Analysis: Paradigm Shift In the US Banking Sector

Today's events have indeed been a thrilling experience experience for the international markets. As I am writing this, the China Central Banks has just cut its key interest rate again by 27 basis points to spur growth, Lehman (est. 1844) has filed for Chapter 11 (Bankruptcy) , there are rounds of ECB having an emergency rate cut, UBS sneaking in to declare another $5B of writedowns, AIG seeking help from the Fed with a request of a $40B bridge loan after rejecting an offer by Flower to prevent themselves from joining the slaughterhouse where their CDs are currently gapping outwards, and it seems that the only few pieces of good news are probably that Merril had a merger with BOA, as well as a consortium of global banks have put together a $70B fund to facilitate liduidity and an orderly resolution between Lehman and their counterparties. ECB also joined in with $30B to curb liquidity woes as well. 

In my opinion, it seems like an obvious trend that all Fed Governors are challenged by the markets whenever the Chairman gets hot on the seat, where the Federal Reserve at this time in history chose to avoid providing support to Lehman as it could gravely cost the federal government to be in a financial position, after nationalising Freddie Mac and Fannie Mae. If the Federal Reserve is to continue taking on more liabilities from the private sector and turning them into a public sector, it may be worth want to rethink about the credit rating of the US Treasuries, as many investors may consider the risk of default. With reference to the article written by Morgan Stanley, where they quoted from Japan and Germany back in the 90s, that the explosion of both governments' debt was followed by a peak out and then a decline of private housedholds' indebtedness, and with the expansion of the public sector's balance sheet was mirrored by a contraction in the private sector balance sheet (always relative to GDP).

The consortium of events have really challenged the belief of many affluent investors and central banks today as to rethink about the safety of their funds with their investment banks (where Lehman is larger than Bear Stearns), and the use of leverage for their creative business models. These institutions tend to face more vulnerabilities as they depend heavily on short and medium term money market instruments to maintain operations, as compared to commercial banks such as JPM and BOA, where they are more dependent on deposits made by their customers to operate. In my opinion, if the economy is to reinvent the banking system, it may also also seem that huge bonuses awarded to CEOs of investment banks may be forgotten for a little while, till people can forget about what happened in 2008.

In my opinion, the effect of liquidation of these troubled institutions may also slowly creep into the US consumers, businesses and net exporters to the US in the coming months, where it may continue to hurt smaller institutions, home owners, other governments, pension/ welfare/ education funds, and corporations who have collaborated in business with these companies. 

So in-lieu with the current jittery sentiment, where consumption and the labour market takes a hit in the slowdown, the availability of credit remaining low,  Europe and Japan in a recession, and the emerging markets having difficulties coping with inflated prices of goods over the past few months, where are the opportunities at?

Considering the events and gloom of the current market condition, we are inevitably experiencing one of the most interesting challenges of human history, that is an asset bubble that rippled into a credit crisis that will remain to challenge the monetary 'pipeline' for awhile. 

First, as a personal preference, I will be staying away from stocks in general, even though Asia may seem like a safer haven for equities investing, but no matter how, so long as there is uncertainty, these instruments should be left alone. Second, keep a close watch on central banks and currencies in both UK and the European region, where logic says we should be hearing some countercyclical monetary policies (rate cut) from them soon. Lastly, we may also begin to see lower prices in general commodities as the world's largest consumer may have to take a cut back on their general expenditure on goods and services, as well as their gross net worth. 

In my next post, I will be looking at which specific markets I would be trading on, and where would be my preferred entry levels.

Please understand that these are only my personal views, and is not intended for the purpose of providing financial advise. If you find the article interesting and would hope to dicuss further on your views on trading and investing, come join me at http://momentum-trading.blogspot.com (Momentum Trading) and http://systematic-trading.blogpot.com (Systematic Approach Trading).

See you soon!