My Diary 317 --- Different Animals, Hated Subprime, Alcoholed A-

August 22, 2007

 

 

Today’s diary will be a bit longer as there are so many funs to share…… some patience is needed in this volatile market…_:))

 

Two Different Animals

I have to acknowledge that Equity and Fixed Income market are two totally different animals. I heard that there were fund flows coming in to buy H-shares which ppl consider are lagging behind the A-shares. HSCEI went up 400pts (3%) and the Hang Seng Index was up 617pts on the back of strong buying. The champanion today is Chalco, which had a record 3-days gain of 44% on the back of its takes-over plans and the expected strong aluminum consumption growth.

 

However, the US sub-primed triggered liquidity –crunch today arrives at Hong Kong as well. Let me quote from SCB HK EFB/EFN Market Daily Recap for 22 Aug 2007-- the shorter end cash continued to get squeezed in the market, overnight rate reached 5% and the 1-3mth cash went up by 10 bps. The reason behind was because some banks who cant get cash in the money market, they turned to hit TT forward and to get the HKD funding. 3mt forward was traded up to -145/-140 and retraced back to -150 level before lunch closing. How does that sounds to you? Start to feel panic or still excited on the HIS’ achievement over the past two days……

 

Europe: Again and Bigger

Worse news is Europe gets hit again. There were three incremental data points late yesterday adding to my concerns about the on-going liquidity crisis in the banking sector. One of them is last night that Barclays borrowed GBP312m under the Bank of England's emergency facility. According to the WSJ, Barclays is taken out the loan after HSBC missed a scheduled payment. Such shortfalls, I'm told, are not uncommon but this is the first report of a bank going to use the BoE's lending facility (at 6.75%, set +100bp above base rates) in the current market environment. Another one is HBOS announced that Grampian, one of Europe's largest bank sponsored conduits, (worth about $37bn or GBP 18.6 bn) will wipe out +40bps of HBOS tier 1 ratio.

 

More data from JPMorgan showed that the stress in money markets is a now global phenomenon, although the pain has not been evenly distributed. Gauged by the spread between the 3-month LIBOR (5.5%) and 3-month Treasury bill (3.6%), US markets are experiencing the greatest disruption, followed by Canada and Western Europe, and then Japan

 

I hope that you all can manage to read though the above paragraphs. To be honest, I felt a cold wind brushing over my back.  According to Bloomberg news today, about $300 bn of Money Market Funds has been infected by sub-prime “disease”. There were several mentioning of AIM MM funds ( A brand used by INVESCO in Canada). … Very sizable holdings as well …. Hey guys, sub-prime stats to hit INVESCO and then maybe my bonus or even my job. … Now have you start to realized the “water ripple “effect of the “Sub-prime”.  I start to feel SICK of the word.

 

A- Shares: No Scare, Only Alcohols

Today’s A share market was scared to open at low level because of the sudden rate change, but only for a short while. I guess there are some investors already waiting there to pick some cheap stocks.  End day, Shanghai Composite Index added 26 ppt to 4981.  5000 is now just a thread away.

 

On the sector wise, Alcohols are outstanding -- Wuliangye +8.94% and Maotai +5.04%. Maybe because the market is so strong, investors need to buy some drinks to celebrate. I am just afraid tat they may become a little dizzy to foretell the index performance. Real estate is strangely strong --  Vanke +3.77% and Oversea China Town +5.3%. Interesting to think here is that Greenspan’s rate hike caused today’s sub-prime fear, but why China rate hike lead property stock to gain? Another Chinese style? 

 

From what can make my brain works by watching A-share market, one is certain, every negative thing will be regarded from a positive angle. Like the rate hike yesterday, people say “OK, rate hike done, will not be rate hike within another two month, let’s buy stocks!” 

 

CNN: Old Birds talk

Lastly some enlightening comments by few old birds from CNN Money. They are insights of sharpest minds such as Warren Buffett, Henry Paulson, Stephen Roach, Jim Rogers, and etc. Read for fun when you have tonight’s dinner….

 

Warren Buffett / Chairman and CEO, Berkshire Hathaway --- They are marking to model rather than marking to market. The recent meltdown in much of the debt market, moreover, has transformed this process into marking to myth.

 

Wilbur Ross / Chairman and CEO, WL Ross & Co --- Subprime models also did not capture ever more lax credit standards nor that real estate might suffer severe and protracted price declines, again proving that the two most dangerous words in Wall Street vocabulary are "financial engineering."

 

John Mack / Chairman and CEO, Morgan Stanley --- Is this a crisis? Anytime you have this kind of market dislocation, it is. As a result, the quant funds de-leveraged. We processed 8.25 million tickets in one day. Just for perspective, we thought we had set a record two weeks before, when we processed 3.6 million tickets.

 

Bill Miller / Chairman and chief investment officer, Legg Mason --- "Stuff that's not supposed to happen once in 10,000 years happened three days in a row in August." I think these quant models are structurally flawed and tend to exacerbate this stuff.

 

Robert Shiller / Stanley B. Resor professor of economics, Yale University --- boom psychology brought us lower lending standards and a lot of wishful thinking about how easy it is to make money, and both real estate and stocks have been at record highs. So far, I don't see any major change in investor psychology.

 

To let you know that…. I like Morgan Stanley’s … John gives me the answer of recent credit crisis and I know someone in this bad year still makes millions of USD bonus….

 

Good Night, My friends