Lessons from the 1987 market crash

This article is taken from the Star, Business section, dated January 30, 2008. The word that you should take note on in this article is “Cash is KING” when the market is down. During recession when people cant meet their repayment, bank will just put the house to auction and that is the time when you have money you will be able to buy a house at a cheaper rate. As share prices goes down, that is the time you are able to find cheap shares around. Have you heard of YTL Corp before ? How did YTL Corp manage to acquire Lot 10, Star Hill and JW Marriott during recession period ? When other company was doing badly in their business during recession period, that was the time when the company make use of the cash they have on hand to acquire property at a cheaper price. Most people sees opportunity when the economy is good. But when you have cash on hand during recession, it will be a better opportunity compare to the good times.

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TAIPING GROUP: YTL to buy properties from ailing firm
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Construction and power group YTL Corporation may emerge as
the “saviour” of financially troubled property group
Taiping Consolidated when it agreed to buy properties and
possibly participate in Taiping Consolidated’s
restructuring scheme yesterday.

YTL Corp yesterday said it had entered into a sales and
purchase agreement to buy three prime properties — two
shopping malls known as Lot 10 and Star Hill and the five-
star JW Marriott Hotel — from Taiping for 323 million
Malaysian ringgit (S$137.7 million) in cash.

In addition, YTL Corp managing director Francis Yeoh Sock
Ping said the group is interested in taking a strategic
stake in Taiping “as a vehicle for future business
development”. However, he said the purchase of a stake in
Taiping is subject to the completion of a due diligence and
a viable scheme approved by all interested parties of
Taiping.

Taiping Consolidated secured a six-month court protection
on July 30 and is currently trying to put in place a scheme
of arrangement with its creditors. Analysts estimate
Taiping’s debt at some RM600 million, of which RM370
million are short-term.

A separate statement by Taiping Consolidated to the Kuala
Lumpur Stock Exchange yesterday said the sale of the three
properties is the first stage of its restructuring scheme.
The second stage will see a capital reduction and
subsequent injection of fresh capital into the company,
including from YTL should it agree to take a stake in
Taiping.

Source : http://bankrupt.com/TCRAP_Public/981022.MBX

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Written by: OOI KOK HWA

Investors need to be cautions and hold more cash because cash is king when the market is down.ARE we heading for a bigger market crash like the one in 1987 or have we seen the worst of the market corrections?The recent global stock market crashes, especially the big sell-off on the Hong Kong market, prompted investors to recall the big market crash in 1987. In this article, we will look into the causes of the US crash.

In 1987, the rapid technological progress and reduction of entry costs to the market caused a real expansion and entry of many new investors into the US stock market.

As a result, the crash in 1987 was partly attributed to over-inflated prices generated by a speculative bubble during the first nine months. The US market experienced more than 30% gains during the period. At the peak, the average price-earnings ratio was about 30 times.

G. William Schwert, in his research titled Stock Market Crash of October 1987, postulated that the various strategies involving stocks with options or futures contracts on stock indices (called “programme trading”) led to an unusual level of selling volume on Oct 19, 1987.

As a result, the specialists were unable to find enough buyers to meet the demand of sellers. The lack of liquidity caused further big drop in prices. Traders were caught by surprise by the speed of the price drop.

On Oct 14, 1987, the US reported the largest trade deficit. To a lot of investors, it was hard to understand how the announcement of its largest trade deficit could cause such a big sell-off in stocks. One of the possible reasons was the potential reversal of the trade deficit. Lowering trade deficit might imply lower capital inflows, which would cause lower stock prices.

The largest fall in the US stock market happened on the Black Monday of Oct 19, 1987. The Dow Jones Industrial Average tumbled 22.6%, or 508 points, within a day. It was the largest single fall since 1929, in both absolute and percentage terms.

In Malaysia, the KL Composite Index (KLCI) tumbled 12.4%. The main reason behind the fall was on the night of Oct 18, a soldier ran amok with an M16 in Kuala Lumpur. This triggered a panic. Then, as a result of the overnight crash in the US, the KLCI plunged another 15.7% the following day.

Could we have predicted the recent market crash?

A lot of investors were unable to escape the recent crashes. Retailers did not know how to deal with their money after selling stocks. Furthermore, most of them would not sell anything as they could not spot the exact top of the bull market and sell out in time.

Harry D. Schultz, in his book titled Bear Market Investing Strategies, highlighted that there were signs of the ending of a bull market or the beginning of a bear market.

According to him, one of the most important indicators was investor sentiment remained bullish while the economic fundamentals started to get worse. Investors ignored all the negative aspects of the companies’ fundamentals.

Besides, business leaders, brokers and advisory services were bullish as well. They would view any downturn in the stock market as a temporary setback and healthy correction.

In addition, the aggressive rate reductions by the US Federal Reserve might confirm that the US economy was heading towards a recession.

Besides, the stock market might be trading at high volume but not much change in prices. Normally, this implied that long-term investors were selling stocks while short-term traders were supporting the market.

The US bear markets have been as short as two months and as long as five years, the average being about 18 months. Hence, we need to be cautious and hold more cash because cash is king during the down market.

Source : http://biz.thestar.com.my/news/story.asp?file=/2008/1/30/business/20165550&sec=business