are coming together," Knight said. "It's not necessarily `buy the dips,' it's more `construct a wealth-building strategy around the broadest array of asset classes, including active strategy as well as market exposure."
  
  And in the midst of all the bearishness, Barry James of James Advantage Funds sees the prospect of a rally.
  
  "Within every bear market, there are rallies," he said. "They kind of come out of the blue."
  
  He said his research is "4-to-1 positive" for the short term, but he warned that it's not a time to be loading a portfolio with stocks.
  
  "Within that phase, it probably will be pretty smart for folks to start cutting back on equities," he advised. (hsource of article )

In the blog sphere, Dr.Brett has posted his indicators for the day here: Indicator Update for March 10th. Trader Mike notes the relative mild volume and the lack of fear. hmmm..

• We had another meltdown on mild volume today. The Nasdaq made a new 18-month low today and the S&P is just a few points from doing the same. Despite the ugly price action I’m not seeing much fear. The VIX is about 20% beneath its January peak and volume shows no sign of panic.

No panic? Well over at Bespoke Investment it's noted that the amount of shorts has increased.

• As reported last week, short interest on the New York Stock Exchange rose to a record high last month to 14.4 billion shares. Looking at the S&P 500 and its ten sectors, we calculated the percentage of each stock's float that was sold short. For the S&P 500 as a whole, the average stock in the index has 5% of its float sold short. Not surprisingly, the Consumer Discretionary and Financials have the highest percentage of their floats sold short (8.12% and 6.11% respectively). ( link )

And blogger Kirk reckons that there's even a chance for a counter rally ( see here )

Market commentator, Rob Kirby, piece for Financial Sense market wrap is definately worth a read, The World's Worst Kept Secret. Well the part where he speaks about how the Silver market traded was certainly most enlightening.

• So, when we see market movements like this one in the silver market – with no discernable reason – that we were ‘treated to’ this morning:
  
  
  
  Odds are, we’ve been witness [or victims, perhaps?] to what Bill Gross terms “a crafty dodge” or worse.
  
  What folks would be well advised to remember is this: market moves like the one depicted above are “paper plays,” achieved through selling futures [derivatives] in a thin market. We are given further evidence that these “paper plays” are orchestrated manipulations due to the fact that the market for ‘physical tangible silver’ remains tight and in short supply, evidenced by the stiff price premiums of physical metal over the futures price.
  
  Price manipulations, like the one above, involving “selling down” the paper price of a commodity have historically failed when manipulators run-out-of or are unwilling to part with dwindling physical supply.
  
  There are many who follow the metals markets closely who feel that time is now close at hand.

And finally for investors who uses low PE as their sole guide, here's another article for you: Are Low P/Es A Valid Reason To Buy Stocks?

How?

Doesn't look good for today's market given yesterday's plunge, yes?

And the following comments were made in today's Business Times article.

• "Fears of a US recession, coupled with uncertainties arising from the ruling coalition's worst-ever performance in the recent general election, triggered the steep fall," said Choo Swee Kee, chief investment officer at TA Investment Management Bhd. ( link here )

And as expected, everyone seemed contended to downgrade KLCI fair value

• The intensive selling activated the circuit breaker at around 3pm. Trading was halted for an hour when the benchmark index plunged 130 points, or 10%, to 1,166. This was the first time the market-wide circuit breaker was activated on Bursa Malaysia.
  
  “The magnitude of the fall was bigger than expected,” said Kenanga Asset Management Sdn Bhd chief investment officer Chen Fan Fai.
  
  Chen described the market as currently in “uncharted territory”.
  He said the direction of public policy and economic measures had become a big unknown after the ruling Barisan Nasional lost its two-third majority in parliament and the opposition parties took control of Kedah, Penang, Perak and Selangor.......
  
  AmResearch has cut its fair value to 1,300 from 1,590, while Aseambankers Malaysia Equity Research reduced its year-end target for the KLCI to 1,350 points.
  
  HwangDBS Vickers Research also trimmed the KLCI's year-end target to 1,360 yesterday.
  
  Despite the expected sell-down, Citi Equity Investment urged investors to pick up “fundamentally good” plantation and telecommunication stocks. It warned clients to avoid the cyclical property and construction stocks.
  
  Credit Suisse said Malaysia would not be attractive until political clarity emerged over the next six or 12 months.
  
  One main concern is whether the roll out of infrastructure projects under the Ninth Malaysia Plan would be affected since these involved both federal and state governments.
  
  Also, there are worries over the possible delay in contracts that have already been awarded should the newly formed state governments review them.
  
  Analysts said scrapping certain public projects would certainly hurt companies' earnings.
  
  However, they said it would be good for the economy in the long term if those projects were not justifiable in terms of social benefits, and the money could be channelled for better use.
  
  “The new political equilibrium will, hopefully, bring with it the checks and balances, which should in the future, curb the excesses of the past,” Credit Suisse's report said.
  
  Stocks perceived to be politically linked and heavyweights were among the worst hit.
  
  Kumpulan Perangsang Selangor Bhd, Equine Capital Bhd and Malaysian Resources Corp Bhd hit limit-down amid fears that these companies might not win certain public projects as expected.

Other worth reading links.

• Market bogged down by concerns
• Foreign funds jolted by uncertainties
• Integrity intact despite trading halt
• Selling by funds cited for rising bond yields
• Players seek business-friendly policies

Worries over water-related stocks

• Investors are uncertain over the prospects of companies with water-related projects, especially in Selangor, where a new government would be formed following Saturday's election results.
  
  The opposition parties garnered a majority of state seats to enable them to form the new government.
  
  This has raised concerns over the Pahang-Selangor interstate water transfer project that has already been awarded. There are also worries that the expected consolidation of water supply and distribution in Selangor might be reviewed.
  
  Water stocks suffered the biggest losses when the market opened for trading yesterday.
  
  Kumpulan Perangsang Selangor Bhd (KPS), a subsidiary of Selangor investment arm Kumpulan Darul Ehsan Bhd, was severely sold down, falling almost 51% to RM1.68.
  
  Also affected was KPS' associate JAKS Resources Bhd, which fell to an intra-day low of 56 sen before recovering to close 38% lower at 62 sen.
  
  Shares in Selangor water concessionaire Puncak Niaga Holdings Bhd lost almost 30% in value, ending at RM3.18, off its intra-day low of RM3.
  
  An industry source said the fundamentals of JAKS were intact as most of the contracts were currently being negotiated with the Federal Government, hence the change in the Selangor government would have little impact.
  
  “Besides, the Langat 2 project is driven by demand and supply. With Selangor expected to face water shortage next year, the contract would have to proceed,” he said.
  
  He also pointed out that JAKS was one of few players with the capability and capacity to undertake such a huge contract.
  
  An analyst with a local brokerage noted that the sell-down in water stocks was driven by fears that the award and implementation of contracts would be reviewed by the new government.
  
  “The bargaining level has changed. The water sector consolidation process might take on new perspective given the new government,” he said.
  
  While the new administration was likely to honour the sanctity of Langat 2, the concern now was how they would implement the project, he added.
  
  In the long term, the state government will still need to address the water shortage issue as it affects the masses.
  
  The analyst noted that Puncak Niaga was scheduled to granted a tariff hike next year, estimated at about 37%, for the supply and distribution of water in Selangor and the Federal Territory.
  
  “Through the proposed consolidation, the Federal Government would take over the assets and, as a result, there would be no tariff hike,” he said.
  
  The Japanese government, which is funding the Pahang portion, is also expected to add pressure for the implementation of Langat 2.
  
  The analyst said the selling of water stocks was a knee-jerk reaction, noting that Puncak Niaga and KPS were backed by assets.
  
  Besides JAKS, KPS also has stakes in Konsortium Abbas Sdn Bhd and Syarikat Pengeluar Air Sungai Selangor Sdn Bhd.
  
  “It is short-term pain for long-term gain as there could be more cost-control efforts, and the benefits passed on to users,” the analyst added.
  
  Another analyst with a local research house said the Selangor government would play a vital role in the consolidation process as well as the implementation of Langat 2.
  
  “Previously, KPS was given the green light to helm the restructuring but it is now uncertain as to who will be driving the consolidation and who will benefit,” he said.
  
  If these were resolved by the year-end, Puncak Niaga would demand for its scheduled hike next year and the state government would have to compensate if the concession agreement was not honoured, he added.

Firms with overseas jobs more resilient

• Construction firms that rely mostly on government jobs would be the most vulnerable to political changes but some companies will be better positioned to weather the uncertainties.
  
  OSK Research analyst Jeremy Goh said earnings of companies such as Hock Seng Lee Bhd, whose projects are mainly in Sarawak, should remain resilient.
  
  “We also remain positive on companies like IJM Corp Bhd and Zelan Bhd, whose operations are focused mainly in the oil-rich Middle East.” he said.
  
  When contacted by StarBiz, Zelan chief executive officer Albert Chang said: “Almost all of our projects are foreign-based. In fact, we have not had any direct government projects for the past 20 years.
  
  “The current uncertainty in the local scene does not have any bearing on us as we’re mainly focused on the Middle East.” he said.
  
  IJM Corp is another construction player that has the bulk of its order book from overseas.
  
  Chief executive officer and managing director Datuk Krishnan Tan told Reuters yesterday that the company had an order book of RM6bil, of which 40% was from overseas.
  
  Tan said notwithstanding some erosion in margin, he saw a steady flow of work from India and the Middle East.
  
  TSR Capital Bhd, whose core business is in construction, remains quite unfazed by the looming uncertainties as most of its projects are in the Federal Territory.
  
  Managing director Tengku Datuk Mustapha Tengku Mohamed said: “We are still confident of prospects as most of our projects are Federal projects.”
  
  The construction sector is poised to be a key driver of the country’s economic growth as projects worth billions of ringgit are being planned for implementation under the Ninth Malaysia Plan.
  
  However, the impending change in administration in Penang, Perak, Kedah and Selangor, which have come under opposition control, has given rise to uncertainties in the award of public contracts.
  
  There are also concerns whether the implementation of projects that have already been awarded would be delayed as the newly-elected state governments have said projects would be reviewed.

Oh, and the BDI closed at 8624. Up another 88 points. However, given all the negative issues in the market, it looks like a non-issue for now.

How now my dearest Brown Cow?