Saturday, February 09, 2008


Intelligent Commentary

I have been corresponding with a fellow reader for sometime, and he has kindly consented for me to publish his essay below but not his name: (my comments in blue)


Dali-san,

You postulated credit implosion is started with excessive money growth driving assets beyond its fair value. Financial institutions will have to go through the balance sheet cleansing process, therefore monetary policy may not the best tool for this. It also very difficult to use fiscal policy to solve this problem. The root is lack of transparency to mark down what they have on their balance sheets. Like Buffet said, many of them are mark to myth, not even close to mark to model.

Since many of these assets are tie to value of the housing properties, the speed of cleansing will depend on the speed of housing prices fall. This will take sometime to sort out. Recent UBS announcement of massive write down did not send the stock price to hell, I wonder why?
(I think there were early sellers, and on news, the actual selling will be limited. I have been harping on the European banks' results in the coming days - I believe there will be surprises, bad ones, but the impact will not be in the banks' share prices, but rather the implications for the spread and reach of the credit bubble implosion).

Global liquidity is still a plenty, as long as there is source of capital replenishment, the financial institutions will be able to go on with business as usual? Some argue these institutions are too big to be allowed to fail. People on this side of the pond and middle Eastern are flush with cash to buy US assets. It is more of confidence issue than liquidity. Subprime loan is about US $ 1.5 trillion? Can the world support a few more hundred billions? I don't think it is an issue, except the creditors faith will be tested to the extreme.
( That is why I am also critical of Bernanke's rate cuts because its as if his prime motive is to save the stock market from collapsing. A central bank is to ensure low inflation, steady economic growth - stock prices and excesses should not bother the Fed. When the Fed cut aggressively, it pours more money on the problem when the problem can only be cured with proper correction. By easing too much, you go back to the root of the problem, thus not curing the illness but only suppressing it).

The rise of Chinese and Indian consumptions will continue to offset slower growth or mild recession in the States. The rest of the world economy has decoupled to certain degree but stock market has not decoupled yet. Chinese economy growth is depending around 20% export to the States in 2007. Many Malaysia still dare not drive up plantation stocks despite run up of soft commodities prices, still have colonial mentality?
(No colonial mentality in palm oil, its an open market, foreign funds are welcomed to buy as much as they like, Malaysians are just a small subset of investors, not supposed tp dictate prices).

My thesis is fundamental and price begin to diverge but not at screaming buy level yet. I will never argue with the market, if it decided to fall more, let it fall - regardless they get the why correctly. Sub-prime, credit implosion or recession, I think the market is having a confirmation bias. As soon as they find some confirmations, they will just sell, sell, sell. If you look at the volume, you won't find extreme volume on the way down or up. There is no extreme short selling yet, what does it tell us?
(It tells us that we are still unsure of what is bringing down the markets. Many still don't think its a credit bubble implosion, which is very much severe than a housing correction only).

Worldwide stock market is not extremely overvalued, dramatic valuation collapse is not happening soon. People constantly doing rotation play. What does it tell us? Single digit PE valuation is also unlikely to happen. I think one just need to sit tight and wait for pessimism to wane.

1 comment:

bryon said...

WorldNetDaily, 5th February 2008:
Consumers should expect a deep recession, triggered by the "stealth methodology" of the Federal Reserve to "depress" the market even while lowering interest rates in an ostensible effort to stimulate economic growth, an economic analyst is charging.
"The Federal Reserve is directly involved in manipulating the stock market," said economic analyst Mike Bolser in a telephone interview with WND yesterday.
The New York Stock Exchange finished the day down 108.03 points, closing at 12,635.16, much as Bolser predicted, despite recent emergency Fed rate cuts of 1.25 percentage points aimed at stimulating the economy.
"Fed wants the Dow Jones Industrial Average and other financial indicators to descend in a managed way," Bolser said. "The Fed wants to drive the DJIA toward the 8,000 level, or below, in order to help create a deep recession which will have the effect of slowing consumption across the board, and dampening the otherwise harmful effects of inflation.
"A falling DOW is only one element of the recession effects of the excessive Fed-created housing and credit creation, whose bubbles are now bursting," he added.
"Without this recession, we would be on quick trip to hyper-inflation," Bolser, the author of an internationally followed newsletter published in conjunction with his InterventionalAnalysis.com website, said, "and the Fed wants to prevent this."
In his twice-daily subscription newsletter, Bolser has devised a quantitative methodology for utilizing Federal Reserve repurchase agreements to predict upward and downward movements of the DJIA, measured on a 30-day moving average.
Yesterday, Bolser noted the Fed added $18 billion to repurchase agreements, edging the pool up to a total of $153.158 billion in unexpired temporary repurchase agreements.
Repurchase agreements involve a sophisticated use of government securities issued every day by the Fed, but little understood or followed, even by sophisticated investors.
A repurchase agreement, as defined by the Fed, is a government security offered by the federal government to a small list of specified primary government securities dealers, for a limited period of time, usually 28 days or less, with overnight return being the most common.
The government securities are "rented" by the primary dealers and they can be added to the primary dealer's portfolio or collateralized and then used in the open market to implement the Fed's open market policy.
At the end of the repurchase agreement, the Fed obligates itself to take back the government securities from the primary dealers, effectively canceling the contract.
Meanwhile, while holding the government securities let out by the Fed in the repo agreement, primary dealers are free to utilize the liquidity provided by the repurchase agreement to manipulate the economy in accordance with the Fed's true monetary policy, whether publicly declared or not.
Primary dealers use the funds provided by the government securities they hold under the repurchase agreements to buy dollar exchange futures contracts, stock market futures, or to buy commodities contracts, including gold mining shares, all in accord with implementing Federal Reserve monetary policy to manipulate currency, commodity and stock markets up or down, depending what goals the Fed wants to accomplish at any particular time, the economist alleges.
Over the past several months, however, the Fed has implemented a policy to issue smaller amounts of daily repurchase agreements, with the goal of reducing the total pool of repurchase agreements available to the Fed's short list of 20 banks that are qualified by the Fed to serve as primary government securities dealers participating in the Fed's Open Market Operations.
Only the 20 banks specified in the Federal Reserve Bank of New York's list of primary government securities dealers are allowed to participate in Fed repurchase agreements.
"The primary government security dealer banks are like a private club," Bolser told WND. "You get to stay in the club as long as you take the repurchase agreements and enter the markets to implement Fed monetary policy the way the Fed wants it implemented. Violate the unspoken rules, and you risk being thrown out of the club."
Yesterday's $18 billion addition to the repurchase agreement pool caused the total amount of the outstanding repurchase agreement pool to remain below the DJIA 30-day moving average in a clear trend.
Bolser used this data to predict the Fed was manipulating the stock market lower, a controversial prediction when most economists see the Fed's emergency actions to reduce the target Fed Funds rate 1.25 percentage points lower over an eight-day period that ended with last Wednesday's meeting of the Federal Open Market Committee.
"Ultimately, the government is in the business of inflating the dollar," Bolser said, "so the Fed is trying to engineer a recession, in order to cushion the pernicious effects of its own inflation."
"In my view, the government intentionally desires a deep recession not unlike that of the 1930s," he continued. "The Fed, however, dissembles, attempting to display the opposite impression with its rate cuts."
"Cutting rates will not boost the economy in an environment where the credit bubble has burst and banks are afraid to lend," he explained. "But decreasing the repurchase pool will push the economy down, especially when the primary banks execute monetary policy in accordance with the wishes of the Fed to short the market with future contracts that push the indices down."
Bolser argued the Fed's ability to manipulate the market by increasing or decreasing the pool of available repurchase agreements amounts to a "stealth methodology" where the Fed can now depress the market, while implementing a policy of lowering interest rates, which most economists would see as trying to stimulate economic growth and the stock market.
"You have to remember the primary goal of the Fed is to support the bond market, which the Fed has done for quarter century," Bolser stressed. "The Fed needs a strong bond market so the Treasury can sell the enormous amount of Treasury securities, especially to China, that we need to sell to finance what this year may be as large as a $400 billion dollar budget deficit calculated on a cash basis."
"As a result, the friend of the Fed is the bond speculator," he added.
Among the U.S. banks and securities firms currently on the list are Bank of America Securities, Cantor Fitzgerald, Countrywide Securities, Bear Stearns, Daiwa Securities America, Goldman Sachs, Greenwich Capital Markets, HSBC Securities (USA), J.P. Morgan Securities, Lehman Brothers, Merrill Lynch Government Securities, and Morgan Stanley.
Also on the list are France's BNP Paribas Securities, Great Britain's Barclays Capital, Switzerland's Credit Suisse Securities, Japan's Mizuho Securities, and Germany's Dresden Kleinwort Wasserstein Securities.
"These dealers are the foot soldiers of the Fed, as it implements monetary policy," Bolser said.
Studying Bolser’s "Repos/DOW" chart from Dec. 7, 2007, through yesterday, a broad correlation between the downward movement in the Fed repurchase agreements pool totals and the DJIA as seen by tracking the 30-day moving average is clear.
"With this strategy, the Fed hopes we won't experience the extreme 'stag-flation' we had in the late-1970s," he argues. "The Fed hopes to induce a recession to manage downward stock prices and commodity prices, including oil, gold, copper, and lumber, as well as the overall consumer demand for retail goods."
"Stag-flation" is an unusual economic situation combined when economic stagnation is combined with inflation, much as the economy is currently experiencing, such that economists fear we are entering a recession while food and energy prices continue to rise sharply.

likely to be truth?