Is Market Plunge a Correction or Bear Market?

[Dennis Ng]

The No. 1 question on the minds of almost everyone is this:

is the recent market plunge a "correction" or start of a "bear market"?

My comments:
personally I think it is NOT possible to say for sure at this point in time.

I personally think that if the correction takes STI down NOT below 2,700 points, the "bull" might still be intact and it was just a correction. Remember even in May '06, STI went down close to 20% but resumed the uptrend thereafter.

However, increasingly, in my personal opinion, the Risk/Reward ratio has worsen. There are more risks in the market currently compared to May '06.

1. U.S. economy is at tail end of expansion, what might happen is a soft landing, or it might go into recession (Alan Greenspan: Recession is possible).

2. The "rise" of the sub-prime mortgages in U.S. market. I read that 10 years ago, "sub-prime" mortgage is only about 5% of the total market. Now it is 20%!

sub-prime market faces the double whammy of rising interest rates and faltering housing prices. When more and more people go into default, this would lead to a "vicious cycle" in weakening housing prices and it would then create another round of increased defaults.

The "disease" in sub-prime market might spread to the rest of the Mortgage and Housing market in U.S.

3. "Unwinding" of Yen Carry Trade. Some people mistaken the concern is about Yen Carry Trade and said such things have been going on for years.

The concern is actually on the "unwinding" of Yen Carry Trade. Last week, the World had a "glimpse" of what impact an unwinding of Yen Carry Trade would have on the world. Basically, everything FALLS. Anything from stocks, to currencies, to oil, to commodities (such as Gold) all dropped during the few days of "market carnage".

In my opinion, the "eventual" unwinding of Yen Carry Trade is a "time bomb" in the "waiting".

4. Increased "leverage" in investments. In the last few years, Hedge Funds have grown and grown. Many of them if they collect $1 from investors, they might even borrow another $1 to $2 and invest the entire sum of $2 to $3!

And when they invest, they might invest in "derivatives", which have "gearing" (Leverage) themselves.....so what happen is "Leverage" on "Leverage"!!!

Thus, if market turns, Hedge Funds would "bail out" in a big way and that itself can create another "vicious cycle".

5. Remember, the "vultures" are eyeing for opportunities. People such as George Soros are waiting for "opportunity" to throw their punch when "things are weak".

And when they "whack it in" (eg. short selling etc), please note that "a body in motion is likely to remain in motion" - any downward market move might precipitate further downward market moves! What I said is also related to the concept of "Reflexivity" as expounded by George Soros.

In summary, whether this is a correction or start of bear market is NOT clear at this moment.

However, compared to correction in May '06, in my personal opinion, the "Risks" have increased and the potential upside (Reward) has reduced. There is a worsening of Risk/Reward ratio and that is partly the reason why I have raised my cash position.

Note: I'm not an expert on stock investing. I specialise in property financing and business financing.

Please note that above is just my personal opinion. You can have a different opinion.

Below I attach some information on George Soros and the concept of "Reflexivity" from wikipedia for everyone's easy reference:

Cheers!

Dennis Ng, http://www.HousingLoanSG.com

Education and beliefs
George Soros has a keen interest in philosophy, and his philosophical outlook is largely influenced by Karl Popper, under whom he studied at the London School of Economics. His Open Society Institute is named after Popper's two volume work, The Open Society and Its Enemies, and Soros's ongoing philosophical commitment to the principle of 'fallibilism' (that anything he believes may in fact be wrong, and is therefore to be questioned and improved) stems from Popper's philosophy. Some critics argue that Soros' static political beliefs appear to conflict with the critical rationalism espoused by Popper, though Soros argues that these beliefs were arrived at through such rationalism.


[edit] Reflexivity, financial markets, and economic theory
Soros' writings focus heavily on the concept of reflexivity, where the biases of individuals are seen as entering into market transactions, potentially changing the fundamentals of the economy. Soros argued that such transitions in the fundamentals of the economy are typically marked by disequilibrium rather than equilibrium in the economy, and that the conventional economic theory of the market (the 'efficient market hypothesis') does not apply in these situations.

Whether Soros is theoretically right or wrong on this issue, Soros certainly has the market credentials and proven track record to effectively maintain that his theory of reflexivity is practically relevant in the marketplace — at least for him. Soros has popularized the concepts of dynamic disequilibrium, static disequilibrium, and near-equilibrium conditions.

Reflexivity is based in three main ideas:

(1) Reflexivity is best observed under special conditions where investor bias grows and spreads throughout the investment arena. Examples of factors that may give rise to this bias include (a) equity leveraging or (b) the trend-following habits of speculators.

(2) Reflexivity appears intermittently since it is most likely to be revealed under certain conditions; i.e., the equilibrium process's character is best considered in terms of probabilities.