Thursday, October 9, 2008

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...)


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