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My Diary 392 --- There is a dim light; To Buy or To Offload; Def

(2008-03-26 07:07:09) 下一個

My Diary 392 --- There is a dim light; To Buy or To Offload; Deflating USD & Inflating RMB


March 26, 2008

It is interesting to see Europe and Asian investors returning after Easter Holiday with better mood, while American remains cautious (S&P500 +0.23%)...Yesterday global equity moved +1.6%, marked by hefty gains in Europe (+3%) and Hong Kong (+6.4%)…Impressive move, but I think 1-2 day's performance provides no indication of what will come on the following day or two, in particular when funding and credit markets remained stressed, implying another round of bad new there (if/when it occurs) could clearly undermine equities and risk appetite

Today, Nikkei retreated 0.3%, Hangseng climbed 0.7% and MSCI AP lost 0.3% (-11% YTD) after automakers and techs dropped due to the decline of US consumer confidence and US sales. In the Commodity and Dollar spaces, the unexpectedly fell (-1.7% in Feb & 4.7% in Jan) of for US durable goods orders has once again triggered Dollar weakening against YEN (99.15) and EUR (1.5724) so far, while 1MWTI moved up to $102.22/bbl, after having fallen about $8.50 over the past 3 days…The key move is on the rate markets ad UST yield curve flattened further (2-10 spread =174bp vs 196bp on 17Mar). 2yr inched down 7bp to1.726 and 10yr slipped 8bp to 3.475. 30-year mortgage rates was +10bp yesterday at 5.72%, after having encouragingly declined about 50bp over the past 2wks, while Jumbo rates never fall and instead risen +30bp at 7.23%. Future market showed a 40% chance the Fed will lower FFR by 50bp to 1.75% on April 30.

Looking at the upcoming economic data flow, we will have an "uneventful" week. And obviously HK investors are too used to bull markets but I really don't see any real positive catalyst to bring the HSI higher (24000) in medium term…My colleague Frankie pointed out that the markets are very tired of bad news, thus despite weak housing prices, employment, consumer sentiments, etc, market still rebound. But he thinks the US fundamental is still worsening and these bounces look like bear market rally, in particular YTD Dow Jones/S&P500 performance, down 5.5% &7.86%, looks too bullish to me.....

In general, I think there is a big picture here…If the Subprime/Credit loss is a net reduction of the US national wealth, then it should be reflected either in US equity market or the US Dollar or a combination of the two……Since the Fed has started to monetize bad debt and continued to drop short rates……the second scenario seems at their preference…but let us read the data prints more closely……

There is a dim light

The reported US consumer confidence was very weak in March (fell 11.9 points to 64.5), the lowest reading in 15 years, and was much worse than the Michigan and ABC polls, which stabilized in the first part of the month. Moreover, the expectations gauge plunged 10.1pts to 47.9, the second lowest reading in the 40-year history of the survey, only exceeded once in 1973……Such type of survey is important to the markets as the consumer expectations are considered a leading economic indicator (LEI). The latest decline in the LEI is a fresh reminder that the US economic slowdown is not over and risks are to the downside. I think the persistent weakness in the LEI implies that interest rate cuts aimed at curing financial sector distress are justified and further easing are coming soon……

Having said so, the Case-Shiller index has fallen 10.7% yoy in January and since the mid-2006 peak, home prices are off 12.53%. Although only time will tell just how deep the home price correction is, Mr. Bernanke appears committed to prevent any catastrophic outcome there, or against another unforeseen development in US capital markets……Thus, we may see the FFR lowered to 1.50% and ideally mortgage rates are grinding lower, and this is also boosting housing affordability - which is supportive of an "orderly" grind lower in home prices……certainly, lower home prices mean more pain in the Wall Street banks, brokerages and hedge funds, which may report $460bn (4X of already disclosed) in credit losses, according to Goldman Sachs…Such a scale of credit losses may “result in a substantial tightening in credit conditions as FIs pull back on lending to preserve their reduced capital and to maintain statutory capital adequacy ratios.''……It looks like there is light at the end of the tunnel, but it is still rather dim……

Indeed, over the past few days, US financial stocks have staged a recovery but the key will remain on the leverage at those I-banks (30X avg). The Fed has been urging banks to raise additional capital but in the absence of this, there will likely need to be further balance sheet contraction. It appears some of money has been taken out of commodity markets as the ongoing balance sheet contraction forces some of the more leveraged players to cut back positions……See the power of deleveraging……

To Buy or To Offload

As we have just suffered a sharp correction or so-called bear market, however one wants to define it. The explosive daily rallies we have seen in the last few days are possible signs that the market may have bottomed. An important question for many of us is that should we buy or should we offload during the ongoing rally? If history is to repeat or at lease acts as an guidance, then here is the comp-sheet……Since 1970s, the turning point to the end to a financial crisis is always marked by the failure of a prominent financial institution or by a large-scale economic crisis, including Latin America Debt Crisis, Black Monday, S&L crisis, Mexico Peso Crash, LTCM fallout, Enron Scandal, and now Bear Stearns …The key reason is that in the early stages of an economic and financial crisis, policymakers almost always underestimate the severity and potential disruption. Obviously, the Chairman Ben Bernanke made a similar mistake at the onset of the credit crisis by refusing to take proactive action……He and His Fed now try very hard to catch up the deleveraging momentum……

As a result, I think we should be a buyer in the current environment as bear markets are buying opportunities. Here are some of my observations to what have changed over the past few weeks --- 1) the Fed has effectively turned itself from a “lender of last resort” to a “buyer of last resort”. Thus, it is reasonable to say the solvency risk for US financial institutions is effectively reduced; 2) the political side has responded by allowing Fannie and Freddie to expand their capital base ($200-300bn); 3) short-term interest rates have tumbled by over 300 bps since 3Q07 and the adoption of various liquidity boosting facilities by the Fed has triggered another around of liquidity boom; 4) technically, VIX index (32.7) has reached a multi-year high on 17Mar, a level which is a typical indicator of a market reversal……Yes we see it over the past two days……Certainly, there are many risks still out there, such as the disappointing economic news, plus the tremendous mood swings as the majority of investors will remain suspicious and show no commitment. But it is the time to separate the weakening economy from the forward-looking markets……

Talking about the forward-looking perspective, there is always flip-side example. According to BBG, the first QDII product launched by China Minsheng Bank was forced to liquidate, because its NAV drop by 50% and trigger the liquidate clause…It looks like the bank has looked to far to see the coming credit crisis when launch the oversea product…Having talked QDII, we should take a look of regional markets as valuations have further compressed with MSCI China trading at 13.1X PE08 &29.1%EPSG, MSCI HK trading at 15.9X PE08 &4.4%EPSG vs MSCI AxJ at 12.8X PE08 &14.2%EPSG. In addition, our local markets remain volatile as HSI realized volatility stayed at 60%.

Sector wise, the big Chine property developers have showed their demonstrated strong execution and skillful cash flow management during their aggressive geographic and volume expansion in 2007. During the meeting with mgmt team, sector leaders remain optimistic about long-term property price trends in China and hold the view that government credit tightening will force out some overly leveraged developers from the industry. As a result, I think the overall sector is trading at attractive valuations, if considering potential consolidations, with average discounts of 30-50% of 2008E NAVs……Who to buy? Big guys +government background such as COLI and Sino-Ocean…..,

Deflating USD & Inflating RMB

On the BBG screen, EURUSD bounced quickly (1.5423 on 24Mar to 1.5716 Now) and understandably led to perceptions that the USD's recent rebounce was a one-week wonder and that the broader pattern of weakness in the greenback has resumed. I think there are two factors underpinning the move and adding volatility to the currency pair, including 1) the upward trend in EU-US interest rate spreads remains well defined. The spread now stands at nearly 170bp, a dramatic increase from -60bp a year ago; 2) European corporates have been caught out by the remarkable rise in EURUSD and may now be repatriating foreign incomes back into EURs; 3) due to the strong negative correlation between commodity prices and the broader US Dollar, the stabilization/recovery in the former should coincide with USD losses vs the rest of major currencies.  

To the RMB, there is little doubt that, with a reasonable long-term growth prospect, the currency should continue to be supported by rising Chinese interest rates, increasing FX reserves ($1.65trn in Feb08), a booming real estate market and strong capex demand. Today, RMB rose to the highest since a Dollar-peg was scrapped in 2005, as PBOC seeks a stronger currency to slow inflation and curb export growth. In the local news, Shanghai government set a higher minimum wage, adding to signs inflation may accelerate. YTD, RMS has climbed 3.8% against USD, compared with a 2.7% gain in 4Q07. FX traders now are betting RMB will probably get close to 7 at the end of this month.…..indeed, RMB has been one of the best carry trade targets, if there is no capital account limit and inflation persists

Overall, including China, the rest of the world is working hard to handle the US deflation, which will result in an interesting combination of strong growth in the commodity–export regions, plus weak currency and low interest rates in the world’s largest capital market……This should underpinned what I called “Deflated USD, Inflated RMB”…

Good night, my dear friends!

 

 

 

 

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