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).

No comments: