Friday, September 19, 2008

Out Of The Woods?


Was that the earthquake or the follow up tsunami? If it was the former, that means there will be a delayed tsunami coming soon. The RTC like bailout fund is massive and should be around US$500bn at least. This will taint the balance sheet of Fed for the longest time. If I was to project the allure of USD following this, I see at least a 20%-25% drop in the value of USD by end 2009.

The good thing about the Fed's move is the confidence it brings to the market place. There was certainly a freeze up in liquidity and credit between banks and financial institutions. This will allay fears and actually prompt SWF, private equity firms and other lenders to DARE to lend, inject capital or buy stakes in troubled US financials and mortgage firms. Hence the US$500bn has a much deeper impact.

While equity market rebounded like shares are going limit up the next day, we have to be careful. Many funds have sold down or under weighted shares many weeks or even months ahead of the happenings over the last few days. Markets can go down sharply on bad news recently because most of the big players have been day traders and funds which took on shorting the markets.


The news of new rules to rein in short selling and to discourage securities lending for such purposes are green light for the shorts to reverse their positions, and much of the reversal is due to covering. Some of these riskier hedge funds may even go very long instead on the news, but they will also be those who will quickly trade out with a 5%-10% gain. Hence the upside may see heavy profit taking if markets rise another 3%-5%.


Another reason for the strong buying are just long term funds who have been underweighting equities for most of 2008 (hence outperforming the respective indices). They should be at least reweighting their equity levels to neutral, which in itself will be massive. After the events over the last few days, many long term funds would NOT want to be caught underweighted on equities in order to continue to outperform the indices.


All said, we are not completely out of the woods. We are not just seeing wealth destruction in financials. We will be silly to think this will affect only Wall Street. The jobs losses and subsequent belt tightening in anticipation of tougher times ahead will ensure dull or downward sales revisions in most sectors.


China will be forced to pick up the slack, and may actually be quite interesting for the rest of the year. Rapid drops in SRR, BLRs and maybe even cuts in transaction tax for stock trades should be forthcoming very soon. China is expected to kick in where the USA machinery is stalling or even reversing.


p/s photo: Elanne Kong

12 comments:

Tony Yap said...

How do you estimate the USD 500 B for the RTC. US Regulator intentionally not regulate its hedge funds so that derivatives are not transparent. I sincerely do not think that US govt knows how deep this Blackhole is. It is going to take decades for US to unwind their massive credit exploitation.

Tony Yap said...

How do you estimate the USD 500 B for the RTC. US Regulators intentionally do not regulate its hedge funds so that derivatives are not transparent. I sincerely do not think that US govt knows how deep this Blackhole is. It is going to take decades for US to unwind their massive credit exploitation.

Yvonne said...

Dear Dali,

with the US Government coming in to provide guarantees for the nation's money market mutual funds, how will it affect the price of commodities?

Thanks.

Salvatore_Dali said...

My estimate was based on the Fed casually saying they could have the fund at US$800bn no problem. I assess that it will be at least 300, but closer to 500bn because it has to be substantive to inject confidence, it has to be big enough to bailout at least 2 big banks and maybe 10 regional banks minimum...

Salvatore_Dali said...

My estimate was based on the Fed casually saying they could have the fund at US$800bn no problem. I assess that it will be at least 300, but closer to 500bn because it has to be substantive to inject confidence, it has to be big enough to bailout at least 2 big banks and maybe 10 regional banks minimum...

yvonne,

though global economy may slow due to the wealth destruction... just look at the injection of liquidity into the system by many central banks.. thats what cause us the problems in the first place, overly strong money supply started by greenspan...the amount injected is actually pretty strong ...not just in the us but everywhere, if u take in the multiplier effect and velocity of money... its pretty severe... hence i think it will even promote the commodities uptrend as the usd will weaken further... couple with the money supply thing

it may not restest the highs reached this year but it will regain at least 10-20% of the losses easily

ru40342 said...

Dear Dali,

For people who still believe in Federal Reserve move to save the economy, god bless you.

The housing bubble is bursting and it's the good thing as financial bubble never good for economy yet fed try everything to keep the housing bubble. The larger the bubble, the harder economy will crash.

What the fed said is irrelevant. now they even claim that short sellers are the reason Lehman and AIG collapse and people believe it! No company in the history of stock market ever collapse because of short selling and will never be. A company just won't bankrupt because of short selling. If a company is healthy and doing well, company will buy back their share and other people like warren buffet, Arcelor Mittal or even we will buy it.

In fact short selling work well as a warning sign for small investor. It's a warning to sell your stock and get out of certain company. It tells you don't be cheated by all those rubbish company that show you a manipulated balance sheet. I personally think short selling activity should be allowed in Malaysia so that small and amateur investor won't buy a worthless company with their hard earn company.

End of the day, short selling is prohibited for financials and guest what, economy still collapse.

sportandstock.blogspot.com

Ivan said...

Dear dali,

I read from WSJ.
US Treasury will inject US200b to FED and hence FED has able to help the market and NO NEED to print the US dollar.

Will the US 200b now become liabilities for FED?
FED no need pay interest to US Treasury?
Thanks

Ivan said...

Dali,

you are wonderful even plp may comment something disagree with your point, but u accept it publish to share with us . .

well done. . .



As been expected by major of us, FED will step in and help the market. Today FED annouce pulmp US 800B into the market.

Will it help for Citigroup and other bank?

Soruce say that citigroup want buy WAMO.. good deal? I thought Citi also need some liquidity..do Citi still dare to involve in M&A?

Chan said...

I hope I am right, technically commodities has reach a temporary base. I am expecting a rebound from this level that can recoup at least 30% maximum 60% of the losses from its peak. The question is, can this take place ? can commodity related stocks move up while there is more downtrend for the Dow, Hang Seng and Singapore after this technical rebound

Chan

successis said...

This is really the liability of all american and the inflation will export its way as a contagion spreading to countries that have american holdings .

Kill the dollar and get gold

maverickspost.blogspot.com

pls give some comments

solomon said...

The sharp rebound in equity is likely to come from the banning of shortselling.

Last week financial damage may take at least 2-3 years like the 1997/98 Asian financial crisis. I still favour Fed moves unless you can tell me what is the option you can think of now? It was reported more than 1000 hedge funds is on the rock.

A strong fundamental company would not collapse because of short sell. But, in weak and fear prevailed investment environment, it could cause a hole in a company. I don't believe in share buy back to support the share price drop. Most of the companies finance executives knows there are financial weaknesses in their balance sheet. You only need to hit the ongoing corporate governance theme (eg high and unverifiable receivables etc), then here drive your share price lower. Or else, 157 years old Lehman Brother would not fall....

Short selling should exist if limited liquidity in Bursa Malaysia. But, it will cause roller coaster up and down and disrupt life and real economic activities. A good mechanism to create extra liquidity but not in current environment.

I still opined that we are in the woods ie. USD for some surety will depreciate over times. WE need to have live in higher commodities era. Life still goes on, and we have to think of a way to cushion all these.

The Contrarian said...

What happend to free market cap, have you no sense of economy? Yesterweek was a wave good bye, banks should be allowed to fail and not sit on their Feraris, smoke their cubans, they made a mistake pack up and leave! Instead they are taking taxpayers money, wait they finish utilized that, they are taking the nation into debt with them by using all the dollar bill as a loan certificate. Whoever supports will only deem to find out the way the economy failed from the contagion of their financial market, financial market is big, it will spark global slowdown, but at the same time there are reasons for the down fall, can i make a mistake and expect government to bail me!! Moreover a bailout amounting to trillion has gone overboard. To wat extent, to what EXTENT !!! you all tell


maverickspost.blogspot.com