My Diary 319 ---What we know, Where we are, Its BOC and Who care

My Diary 319 --- What we know, Where we are, Its BOC and Who cares

Four Days’ Up, One Day’s Down…

To equity investors, the last five days are definitely worth of a glass of “Veuve Clicquot” as the S&P500 + 4.1% and HSI + 12.5% since the bottom on Mid-August. Do you really believe what have you seen?...well, you should… as market shows the score card, but I don’t

What we know?

Basically, from what I have read and heard over the week, I don’t think there have any meaningful changes so far. Let us do a quick review of “what we know” list:

1.      The discount rate has been cut. BoA, Citi, Wachovia and JP Morgan all borrowed from the window yesterday. The Fed accepts wider array of collateral at the discount window.

2.      The BOJ left policy rates unchanged at 0.5% on an 8-1 vote. The ECB will maintain their hiking stance for Sept despite the extraordinary steps it is taking to calm European money markets.

3.      Other good news including EURUSD rebounded sharply along with the recovery in equities, mortgage lenders finding investors (BoA invested $2b in Countrywide CBs), Warren Buffet getting back into equities, Fitch saying that German banks are safe, ...

But have central banks and the “investment godfather” and rating agencies have done enough to support a + 2600 ppts rebound of HSI in five days? My personal answer is NO… nothing has really changed in the last week.

Where are we?

By not looking at the stock markets, what I have seen are there is still no liquidity in fixed income side. Sub-prime lending is almost nonexistent. Credit on quality borrowers has been tightened, including jumbo borrowers. Dealers may be buying mortgage pass-through’s periodically but not much else.

In addition, hedge funds have had their leverage cut via higher haircuts or pulled lines of credit.  A Fed ease doesn't help borrowers. It may help margins at banks but it doesn't help a subprime borrow that needs to refinance and can't.

Worse is that futures rolls are not happening (from Sept to Dec) as they would normally because basis players can not get term repo bids on their treasuries. This sounds like the definition of illiquidity to me. In fact, the total amount of outstanding commercial paper fell 4.2% ($181.3 billion), the biggest weekly drop in at least 7 years. Taking the face value, this seems to me that Fed has failed to instill enough calm to draw back investors.

As a result, I don’t believe that this recovery can come in a straight line as banks and funds are still sitting on assets that have lost a lot of its original value, given that credit conditions are much tighter. At the mean time, the probability of a recession 12 months out goes higher in my mind every day considering that downside risks to growth have increased over the last weeks as stated by the Fed and BOJ. I continue to believe market confidence in risk is very fragile and the Fed still needs to cut to sustain confidence levels.

The key issues now are whether recent/further measures taken by major central banks will be enough to stabilize the global financial system, and whether a U.S. economic recession can be avoided.

It’s Bank of China, Not China!

Bank of China had its biggest drop since IPO after disclosing almost $9.7billion of securities backed by U.S. sub-prime loans, the most of any Asian company. Losses related to sub-prime loans damped enthusiasm for Bank of China even after it reported a better-than-expected 51% increase in first-half profit.  This tells you that to how large extent that the investors want to get rid of “Sub-prime” stories.

Very interesting point is today, in A -share market, BOC (6001988) rise ~1% to CNY6.16, while in Hong Kong, BOC (3988 HK) dropped 5.38% to 3.87HKD. As a hedge fund manager, you should be happy to see this type of long-short opportunities which give you + 6% gross return in one day, but the remaining problem now is where do you get funding?

In short-term, I do see the structural catalyst for Hong Kong stocks to move stronger as China continues to liberalize its capital account. While the expected rate cut by HKMA following Fed will provide an additional catalyst to support already robust consumption growth going forward, along with an ongoing broad-based acceleration in wage growth.

Who cares?

A share today, everything looks good. Good 1H07 results from blue chips pushed index conquering 5100.  After 5000, it seems the picture is quite clear again -- Blue chips are leading the trend and the market is going up.

More AH arbitrage seems going forward, as CCB’s general meeting confirmed its A share IPO and Shenhua Energy also wants to do that.  The problem is there is already a long queue out there like Petro China.  Rumor has it that HK is afraid of red chip going back Mainland, because HK as regional financial center may lose glamour. …

I believe A share investors would reply “who cares?” …  Let those big guys return and push the index further….:-)

Have a good weekend, my friends. Btw, I will be out for a biz trip so there would be no daily market diary for the rest of 7 days.

 

[不才白金]

Good stuff.