HEDGE FUND NEWS
@ Wed 29 August 2007 : GMT

FINTAG COMMENT

A day of contrasts. Some are happy and others are sad.

UK Private Equity executives are fit and healthy.

US Pirates (Blackstone, Carlyle) are in a shocking state of health.

Euro money supply is at a 25 year high - interest rates have to go up (so says Milton Friedman RIP)

Quants are shown to be nice people.

There is hope that Bear Stearns investors may get some money back.

Carlyle looks to hire a new PR agent - is it the next LTCM (major blowup) or Bear Stearns (incompetent)?

London is staring down the barrel of a shot gun.

Is Barcap the next Barings?

Hang Seng parties as it sees subprime being the American equivalent of bird flu.

The US markets are as volatile as Mrs FiNTAG when the waiter brings her coffee instead of tea at the Ivy.

Cheyne Capital, winner of the 2006 Euromoney best CDO house gets into a right old chapter 11 type mess and maybe forced to fire sale USD6 billion of toxic waste.

SHEEP NEWS

Corporate Bond Risk Rises on Concern Over Forced Asset Sales (bloomberg)

Cheyne admits to funding breach (ft)



Bear-ly Enough (nypost)

China's Wall of Money (hedge-fund-hotel)

Brother Hopes Missing Barclays Capital Trader Is Not Next Nick Leeson (hereisthecity)

Your SEC: Still Enabling Corruption (watchingthewatchers)

Deal activity seen to resume as the Hang Seng hits a new high (financeasia)

FoFs Seek To Benefit From Credit Turmoil (iialternatives)

Private Equity Activity In U.K. Remains Robust (finalternatives)

Blackstone Drops to Post-IPO Low on Debt Concerns (bloomberg)

Eurozone M3 money supply growth surged to 25-year high in July (finfacts)

EXCEL 2007 WAS TO BLAME

Quants Say Meltdown Was All Stat Arb (iialternatives)
This month's meltdown in quantitative hedge fund strategies, which are based on computer simulations, was limited to statistical arbitrage funds, which mine data to identify mis-priced stocks. This goes a long way toward explaining why the drawdowns earlier this month were so acute and correlated, say quant managers.

"It's interesting that people confuse the real quant approach with statistical data mining," said Dimitri Sogoloff, founder of Horton Point, a multi-strategy quantitative investment firm that was up 1% in July and is up so far in August. "It's easy to call yourself a quant fund if you're trying one tried and true model," he added. "The only problem is statistics tell us a lot about the past but not a lot about the future."

Alexei Chekhlov, a portfolio manager at New York quant firm Thor Asset Management, agreed. "A lot of the stat arb quants in some shape or form use clusterization, where they will be forming market neutral [books]," said Chekhlov. "To forecast the return they make projections onto some common factors, including growth factors that are pertinent to the equity markets."

The influx of capital via stat arb models in recent years has led to an increasingly crowded space with more money chasing fewer opportunities, Chekhlov said. "The factors dictate to them to be long and short the same names," he said. Compounding the issue was the so-called leveraged buyout premium, which inflates the price of certain stocks that are seen as buyout candidates, said Andrew Pernambuco of advisory firm Deniad. "When the leveraged buyout premium that's based in those stocks dries up, which is exactly what happened in July, the models say 'these things are cheaper, let's buy more,'" said Pernambuco. "On the short side you have people covering so it turns into a perfect storm."

Hedge funds affected by drawdowns in their stat arb strategies include AQR Capital Management, Barclays Global Investors, Black Mesa Capital, Highbridge Capital Management, Renaissance Technologies and Tykhe Capital, among others. Letters sent by the firms' management to investors appear to support these theories. All traded equities--predominantly U.S. equities--and nearly all were market-neutral, with management blaming market-wide de-leveraging for the meltdowns.

"This isn't about models, this is about a strategy getting too crowded [...] and then suffering when too many try to get out the same door," wrote AQR managing principal Cliff Asness. "We believe that the catalyst for the abrupt rise in volatility has been non-BGI quantitatively managed hedge funds de-levering their portfolios, i.e. liquidating their positions," wrote BGI's Minder Cheng. "We believe a very large (or several very large) trading entities, possibly very large hedge funds or investment banks or both, are liquidating massive market-neutral portfolios," said a letter to Black Mesa investors. Even Renaissance got into the act. "We have been caught in what appears to be a large wave of de-leveraging on the part of quantitative hedge funds," wrote Jim Simons. --Nathaniel Baker

PUT DOWN

GLG takes out options on its prime brokers (financialnews-us)
UK hedge fund manager GLG Partners has taken options to sell shares in investment banks Goldman Sachs, Morgan Stanley and Lehman Brothers, each of which provide GLG with prime broking services.

The firm acquired put options in the banks' shares, giving it the right to sell the shares at a pre-determined strike price, between April 1 and 30 June 30 2007, according to its 13-F filings with the Securities and Exchange Commission.

The filings show it has put options on 1.2 million shares in Goldman Sachs, or 0.3% of the bank's share capital; 1 million shares in Morgan Stanley, 0.1% of the shares outstanding; and 1.8m shares in Lehman Brothers, 0.3% of its shares. The purchases were made between April 1 and June 30.

Each of the banks has seen its share price fall since April 1.

The hedge fund has small positions in the shares of each bank. This is less than 100,000 shares in each case, far smaller than the shares covered by the put options.

The filing does not disclose the strike price, nor the premium paid for them, nor whether the options were in or out of the money as at the end of June. A put option would be in the money if the shares were trading below the strike price, since that would allow the option-holder to buy the shares at the market price and sell them for a profit at the higher, strike price.

GLG uses Goldman Sachs, Morgan Stanley and Lehman Brothers as its prime broker, alongside Deutsche Bank and UBS, according to a source close to the firm and the proxy statement of Freedom Acquisition Holdings, through which GLG is attempting to float on the US market via a reverse takeover.

Lehman Brothers also owns a 15.3% stake in GLG Partners, according to the proxy statement.

Hedge funds run by Lansdowne Partners, a UK firm, and Jana Partners, considered one of the world's most aggressive US hedge fund managers, have taken stakes in Goldman Sachs, according to SEC filings.

PIRATE

State Street hit by ABCP conduits exposure (ft)
State Street shares fell 4.3 per cent after it emerged the US financial services group has almost $29bn worth of exposure to so-called asset-backed commercial paper (ABCP) conduits among investment products at the centre of recent market turmoil.

A quarterly regulatory filing with the Securities and Exchange Commission puts State Street's holdings in the conduits at $28.81bn as of June 30 this year, up from $25.25bn at the end of last year.

State Street issued a statement about the conduit programme, which has been part of the company's business since 1992: “The credit quality of the assets is very good - primarily AAA/AA assets. The commercial paper continues to be sold daily. We continue to actively monitor market developments,” it said.

Asset-backed conduits are large programmes used by banks to fund lending to clients at cheaper rates than they would provide themselves, or to exploit the arbitrage potential between long-term investment rates and short-term funding rates.

The conduits are designed to spread risk among lenders financing mortgages and other investments. Packages of loans are financed by short-term debt raised in the commercial paper market, and companies such as State Street commit back-up financing for the deals.

SPINNING PIRATE

Carlyle forced to pump £100m into newly floated UK offshoot (guardian)
A Guernsey-based mortgage investment offshoot of the private equity firm Carlyle has been forced to seek a $200m (£100m) lifeline from its US parent as it struggles to meet commitments to its lenders.

Carlyle Capital Corporation, which has $22.7bn largely tied up in mortgage-backed securities, raised $322m only last month by floating on the Amsterdam-based Euronext exchange. Disgruntled clients have accused it of failing to keep them informed of events.

In an open letter to investors yesterday, John Stomber, chief executive, said a liquidity squeeze across markets was worse than the crisis caused by Long-Term Capital Management's demise in 1998.

Because its investments are worth less, the Channel Islands firm's lenders have demanded extra collateral. To meet these requirements, it has offloaded 5% of its assets for $900m - at a loss of up to $40m. Its Washington-based parent, Carlyle Group, has lent $100m in seven days to help it meet commitments.

Mr Stomber told investors in a letter: "We designed CCC's business model to withstand a liquidity event equal to the events of October 1998, when the demise of Long-Term Capital Management threatened the financial markets. We believe the recent liquidity disruption is significantly worse than the events of 1998."

Carlyle Capital joins a long list of institutions pummelled by the collapse of the US sub-prime mortgage industry. Kohlberg Kravis Roberts, Carlyle's private equity rival, has seen a similar liability develop at its offshoot KKR Financial Holdings.

Wall Street banks, including Goldman Sachs and Bear Stearns, have injected funds to prop up their hedge funds. Reports in the US yesterday suggested that another American bank, State Street, has seen the value of a bond fund collapse by 37% in three weeks.

Carlyle Capital's problems are likely to infuriate investors who bought shares at $19 in a flotation in July. By yesterday, the shares had fallen to $14.95. In his letter, Mr Stomber acknowledged that the firm's communication of its problems may have been "unsatisfactory and frustrating".

Prior to its public offering, Carlyle Capital insisted that it specialised in triple-A rated securities and was "as far away from sub-prime as you can possibly get".

OFF BALANCE SHEET

Banking on Trust (times)
Financial markets are generally good at responding to events, but lousy at reckoning with an uncertainty. The collapse of the US sub-prime mortgage market sent ripples into credit markets all over the world, because so many financial institutions had traded in these home loans, and other loans, without being overly concerned about the creditworthiness of the core borrower. The potential number of Americans who may default on their mortgages is at least known, and the potential cost to mortgage lenders, more than $100 billion, is significant. The continuing nervousness in the markets chiefly reflects uncertainty over who was left holding what in the elaborate games of pass-the-parcel-adding-wrapping-each-time that financiers have played avidly for years. We cannot really know how much to worry, until more institutions 'fess up to what is on their books.

The firms that have so far admitted to problems have done so only under duress. The suggestion that Barclays might be liable to pick up some of the tab has been made since one of its clients, a German bank called Sachsen LB, had to be bailed out after suffering heavy losses linked to the US sub-prime market. Barclays is denying that it has significant liabilities. But its involvement in setting up a special investment vehicle for Sachsen only three months before its collapse will concern people who expect such risky manoeuvres from hedge funds, but not from a high street institution. Like many banks, Barclays has something of a split personality: it is part buccaneering dealmaker and part retail bank serving the public. The onus is on it, along with other banks, to explain clearly what has been going on.

Banks have become increasingly sophisticated at parcelling up mortgages and other kinds of debt, and selling them on to a wide range of buyers as collaterised debt obligations (CDOs) and loan obligations (CLOs). By spreading the risk between pension funds, hedge funds, banks and insurers, this process has probably lessened the dangers to the financial system and to the “real” economy. But because this process is utterly opaque, it is impossible to gauge how weakened some companies are. The lack of transparency is not helped by so few people really understanding the complex financial instruments that have been involved: a CDO may sound confusing enough, but try getting your head around a CDO “squared”: the CDO of CDOs. The picture is complicated even further because so many banks have been playing similar games to the hedge funds and private equity houses they have been content to see reviled. Banks' proprietary trading desks have made bets on the market and their corporate finance departments have made huge fees out of raising extraordinary amounts of debt for private equity deals.

The impact on economic growth remains unclear, but we are all reaping material benefits from the industrial revolutions in India and China. US mortgage approvals are down but not vanished. The US and UK stock markets have bounced back from their mid-August low, but there will surely be shocks to come. Those who will suffer most will probably be the poorest Americans, who will find it harder to get credit.

There is no reason for investors to panic. Markets will remain volatile, and investors will stay twitchy, as long as there is uncertainty about the depth of indebtedness. It would be better to get the bad news over with. That means institutions being much more forthcoming about their activities than they have been so far.

ITS BAD

U.S. hedge fund losses seen adding up (reuters)
For hedge funds the last weeks of summer have been anything but lazy or dull as market turbulence left many of the industry's most prominent funds nursing losses this month, investors and analysts said.

As the end of August draws near, investors and analysts are bracing for the year's first monthly loss for the U.S. hedge fund industry as a whole, likely shriveling an otherwise strong year.

"This month looks pretty grim," said Christopher Holt, managing director of Holt Capital Advisors, which helps investors put money into hedge funds.

The loosely regulated investment portfolios often promise to make money in all market conditions, through techniques like borrowing money and betting on stocks falling, strategies that are off-limits for most mutual funds.

While hedge funds were once limited to wealthy individuals, pension funds and other institutional investors have become active investors as they seek to boost their returns.

Tudor Investment Corp.'s $8.5 billion (4.2 billion pound) Raptor Fund, which concentrates on buying and selling stocks and has boasted annual double-digit returns since its launch, lost 5.5 percent through last Friday, a person familiar with the fund's numbers said. Losses at the Tudor BVI Global Fund were even wider, standing at 6 percent through August 22, the person added.

A spokesman for the funds declined to comment.

A week ago D.E. Shaw's Composite International Fund was down 7 percent through August 17. A spokesman declined to comment. Cantillon Capital Management's Pacific Fund, launched several years ago by William von Mueffling, lost 9 percent through August 17, another person familiar with the numbers said.

Based on what hedge fund managers are telling investors and the numbers that some hedge funds have already reported to performance trackers, investors will see a lot of funds in the red this month.

"These days everyone is hearing managers complain that they are losing money on the long side and that they are losing money the short side. So the bottom line is that this is going to a pretty bad month," said one person who invests with many hedge funds but is not authorized to speak about them.

Through August 22, the average global hedge fund lost 3.73 percent, data from Hedge Fund Research Inc shows. In July the average hedge fund was flat and for the first seven months of the year it was up about 8 percent, industry trackers said.

Global macro funds that bet on interest rates, currencies and commodities were especially hard hit by unexpected movement in the Japanese yen. Hedge Fund Research data shows they were off 9.36 percent in the first three and half weeks of August.

While the turbulence began with what seemed like isolated problems for hedge funds that dealt with subprime mortgages and financial sector stocks, it soon spread to hundreds of funds that only traded in equities.

The turbulence caused investors to shun risk and flee to government debt issues, a move that often hurts equities. Many hedge funds also had to sell their most liquid holdings to cover margin calls as their lenders tightened conditions, investors said.

The moves affected even powerhouse funds like SAC Capital's multistrategy fund which was down 6 percent for the month through August 17 but was up 6 percent for the year to date through the same date, an investor said.

Citadel's Wellington fund was off 3 percent through August 22 and Lone Pine, which was about 20 percent higher during the first seven months of the year, was also off in August, a person who had seen their numbers said.

While some investors in hedge funds are confident that losses like these can be made up in the next weeks and months, they worry that some big investors, like pension funds, might review investments in the industry.

"When Goldman Sachs and Bear Stearns funds blow up, people may start stepping back," said Mike Hennessy, managing director at investment adviser Morgan Creek Capital Management.

BRICKS

Emerging market debt is the new safe haven (ft)
The world is turning upside down. Or so it might seem to some trying to cope with subprime woes, leveraged structured credit blow-ups, stutters in the commercial paper market and holders of illiquid AAA debt facing 20 per cent losses. To the emerging debt investor of 10 years ago, however, it all looks quite familiar, if from a distance and in a different context.

The ingredients are an underlying credit problem, a largely homogenous base of investors not fully aware of the credit risk when they bought and who try to rush for the exit all at the same time, and a high degree of leverage to exacerbate the rush and create contagion as "good" assets are sold to meet margin calls and cover losses on "bad" assets. Oh, and there were all along some people to say 'I told you so', and that the whole thing was very predictable given the copious quantities of greed and leverage applied.



Risk tends to be seen by many as binary: once it is deemed non-risky, risk is simply ignored. However, everything is risky. Hence my definition of an emerging market: all countries are risky; the emerging ones are those where this is priced in. People also talk of US Treasury yields as the risk free rates, which translated another way means that US Treasury risk is priced at zero, which it clearly is not (it has plenty of dollar, yield curve and mark-to market risks).

The riskiest high yield carry trade currencies are not those in emerging markets like Turkey or Brazil, but the developed market ones like Iceland and New Zealand - in part because investors are complacent, creating a larger imbalance than possible for an emerging market.

This lack of perception of risk in the Group of Seven leading nations today is different to the emerging markets of old, where risk may have been mispriced but was never priced near zero. Walter Wriston, the late former head of Citigroup, did say "a country does not go bankrupt", but for the most part nobody thought or thinks that buying emerging debt was risk free.

But then again the possibility of a subprime blow-up was flagged early last year as a risk to global markets. There are also many who have long understood that "long short" hedge funds and structures are dangerous. In extreme situations, the "hedge" often moves the "wrong" way. And excessive leverage can be dangerous whatever the underlying credit risk. So the fact that good credits can be infected by bad - financial contagion - should not be a surprise.

It was the leverage in the market and the homogeneity of the investor base, plus the vulnerability of countries to external shock, that encouraged the emerging market contagion of the past. Today the investor base is much more diverse, institutional, long only, unlevered, and significantly underweight with a buy-on-dip mentality.

The countries themselves are much less vulnerable to external shocks, often with better debt ratios than developed countries, stronger reserves, low inflation and strong current account and fiscal surpluses. If central banks' main risk is too big a concentration in US assets (including US Treasuries), then non-G7 sovereign debt is often a better risk reducer than other G7 sovereign debt. So emerging debt is the new safe haven. We only hope that there are enough people who do not believe me and sell emerging assets anyway, allowing us to buy paper more cheaply.

Another echo of emerging debt is that crisis can evaporate fairly quickly. As crisis mounts so myopia and fear take over. But hedge fund and investment bank losses may not impact underlying economic activity much, so long as there is a reduction in uncertainty over where and how large the subprime losses are.

This information problem may be resolved much faster than feared, possibly by banks volunteering full transparency of their assets and losses. Likewise the spill-over to emerging markets may reverse suddenly with or without early resolution of the G7's problems, starting with emerging currencies which would arguably rally more the worse the crisis as the dollar weakens.

Jerome Booth is head of research atAshmore Investment Management.

DO YOU BELIEVE A WORD THEY SAY?

Lehman, Bear Stearns, Citigroup Rating Cut by Merrill (bloomberg)
Lehman Brothers Holdings Inc., Bear Stearns Cos. and Citigroup Inc. were downgraded by Merrill Lynch & Co. stock analyst Guy Moszkowski because of looming losses on mortgage bonds and leveraged loans, as well as a slowdown in investment banking.

Moszkowski, the top-ranked U.S. brokerage analyst in Institutional Investor magazine's survey of money managers, said in a note to clients that New York-based Lehman and Bear Stearns will be hurt because of their dependence on debt markets. He cut earnings estimates for the two securities firms, as well as for Citigroup and JPMorgan Chase & Co., the largest banks based in New York. All four stocks fell in trading today.

The worldwide credit crunch triggered by rising defaults on U.S. subprime home loans has undermined some of Wall Street's biggest moneymakers, including mortgage securitization, leveraged finance, equity underwriting and mergers. While that has made profit estimates for next year ``increasingly unrealistic,'' Goldman Sachs Group Inc. and Morgan Stanley are ``best- positioned'' because they're more diversified, Moszkowski wrote.

``There has been no good place to hide during the month of August, which must surely go on record as one of the industry's most hair-raising ever,'' Moszkowski, who's based in New York, said in the report written with Patrick Davitt and entitled ``Differentiation Escalates.''

Merrill, which competes with the firms, now rates Lehman, Bear Stearns and Citigroup ``neutral,'' down from ``buy.''

Estimates Cut

Lehman, the fourth-largest U.S. securities firm, has dropped 30 percent this year and is on track for its biggest annual share decline. Bear Stearns, which ranks No. 5, has fallen 33 percent. Only online broker E*Trade Financial Corp. has declined more among the 12 stocks in the Amex Securities Broker/Dealer Index.

Moszkowski cut his estimate for Lehman's earnings in 2008 by 22 percent to $6.80 a share. That compares with an average estimate of $8.14 in a Bloomberg survey of 19 analysts. He expects the firm to earn $7.07 this year.

Bear Stearns will earn $12.07 a share in 2008, Moszkowski predicts, more than $2 below the average estimate of $14.53. Earnings this year will drop to $11.86 a share from the record $14.27 that Bear Stearns reported in 2006, he said.

Lehman shares declined $3.47, or 6 percent, to $54.28 in composite trading on the New York Stock Exchange. Bear Stearns fell $3.78, or 3.4 percent, to $108.42.

``Merrill's downgrade is a very good sign that these stocks will bounce from here,'' said James Barrow, president of Dallas- based Barrow Hanley Mewhinney & Strauss, the sixth-largest Bear Stearns shareholder. ``They've made many market-bottoms by putting stocks on sell lists.''

Loan Losses Loom

Profit at Citigroup and JPMorgan, the biggest decliners in the Dow Jones Industrial Average Index over the last three months, may erode because the banks probably will have to record losses on loans they made to finance leveraged buyouts, Moszkowski wrote. He expects most of the damage to be reflected in third-quarter results.

Moszkowski cut his estimate for Citigroup's 2008 earnings by 4.7 percent to $4.91 a share. He reduced his estimate for JPMorgan by 3.9 percent to $4.72 a share.

Citigroup, the biggest U.S. bank by assets, faces more risk than JPMorgan because of obligations related to securitization and high-interest lending, Moszkowski wrote. He said he didn't downgrade JPMorgan shares because they trade at a lower price-to- book ratio and management has more room to increase return on equity.

`Inevitable'

JPMorgan fell $1.31, or 3 percent, to $43.60. Citigroup dropped $1.65, or 3.5 percent, to $46.14.

``Slower debt, mergers and acquisitions and equity- underwriting businesses seem inevitable,'' Moszkowski said. ``Given their highly diverse business mixes and their significant geographical diversity of earnings, Goldman and Morgan Stanley are best positioned for the current environment, with the perhaps obvious caveat that it's not a great environment for anyone in this business.''

Goldman shares fell $7 to $170.95, extending their decline this year to 14 percent. Morgan Stanley, the best-performer among the five largest Wall Street brokerages so far this year, dropped $2.96 to $60.77. Shares of Moszkowski's firm, Merrill Lynch, sank $2.89 to $72.

Moszkowski said he doesn't expect Bear Stearns to sell itself, as some investors have speculated it might, based on a meeting ``a couple of weeks ago'' with the firm's president, Alan Schwartz. Bear Stearns shares have been under pressure since bad bets on subprime mortgages sent two of its hedge funds into a tailspin in June. The firm closed the funds after granting $1.6 billion in emergency funding and has since put them in bankruptcy protection.

On Aug. 5, Bear Stearns ousted Co-President Warren Spector, who ran fixed income and asset management. The firm's shares reached a two-year low the next day.

``The embarrassments of the past several months and the change in senior management are likely to have some chilling effect on business beyond just the beleaguered asset management area,'' Moszkowski wrote.

OCTOBER 17

Ten-year cycle of market crashes? (thestar)
The market crash in 2007

The recent heavy sell-down on the bond and stock markets caught a lot of retail and institutional investors by surprise. What appeared to be a haven in investment like the bond market was still subject to panic selling from institutional investors.

We believe the crash in the bond market was mainly due to the withdrawal of some foreign funds. As a result of tight liquidity, unwinding of yen carry trade and potential high losses in some hedge funds, some foreign funds might have been forced to withdraw their investments from the Asia-Pacific market.

The plummet in our stock market was mainly due to the fear of sharp drops in the US, Hong Kong, Singapore, South Korea and Japan markets.

Even though our banking institutions were not really affected by the US subprime issues, the international contagion and fear of more crashes, margin calls and panic selling from retailers caused heavy losses on Bursa Malaysia.

Nevertheless, the magnitude of our losses was far less than those in the regional markets.

The market crash in 1987/8

The market crash in October 1987 was partly attributed to strong market performance of most markets during the first nine months of the year. For example, the US market experienced more than 30% increase during the nine-month period.

However, from Oct 12 to 16, the Dow Index tumbled by 9.5%. On Black Monday of Oct 19, it plunged 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 by 12.4% on Black Monday. As a result of the overnight crash in US, the KLCI plunged another 15.7% the next trading day.

The market crash in 1997/8

The Asian stock market crash of 1997/98 began with a currency crisis in July in Thailand and quickly spread to neighbouring nations. One by one, overheated markets crashed in Thailand, Indonesia, Malaysia, the Philippines, Hong Kong, Singapore, Taiwan and South Korea. This was mostly due to the rapid industrialisation in these countries.

The US market was affected by the turmoil in Asia. Its share prices began to collapse at the beginning of October 1997. On Oct 27, the Dow Index tumbled by 554 points, or 7.2%, within a day. However, it recovered by recording a rise of 337 points the next day.

In Malaysia, the KLCI tumbled from 1,231 points in the beginning of 1997 to the low of 262 on Sept 1, 1998, representing a total percentage drop of 78.7%.

Comparing the three market crashes, the KLCI suffered its biggest daily drop of 21.5% on Sept 8, 1998. The crashes in 1997/8 and 1987/8 were also far more severe than our recent market crash.

We are not too sure whether we have seen the worst of the crash in 2007. However, the sell-down has caused a big disruption in our uptrend momentum. It appears to be quite difficult for the KLCI to touch the recent peak of 1,392 again.

Any market rebounds may prompt fund managers to continue offloading their equity exposure. Most of big losses in 1997/8 and 1987/8 happened in October.

As we can only know the actual exposure of the subprime issues for most of the US financial institutions when they report their third quarter results in early October, we are expecting some market volatility in that month.