The Professor by wuyunqing

VIEWS: 23 PAGES: 11

									Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg




           QUARTERLY REVIEW
                                                                                              29 October 1999, Quarter 3
                                                                                                      By Dr David Lee


Saving the World Markets
- Policy Makers Rule
“And how do we know when irrational exuberance has unduly escalated asset
values, which then become subject to unexpected and prolonged contractions as they
have in Japan over the past decade?”
                                                 Mr Alan Greenspan, Dec 5 1996

That was the beginning of the AGIE (Alan Greenspan‟s irrational exuberance)
warnings and remarks from Greenspan.

Irrational Exuberance

There is a difference between a speculative bubble and an irrational exuberance. You
could only tell that it was a bubble after it had burst and before that, it was only an
irrational exuberance and it could continue for a long time. Table 1 outlines the
phases of a Boom/Bubbles/Crashes/Chaos cycle. Examples such as the Tulip
Madness, the Mississippi Madness, the South Sea Fiasco and other major crashes are
given in Table 2 in the Appendix (Goh, Lie, Yew and Tang (1999)).

Table 1                The Structure of a Boom/Bubbles/Crashes/Chaos Cycle
 Phase        Description                                   Added          Description
                                                           Features
    1         The Initial Trigger                             1            New Securities Emerge
    2         Cheap and Easy Credit                           2            New Financial Innovations
    3         Asset Inflation                                 3            The Irrational Investors Arrive
    4         Overtrading/Speculation                         4            Inadequate Financial Authorities
    5         Mass Participation                              5            Leverage Increases
    6         Early Nagging doubts                            6            Frauds and Tricksters Appear
    7         Massive Selling                                 7            Demise of Major Firms or Institutions
    8         The Panic sell-off                              8            Consistent Chart Patterns Occur
    9         Onset of Debt Deflation                         9            Massive Retracements in Bubbles
   10         Base-Building in Recovery                      10            Base-building in Prices/Indices appears
                                                                           on the charts
Source: Cohen (1997)

Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is
accepted whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte
Ltd and its directors, employees and associates may from time to time have positions in, and may effect transactions. This
research report is prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and
the particular needs of any specific person to receive this report. This document is not to be constructed as an offer or a
solicitation of an offer to buy or sell any financial instruments".
                                                                   1
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg



If one does not believe in the new paradigm and the likes of Internet and IT stocks,
then the Internet and high tech play is the trigger. The Day Traders have arrived
with the US market PE ratio at 35 and when US companies themselves are warning of
lower profits. Greenspan is also worried about the increase in leverage as US banks
are estimated to lend 22 cents against every dollar of stock gains that investors have.
Nagging doubts are forming with US market trying to find its footing as equity yields
are way below those of bonds. Fortunately, even without Robert Rubin, we still have
a partial “Committee to Save the World” which is competent and not an inadequate
financial authority. The real worry, as it is, is the grossly over valuation in the
NASDAQ market.

The NASDAQ Play and Sycamore Networks

Sycamore Networks Inc., an optical-data hardware manufacturer, made history on Oct
22, 1999 with 610% intraday gain from IPO offer price of $38 to a high of $270. At
the closing price of $184.75, the company‟s market capitalisation is $14.36 billion.
The reported revenue is $11.3 million and the net loss for the year ended July 31 is
$19.5 million.

The closing gain of 386% from its offer price only puts Sycamore in fourth place,
behind the-globe.com (606%), Foundry Networks Inc. (525%) and MarketWatch.com
Inc. (474%), according to a report by Asian Wall Street Journal.

Stocks in America often fell in the trading session immediately following
Greenspan‟s remarks. Ironically, as long as the markets pay respect to what
Greenspan has to say, the stock market would be a much safer place to invest. This is
true so far, as the Dow Jones Industrial Average and the NASDAQ composite have
soared 55% and 110% since the now-famous rhetorical speech.

Will It be a Crash or a Correction?

The so-called Committee to Save the World, even without Robert Rubin, is still
very much in control with Alan Greenspan and Lawrance Summers. So, it does not
seem that we have an incompetent financial authority with independent FED
“collaborating” with the Treasury. If Greenspan can talk down the market, then the
policy makers are still in charge. If the policy makers are still in charge, then there is
no reason to worry about a crash.

But a correction of 20%-30% may still be in store, according to a number of technical
and fundamental indicators. One indicator is the dividend discount model of Morgan
Stanley which suggests that at 6% 30-year bond yield and $50 per share operating
earnings, the fair value for S&P 500 is 953. This is way below the current level of
around 1300.


Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is
accepted whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte
Ltd and its directors, employees and associates may from time to time have positions in, and may effect transactions. This
research report is prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and
the particular needs of any specific person to receive this report. This document is not to be constructed as an offer or a
solicitation of an offer to buy or sell any financial instruments".
                                                                   2
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg



Whether a correction is good or bad depends on the speed of outflows of capital from
the market and USD. If the correction is gradual and we have a soft landing, then the
world would continue to be fairly peaceful. A rapid flow of capital out from the stock
market and USD will spell trouble for the global economy and will have social and
political implications in the short term. However, in the medium term, it need not be
all that bad as we have seen and experienced during the Oct 1987 crash. As capital
flows out of US, other economies would benefit in the form of asset reflation thus
stimulating these economies. In countries where policy makers can influence asset
prices, the policy makers would be pressured to adopt policies to inflate asset prices
way beyond fundamentals.

While a major sell-off in the US would cause all markets to correct significantly, we
expect the non-US markets, especially Japan and Asia, to recover rapidly and
outperform on a relative basis. The wealth effect from asset price inflation and the
low base of economic numbers and earnings will push asset prices higher. Back in Jan
1988, less than three months after the Oct 87 crash, Japanese markets rallied strongly
from an initial sharp fall to 19,781. In less than 30 months, the Nikkei rallied to a high
of close to 39000. What happened to Japan after the liquidity driven rally was history.
But the effect on asset prices caused by the flows of capital combined with loose
monetary policy response could have effects that last for a few years.

Inflation Risk

US inflation risk is real and alive. First, it has been argued that with the growth of the
Internet and IT industry, competition has increased and that has kept prices down.
This has help the US economy grow with high productivity without worrying too
much about increasing wages and prices. However, the trigger for inflation, like stock
price increase, may be just pure expectations or suspicion of a price hike. Once there
is a suspicion that inflation is highly likely, there is no stopping the train. With rapid
information flow and low cost of making price changes (menu cost) in the cyber age,
prices would adjust a lot faster than many can imagine. The speed of price changes is
the flip side of the Internet and IT.

Second, the Asian crisis has also helped to moderate price increase in the US. But
now that the affected economies are bouncing back, price and wage inflation in both
Asia and the US are more likely. The historical current account deficit and high asset
prices are consequence of the FED actions of printing money equivalent to 0.75%
decline (3 successive cut in FED fund rate in 1998) in interest rate to save Asia. This
may be fine as long as the rest believes that the income in US will continue to grow
and thus willing to lend to America by holding USD assets. Fortunately, there is no
sign to suggest that USD assets are not favoured as yet. With seemingly newfound
strength in a long dormant Japanese economy, a sharp appreciation of Yen to the level
of 100 Yen/USD cannot be ruled out. This may trigger a selling wave of USD and
USD assets, thus creating rapid outflow of capital from the US.

Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is
accepted whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte
Ltd and its directors, employees and associates may from time to time have positions in, and may effect transactions. This
research report is prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and
the particular needs of any specific person to receive this report. This document is not to be constructed as an offer or a
solicitation of an offer to buy or sell any financial instruments".
                                                                   3
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg



Asia is the Place to Invest

Euro will continue to be the currency for short term parking, and not for long term
investing. EMU is projected to grow 2.1% with CPI growing at 1.1% in 1999, with
Ireland growing at 6%, way ahead of the rest. Finland is in second place with 3.7%.
However, it is unlikely to see much higher growth as inflation is especially feared in
Europe and interest rates are raised at the slightest suspicion of inflation picking up.
As most countries have given up their most important monetary instrument and rely
only on fiscal instruments, it is extremely difficult to achieve the twin goals of higher
employment and price stability armed with a single policy instrument.

Furthermore, the number of mergers and acquisitions was lower than expected. A
higher number of M&As will excite the market but at the same time, will create
unemployment. Job mobility, important for increasing efficiency from re-structuring,
is not as ideal as it should be in Europe, especially in Euroland. Thus, it is unlikely
that the risk-adjusted return will be high in Europe relative to the US and Asia.

Japan is expected to registered economic growth of 0.6% in 1999, and average
earnings growth of 81% for 1999 and 2000. This is much higher than the average of
15% for EMU and 13.5% for the USA. It is likely that the economic numbers in Asia
will continue to be revised upwards and that of the USA and EMU to revised
downwards with higher interest rates.

Fundamentals Do Not Matter Yet

Even if all the good news is reflected in the prices, we need not to worry about
fundamentals in Asia yet. This is because capital flows from the US and Europe will
continue regardless of whether Asia‟s growth is sustainable. The downside risk in the
US is simply too high, while the downside risk in Asia is low and the reasons are
given below.

1. Highly Leveraged Institutions - Hedge Funds

A few large macro hedge funds have their net assets shriveled by almost half to two-
thirds since last August. There were many changes in their professional staff with
some funds having 50% of new staff. Many previous employees had resigned to set
up their own funds and others had been fired since August 1998. Some of the
founding hedge funds gurus had been accused of giving too much control to their
lieutenants rather than running the show themselves, resulting in bad performance.

Julian Robertson‟s Tiger Management LLC, which allows redemption of funds by
clients quarterly from its largest fund, will only allow them to exit twice a year,
beginning March 2000. With lengthened redemption notice, it is hoped that only a
quarter of the assets under management will be at risk of redemption at any one time.

Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is
accepted whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte
Ltd and its directors, employees and associates may from time to time have positions in, and may effect transactions. This
research report is prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and
the particular needs of any specific person to receive this report. This document is not to be constructed as an offer or a
solicitation of an offer to buy or sell any financial instruments".
                                                                   4
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg



The lengthening of the investment horizon is important for hedge funds, as, unlike
traditional non-leveraged funds, redemption will trigger a chain of events involving
de-leveraging the portfolio. When redemption sets in, the leveraged fund is forced to
sell positions to raise cash. There is a multiplier effect as the amount sold is multiple
of the cash amount raised, causing poor performance of the portfolio.

In any case, the amount of funds under management by one of the largest hedge funds
has shrunk from 22 billion to 8 billion. It has been one year since the 14-banks $3.6
billion rescue of Long-Term Capital Management LP. The banks had been paid back
except for the remaining $660 million. A leveraged fund specialising in arbitrage,
LTCM had returned 40% in both 1995 and 1996, and 17% in 1997. The results were
not as impressive as Tiger‟s return of 17%, 38% and 69% for 1995, 1996 and 1997
respectively, or as consistent as Tiger‟s average of 39% from 1980 through 1997. But
LTCM is important enough for Federal Reserve Board to act. Some said that this had
created a huge moral hazard and gave the doctrine of “too big to fail” new legs to
stand on. LTCM returned $2.7 billion of capital to investors at the end of 1997,
leaving $4.8 billion capital under management with an increased leverage ratio of 25
to 1. In Sep 1998, LTCM had a capital base of $600 million and assets under
management of $80 billion, with a stratospheric leverage ratio of 133 to 1.

Although there were no increased regulation of hedge funds, as increased US
regulation would stimulate hedge-fund emigration to friendlier climes (Alan
Greenspan‟s testimony), it is clear now that hedge funds and other highly leveraged
institutions have smaller fund size and at the same time, it is harder to leverage.

2. Leverage and Debts

Most of the individuals and corporate are not as highly leverage after the recent
recovery. Most of the debts had been restructured and force selling of assets had
already been done for questionable debtors. High margin financing and heavy
commitments have not taken place.

Table 4 shows the net capital inflows into five Asian countries, namely, South Korea,
Indonesia, Thailand, Malaysia, and the Philippines. The latest numbers from the
Institute of International Finance signals that there is a rising volume of debt
repayment using the inflows of fund into the equity investment. These countries are
taking in more private equity, not for borrowing, but to use the funds to repay their
debt. Some debts have been converted to equities.

Sharp fall in asset prices seen in 1997 and 1998 is something in the past and until next
cycle of easy credit is made available, we are not going to experience any asset
deflation as serious as what we had seen for the next few years.



Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is
accepted whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte
Ltd and its directors, employees and associates may from time to time have positions in, and may effect transactions. This
research report is prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and
the particular needs of any specific person to receive this report. This document is not to be constructed as an offer or a
solicitation of an offer to buy or sell any financial instruments".
                                                                   5
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg



3. Asian Policy Makers

Most policy makers, especially Malaysia and Hong Kong, have shown understanding
of the kind of damages that reverse capital flows from a country can cause to asset
prices and currencies. With regulations such as capital controls, exit taxes and careful
monitoring of beneficial owners, unusual and large build-up of short positions in
currencies, equities, bonds and derivatives can be easily detected and monitored.
Attacks of the kind seen in Oct 1997 and Aug 1998 are not likely to have a high
probability of success.

4. Low Base and High Growth

With the low base in GDP, earnings, and absolute price level, coupled with high
growth in the same variables, there are few excuses for fund managers to sell. The
justification to switch from buy to hold is hard, let alone switching from hold to sell.
The downside-risk adjusted return for Asia is much higher than elsewhere and most
would be happy to remain invested, even if the markets remain sideways for a long
period.

5. Currency

Most Asian currencies, excluding Yen, have depreciated substantially since the crisis.
The one-way bet for currency common during the Asian crisis, rare occurs now. A
recent attack on Thai Baht was not successful as policy makers were more aware of
the policy instruments available to them. More importantly, the market now perceives
that the policy makers have more influence over asset prices and currencies than the
market participants do. Thus, avoiding the kind of mass attack trigger by leveraged
funds.

6. Political Risk

With the elections over in Indonesia, the investors now concentrate on the elections in
Malaysia. The political risk is likely to come down tremendously over the next month
or two, thus boasting risk-adjusted return for Southeast Asia. With MSCI weightings
increased substantially for Malaysia, and the gradual loosening of the capital control
measures, fickle minded investors with short memory are most likely to return to
Malaysia. When there is money to be made, few want to be left out. Whether one
likes it or not, investing in Asia involves investing in political-linked stocks. The
political risk is high, but the return, hopefully will be able to compensate for taking
the risk. Investors will return to Southeast Asia after the Malaysian Election.




Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is
accepted whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte
Ltd and its directors, employees and associates may from time to time have positions in, and may effect transactions. This
research report is prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and
the particular needs of any specific person to receive this report. This document is not to be constructed as an offer or a
solicitation of an offer to buy or sell any financial instruments".
                                                                   6
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg



7. Inflation

Inflation in Asia is not as bad as one would have thought. Indeed, most policy makers
are adopting loose monetary policy while the US and Europe are on a tightening
stance. Countries in Asia are in a policy comfortable zone, as opposed to that of the
US. With asset reflation, as opposed to inflation, wealth effects are setting in, boasting
consumption. This would further fuel asset inflation, rather than production or
consumption price inflation fueled by wage inflation. This cannot be bad until
everyone is highly leveraged once again some years down the road.

8. Y2K and Excess Cash

With the year-end round the corner, fund managers are holding more cash than they
think they should in order to meet unforeseen redemption, which may never come.
Non Asian fund managers are unwilling to commit more funds until year 2000 as the
Y2K problems seem too obvious to ignore. It would appear to be unprofessional to
commit fully before year-end, unless the markets have dropped to a level that has
priced Y2K problems in.

9. Protectionism

Protectionist sentiments in an US election season may sidetrack its long-standing
commitment to free trade. The next WTO meeting in Nov may be crucial as US plays
a pivotal role. USA may have the largest ever budget surplus of USD123b for the
financial year ended Sep 1999, it is just a reflection of higher historical income and
can turn around quickly. Faced with a large current account deficit, US may be
pressured to adopt protectionism that may be bad for Asia. However, as policy makers
are in the comfort zones and they are more viable instruments than policy targets. We
may see countries such as Japan boosting its consumption.

The experts were wrong time and again. In 199Q2, Japan grew by 0,25 instead of
shrinking 1-2% as predicted. This is on top of the 2% growth in the first quarter.
Personal consumption grew by 0.8% over the previous quarter and housing
investment catapulted 16%. There are improvements in consumer sentiment with the
IT sector expanding. Japan GDP can be increased by purely increasing consumption
as consumption spending accounts for 60% of GDP. Some good signs, such as a year-
on-year growth of 8% on car sales, are clear evidence that money under the pillows
are showing up in the economy.

The transformation that took place in the US has yet to take place in Japan. It is likely
that Japan will become more of a service rather than manufacturing economy. Save
for a rapid rising Yen, a gradual strengthening Yen will force the transformation and
re-structuring of the Japanese economy.


Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is
accepted whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte
Ltd and its directors, employees and associates may from time to time have positions in, and may effect transactions. This
research report is prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and
the particular needs of any specific person to receive this report. This document is not to be constructed as an offer or a
solicitation of an offer to buy or sell any financial instruments".
                                                                   7
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg



The Downside

With presidential election due next year in Taiwan, the political uncertainty is there.
In the event that more places get hit by earthquake, the economies would be affected.
Nobody is predicting an earthquake in the states, but if it happens at the wrong place,
Asia would be affected quite severely.

Conclusion

MSCI plans to reinstate Malaysia from 0% to 9%. Investors are not feeling the
pressure to move quickly and there is still a net outflow of funds from Malaysia. As
the risk reduced in Malaysia, the 9% weightage, may prompt more fund managers to
return to Malaysia next year.

Most markets will continue to be range bound for the last quarter. We would continue
to overweight Japan, Singapore, Hong Kong, Malaysia, Indonesia, and remain neutral
on South Korea, China, Taiwan, Philippines, Thailand, Europe, and underweight the
rest of the world, especially NASDAQ. Well, remember the Second Board of
Malaysia?

When Greenspan speaks with the intention of talking down the market and the market
dips, we are safe. When Greenspan attempts to talk up the market or retires, we will
soon know whether the US market is a bubble…..



References
Bernice Cohen (1997), “The Edge of Chaos: Financial Booms, Bubbles, Crashes, and
Chaos”, Wiley, England.

Goh SM, Lie ATW, Yew V, Tang TS (1999), “Book Review of “The Edge of
Chaos””, National University of Singapore.




Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is
accepted whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte
Ltd and its directors, employees and associates may from time to time have positions in, and may effect transactions. This
research report is prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and
the particular needs of any specific person to receive this report. This document is not to be constructed as an offer or a
solicitation of an offer to buy or sell any financial instruments".
                                                                   8
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg


                                                                                                                                                                                                     Appendix 1

Table 2               The Eight Phases in a Simple Boom/Bust Cycle

                                        Phase 1 – The Trigger                          Phase 2 – Easy Credit                          Phase 3 – Asset Inflation                       Phase 4 – Overtrading &
                                                                                                                                                                                      Speculation
Tulipomania (17th century,              Viruses emerge on tulips.                      Holland had access to credit.                  Inflation (silver from Baltic trade             Speculation existed even in
Holland)                                                                               Futures contracts & options were               financed Dutch trading).                        remote hamlets and villages.
                                                                                       introduced.
Mississippi Chaos (1720s,               John Law‟s intervention to re-                 Jun 1719 – introduced a sequence               Inflation    in    asset   prices               The     emergence      of    pure
France)                                 energise the dampened economy.                 of attractively priced rights issue            (especially in stocks, bonds and                speculation     and     increased
                                                                                       with small down payment and                    property).                                      borrowing to participate in the
                                                                                       many installments.                                                                             purchase of these shares.
South Sea Fiasco (1720s,                Obtained an Act to take over the               Small downpayment & bi-                        Demand for consumer goods and                   2nd money subscription.
Great Britain)                          national debt; raised money from               monthly installments; loan-on-                 property increased.
                                        several highly successful money                stock issues to complement the 3
                                        subscription issues.                           new share issues.
1929 Crash (USA)                        Charles Ponzi‟s plan to develop                Spring 1927 - Central banks                    Early 1928 – huge credit                        Margin      trading     increased
                                        Florida suburb; boom centred on                adopted easy money policy at                   expansion led to inflation in stock             (massive borrowing in order to
                                        the right to buy lots of land at a             England‟s request.                             and commodity prices.                           speculate; euphoria of future
                                        stated price.                                                                                                                                 thriving economy).
1987 Crash                              Aug 1982 - Decision by the Fed to              Easy credit with US financial                  1985 - Cuts in discount rates                   Substantial increase in money
                                        reverse deflationary stand (on                 deregulation and liberalisation;               reduced borrowing costs; levels of              supply, cheap dollar and oil
                                        monetary policy) to prevent the                Reagan govt committed to lax                   debt rose; the bull market moved                fuelled    further    speculation
                                        Mexican       debt   crisis  from              fiscal policy (Fed : maintain tight            into higher gear and property                   financed by a build-up of debts
                                        snowballing out of control.                    policy).                                       prices in US,UK, Japan rose.                    at all levels; warning signs
                                                                                                                                                                                      ignored.
Japanese Bubble                         1987 – reforms introduced and                  Low interest rates contributed to              Investment boomed,                              sustaining and reinforcing
(1987 – 1991)                           slowly followed by financial                   the speculation in the stock                    the upswing. Cheap                             and easy monetary
                                        deregulation (including lowering               market.                                        policy.                                         maintained.
                                        discount rates).


Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is accurate. Any opinions expressed herein are given in good faith but are subject to change
without notice. No liability is accepted whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte Ltd and its directors, employees and associates may from
time to time have positions in, and may effect transactions. This research report is prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and the particular needs
of any specific person to receive this report. This document is not to be constructed as an offer or a solicitation of an offer to buy or sell any financial instruments".
                                                                                                                 9
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg


                                                                                                                                                                                                     Appendix 2

                                     Phase 5 – Gullible Mass                           Phase 6 – Nagging Doubts Form                  Phase 7 – The Selling Flood                      Phase 8 – The Panic Sell-off
                                     Participation
Tulipomania (17th century,           Tulip growing became the national                 Officials in Harlem attempted to               Bulbs became worthless and                       Almost unsaleable overnight.
Holland)                             obsession.                                        dampen the wildest speculation in              In 1639, it was 5000 guilders.                   Worth only 10% of the price
                                                                                       Feb 1637.                                                                                       commanded in 1937.
Mississippi Chaos (1720s,            Early 1720 – mass participation                   Nagging       doubts     after the             21 May 1720 – Confidence                         Between Jun – Nov 1720, the
France)                              caused the share price to peak at                 infamous Bubble Act; enough                    shattered by the plan to cut the                 share price fell to only one-
                                     10,000 livres (compared to only 650               sellers emerged even though there              value of all shares and notes in                 third of its peak of 10,000
                                     livres in Jun 1719)                               were still firm holders.                       circulation. Price went down by                  livres.
                                                                                                                                      50%.
South Sea Fiasco (1720s,             Mass participation from the                       Aug 1720 - First proceedings                   Confidence       of     all    shares            Closure of Sword Blade Co and
Great Britain)                       Provinces and Europe); dozens of                  against 4 companies accused of                 undermined in London. 4th & 5th                  near closure of Bank of Eng.;
                                     bubble companies launched to                      misusing their charters (price of              subscriptions at a discount (price               chain effect; price collapsed to
                                     exploit the intense interest.                     share = 900).                                  fall led to banks recalling loans).              only 150 by 25 Sep 1720.
1929 Crash                           Could trade overseas as well „cos of              Commodity price fallen and                     Started with mini-crash on 24 Oct                Till 30 Oct – margin accounts
                                     branches; those expressing alarm at               productivity capacity /                        1929, wave of selling sent prices                are liquidated, shares were
                                     growth of debts seen as unpatriotic               construction declined.                         falling.                                         dumped, market collapsed.
                                     or pessimistic.
1987 Crash                           1986 - Skeptics were shoved aside,                Early 1987 – intervention to                   Majority of people were fully                    Major int‟l stock markets
                                     London and Japan joined in with                   support USD; Sep 87 – gradual                  invested, heavy selling started in               followed Dow‟s fall (positive
                                     their stock market mania.                         withdrawal of funds from US by                 the 2nd week of Oct 87.                          feedback loop leading to panic
                                                                                       Japanese investors.                                                                             selling), bubble burst on 19
                                                                                                                                                                                       Oct.
Japanese Bubble                      Steep rise in property prices;                    Early 1989 – confidence seeped                 Markets responded badly to Aug                   1991 – Aug 1992 : the stock
                                     savings    dropped;   investments                 away. Prices began a more                      invasion of Kuwait by Kuwait in                  market continued to sell and
                                     increased. Consumers en masse on                  serious decline.                               Aug 90. Selling in Japan became                  debt     hangover    remained
                                     a spending spree.                                                                                stronger and more determined.                    astronomical.




Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is accurate. Any opinions expressed herein are given in good faith but are subject to change
without notice. No liability is accepted whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte Ltd and its directors, employees and associates may from
time to time have positions in, and may effect transactions. This research report is prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and the particular needs
of any specific person to receive this report. This document is not to be constructed as an offer or a solicitation of an offer to buy or sell any financial instruments".
                                                                                                                10
Ferrell Asset Management Pte Ltd
20 Cecil Street, #25-05 The Exchange, Singapore 049705
Telephone: (65) 536 6623 Facsimile: (65) 536 1738
Email: fam@ferrell.com.sg Website: www.ferrell.com.sg


                                                                                                             Appendix 3

Table 3                More Prudent Borrowers
Net capital inflows into the five Asian countries - South Korea, Indonesia, Thailand, Malaysia
and the Philippines, in billion dollars

                                                     1996             1996             1998           1999F           2000F
Total external financing                             103.2             27.5            -12.9           10.8            6.6
Private flows                                        106.4             -0.8            -38.6             5.1           -2.0
 Equity investments                                  18.6              4.4             14.2            25.2            22.1
     Direct equity                                     4.4             5.9               9.9           11.9            14.8
     Portfolio equity                                13.9              -1.5              4.3           13.2            7.3
Private creditors                                    87.8              -5.2            -52.7           -20.0          -24.1
 Commercial banks                                    59.9             -17.2            -48.3           -18.7          -22.3
 Nonbanks                                            27.8              12.0             -4.4            -1.3           -1.8
Official flows                                        -3.2             28.3            25.6              5.7           8.6
 Int'l financial institutions                         -2.0             22.5            19.4             -3.3           3.2
 Bilateral creditors                                  -1.3             5.7               6.3             9.0           5.4


Source: Institute of International Finance



Table 4                Asset Allocation and MSCI Index

Back in the Index
When Malaysia returns to the MSCI indexes, fund managers across the region will take note
                     One possible reweighting scenario
                                                                                            Current foreign holdings as % of
                                 MktCap Foreign % weight in MSCI                              MSCI Asian New MSCI
                                  $ Bln holdings Old        New                              portfolio hldgs benchmark hldgs
Hong Kong                         436.0   87.2    33.4      25.9                                  37.3              144.0
South Korea                       243.0   46.7    24.1      18.7                                  19.9              107.0
Malaysia                          110.0    8.0     0.0      9.2                                    3.4               37.0
Singapore                         234.0   36.3    13.4      10.4                                  15.5              149.0
Taiwan                            341.0   21.7    17.0      26.4                                   9.3               35.0




Source:                ABN Amro Malaysia, Sep 1999
                       AWSJ, 27 Oct 1999.


Ferrell Asset Management Pte Ltd has taken all reasonable care to ensure that the information contained in this report is
accurate. Any opinions expressed herein are given in good faith but are subject to change without notice. No liability is
accepted whatsoever for any direct or consequential loss arising from the use of this document. Ferrell Asset Management Pte
Ltd and its directors, employees and associates may from time to time have positions in, and may effect transactions. This
research report is prepared for circulation to clients only. It does not have regard to the specific objective, financial situation and
the particular needs of any specific person to receive this report. This document is not to be constructed as an offer or a
solicitation of an offer to buy or sell any financial instruments".
                                                                  11

								
To top