BT: Is this really the worst bear market ever? (08 Sep 2008)

Is this really the worst bear market ever?

By R SIVANITHY
SENIOR CORRESPONDENT

IT'S not often that fear trumps greed in the stock market but this is one such occasion at the moment - no one wants to buy for fear of immediate loss. According to one ballpark estimate, over half of daily activity is generated by programme-short-selling, short covering and day trading.

This shouldn't come as too much of a surprise. The excesses of more than seven years of loose US monetary policy that led to a four-year bull market for equities are now coming home to roost in the most savage fashion - and it can hardly be expected to be fully purged in just 10 months.

The outcome, according to anecdotal evidence from many brokers, is the worst bear market they have ever seen.

With more than 80 per cent of the local market trading for less than $1 per share and with China and property stocks at multi-year lows, it would be tempting to agree. But is it really the case? When you look at the numbers dispassionately, this contention doesn't really hold true.

First, take the Straits Times Index. Whatever its failings (and we fully expect these to be addressed in an upcoming index review), the STI is still faithfully tracked as a key barometer of the local market's fortunes. So let's assume for now that the STI is, most of the time at least, a good indicator of where the broad market stands at any point in time.

Even after all the recent collapses, the index has only lost 33 per cent from its all-time high last October.

The rate of loss in 10 months is roughly 3 per cent monthly - not overly shocking or debilitating by any means, and all the more so when you consider that stocks went on a run that lasted four years starting with the end of the Gulf War in April 2003, and saw the STI rise a whopping 220 per cent during that period.

Furthermore, the present loss is nowhere as bad as previous falls - during the regional crisis 10 years ago for instance, the STI lost almost 60 per cent. Recall for example that DBS sank to $7 during those awful times (versus $17.30 now) and NOL traded at 40 cents (versus $2.12 now).

In the wake of that selloff, City Developments fell to $3 in 2001 compared to its current $9.06 while - despite all the broker downgrades and concerns over thinning turnover - SGX's shares at $5.95 are still significantly above their $1.10 offer price. And they are still 576 per cent above their 2001 low of 88 cents.

So if you accept the definition that the worst bear market ever must result in stocks falling to their all-time lows, then the present climate is nowhere near that definition.

Of course, it's possible these stocks - and the rest of the market - could yet fall back to these levels, but it isn't probable because companies are much better capitalised these days and investors better informed about the differences between the Asean markets.

Which brings us to the next interesting question: if this is not the worst bear market ever - at least not yet - then where might the bottom lie?

Here, we enter the realm of pure guesswork - albeit with a dash of (minor) intellectual reasoning.

You could use the charts - one approach being to look at the all-time high reached during the dot-com bull market as representing current strong support.

There's no joy here at the moment because that figure was 2,582, a level that has unfortunately already been breached.

Another means might be to survey market experts for their worst-case loss from an all-time high, and then to take a simple average.

Our best (or worst, to be more accurate) estimate is for a 40 per cent drop in the STI, in which case a bottom might lie around 2,300. While conditions today are bad, they are by no means as bad as 10 years ago. So it is highly unlikely that we will see a repeat of those lows.

The problem - as we've repeatedly highlighted in this column and elsewhere - is Wall Street, where stocks are being artificially supported by implicit and explicit bailout promises from officialdom.

Until the US market faces reality (and last week's selling may be the start of this process), it's difficult to envisage an end to this bear market, even if the bottom may not be that far away.


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