Thursday, October 9, 2008

OLD 3: 2008-9-23

Dear friends,

Significant movements on Key Rates and Bond rates are noted:

1month from 2.47% to 3.18%
3month from 2.81% to 3.20%

AAA Banking and Finance
5-year from 4.97% to 5.96%
10-year from 5.94 to 6.99%

These rates have significantly increased and have not dropped despite FED's announcement on saving measures.

Mortgage Rate changes are also interesting:

While 30-year and 15-year Fixed Rate has decreased by 39pts and 16pts respectively, the 1-year ARM has increased by 32pts instead.

Now T-bill Rate changes are similar to Mortgage Rate:
For 5-year and longer maturity bonds, yield rate rise and price drop.
For 2-year and 3-year maturity bonds, yield rate drop and price rise.
For coupons within a year, both yield rate and price rise.

If we integrate these information together, we can conclude that the trust in-between bank has been shaken and is still shaking, and instead of financing between banks banks look for funds from the government. It will induce a further weakening on other commercial activities as well. Besides, banks also seek short-term shelter on short-term government coupons and further hints a contraction on financial activities. Nevertheless, due to government intervention, confidence on USD is weakened and reflected on the rise of yield on longer maturity bonds.

On the property market, due to the drop on the market as well as the losing confidence of potential buyers (for self-use), the long term fixed mortgage rate is dropping which reflects the eagerness of attracting new buyers (to quick sell). Yet, the sub-prime and Alt-A part, reflected by 1-yr ARM rate, is increasing. So, the bank still evaluates higher risk of default on speculation market. If that is the case, it means the property market will still worsen. Coupling with the CDO and CDS problems on banks, the entire financial market will still subject to high fluctuation, with a bigger drop waiting at the end.

When the above scenarios further couples with the US government intervention, in the half a year period an expectation on the drop of USD and hence another rebound on Gold, Oil, and raw materials can be expected. The rebound inertia, however, may not be as substantial as early 2008, due to the possible lack of money on speculation. Yet, we can at least expect the rebound can compensate the gap of latest drop and may return to 50-day line above. After that, it will subject to market situations. The potential of deflation happening before hyper-inflation is still substantial and plausible.

Thus, for the coming 3-6 months, we had better continue a conservative strategy overall. Yet, grasping the rebound on commodities, we can either unload existing stocks at a higher price and take profit or (not really recommended) attempts to capture profit through surfing. Speculating on the downside of the equity market is another way of taking profit. On the other hand, although USD will subject to another downside pressure, speculating on the drop of USD against EUR, JPY, and other commodity currency is not recommended as the fluctuation may not be as big as last year, due to the downside of OECD economies, as well as competitiion from commodities and Gold.

Afterall, "CASH IS KING".

Best regards,
David Chan
P.S. The above are only my non-professional opinions. Please feel free to comment/critize/scorn at. :)

Disclaimer: The above is onyl a personal opinion and does not form any part of the wills or contracts to invite and ask for business, nor does the author have any direct and indirect benefits received through the sharing of opinions or attempt to benefit through the influence of others investment tendency and action. The sharing of opinions is purely voluntary and acts as a hobby.