Analysis: Global Recession Due

Hi all,

It has been another interesting week that will make history in the global financial markets where the US markets lost a total of $1 Trillion on the market bourse, as Dow was down 777 points closing 10,365.45, Nasdaq down 199 points closing the day at 1983.73, S&P 500 down by 106 points closing the day at 1106.39, in the US market trading.

Asian bourses was pretty weak gaining what was lost from the opening at mid-day with STI closing down 2.43 points at 2358.91, Nikkei 225 closed down 483.75 points at 11259.86, Hang Seng closed up 135.53 at 18016.21 (where tomorrow will be a public holiday), and Chinese stock exchanges closing for the week for National Day.

The selling in the earlier session was sparked by a rejection of the bailout plan that was proposed by Henry Paulson, and his Fed aides, as many market participants held high hopes of the implementation of the proposed rescue package. In my opinion, a veto on the proposed bailout plan may not exactly be a wrong move for the US economy on the long term. I may not be a US taxpayer, but to be transferred an obligation, and to 'foot the bill' for mistakes made by others, would make me feel upset about it as well. 

These troubled institutions have, for the past decade adopted a loose system in assessing the credit-worthiness of their borrowers, and thus, lent out billions of dollars to NINJAs (No Income No Job or Assets Individuals). As a result, causing a vacuum in the credit system. With fear of further failure with banks, the Federal Reserve has, since March, spent on these items:

1. JP Morgan's takeover of Bear Stearns, brokered by the government ($29B)
2. Liquidity Injections such as Term Lending Facility and Term Auction Facility ($200B)
3. Economic Stimulus Package ($168B)
4. Refinancing of failing mortgages into new and reduced principal loans with a guarantee ($300B)
5. AIG's bailout ($85B), can be up to $400B due to AIG's CDS on CDOs, CMOs, MBS, and etc...
6. Fannie Mae and Freddie Mac $200B, can be up to $800B
7. Money market insurance (likely another $50B)
8. MBS purchases ($10B), up to $800B.
9. Global credit market injection $300B just last Friday.
   
10. Repayment to JP Morgan for providing liquidity to Lehman's bankruptcy ($300B)
11. What if the 2nd attempt of the bailout proposal succeeds this Thursday? ($700B)
12. Taken from an article in Reuters, US banks and money managers had to borrow $188B a day to keep afloat.
    

Do you think the Fed has been successful with such spending and injections? What is it about another $700B of injection, will the system stabilise because of these injections? 

As of 30Sep2008 Libor Fixing

         Tgt   O/N    1mo    2mo  3mo  3m chg
US   2.00%  6.875  3.926  3.966  4.053   17.0
UK   5.00%  6.781  6.075  6.156  6.300   3.9
EUR  4.00%  4.449  5.050  5.130  5.277   4.0
JPY  0.50%  1.031  0.926  0.950  1.015   5.4
CHF  2.75%  3.333  2.800  2.860  2.955   2.5
CAD  3.00%  4.500  3.997  4.100  4.208   0.8
AUD  7.25%  6.938  7.775  7.725  7.800   3.7

Taking a look at LIBOR (London Interbank Rate) which is a rate for interbank lending, is at a nervous state, as banks begin to lose confidence with one another, loans offered by banks to retail customers are also shorter, and do you think bulk cargoes that are shipped long distance by ship easily get their financing as well?  

Next, let's take a look at European banks, are they any better off than us? Here are some numbers:

• More than $300B of credit insurance were written by AIG to the European banks.
• Deutsche Bank leverage ratio is 50x, 80% of Germany's GDP.
• Barclay's leverage ratio is 60x,  100% of UK GDP
  
• Fortis's leverage ratio is 30x, 300% of Begium's GDP.

Scorecard: Avg Leverage Ratio (US Banks) 20x Vs Avg Leverage Ratio (EU Banks) 35x

The numbers speaks for itself. If you have read the contents that was written above, you would derive that we are currently in the phase of a global slowdown, also called a recession. Let's not deny that. 

So where do we invest our money in? Writing Blogs? Not a bad idea in fact, well I happen to come across a website (http://www.postiecon.com) lately, and they seem to be providing some very interesting ideas as to how successful blogs can be created. Look into them if you are keen.

As for my personal opinion as to where funds could be invested, for the moment, even though stock valuations are already at one of its lowest levels, I still believe cash is king, for those who are not involved in the forex markets. But if you are into trading forex, crude oil and gold for the week, I would suggest everyone to only try holding on to short term positions, as news of intervention and further injections from central banks may come anytime, causing the markets to be a little volatile at times. 

Video: The Last Lecture

Before I end my last note for the week, I thought this video could be good for the soul. Let's pay a tribute to Dr Randy Pausch for his many years in education.

Have a great weekend.

Analysis: Volatility Increased As Market Waits

As the trading day ends for the week in a few hours, the world anticipates for news on Paulson and the members of the Treasury to disclose details on the bailout plan. The current market's  sentiment, judging from how equity indices are performing (volatile), indicate that market participants are running dry on patience, as they begin to doubt whether anything would be passed to restore liquidity in the markets, and save the sinking boat. 

In my opinion, restoring liquidity may not save all the firms from failing, but it is likely to calm the markets as well as those OTC derivatives creators who are still writing credit default derivatives.

Monday's market open would likely be another interesting one, as the markets will likely begin to discount the outcome, as it may no longer matter if the Bill is passed or not. Here is a short article of an enthusiastic party to this bailout plan:

UK banks hold 95 bln pounds of sour assets that could qualify for US bailout plan - Times of London

Times of London reports Britain's five leading high street banks have as much as 95.3 bln pounds ($175 bln) of distressed assets on their books that may qualify for the American bailout scheme. If the British banks tap the rescue fund being set up by the US Treasury and the Federal Reserve to the maximum, they could secure one quarter of the $700 billion being made available. Under the terms of an outline agreement that appeared to have been reached by US policymakers last night, Britain's lenders will be able to use the facility... According to analysts' estimates, and the banks' own recent filings, HSBC (HBC) has as much as 45 bln pounds in structured mortgage debt and other soured assets sitting on its balance sheet that it might look to exchange with the Fed under the plan. Next are Barclays (BCS), with 17.4 bln pounds; Royal Bank of Scotland (RBS), with 16.2 bln pounds; and HBOS, the UK's largest mortgage bank, with 13.3 bln pounds, analysts said yesterday. Lloyds TSB (LYG) follows some way behind in its exposure to the troubled mortgage securities, with assets of about 3.4 bln pounds.

Let's look forward to next week, where the Chinese exchanges will get an entire week's holiday for their national day. And I will be looking forward to this weekend's F1 in Singapore. Have a Great Weekend! 

Analysis: Market Outlook

The world markets today will remain focused on further developments on the U.S. financial bailout program, that has just about worked its way through Congress. It now appears to be a done deal. The strongest reaction has been in equty markets, which have improved. The USD really does not know what to do with it, but its tone improved as the day wore on. It may indeed be a dramatic

The major question now is whether interbank liquidity will start to improve once the bill officially has been passed as the interbank lending had dried up pretty drastically. As simply, banks who have cash do not want to let it go for credit/liquidity reasons.

Next Monday will be an interesting day because on that date, markets will start trading the three month maturity over the turn of the year. Equity markets and the bond vigilantes will have the final word on the bailout program and have already rallied in anticipation of its passage.

The USD is trading steady to lower against EUR, CHF, JPY and GBP. Crude Oil starts lower at 106ish away from yesterday's high at $108 per barrel. Gold is also lower

Asian bourses traded lower with HSI 18771.02 -163.41, Nikkei 225 closed at 11893.16 -113.37, STI currently trading at 2409.90 -34.26, and Shanghai 2293.784 -3.717. 10-yr JGBs were a touch weaker. European bourses rallied. E-Z bond prices have gained.

U.S. equity markets closed up stronger yesterday. Likely to follow with a weaker opening in the US markets today. Bond prices are also weaker.

Comic: What Will Happen If Market Uncertainty Persists

Ever wonder what will happen to your stockbroker if the financial situation persists?

Analysis: Correlation Charts

Thank you for your kind support and encouragement. I am glad my info has been useful to some. 

Just last week, a reader asked, if there were any currencies that showed a correlation with specific commodities, so in order to answer this query, the above image may speak for itself. 

Tribute from George Soros

Paulson cannot be allowed a blank cheque
By George Soros 

Published: September 24 2008 20:28 - Last updated: September 24 2008 20:28

Hank Paulson’s $700bn rescue package has run into difficulty on Capitol Hill. Rightly so: it was ill-conceived. Congress would be abdicating its responsibility if it gave the Treasury secretary a blank cheque. The bill submitted to Congress even had language in it that would exempt the secretary’s decisions from review by any court or administrative agency – the ultimate fulfillment of the Bush administration’s dream of a unitary executive.

Mr Paulson’s record does not inspire the confidence necessary to give him discretion over $700bn. His actions last week brought on the crisis that makes rescue necessary. On Monday he allowed Lehman Brothers to fail and refused to make government funds available to save AIG. By Tuesday he had to reverse himself and provide an $85bn loan to AIG on punitive terms. The demise of Lehman disrupted the commercial paper market. A large money market fund “broke the buck” and investment banks that relied on the commercial paper market had difficulty financing their operations. By Thursday a run on money market funds was in full swing and we came as close to a meltdown as at any time since the 1930s. Mr Paulson reversed again and proposed a systemic rescue.

Mr Paulson had got a blank cheque from Congress once before. That was to deal with Fannie Mae and Freddie Mac. His solution landed the housing market in the worst of all worlds: their managements knew that if the blank cheques were filled out they would lose their jobs, so they retrenched and made mortgages more expensive and less available. Within a few weeks the market forced Mr Paulson’s hand and he had to take them over.