Is FBMKLCI Crashing and can Najibnomics Prevent it?

It is finally happening and the FBMKLCI is giving way after more than a month of support by local pension and institutional funds. As we have mentioned earlier in our article (Malaysia's Economy and Stock Market Disconnect) dated on 2nd June where you need a strong economy to support a strong stock market. When fundamentals are lacking market manipulation will have to come to an end sooner or later. As a matter of fact the sooner the better so that the market will rid itself of excesses and begin another cycle of growth. In contrary it seems like every country in the world is busy trying to outdo each other in propping up their economies with cash injection or so-called Quantatitive Easing. But such a move is wrong because the longer they delay the eventuality (market correction) the worse will be the outcome.

Why Market Manipulation does not Work?

What they are doing is practically misallocating resources from the good to the bad sector of the economy by manipulating everything such as Libor, interest rates, Bonds, Stocks, precious metals, currency, Oil, HFTs, Options, Swaps, Forwards and any damn thing they can get their hands into. Propping up the stock market does not produce any ‘real economic benefit’ as in raising productivity or efficiency of the economy. Those are just ‘paper gains’ and does not contribute to the wellbeing of us in the long run. By propping up the stock market will also eventually leads to the formation of other bubbles like the real estate and consumer credit due to the artificially suppression of interest rate and the flood of cheap money into the economy. When the stock market crashes it also will bring down these sectors with it and the after effect will be disastrous.

Artificially propping up markets will eventually fail because there are only that many suckers that you can persuade to invest in the market. When everybody is ‘fully invested’ then that’s where the problem comes in because there is no further buying and eventually the Government have to step in to pick up the lag.

Najibnomics

As in Malaysia, Najib’s Government effort to support the stock market will have to come to an end because in order to support the market the government will have to buy in everyday in order to maintain the index. Eventually our Government through its agencies will end up being the majority shareholder of every single 30 index linked counters. They have to keep buying when investors sell if not the index will go down. If they don’t stop this insanity then in the end our ‘Government is the Market’ due to its controlling interest in the index linked counters. That is the problem facing all Governments around the world at the moment buying up all everything but unable to unload. As a result they ended up being the biggest owners of real estates, equities, financial derivatives and all the financial instruments that they manipulated. Finally all these investments will be to be ‘deleveraged’ and now this seems to be happening to financial markets around the world.

How other markets fared?

To see the extent of the deleveraging we present to you a few selected markets in Asia and Europe below.

FTSE  London

Hang Seng

Straits Times Singapore

Shanghai China

And KLSE Malaysia

Folks, our index hardly moved !!!

The New Normal

For the past one week the daily trading volatility of the FBMKLCI has increase quite substantially. What normally was a 3-5 points daily trading range turned into something much more volatile with trading range go up to 5-10 points. Now we are entering a stage where losses will mount and investors will start to get emotional. Once we passed this stage, investors will start to panic and will dump their stocks and that is when you will see increase volatility in KLSE. Daily fluctuations of 20-30 points in the FBMKLCI will be normal events. Further on such volatility will be the ‘new normal’ of the KLSE trading as what is happening in foreign markets now.

Welcome to reality!! If you have noticed for the past month since the elections on May 5th our market has somehow been shielded from the carnage in the Global Stock Markets correction. Our Plunge Protection Team (PPP) has been working overtime to ensure there is no panic in our market by limiting the market drop to single digits. Unfortunately we can say at that this moment is that it has come to an end and from now onwards we are very much on our own. They (PPP) are not going to support the market any more knowing too well that everybody is going to dump their stocks in the market.

The New Support

In summary we reckoned that the support level at 1712 points that we have indicated several times in our previous articles will not hold. With the current carnage in the stock markets around the world and our market’s decline still at its infancy, we have downgraded the support level to 1664 points. This is because the earlier low at 1743 have been breached as indicated by the following chart.

Happy Trading !