HAPPY NEW YEAR

WISH ALL MY BLOG READERS A PROSPEROUS, HEALTHY, AND HAPPY 2009!

I will return to the blog on January 4, 2009.

CASH IS KING!

中國應否建立航母艦隊？ (from HKEJ)

http://www.hkej.com/template/forum/php/forum_details.php?blog_posts_id=7305#msg_86042

克勞茨維茲說過：戰爭是政治的延續。

這不只是資金問題，而是綜合國策的問題。說到底，中國現時是要做全球的大阿哥，區域大阿哥，區域裡其中一個有決定性影響力的國家，還是純粹自保的國家。

對於現時的中國，自保基本已不是問題。其縱合實力已經肯定是站在"區域裡其中一個有決定性影響力的國家"，並向著"區域大阿哥"邁進。但是要做全球的大阿哥，時機還遠遠未到。因此維護全球秩序和安全這等重擔，還是讓給老美好了。老俄經常想與老美爭，那就更正中下懷：看風使里；利用兩者矛盾，要求爭大環球影響力是虛，鎖緊地區性影響力為實。

這就要求中國的武力要同時能做到域投射和對世界警察(老美)及世界流氓(老俄+伊期蘭)在中國投射區內的反制能力。簡單點說，兩條腿走路。但是其中以反制力為主為實，投射力則是"站在反制力的肩上"；蓋因現時中國還是不宜和上述力量硬碰。只要能減弱他們的在區域內的投射力，"西瓜靠大邊"再加上"山高皇帝遠"，自然能增長中國的投射力。只需要在此基礎上稍稍加點發展於投射力兵種上，自然可以四兩撥千斤地達到目的。

導彈和潛艇主要用作區域反制(和勢力均衡)之用，而航母最重要的功能是權力投射和保護商道。因此，中國以導彈和潛艇為主，加上一定的陸基航空力量作為其區域反制的主要手段，並將這些武器系統(的次級品)的概念作為一個第三國反制思維"出口"，一方面增加收入，另一方面拆美國牆角甚至作為暗戰時交易的籌碼，以鎖緊區域影響力。同時中國慢速發展航母羣，以此作宣傳和熀子，並吸收海權國家維護商道和投射的經驗，與反制力結合，以進一步加強區域投射力，達到成為區域龍頭的目標。 12月19日 10:47

......策略之用有虛有實方能靈活。再者，中國的發展已經從陸地開展到海上去。中國的海域資源豐富，但是以往中國因實力和觀念所限基本上等於放棄海域。隨著中國的高速增長，海域的資源，商道的保護都變得重要。導彈和潛艇可以在戰時打擊對手，但是在和平時宣示主權和投射影響力卻是無力的。在這種低度衝突的環境下，數支實際上經常遊弋的護航艦隊再加上一支航母羣的支援是可以起到作用的。這不單止對對方的艦隊，甚至對私掠船亦可以有震懾作用。 12月19日 11:48

About Newcrest, the Gold Mining Company...

Chan David Brother Law, sorry that maybe I cause you lose money on your put bet. Wish that you remembered to limit your bet.

One thing, I have just read Newcrest in more details. Although it claimed that it has cleared its hedgebook, it still has a gold put contract in effect delivering 500,000 ounces/year for 4.5 year with strike at AUD800/ounce. In a sense it protects its downside risk. But with its huge gold reserve (about 55m ounce) and a large capacity (2m ounce/year for now), its remaining stock of gold will still be affected by the fluctuation of gold price. By such observation, and that gold price will drop back due to the strong performance on bond market as well as Newcrest's price has hit recent high, brother Law may still hold for a while (maybe to next year) if the price of your contract has not dropped below your stop-loss point. 12月19日 14:13

Chan David Lets play some fantasy again, Brother Law.

Some financial data of Newcrest:ROE = 6.481%
P/E at current price = 102
Financial Leverage = approx. 1.5

Now first method to play with.

Given that ROE is 6.481%, if we assume compound interest growth (all ROE re-invested), then it will take about 11 years to break-even the initial invesmtent (double the value of the initial investment). Meanwhile, the actual P/E is 102. For the current market price to be rationalized, the EPS must grow by 102/11 = 9.27 times. Now as it has a financial leverage of 1.5, the actual increase on profit is 9.27/1.5 = 6.18 times. Assume a back-to-back rise between earnings and gold price, it means gold price has to grow by 6.18 times from its current settlement price 975AUD/ounce to 6027AUD/ounce (or 670USD/ounce to 4143USD/ounce) . Even if we assume that it grows steadily in another 11 years (break-even period of the company's investment), it still means a consecutive 11 years growth compounded at 18% annually. Can it be real?

Lets take another scenario. This time we do not use the reverse of ROE to compute the "reasonable PE". By practice usually a gold mine will have 30-50 years right of mining, and the half-life (usually the break-even period) is around 18-20th year. Now lets take 20 as the reasonable P/E and believe that a lost of value of USD will be 5%/year and an appreciation of gold value will be 15%/year, together a total of appreciation of value of 20%/year. Now by usual practise we made a five year forecast to calculate the value of earnings. By 5 year, the future value is 2.49 times of the current value.



Assume we all believe such bull market and has already rushed to the market to buy the stocks and drive it high. At most the reasonable price (at par to the future value) is 20x2.49 = 49.78 times of P/E. Now its P/E 102 times.From the above estimation, plus that actually the bond market is still strong and the confidence on fiat money has not completely lost yet, the current price of Newcrest is more like a rebound after over-sold. Combining with the technical analysis, an adjustment has a great chance to come.Just my 2 cents...my wild thought... 12月19日 15:48

My Answers to about the Oil Price Drop to 38USD in HKEJ forum

For details, please refer to the following link:

http://www.hkej.com/template/forum/php/forum_details.php?blog_posts_id=7284

Chan David Lets set aside the speculators influence on the oil price first. How about the actual users like power plants, vehicles, and air and sea freight?While at the earlier half of 2008 the transportation related companies still madly hedge their price risk by building up long position, the tsunami and the dim future has not only largely damaged their hedging (as they bought expensive oil) but also deeply affected their demand on the future. Combined together, the actual users have no interest on buying oil at all - afterall, they might have already stored a huge pile of expensive oil that may not be used immediately. Although with modern storage technique oil is not perishable in the short-term, the storage still takes fee as well as physical space. With no more spaces available and the expected huge reduction on usage, plus a tight cash flow, they may even want to sell their oil if possible even at a substantial realized loss. Therefore, it is not surprising that the oil futures has dropped like mad despite the "efforts" done by OPEC. 12月19日 12:05


Chan David Lady 海靈心: I am afraid you overlook the factor due to expectation. Oil demand and supply, as well as economic cycle, are not 100% overlap. Before the hard-core really hits the market, the demand on oil was so insatible that the supply could not match (be it physical or peculinar) and drove the future price up. Those companies would really like to buy future oil instead of spot; otherwise, 1 month later the spot price at that time would even be higher than the exercise price of the future contract. Put it in this way, either you buy the oil at future market at premium, or you can't even buy the oil at that time, and your aircraft will be a sitting duck.Now, holding a lot of oil inventory at hand, and a bad future on the business, all they can do is to sell the cheap oil, if possible, in order to get cash, or their abilities to pay back debt will be greatly affected...so much so, it may even affect their abilities to deal with operating expenses. 12月19日 12:38

My Answers to VicktorCapitalist post about Gold

Please refer to the following post in HKEJ forum:

http://www.hkej.com/template/forum/php/forum_details.php?blog_posts_id=7250

My parts:

Chan David One thing I do not agree is about the linkage between other commodities and gold. Each commodity has one's own characteristics, market structures, and cycle. They are not necessary directly related to the conjugate part of the gold-USD relationship. For example, iron ore market is basically an oligopoly, and its price can be manipulated/controlled by the mutual agreement among CVRD, Rio Tintio and BHP Billiton. And due to the vast amount for transportation by bulk ships, these big 3 also exert significant influence on freight price (and hence BDI). Yet, whether or not these 3 companies will simply be affected by a gold rush is subject to further queries. 12月18日 13:49

Chan David Another part that is subjected to further discussion is about the collapse of US treasuries. As pointed out by Mr. Lin in his HKEJ column today, US gov't and FED are the biggest buyers/holders of US treasuries. Since they are also the sole suppliers in the primary market, they have certain controls over the demand and supplies and hence the price of US treasuries. Unless USA is no longer the hegemony but a lame duck with its scale of economy downsized more than 1/2, it is hard to find a competitor of equivalent strength and importance. Setting aside the fluctuation, even at big scale, of USD price, USD is still the ultimate currency. Other countries/investors bet not just on the inflation rate of USD but also on the strength (and hence abilities to honor the contracts) of USA. Up till now a substitute with USA's size and power has still not emerged. Thus, inflation or not is not the only factor, or not even the most important factor that affects USD's value. 12月18日 14:04

Chan David Brother 肥嘉: Rally is different from a continuous trend. The current rally can be of short-term technical rebound. At least, from the actions taken by mining companies as well as the performance on bulk freight, the return of ore-related commodities is nowhere near. 12月18日 14:24

Chan David Brother 肥嘉: as I said already: At least, from the actions taken by mining companies as well as the performance on bulk freight, the return of ore-related commodities is nowhere near. 12月18日 14:48


Chan David Brother Law: from the way the money move, particularly treasuries of OECD countries all have their yields dropping, the investors for the moment still choose fiat money as the currencies rather than gold. Gold may act as a security in their portfolio. If that is the case, gold price may fluctuate only at a narrow trend. 12月18日 21:46

Another Bubble?

I have the feeling that FED is trying to create the bond market bubble to re-inflate the market. They wish that bond market and government spending can temporarily take over the role of equity market and bank loans respectively. Meanwhile, FED will deal banks with carrot and stick: "easy money" through buying assets and discount window is the carrot; tightened regulations is the stick. With money flooding, banks can survive under the current accounting principles and the banking regulations. Yet, without viable projects and bright expectations, in addition to the competition from the government, banks are reluctant to lend money. Afterall, if government takes this role, why do banks bother to risk of their own money at a highly uncertain market? Such attitude will dampen the recovery speed.

Back to the topic: bond market bubble. Can it be the savior? I am afraid not. Bond market will only alienate the recovery, not enhance it.

Now lets assume that FED measures work and bond market is hotter than the equity market. With insufficient participants in the equity market, it is no longer efficient and delivers no clear estimation through stock prices.

The way bond works, from an investor point of view, is a bet on the company's survival, not development. Bond price comes from the discounted cash flow of the principal plus the coupons. The only "derivative value" of bond is the coupons. Since coupon's nominal value is fixed, it does not relate to company's performance. It can only tell you the company has the ability to repay the debt but reflect nothing on its potential.

The present value of the coupon is only the nominal value divided by the current cost of capital. At the normal "healthy inflation" period, the maximum present value of the coupon is only at par when the market is estimated as risk-free. The higher the risk, the higher is the discount rate and the lower is the coupon present value. While in free market, the cost of capital is "negotiated at the best knowledge"; the benchmark, FED target rate, is manipulated as a tool for controlling economy. During a economic downturn, the risk is high and hence the cost of capital is high. But in order to "stimulate" the economy, FED moves the target rate low, at the expenses of tax-payer. On the other hand, during the economic boom, the risk is low and hence the cost of capital is low. But in order to "cool down" the economy to prevent inflation, FED moves the target rate high, at the expenses of debt-payer. The resulting effect is that while the actual risk of bankrupcy of company is high, the coupon has a higher value due to a lower FED rate for stimulation, and vice versa. In other words, investors are paid a lower risk-adjusted rate of return during a riskier period, and a higher risk-adjusted rate of return during a safer period. If we alter the view to corporate, the worser the corporate and the riskier the period, the higher is the present value of their coupons, and vice versa. All in all, it encourages riskier companies to issue bonds at riskier period and investors to buy riskier bonds at riskier period. What would happen when one day those companies really bankrupt?

75pts Cut - Cocaine or Placebo?

FED made the historical cut last night and drove DJI, S&P500, and NASDAQ up by 4.20%, 5.14% and 5.41% respectively.

Nevertheless, anyone who had paid attention on the T-bill yields and FED funds rate for the recent 3 weeks would not be surprised by the cut for the de-facto FED rate had been between 0.12% and the lowest -0.012%.

LIBOR have also been driven down to 88pts (3month) and 185pts (6month) respectively. 3month T-bill yield rate is 6pts. TED hence has narrowed down to 2-digit: a difference of 82pts.

Long-term finance rates have dropped but the risk premium has remained outstanding by far: 516pts (5 year) and 592pts (10 year) respectively. It echoes by the corporate bond market in which investment grade and junk grade bond yield rate are 7.22% and 22.49% respectively. Comparing with the figures with last month, the 75pts cut have not exerted the same effects on corporate bond markets. It means the worries on the survival of corporates have not passed yet.Such lack of confidence on corporate survival, convoluted with the competition by treasuries markets, makes the last night rally as prescribing a dying patient cocaine as placebo. Had the economic conditions not changed and FED continued to supply money through manipulating bond price expectation, the stock market eventually will subject to a big adjustment after the rally.

Negative Interest Rate

Fed Funds rate has dropped by 0.12% to -0.06%.

Spread between TIPS and T-notes are as follows:
5-year: -21pts
10-year: 17pts
30-year: 74pts

TED spread is 191pts.

If we take the actual FED funds rate as reference, then the 5-year and 10-year AAA banking and finance rate risk premium, together with mortgage spread rate, has not decreased.

In other words, FED is supplying money for banks to polish their balance sheets but the money cannot leave the banking system. Alienating the yield rate of treasuries cannot cover the actual lack of good investment projects, except the ones that are not related to daily demand and supplies.

The Effect of Zero Interest Rate

By manipulating the short-term bond rate and hence rise the bond price, the actual FED funds rate is close to zero. Now the effect has been shown, coupling with so-called good new s like stimuli and bailout plans. However, the mortgage rate and finance rate, if compare to the actual rate, are still at high risk premium. Despite the decrease on price of longer term bond, bond market has not really collapsed. Besides, TED spread also shows that the deflation expectation within 5 year is still valid. Considering the rather small volume of DJI, HSI, and even Shanghai indexes, the HSI currently is subject to a rebound due to an influx of money, possibly from China and from other overseas money retreated from China market.


With the short-term influx and the mid-term dim expectation, the rebound may not stand long. Events like prolonged deflation, jobs cut, other firms collapses, or at least unfavorable 2008Q4, 2009Q1, or 2009Q2 results can trigger the end of rebound. During this period, either hold cash until the period is clearer or speculate on the ups and downs of the equity market. Gold worths attention when demand on gold will rise due to huge supplies and high velocity of USD in the market, through not only government pumping but also welfare policies (if any).

公司債卷或有可為

在現時股、樓、匯、金、商品和衍生工具都閹悶的情況下，債市或許是有投資價值的市場。如果嫌政府債卷的回報太低，則可以考慮風險較高的公司債卷。公司既難以從股本市場集資，而銀行又為了避險而不願融資下，發債是一個可行的途徑。由銀行的角度來看，他們也樂意為上市公司發債包銷。一來公司可以繼續營運，銀行繼續保有客戶。二來銀行的舊有借給企業的貸款的信貸風險由一眾債卷持有人共同承擔，甚至公司借來的錢可以直接還給銀行，間接減低銀行的壞賬。三來銀行不願放債就等於沒有利息收入，在只有少量上市生意下，幫公司發債又是一門生意。既有費用收，又可以減低自身風險，何樂而不為呢？在這種情況下，買賣雙方都有越來越多人進場，也就是說投資者也因而多了選擇，這對有興趣投資債市的人來說是好消息。

FED Funds Rate 0.06% - Historical Low since 1954 Record

Before the actual announcement from FED have happened, market has already responded to the expectation on zero interest rate. FED funds rate hit a record low of 0.06% ever since 1954.

3-month and 6-month T-bill yield rate lowered to 0.01% and 0.25% respectively. 12-month T-bill yield rate was only 0.57%.

Even longer term note and bond yield have decreased. Market is lust for shelter as well as potential for some speculation. Exit period of the bonds issued may come before the offical decrease of interest rate ceases at 0%, and government starts to issue higher yield bond to fund its stimuli plan. Yet, after issuance, any wave of speculation may increase. Companies that can be benefited from the stimuli plan may find their corporate bonds issued now may rise in the price during that period.

Another observation is that the T-note/bond-TIPS spread has turned around from deflation expectation to inflation expectation: 5 year inflation expectation is 0.14% and 10 year is 0.59%. Yet, both are small in magnitude.

Despite the expectation of huge money supply, the market does not expect a real inflation will go ahead. Depending on the scale of stimuli, raw materials prices may subject to a rebound due to USD depreciation and demand from infrastructural projects.

FED has Already Lowered the Target Rate

Special meeting announcement? No. Insider News? No.

Please just pay attention to FED Funds Rate: 0.38%, and 2 weeks before it had dropped to 0.5%. Last friday, before the finish of rebound, FED funds rate did touch 0.38%. It rebounded on Monday to 0.5%. But last night it touched 0.38% again and now sits there.

FED Funds Rate is the actual rate that the banks "borrow" the surplus of the counter party bank in the FED balance. FED can adjust and usually adjust this rate close to the Target Rate (now 1%) through open market operation.

Yet, ever since 2008, FED has not followed their own Target Rate tightly. The spread has been about 200pts. But ever after the black October and November, the spread has expanded to 400-500 pts, and now even 620pts.

Another observation is on the 3-month T-bill. The Monday auction hits 0.05% discount rate, a huge drop from 0.15% from last auction. Apparently FED cannot wait until another week.

Despite the "advanced drop" of interest rate, the risk premium charged on corporate (3A banking and finance rate) and on mortgage do not fall in proportion: 5-yr: 543 pts -> 552 pts; 10-yr: 611 pts -> 652pts; 30-yr fixed: 483 pts -> 514 pts;1-yr ARM: 499 pts -> 548 pts.

Market has not hit the bottom yet. Most experienced investors currently will adopt Mr. Cho's method (a small percentage for "gambling" and others in cash or cash equivalent vehicles). Thus, there are money rolling in the market and fluctuating it. Nevertheless, since these money targeting on making profits through both long and short position, coupling with the overall continuous economic downturn the rebirth of the equity market is still not in the recent future.

Bond Price Rose After Settlement; USD Dropped – What are the Inspirations?

3-month T-bill price rose from 0.10% (“discount rate”) on Monday after the auction of 0.15% bulk to 0.04% on Friday after closing. 6-month T-bill price fluctuated from 0.39% closing last week to 0.54% after the sale of 0.55% bulk and then rose to 0.44%. 12-month T-bill price rose from 0.94% after the auction of newly issued 1.05% bulk to 0.81% on Friday after closing.

Longer term notes and bonds prices have similar fluctuation pattern: dropping after stock market advancement then rallying and rebounding back to a relatively high level.

Corporate bond yield has dropped by 12pts (for investment grade) and 140pts (for junk bond) to 7.98% and 22.00% respectively after the announcement of the bailout of Citibank and the grand scale stimuli plan by USA, UK, China, and other governments.

Despite the softening of government bond prices and the trace decrease of corporate bond yield, both governments bond prices and corporate bond yield remain high. Most of the economic data announced confirm the recession and project a dim future. Although stimuli plans by various governments help restore the market confidence and lure part of the cash reinvest on equity market, investors’ confidence is still weak, and their attitude is still risk-adverse. Hence, regardless the recent strong rebound on stock market, on average 15-20% from the lowest point in 14 days, money still seeks shelter and drives the bond price up amidst fluctuation.

The 3A banking and finance rates echo to the market worries on corporate survival: 6.34 and 7.11% respectively, comparing with 5.98% and 6.95% closing last week. Combining with the corporate bond yield rate, it shreds no light to the coming 3 months company performance.

Another factor that drags down the rising speed of bond price is the expected decrease of FED target rate and hence the over-supply of USD. USD rate against EURO and GBP have decreased from 1.24 and 1.43 to 1.27 and 1.55 respectively. Such decrease makes USD asset, including government bonds, unfavorable. It is temporary, though, for ECB and BOE will announce another wave of decrease of interest rate to cope with the existing shrinkage of credit. Yen, under the deleveraging, will surge due to unwind of carry trade. It will hammer the Japanese export stock accordingly.

The flooding of money may or may not cause another wave of asset appreciation. Two scenarios can be expected.

The first scenario sets on the competition of resources between government and corporate. So far the debt market has not changed its pessimistic view on corporate as shown on the high corporate loan rate and corporate bond yield rate. The enormous government stimuli plan, including direct bailout of troublesome corporate, guarantee on mortgages of home owners, and investment on infra-structural projects, will be done by the government directly to the market without intermediates. Although it avoids the problem of blockage of capital flow by banks for capital reserve, it weakens the multiplier effect since the value chain from the government directly to the corporate is short. Corporate receiving the fund will only save more retained earnings rather than reinvestment/expansion/distributing dividends so as to polish their balance sheets. Infra-structural projects usually result in redundancy and wastage of resources even though in the construction period the commodity price may rebound. None of the above can inflate the market with sustainable capital.

In addition, government needs to issue more higher-yield government bonds to raise funds from the market (without raising tax rate) for stimuli plan; thus, it competes for fund with and actually sucks the essential seed money from private sector. It is reflected on the lowering of government bond yield rate. With the expectation of the slow pace of equity market and company expansion as well as of the higher intervention from the government, market will invest and even speculate on government bonds. The auction price of the government bond will start initially lower to attract investors, and in spite of the lack of room of further decreasing interest rate, the lack of alternative risk justified instrument will drive investors to compete for government bonds and drive the price higher. As a result, the money supplied by the government will return to the government, with only a small part really stay in the market and roll. Corporate will follow the same route disregard of the higher cost of capital. Debt market will be the next appreciating market.

The other scenario will sets on the excessive supply of the money to the market and induce a hyper-inflation. This scenario will happen when government expands the state-owned sector over the private sector. Under the government direct management, political considerations will over-ride the economical and commercial ones. Labour will be over-paid and will under-perform. Organization size will inevitably grow, and efficiency of production will decrease. Stickiness of salary and government expenses through the purchases of unnecessary resources at over-stated price and the creation of redundant jobs may provide a temporary secure feeling to the public. They may spend more and induce a boost on internal consumption. Meanwhile, the corporate, under the government protection, will earn unexpected profits and be tempted to expand further. Bureaucrats will encourage these behaviors for their better evaluation of performance and corruption. These excessive demands will drive the equity market, commodity market and property market high and lower the attractiveness of bond market (and leave the government with even higher deficit). Yet, without substantial growth of GDP due to low efficiency, soon asset and consumer product prices will overshoot and result in hyper-inflation. Under such scenario, gold, and probably oil and agricultural product, price will shoot up high. Stock market will be highly volatile, and debt market will plummet.

Bond Market Goes Upward; Stock Market...well...

AAA banking and finance rates, 5 year and 10 year respectively, are rising again to 6.53 and 7.43% respectively which are inline with the tendency of corporate bond rates.

3-month T-bill is still discounted at 0.150% like last week. It may affect the secondary price by dragging it down from a discount of 0.01% last week now back to 0.09%. Apparently there is profit-taking behavior due to both speculation as well as news like Citibank bailout by US government. On the other hand, 6-month was sold at 0.49% this week, a huge drop from 0.84% last week. This is a sign that capital rushes to bond market for shelter except that the close-to-zero rate of 3-month T-bill becomes unattractive. Such drop also widens the TED spread to 171pts though this time it is initiated by the drop on T-bill but not LIBOR. While short-term credit risk is not the issue, the confidence on the market is apparently lost and losing.

The discrepencies between TIPS and Bonds are:
5-year = -0.42%;
10-year = 0.28%;
30-year = 0.42%
From the above data, the market has extended the deflation period to 5-year.

Certificates of Deposit rates have decreased. It reflects the expectation on the coming decrease of target rate as well as deflation.

Combining the above phenonmena, liquidity issue is still alright but confidence on the equity market has lost to debt market. Even for debt market, corporate bond market is doomed as worse news has not all emerged yet. Investors become more and more risk adverse, and the expectation on deflation has extended. Judging from the way many banks announced their Q3 results as well as the financial statements last year/Q3, financial institutions will continue to have problems/bad news. Other companies will also face similar problems. However, as the market has dropped tremendously before, investors may attempt to do bottom fishing. Yet, it can only trigger rebound, not refuel the market.

怪圈：USA越減息越跌市

最近長息最終跟隨拆息回落：5 year AAA banking and finance rate = 5.94%; 10 year AAA banking and finance rate = 6.86%。但是這並非代表雨過天清：

1. 美國政府已經改變救銀行的方向；各大銀行自求多福；季結和年結又將臨近，必然要"做靚盤數"：生意少做不打緊，最緊要沒有更多壞賬；短期多給大額存戶存款利息沒問題，但求他們的資金能"再坐一會"。
2. 風險溢價仍然高企：5 year = 494點，比上月同比高11點；10 year = 586點，比上月同比低17點而已、比三個月前仍高出204點子之多。
3. 公司債卷的贖回孳息上升：投資級至8%；高息級至24%；市場對公司的生存和還債能力的信心仍然不足。
4. 樓按的風險溢價，除一年期浮息外，仍較比上月同比高16-50點不等，其中以豪宅樓按的升幅較高；在裁員潮下，貴價樓當然乏人問津。用次按買中小宅的已死得七七八八。危機源頭開始收縮，然而危機仍在擴散中，尚未穩定下來。
5. 但是，另一方面，在需要大額的資金儘量存入銀行的情況下，各銀行出的存款證的息差由一個月的90點子，六個月的198點子、一年的248點子至五年的292點子不等。
6. 各國的政府債卷的孳息均不斷下降，而其中結合相對歐羅和英鎊上升的美元來看，美債仍為"避難所"，因此資金湧入，進一步推高美債價格。
7. 今年第四季季結方能顯示各企業最惡劣的成績。在市場如斯波動難明的情況下，所謂股市領先經濟六個月的說法未必適用。資金流向易受情緒的影響而變得極端。
8. 在避難心態下，再加上預期美國再減兩次隔夜息，資金進一步湧入債市和貨幣市場，與股本市場競爭資金。結果是越減息資金反而越遠離股本市場而流向債市。

本港股市是否在10676已尋到底部與否仍非定數，端視下列因素而定：

1. 美國樓市和各証卷市場是否在2009年上半年在穩定中。
2. 中國的拯救經濟措施在2009年上半年是否已開始收效。
3. 香港的救市措施能否現在開展(多數不成)。
4. 下年農曆年前後的裁員潮和因而引起的斷供及消費進一步萎縮等的連鎖反應。

由於技術上看底部已近；終極一跌是否到來，還看以上各點。亦正因為市況還未明朗，狂做單邊倉易遭挾死是也。必欲做單邊倉，小注分價分段買賣為宜。

Money Rush Back to Bond

(For November 17, 2008 Bloomberg data)
3 month bill was auctioned yesterday. The yield was 0.150%. At the secondary market, the existing bill has already had its yield dropped by 6 pts to 0.09%, another new low. Spread from FED rate is -64pts. But if FED rate drops to 0.5%, then the spread will be -14pts. If it is 0%, then the spread will be 36pts. The market speculates strongly on a cut of interest rate in 3 months to zero.

6 month bill was auctioned yesterday. The yield was 0.840%. At the secondary market, the existing bill has already had its yield dropped by 8 pts to 0.76. Spread from FED rate is 52pts.

6 month UK bond yield is 1.71% (BOE rate is 3%); 6 month Germany bond yield is 2.05% (ECB rate is 3.25%). The spread is 42pts and 85pts respectively.

USD vs EUR is 1.2643; USD vs GBP is 1.4986; USD vs JPY is 96.395. The previously weak dollar has started to rally as all countries will compete for lowering interest rate to stimulate their economies.

On the other hand, Certificates of Deposits in US remains at relatively higher yield. 6 month CD is at 3.01%; JUMBO for the same period is 3.18%. Banks are on the one hand lusting for money and willing to offer higher rate for deposit. On the other hand, banks are unwilling to lend money that are both reflected on high mortgage rate (30 year fixed 6.08%; 15 year fixed 5.76%)and high AAA banking and finance rate (5 year 6.24%; 10 year 7.70%).

The above will reflect the harsh environment of banking and finance. The cost of capital from personal accounts, particularly large deposit, is high due to loss of confidence from the clients. But, the bank in turn does not trust the corporate and demands a high cost of capital on them. Hence, the "backbone" of the business, commercial loans, will greatly diminish, on both clients and profit margin (due to narrowing risk premium). The shrinking wealth management and investment bank business will only worsen the situation. Cost cut through layoff can only be first aid. It cannot cure the situation, nor can it even just stop the worsening.

With a declining banking business and the increasing government intervention (direct "investment" on various projects), SMEs may cease the dying wave for now but in the longer term the lack of "investors" will delay the recovery (and even encourage corruption).

Bottom is Coming Closer, But Not Yet

DJI, S&P500, and NASDAQ all rebounded by significant percentages last night after touched the day's low.

Oil companies along had led 317pts rose on DJI in accordance with the oil price rally, according to reports on bloomberg.

CB Richards raised capital from the market by issuing shares and walked them through the capital shortage for the moment.

Nevertheless, despite a drop on T-bill and Gov't Bond price, overall speaking the 3-month and 6-month T-bill remain at low level: 0.18 discount rate and 0.92 yield rate, respectively. So do 12-month and 2-year note, at 1.13% and 1.23% respectively. TED has increased to 197pts from 182pts 2 days ago. Spread between 10-year note and 2-year note is 261pts, comparing to 256pts 2 days ago. As USD is climbing against JPY and GBP again, money is continuously flowing back to US market. In US market, although equities price rose according to speculation on individual company's result, a bulk of money still chose relatively safer tool as shelter.

Another hint on company performance is that the AAA banking and finance rate, after a consecutive drop for about a week, rose back to 6.36% (5year) and 7.86% (10year) respectively. Ambigious plans from US treasuries have damaged the market confidence. The alternation on Paulson's plan reveals both the handicaps and the fierce internal struggles between the current and the elected presidential office. Republicans will hijack (or even sabotage) the government operation for last-time bargaining before Democrats can fully control the government by next year. Skeletons inside the box can be expected for the first and even second quarter of 2009.

Jobless claims hits 516k and is worse than the consensus 482k, according to bloomberg.

The economy of USA is still worsening. Bankrupcy will continue to surface as the capital environment has not really eased considering the widening risk premium of company loans and the steadily high spread between FED and Interbank rate. As USD rate is getting closer to JPY, USD becomes a competitor of JPY on carry trade. Demand on USD will increase while demand on JPY will retreat. USD obtained can be invested on carry trade market, bond market market, and equities market (while commodity market will be less likely as commodity demand is greatly decreased, and the portion taken up by actual commodity demand by USA does not match with emerging countries like China). With US government bonds as the back-up on the portfolio (thus yield stays low), investors can use smaller portion to speculate on other higher interest rate currency and on both ups and downs of equities market. Swinging back and forth from one market to another is expected. But as limited by the economy, as shown on increasing jobless claims, decreasing house orders, decreasing consumer spending, and high treasuries deficit, the overall trend is a dropping one.

Since Central Banks worldwide are mad on cutting rates to boost economies, carry trade will shrink and die most quickly. The sufficiency of currency, at a while, will boost first bond and equities markets in turn, depending on different periods of result announcements. After announcement and confirmation of various infra-structural projects from governments like USA and China, commodities and BDI may return to a certain level. Equities on related areas may also rise. However, such "artifical" increases cannot stay for long without supports from new inventions and innovations. Assume there is no such discovery being made, then thhe world economy after a flush of cash, will drop again, either by deflation (in USA) or by stagflation (in China).

China Retail Rose by 22% - Decoupling or not?

Retail in China rose by 22%. Good news. A solid proof of decoupling, isn't it?

Wait. Question: By what percentage the wages has increased in China since last year?

20% at least. Middle management and professionals have even higher percentage as shortage is there.

But do we still have shortage this year? Or has the gap been narrowing? According to my little survey on headhunters, the answer is "YES', particularly on real-estate, finance, investment, and professional services related areas. These people belong to one of the groups who can spend most.

The decline of sales on telecommunication and electrical appliances and household related decorative and utilities materials, another part of the domestic consumption, which takes a big pie on manufacturing, tells another story. The decline on real-estates and investment has already started to affect on certain area. Another area that was not told in the statistics is restaurant. The middle-to-high class dining places have been closing ever since the lower half of the year.

Clothing rose. But please pay attention that the real famous brand name fashion companies all have significant loss, including China areas, in their income statements. Daily casual clothing is not much affected: afterall, you will not go naked on the street, aren't you?

One should never forget that the largest pie on GDP is still export. Yet, influence on the consumption due to weakening export takes time to effect. It has to walk through the supply chain, shut down the factories that solely rely on exports, laid off their labour, cause the remaining to focus on domestic market, initiate another round of survivors' games, kick out the unfit, cause another lay-off wave, cripple some stores, layoff the labour related to that sector, and eventually settle.

Won't the 4t RMB stimuli program bail China out from this miserable future? Government spending project can certainly prevent or at least delay the worsening. But it cannot simply reverse the trend and boost China economy to a new level. For details, please refer to my previous articles.

Afterall, this year China workers have salary risen. How about next year?

AAA drops; TED Spread Rises

Both 5 year and 10 year AAA banking and finance rates drop at a slower speed, and settle at 6.30% and 7.77% respectively. The risk premium of each is 530pts and 677pts respectively. One month prior, immediately after Oct 10 and interest rate cut by 50pts, the risk premium of each is 475pts and 600pts respectively. With massive bailout and expectation on new policies, banks are still unwilling to do longer term commercial loans. The figures are actually worsening. More bankrupcies in USA can be expected (that will further drive down the market).

Mortgage rates drop also slowdown and settle at the range of 5.93 to 7.31%. Property market will continue to go worse and trigger another wave of panic.

1 Month LIBOR is 1.54%. 3 month LIBOR is 2.24%.

The 3-month T-bill was auctioned yesterday at a discount of 0.355%. Today at ET2:00am the T-bill was quoted at the discount of 0.42%. Despite the drop which may be a hint of capital leaving risk-free market looking for short-term return, the TED remains at 182pts, some 150pts deviated from the normal range. Further observation on the 3-month T-bill at later period, after Asian market closing and European marketing opening, may show the trend of US market tonight.

Meanwhile, UK, Japan, Germany, and Australia have their government bond prices risen. Investors on OECD are shown to become more and more risk-adverse. Brazil bond prices dropped on the other hand. Lack of confidence on emerging countries economic and underlying political stability arises. Money continuously flows out from these countries.

Hong Kong, with the rather small pool, China factors, free capital flow, and lame government becomes a haven for speculators and risk-takers. By balancing a portfolio with risk-free assets, globalized investors can on the one hand borrow JPY to invest on comparatively safer asset in OECD countries; on the other hand, can put a part of the investment to make a fortune by speculating in Hong Kong. While overall speaking Hong Kong will not be immuned from the downturn by both USA and China, high magnitude of fluctuation on a downward long-term curve can be expected.

Money Supply Drop on the Last Week of Oct

According to bloomberg, the M2 supply was recorded as -48.2billion at the last week of October, 2008.

Meanwhile, the secondary market 13wk (3month) T-bill yield at the same week were as follows:
Oct 27 - 31: 0.84, 0.76, 0.61, 0.40, 0.44

Despite the fact that the target rate was dropped from 1.5% to 1.0% at the same week, the drop on yield is still significant. We may compare with the same data for one week earlier.
Oct 20 - 24: 1.24, 1.09, 1.03, 0.96, 0.86
M2: 54.3b

It may be a coincedence. However, if US government becomes competitive with the bank on taking deposit, the efforts of US government on money injection to the banking system will go in vain.

Long-term AAA banking and finance rate premium over target rate maintains high:
5 year: 542pts;
10 year: 687pts

So are mortgage rates:
30 year fixed: 503pts;
15 year fixed: 470pts;
5/1 year ARM: 495pts;
1 year ARM: 469pts

Both corporate and property loan markets signal winter. Government bonds are welcomed despite its low yield rate (and even lowering coupon rate). Particularly under the expectation on further reduction on FED target rate will bring up the government bills, notes, and bonds prices. Goverment's abilities on fund raising is also weakened due to lack of creditibility in spite of the announced result of presidential election. Currency of USD will be expected to drop against EURO this week, neutral against JPY, and rise against AUD, NZD, etc.

China's 10 economic stimuli may have some encouargement on AUD rate. Yet, the declining economy plus the sliding interest rate will offset the favorable factors and further turn AUD downward.

This week USA equity market may also experience another slide (with fluctuation), with the knowledge that money is looking for shelter from volatility and grimmy hope. The rebound within this week may prove technical only.

Chinese Bonds may Surge

The massive stimuli plan requires fund to operate. With the reduction of export and the growth of foreign currency reserve, Chinese government cannot print as much money as last year. While rising RMB rate is a method, the side-effect of further hammering the already-at-stake manufacturing industry is too much to risk of. Even though the isolation from many of the foreign financial products prevents massive write-offs, banks in China will still be prudent on loans due to the reduction of risk premium by interest rate cut. Therefore, a plausible plan for Chinese government is to issue bonds at a low price and a high yield to collect money from the public. With the expectation that further interest rate cut may follow, the bond price has the potential to rise. It can be furthered by the rather lack of choices on financial products.

Nevertheless, it will enlarge the financial deficit of Chinese government and may act as a disfavorable factor on the future RMB rate.

The 10 Saving Measures of China

From New China Agency:

温家宝主持召开国务院常务会议 研究部署进一步扩大内需促进经济平稳较快增长的措施

新华网北京１１月９日电
国务院总理温家宝５日主持召开国务院常务会议，研究部署进一步扩大内需促进经济平稳较快增长的措施。
会议认为，近两个月来，世界经济金融危机日趋严峻，为抵御国际经济环境对我国的不利影响，必须采取灵活审慎的宏观经济政策，以应对复杂多变的形势。当前要实行积极的财政政策和适度宽松的货币政策，出台更加有力的扩大国内需求措施，加快民生工程、基础设施、生态环境建设和灾后重建，提高城乡居民特别是低收入群体的收入水平，促进经济平稳较快增长。
会议确定了当前进一步扩大内需、促进经济增长的十项措施。

一是加快建设保障性安居工程。加大对廉租住房建设支持力度，加快棚户区改造，实施游牧民定居工程，扩大农村危房改造试点。

二是加快农村基础设施建设。加大农村沼气、饮水安全工程和农村公路建设力度，完善农村电网，加快南水北调等重大水利工程建设和病险水库除险加固，加强大型灌区节水改造。加大扶贫开发力度。

三是加快铁路、公路和机场等重大基础设施建设。重点建设一批客运专线、煤运通道项目和西部干线铁路，完善高速公路网，安排中西部干线机场和支线机场建设，加快城市电网改造。

四是加快医疗卫生、文化教育事业发展。加强基层医疗卫生服务体系建设，加快中西部农村初中校舍改造，推进中西部地区特殊教育学校和乡镇综合文化站建设。

五是加强生态环境建设。加快城镇污水、垃圾处理设施建设和重点流域水污染防治，加强重点防护林和天然林资源保护工程建设，支持重点节能减排工程建设。

六是加快自主创新和结构调整。支持高技术产业化建设和产业技术进步，支持服务业发展。

七是加快地震灾区灾后重建各项工作。

八是提高城乡居民收入。提高明年粮食最低收购价格，提高农资综合直补、良种补贴、农机具补贴等标准，增加农民收入。提高低收入群体等社保对象待遇水平，增加城市和农村低保补助，继续提高企业退休人员基本养老金水平和优抚对象生活补助标准。

九是在全国所有地区、所有行业全面实施增值税转型改革，鼓励企业技术改造，减轻企业负担１２００亿元。

十是加大金融对经济增长的支持力度。取消对商业银行的信贷规模限制，合理扩大信贷规模，加大对重点工程、“三农”、中小企业和技术改造、兼并重组的信贷支持，有针对性地培育和巩固消费信贷增长点。

初步匡算，实施上述工程建设，到２０１０年底约需投资４万亿元。为加快建设进度，会议决定，今年四季度先增加安排中央投资１０００亿元，明年灾后重建基金提前安排２００亿元，带动地方和社会投资，总规模达到４０００亿元。
会议要求，扩大投资出手要快，出拳要重，措施要准，工作要实。要突出重点，认真选择，加强管理，提高质量和效益。要优先考虑已有规划的项目，加大支持力度，加快工程进度，同时抓紧启动一批新的建设项目，办成一些群众期盼、对国民经济长远发展关系重大的大事。坚持既有利于促进经济增长，又有利于推动结构调整；既有利于拉动当前经济增长，又有利于增强经济发展后劲；既有效扩大投资，又积极拉动消费。要把促进增长和深化改革更好地结合起来，在国家宏观调控下充分发挥市场对资源的配置作用；发挥中央和地方两个积极性。
会议强调，尽管我们面临不少困难，但我国内部需求的潜力巨大，金融体系总体稳健，企业应对市场变化的意识和能力较强，世界经济调整为我国加快结构升级、引进国外先进技术和人才等带来新的机遇。只要我们及时果断采取正确的政策措施，把握机遇，应对挑战，就一定能够保持经济平稳较快发展。

In appearance the plan looks grand. However, plan 7 has to be done no matter under what circumstances. Plan 2 and 8 target on improving securities to town's residents and farmers for narrowing the income gap and stablizing these people. They are more political than economical. So is plan 1 for the root class in big cities. Plan 4 is for social welfare purpose and hence political stability. Plan 6 is vague; it is more than obvious that Central Government has no ideas on how to do with high tech development.

On the other hand, plan 3 has already been launched before the financial turmoil. And as they are large scale infra-structural projects, they cannot be speeded up at will. More money may put to raise more projects and create more opportunities. Although these projects can improve the hardware economic efficiency and effectiveness of the country, the main aim is more on creating jobs to prevent citizens from going mad and riot due to unemployment. Plan 1, 2, and 5 have similar properties. The Net Present Values of these projects are on questions.

The more substantial plan is plan 9 which can help ease the real core deal: the closing of production facilities due to liquidity and heavy taxation. Nevertheless, even if they can pass over the toughest liquidity period, whether or not they can stand a chance in 2-3 year period of time is subject to queries. Afterall, the GDP drops due to OECD economic recession is too large for domestic consumption to offset. Plan 10 can work with plan 9 to provide bandages to the current doomed manufacturing industry.

Nonetheless, for the manufacturing industry, even with such a large scale of bailout plan, they may not be really able to survive. We can perform a simple calculation as below:

For simplicity, and as according to recent roundup GDP figures (in USD): US GDP is 12t; EU is another 12t; Japan is 4.5t; Total = 12t + 12t + 4.5t = 28.5t.

GDP by consumption takes about 70% of total GDP; so it is 28.5t x 70% = 19.6t.

Assume in the following year the OECD will experience a drop of 2% on total GDP; evenly distributed to every sector, thus, the drop of GDP on OECD consumption will be 19.6t x 2% = 0.392t.

Now, China's Total GDP is 2.4t, with 39% on export = 0.936t. Assume China export only take 40% of the pie of the consumption GDP of OECD countries. Thus, the drop of consumption GDP of OECD countries that will affect China will be 0.392t x 40% = 0.1568t. It means a reduction of 0.1568/0.936 = 0.1675 or 16.75% of export GDP of China. It is a lot.

As China's domestic consumption GDP is 40% of total GDP, i.e. 2.4t x 40% = 0.96t. In order for the domestic consumption to completely take over the decline of the pie on export manufacturing it will be an increase of domestic consumption by 0.1568/0.96 = 0.1633 or 16.33% .

Take another point of view. There are about 400m citizens living in the big cities that are the core consumption force. To spread the increase of 0.1568t to 400m people, it means 156,800m/400m = 392USD/year additional consumption. With the average annual income at 2000USD, it means they need to have a minimum increase of after-tax salary by 392/2000 = 0.196 or 19.6% next year in order to completely offset the lost of GDP from overseas. Under the current economic environment, how can it be done?

A New Era

But it is not defined by Obama.

It is defined by the financial tsunami. It is defined by the de-leveraging. It is defined by the return to invest on values, not on derivatives.

Different countries have risen to power at different periods. Besides their power, the economic shift brought by these countries exert its influence on their own citizens and then project to the world. The new value becomes universal, and everyone in the world is willing to pay for it. Money funnel to those countries and propel their growth.

UK - Industrial Revolution -> improved efficiency and throughput and division of labour.

Germany - 2nd Industrial Revolution -> electricity prevails and further enhances not only efficiency and throughput but also the decreased size (and interference).

USA - Booming of invention -> self-propelling steamboat; automobile; aircraft; light bulbs; recorders; radio; microwaves; TV; telephone; rockets; satellite; fax; computer; internet.

Japan - do what USA can do, and only better and cheaper, except a lack of advance on high tech like computer and internet.

Whenever a new product (and its adhered value, life style, production and management models) emerges, the country of origin can enjoy the booming period when every other country needs to pay premium to access the technology and the underlying value. What brought USA out from 1980's crisis is more than FED policy; it was first the PC then the internet that pulled USA out from previous recession and fuels the growth without having had USD weakened, inflation thrived, and trading deficit enlarged.

Following these products are the values: mass customization, a combination of responsiveness, niche market segmentations, and efficiency. It was origionated from USA, excelled in Japan, and perfected in USA again.

With the influx of money to embrace these values, USA has a large pool of capital. Under the loose FED policy, it leads to a rocketing growth of investment - even to areas that create transactional price but no realistic value, like derivative finance and derivative property markets. It means a waste of resources. High amount of liquidity, high amount of resources consumption, and low amount of value creation, result in today's financial collapse.

Constructive collapse it is.

A shift of paradigm will happen. Corporates, big and small, start to face this shift without knowing what the new values are. This is why global economies, particularly the previously largest beneficiary, USA, has entered an uncertain age. Uncertainty defines risk; and with a huge evaporation of non-asset backed or virtual-asset backed securities, investors become highly risk adverse, and take money out. There comes the difficult period.

Whether or not USA, and OECD economies, can resurrect from dying depends not on the financial saving measures. It depends on if any new values, represented by any new products, can be invented and wide-spreaded to the world, and embraced by the users and consumers. This is where opportunity for future lies.

Can it be environmental-related technologies that can shift our life-style from a simple open cycle to a more complicated, dynamically balanced, and recycling cycle? Or can it be simply another more advanced tools, like A.I. robots or genetically-engineered-what-so-ever-tools, that enhance production but still follow the same old values at the golden oldies?

I don't know.

All I know is: no matter it is Obama or McCain's office, as long as the new president embraces the changes and encourages the citizens to create, develop, and spread the changes, then USA can recover. Otherwise, it is just another Japan.

The same is applicable to China. The new world is knocking door. Open the door, and China will get the jewel of the crown. Open it not, China will be another S.E. Asian or Latin American country.

Long Term Interest Rates Drop

Long term interest rates, as shown on the 5 year and 10 year AAA rates, eventually drop in a consecutive 4 days, to 6.79% and 8.29% respectively. However, the spread between them and the FED target rates, 5.79% and 7.29%, remain high and higher than 3 months prior at 2.98% and 3.92% respectively. Further observation is needed to determine if the loan market will further lessen despite the fact that immediate liquidity issue is relaxed by FED money injection program. It can be further verified by the M2 supplies announced on thursday for last week.

Corporate bond market confirms this message. Corporate bond indexes show that the total return value, price, yield and volume of transaction increased. This is a mixed message: on the one hand the bond price advances with the drop of interest rate (i.e. discount rate); on the other hand, coupon also increases which indicates the issuers have to offer a higher coupon rate to attract investors for a justified risk-adjusted rate of return. Meanwhile, the volume increases reveals that equity market, to corporates now, is still not the market for finance. Nor do the investors are willing to completely return to equity market owing to the high risk of insolvency of corporates in the recent future.

Combining both the loan market and corporate bond market performance, even though corporate risk of immediate liquidity issue may have lessen by FED money injection policies, in the long run the risk of insolvency still exists. The market is resettling to a reasonable level, which is still high comparing with the level 1 year or even just 3 months prior.

Mortgage Rates also start to drop yet but a few basis points only - insignificant to claim the ease of property market. With the property market at risk, the down side of the equity market and even money market are still valid and threatening, though may not be at the paranoid level before.

US T-bill have price dropping and yield rising. An indication that money injection program injects some confidence to the market of which previously un-harmed investors start to long for relatively low P/E, i.e. cheap, stocks. Money is moving out from shelter to the market for the moment.

In conclusion, immediate liquidity issue of the market stops progressing. Bank is willing to do short-term loans as reflected on decreases on LIBOR. It is also willing to lend money to corporates at a safe (i.e. high) level. Corporates can borrow money to continue operation and longer term projects if they can afford a higher cost of equity. The once broken money flow is restored, though the volume and speed are way weaker than before.

擬似"牛一"不足信

以美國的各種貸款息率的形勢看來，危機尚未過去。而且，由成品鐵價暴跌和BDI打回05年左右的水平來看，2009年的上半年經濟活動都會大幅減少，這都會大大減低公司的盈利；對於擴張過度的公司更會有虧損甚至倒閉。失業人數和被凍薪的人仕肯定繼續增加；消費繼續不振，而中國的出口則繼續疲弱。

當然，各國央行會大力印銀紙和開工程去谷起經濟活動。縱使真的成功，銀行填好黑洞起碼要過埋08季尾做年結和09第一季才可以"做好盤數"—想做數，光做2008年是不夠的，必須要借用2009第一季方可"乾坤大挪移"。

至於各大白象工程開展；美國肯定要到09年新總統上任才開始討論。就算100日內通過，但是再加上計劃和招標，起碼都要有另外180日時間，然後再加上由中標到開工又需要最少60日的時間，開工後最快30日公司和員工才有糧出。公司項目要打和，以一年的工程，毛利50%，純利15%計算，要9個月約270日。這樣計算的話，少說也要(100+180+60+30+270)=640日即一年零九個月的時間政府送去企業的錢才起效。就算以個人重新有人工就立即加大消費都是370日後的事，再加上55日後才在第一季業積反映，也是425日後即2010第一季的事。縱使股市行先經濟半年，也是2009第三季的事。或許中國能加快工程開展的時間，說什麼也要半年的時間才上馬。而且縱然中國國民能增加消費，最多也是令國內產品增銷，對外國的入口產品改善有限。在這種形勢下，最多是保八、即約2004-2005年間的擴張規模。要回到2006-2007的火紅火綠，則恐怕要全球經濟復甦才成。香港既然深受此兩者的影響，要重新好景恐怕都是三季後的事了。

FED Pumps Money; How Long can these Money Last?

From the week of Oct 13 - Oct 20, FED has dumped a total worth of (43.6+54.3) = 97.9b USD to the market. At the same period, up to now the LIBOR-FED rate spreads have decreased from 309pts and 332pts (on Oct 13) for 1 month and 3 month respectively to 185pts and 219pts respectively. Temporarily the liquidity of banks and hence corporates can restore.


However, the longer term loan rates have climbed from 6.25% (5 year) and 7.50% (10 year) on Oct 13 to 7.39% (5 year) and 8.83% (10 year) on Oct 31; only by the interest cut on Oct 30 the longer term loan have mildly decreased to 7.32% and 8.79% respectively. But, comparing with the same rate 1 year prior (when the sub-prime has emerged but the market is still positive about soft-landing), at 5.11% and 5.16% respectively (and FED Target rate is 4.75% at that time; risk premium is only a mere 36pts and 91pts respectively), the mild drop is insignificant at all. Corporate will still face hardship on raising fund for longer-term projects. Only money for immediate survival is available.


Mortgage Rates have not changed from Oct 30 and remained at high point. Auto Loans also increased by 2 basis pts on average. Now 36 month new car loan is 6.84%, 48 month new car loan is 6.60%, 60 month new car loan is 6.62%, and 72 month car loan is 6.44%. In other words, the loan rates for consumption remains at high.


The only bizzare response is on DJI which makes significant rebound after the injection of 97.9b USD to the market. Yet, the rebound is only back to 9180.69 from 8451.19, by 8.63% only. Comparing with the closing at 2008 first trading date, 13043.96, the discount is still at 42.08%. Even if the FED continues to flood money at the same rate, to restore to the same level, even just by proportion method another 476b USD is needed. It has not included the already existing 700b USD offering by goverment on any single institution for bailing out.


Thus, the rebound effect due to the money pumping perhaps is only a short-term one. In longer term, recession is perhaps still unaviodable.

適得其反：減息只能令市場嫖客化…

現在減息一如嫖客吃偉哥，越吃越要多吃才有效果，不能自拔。

現在有數點可以肯定：
1. 還會繼續減息，
2. 樓市還會下跌，
3. 消費持續減少，
4. 公司經營困難，
5. 銀行增加資本。

這樣一來，幾乎可以估計到銀行會怎樣反應了：
1. 減息後向財政部買錢，但適可而止—充足資本比和夠營運即可，
2. 買來的錢去買短期的國庫債卷，在下次減息前後債券價格上升時再賣出，然後買進下一輪的債券。時間把握得好再加點運，分分鐘可以執到錯價貨。
3. 拉高其餘借貸息率，減低風險。

在這種情況，美國政府注入的資金結果又回到了美國政府去，市場上貨幣短缺。如果懂得把玩銀行出入錢的時刻，則或許可以做美匯兌其他貨幣的長短倉賺錢。甚至對於商品價格亦有參考作用。

對後市的小小估計

以下是在信報的回應：

"羅兄，"行家"二字小弟可不敢當。我的意見不就很明顯嗎：

1. 在樓市尚未喘定(利率下降但房貸息率上升；息差上升)，

2. 銀行不願放貸(利率下降但長債息率上升；息差上升；政府債券孳息下降—銀行寧可買債券都不放數)，

3. 企業盈利下降甚至倒閉(長債息率、息差上升；公司債券孳息上升；資產貶值；公司難以進行大發展；項目減少；人手減少)，

4. 消費減少(失業上升；工資下降；可抵押資產貶值甚至負債)，

5. 工業製品和原材料需求下降，炒作資金亦短缺(CRB和BDI崩盤)，

6. 政府稅收下降，開支卻增加，令債務增加(貨幣供應增加引致貶值)，

7. 資金離開資產市場，再加上消費下跌，引發新一輪的資產跌價潮。

8. 如此直至平衡點到達或者其他因素改變。"

記得要看長息…

昨夜道指大反彈，連商品都上多少，同時LIBOR回落少少，容易令人頭腦發熱。

值得注意的是3A Banking Rate卻和LIBOR背馳上升：5年期已至7.25%；10年期升至8.74%。此外，長期定息房貸息率已經逼近上次減息前的高位：30年期的相差才7個點子；15年期的更已經高過減息前的高位做5.94% (P+1.44)。銀行仍在調高房地產市場的風險溢價。而該市場一日未穩定下來，一日都未可以說到底。

另外，消費信心指數居然跌到得38，和上月的59.8相比，足足跌了46%，就算把過度恐慌的情緒也計算在內，跌幅依然驚人。就算由2008年1月份的87.9跌至6月份的50.4(38點之前的低位)，6個月才跌了43%，可見現時人心有多麼的虛怯。消費不前，公司利潤大幅減少；長期發展的資本又不足，所有的因素都大大影響公司未來的盈利能力。這樣一來，到年底時又將會發現現在的P/E和P/B原來還不算便宜—畢竟EPS是可以負數的也。

當然，有人會認為現時股價已反映(甚至過度反映)對未來的期望。關於這一點，借用曹sir的口頭禪"木宰羊"。可是，如果環境真的那麼好，在沒有通脹的情況下，為什麼銀行的長期借貸和房貸的息率還是只升不跌？

Problems with Gold: Why not Rise?

Traditionally, whenever most of the world currencies face the creditential problems, or whenever the money supplies surges and drives hyper-inflation, gold should be the ideal haven. However, it seems not the case now. Why?

The blind spots of the above position are:

1. It ignored the credit crunch is caused by the burst of property and finance market bubble and hence the massive write-off of asset value. In another sense, it also means the "evaporation" of "money on the book". Thus, money supply is not "excessive" in the market.

2. It ignored the fact that new money supply from FED and central government has not flown to the market, as shown by first LIBOR and now AAA finance and Mortgage Rates. Instead, the lowering of bond yields and the surging JPY and USD show that the money supplied to the bank has returned to the supplier through sales of overseas asset and then purchases of government bonds, particularly US government bond.

3. It ignored the fact that Gold has already hitted new high previously, at the time before credit crunches has become serious. When the risk of inflation drops, the function of gold as hedging against USD has weakened.

4. It ignored the fact that there were speculations on gold market previously, and that the gold futures market has grown 10 times larger (or even above) than the spot market, a hint of speculation over actual demand. With the credit crunch and tightening of new loan, speculators can no longer continue to play at large.

5. It ignored the implausible return of Gold Standard. The nominal World GDP on 2007, in USD, is 54.62 trillion. Meanwhile, the total mined gold weighed about 30,000tonnes. If we use Gold Standard and keep the existing capital reserve ratio at 8% (and hence the same money muliplier) and that the gold mining rate can keep up with the multiplier, then at current price of gold at 730USD/ounce, our gold reserve can only support a size of world economy at nominal GDP of about 9.64trillion USD, only 18% of the current economic activities. Besides, by Gold Standard, the world economy growth is controlled by the demand and supply of gold (and silver) but not by the demand and supply of human consumption and productivity.

Nevertheless, it does not mean that gold price will simply plummet back to before Iraqi War level. It only means that gold price may be up and down with a narrow band-width and a bottom price at 600USD/ounce. If eventually Keynesian economy takes place in the world successfully, a long position for gold may be viable in longer term.

New Home Sales in US vs Mortgage Rate

The so-called improvement on new home sales on september in US is vague: it is better than "consensus" value. But people overlook that the trend is still at the down side.


On the other hand, mortgage rates rising has started to pick up momentum again after the tiny drop last week. The worst is that despite the money injection and improvement on short-term liquidity availability, as shown on LIBOR easing, the long-term borrowing rates are rising. 5-year and 10-year AAA banking and finance rates reached 7.06% and 8.55% respectively.


Under such rates, enterprises can no longer afford any new developments requiring finance from outside. Anticipated profits will be lowered in alignment to the lowering of economic activities. It will further push down the equity market, and in turn worsen enterprises' liability position. Chain reaction will continue until the situation settles.

Attention...

Several periods are to be noticed:

New Year: the release of Q4 result. For financial, high-end consumer goods, construction (and related machinery), transportation, raw materials, automobiles, and oil industry, ask for God's mercy.

Chinese New Year: lay-off wave.

March and April 2009: release of 2008 annual result. Again, for the above mentioned industries, unless for the highly conservative corporates, otherwise, again, pray.

Exceptional Movement on Rates

LIBOR is down but the crisis is far from over.
5 Year and 10 Year banking and finance rate, after the continuous drop from last Monday, has increased to the new high 7.03% and 8.31% respectively on Friday, following the plummet of US stock market.

Apparently the market is worrying about both the profitability and solvency issues of the corporates. With an expected huge retreat on corporate profits, the operating cash flow that can at least pay off the cost of working capital will be greatly decreased. The potential enormous write-off and impairment on short-term investment and hedging is already no news. Even if LIBOR is decreased enough for corporates to survive today, their abilities to deal with their loans and losses, and hence their longer term of survival, are highly questioned by the market. Any banks, in trouble or not, will no longer provide windows for corporates to re-finance, or even finance potential long term projects. The increase on AAA banking and finance rate, plus the high corporate bond coupon rate at 10% by giants like GE and Caterpillar, are proofs to the above observation.

Under huge credit pressure, plus the plummet of commodity markets, a traditional hedging tool of USD inflation, further dries up the pool of current asset of the corporate, and drives them to sell as much of these asset as possible to stop loss, polish their balance sheets, and preserve cash to fund the projects/operation of the coming year, under the assumption that no new line of credit will be available.

The collapse of these markets will also induce the collapse of the high-yield commodity currency. USD's strength against these currencies is a proof. The drops on the T-bill yield is another. Besides, the spread between yield and target rate keeps narrowing, another hint on the closed-money-loop: money loant by FED to banks will simply go back to FED via t-bills, at the absence of other low risk investment tool.

Combining the above observations together, it is too early to say the market has already reached bottom. The new figures and saving measures showing up on the coming weeks may ease the pressure by little; nevertheless, as long as Main Street and Wall Street as well as property market are still dropping, and the black holes of the corporates have not been filled up, all the measures by FED are only pain-killers with its potency shrinking unstoppedly.

Updates

Short-term credit crisis has relaxed as shown on LIBOR spreads: 203pts and 233pts for 1 month and 3 month respectively. Nevertheless, the spreads of AAA finance still stand high: 483pts and 603pts respectively for 5-yr and 10-yr. Risks on longer-term loans for F.I. and corporates are still rated HIGH.

Mortgage, as expected, is no better off. Relaxation by not more than 20pts are nothing significant comparing to 100pts less (than now) on the same rates at 6 months prior.

M2 supplies is negative on the 2nd week of October. While the government has made various bailout plans, the money supplies can go nowhere but on the balance sheets of banks and on government bonds (overseas investors). Same trend continues; liquidity trap can be observed.

With such pattern, plus the rally of USD, still tells us that despite the gone of immediate credit collapse the shrinkling and de-leveraging of the economy is still substantial and continuous.

The market will see the first real bottom around the time the announcement of annual results of various companies. Although market has expected the "worst", it is only an expected estimation. What actually happened is not known, but at the very least, we can expect consumer goods, unless those cheap daily ones, will drop in sales. Following the entire value chain, one will see the dealers and manufacturers are in even deeper troubles. After last year, the golden age of commodities has temporarily gone. Raw material producers, many of whom have had stockpiled doubled or even tripled for last few years will swallow the bitter fruit they pow.

通脹、通縮，均非定數

通脹，還是通縮，這是個問題。

問題的核心，還看政府和薪金的關係。

就算金融的黑洞被填好，如果市場在重重監管下無法自由地投資到較高回報的項目或因為太多規條而令新企業缺乏較抵玩的資金去拓展業務，再加上貿易保護令本土市場缺乏競爭和選擇，則政府平賣予銀行的資本卻會由銀行和普羅大眾購買國債之行為"回饋"。尤其在人口老化的地區區，一眾原本可安享晚年現在卻大損其老本的退休人仕肯定會對風險極為忌諱，寧可收"可耻的利息"也不願投放在任何有較高風險卻也有較高回報的項目上。已到了收成期，原本手頭鬆的有銀仕尚且如此；一眾尚有家庭負擔並拼摶中的中堅份子更不會"亂咁來"。至於國債的本源卻依然是財政部的墨水(和稅收)。再者，企業缺乏擴張，人工無法上調，賤物鬥窮人的情形就會出現。本來印銀紙是導致通脹的，可是在投資和消費意慾極低的情況下，泛濫的信貸卻進不了國內的市場，形成國內通縮(但是國外卻可以通脹)的奇象。

可是，要是政府在救金融系統的同時，直接通過各政府直接投資的項目，再加上各種變相補貼和行業及貿易保護以減少國外競爭甚至人為抬高工資和福利，並借各種手段減低全球化外判的可能性，使到資金追遂人工上漲，則惡性通脹重臨絕非奇譚。

由現時各國的手段來看，重心還是先放在恢復金融體系的信用和正常營運上，在輔以一定程度的公共開支去刺激經濟，至於高度的貿易保護卻未見抬頭。在工資和資金沒有互相追遂，消費和投資都低迷的情況下，發生通縮似乎更有可能。

可是，這次因為是用國有化的點子去救市，對日後的經濟發展留下變數。一旦經濟情況在數年間難有起色，在民粹派和工會/左翼份子的夾擊下，屆時政府可能用國有化，高福利和貿易保護去解決問題。如是者潘朶拉的箱子被打開，惡性通脹這頭猛獸將重臨！

The above article is also posted in Hong Kong Economic Journal's forum at
http://www.hkej.com/template/forum/php/forum_details.php?blog_posts_id=4330

Premier Wan's 10 Economy Saving Measures...

溫拾招
國家統計局公布內地第三季經濟數據前夕，總理溫家寶上周五(17日)召開國務院常務會議，提出「靈活審慎的宏觀經濟政策」，包括：
1.加大對農民農村優惠力度
2.鼓勵金融機構增加對中小企貸款
3.提高服裝、紡織、機電產品出口退稅率
4.加大投資、保持合理投資規模
5.繼續控制物價上漲
6.推進節能減排，嚴控環保監控
7.加強稅收徵管，嚴控支出
8.加強金融監管，防範金融風險
9.做好食品安全和安全生產工作
10.解決涉及民生的問題，加大保障性住房建設規模，降低住房交易稅費，支持居民購房

新華社引述會議稱，「國際經濟環境中不穩定因素明顯增多，對中國的影響逐步顯現，國內經濟運行中出現了一些新情況、新問題。主要是經濟增長放緩趨勢明顯，企業利潤和財政收入增速下降，資本市場持續波動和低迷」，並重申結束的中共三中全會提出了「堅定信心，冷靜觀察，多管齊下，有效應對」的16字方針。會議還提出「加大保障性住房建設規模，降低住房交易稅，支持居民購房」。所謂保障性住房，即針對中低收入建造的經濟適用房和廉租房。

據統計，北京、上海等內地13個大城市今年計劃新建保障性住房面積共4894萬平方米，佔新建住房面積比例為27.8%。全國大部分城市保障性住房面積佔新建住房面積的比例都在10%以上。有分析認為，由於保障性住房在內地城市房市中亦佔有一定比例，會議提出「支持居民購房」，對樓市也會有一定的刺激作用。

The above announcement is interesting.

The first 3 target on the plummeted farmers and SME in manufacturing and export sectors. However, the first measure will be encountered and even offset by 9 due to the markt structure: small individual farmers, with insufficient subsidies, comprised of the main force and hence are incompetitive in the highly commiditized farming products market. Without sufficient incentive, farmers are either continuing to cheap chemcials to replace natural products or selling their lands to real-estate/manufacturing sector, which in turn will be in conflict with measure 6.

Measure 6 and 7 will again counteract measure 2 and 3. Entrepreuners who have invested in China understand how complicated and heavy and unfair the tax is. The source is the central goverment that wants to save as much money as possible in their own accounts and wants to benefit the state-owned enterprises as much as possible. Besides, environmental regulations are known as a tool of asking money from the enterprises by the municipal and county governments. But, the most important point is: with the declining OECD markets, measure 2 and 3 can only be bandages. The previous tightening on 6 and 7 has already resulted in waves of bankrupcy of manufacturers. It is already too late to start on preserving them (as many of them had cut too deep already).

Measure 10 just walks on the previous steps of US government. And it is apparent that it is against measure 5. If measure 10 is successful, measure 5 is not, and vice versa.

Now, the noticable part is 4: what will the central government do? How much will they invest? Are these investment are for job creations only, or can really improve competitiveness of China? And can with these investment government can improve the supplies side efficiency and hence control 5? Lets pay attention to the forecoming details.

Inflation or Deflation?

By definition, the money supply decides inflation or deflation. CPI is NOT the index of inflation. It has been proven in the last few years: while US was expanding on credits, it benefited from the cheap production cost from China. Yet it was reflected on commodity price.

The current policy makers, in order to avoid liquidity trap as shown on Japan, have supplied money to the intermediates (banks and financial institutions) to encourage loans. Yet, without reliable and highly potential projects, bankers invest on nowhere. Besides, as the borrowing cost is low, it does not matter for them to re-invest back to the government for a low yield rate.

The control of banks by government may alter the appetite of bankers by orders.

Meanwhile government needs to "create" beneficiary of the "mandatory loans". Government projects will be one of the obvious most ways; subsidies from government on "coporate participants" for creating projects and jobs will be another.

Depending on the strength of will of maintaining a certain level of salary by labour through their representatives as well as the economic conditions, the degree of divergence of salary from actual labour market determines the stickiness of salary - the essence of Keynesian school. Government will be easily tempted to please their electors by altering the actual demand and supply on labour market.

If that appears, inflation will also come back.

Possible scenario, then, will be: first deflation due to credit crunch; then hyper-inflation due to un-disciplined government spending. But if the government refuses to directly spend money and level up labour salary, deflation continues and will also harm the global economy completely.

Can this "rebound" in HSI last?

Hong Kong market is an open market that couples with China and US market. The so-called fundamentals in Hong Kong are comprised of property, banking and finance, and China concepts. None of these sectors are sound under the anticipated decline on economy. As eventually equity market will follow the economy and not the vice versa, the "rebound" in HSI in recent 2 days cannot last long.

An update on US credit crisis:

Risk Premium (according to figures posted on Bloomberg):

1-month LIBOR: 297 pts (dropped)

3-month LIBOR: 314 pts (dropped)

5-year AAA: 531 pts (risen!)

10-year AAA: 651 pts (risen!!!; now 8.01%!!!)

This is a notable phenomenon: LIBOR drops; AAA finance rate still rises. The bailout only benefits the bank yet the bank does not pass it out to grade AAA financial institutions. Without continuous support, selling of asset will continue. Companies that rely solely on banks may stop worsening on liquidity issue as bank will loan. But, companies that also include institutional investors will find their shares in the market at a low price - even not as bad as last week. Divestment still rolls on. We cannot expect much on the coming market.

An alternate explanation is that banks KNOW their AAA counterparts are in deep holes. These AAA counterparts do not have the muscles to climb out. Under a starving condition, why bother throw a pill of supplement while bank themselves cannot have their crave fulfilled? And afterall, this pill of supplement can only provide vitamins but not calores.

Actually, there can even be a third interpretation: AAA is anything; AAA is nothing. The rather arbitrary announcement of upgrading and downgrading, particularly AFTER corporate quarterly result announcement, inevitably raises our question: what are you guys, S&P, Moody, etc, doing? You do not warn ahead but after? And a grading from AAA to AA+ or even just AA can be changed in ONE NIGHT? This is a REAL CREDIT CRUNCH: not on figures but on TRUST.

Mortgage rates do not change. Yes, no rise; NO DROP.

If we look at the bond yield, they all rise. However, interestingly the prices for bond below 2-year also rose - the reverse of the trend of last Friday. While bond yield rise should mean an outflow of money from bond market to elsewhere, the short-term bond yield and price rise at the same time can also mean the market is still looking for shelter despite the rise of yield.

How about the currency market? USD is rising against EUR again, and JPY is rising against USD, also again. USD drops against GBP though (again according to bloomberg figures).

EUR:USD -> 1.3572

GBP:USD -> 1.7400

USD:JPY -> 101.77

The trend may mean a turn back for USD and JPY. GBP is still stable so far (yes, so far, but at least thank Gordon Brown). Integrating with the above phenomena: credit is tight on financial institutions; demand on bond is still substantial, and easy money like USD and JPY is still not accessible; US credit crisis is far from relaxing, not to mention resolving. If financial instiutions continue their divestment, then the stock market of US will continue to tumble. Meanwhile, property market is still tight judging by the high risk premium on mortgages. Both markets will hammer the derivatives and futures markets, and initiate further losses on and sucks liquidity from banks and financial institutions. Such tide-up will tighten the credit of banks again due to write-off on balance sheet and compliance to accounting principle. The cycle will continue.

So, can we expect a deep V? It can be a deep V, but for sure it is not LV (Long deep-V).

Or, actually I can think of a forth explanation on the rise of AAA rates amidst the fall of LIBOR: helicopter is there. Bernake and Paulson, like the Joker (Jack Nicolson) in Batman 1 (by Tim Burton), will throw as much money on the street as they like. If I were the bank, understanding that there would be a "competitor" with "unlimited" money supply and authority to loan at will (at any rates), why did I drop the rate and bear the risk myself? Particularly I know it cuts really deep?

Just pray that our Jokers will not be like Jack the Joker who spreaded poisonous gas at the same time. Don't forget about the national debt, and the flooding USD.

Rates Update

Up to now, the saving measures have a very limited effects:

Risk Premium:
1 month LIBOR: 309 pts
3 month LIBOR: 332 pts
5-yr AAA: 475 pts
10-yr AAA: 600pts (!)

30-yr Fixed Mortgage: 466 pts
15-yr Fixed Mortgage: 440 pts
5/1-yr ARM: 443 pts
1-yr ARM: 582 pts
30-yr Fixed JUMBO: 596 pts
15-year Fixed JUMBO: 533 pts
5/1-yr ARM JUMBO: 467 pts

NONE OF THEM HAS IMPROVED!

Will the BOE measures work?
The dilemma is :
if not save, the bank that does not use it can still subject to further pressures from the market. Only the biggest bank with good fame can take this burden. Even so, the risk of insolvency is high. The good side is: incompetent bank will no longer be in the market and further poison it. The risk is: panic, and despair.

if save, it means that the beneficary bank is really in trouble. For the moment a sharp drop may be ceased by the government action. Yet, its future is even more uncertain. Once the government invests, it locks in. Tales about inefficiency and political interference of SOEs are no news to the public. The handling of these acquired banks, after the turmoil, is another headache.

Maybe a combination of direct injection, nationalization, endorsement, acquistion, and exchange of problematic asset by government bonds may help out the current situation. However, it also means the huge accumulation of government debt as well as an influx of "money" into the black-holes. Governments use their own credits, at the risk that eventually even the government will bankrupt and its currency will greatly depreciate, meanwhile deflation is still happening inside that country (which is completely against conventional economic concept but can happen as its asset also loses price).

Dilemma (Con't).

If I were the investors of the bank, and with the information that the government will take over, what will I do?

The government invests on the banks to provide capital to polish the balance sheet. It also lowers the volume of available shares in the market (and hence drive the price up, or at least stop tanking of the stock price, and hence the book value of the equity). However, whichever bank accepts this investment gives the signal that it is in deep problem. The larger the amount, the bigger and deeper the black-hole. In case the black-hole is too large and deep to be saved, under the consideration of stopping panic, government may take-over the bank to continue its operation and prevent massive withdrawal. But, government will not simply just eat the rotten tomato, and there may not be just one rotten tomato. Merger and buyout, under government's guide, will happen when situation "stablizes", or on the contrary, may happen immediately to avoid further worsening. Restructuring, in the company and in the market, can be expected. Job cut by these banks may not happen immediately (or the panic will continue), but it will continue after the panic period, after restructuring takes place.

Go back to the question: if I were the investor, what will I do?

In case I look for long-term investment return, I will not dare to invest on them at all. In case I hold shares of them, even at a low price, divest them. Even though there may be a chance of its survival, and, after restructuring, its result will improve and hence its stock price may increase again. However, there are too many uncertainties. Particularly once government takes over the ownership, the transaction terms and deal will no longer be a purely commercial decisions. Chances are transferral at a premium (especially if transaction takes place among "natoinalized banks") and the acquirer will have to take a heavy burden for a few years before full recovery. During the same period, one may find other more transparent and market based companies to invest on. At worst, receiving interest through the shamed deposit rate is still better than exposing to another 10-20% downside risk. Opportunity is always there; just whether or not one grasp it when it is there.

Dilemma

If I were the US government, what would I do?

I would have nationalized everything: banks, thrifters, and even home owners (?!). I would be the major shareholder of banks and make them continue to lend money. I would be the major shareholder of thrifters to gurantee all CDOs. I would, well, finance the home owners directly so that they can continue to pay the thrifters and banks.

However, if that is the case, will the stock market will be out of troubles? What will the investors think?

Chain Reactions

Now with the credit crunch, various companies will face shortage of cash and may result in solvency issue. The possibilities of bankrupcy has increased. But this is not the end of it. Many of these firms had issued bonds and many buyers of these bonds also buy the CDS (credit default swap) from banks and financial institutions for hedging purpose. Now as banks and financial instituions are in deep dangers that trigger their clients' liquidity problems, it can cause the both the bankrupcy and the inability to honor all CDS which in turn trigger another wave of scare on the banking system. If they couple with the problems on Alt-A and credit card loans, a huge global recession can be expected.

Interesting Observation...

The most updated key rates spread are as follows:

1-month libor: 301pts

3-month libor: 325pts

5-yr AAA: 468pts

10-yr AAA: 593pts

30-yr fixed mortgage: 447pts

15-yr fixed mortgage: 423pts

1-year ARM: 570pts

30-yr fixed JUMBO: 582pts

15-yr fixed JUMBO: 523pts

Two horrible observations:

1. 1-month libor now is higher than the prime rate, even though just by 1 basis point. It means that bank lends money to another bank is even "riskier", from the bank's point of view, then bank lends money to an individual.
2. 10-year AAA banking and finace rate is even higher than 1-year ARM (and no need to mention about 15 and 30 year fixed rate) by 23 basis point. Bank is even not trusted by their colleagues than the trust on an individual who may just have nothing but a social insurance number to purchase a flat.

Another observation that may tell more stories:

M2 Money supply by Fed:

June 1st wk: -10.8b, June 2nd wk: -6.8b, June 3rd wk: 2.4b, June 4th wk: -23.6b

July 1st wk: 24.5b, July 2nd wk: 0.3b, July 3rd wk: 48.7b, July 4th wk: -14.2b

Aug 1st wk: -8.8b, Aug 2nd wk: 7.0b, Aug 3rd wk: -10.5b, Aug 4th wk: 3.9b

Sept 1st wk: -5.5b, Sept 2nd wk: -1.9b, Sept 3rd wk: 20.6b, Sept 4th wk: 165.5b

Oct 1st wk: -4.0b

From June to August only 12.1b USD was supplied to the market by FED, unlike the beginning of the year (almost 20-30b every week). This may partly explain why actually the capital market loses fuel to continue the rebound. Of course, once trust is lost; the money borrowed will not go to the market but back to bank's balance sheet. Nevertheless, the situation at the beginning of the year is less worse than the middle. Particularly when more banks find themselves eventually will face their judgement days, they will become more conservative and are willing to hold risk-free asset (for a low yield) and hence money flows back to US treasury and FED.

Same trend continues on September at a more extreme scale. Only by the last week (when special credit event happened) FED supplied a real substantial amount at 165.5b at once. But then on the last week, FED "received" money again ("-4.0b"). It is rather obvious that to keep the business running, banks and financial institutions have to feed money to the black-hole like balance sheet. And these money can only go nowhere but back to almost risk-free asset, i.e. government bonds, certificate of deposits, or plain cash.

Unappealing enough, there are something also notable:

USD->JPY: 98.66

EUR->USD: 1.3548

GBP->USD: 1.6966

USD->CAD: 0.861

USD->AUD: 0.6618

USD->RMB: 6.8318

Just a day JPY keeps climbing while other OECD currencies keep tanking. So is RMB. In a sense USD is "climbing" against other OECD currencies except JPY. But again, if USD flows back to US for balance sheet, the expansion of credit by FED indirectly to the market does nothing good at all. On the other hand, comparing with countries with sufficient reserve or with foreign currency control (Japan and China respectively), USD keeps dropping: it is an unwanted currency or has no channel to leave the country. Combining together, USD is contracting all the way back to its country at a big discount (as OECD countries' asset has lost value by 60-70%) and is not welcomed (or blocked). It means the losing influence of USD on the world.

Once such a trend/attitude is formed, soon enough the demand and supplies of USD will form a "super-conducting loop": USD from FED to bank and then back to FED and to bank, with little multiplier effects due to high distrust on market and low level of investment.

What does it mean? It means liquidity trap: see what Japan has been.

OLD 7: 2008-10-8

Dear friends and investors,

The credit crunch is nowhere close to an end. Take a look on this (please remember, FED has reduced the target rate from 5.00% to 1.50% during the period):

Risk Premium from Risk free rate (FED):
1 Month LIBOR: 37 pts (1 year prior) -> 49 pts (1 month prior) -> 279 pts (current)

3 Month LIBOR: 50 pts (1 year prior) -> 82 pts (1 month prior) -> 302 pts (current)

5 Year AAA Finance and Banking Rate: 36 pts (1 year prior) -> 286 pts (1 month prior) -> 464 pts (current)

10 Year AAA Finance and Banking Rate: 91 pts (1 year prior) -> 379 pts (1 month prior) -> 582 pts (current)


Property Market is still horrible:

Risk Premium from Risk free rate (FED):
30 Year Fixed: 132 pts (1 year prior) -> 408 pts (1 month prior) -> 432 pts (current)

15 Year Fixed: 95 pts (1 year prior) -> 362 pts (1 month prior) -> 402 pts (current)

1 Year ARM: 97 pts (1 year prior) -> 394 pts (1 month prior) -> 560 pts (current)

30 Year Fixed JUMBO: 207 pts (1 year prior) -> 523 pts (1 month prior) -> 573 pts (current)

15 Year Fixed JUMBO: 180 pts (1 year prior) -> 447 pts (1 month prior) -> 506 pts (current)

5/1-Year ARM JUMBO: 168 pts (1 year prior) -> 428 pts (1 month prior) -> 461 pts (current)

Even for the conforming long maturity fixed rate mortgage on which most stable home owners are applying, the risk premium has gone up by 3.3 times (while the target rate has been cutting). One can imagine how mad the bank is on CASH. Nothing but cash cash cash. Needless to mention about ARM on which most "aggressive" home owners are borrowing. Another worthy to note phenomenon is that the JUMBO rate, i.e. for non-conforming mortgage (mainly for luxurious homes or in a sense for speculators who operate an leverage), which has already been necessarily higher than conforming mortgage rate, has also increased by 2-3 folds. People, with more asset living at or speculating on luxurious houses, or with ordinary lives at ordinary homes, or with nothing but a driver licence or social insurance number, are all evaluated by banks as RISKY. This is a really worthy phenomenon to observe.

Meanwhile, we can also take a look on the currency rate (spot):
USD - JPY: 100.4
EUR - USD: 1.3652
GBP - USD: 1.7221
USD - CAD: 1.1244
USD - AUD: 1.4457
USD - RMB: 6.8233

What are the same rates at 1 year ago?
USD - JPY: 117.3
EUR - USD: 1.4206
GBP - USD: 2.0394
USD - CAD: 0.9837
USD - AUD: 1.1127
USD - RMB: 7.5149

USD seems "rebound" (I don't agree with this term). But it more actually goes up against other equally or more seriously screw-up currencies like EUR and GBP (both are hit hard by financial turmoil) and CAD and AUD (both are hit by anticipation on lower consumption and hence lower demand on raw materials). JPY, despite its suck economy, has sufficient savings and reserves and hence somehow are "liked" by investors (at least its financial sector had screwed up way before other OECD countries, and by the never-hitting-same-tree-twice theory, it is safe, for now...). RMB is more interesting one. While its value is still stable due to its "isolation" from the world economy, it also subjects to a potential foreign investment withdrawal to cover their own asses.

Following the same logic, since most investment institutions and investors are holding their hands and withdraw their investments, and that cash is more preferred, gold price may not rocket as insufficient money for speculation and basic demand. But on the other hand, a collapse of gold price may not be seen in short-term, as there are investors using gold as a capital preserve tool, at least against inflating USD, EUR, GBP, etc (though evaporation rate may be higher).

Ok, enough pessimistic. Lets go for another way: what are the industries that may be able to survive?

As we can forsee a lack of easy credits and contraction on expenditure in the coming year, I think companies:

1. with substantial cash and null liabilities as well as tight cost control will find various opportunities for M&A,
2. related to daily consumptions, like fastfood chains, wal-mart like retail (cheap), cheap transportations, public utilities (electricity, gas, phone, internet), and cheap trading platforms (e-platforms),
3. in the government regulated business like also public utilities, public transportation, any green products required to comply with environmental regulations,
4. and professional firms that can help enhance company performance and provide restructuring, re-engineering, coperate governence, hiring and recruitment, change managment, etc solutions (like consulting firms, Big 4, law firms, HR, etc)

will have opportunities to survive.

(to be continued...)

David