What are emerging markets telling us?

Are You Panicking Over the Emerging-Markets Slide?

"Fears Over Interest Rates Send Emerging Markets Tumbling"
"Dealing on Indian Exchange Suspended"
"Worst Emerging Markets Run Since Russian Default"

"These alarming reports, which appeared in the May 23 editions of The Wall Street Journal and Financial Times, indicate the depth of the slide in emerging markets around the world. And while those items referred to a single day's carnage, the decline has been going on for weeks now."

This article got me thinking that the sharp falls in emerging and secondary markets in the past week or so are probably due to reduced levels of liquidity and hot money closing out secondary positions to maintain their core holdings. Hedge funds have long been blamed for causing stock market volatility by quickly moving around money chasing gains or fleeing falls. As volatility continues, one would expect most fund managers to continue doing so, exacerbating market moves. The secondary markets are usually the ones to react first and give clues as to the direction of the 'tide' of money and mood of investors or market makers. Perhaps they are sending ominous signals.

Market Crash
http://mktcrash.blogspot.com/

Stock market volatility continues

Global interest rate fears and uncertainty over economic growth prospects are beginning to take their toll on share markets the world over. Last week was particularly brutal with sharp declines across all major indexes across the globe. This volatility appears to be continuing this week with more heavy falls already underway.

Ten days that shook the world's markets

"From Stockholm to Tokyo, New York to Istanbul, market mayhem swept across the world last week, unleashing violent movements on stock markets and foreign exchanges everywhere, and hammering down the price of commodities such as copper and gold."

"Stephen Lewis, of bankers Insinger de Beaufort, says it's too early to write off the risk that the events of the past few days could be the trigger for a full-blown financial crisis. 'Volatility rises, to the extent that it has in equity and commodity markets in recent days, when emotions take over; when actions in the markets are forced; when survival is at stake. In such circumstances, there can be no reliable forecasts of how far markets will move,' he warned."

"The worldwide wobble started with the dollar. A warning from G7 finance ministers last month about imbalances in the global economy, and a hint from Federal Reserve chairman Ben Bernanke that he might halt the rise in interest rates, brought the greenback bears out of hiding, and triggered a frenzy of selling."

"Through the fog of market panic last week, analysts said it was important not to forget the underlying economic causes of the upheaval. For several years now, economists have been watching with growing alarm as the US spent more than it earned, running up a record current account deficit with the rest of the world - worth almost 7 per cent of GDP last year."

"This economic story will play out over months, not at the breakneck speed of the financial markets, and it is hard to predict how its ramifications will ripple across the world. 'There's no new trend established yet,' said HSBC's Bloom. 'It's an unsettled time.' But Bernanke, whose hands are on the world's most important economic lever, will have to hope he isn't forced to win the confidence of the markets the way his predecessor, Alan Greenspan, did - by stepping in to stop the stock market crash of 1987 turning into a global financial crisis."

Caution on Hedge Funds

Plenty of debate in recent times regarding the unchecked growth of hedge funds and their potential to cause major disruptions to the financial system. It seems that we have not yet learned the lessons from the LTCM collapse.

Bernanke Urges Caution on Hedge Funds

"Financial authorities must stay attuned to any potential risks posed by the growth of hedge funds, an investment domain of the wealthy that has become more popular with smaller investors, Federal Reserve Chairman Ben Bernanke suggested Tuesday."

""Authorities should and will try to ensure that the lapses in risk management of 1998 do not happen again," Bernanke said, referring to the collapse of Long-Term Capital Management, a hedge fund that had received a $3.6 billion private bailout."

"Today some 7,000 to 9,000 hedge funds in the United States command an estimated $1 trillion in assets and are believed to account for as much as 20 percent of all U.S. stock trading."

"Hedge funds - high-risk, largely unregulated and secretive investment pools - have traditionally been the investment domain of the wealthy but have become popular with small investors in recent years."

"The Fed chief suggested that financial institutions and others that do business with hedge funds make sure they are doing all they can to sufficiently blunt their risks. "Continued focus on counterparty risk management is likely the best course for addressing systemic concerns related to hedge funds," Bernanke said."

Housing bubble threatening economy

Homes glut pressures US economy

"The US economy peaked in January and is tipping into an unstoppable "bust" whether or not the Federal Reserve halts its cycle of interest rate rises, Lombard Street Research has warned."

"The economic research group said the US property market was crumbling, taking away the key prop of the consumer boom."

""The real US hard landing starts now," said Charles Dumas, the chief global economist. "It's going to be a long grind for two or three years, not as bad as Japan but going in that direction."

The price of new houses in the US has been tumbling for five months at an annualised rate of 18.4pc, while mortgage applications are down 20pc."

"Elsewhere, Banque AIG has warned that a US housing bust risked plunging the economy into a deeper downturn than generally expected."

""House prices have been falling hard for five months and all the guidance from builders points to a continued fall. You cannot ignore the threat," said Bernard Connolly, chief global strategist."

""A fall of perhaps 20pc in US residential construction in the course of the next year or so is not an implausible scenario. That would be a big deal. Rates will have to come down, perhaps by rather a lot," he said."

The Nasdaq crash

During the mid to late 1990's computing technology was advancing rapidly, the most notable innovation was the internet. The internet became immensely popular as individuals and organizations quickly recognised its potential. Many companies rushed to commercialize this greenfield opportunity, attracting a lot of attention with some high profile success stories. Startup companies easily attracted capital as investors became infatuated with anything internet or technology related and threw money at these companies without questioning the viability of the businesses they were funding. During this time it was not uncommon to see the share price of a dot com rise by hundreds or even thousands of percentage points as the Nasdaq index rose from approximately 1000 to over 5000 in four years.

In the year 2000 reality quickly set in as investors suddenly came to the realization that they were caught up in a bubble and euphoria turned into panic. The 10th of March 2000 saw the Nasdaq Composite index peak at 5048.86. Both professional and amateur investors quickly realized that the bubble had burst and progressively sold down anything internet or technology related. Over the course of the next 2.5 years the Nasdaq Composite index dropped from a peak of 5048.86 to a low of 1114.11 for a loss of 78% causing approximately $4.2 trillion of shareholder wealth to be lost.


The Nasdaq (or dot com) crash is a textbook example of a stockmarket correction ending a speculative mania.

With the benefit of hindsight, the warning signs were painfully obvious. The Wall Street cheerleaders extolled the virtues of the 'new economy' saying 'this time it's different' and traditional valuation methods were no longer relevant. The majority of dot com companies had no earnings, yet they commanded extraordinary valuations. Speculation was rampant amongst the general public, with scores of individuals giving up their regular jobs to become online daytraders.

The aftermath of the Nasdaq crash was far reaching. Millions of technology workers lost their jobs, stock options and life savings, investors were decimated as many internet companies became worthless. The economy went into recession in 2001 as the Federal Reserve repeatedly lowered interest rates in order to stave off deflation and stimulate the economy. The effects are still felt in the present day as some particular sectors including technology, telecommunications and internet are still out of favour with investors.

http://mktcrash.blogspot.com/

Fed raises rates again

The Federal Reserve raised interest rates to 5 percent on Wednesday. This is the 16th consecutive increase and brings the key rate to its highest level in 5 years. It has also clearly signaled that further rate rises may be required to keep inflation under control.

Fed Raises Key Rate to Highest Level in 5 Years

"The committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information"

Gold price hits 25 year high

Rising geopolitical tensions and uncertainty have clearly demonstrated the value of Gold as a traditional defensive asset and store of wealth. At present there appear to be a number of factors that will support upward pressure on the price of gold.

Gold Tops $700, Oil Exceeds $71 on Iran Nuclear Plan Concern

"Gold jumped to $700 an ounce in New York for the first time since October 1980 and crude oil rose above $71 a barrel as tensions increased over Iran's nuclear- research program."

"Gold also gained on speculation central banks will sell their dollar reserves and buy gold. Some of China's economists are urging the country to quadruple its gold reserves to 2,500 tons from 600 tons, Reuters said, citing an official industry newspaper."

"A weaker dollar is also helping boost the allure of gold. The metal traditionally moves in the opposite direction of the currency."

"``People who are bullish on gold are doubtful the Fed is committed to fighting inflation,'' said Daniel Vaught, an analyst at A.G. Edwards & Sons Inc. in St. Louis."

MSCI World Index hits record high

World stocks storm past tech bubble high

"World stocks stormed past highs reached during the 2000 tech bubble on Monday, with the MSCI World Index <.MSCIWD> hitting a record 349.28."

"The all-country world index has gained more than 12.5 percent so far this year while its emerging market stablemate is up nearly 25 percent."

"Such rises, along with gains in other major indexes, have raised some concerns that equities are heading for another fall -- especially as interest rates are generally rising worldwide."

All booms bust

Some timely advice in this article from rich-dad Robert Kiyosaki:

ALL BOOMS BUST! Words of Caution from Robert Kiyosaki

"Lately, I have been asked if we are in a real estate bubble. My answer is, "Duh!" In my opinion, this is the biggest real estate bubble I have ever lived through. Next, I am asked, "Will the bubble burst?" Again, my answer is, "Duh!" "

"So the answer to the question, "Will the real estate bubble bust?" is an emphatic, "Yes. All bubbles bust." The reason I write this alert is because this time, when the bubble bursts, I think it will be a monster. Never in my life have I seen so much money being made on such weak fundamentals. If you think the last recession caused by the bubble bust was bad, the coming recession will be at least twice as bad. It might lead to a depression."

"How long will the bubble last and keep expanding? I do not know. I just wanted you to know that I am currently preparing for a crash, an economic recession, and possible global depression. Why? Because this is a very big worldwide bubble... the biggest I have ever seen."

Oil price may hit $100

Iran minister: Crude oil may hit $100

"Iran's deputy oil minister, M. H. Nejad Hosseinian, on Tuesday said crude oil prices are likely to hit US$100 a barrel this coming winter as demand outpaces supply."

"By winter, it is very much possible," Hosseinian said, when asked by reporters if global crude prices would peak at around US$100 barrel.

"Oil supply in the short term cannot be increased," he told reporters in New Delhi, according to Dow Jones newswires.

Beware the Real Estate Bubble

Experts agree that at present real estate bubbles exist throughout many cities in the world. This situation should be closely monitored as it has the potential to cause disruption to financial markets and economies alike when the bubble inevitably bursts.

From The Economist magazine: "The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops."

A good reference for the real estate bubble can be found at the following site:

Housing Bubble Facts and Figures

Sell in May and go away

The start of May is an opportune moment to remember the old adage: Sell in May and go away.

`Sell in May' Strategy in U.S. Stocks Seen as Prudent This Year

"`Sell in May and go away' became a Wall Street axiom two decades ago, thanks to the Stock Trader's Almanac. The strategy may be more compelling than usual for U.S. stock investors this year, according to its editor."

"The Dow Jones Industrial Average may tumble as much as 30 percent between May and October from the six-year high set last month"

"We have a very lofty market entering a seasonably unfavorable time in the most vulnerable period in the election cycle"

"Financial-newsletter writers are increasingly calling for stocks to fall 10 percent, according to Investors Intelligence. Advisers predicting a ``correction'' climbed in the week ended April 21 to 28.8 percent, the most since August 2004"