Tuesday, November 25, 2008

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.

Friday, November 21, 2008


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。


  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。


Tuesday, November 18, 2008

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).

Friday, November 14, 2008

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).

Wednesday, November 12, 2008

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?

Tuesday, November 11, 2008

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.

Monday, November 10, 2008

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.

Sunday, November 9, 2008

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













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?

Wednesday, November 5, 2008

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.