My Diary 384 --- You Pain then You Gain; Credit and Equity Investor Talk; The National People's Congress; The Chicken-and-Egg
March 6, 2008
Another struggling night for the markets to swim on the woes around Ambac and the adequacy of potential capital injections…A talk from Goldman's CEO, Lloyd Blankfein said that we are somewhere 2/3 through the current liquidity crisis, implying that we maybe still too early to all a bottom of asset price. Adding to his words, today market rumors around UBS is the bank sold its Alt-A portfolio to PIMCO at 75c per$ vs 4Q07@90c, also implying more markdowns. In addition, data released yesterday portrayed the
Equity prices were mixed over the past 24 hours (US and HK flat, Nikkie + 1.88%, while Major EU down 1% now on BBG). UST curve steepened further as 2yr yield (1.566) edged down 9bp while 10yr (3.647) moved up 2bp, with 2/10 spread at its widest since 2004. The US Dollar slipped on a TW-basis (73.209) and against EUR at 1.5345, a new height. Commodities also roared back, seeing 1MWTI closed at an all-time high of $104.62/bbl. Industrial metals prices climbed a healthy 2.5%.
However, one thing to be sure, is that the bigger hurdles arrive with the weekly jobless claims figures tonight and the labor market reports tomorrow……but let us look at Beige Book first……
You Pain then You Gain
In the past week, several Fed officials have signaled deep concern about the
The “Beige Book” prepared for March FOMC meeting had a clearly recessionary tone to it. 2/3 of the districts said that business activity had weakened in Jan and Feb and the other 1/3 "referred to subdued, slow, or modest growth." Consumer spending was seen as "generally downbeat" across the country, with the majority of regions describing retail sales as "below plan, downbeat, weak, or having softened." The Book also said housing markets in just about every area of the country were weak, and were characterized by low demand, high inventories and falling prices...… No doubt that the Subprime crisis has increasingly threatened to engulf corporate and consumers, not just banks/brokers.
Having read the Fed talks, the market is realizing that investors is living in an very interesting times --- (WSJ, 28Feb) Chairman Bernanke publicly states his expectation on some bank failures due to the spreading financial crisis, then shortly thereafter (FT, 04Mar) he publicly calls on banks to forgive a portion of US mortgage loans made to now troubled borrowers. "In this environment," he said, "principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure"…To the Wall Street and many seasoned financial professionals, this is a call more than an economic puzzle…. Why?
Based on the defined duty, The Fed is charged with protecting the soundness of the banking system, while the safety belt is shareholder equity capital, which is generated in part by income-producing assets known as loans. Now the Fed chairman advised the banks should transfer their shareholder’s money to mortgage debtors, an interesting question to follow up is --- how this transaction can help ease the mistrust at the heart of the current credit crisis, not mentioning this could be a new political risk to both parties.
Well, at the end of day, as the Fed’s Chairman, Bernanke knows that the mortgage crisis is in large part the fault of the Fed's own reckless monetary policy --- low real interest rates for too long created a subsidy for debt that spurred the housing and credit bubbles that have now burst…… now his proposal might send a signal to borrowers that they needn't do anything at all, either waiting for their banker to tell them they don't owe nearly as much as they thought, or waiting for Congress to provide its own mortgage bailout…you see how the American logic works out here…You Pain then You Gain…
Credit and Equity Talk
Positive picture across
Nowadays in
I think the Morgan Stanley analyst does lay down some valid points here. Given the
National People's Congress
Nothing is more important than the political agenda. This is something I know as a Chinese, but I think more and more foreign investors understand it as well…… Thus, there is no surprise that the 11th National People's Congress has attracted so many journalists and cameras.
Apparently in this year’s “Work Report”, Premier Wen Jiabao emphasizes that the rising uncertainties and potential risks in the global economy will have bigger impact on
More eye-catching part is regarding the housing policy. The Premier mentioned four key strategies of the national housing policy, including 1) strengthen the housing protection system and to provide adequate small-to-medium sized units; 2) provide enough financial support for middle income family; 3) high-end market demand and supply dynamics to be market oriented; 4) and provide adequate affordable housing for low-income class……Well, there is nothing new so far, but it is interesting to see that the government is still leaving the high-end demand for to market forces, which could imply some potentials for the big & government supported developers, like COLI and China Resources Land.
The Chicken-and-Egg
Many headlines have been devoted to the potential "collapse" of the US Dollar lately. It seems that currency traders have drawn the reasonable conclusion that steady depreciation of US Dollar is in everyone's interest. In fact, the US Dollar decline is acting as a shock absorber (or a stimulus) for the
However, the investors only believe what they have seen…starting from a huge US balance of payments deficits, in which stock and bond markets run in the face of capital flight; and then a credit crisis caused by housing and Subprime mortgage, in which the net long-term portfolio inflows has collapsed at a time when the Fed is cutting interest rates…as a result, a backup in Treasury yields, even when US Dollar drops, would warn of a rising risk premium on US assets. Thus, even though USTs remain well bid and SWFs continue to show interest in US assets, it would be safer to maintain USD short positions, against EM or Commodity currencies, as the US growth expectations have ratcheted down significantly and I do not want to bet against a possible recessionary outcome.
Having said so, the commodity story remains a key focus and oil surged once again yesterday, rising a remarkable $5 a barrel to a new record over $104 after the government reported a surprise drop in crude oil stockpiles (EIA, -3.1mn bbl) and OPEC held production levels steady. Interestingly, there is an ongoing chicken-and-egg argument regarding crude oil, commodities and the US Dollar, and there are various forms of analysis which show one market leading the other. But importantly, some global monetary officials are citing USD weakness as one factor behind oil price gains. But whatever the results, at this extremely price levels, I think the generally high correlation between crude and the EURUSD would imply that oil moves in either direction, it would increase the risk for similar movements in EURUSD…… You see why the
Good night, my dear friends!