Have We Seen The Bottom?

It is very hard to predict the top and bottom of a market. Chartists use a combination of many indicators, volume, price volatility, etc. to measure change in investor sentiments.

Very often, the top and especially the bottom occur when there has been a in investors' sentiments. At the top, you don't suddenly see people rushing for the exits, rather, the opposite as ever more people join the line at the "ATM machine" where there is "free" money.

Bottoms are even harder to predict. How much further can the market drop? Just like at the top commentators keep changing the target. However, changes in sentiment at the bottom is very subtle. It is often a final surrender when everyone decides that the market has nowhere to go but down.

So, have we seen the bottom? In terms of sentiment, I still cannot detect the sense of abject surrender. However, I have seen the interest of retail clients decline to levels that are 20% of the peak or less. HK retail investors have been through many cycles, and many are using only spare cash for the stock market so there is less need to meet margin calls. Also, 60% of the market is dominated by institutions and although they will trim their portfolios, they also know that when the market turns around, it is very difficult to buy back in, so they will always hang on to the core holdings.

But every market turning point needs a trigger. And the trigger this time is the takeover of Fannie Mae and Freddie Mac by the US Government.

Many will remember that HK Government was castigated by the world for "interfering in the free market" by intervening in the currency market to protect the HK dollar's peg to the US dollar at a time when all Asian currencies were being sold off by hedge funds. When the hedge funds found they could not borrow enough HK dollars for shorting they decided to short the HK stock market as a proxy. The market fell from around 18,000 to around 6,000 before the HK Government stepped in to buy blue chips in the open market. That marked the turning point. The shares bought were subsequently injected into a new vehicle called the Tracker Fund (#2800) and HK residents were allowed to buy into this at around the 12,000 level, But that is another story.

The US Government had decided to "rescue" the 2 mortgage companies and put the credibility of the US Government behind the papers they issued. The minority shareholders are out of luck, but that is unavoidable. However, financial institutions around the world breathed a sigh of relief because if they failed, banks around the world will have to go through another round of write downs.

The financial markets are all about credibility, sentiment, and liquidity. In the past few months, the US Fed had injected liquidity into the system and will continue to do so. By taking engineering the takeover of Bear Sterns, and now taking over Fannie and Freddie, it is now putting some much needed credibility into the market. There is nothing that can be done about sentiment. Investors will either decide it is time to buy or time to sell.

A very interesting thing happened on the HK market. Cocal Cola announced that it is buying out the shareholders of Huiyuan Juice (#1886) at HK$12.20 which is the highest price achieved after the stock was listed at around HK$6. The stock was trading at about HK$4 at the time of the announcement. The interesting thing is that Coca Cola had decided to buy into the China market with 1.4 billion consumers rather than to try and build their franchise and distribution network. Huiyuan owned close to 50% of the pure juice market in China. At HK$4, it was valued at HK$6billion. Even at HK$12 it is only HK$18 billion (or 18 times P/E).

Buy or sell Huiyuan? Coke will privatise the company if it gets enough acceptance to the offer. If it doesn't, then it will have to maintain the listing. Will Huiyuan become "Coke China"? That is the question. I suspect that Coke will want to list its' own shares someday in China (as and when it is allowed) rather than a subsidiary. Some are hoping for a better offer from Coke to sweeten the deal. Or, maybe a competing bid?

However, there are still regulatory hurdles and the deal is by no means assured, although I cannot believe that Coke would go this far without some indications that it will be approved. There is 20%-25% upside if the deal goes through.

My advise to clients who already hold this is to decide whether the upside is attractive enough or to look for the next value stock to be taken over now that Coke had started the ball rolling. For the HK and China markets, this may be the trigger that changes sentiments.

Note: Clients and entities affiliated with the author holds some positions in this stock.