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Moolah
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Posting #1: Wed Jan 23rd, 2008 03:50 |
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Posted on BTimes:
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Global rout, but is the panic justified?
The broad international sell-off in the past two days has raised fresh concerns that a looming US recession and the fallout from subprime mortgages could have global repercussions.
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Published: 2008/01/22
NEW YORK: The fear is spreading.
For months now, investors have been lured to overseas markets with the promise that surging growth and solid economic fundamentals in Asia and the Middle East would insulate them from the credit squeeze plaguing the US market.
But the broad international sell-off in the last two days - and the prospect of a steep market decline in the US yesterday - raised fresh concerns that a looming recession and the fallout from subprime mortgages could have global repercussions.
Some analysts saw the sell-off, with leading indices off 4 per cent to 7 per cent worldwide, as being driven by fear more than by fact.
"I don't think it's warranted by the fundamentals," said Edward Yardeni, an independent strategist. "The resilience of the global economy in the face of a credit crunch has been impressive."
Yardeni warned, however, that in a time of panic and fear, less attention is paid to fundamentals, like a fairly tight US job market and strong growth and the extraordinary buildup of foreign exchange reserves in emerging markets.
The result is panic selling and the prospect of a global recession. "People are creating the financial violence that they hoped to avoid," he said.
More could be in store. Markets in the US were closed on Monday in observance of Martin Luther King's Birthday, but futures for the Dow Jones industrial average traded 500 points down in a stark indicator that the main indices could face a sharp drop, adding to one of the worst-ever starts to a year.
Other analysts point out that the overseas uncertainty reflects the unpleasant if not devastating reality that the excesses of the long-running credit boom will not go away soon.
What makes this correction more dangerous, they say, is that the selling is not being driven by panicky retail investors, as it was in the collapse of the technology bubble, but by hedge funds and investment banks that find themselves saddled with illiquid securities backed by an array of valueless assets.
"What you see is not a panic of the public. This is a panic of the sophisticated," said James Sinclair, a well-known gold trader who oversees a financial website and who has warned investors for years about the dangers of derivatives. "But this will have a tremendous impact on the public. In the end, this will hit Joe Sixpack. It's very serious, and drastic emergency economic action is needed."
Indeed, according to research on liquidity flows by Thomas McManus, an equity strategist at Bank of America, net inflows to domestic stock-oriented mutual funds through the first nine days of the year were positive, albeit off from higher levels in previous years.
Most retail investors have not invested directly in the complex securities that have ruined the reputations of some of Wall Street's best-respected minds. But their exposure to plummeting companies like Citigroup and Merrill Lynch, and now a broader basket of stocks affected by the market malaise, will add to the sense of wealth erosion that many are already feeling from the declining values of their houses.
On his blog, JSMineSet, Sinclair has told his readers that as much as US$450 trillion (US$1 = RM3.30) worth of derivatives could disintegrate, leading to a far greater, and in some ways unpredictable, calamity.
He argues that compared with the savings and loan crisis in the late 1980s, when the formation of a trust company for beaten-down institutions established a floor for sinking assets, the inability of the government to form a similar entity for suffering securities has heightened investors' unease.
While the views of Sinclair, a gold bug who expects the price of gold to go to US$1,650, up from about US$870 now, might be taken with a grain of salt, other experts have also begun to warn of the dire consequences of the credit market collapse.
Christopher Wood, a strategist based in Asia who publishes a widely read newsletter called Greed & Fear, pointed out in a note published this weekend that the potential insolvency of bond insurers like Ambac, MBIA and ACA Capital speaks to a larger market correction that has not yet been grasped by policy makers. "Greed & Fear's view is that with the bond insurance business model fast unwinding, a full-scale crisis could be coming," he wrote.
The international selling has also stoked a long-held fear that flush Asian and Middle Eastern central banks and government-backed investment funds will cut back on their dollar-based investments - like Treasury bills and stakes in troubled investment banks - in the face of another round of interest rate cuts and continued weakness in the US dollar.
These flows have represented a crucial font of liquidity for an economy that produces little of its own domestic savings, and they have been lifelines for capital-starved banks.
But no money manager, regardless of the time frame, likes to invest in a falling market, and analysts fear that a spate of additional write-downs and market turmoil will signal to foreigners that the markets here have not yet found their bottom.
One large investor, who asked not to be identified because he did not want to tip his hand, said that the sell-off on Monday was a direct response to the stimulus package proposed by the Bush administration - not so much a judgement that the proposal was inadequate as a reflection of the weakness and drift of the world's largest economy.
"It is one thing to see the market go from 14,000 to 12,000," he said. "But when the president of the US says we are sick, you can't ignore that." - NYT
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Moolah
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Posting #2: Wed Jan 23rd, 2008 04:28 |
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PM: Investors still have confidence in KL bourse
Published: 2008/01/22
PRIME Minister Datuk Seri Abdullah Ahmad Badawi said yesterday the country’s well-managed economy plus its strong fundamentals have preserved investor confidence in the stock market despite the downtrend in shares regionally and globally.
The local market, along with most global markets, has been affected by growing concerns over an impending recession in the United States following the fallout of the subprime credit crisis.
“The share market sometimes goes up, sometimes (it goes down). What is important is that our market is fairly stable,” he told reporters in Kuala Lumpur after a special closed-door briefing for Umno divisional leaders.
Although declining on weaker regional sentiment, the benchmark Kuala Lumpur Composite Index had registered a record high of 1,516.22 points earlier this month.
It later reversed gains as the market underwent a technical correction in line with weak global sentiment.
“There is no serious fluctuation. We are performing at a very high level of beyond 1,000 points,” he said.
“I think it is good. There is confidence in our market and this reflects confidence in many other things. The market would not have done well if we had not managed our economy well,” he said.
The stock market managed to hold its own yesterday, falling by 3.84 per cent.
However, regional markets fared badly. Japan fell to its lowest level in a decade while trading in Korea and India were halted temporarily due to steep losses.
South-east Asian bourses also fell significantly with the Singapore bourse falling by 5.8 per cent.
On another note, Abdullah dismissed the notion that the higher dividend of 5.8 per cent declared by the Employees Provident Fund for 2007, up from 5.1 per cent in 2006, was due to the imminent next general election.
Stressing that it was not an “election dividend”, he nevertheless congratulated EPF contributors for receiving a much higher dividend.
He attributed the higher dividend to EPF’s ability to generate higher returns from increased profitability of its share investment portfolio.
“They can afford it (pay a higher dividend), so they give it to contributors and shareholders,” he said. — Bernama
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Moolah
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Posting #3: Sat Jan 26th, 2008 03:32 |
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Saturday January 26, 2008
Inflation and bubble bursting hurt world economies
INVESTMENT SCENTS
By S. DALI
LIKE many of you, I was glued watching the CNBC the last few nights and was amazed at how many are still looking at the wrong reasons why the markets are correcting.
Some are still explaining that the US jobs data are still good and that a recession is not likely. The markets were already factoring in a 50 basis points cut end of January. Doing an additional 25 points a week earlier: is that sufficient?
Downward property prices and impending foreclosure won’t be helped by a 75 basis point cut. This is a correction which aggressive rate cuts won't help, the correction has to play itself out. It’s not just a US recession, neither is it US jobs situation which are killing the markets. If you cannot get to the right reasons, you will mis-read the markets.
If you have to put it down to one reason, it’s the implosion of credit bubble. If you want a secondary reason, it will be inflationary pressures due to the excessive money supply growth worldwide for the past 5 years – which are directly linked to the primary reason.
In Australia, the M3 money supply rose 20.7% from a year ago, Brazil's M3 +17%, Canada's M3 +12.9%, China's M2 +18.5%, the Euro zone's M3 +12.3%, Hong Kong's M3 +31.5%, India's M3 +21.5%, and the United States' M3 +15.8%, a 47-year high.
Under the leadership of Jean Trichet, the European Central Bank (ECB) has shifted far away from its monetarist roots and its original 4.5% growth target for Euro M3. Since Trichet was appointed in November 2003, the Euro M3 money supply has exploded from a 5% growth rate to an annualised 12.3% in October 2007, its fastest in history, lifting the Euro zone's inflation rate to a six-year high of 3.1%, and far above the ECB’s target of 2%.
By doing so, Trichet has immunised the Euro zone stock markets from record high oil prices with money supply. The ECB engineered an 11% Euro rally against the US dollar in 2007, by printing money at a bit slower pace than the Fed.
To use monetary policy to fine-tune economic activity or asset markets, or to gear it above a sustainable level will, in the long run, simply lead to rising inflation – not to faster economic growth. What we are seeing is a credit bubble being pricked. Hence, this is not just a market aberration that will correct itself swiftly. And - it is likely to take more than a few weeks to play out completely.
Not to blame just the ECB and the Fed, but most major central banks globally have been increasing annual money supply M3 at double digits since 2001. Initially it was to reflate the economies that were stricken with credit implosion issues.
The recovery of the global economy was hastened with the emergence of China and India, both as a low cost production centre and a huge additional group of global consumers.
A new paradigm
The US central bank has pumped a lot of liquidity into the world economy over the last four years, as a result triggering a synchronised world-economic recovery. The ample liquidity, rise of BRIC, and globalisation trend caused all commodities to surge.
The US has to contend with lower growth compared to the rest of the world, hence explaining the underperformance of US equities relative to other developed markets and emerging markets for the past four years. The trade deficit, which the rest of the world had been financing, became the epicentre for the shift in economic paradigm. The world is not that keen to keep holding US assets as the new paradigm asserts itself. Oil trade resulted in huge surpluses for the oil rich nations. BRIC countries now have a solid economic and industrial framework to pull itself onto the global economic power platform. Currencies began to realign to the new competitive order.
As most commodities were priced in USD, the persistently weaker USD ignited a rally in commodity prices. Added to that, demand for commodities also kicked in with strong demand from China and India.
The Fed initially increased money supply for valid reason in 2001-2002. The last few years have been adding gasoline to fuel the inflationary fire. Now it looks like everything has come to a head. The imploding sub prime mess and credit contraction looks likely to be the catalyst for the unwinding of the upcoming inflationary mess.
Even though the US has been showing signs of recession and a sub prime mess is evolving into a consumer debt problem: inflation is still very much a lagging indicator. Thus the next few weeks will see more “inflationary fears” articles in the media mixed with “US recession” debates. Not exactly fun stuff for the rest of the world.
Bubble waiting to burst?
Inflation is a very slow cycle. The entire cycle takes anywhere from 12 to 16 quarters to work itself out of the data. Thus the weakness in the US may not be of much help to those robust countries trying to contain inflationary pressures on their own.
We have been through a long period of inflationary credit expansion but credit expansion is a self-limiting condition. Credit bubbles are merely the rediscovery by a new generation of the powers of leverage. Every credit bubble that ever existed has eventually deflated. Is this a credit bubble being pricked?
Sure looks like one. We have essentially already reached the limit of debt serviceability that brings the merry go round to an abrupt end. We are already seeing the tightening of credit standards, the refusal of banks to lend to one another, the frozen commercial paper, the bank runs, the redefinition of what constitutes a store of value, the rejection of financial alchemy, the debt defaults, the falling prices in the housing market, the lack of confidence. These are all hallmarks of a credit bubble bursting.
The US has basically exported inflation away from the US with the weak USD and settling for lower growth strategy, and now the problems lie more with Europe and emerging markets. Local currency will still be strong, and will have to remain strong to counter imported inflation. Production capacities have been enhanced already. The slowing US economy will hit hard in 2008.
Twin trouble
Another key factor is the Baltic Dry Freight Index. The Index measures the cost of moving raw materials by sea in container ships. Many economists consider the index to be a good leading indicator of economic activity; when not many people are looking to move cargo, ships will be in less demand, causing a drop in the price that shippers can charge. Recent dramatic declines in the Baltic Index have reinforced views that the US is probably heading into recession. The index has lost nearly 40% since mid-November.
So we have the terrible twins: inflationary pressures still in the system and the credit bubble bursting. Not a pretty sight.
The coming weeks and months will see these things being played out:
· Occasional bad news about companies affected by CDOs related writedowns and bankruptcies by companies hit by higher credit cost or inability to refinance;
·Banks in the US coming to terms with worsening consumer loans;
·Fed dropping rates by 75 percentage points by February but failing to re-ignite the markets (this happened on Tuesday night);
·USD to lose 3%-5% in value in 1H2008;
·Commodities prices ease from their peaks but still stubbornly high;
·Real estate led correction hits Britain hard;
·Developed markets and emerging markets having to contend with inflation in goods and wages, plus coming to terms with a weaker US demand; and
·Some collateral damage in “good sectors” being sold down to help cover losses and redemptions in affected funds.
All said, the sooner we wring out the excesses due to the irresponsible money supply growth policies, the better. All markets will become attractive once they have fallen sufficiently. However, we have to wait for things to unfold from here. A good yardstick would be to monitor the financials in the US. Many are already trading below book value. We probably should see good value with another 5% lower from here. The catalyst which could bring about a buying platform should be a major purchase effected by a well regarded investor or institution, e.g. Warren Buffett.
Hence it is very difficult to predict bottoms.
l S Dali is a pseudonym. He is an ex-analyst/fund manager and active blogger (malaysiafinance.blogspot.com) who says he is too young, too old, too sarcastic, too dark, too funny, too charismatic, too poor, too Cantonese, too Malaysian, too frank, ... too bad.
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