Is The Party Over?

Abrupt end to sizzling market rally serves as wake-up call for investors
By Goh Eng Yeow,
Source: Straits Times Interactive

THE recent super bull run by penny stocks has been nothing short of spectacular - despite Wednesday's slide which was followed by a rebound yesterday.
In just three months, stocks costing less than $1 have shot up in value by half.
This week alone, the more fancied counters have registered double-digit percentage gains daily - barely raising an eyebrow.
Buying into the right penny stocks at just the right moment seems to have become a sure-fire way to make quick money.

On Wednesday, trading became so frenzied that one counter - Ban Joo - attracted a volume of 581 million shares. This would have been the equivalent of a day's trading volume on the entire Singapore Exchange only two years ago.

For many observers, it begs the question as to whether the rally has become so fevered that it amounts to irrational exuberance - a term coined by former United States Federal Reserve chairman Alan Greenspan to describe a market that has lost its head.

Ever higher volumes and greater volatility - all these can lead to a build-up of a stock market bubble, and that may be what we have been witnessing in the penny-stock buying frenzy in recent weeks.

One brokerage's head of risk management noted that many of the punters did not even know the type of companies they were buying into when they snapped up penny stocks.
Many of these companies are financially-strapped firms whose businesses have been bled dry by years of losses.
The only reason why there is such hot demand for their stocks is that these companies have become attractive takeover targets for businessmen who want to inject assets or businesses into them.

But even this line of reasoning may not hold much water.

The run-up in prices of some penny counters has been so sharp that it defies any logical reason for the lofty valuations, even after throwing in the valuations of the businesses which may be injected into these companies.

Take Jade Technologies, for example. The company is worth $395 million, based on its stock's closing price of 46.5 cents yesterday.
In its latest full-year results, Jade reported a loss of $1.4 million on a revenue of only $39.2 million. The only attraction it holds for any new owner is its listed status, which may be worth up to $15 million. This barely justifies the price investors now pay for its shares.
But Jade is hardly the exception. Other penny stocks with similar characteristics include Rowsley, Ban Joo and Equation - which are worth more than $200 million each - even though they have businesses not worth shouting about.

And for all the exuberance associated with the giddy run-up in penny stocks, seasoned investors have been getting out of them in droves.
This may signal their discomfort with a market that relies not so much on the fundamentals supporting a company's share price, but rather on rotational plays among certain stocks taking their turns to be in the spotlight.

Businessman Oei Hong Leong, an investor with a history of savvy timing, has recently liquidated his stakes in small-capitalised stocks.
In the past two weeks, he has sold his entire 29.98 per cent stake in Sesdaq-listed China Healthcare, which he has held since 2005. He has also offloaded his 13.2 per cent share in Super Coffeemix Manufacturing, which he has held since 2003.
Unlike the small-time punters who get in and out of stocks daily in the hope of making a fast buck, Mr Oei has been known to hold his investments for years.
In recent years, his picks have included sizeable stakes in NatSteel, Haw Par, BIL and United Industrial Corp.
So the disposal of a stake in a listed company is not a decision he would have taken lightly.
Mr Oei's investing philosophy, similar to that of legendary US investor Warren Buffet, (aC: Serious? Is he really that good?) is to look for neglected companies whose values are waiting to be unlocked.

Besides share sales by savvy investors, there has also been a slew of data showing an increase in foreign fund outflows from Singapore-listed stocks recently.
A Citigroup report on Monday showed that the weekly outflows had doubled to US$7.9 million (S$12 million) last week, from only US$3.9 million the week before.
Admittedly, this is still a small amount, compared with the US$1.1 billion that foreigners had poured into the Singapore stock market since the start of the year.
But what worries market experts is the likelihood of the outflows increasing over the coming months.

And that raises the spectre of large numbers of badly burnt punters if the rally screeches to a halt.
The risks which could stall the market, said one UOB Kay Hian report, could come from anywhere. The brokerage has advised investors to exercise caution when punting heavily on speculative penny stocks.
On Wednesday, punters got a foretaste of what could happen when the runaway penny stock rally was abruptly stopped in its tracks.
Some Sesdaq counters tumbled by as much as 25 per cent from intra-day highs, in a knee-jerk selldown as the market reacted to a government move to raise development charges for new building projects.

The only redeeming factor so far is that brokerages are moving gradually to protect both their clients' interests and their own by imposing trading curbs on some of the most heavily traded speculative counters.

Yesterday, UOB Kay Hian imposed trading curbs on Jade, Ban Joo and Ocuclus, while Kim Eng Securities slapped similar controls on Alantac.
But requiring clients to put up cash upfront for a few stocks may lull many into believing that adequate measures are in place to stop a market bubble from forming.
There is no cause for panic, but retail investors would be well advised to do their homework before jumping in to buy the next hot stock.

This could save them from a scalding experience if market sentiment takes a sudden dive. (aC: I suspect there could be 2 more major corrections which would serve as a prelude to the impending bear runs. I would have expected one of the major correction to have happened today {25 July 07}, given Wall street's 226 points decline, but nothing of that sort happened; The Singapore market's index was rather muted. I think the major correction will happen today or tomorrow if Wall street remains flat or continues to decline even by a little today)