More and More Worries

On Thursday, stocks in the United States tumbled after more shits were discovered from the credit markets pot hole. Coupled with the lackluster retail sales, everyone now is really worried that the economy is nearing recession.

One of the main culprit from the series of fresh jolts to the market is that there was news that this "jumbo" mortgage lender in US called the Thornburg Morgage Inc, was in default after failing to meet its creditor demands for upfront cash. Needless to say, the share price of Thornburg plunged 51.5%!

Second news was that there is a report that showed the number of foreclosures of US mortgage hit a record high in late 2007. That slapped the S&P financial index (equivalent to KLCI in Malaysia) down 3.7% in its sixth straight daily decline.

It is interesting to note the following statement from Frederic Dickson, senior vice president and market strategist at DA Davidson &Co in Lake Oswego, Oregon (not too sure whether actually) - "We are dealing with a market that at this point is still very, very jittery, wondering what's going to come out of the closet next". What does that tell us as a layman investor? The so-called experts can't even determine what is coming next. So, how can we? Every few days you will hear some good news and share prices rebound (go up) but in the next few days, some bad news slapped share prices down again.

Can the market be timed? I would prefer to take a No as the answer. Best strategy is to invest a portion in the market and half as cash. Let me talk more about the strategy in asset allocation for the Hengdai Equity Fund IV ("HDFIV") in the next post.

What Are These Mad Losses?

UBS analysts predict financial firms' losses to hit $600B
UBS AG analysts are predicting that financial firms, including brokers, banks and insurers, will experiences losses of $600 billion or more in the crisis stemming from the subprime mortgage market meltdown. So far, financial institutions have revealed write-downs and credit losses of more than $181 billion. Bloomberg (29 Feb.)

Seane Lynch says, that's another $419 billion (2.3 times more!) from how much financial institutions have revealed so far. These numbers are analysts' expectations but in view of the more conservative approach that auditors might adopt, the amount could be worst come the audit on the financial numbers of the affected companies. Audited figures are expected to be released by mid to end March itself.

But but but, most of us, the people on the streets are confused with what these losses are. The write-downs and credit losses madness are basically paper/unrealised losses that arose due to mark to market valuation of the instruments. In layman term, there are no one in the market that would like to buy these investments, hence the market value is marked down tremendously based on a very steep discount. Fair to do so? Accountants called it the "fair value accounting", hence it is supposed to be fair and reflect the most accurate valuation of these instruments. Again, accounting can and will always strive to provide the best valuation but most of the time can be challenged.