Sub-Prime Woes Continue To Hold Sway

Source : The Business Times, November 13, 2007

ST Index hits two-month low after 2.5 per cent fall, in line with Hang Seng Index

AS EXPECTED, the local stock market was unhinged yesterday by Wall Street's continuing fears over the impact the sub- prime crisis might have on its earnings and the US economy, fears which have now rendered the two interest rate cuts of the past seven weeks nothing more than a distant memory.















The end of a weak session saw put warrants - instruments that gain in value in a falling market - occupy 18 of the 20 spots available in the top gainers list, while the Straits Times Index (STI) stood 88.55 points or 2.5 per cent down at 3,511.12, the lowest in two months.

This loss was very much in line with that in Hong Kong, where the Hang Seng Index closed 1,117.68 points or 3.9 per cent lower at 27,665.73.

Other than describe the market as 'very nervous' and 'jittery', brokers were at a loss to comment further on the present sentiment. 'Who knows what might spook Wall Street next?' asked a dealer, echoing the feelings of the majority. The December futures contract on the Dow Jones Industrial Average, usually a reliable guide to how Wall Street might open later that same day, first dropped 50 points but regained about 40 points by 5pm.

The broad market experienced one of its worst performances, registering only 61 rises versus 497 falls and 266 unchanged or untraded counters, excluding warrants. This works out to about eight falls for each rise.

Since peaking at an all-time high of 3,875 almost exactly one month ago, the STI has now lost 364 points or just under 10 per cent. A weak Wall Street has been chiefly responsible, with stocks coming under severe pressure following announcements by the major banks of large write-offs relating to the sub-prime problems in the US.

Here, banks have also led the decline. In yesterday's session, falls in the three banks cut a total of 25 points off the index. DBS continued to lead the sector's decline, losing 70 cents at $19.80 versus 50 cents for UOB at $19.60 and 15 cents for OCBC at $8.50.

With sentiment as shaky as it is, positive broking recommendations had little impact - Kim Eng's 'buy' on construction firm Lian Beng with a $1.22 target price, for example, was shrugged off by the market, and the stock closed 2.5 cents weaker at 74 cents. The local broker based its call on the upswing in construction, the company's healthy profit margins and sound financial management.

'We are initiating coverage with a $1.22 target based on a sum-of-the-parts valuation with 16 times FY09 PE on recurrent income from its construction business, along with the addition of the present value of development profits,' said Kim Eng.

On the outlook for Wall Street, US newspaper Barron's Nov 5 issue carried the results of its latest Big Money poll of fund managers, which is always an interesting read. Some of the findings are: 22 per cent thought Wall Street (with the Dow at 13,595) was overvalued, 23 per cent undervalued and 55 per cent fairly valued.

The single factor seen which could lift stocks over the next few months was better-than-expected corporate earnings while, overall, 42 per cent of respondents said they are still bullish on stocks. However, this figure was down from the 64 per cent of a year ago.