From: John Conover <john@email.johncon.com>
Subject: forwarded message from Spirit Of Truth Page
Date: Sat, 10 Jan 1998 17:24:54 -0800
The attached is more Domesday prognostications from the macroeconomics
community. The attempt utilized is to establish some sense of
credibility for such prognostications through a consensus of media
reports. Not being daunted by the selective democratic polling of a
the members of a profession which is founded on inductive reasoning,
(ie., statistics,) I worked my way through the numbers:
Chances of 1998 being a "bear" year? 62%, (and a 38% chance of
being a "bull" year.)
Chances of January, 1998 being a "bear" month? 41%, (and a 59%
chance of being a "bull" month.)
Chances of next week, (starting 12 January,) being a bear week?
29%, (and a 71% chance of being a "bull" week.)
Chances that the day of Monday, 12 January, will be a "bear" day?
45%, (and a 55% chance of being a "bull" day.)
Chances that the day of Monday, 12 January-if it is a "bear"
day-of the equity markets dropping at least 6%? 0.13%. (Note that
such small probabilities do not mean something will not
happen-only that there exists a remote possibility that it will. A
better way of looking at such things is that we would expect a 6%
daily drop in the equity markets every 769 business days, or about
once every 3 years.)
Although not cause for unbridled optimism, the probabilities certainly
do not justify cynical pessimism, either.
Is a US equity market disaster possible? Yes it is, (that's life.) Is
it probable? There is a little less than a 0.0001% chance that the US
equity markets will drop 33% in the month of January, 1998, (or, very
roughly, about the same chances of perishing in a commercial aviation
disaster,) which is about the average drop in the Asian Tiger's equity
markets for the month of December, 1997. (Note that such small
probabilities do not mean something won't happen-only that there
exists a remote possibility that it will.)
How about the probability of 1998 ushering in a sustained bear market
lasting at least 25 years, (as from 1930-1955, ie., a great depression
starting again?) 20%. (20% sounds almost eminent, huh? Well, not
exactly. There is also a 27% chance that the "bull" market that
started in 1984 will continue through 1998. There is, also, an 11%
chance that the current very "bull" market, that started in 1992 will
continue through 1998.)
John
------- start of forwarded message (RFC 934 encapsulation) -------
Message-ID: <17EDA916FS86.JPA94001@UConnVM.UConn.Edu>
From: Spirit Of Truth Page
Subject: BLACK MONDAY?
Date: Sat, 10 Jan 98 10:20:31 EST
BLACK MONDAY?
J. Adams
January 9th, 1998
The Spirit Of Truth Page
http://www.ucc.uconn.edu/~jpa94001/
------------------------
"Current financial excesses made the boom
which led to the 1929 Wall Street crash
'look like a tea break in a nunnery'".
The Reuter European Business Report
November 11, 1993, Thursday
"Stocks Set To Crash As Mania Grips, Says Dr. Doom"
------------------------
"It seems likely that the derivatives market is massively
undercapitalised and it can do this because it is trading
off the implicit guarantee of world governments. We, the
taxpayers who will have to pay when things go wrong, are
crazy to allow this."
From: "This is an option we cannot afford to bank on"
By Andrew Smithers, Evening Standard (London), April 07, 1997
------------------------
The DJIA plunged 222 points today to below critical support
at the 50-day and 200-day moving averages for the index.
http://www.timely.com/cgi-bin/timelyindexs?chart=1&ticker=$indu&d=1
For this first full week of trading in 1998, the Dow fell more
than 5 percent following a test of the psychologically important
8000 mark on Monday.
(Notably, a sell signal was generated today according to the 1%
rule- i.e., the DJIA fell more than one percent on rising volume
from the previous trading day; NYSE volume today was the third
heaviest ever.)
The accelerating decline in equity prices and technical
breakdown indicates that the U.S. stock market and stock markets
around the world are crashing. Indeed, there is a possibility
that when trading resumes on Monday, history will be made by
another Black Monday like occurred on October 27th, 1997 and
October 19th, 1987. That is, a single-day collapse of 10% or
more in equity values could soon occur- possibly on Monday,
January 12th, 1998 (although circuit breakers could constrain any
potential single-day crash).
As explained in my previous post, one should note that,
according to the "January Effect", 1998 will be a bear market
year for U.S. stocks. The first five trading days of 1998 were
down. Historically, this means there is a 90 percent chance that
1998 will be a down year for stocks.
Another indication that a bear market is starting comes from
Dow Theory. According to Dow Theory, a bear market is signalled
when the Dow Jones Industrials, Transports and Utilities peak at
different times (there are diverging tops) and then each of the
averages confirms a stock market reversal by reaching lower lows
than had occurred in previous secondary corrections.
As can be seen in recent charts of the Dow Industrials,
Transports and Utilities, the three Dow Averages reached
diverging tops during the last six months. The Industrials
topped in August, the Transports topped in October and the
Utilities peaked last week.
http://www.timely.com/cgi-bin/timelyindexs?chart=1&ticker=$indu&d=1
http://www.timely.com/cgi-bin/timelyindexs?chart=1&ticker=$djt&d=1
http://www.timely.com/cgi-bin/timelyindexs?chart=1&ticker=$dju&d=1
For an official Dow Theory bear market signal, the Dow
Industrials and Transports would need to close below their recent
secondary lows of 7600 and 2865, respectively. An all-out bear
market will be indicated when the Dow Industrials, Transports and
Utilities drop below 7000, 2865 and 237, respectively.
One should note that when the DJIA had its largest single-day
point loss on Monday, October 27th, 1997, it occurred as the
Industrials fell below the key 7600 mark such that the first half
of a Dow Theory bear market signal occurred. When 7600 was
breached, panic selling ensued and the DJIA ended up down 554
points on the day. Fortunately, the second half of a bear market
signal never occurred last October as the Transports stayed above
2865.
Today the DJIA closed below 7600 once again. This means the
first half of a Dow Theory sell signal has occurred and leaves
open the possibility that, come Monday when trading resumes on
Wall Street, panic selling will ensue like occurred after the
DJIA dropped below 7600 on October 27th of last year. (Strangely
enough, negative developments in overseas market like an Asian
financial meltdown may occur for Monday to seemingly make this
prove true. Historically, one notices that negative events will
occur to fit the bear market rather than a bear market emerging
in response to negative events.)
Of equal importance, the Dow Jones Transportation Average
closed at 3200 today. Should the Transports fall below 3000, and
particularly should the Average close below 2865, then an offical
Dow Theory bear market signal will occur (given the Industrials
are below 7600). In the event of such a signal, extreme panic
selling would be probable as the first major bear market since
the 20% decline in 1990 will be signalled. This could occur as
soon as Monday.
A financial meltdown including an international banking panic
would come as no surprise next week. Technically, as explained
above, there are developing indications that a bear market is
getting underway in U.S. stocks as 1998 begins. Furthermore,
Asia's worsening economic and financial collapse is starting to
become an acute crisis and spread around the world. Should these
two factors combine into a global stock market crash here than,
with the magic of derivatives, the world banking system might
collapse.
In recent years banks around the world have been reaping
enormous profits in creating and trading derivatives and today
there is a staggering $50 trillion in the derivatives markets,
nearly twice world gross domestic product. A loss of 2% of the
contract value of global derivatives would be roughly equal to
the total capital of all the world's banks. This is probably the
most perilous situation in world banking history. (See the
Evening Standard article below dubbed: "This is an option we
cannot afford to bank on".)
In the event of a major worldwide stock market crash, say of
20 to 70 percent of equity values in a matter of days or weeks
(already the case for some Asian stock markets), banks around the
world could fail literally overnight. Why? Because banks are
the main backers of derivatives. Since derivatives are
effectively insurance against large, unexpected market movements,
in the event of historically unprecedented movements, the
insurers might find themselves unable to cover the insured. In
other words, banks have effectively become the insurance
companies used by financial instutions and investors to hedge
against financial earthquakes. Unfortunately, however, banks
don't keep very much in reserves for paying-off those insured by
derivatives in the event of earthquakes. As long as financial
quakes are relatively minor, there are no problems and insurance
policies are settled smoothly. However, in the event of a global
financial "Big One", banks that have become involved with
derivatives will likely not have enough in reserves to pay off
oustanding derivatives contracts- rightful insurance claims for
the financial earthquake that unexpectedly took place.
Accordingly, many banks will go broke. Thus, a world banking
crisis of unprecendented magnitude could go along with a major
international stock market crash, something that might occur as
soon as next week.
Should a world banking crisis ensue like is outlined above,
it will be bitterly ironic to the field of so-called economic
"science". Last year the Nobel Prize in economics was awarded to
the economists that developed the mathematical and theoretical
framework for derivatives markets. In retrospect, this might
prove as foolish a choice for an award in economics as it is in
that derivatives, rather than being a source of financial and
economic progress, could end up being the source of world
financial and economic ruin.
For more information, see-
http://www.ucc.uconn.edu/~jpa94001/social.html
- -----------------------------------------------------------------
"Old Wall St. rule of thumb may bolster the bears"
Wednesday, January 7th
By Huw Jones
NEW YORK, Jan 7 (Reuters) - An old Wall Street rule of thumb --
that the first five trading days of January determine the Dow's
fate for the rest of the year -- may well back the bears this
time around.
Seasoned Streeters, however, say the rule has about as much
credibility as that other forecaster favorite, the Superbowl
theory.
That one goes that if one of the original National Football
League teams wins the final later this month, a bull market is in
store for stocks.
So far, the bulls are on tenterhooks.
Thursday will be the fifth trading day of the year, and dealers
are looking to see if the Dow Industrial Average index ends above
or below its close at 7908.25 on December 31, 1997.
Richard Cripps, chief market strategist at Legg Mason Wood Walker
said the rule of thumb has been 89 percent accurate since 1950.
``Is it taken seriously? I would say technicians take it more
seriously than the fundamentalists think they should,'' Cripps
said.
``Short-term, the very trading oriented might react to it to some
extent,'' Cripps added.
At the close of trade on Tuesday, the Dow was up just two points
from the end-of-year close. The index was down 74 points by noon
on Wednesday.
``It's very important that the market starts to dig in,'' said
Joseph Barthel, chief investment strategist at Fahnestock & Co.
``Today and tomorrow will answer the question as to whether or
not we will have a good 1998 using that indicator. Wall Street
will make hay of this,'' Barthel said.
Traditionally, fresh, start-of-year cash flows boost stocks in
January.
``The rule does not always work, but it does give us a clue to
what the month of January might do, and so far we are not doing
too well,'' said Harry Laubscher, market analyst at Tucker
Anthony.
``If we are down for the first five days, it would suggest to me
that we might be in for a troublesome month,'' Laubscher added.
``Most people don't trade off it, but some people do, though most
people do pay attention to it. It's probably more valid than that
silly Superbowl theory.''
- -----------------------------------------------------------------
"On Wall Street, all signs point down"
NEW YORK (January 9, 1998 5:07 p.m. EST) -- Stocks plunged
Friday, with the Dow industrials falling as much as 275 points as
investors worried that the continuing Asian economic crisis would
eventually hurt economies around the world.
The Dow Jones industrial average finished with a loss of 222.20
points, or 2.85 percent, to 7,580.42 after a modest recovery in
the final half-hour. Trading was heavy in bringing the Dow's loss
so far this year to 328 points.
It was the Dow's worst day since its 554-point drop Oct. 27 and
its fourth-worst point drop ever.
Broad market indicators also were sharply lower, with the Nasdaq
Stock Market suffering its second-worst point drop.
Stocks fell after another decline in financial markets across
Asia. Investors fear that continued problems in Asia will
eventually hurt global economies and erode corporate profits.
A key stock market index in the Philippines tumbled more than 8
percent today to its lowest level in almost five years, while
prices in Singapore, Malaysia, Indonesia, Hong Kong, Thailand,
and South Korea also finished lower.
While Indonesian markets recovered Friday, there were still
worries about the country's outlook. On Friday, Indonesia's main
stock index fell only 1.2 percent after a devastating 12 percent
plunge Thursday. The Indonesian currency rebounded more than 20
percent from Thursday's decline after President Suharto promised
to implement sweeping economic reform under an International
Monetary Fund bailout plan.
But the latest turmoil in parts of Asia failed to rattle several
other key markets. Tokyo's Nikkei stock average fell just 0.2
percent, Frankfurt's DAX index fell 2.5 percent and London's FT-
SE 100 fell 1.9 percent percent.
Despite news of booming employment from the Labor Department this
morning, the report also showed only a slight increase in hourly
wages. The continued news of low inflation gave the stock market
some support in early trading.
- -----------------------------------------------------------------
"Last-ditch bid to rescue sinking Peregrine bank"
Saturday January 10 1998
BY DEBORAH ORR
Desperate efforts were being made last night to save Peregrine
Investments Holdings, Asia's largest independent investment bank,
after the collapse of a rescue led by Zurich Group.
Three senior executives - chairman Philip Tose, managing director
Francis Leung Pak-to and head of equities Andrew Jamieson - were
making last-ditch attempts to find local, European or United
States investors to inject funds into the troubled bank.
Their efforts came at the end of a dramatic day as long-standing
rumours about the bank's financial difficulties intensified.
Employees, just three weeks away from receiving their annual
bonuses, were told of the collapse of the rescue talks at 5 pm,
although the gravity of the situation had become obvious earlier
in the day when traders were told not to answer their phones.
"There was complete shock when we were told. We thought they had
a deal with Zurich," one said.
The Swiss group abandoned plans to buy nearly a quarter of
Peregrine for US$200 million (HK$1.54 billion) after its shares
plunged 36 per cent since the deal was agreed in mid-November.
Mr Tose said: "The company has been unable to reach agreement
with Zurich Centre Investments on the final terms concerning the
investment. Discussions have therefore been terminated."
The Securities and Futures Commission responded by restricting
Peregrine's business "effective immediately pending clarification
of the position of the group".
Its traders can sell securities and settle existing trades, but
they cannot take any new positions. However, even before the
restrictions were announced, Peregrine's debt, foreign exchange
and interest rate derivatives trading desks were "paralysed",
sources said.
They claimed that without a capital injection this weekend, the
firm risked default on a line of credit that would fall due
today.
Peregrine spokesman Tom Grimmer refused to comment on the debt
deadline, but added: "We are funded. We will continue to operate
our business."
Analysts were not surprised that the Zurich deal fell through.
Peregrine has extensive exposure to some of Asia's hardest-hit
markets, particularly Indonesia.
The Indonesian rupiah has lost more than half its value since
November.
Since late last year, Peregrine's US$265 million bridge loan to a
troubled Indonesian taxi company, Steady Safe, has been thrown
into question by the falling rupiah.
With Zurich pulling out of negotiations, the rest of Peregrine's
plans to bring in new capital have come undone.
First Chicago, a US commercial bank, had planned to take a US$25
million stake through the purchase of convertible preference
shares, but that deal was contingent on the Zurich transaction
coming through.
However, there were rumours last night that the Bank of China
Group or original Peregrine backer Li Ka-shing could orchestrate
a rescue bid.
Peregrine's announcement helped spark an immediate 6 per cent
drop in local shares trading in London. The Hang Seng London
Reference Index plunged 526.72 points to 8,367.92.
- -----------------------------------------------------------------
"Moody's cuts Indonesia, South Korea ratings"
Friday January 9, 3:27 pm Eastern Time
NEW YORK, Jan 9 (Reuters) - Moody's Investors Service on Friday
cited increased pressure on Indonesian companies and banks and
pointed to the rollover of South Korea bank obligations when it
lowered the two countries' ratings.
Moody's said it needed to cut South Korea's foreign currency bank
deposit ceiling to Caa1 from B1 because of the forced rollover in
late December of interbank credits.
``These rollovers are a default in the way we define it,'' said
Vicent Truglia, managing director at Moody's. ``The definition
forces our hand.''
The ratings move also reflected concerns over Korea's currently
fragile external payments position, coupled with adverse regional
factors, which could prolong the forced rollover period, the
agency said.
But Moody's considered it highly likely the Korean debts would
ultimately be repaid.
``There is probably going to be an extremely high recovery value
of principal, but it's nonetheless defaulting,'' Truglia said.
Moody's also said it may downgrade Korea's Ba1 foreign currency
ceiling for bonds, but noted that the country's problems were
short-term in nature.
``The fundamentals remain good,'' Truglia said. ``If confidence
returns you will probably see a move up in these ratings.''
Regarding Indonesia, Moody's downgraded the country's foreign-
currency country ceiling for bonds and notes to B2 from Ba1 and
its foreign-currency bank deposit ceiling to Caa1 from Ba3.
The downgrades resulted from rising concerns over the economic
consequences of continued volatility in Indonesian financial
markets, the agency said.
An economic contraction, sustained weakness in the country's
currency and questions regarding presidential succession are
affecting the banking and corporate sectors, Moody's said.
The Indonesian corporations, in particularly, will likely be
unable to repay a considerable portion of the large external debt
on a timely basis.
``You're going to be getting increasing defaults by Indonesian
corporates,'' Truglia said.
``As a result, you've got to have increasing pressuring on
nonperforming assets in the banking system, and that's going to
add pressure on the ability of banks to finance themselves.
- -----------------------------------------------------------------
"Clinton Steps Into Indonesia Crisis"
Friday January 9 7:45 AM EST
By Raju Gopalakrishnan
JAKARTA, Indonesia (Reuters) - President Bill Clinton personally
stepped into Asia's financial crisis on Friday, telling President
Suharto in a 25-minute telephone call that Indonesia has to
follow through on economic reforms.
Suharto agreed with Clinton's assessment and would "seriously
implement" reforms, Indonesian State Secretary Murdiono said.
The White House said Clinton also talked for 12 minutes to
Singapore's Prime Minister Goh Chok Tong and announced a U.S.
delegation would travel to Southeast Asia for consultations.
Separately, calls for the 76-year-old Suharto to step down --
unthinkable just a week ago -- were published on Friday on the
front page of the Jakarta Post, Indonesia's most widely-
circulated English-language newspaper.
Jakarta was calm on Friday, and there was no sign of an increased
troop presence in this capital city of more than 10 million
people.
But the military vowed to crush any attempt to create
disturbances and said peace would be maintained.
As the country sought to steady itself, the international credit-
rating agency Standard and Poor's issued another downgrading. It
cut Indonesia's long-term foreign currency rating to BB from BB-
plus and long-term local currency rating to BBB from BBB-plus.
The financial markets were calmer after Thursday's historic falls
but supermarkets were still crowded with shoppers eager to stock
up on food and other essentials for fear of hyper-inflation.
The rupiah surged some 25 percent after falling below 10,000 to
the dollar on Thursday, but the Jakarta stock market index was
down more than two percent in the afternoon on top of a dive of
almost 12 percent the previous day.
Suharto's eldest daughter Siti Hardianti Rukmana sold U.S.
dollars for rupiah at a state-owned bank on Friday in a public
bid to restore confidence in the Indonesian currency. She did not
say how much she sold but aides said it was $50,000.
The Indonesian financial crisis exploded into chaos, sending
shock waves throughout other Asian countries already struggling
with their own economic woes, after Suharto unveiled the 1998/99
budget on Tuesday.
Market analysts said the budget did not contain concrete
proposals to follow through on a reform program agreed with the
IMF in exchange for a $43 billion bail-out plan.
Whispers that Indonesia may declare a moratorium on its huge
overseas debt of $133.3 billion persisted despite Suharto's
pledge earlier this week to honor all debt commitments.
Mohammad Syahrial, head of research with Pentasena Securities,
told Reuters only 22 of 282 companies listed on the Jakarta Stock
Exchange were financially viable, with the rest technically
bankrupt because of overseas debt commitments.
That raised the specter of liquidations and massive unemployment
in multi-ethnic Indonesia, the world's fourth most populous
country with 200 million people, analysts said.
The president ordered officials to ensure food supplies to
markets were maintained, which one economist said appeared to be
a far bigger problem than the monetary crisis.
Analysts said any shortage of food during the holy Islamic month
of Ramadan, when devout Muslims fast from dawn to dusk, could
trigger social unrest in the sprawling archipelago.
The country, which straddles major trade routes from the Far East
to the West, was calm except for the rush on food counters.
Traffic was normal in Jakarta and there were no reports of unrest
anywhere in the country.
Discussing Clinton's call to Suharto, a senior U.S. official in
Washington said: "The president made it quite clear that the IMF
program needs to be followed."
Clinton also underscored the importance of Indonesia to the
region and to the United States.
The official said Deputy Treasury Secretary Lawrence Summers
would visit Indonesia and other Asian nations from Saturday to
outline Clinton's position on the region's economic crisis.
The IMF's top two officials, Managing Director Michel Camdessus
and First Deputy Managing Director Stanley Fischer, would also be
visiting Indonesia next week, officials said.
While Jakarta's markets took some solace from the announced
visits of U.S. and IMF officials, intriguing questions remained
over the political future of Suharto.
The Jakarta Post quoted former cabinet minister Mohammad Sadli as
saying a change in government was needed to restore international
confidence.
"The existing government must be replaced," he was quoted as
saying, a clear reference that Suharto should step down after 30
years in power.
In another article, political scientist Arbi Sanit was quoted as
saying the 76-year-old former army general must quit.
"We need a president who is in good health," Sanit, a professor
at the University of Indonesia, said.
"Because we are facing a serious economic problem, the new
president must have a good reputation and credibility, be well
experienced in the government system, be widely supported by the
people and capable of mending the country's political and
economic systems."
Suharto has ruled Indonesia with an iron grip since he took
effective control of the country in 1965. He has tolerated little
dissent and calls for his removal from the presidency have
usually been restricted to marginal or underground groups.
Rumors that Suharto was critically ill broke out last month after
the president was advised to rest by doctors when he returned
from an exhausting foreign tour.
But he has appeared several times in public since, including a
55-minute nationally televised speech on Tuesday when he
announced the budget.
Analysts have said the biggest fears on the markets was that any
change in government would be accompanied by massive social
unrest.
Indonesia has undergone only one change of government since it
gained independence from Dutch colonial rule.
Suharto took over from founding president Sukarno in 1965 after
what the government now says was an abortive Communist coup.
At least 500,000 people were later killed in anti-Communist
pogroms.
- -----------------------------------------------------------------
"Panic-buying hits Indonesia as currency and stocks plunge"
JAKARTA, Indonesia (January 8, 1998 5:07 p.m. EST) -- The
Indonesian rupiah sank to an all-time low Thursday, losing a
quarter of its value in one day and sending thousands of panicked
residents to supermarkets where they snapped up everything in
sight.
Ignoring an army appeal for calm in the world's fourth most-
populous nation, Indonesians lined up more than 20-deep at cash
registers to buy sugar, rice, cooking oil and whatever else they
could grab before yet another price rise.
The rupiah's dive apparently was driven by fears that the
International Monetary Fund will yank back a bailout package
extended late last year when Asian economies began falling like
dominoes. The IMF is losing patience with Indonesia's failure to
implement reform measures that were required for the $40 billion
in rescue money.
Financial analysts warned that the rupiah's dreadful performance,
compounded Thursday by a record tumble on the stock market, could
leave many companies unable to pay the interest on their foreign-
currency debts, thus forcing them into bankruptcy.
While President Suharto has yet to face a credible opposition in
his 30-year reign, the prospect of social unrest triggered by
inflation and unemployment is looming. The army has pledged to
back Suharto in the event of widespread tumult.
For half a year, Indonesians have remained calm as their currency
has continued to slide. They have maintained faith that the 76-
year-old president would revive the economy in the same way he
built it up years ago.
But their confidence plunged Thursday -- along with the rupiah,
which fell 26 percent. The dramatic one-day drop leaves the
rupiah down 76 percent since the country's July currency
depreciation.
Thousands of people dashed to stores and picked the shelves
clean. "I only wish I could buy more. Who knows what is going to
happen?" said one woman as she and her family pushed five
shopping carts of groceries.
To calm rattled nerves, state-owned television flashed pictures
of a national rice stockpile, and quoted officials saying the
nation's food supplies remained plentiful -- despite the need to
import rice because of prolonged drought.
The rupiah's crash left it at a record 10,550 rupiah to the U.S.
dollar Thursday, while the Jakarta Stock Exchange index closed
down 12 percent. The index rallied after hitting a four-year low
in the afternoon -- a record drop of 19 percent.
Spooked by the rupiah's sharp fall, stock markets across
Southeast Asia plunged Thursday. Singapore shares hit a 5 1/2-
year low and Philippine stocks reached a 4 1/2-year nadir.
Critical to the resusciation of Indonesia's economy is the nearly
$40 billion in bailout money from the IMF. The fund, which had
demanded sweeping financial reforms including deep spending cuts,
was taken aback Tuesday when Suharto announced a new budget that
lacks a clear reform agenda. According to the plan, an expensive
modernization of the politically powerful military will go
forward and spending on social projects is up.
The buying panic, the latest chapter in a financial crisis in
Southeast Asia that has hobbled economies from Thailand to
Malaysia to South Korea, has turned the focus on Suharto and his
future as president.
The former five-star general, who took power after crushing an
abortive communist coup in 1965, is Asia's longest-serving head
of state. Backed by the military, he has ruled by tolerating
little dissent among his 202 million people.
All indications are that he will be elected to a seventh, five-
year term in March by a 1,000-member People's Consultative
Assembly.
Until recently, he delivered consistently strong economic growth
and stability. The major blemish on his record is the corruption
that has steered lucrative government contracts and official
monopolies to his six children and close friends.
While Suharto continues to dominate the country's administration,
the current turmoil, combined with his age and speculation that
his health is failing, has fueled calls for him to step aside.
Adding to the anxiety, he has failed to name a successor.
Amien Rais, a leader of the country's second-largest Islamic
organization, said in a Jakarta newspaper Wednesday that the
government's mishandling of the financial crisis demanded
Suharto's replacement.
In addition, a group of retired high-ranking military and
political figures has called for reforms, and student groups have
demanded more democracy.
Anti-government rioting broke out in 1996 and political street
fighting marred a parliamentary election in 1997.
With officials predicting the 4.4 million Indonesians now without
work could swell to 6.5 million in 1998, analysts say the level
of unrest could reach new heights.
- -- By GEOFF SPENCER, The Associated Press
- -----------------------------------------------------------------
Evening Standard (London)
April 07, 1997
"This is an option we cannot afford to bank on"
By Andrew Smithers
NATWEST'S recent discovery that it had unexpectedly lost L90
million has been attributed to mis-priced options. To the outside
observer, this claim has real charm as it suggests that the mis-
pricing of options is a rare accident, whereas it appears to be
standard practice.
Options are a form of insurance. If, for example, you have a
portfolio of shares and you wish to ensure that their value does
not fall by more than 5%, you can do so by buying a "5% out of
the money put".
This is not like selling the portfolio, as you will still
benefit if the shares rise in value, but you will lose the cost
of your option. If the value falls, however, you will lose only
5% plus the cost of the option. The risk to investors can only
be reduced if someone else takes it and this falls to the banks
that deal in options.
Since we cannot know the future, the only reasonable guide to
whether or not options are mis-priced is the past.
What constitutes past experience is, however, an open
question. If the past 10 years is a reasonable guide, then the
prices of equity market options are also reasonable. If you take
30 years as your guide, however, they are much too cheap.
The relative youth of the traders has been the subject of
widespread comment, but it is the relative youth of the databases
which poses the more serious problem.
Derivatives contracts are currently estimated to amount to
L36 trillion, which is nearly twice world gross domestic product.
A loss of 2% of the contract value would be roughly equal to the
total capital of all the world's banks.
It is not surprising, therefore, that central bankers have
expressed concern about the banking industry's vulnerability to
derivatives. The surprise is that they have not sought tougher
controls.
Studies of the world's banks' exposure have tried to offer
comfort. Some assure us that banks run matched books. If this
means that bank profits will not be hit by a stock market crash,
this borders on the incredible. They are providing investors with
insurance and if the hurricane strikes investors will collect.
The buyers of this insurance seem well aware of the risk
being run by the sellers. Everyone I know insists on buying his
puts from large banks, as these are assumed to be "too big to
fail".
This is the real problem. As taxpayers we effectively
guarantee banks. It can be argued that this is sensible with
regard to bank deposits, as worries about the banking system can
cause economic crises and we benefit from reducing the risk of
such crises.
Subsidising the banks' options business, however, seems
madness. The easier and cheaper it is to insure against a market
collapse, the higher stock markets are likely to climb. Allowing
the banks to write options therefore increases the risk that we
will have to pay for a bank failure and we also increase the risk
of overvalued markets leading to economic crises.
This type of problem is known to economists as "moral
hazard", which is the reason why "you can insure against anything
but poverty and prison".
Insurance that encourages anti-social behaviour is, to put it
mildly, un-desirable.
It is the combination of the implicit Government guarantee
and the ability of banks to trade options which results in the
business being so dangerous.
If banks did not offer options, those doing business with
option traders would be very concerned with the credit-standing
of those businesses, which would then have to hold, as insurance
companies do, large reserves.
Limited liability companies doing business at Lloyds's have
to have capital equal to half their premium income, whereas banks
need only "tier one" capital equal to 4% of their liabilities.
It seems likely that the derivatives market is massively
undercapitalised and it can do this because it is trading off the
implicit guarantee of world governments. We, the taxpayers who
will have to pay when things go wrong, are crazy to allow this.
- -----------------------------------------------------------------
"OTHER BANKS COULD CRASH LIKE BARINGS, BOE SAYS"
February 18, 1996, Sunday, BC cycle
Banks in most countries still run the risk of collapsing like
Barings, the British merchant bank that was brought down almost
single-handedly by trader Nick Leeson, Bank of England supervisor
Brian Quinn said on Sunday.
No banking system could include both freedom of choice for
investors and absolute safety, Quinn told BBC television.
"It's a question as to whether you want a financial system
that has all the risk taken out of it, or more of the risk taken
out, so that people have greater reassurance," he said.
Barings collapsed one year ago after the Singapore-based
Leeson ran up losses through unauthorised derivatives trades that
eventually amounted to around $ 1.4 billion.
Leeson is just beginning a 6-1/2-year prison sentence in
Singapore for fraud and forgery.
Quinn said many banks were at risk of such a disaster.
"The existence of deposit insurance arrangements in the U.K.
and most other countries, is, in fact, an explicit recognition
that banks go bust," he said.
Regulators such as the Bank of England could not always
protect a bank, he added. But he said Britain had a lower bank
failure rate than other countries.
After its collapse, Barings was taken over by the Dutch
banking group Internationale Nederlanden Groep NV <ING.AS>.
- -----------------------------------------------------------------
Financial Times (London)
October 15, 1997, Wednesday
"EnNobeled"
The principles underlying the use of options were known to the
ancient Greeks. Yet it was not until the 1970s that options
trading became a mainstream activity in financial markets around
the world. That development owed much to the work of Robert
Merton and Myron Scholes, who with the late Fischer Black
established the option pricing models that have won them the 1997
Nobel economics prize.
The timing of their respective seminal papers, which emerged
in 1973, was perfect. The new ability to put a value on any
option coincided with the rupture of the Bretton Woods exchange
rate system. With central banks ceasing to stabilise the exchange
markets, the need for a private means of insuring against
volatility in a floating world became paramount.
At the same time the first post-war moves towards financial
deregulation led to increased domestic interest rate volatility.
Between them these academics provided financial institutions with
a new and effective tool for managing and reducing the resulting
risks.
To most men or women in the street the differential equations
at the heart of these models are as incomprehensible as the names
of Black, Scholes and Merton are obscure. The wider derivatives
markets appear equally remote from their experience. Yet they
touch many ordinary people very directly.
In Britain the reintroduction of a fixed-rate mortgage market
after the great inflation of the 1970s was facilitated by the
new-found ability of financial institutions to hedge against
interest rate risk. Many Americans have enjoyed access to cheaper
student loans for similar reasons. The risk that people with
money purchase pensions may retire when markets are collapsing
can now be hedged via the options market.
The models of Merton, Black and Scholes have so far stood up
well. But they are still relatively young; and while individual
institutions can use them to reduce risks, the incidence of risk
within a system is merely shifted from one group to another.
Since the 1987 stock market crash it is striking that the amount
of portfolio insurance conducted via the options market has
greatly increased.
Whether the growth in derivatives has increased systemic risk
remains controversial. But their innate complexity, lack of
transparency and leverage, whereby modest outlays secure large
exposure to market risk, are a cause for concern. Nor is option
trading any more immune from moral hazard than basic banking. The
markets may yet present these models with a more stringent test
than the Nobel prize judges.
- -----------------------------------------------------------------
Date: Wed, 29 Oct 1997 08:24:38 -0600 (CST)
From: Mary (mary.burch@mankato.msus.edu)
Subject: stock market (fwd)
Submitted this to Vanguard's list back in August....and am
forwarding it to you as it seems relevant to the events of the
past week. Whether this applies I do not know, but I know the
source and he has a very proven track record in the office of the
prophet. I will quote him:
(BY HAROLD EATMON)
"...In my last article I mentioned a vision of the Stock
Market's 'Big Board' having serious upcoming problems. I saw
the Stock Market soar and then crash. After the crash, many
big business corporations and private parties bought up stocks
because of the low cost to buy in. Then I saw the market begin
to climb again in a short period of time. Then it crashed
again bringing tremendous loss, ruin, and devastation to all
who bought in the first time. This is what I have labeled "Two
Black Mondays." The time period between the Two Black Mondays
was very close together. I could not tell exactly how close.
It could be a couple of days to a couple of months. There are
some tell-tale signs indicating the season and the setting.
*I saw the season to be when 'the leaves fall to the ground'
then the first crash would occur.* I also saw the Yen and Mark
fall dramatically just before this sudden and inexplicable
crash. Like Joseph in Genesis, I believe America will have fat
years of financial blessing. I also believe there are coming
lean years of financial difficulty for America. I do not
believe God is showing this so people can beat the game
financially. I rather believe He is saying keep your eyes on
eternal things. Store up treasures in Heaven."
"The Lord is speaking to us through many types of revelatory
and tangible waves. There are financial waves, natural
disaster waves, health waves, political waves, and last, but
certainly not least, are spiritual awakening waves. Whether it
is natural waves of revelation or supernatural waves of
prophecy, we are called to have ears to hear what the Spirit is
saying. God is saying these are days for repentance, healing,
salvation, and blessing. Our God is speaking. The question
is, are we truly watching, waiting, and listening?"
- --from The Trumpeter Journal
Summer 1997
- ---
NOTE: I am only quoting, so for more information or to
correspond, please contact Harold Eatmon directly at:
Harold Eatmon Ministries, Int'l
PO Box 48402
Minneapolis, MN 55448-0402
- --
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EDITOR - Andrew Strom:-
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- -----------------------------------------------------------------
ARTICLES FOR FAIR USE ONLY
- -----------------------------------------------------------------
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--
John Conover, john@email.johncon.com, http://www.johncon.com/