Subject: IC940827: Thoughts about Market - Jianping Zheng

From: "Gray Zhu, 800-289-2498, 212-279-6700" <[email-masked]>
Date: Sat, 27 Aug 94 22:32:05 CDT

==================    IC940605: Investment Club  ======================

0. The market had another 51 points move on Friday.
1. Some Thoughts of the Market ......................... Jianping Zheng
2. Book, Interest rate and stock market ................ Gray Zhu
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1. Some Thoughts of the Market

>From [email-masked]  Sat Aug 27 07:48:25 1994

The Bull is not Dead
~~~~~~~~~~~~~~~~~~~~

The 70 points rise of Dow gives everyone a relief: the Bull is not Dead!

I am strongly advocate the point of letting market tell where it is, rather
than been preoccupied to speculate where the market is. Therefore, though
I felt the market is coming back quietly early in the month (ref. IC940608),
I don't think it worths more than just a speculation.

At the time, things were still uncertain. The most obvious: people were 
still haggling whether the Fed should or should NOT raise the rate again. 
And perhaps more important, whether the market will react to such a move 
or non-move. 

However, the unexpected rate-hikes in Italy and Sweden did betray the market
psyche. Rather than seeing a great turbulance, many markets stabilised 
after the initial shock. What it told us? Well, the market is waiting 
for something: some GOOD news (or excuses) to muscle a rally. Seeing that,
the decision of riding over the storm would not be too difficult to make.

It is a bit funny to see how the coverage tried to relate the 50 points
rate-hike with the market rally, and particularly, how badly the non-rate
-hike (which would never happen afterwards) would damage. If we remember
the days market used every excuses to drop, we should not be difficult 
to see that the market will rise even without such a rate-hike. Poor
economists, they should really resort to psychology books rather than 
stick to their thick economic books.

Don't Forger: The Bull has been Wounded
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

It will be unwise to think that the market will rocket regardless of the 
recent deep scar. The Bull is already severely wounded. 

If the 70 points rise of Dow tells that the market is still a place to stay,
the afterwards 50 points rise should be an alarm. A too rapid rally would 
only bring, at the best, a subsequent prolonged period of consolidation.
I would rather see a few months digestion at the current level rather than
a sharp up-and-down, which will give us an ominous short-term double-top 
pattern and an extremely difficult time.

When over-pessimism turns to over-optimism, it is probably the time to make
an orderly retreat.

Summarise of my points: the trading window, which I stated in IC940608, will
close shortly. It is probably the time to be cautious and take some profit.
The market is still a place to stay, but it does need a very long period 
to consolidate, which is just the time to restructure your portfolio for
the serious rally that will occur no earlier than the end of this autumn.

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2. Book, Interest rate and stock market

>From [email-masked] Thu Aug 25 13:39:05 1994
>What tutorial book on stock market would you recommend to begin with?
>By the way, what's the effect of interest rate change on stock market?

Gray:

The first book I read was "Understanding Wall Street". I do not know
much about other books, but this one is enough to start with.

WHEN INTEREST GOES UP, BOND PRICE GOES DOWN, and normally the stock
market goes down too. To understand this, let us talk about T-bond
with PAR value $1000 and fixed 8% return (coupon yield), i.e. it pays
you $80 a year. In the market, the current yield, which is $80 divided
by current market price, should move in the same direction as the
interest rate. What could be changed is the denominator - current
market price, not the $80 in the numerator. 

Bonds are related to stocks in many ways such as convertable bonds,
when bonds go down, stocks go down too sometimes.  Also, when the
interest rate goes up, bank savings could be more attractive than the
stock market to some people. Those people may move their money from
stock market to savings, which creates a supply. Big supply (selling)
will make the market lower.

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