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