匯豐狂想曲

匯豐面對如此沽壓，或許是進軍美洲的副作用？

HSBC在北美首用零首期吸引顧客，又積極發展各類房貸產品市場搶客，早已令北美大行不滿。次按一役率先引爆，小人點看，匯豐此舉很有點"七傷拳"的味道，仗著底子厚去玩一鑊熟。點知你精我唔笨；兩大"拿拿林"轉做商業銀行，企穩陣腳後就來個"帝國反擊戰"，睇下邊個熟。至於會不會有"(白)武士復仇"，天行者的"第一名子"是"約翰牛"還是"瑞士糖"，還看下回分解。

同場還加映"基督山恩仇記"：艾力."騎士"會否再次借基督山伯爵之名去"逼宮"，而H記格連等人會是"將相和"還是"挑滑車"？六國大封相鑼鼓已響，靚次伯準備坐車，各位看宮可要擔定凳仔，不容錯過。如果乘機十八摸，上下其手，話唔定揩油high過索K tim!

The Choice of Stocks (1)

The financial tsunami creates a chance to search for best-buy stocks.

There are several types of stocks that may become best-buy:

1. The Basic Demand type - they are companies providing products or services required daily. No matter under what conditions, people still need to eat, drink, excrete, move, and sleep. In our life, we need basic food, water supplies, electricity, communication, transportation, and sewage treatment. We also need basic clothing and some other fundamental appliances. The companies that provide such basic needs will not have their business greatly declined. Their stocks, though, under extreme financial environment, may be under-valued.
2. The Government Policy type - they are companies being benefited by the national policy for economic stimulation. Usually government will invest on infra-structures (both hard and soft) for improvement on competiveness. Government may also support some industries for capturing new market and expanding existing market shares.
3. Survivor Type - they are the survivors of the affected industries. Due to the severe environment, many 0f their competitors are "phased out". Despite the contraction of the overall pie, the expansion of their shares may all too well offset it.
4. New Star Type - they are new ideas that create new demands and have the potential to be the next stars.

Each of them have their own criteria of choices. I will continue to discuss abotu them at the following days.

HSBC and US Bond Market

I have emphasized many times (in Hong Kong Economic Journal Forum) about HSBC already. From the current announcement, HSBC's latter half of 2008 and 2009 Q1 results can be expected.

The most serious part is the cash outflow through withdrawal by clients. The other serious part is the actual cash outflow to financial asset losses (means it must have owed the counter-parties debt - can be obligations to CDS and other tools).

Since the drops of US property market, now spreaded even to property management for commercial and retail purpose properties, have not ended and will only worsen, HSBC, actively involved in the US property market, will only get even worse.

NONE OF THE TIME NOW, NO MATTER AT WHAT PRICE, IS THE PURCHASE TIME.

A POTENTIAL FINAL TRIGGER ON ANOTHER BIG DROP MAY HAPPEN BEFORE THE KICK-OFF OF THE EXISTING PRESIDENT, CEO, AND SENIOR MANAGEMENT.

But after their step-down, light may shred to HSBC.

On the other hand, US bond market may not really burst as early as HKEJ other writers had predicted. The key reasons are:

1. China and Japan, combined together, only held about 1,158b USD US debt (totalled 10,890b USD), while US domestic market, government and public, have already hold 6,289b USD US debt (according to US treasuries data as per Jan 12, 2009). The sensitivity of China + Japan, by 1% drop, can only affect 0.1% percent of total USD debt, while US domestic can affect by 0.57% percent of the total. The signficant is not comparable.
2. What are the substitutes to US debt? Euro and GBP assets are in more troubles. JPY asset is not attractive; rise on JPY is due to unwinding. AUD and NZD have dropped by large percentage due to weakened raw materials demand. CAD relies on US too much. RMB is not a hard currency. Gold has both the role of alternate currency and commodity: while the former role makes gold attractive, the latter position offsets quite a degree of gold's value. Under the absence of the best substitute, US bond will still have demand.
3. Obama's office will certainly need to bail out some other firms. A method is to purchase the corporate bonds to inject money. Before the implementation of this strategy, as well as the turn around of US economy, Obama's government will not have sufficient gut to burst this bubble.
4. The bid/cover ratio shows that at reasonable discount rate/coupon rate, UST are still favored by the investors.

For sure UST will subject to a risk of deep adjustment on prices had Obama's government issued new treasuries at large discount and large amount. It is not wise to purchase the treasuries now (the timing has gone). However, calling it "collapse" is a sensational claim more than a refined analysis.

A Small Conclusion on Bond So Far

This is the first week of 2009 on which many bonds are sold. Results are as follows:

4-week: sold 24b, bid/cover 3.72, discount 0.06%;
(last sale: Dec 30, 2008: sold 22b, bid/cover 3.09, discount 0.03%)

3-month: sold 26b, bid/cover 3.11, discount 0.15%;
(last sale: Dec 29, 2008: sold 26b, bid/cover 2.44, discount 0.05%)

6-month: sold 27b, bid/cover 3.26, discount 0.32%;
(last sale: Dec 29, 2008: sold 26b, bid/cover 2.51, discount 0.25%)


3-year: sold 30b, bid/cover 2,21, yield 1.2%, coupon 1.125%;
(last sale: Dec 8, 2008: sold 28b, bid/cover 2.15, yield 1.245%, coupon 1.125%)

10-year: sold 16b, bid/cover 2.59, yield 2.419%, coupon 3.75%;
(last sale: Dec 8, 2008: sold 16b, bid/cover 2.44, yield 2.670%, coupon 3.75%)

10-year TIPS: sold 8b, bid/cover 2.48, yield 2.245%, coupon 2.125%;
(last sale: Oct 8, 2008: sold 6b, bid/cover 2.22, yield 2.85%, coupon 1.375%)

There are 2 common points in the auctions:

1. All yield rates of short-term bills increased from last auction.
2. All bid/cover ratio increased from last auction.

Despite the drop on bond prices owing to over-bought and worries on US government deficit, the demand on the bills, notes and bonds, are all solid at the current level. After the rather rapid drop before the 2009 auctions, the new auctions signalled that investors were still looking for a comparatively risk-adversed asset as a part of their portfolio. Assume the "announcements" by China and Japan governments about the decrease of bond positions are true, then the other non-governmental investors are still long for reasonably priced US government debts. Don't forget that the primary sales on last 2-3 months are not "normal" - Treasury and FED faced severe illiquidity period and took extreme measures to inject money to the banking and finance system. The first wave has passed so far, and it is normal that the price returns to a normal range and closes its gap with FED target rate 0-0.25%.

Special attention is to be made on the 10-year note and 10-year TIPS:

1. The trend of yield: both bonds' yields have decreased by 251pts and 605pts respectively from last sale.


2. The difference between their yields: in this current sales the difference between Note and TIPS is 0.174% that has increased by 0.354% from -0.18%.


3. The coupon rate of 10-year TIPS has increased from 1.375% to 2.125%.

Comparing with the last issues, this auction of the longer term bond still have their yields decreased which is a general trend. Market confidence in general is still weak and seeks for shelters should anything happens. But particularly for 10-year TIPS, despite the drop of yield rate, treasuries raised the coupon rate from 1.375% to 2.125% in order to attract bidding. It only happens when market considered that inflation is not the big concern and hence the yield of 10-year notes will be better than the 10-year TIPS, by equation that real interest rate = nominal - inflation. Thus, although in the primary market the yield rate of 10-year TIPS is still lower than that of 10-year notes, the trend may lean towards an expectation of prolonged deflation even up to 10-year. Assume this is the market expectation, then in 2009 and even 2010 USA stock market will only subject to rebound but not recovery.

Bond Market - Bursted or Yet?

January 5, 2009, Monday, 3-month and 6-month T-bills were auctioned. Results are as follows:

3-month T-bill:
discount rate: 0.15%; bid/cover: 3.11; total amount: 26b
(last auction: discount rate: 0.05%; bid/cover: 2.44; total amount 26b)

6-month T-bill:
discount rate: 0.32%; bid/cover: 3.26; total amount: 27b
(last auction: discount rate: 0.25%; bid/cover: 2.51; total amount 27b)

Both rates are increased from the last auction. The rise of the discount rate of 3-month T-bill is even at 3 times than before. However, it is too early to mention about the dead of bond market. The key is about the bid/cover ratio. For both T-bills, the bid/cover ratios are above 3.00. It is a signal of strong demand on the auctioned bills.

If we look for the discount rates of the same set of T-bills with the closest bid/cover ratio, they will be 0.15% (3 months, on November 17, 2008, bid/cover: 3.14) and 1.4% (6 months, on October 27, 2008, bid/cover: 3.28 ). Either they are the same as the current bid, like the 3-month bill, or they are 115 pts higher than the current bid, like the 6-month bill. Market has not completely walked away from the bond yet; rather they are looking for a "reasonable" bid. From the bid/cover ratio, currently the short-term T-bill ratio will settle around 0.05-0.15% (3-month) and 0.32-0.49% (6-month), according to the closest bid/cover ratio in December 2008 (3-month; 0.05%; on December 8, 2008 and 6-month; 0.43%; on December 8, 2008).

Taking a more macroscopic point of view, desipte the anticipation of the depreciation of USD ratio and potential inflation (which is quite impossible in short-term), T-bill so far is still one of the "safest" class of assets for central banks and even large commercial banks portfolio provided that USA government can still operate and honor its contracts. Europe can be a competitor yet it is subjected to a equivalent, if not bigger, scale of recession. EURO's strength is also subjected to further questions had EURO zone property market and domestic consumptions continued to drop. The lack of military strength of Europe will not help EURO stand stiff against USD either. Other Asian currencies, including RMB and JPY, have already heavily invested on Treasuries market. Their discontinuity on purchasing Treasuries will damage no-one but themselves. Their so-called threat of buying other asset in replace of US Treasuries can only be interpreted as "complaints". Once USA re-adjusted the basic discount rate for later rounds of auctions, in the short-run China and Japan will not deviate from US Treasuries in order to protect their own existing asset and currency base, particularly under a highly fluctuated market.

Jan 8 - Announcement about Consumer Credit

The next wave of concern will be the changes between debt-to-income ratio and consumer credits. While the debt-to-income ratio remains the same, the consumer credit contracts substantially these months. Combining with the risk premium of ARM: 540pts for 1 year and 559pts for 1 1/2 - 5 year despite the decrease of the FED target rate, the out-break of another credit crunch is coming closer. Integrating with the jobless claims announced on the same day, and the unemployment announced on Friday, the rebound may come close to an end, or at least will cease. In case the Gaza area caused another wave of shortage (pretended or true) of oil, then maybe even bond market will be affected. Even if big accounts will not take big actions on this week, data announced this week will be indicative.

RMB Spreads 200pts in HSBC

In recent 2 days when I deposited my RMB in HSBC, I discovered 2 things: first, HSBC would charge 0.125% service charge for a total amount of cash deposit at 12,000RMB/day or over (which the maximum had used to be 50,000RMB/day before the change). Second, when I checked the spread of RMB against HKD, it was 114.07:112.04 (friday) and 113.95:112.13 (yesterday), a spread of 203 and 182 pts respectively. Maybe I am over-sensitive, but both are not normal measures, anyone likes to express your valuable opinions?