The Perfect Storm

I don't intend to make a lot of comments today as I've said enough. You can see in the chart above, a lot of stocks have fallen like potato from the top. If they want to test the market faith to the extreme, strong stocks like IOI Corp, Public Bank, TM International, KL Kepong, Digi and etc need to fall. If this last line of defense is broken, I think the market will give up all together. A towel will be thrown. The six million dollar question is: possible?

I'm keeping the below for my future reference, documenting the market sentiment leading to the bottom. KL Composite closed at 1,121 on 8-7-2008.

(The Edge) CLSA Research in a report yesterday downgraded its rating for the 100-company KLCI to underweight from neutral, and slashed its year-end target for the index by 13% to 980 points from 1,150 previously. At the same time, the research house also expected corporate earnings growth to weaken on higher inflationary pressures next year.

Corporate earnings growth is expected to hit 16% this year and anticipated to slow down to 10% next year, the research house said. The reduced forecast is on expectation of a slower economic growth next year of 3.3% from 5.3% this year and inflation increasing from 4.7% to 5.1%.

Driven by depressing sentiment, Citi in a note last Friday stated that one could easily add many companies on the sell list, arbitrarily cutting target prices and earnings.

"Positive fundamental news has, so far, been ignored completely," Citi said. Among the indicators that have been ignored are the trade surplus hitting a record RM15.6 billion and export growth of 22.9%, almost double market expectations, in May. Citi also said that foreign exchange reserves are now at US$125 billion (RM412.5 billion), probably ranked among the top 15 in the world.

The KLCI dropped for the eighth consecutive day yesterday losing 0.6% or 6.88 points to finish at 1,127.26 points. The index was dragged down, mainly, by shares of plantation companies IOI Corp Bhd and Sime Darby Bhd which dipped 10 sen each to RM6.80 and RM8.65 respectively.

At yesterday's close, the KLCI was trading at a price-to-earnings ratio (PER) of 12.11 times, and had declined 21.99% so far this year. For comparison, regional indices like Hong Kong's Hang Seng, and Japan's Nikkei 225 are trading at 12.74 times and 16.49 times respectively. On a whole, Bursa Malaysia saw 262 gainers and 372 losers while 231 counters were unchanged. A total of 412.99 million shares worth RM1.02 billion changed hands.

Citi stated that the substantial drop in the KLCI has pushed the index's valuations close to its historical lows since the 1997-1998 Asian financial crisis. It stated that the KLCI at a PER of 11 times, was trading at the "lowest valuations in history" versus its historical average of 21 times.