Wednesday, April 15, 2009

Watch Out - Bull has Not Come Yet

1-month LIBOR has dropped from 0.54% to 0.41%, and 3-month LIBOR has dropped from 1.32% to 1.11% in one day. Expectations about the rebirth of credit from the bank, and hence the bull market, has widely spreaded.

However, please pay attention to the followings:

1. Both of them are still higher than the figures 3 months ago, which were 0.33% and 1.09% respectively. Today is April 15, 2009; yesterday was April 14, 2009 when DJI was closed at 7920.18. 3 months ago is January 14, 2009 when DJI was closed at 8212.49. Only a week later from that day, while the LIBOR remains the same level, the DJI has already closed to 7949.09. Therefore, the high or low of LIBOR, at the current stage, has nothing big to do with the stock market. Current situation is not comparable to the moment on October and November 2008; at that time the credit had contracted at an extreme speed and hence was an issue. Now, the LIBOR had rather been stablized despite the governnment pumping of money. The key now is whether or not the bank is willing to lend, and whether or not it has target firms to lend to.

2. Regarding the target firms/projects, currently under a rising unemployment rate, contracting consumption rate and price, retails and hence production are no longer the targets. Nor are the collapsed property and financial market. Government projects, particularly infra-structural, may be targets. Nevertheless, raw material and energy firms have already over-expanded to over-capacity. Meanwhile, the demand even raised by the government cannot match the peak period when many of those firms had taken as reference for expansion. Checking the current BDI can tell the story: the rise has been relaxing from the recent peak at 2271 to 1492.

3. At the same time, the actual 3A banking and finance rates have not followed the drop of LIBOR: 5 year is 5.14%; 10-year is 5.72%, the same as the ones since two weeks ago. It means the banks have no intentions to relax on commercial loan.

4. Also, the mortgage rates are very stable at a range of 4.74% to 6.38%, no sign of relaxation from the banks either.

5. On the other hand, treasuries yield rates have not subjected to big changes; short-term even subjects to a drop on yield rates. Corporate bond yield rates have also been dropping back from 7.x% to 6.94%. The demand on safer investment tools is still substantial; risk assessment maintains high.

6. While previously the market has speculated on sharp inflation and hence the gold price was once pushed up, currently gold had stayed at a lower range. The expectation on a near term sharp inflation has vanished. When the stock market was hot but the bond market was not dead, and yet gold and other commodities were weakening, signs of a slow inflation and hence the vanish of near-term quick recovery was told.

7. Other economic figures are not supporting a revive of bull market either. PPI remains weak, and it is even more fore-telling than CPI, as PPI reflects the demands of the market on goods at certain price level several months later (due to the time to finish a product). The myth about new and existing homes sales have been cracked before (please refer to my previous posts).

Combining these factors, the current uptrend is more a manipulated rebound than the recovery of the market as a whole. It is a good chance to play with quick-in-quick-out and call-put strategy but not for long hold.

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