Emails

(Copy of emails between two friends of mine - on 22 January 2008.)

Dear Warren,

The index closed below 22000 this morning. If Branicke announces some drastic strategies tonight e.g. immediate interest cut >0.75%, there will be a rebound tomorrow. Otherwise, the HSI will continue to fall tomorrow. The latter is in fact a good thing because rapid and deep correction will usually finish early. If you are not holding many stocks and your aim is long-term investment, I think you can start considering the following stocks if their prices fall further by another 5-10% e.g. 2628 (current price $28), 941 (current $110), 1800 (current $17.46), and 5 (current price $106). For myself, I have enough long-term investment from my xyz retirement funds/stocks. Now I am holding a lot of cash for short-term technical rebound - remember my "10%-RULE" if you want to play short term game.

What do you think?

GS

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Dear GS,

Bull market is dead.

However this will be a relatively gentle bear market so the magnitude of drop won’t be more than 50% from the peak. I guess a reasonable trough would be around 15800-17380 (~45-50% drop).

It doesn’t mean that HSBC will drop at the same magnitude to $75. If that’s really the case, it will be traded at PE of 7, PB 0.9 and dividend rate of 7.5% (similar to a cheap industry stock). I will beg/rob/steal/lend so that I can buy more HSBC shares. On the other hand, for those hottest stocks in hottest industries (Chinese insurance, property developer, retail), their share prices will vaporize by 60-80%. To me, the current prices for these companies are still exceedingly high.

10% drop from maximal gain usually means a few % cut loss from the capital because it is very difficult to gain 11% by speculation in bear market. That’s why most short term speculators will disappear at the trough of bear market when they become hopeless or cashless after repeated cut loss.

In fact the most difficult question is: how long will the bear market last? I have no idea but Joseph Yam (Monetary Authority CE) and Steven Green (HSBC Chairman) may give quite accurate estimation. Previous statistics suggests duration of 1.5 year and trough will be reached in 12 months time.

Warren