MANY readers have difficulty with financial terms used in the stock and bond markets, so here is some clarification. A falling stock market is when the Standard and Poor 500 stock index drops more than five per cent below its 52-week moving average. A steep yield curve is a point where a US three-month Treasury bill is at least two per cent below the 10-year US Treasury bill yield. A steep yield curve implies rising short-term interest rates. Implied forward credit markets occur and change constantly, especially when bond buyers do not believe current conditions will continue and they buy or sell bonds, notes or bills based on the future conditions they think will prevail. This difference is measurable. Thus an investor will know what interest rates, bills, Treasury notes and Treasury bond yield the market is implying for the next three months, six months and so on. It is most unusual to have stock market weakness when the yield curve is steep. When it happens, it is likely that the yield curve will flatten, led by a decline in long rates. Since 1941, there have been a total of 55 weeks when the stock market fell when the yield curve was steep. In the 90 days following each of these 55 weeks, bond yields fell by an average of about 55 basis points and the yield curve flattened by an average of 50 basis points. At the end of April, the Standard and Poor 500 was about 2.5 per cent below its 52-week average. Three-month Treasury bills were about three per cent below the yield on 10-year treasury notes. So US long stocks investors are not yet in deep trouble. When the US economy starts to slow down, there will be a great opportunity to buy bonds. It is already a bear market so this is no time to be in stocks, except special situation stocks. The stock market may have one more dying gasp of a rally but then stocks should weaken for a long time. A cautionary note IT HAS been reported that nearly 50,000 Chinese companies are prepared to seek a stock market listing as soon as government approval can be obtained. There is optimism for the long-term future of China equity markets, which will be fulfilled if overseas capital continues to enter the country: over US$25 billion (about HK$193 billion) came in last year. However, both A-and B-share prices have taken a big fall during the first four months of this year. The B-share index has dropped about 28 per cent and the A-share index has shed nearly 20 per cent. The A-share market has fallen for eight months and there appears little chance of a near-term rally. B shares are unlikely to start rising this year. Even so, China A and B shares are undoubtedly a good prospect for the future as China's long-term growth potential is near certain. There are many medium-and short-term problems in China, which include: High inflation and the tightening of credit, which will cause illiquidity in the economy. The Government has planned for a fall to nine per cent growth in gross domestic product (GDP) in 1994, from last year's 13 per cent. This is an unrealistic target. The central bank is not prepared to raise interest rates enough to stop inflation as this would cause the closure of up to one-third of state-owned companies. It now uses credit controls, which hurt well-managed companies the most as they need to borrow. Stocks take the strain THE Hong Kong stock market has fallen about 30 per cent since January 1 and it still has some way to drop. US interest rates should rise to five per cent by the end of the year, but most local companies can tolerate this. Once the excesses are removed, the local market should do well and some stocks now offer good long-term buys if events external to Hong Kong are not disruptive. Bonds looking up US MUTUAL funds have been a sad investment in recent years. Most investors were lured in after the profits had been made. An example is the case of bond funds. From the beginning of 1987 until the end of 1993, US$439 billion were invested in bond mutual funds. During 1987 and 1988, bond prices were the lowest in 25 years but less than six per cent of bond funds were bought at this bargain period. Over 80 per cent were bought between 1991 and 1993, when bond yields were low and prices extraordinarily high. Naturally, most bond fund investors are holding losses. However, most banks made the same mistake and are stuck with losses also. US bonds are risky, but there is still good profit to be made from Italian, Canadian, French and German bonds. Global bonds took a bad fall with US interest rate rises, but are getting back on track. Finding book value MANY investors have asked for a good, up-to-date book on investing. Douglas Casey, whose 1982 book Strategic Investing was number one on the New York Times bestseller list for 29 weeks, has come up with a great new book, Crisis Investing For The Rest Of The Nineties. It is a Birch Lane Press book, published by Carol Publishing Group, 120 Enterprise Avenue, Secaucus, New York 07094. If your book store does not have it in stock, order direct from the publisher.
