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whose surprised about the Thai crash?


junglesoup

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This is an article I m writing for my trading blog, where I trade in the foreign exchange market. I m just starting the blog, and it will be a while to get it all together.

Howeever I ve written this in relation to todays not so new events...

Onb my trading blog I will be trading the baht and dollar, so anyone can see how I m doing. I can post the charts here if anyone is interested.

 

 

 

 

A stockmarket crash is caused by human behaviour, because human actions over time repeat themselves.Markets are rational. People are not.Greed and fear are the emotions of the day in investment and they are contagious. Crashes have been in existence since markets began. They have nothing new in them, and they will still continue to happen in years to come.

 

Yet when there is a crash like the one that occurred in Thailand today there is much surprise and shock at the events that unfold. It seems to come out of the blue like a bolt of lightning. Billions is wiped off the value of stocks in an hour and the great financial houses, banks , investors the world over are unprepared for it. It comes to them as a jolt.

Well how can I say it comes as a surprise and investors werenâ??t prepared for it?

The answer is in the fact that a panic sets in. Mass selling takes place, there is a great market exodus. Panic only occurs out of unforeseen events and occurrences that people arenâ??t prepared for. When something does happen there is a total lack of plan to deal with the situation.

 

Now on the site today there was a member quoting this:

 

Gadfly said:

 

 

â??More bad news on the way. On 27 December, the Thai government is expected to announce a retroactive change to the Alien Business Law which will make the preference share structures foreigners generally use illegal.

 

A Europeon diplomat estimated that there 14,000 companies using such structures; The Nation estimated 100,000 companies. In brief, no one really knows, but a lot.

 

The Thai economy is not doing well. Regionally its performance has been poor. GDP figures are down. Bad debt is (unofficially) increasing.

 

It is this last development that has me the most concerned. The 1997 financial crisis occurred because of bad debt. Banks were not lending on a commercial basis, but on the basis of connections. You can extend the terms, but you cannot do this forever.

 

Thailand was supposed to seriously reform its financial sector, principally by opening up that sector to international competition and adopting international standards. It agreed in principle to do so, did a bit at the beginning, and then reversed direction. The bad habits returned.

 

The investment and banking community know this and they remember what happened, and they will view the latest 'administrative move' by the BOT in light of what happened before and what is happening elsewhere in Thailand.

 

Will there be another crisis? No idea. But 2007 will be an 'interesting year'â?Â

 

 

 

 

This post suggests that these crashes happen because Thailands markets werenâ??t reformed after the 1997 financial crisis and that the crash came about because Asian capital markets are not up to international standard.

 

This suggests that if the markets were up to international standards this would somehow be the nectar to cure all ailmentsâ?¦however this doesnâ??t prove to be the case.

 

Juxtapose then beside this the â??advancedâ? Western Capital markets. They are much better regulated than their Asian counterpartsâ?¦ Yet in all, crashes occur as frequently if not more so in these markets. Despite all the technology and trading instruments available (options , warrants, bonds, index trading, CFDâ??s , spreabetting) these markets suffer the same fate.

 

 

This begs the question why?...when the western countries with all the highly sophisticated and advanced capital markets suffer from crashes. This has been happening for 3 centuries. There is nothing new in the phenomenon.

 

The tulip bulb bubble in the 17th century was a bubble and then crash.

 

There was a speculative bubble in the rail industry in the 18th century.

Here is a list of 10% plus day crashes.

 

1929-bubble/crash

1931-bubble/crash

1932-bubble/crash

1987-bubble/crash

1997-bubble/crash

2001-bubble/crash

 

How can the experts keep getting it wrong? Why do they not learn from history? Just recently in 2001 there was yet another sustained decline in the markets.

 

Of course the reasons for a crash might be many and varied. Usually you will find the analyst experts become very smart after the event and can come up with all the reasons to explain what happened. Corporate, consumer credit debt etc.They didnt however seem to see the problems before the event.

 

 

In short, the whole approach is wrong. The financial houses, CNBC, Bloomberg, analysts in print media have the wrong approach.

 

Firstly this BUY and HOLD theory is touted all the time on these channels and in the newspapers and from all the stockbrokers that try to give buying tips. This is the first error.

 

Also the way the media report stories causes panic in itself. A crash is seen as a negative thing. We hear that stocks crashed today wiping billions of the value.

 

Is this actually true? I mean for every buyer there must be a seller.

 

In October 1987, around 1.2 billion shares were purchased on that day in the NYSExchange. Pretty impressiveâ?¦The next day the media reported a huge sell off. But for every share sold, someone had to buy. If it been reported massive share buying it would have been just as accurate. You see out of all the participants in the market everyone has a different definition of what is high and what is low. For some the 10,000 level in the Dow Jones maybe low and for another it maybe high. The stock market crash in 1987 then would have been an excellent buying opportunity for someone who thought the price was low.

Another important note to make is that it was in times of these stock market crashes that biggest price rising days also occurred.

In 1987, the biggest one day rise in share prices also occurred. However we donâ??t hear the media harping on about this.

 

Another example came when the Nikkei 225 reached its peak in 1989 and lost two thirds of its value over the next decade. It was in this period also that the Nikkei had experienced 7 out of 10 of its biggest ever gains. Including a 14% gain in 1990 at the height of the panic.

If the market was increasing someone must be buying amidst the panic. Who? The savvy investor who remained calm and his analysis led to a different of what was high and low than the others who were panicking.

 

I first mentioned this BUY and HOLD method.

 

I ll give some examples of the dangers of using this method. If you used bought and hold after 1929 you would have had to wait 25 years to recoup your money.

 

Imagine you had bought and held Enron, or any of the tech stocks on the Nasdaq at the end of 2001. You would have watched all your money disappear. Of course this is what the great majority of â??expertsâ? did.

 

Research has shown that in 2000, the year preceding what led to a 40% decline that 99.4% of brokers from the likes of Merril Lynch, Goldman Sachs gave clients buy recommendations. 99.4% recommended a BUY. Look what happened within the next 2 years. These are the experts remember.

 

A joke/story:

 

A technical analyst and a fundamental trader went out to diner. At one point a sharp knife dropped off the table and headed straight for the fundamental analysts foot. He let it stick into his foot.

The technical analyst asked him, â??why did you not try to stop catch itâ?Â

The fundamental analyst said, â??I was waiting for it to go back up againâ?Â

 

The more a position goes against a fundamental analyst the better an investment looks.

 

The other thing is that all the mania is about buy and hold. However its as easy to go sell a stock first( going short) and then buy second. This is another simple concept wall street can get its head around.

The great technical traders and trend following traders cleaned up in the down trend during the 2001 onwards. Why? Because they were short. If the trend is down why would you go against the trend? This is short selling.

 

The whole approach is wrong.

 

The problem with this buy and hold method is that the optimists have to be right everyday where as the pessimists only have to be right once.

 

The great mathematician Mandlebroit in his book the (mis)behaviour of markets clearly shows that current financial models used by the financial institutes are inadequate to deal with price action in markets. The models are based on the bell shaped curve model of standard deviation. However the world isn t linear and these model dont work.

 

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hmmmm, not sure what you are on about here, it will be interesting to see how your trading develops ; fwiw i dont think todays crash will be long lived at all , the REAL fundamentals are very supportive of both the baht and the Thai stockmarket they will both keep going up, in 6 months we will look back and see today as a tiny blip. BTW i think you are dead wrong in talking about a "buy and hold" agenda in the financial media, CNBC, Bloomberg etc; i would suggest the exact opposite is true their focus is entirely on trading and position taking and they seem to have lost touch with fundamentals. anyhow good luck, it takes all sorts to make a market!

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hmmmm, not sure what you are on about here, it will be interesting to see how your trading develops ; fwiw i dont think todays crash will be long lived at all , the REAL fundamentals are very supportive of both the baht and the Thai stockmarket they will both keep going up, in 6 months we will look back and see today as a tiny blip. BTW i think you are dead wrong in talking about a "buy and hold" agenda in the financial media, CNBC, Bloomberg etc; i would suggest the exact opposite is true their focus is entirely on trading and position taking and they seem to have lost touch with fundamentals. anyhow good luck, it takes all sorts to make a market!

 

 

Yes thats my point. Its a phoney panic. And it will be short lived. I did say that the biggest 1 day rises come almost right after a crash or in the midst of a crash.

 

You say the fundamentals are strong. They may be but the other point of what I am saying is that markets are rational and people are not. Greenspan said in 1996 that todays markets were a result of irrational exuberance and "infectiuos greed". Greed and fear aren't rational.

 

Maybe today will be a blip, but there will be another crash maybe not this year, but sooner or later.

 

I honestly dont believe anyone can learn much about traduing from bloomberg. For a start do they ask you how much money you have

 

They dont tell you

 

how much to risk?

how much do you buy?

where exactly to enter

where is your stoploss?

How much to risk in one trade?

where to exit?

money management?

 

Never been told this on Bloomberg.

 

BTW, my trading is going well.Double digit percentage returns in the last few months. I ve been trading and I am starting a blog, not trading.

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Here is a comment from the danish "Danske Bank".

 

December 20, 2006

Thomas Harr, Senior analyst

 

Thailand: Huge rebound â?? what next?

As we wrote yesterday (see Flash Comment â?? Thailand: Thailand capital controls follow-up: Total confusion,

19 December) the removing of the capital controls for equities late yesterday afternoon spurred a rebound

in Thai stocks in particular and Asian stocks in general. The Thai market is up by more than 10% hunting

the 15 % it lost yesterday. Nearly all Asian stocks are up during a night were the US markets were close to

unchanged. Also Asian currencies have gained slightly. In our view this is only a natural reaction to the removing

of the capital controls measures for equities. The capital control rules will now only apply for bonds,

property and other assets.

That said the steps are clearly, on a longer-term basis, a negative development for the Thai markets. The

development illustrates the authorities' limited ability to control the economy. Most surprisingly, apparently

Thailandâ??s central bank, Bank of Thailand, introduced the capital controls for equities without consulting the

stock market regulator or the stock exchange. And the only reason why the central bank removed the capital

controls measures for equities was because they had underestimated the effect on stocks. This is obviously

not a very convenient way to coordinate such crucial policy measures.

Of course the deeper rooted problem is that the TBH have been the strongest performing currency in Asia

whereas we still see limited currency appreciation in some of Thailandâ??s competitors, e.g. China and Malaysia.

And the central bank may have a point in arguing that they couldnâ??t lower the interest rates because of

still mild inflationary pressures. But what the authorities could have done is to sterilize a larger part of the

hot money inflow. The interest rates in Thailand are still relatively low which make the costs of sterilization

marginal. That would be a less costly way of limit the appreciation of the THB relatively to impose capital

controls.

What does all this turbulence imply for Thai and Asian markets going forward? As we argued yesterday we

think that the Thai authorities clearly have lost in terms of credibility. Hence, despite the lifting of capital

controls for stocks we forecast that the strong appreciation trend of the THB will slow down. However, we

see limited spill over effect to other Asian currencies as we donâ??t expect them to impose similar harsh

measures.

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