Is It Time To Get Optimistic?

Another eventful day! Just when the global market sentiment had appeared to reach rock bottom where doomsayers largely outnumbered optimists, global financial markets have suddenly embarked on a quick turnaround and appeared to have taken express rides to the north pole! Dow up 4% overnight, followed by key Asian markets like Hong Kong and Shanghai indexes with both registering more than 9% up, while Singapore, Taiwan and India markets registering more than 5% up!

Malaysia's KLCI market has not been left alone either with a decent 3.4% up, despite the continued political uncertainties!

What trigger this latest fresh bit of optimism? Haven't we just sensed the market heartbeat from the latest AIG bailout by the US Government that had literally leave many people fearing for the next victim?

The latest "incentives" this time come from not one but multiple sources. First and foremost, following AIG's bailout and Lehman Brother's collapse, perhaps served as a good wakeup call on the US Government, somebody finally realized that perhaps the approach to tackling the financial issues weren't systematic enough, thus rendering the need for one. The idea of RTC (Resolution Trust Corp) type solution emerged.

So what is RTC? Think of it as a mechanism to get the doubtful or bad loans off the hook of financial institutions so that these guys have some breathing space to continue their business survival. After all, the argument is that troubled assets don't become more valuable over time; they become less valuable!

Great idea, but who will absorb these bad loans and who funds it? Well, it has to be Government's funding (in another words, public money!), of course! Thereafter, the idea is to get the RTC entity to gradually sell off the restructured loans as the market improves. Auction of collaterals as the market improves is another way to salvaging these bad debts.

Similar RTC solution was in fact set up in the late 1980s to restructure the underwater mortgages held by nearly 750 insolvent savings and loan institutions.

Tracking back to the 1997 Asian financial crisis, the same RTC type approach was in fact adopted by Malaysia to effectively saved Malaysia's financial institutions from going insolvent during the peak of the crisis. The entity was then called the National Asset Fund or Danaharta. The entity was finally dissolved in 2005 after successfully completed the disposal of assets.

Given that the above approach worked well for Malaysia, I have no doubt that given the right planning and execution, it should work well for U.S too. Nonetheless, it has to be mentioned that U.S possesses a much more sophisticated financial market. So much more thought process will have to be put in place for it to function effectively.

Bear in mind the market is responding to a conceptual idea that has yet to be crystalized, let alone the results!

One of the other sources of optimisms being UK (later emulated by US) decision to temporarily ban equity short-selling activity on the financial sector. Financial equity short selling has been blamed by many for the recent sharp downfall of financial stocks.

Finally, China's decision to exempt stamp duty payment on stocks trading has intensified hungry traders and investors to re-enter the market with a vengeance! Remarkably, Shanghai's stock market even hit limit up! However, in my view this could well be a short term knee jerk reaction. Fundamentally nothing has changed.

The world still depend on a permanent recovery on U.S situation!