From One Baseless Scare To Another

We Like To Scare Ourselves Shitless

Let's take a few steps back and look at the developments over the last 2.5 weeks. It seems all global investors have decided to see The Exorcist at the same time, followed up by a double screening of Salem's Lot and The Omen. After every movie, we come out with shivers, recounting some of the scenes, ... its just a movie but were scared shitless for a couple of hours anyway. Are we having that kind of experience in global markets? You be the judge.

First scare, rumours that there will soon be a capital gains tax on stock trades in China sent Shanghai tumbling by 9%, causing a rippled effect across all time zones. The next day, phew, its rumours only.

Second scare, yen suddenly begun to stregthen as investors preferred to see more horror movies, causing investors to assume a huge yen carry trade reversal is in the offing. This was followed by a sequel and then a prequel, the yen carry trade caused panic attacks on viewers over an extended period. At the end of the day, it is still just a scare because:

a) bulk of yen carry trades is by Japanese investment trusts and companies, and not international hedge funds or something similarly sinister.

b) Japanese investment trusts' holdings of overseas assets rose for the 9th straight month to a record high in February despite the doubling of interest rate to 0.5% in mid-February. Actual increase was US$6.36bn to US$254bn.

c) The bulk of the yen carry trade is actually not in exotic securities or emerging markets' equities but rather the staid US Treasuries, and maybe a dabble in Kiwi and OZ bonds. Suffice to say that the Fed would have its fair share of burden to ensure that there isn't an implosion in the yen carry trade as that could sell down US Treasuries significantly.

d) Estimates by banking experts say that if there was a wave of reversal in yen carry trades, the yen dollar rate would have gone to 100-105 and not at current levels. Plus there are too many investment factors ensuring that yen carry trades are a viable investing option. The scare also caused a dribble of actual reversal which is good for the overall situation.

e) After two horrendous but empty scary movies, investors were hooked, they looked for the next one. Hah! Subprime in the US!!

While I am not trying to play down the dangers, its still looks like a marathon horror movie expedition to me. (Readers should download the bearish CSFB report by going to www.billcara.com then look for the March 13th posting on Research on US Housing & Mortgages). Housing stats weakness is a given in any cycle, its inevitable as housing works in a cycle, but investors /analysts and strategists act as if its the FIRST time they have come across problems in housing starts or subprime lending!!! Come on, grow up, we have seen this before, and on a firm labour markets in the US, I am not that concerned. In every cycle there will be weaknesses and downturns, we don't have to go out to catch a horror movie everytime it comes around, do we? Don't forget that with housing weakness come rate cuts as well. Coupled with firm corporate earnings, its not a catastrophe, just an apostrophe!

What have we learnt so far? First wobble, scary movie. Second wobble, scary sequel movie as well but with some real blood and gore. Now, it still looks like a scary movie, in fact, the prequel was not as scary as the sequel, if you ask me!