To paraphrase Paul Revere.
Moragn Stanley just announced a 4th quarter loss of US$3.59 billion, the first in its history, and an injection of US$5 billion. But this time, unlike Citigroup (US$7 billion) and UBS (US$10 billion), it is not the Middle-East cavalry that is coming to the rescue. It is the China Investment Corp ("CIC") the Chinese sovereign-wealth investment fund set up to funnel some of the excess trade surplus dollars back into the world market.
The CIC had previously made a US$3 billion investment as a cornerstone investor in the Blackstone Group's IPO. So far, only a minor portion of the earmarked US$200 billion has been used. The sub-prime crisis has single-handedly changed the landscape of international funds flow and ownership. This is a 180 degree turnaround from just a few short months ago, when the US objected to Dubai buying up US Ports, and to China investing in Unocal. Before that, the US also objected to Hutchison a HK listed company investing the Panama Canal on the dubious allegation that it is a defacto proxy of the Chinese Government. Now, Middle East and Chinese money is welcomed with open arms. Money is green and it doesn't matter if the owner is brown or yellow.
Chinese companies have also invested in Standard Bank (ICBC US$5.6 billion), Barclays Bank (China Development Bank US$2.98 billion), and Fortis (Ping An Insurance (US$2.7 billion). Chinese M&A deal flow has been mostly outwards with the top 5 accounting for close to US$20 billion while the top 5 inflows were a measly US$3.8 billion.
Just as the Middle East is recycling petrol dollars, the Chinese are recycling trade dollars.
Thursday, December 20, 2007
Wednesday, December 12, 2007
Waiting For The Fed
The Federal Open Market Committee announced it would cut the federal-funds rate, charged on overnight loans between banks, by a quarter-point to 4.25%. The move met most expectations, although some had hoped for a half-point cut.
The Fed has cut short-term interest rates by a full point since its first move lower this year on Sept. 18. The Fed's accompanying statement mentioned apparently slowing economic growth, as a result of mounting damage from the correction in housing markets, as well as slowing in business and consumer spending. Those who had hoped for a half-point cut to the discount rate were also disappointed. The Fed cut the discount rate, charged on direct loans to commercial banks, by a quarter-point to 4.75%, which left the spread between the two rates unchanged.
To some, the Fed statement seems out of touch with reality and missed an opportunity to bolster confidence in the credit markets.
The accompanying guidance was difficult to interpret. It did not address the balance of risks between growth and inflation and appears to be a compromise with the inflation hawks. Although it did mention slowing growth, but it also said that "some inflation risks remain" because of energy and commodity prices. The language about inflation risks was identical to language in the last FOMC statement.
Is the Fed for real? It doesn't seem to know that the market is very weak and expectations are what is driving the market.
Markets reacted badly. The Dow Jones Industrial Average fell 294.26, or 2.1%, to 13432.77.
The Fed has cut short-term interest rates by a full point since its first move lower this year on Sept. 18. The Fed's accompanying statement mentioned apparently slowing economic growth, as a result of mounting damage from the correction in housing markets, as well as slowing in business and consumer spending. Those who had hoped for a half-point cut to the discount rate were also disappointed. The Fed cut the discount rate, charged on direct loans to commercial banks, by a quarter-point to 4.75%, which left the spread between the two rates unchanged.
To some, the Fed statement seems out of touch with reality and missed an opportunity to bolster confidence in the credit markets.
The accompanying guidance was difficult to interpret. It did not address the balance of risks between growth and inflation and appears to be a compromise with the inflation hawks. Although it did mention slowing growth, but it also said that "some inflation risks remain" because of energy and commodity prices. The language about inflation risks was identical to language in the last FOMC statement.
Is the Fed for real? It doesn't seem to know that the market is very weak and expectations are what is driving the market.
Markets reacted badly. The Dow Jones Industrial Average fell 294.26, or 2.1%, to 13432.77.
Wednesday, December 05, 2007
How To Fix The Sub Prime Mess?Lessons From The Asian Financial Crisis
The Bush Administration is proposing to freeze the resets on sub prime loans in order for borrowers to be able to continue to pay their mortgages. This of course is politically expedient. But is it good economics, some ask. Many have condemned the proposal as going against the original spirit of the contract and therefore will undermine the competitiveness of the US dollar as a store of value, and the attractiveness of the US economy as the storehouse of wealth.
The argument is that if the rate on sub prime loans are capped, then the investors will suffer (i.e. get less interest than they expected) and borrowers will therefore benefit (i.e. pay less than they would have). Who would then buy US assets?
This is a "prime" example of classroom theorising vs. market savvy. We are often bombarded by learned commentators, professors and such like, that it's "Economics 101", as if the label itself gives it credence just like the pieces of parchment on their walls. My answer is it's "Market Behaviour 101" that matters.
By capping the rate on sub prime loans, lenders will be able to keep receiving payments. It's the income stream that matters. The alternative is that borrowers will just give up and hand the properties back. The banks will then have to try to sell the properties into a weak market, get much less than their original principal, and write-off the difference.
The recent price paid by a hedge fund for e-Trade puts this at about 35 cents on the dollar. Less me ask you, would you prefer to get 95 cents (by foregoing some interest) or 35 cents. Mind you, the increase of interest on reset was not a "sure thing", i.e. the borrower has the option to repay or refinance. Who knows, if this had not blown up, they may have been able to refinance. So the lenders are only giving up something which had a theoretical value which they may or may not have counted on in the first place. They may actually have expected the borrower to refinance and get the loans off their books.
So what are we asking them to do by capping the rates? Only that they refinance the loans at some thing close to the market rate and not punitive.
During the Asian Financial Crisis, the HK government was castigated by many "free market" thinkers for intervening in the stock market to stop speculators using it as a proxy for shorting the HK dollar. Similarly, the Malaysian government was pillored for imposing exchange controls. In both cases, the governments saw the need to protect the local economy from excessive outside intervention and took the appropriate steps. The current strength of the economies belie the dire predictions of the "learned" community.
Text books on economics are written after the fact. Different people will extract and interprete facts in different ways. In time, some of these lessons will be "Economics 101". People tend to forget the market is made up of individuals who are prone to the emotions of fear and greed.
When "sub-prime" loans were the thing to be in, the captains of our financial industry were greedily fighting their way to the "feeding troughs" to get a piece of the action, afraid of losing out. In the now famous words of a certain Mr. Prince, previously of Citigroup, "When the music starts, you have to dnace". Now that "sub-prime" is a pariah, the vultures are waiting for the carcass to rot (i.e. they want 35 cents on the dollar) and trying to scare off anyone who wants to take the not yet dead bodies away for treatment by saying "let nature takes its' course, let them die!"
That's "Market economics 101". Sometimes, it is necessary to take some action that the "pure" economists abhor. Let's try and save what we can. The alternative is that we will be faced with a bigger problem of a collapse as borrowers renege, banks start writing off bad debts, and the credit crunch becomes a black hole.
The argument is that if the rate on sub prime loans are capped, then the investors will suffer (i.e. get less interest than they expected) and borrowers will therefore benefit (i.e. pay less than they would have). Who would then buy US assets?
This is a "prime" example of classroom theorising vs. market savvy. We are often bombarded by learned commentators, professors and such like, that it's "Economics 101", as if the label itself gives it credence just like the pieces of parchment on their walls. My answer is it's "Market Behaviour 101" that matters.
By capping the rate on sub prime loans, lenders will be able to keep receiving payments. It's the income stream that matters. The alternative is that borrowers will just give up and hand the properties back. The banks will then have to try to sell the properties into a weak market, get much less than their original principal, and write-off the difference.
The recent price paid by a hedge fund for e-Trade puts this at about 35 cents on the dollar. Less me ask you, would you prefer to get 95 cents (by foregoing some interest) or 35 cents. Mind you, the increase of interest on reset was not a "sure thing", i.e. the borrower has the option to repay or refinance. Who knows, if this had not blown up, they may have been able to refinance. So the lenders are only giving up something which had a theoretical value which they may or may not have counted on in the first place. They may actually have expected the borrower to refinance and get the loans off their books.
So what are we asking them to do by capping the rates? Only that they refinance the loans at some thing close to the market rate and not punitive.
During the Asian Financial Crisis, the HK government was castigated by many "free market" thinkers for intervening in the stock market to stop speculators using it as a proxy for shorting the HK dollar. Similarly, the Malaysian government was pillored for imposing exchange controls. In both cases, the governments saw the need to protect the local economy from excessive outside intervention and took the appropriate steps. The current strength of the economies belie the dire predictions of the "learned" community.
Text books on economics are written after the fact. Different people will extract and interprete facts in different ways. In time, some of these lessons will be "Economics 101". People tend to forget the market is made up of individuals who are prone to the emotions of fear and greed.
When "sub-prime" loans were the thing to be in, the captains of our financial industry were greedily fighting their way to the "feeding troughs" to get a piece of the action, afraid of losing out. In the now famous words of a certain Mr. Prince, previously of Citigroup, "When the music starts, you have to dnace". Now that "sub-prime" is a pariah, the vultures are waiting for the carcass to rot (i.e. they want 35 cents on the dollar) and trying to scare off anyone who wants to take the not yet dead bodies away for treatment by saying "let nature takes its' course, let them die!"
That's "Market economics 101". Sometimes, it is necessary to take some action that the "pure" economists abhor. Let's try and save what we can. The alternative is that we will be faced with a bigger problem of a collapse as borrowers renege, banks start writing off bad debts, and the credit crunch becomes a black hole.
Tuesday, December 04, 2007
Looking For 2 Rate Cuts From The Fed
Asian markets finished mixed, with Tokyo stocks edging lower. Hong Kong gaining on hopes of a U.S. interest-rate cut.
Market Indices
Australia All Ordinaries 6588.80 - 0.13%
Bombay Sensex* 19529.50 - 0.38%
Hong Kong Hang Seng 28879.59 + 0.77%
Japan Nikkei 15480.19 - 0.95%
Shanghai Composite 4915.88 + 0.97%
Singapore STI 3527.87 + 0.18%
South Korea Composite 1917.83 + 0.81%
Taiwan Weighted 8651.28 + 0.79%
*Late trading
Market Indices
Australia All Ordinaries 6588.80 - 0.13%
Bombay Sensex* 19529.50 - 0.38%
Hong Kong Hang Seng 28879.59 + 0.77%
Japan Nikkei 15480.19 - 0.95%
Shanghai Composite 4915.88 + 0.97%
Singapore STI 3527.87 + 0.18%
South Korea Composite 1917.83 + 0.81%
Taiwan Weighted 8651.28 + 0.79%
*Late trading
Monday, December 03, 2007
HK Continues To Move Up
Asian shares ended mixed. Profit-taking drove Tokyo and Shanghai lower, while Hong Kong advanced on strong blue chips buying in anticipation of the Fed lowering interest rates..
China Railway shares surged 69% on their Shanghai debut, on expectations China's infrastructure demand will remain robust in coming years. This augurs well for the H-share debut in HK on Thursday.
Market Indices
Australia All Ordinaries 6597.20 + 0.05%
Bombay Sensex* 19587.36 + 1.16%
Hong Kong Hang Seng 28907.77 + 0.92%
Japan Nikkei 15628.97 - 0.33%
Shanghai Composite 4868.61 - 0.07%
Singapore STI 3558.61 + 1.06%
South Korea Composite 1902.43 - 0.19%
Taiwan Weighted 8583.84 - 0.03%
*Late trading
China Railway shares surged 69% on their Shanghai debut, on expectations China's infrastructure demand will remain robust in coming years. This augurs well for the H-share debut in HK on Thursday.
Market Indices
Australia All Ordinaries 6597.20 + 0.05%
Bombay Sensex* 19587.36 + 1.16%
Hong Kong Hang Seng 28907.77 + 0.92%
Japan Nikkei 15628.97 - 0.33%
Shanghai Composite 4868.61 - 0.07%
Singapore STI 3558.61 + 1.06%
South Korea Composite 1902.43 - 0.19%
Taiwan Weighted 8583.84 - 0.03%
*Late trading
Subscribe to:
Posts (Atom)
