My Diary 369 --- Monolines situation is worrying, Chinese shoes are shaking, The EUR bull is ending
January 22, 2008
“God Bless Us” is the final remark of a late afternoon market notes sent by Citi’s regional sales head, quoting huge redemption from long funds and hedge funds, margin call for retail accounts, structural product hedging and pessimistic sentiment. Echoing his comments, Asian equities have collapsed for a second day on unrelenting fears that the
Meanwhile, intra-day BBG news quoted the long-time-no-see investor’s, George Soros, bearish views on the global economy, saying the situation is much more serious than any other financial crisis since the end of WW2. …Now, I see another market rumor saying that FED will have urgent meeting tonight and to cut 75bps…But where is Ben? Does anybody have his phone number… give him a call then ……I will put some inks about monolines first…
Monolines situation is worrying
After S&P and Moody's had placed the ratings of Ambac Financial Group and subsidiaries on review for downgrade, Fitch Ratings has now taken the once inconceivable step of downgrading a major US financial guarantor, Ambac to AA and its senior debt rating to A, leaving both on Watch Negative. The deciding factor was clearly ABK's decision to shelve its equity offering plan given market conditions along with pressure from a large shareholder to consider a less dilutive option of run-off that may be more beneficial to shareholders.
This is a big deal. Monolines insurers have created US$2.5 trillion "wrapped" securities of which US$260bn relate directly to subprime. As the rating agencies adjust their models and start to downgrade the monolines based on a paucity of capital to pay out on defaults, the knock-on impact could spiral…Why? Because the number of forced sellers (AAA accounts that can't hold bonds rated below that) and the investment banks with hedges that need to be written down will lead to further financial system stress. In the case of the
Equity markets are currently trying to price this in, with RBS at GBP3.50, 50% of last summers high at a level not seen since July 2000…Hey, is this another Y2K bug… This looks like overdone, but clearly all the leverage is not out of the system yet.
Chinese shoes are shaking
Talking about A-shares, this market is essentially operated in a closed environment & subject to the local news flow & sentiment. I think it’s now due for some consolidation, hence the risk-adjusted return may not look that favorable in the short-term as mounting inflationary concerns may continue to overhang the market. Policy wise, Chinese government has rang in the New Year with a clear tightening bias, as evidenced by 50 bps RRR hike effective from 25 January 2008 and a significant acceleration of RMB appreciation in the past several weeks. The authorities have reportedly set a new bank loan growth target of 13% for 2008, down sharply from the current loan growth rate of 17%. Last week, the central bank pledged more actions to cool the economy and contain inflation with NDRC surprised the market announcing ‘temporary’ freeze on retail prices on basic foodstuff. It has triggered concerns amongst some investors whether the motive behind such measures is that the food inflationary pressure has been more severe than expected. The most updated CPI forecasts for 2008 now are 5.0-5.5%.
In general, three rationales behind the current tightening campaign --- 1) structurally, it is part of the government’s growth “re-balancing” strategy to reduce the economy’s overdependence on capital spending and the export sector while boosting private consumption; 2) cyclically, it reflects the authorities’ heightened concerns of liquidity overflows in the economic system, and consequently rampant speculation in asset markets; 3) recently, officials have become increasingly worried about overall price stability caused by surging food costs. In this environment, I will continue to suggest "defense" in portfolio construction and recommend overweighting sectors, including toll roads, IPPs, gas distributors, consumer staples, telecom particularly Mobile, Sinopec, while avoiding cyclical sectors, e.g. property, steel, cement, bank, nonferrous, shipping, ship building, construction, etc.
The EUR bull is ending
The Yen rose against the Dollar (106.55) and the Euro (154.63) after the Fed and ECB said economic growth is slowing. As the
Judging from the current prints, the downward momentum for European growth is picking up pace as hard data (German retail sales and IP) and business sentiment surveys demonstrate. The ECB are right to worry about wage deals and the rise in inflation expectations, but at some point lower growth outlook will see these concerns subside. Europe cannot insulate itself from the
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Good night, my dear friends!
