I addressed the World Federation of Exchanges Town Hall Meeting in Hong Kong today Wednesday 26 March 2008.
Dominant institutional brokers are demanding that exchanges move towards broker anonymity i.e. not display brokers' ids on the trading screens. What do they have to hide? For a start, many trade on their own book and they want to disguise their trades from clients. If you are advising a listed company, you certainly don't want the company to know that you are selling their shares on the open market.
Many also use their own capital to buy a block of shares which a client wants to sell. They then "slice and dice" the block and re-sell on the market, at a profit of course. How would you feel if you jsut sold a block to your broker and then see him seeing the same shares at a higher price.
Finally, clients like to monitor the execution of their trades, and without broker ids' on the trading screens, this is impossible to do.
The following is the text of my speech.
WFE Hong Kong Town Hall Meeting
26 March 2008
Panel 3: Market Quality – Changing the Competitive Environment
Good morning ladies and gentlemen.
The topic is very timely as exchanges compete for market share with each other and with trading venues such as ECN’s, ATS, etc. It is only natural that exchanges look at the “micro trading mechanisms” of these alternative venues and consider changes to your own market structures to compete effectively.
Recently, we have seen a move towards what is commonly known as “broker anonymity”. The demand appears to come from dominant brokerage houses which find it difficult to complete large client orders and attribute this to “front running” by other market participants. Let’s get this straight. “Front running” is used to describe the illegal behavior of a broker buying or selling ahead of a client order so as to profit from the subsequent movement in the market. There is nothing illegal for a broker to trade ahead of another broker because he thinks that other broker may be acting for a big client with a large order that may move the market.
Let me quote you a passage from a report supporting “broker anonymity” --- “Transparency invites market manipulation, increases volatility, distorts pricing and ultimately reduces liquidity”. Sounds counter intuitive doesn’t it?
“Market transparency” is the ability of market participants to observe information in the trading process. Pre-trading market transparency provides a level playing field for all stakeholders in a market and is a key component of price discovery. “Post trading transparency” is only sufficient as an audit trail to guard against market abuses. It is not a substitute for real time price discovery which tends to stablise prices, increase liquidity and lower transactional costs.
There are a number of stakeholders in a market, each with their own interests and agendas. We have the government representing public interests, the regulators who are there to protect the investing public, the issuers who need a properly functioning market for fund raising, investors (both institutional and retail), and intermediaries. Ultimately, the market is for issuers and investors, and the regulators and intermediaries are there to facilitate trading and to guard against abuses.
For investors and issuers, market quality is measured in terms of a level playing field, price stability, risk management, information flow, liquidity, and trading volumes. “Broker anonymity” tilts the playing field in favour of those in the know i.e. information on trade flows will be concentrated at the trading desks of the dominant brokerages, and available only to their favoured clients.
Investors and fund managers are overwhelmingly in favour of full transparency in trading and disclosure of broker identification on trading screens. This allows them to properly monitor the execution of their orders. Broker anonymity reduces the transparency in a market and makes it difficult for fund manager, who have a fiduciary duty to their clients to ensure that there is best execution, to monitor the execution of their orders.
As a matter of fact, there has been a trend towards more transparency in all aspects of the market. For example, price discovery is facilitated through pre-opening auction sessions. “Broker anonymity”, therefore, appears to be a step back to opaque markets where only the brokers know who is buying and who is selling.
As operators of exchanges, you have a fiduciary duty to your stockholders to maximize returns, and certainly increasing turnover and trade flow must be at the very top of your list of priorities. However, in every financial market, there are a number of stakeholders whose interests must be safeguarded.
Markets and trading venues developed and evolved to fill a need. Their trading structures are very much a product of their history, and development. To a large extent, there is no one market structure that fits all exchanges or even all stocks traded on a single exchange.
In HK, public interest is enshrined in the law that created the HKEx. Public consultations are conducted prior to the introduction of major new initiatives, and new products and trading practices are vetted by the SFC which takes a balanced approach and ensures that the interests of all stakeholders are considered.
In HK, our trading system is automatic order matching and therefore there is no partiality as brokers cannot choose their counterparty. Also, we can negotiate block trades off market, but these are required to be reported to the exchange to ensure transparency.
The market in HK is not as concentrated in the hands of a small number of brokers as in other market. The top 14 brokers account for 55% of the turnover, while the next 50 account for 30%. In the Australian market for example, the top 10 brokers account for 72% of turnover while the top 4 account for 37%.
In contrast to some markets where real time information is only available to brokers, institutional and retail investors in HK have always had access to the same information as brokerages. Moreover, HK does not have trade practices which restrict the flow of information from brokers to investors. We enjoy a very level playing field indeed.
Retail investors in HK account for some 37% of the turnover while institutional investors account for 56%. Proprietary trading only accounts for 7%. In overseas markets, proprietary trading account for a much higher percentage as brokers often take client positions onto their own books and then re-distribute into the market. This is another reason why large brokerage houses would prefer to hide their trading from the prying eyes of clients who may feel aggrieved.
HK does not have competing local exchanges, and that makes life “less interesting” for our exchange operator. However, many HK issues are traded on other exchanges, and we do want to bring that liquidity back onshore.
Overall market quality and integrity is what ultimately drives investors’ interests, and liquidity and turnover will gravitate towards quality markets. “Broker anonymity” is a short–term fix at the expense of market transparency and will detract from the attractiveness of a market to investors.
For exchanges with broker anonymity, I encourage you to provide more trading information to your ultimate clients, the investors, instead of less. The HKEx has made a business out of this and derives 8% of revenues from information services, and most of this drop directly to the bottom line.
We have the best practice in HK and there is no need to regress to a less transparent model.
Wednesday, March 26, 2008
Friday, March 21, 2008
Fed intervenes in the US Market!
There is market intervention, and there is market intervention. But when it's done by the Fed, it's called saving the economy.
In 1998, currency speculators attacked the Thai Baht, and then went the rounds of other Asian countries bringing down the value of the local currencies and making a huge profit in the process. Shades of George Soros attacking the UK pound sterling.
The HK Governemnt instigated a series of controls limiting the ability of speculators to borrow HK dollars for short selling. Unlike the other Asian countries, HK did not have any external debt denominated in foreign currencies that could be called in. The speculators decided then to use the HK stock market as a proxy and borrowed HK stocks instead. They sold the HK stocks for HK dollars and then sold the HK dollars for US dollars, hoping to drive down both the HK dollar and HK stocks, and doubling up their winnings.
The HK governemnt spent HK$120 billion of our foreign currencies reserves buying up blue chips in the HK stock market, and was successful in halting the slide from 16,000 on the Hang seng Index to around 6,000. HK was facing a financial abyss. If the government had not intervened, the stock market would have collapsed first, and then followed by the housing market, and the rest of the economy.
The HK Government was roundly castigated for intervening in the free operation of the market by "international community" i.e. those had the most to gain by a collapse of the HK dollar and the HK stock market, and by academics in their ivory towers. As it turned out, the stock market rebounded, and the HK governemnt put the majority of the shares purchased into an exchange trade fund which is still the largest ETF in the world. By the way, the HK residents were given a discount when the ETF was floated on the HK stock market, and those who held on for 2 years were given bonus shares.
I personally believe that the Fed has a duty to defend the economy from a financial meltdown. In fact, I had pointed out earlier that the Fed's action was too late and too timid. Until now. But this begs the question of why is it ok for the Fed to intervene in a commercial transaction? The point is the Fed is lending US$30 billion to a commercial enterprise (JP Morgan) to take over another commercial enterprise (Bear Stearns). And this is a non-recourse loan. Of course, if the value of the bonds subsequently recover, the Fed will be make a profit. I hope that the Fed will consider putting this into a listed vehicle and letting the US taxpayers benefit because after all it is their money at risk.
In 1998, currency speculators attacked the Thai Baht, and then went the rounds of other Asian countries bringing down the value of the local currencies and making a huge profit in the process. Shades of George Soros attacking the UK pound sterling.
The HK Governemnt instigated a series of controls limiting the ability of speculators to borrow HK dollars for short selling. Unlike the other Asian countries, HK did not have any external debt denominated in foreign currencies that could be called in. The speculators decided then to use the HK stock market as a proxy and borrowed HK stocks instead. They sold the HK stocks for HK dollars and then sold the HK dollars for US dollars, hoping to drive down both the HK dollar and HK stocks, and doubling up their winnings.
The HK governemnt spent HK$120 billion of our foreign currencies reserves buying up blue chips in the HK stock market, and was successful in halting the slide from 16,000 on the Hang seng Index to around 6,000. HK was facing a financial abyss. If the government had not intervened, the stock market would have collapsed first, and then followed by the housing market, and the rest of the economy.
The HK Government was roundly castigated for intervening in the free operation of the market by "international community" i.e. those had the most to gain by a collapse of the HK dollar and the HK stock market, and by academics in their ivory towers. As it turned out, the stock market rebounded, and the HK governemnt put the majority of the shares purchased into an exchange trade fund which is still the largest ETF in the world. By the way, the HK residents were given a discount when the ETF was floated on the HK stock market, and those who held on for 2 years were given bonus shares.
I personally believe that the Fed has a duty to defend the economy from a financial meltdown. In fact, I had pointed out earlier that the Fed's action was too late and too timid. Until now. But this begs the question of why is it ok for the Fed to intervene in a commercial transaction? The point is the Fed is lending US$30 billion to a commercial enterprise (JP Morgan) to take over another commercial enterprise (Bear Stearns). And this is a non-recourse loan. Of course, if the value of the bonds subsequently recover, the Fed will be make a profit. I hope that the Fed will consider putting this into a listed vehicle and letting the US taxpayers benefit because after all it is their money at risk.
The Asia Era: Challenges and Opportunities After The Subprime Mess
The year 2007 marked a major turning point in the financial world order. The market capitalization of the Americas (USD22.5 trillion), Europe Middle East (USD20.3 trillion) and Asia Pacific (USD19.7 trillion) were roughly equal. Over the next decade, the Asian markets are expected to continue their phenomenal growth with the expansion of the economies of China and the Indian sub continent as the new engines of growth.
Of the top 5 growth markets in 2007, the top 4 were in the 2 most populous countries China and India. Shanghai and Shenzhen grew at 303% and 244%, and Bombay and NSE grew at 122% and 115%. Except for Japan, all Asian markets enjoyed double digit growth.
During 2007, the NYSE and LSE each grew at a paltry rate of 1.5%. The US and European markets will be pre-occupied with dealing with the aftermath of the subprime debacle. New regulations expected to be put in place to prevent similar problems will handcuff the principal US and European markets in the same way that Sarbanes-Oxley inhibited US market growth in the wake of WorldCom and Enron.
The ASF is the annual gathering of the representatives of the securities industries in the Asia Pacific region. The objective of the ASF is to allow delegates to share experience and to explore opportunities in co-operation. Currently, markets represented on the ASF include Japan, Korea, China, Chinese Taiwan, Hong Kong, Thailand, Malaysia, Philippines, Indonesia, Australia, India, and Vietnam. The ASF 2008 in Hong Kong will be the 13th in the series of annual meetings.
The ASF will consist of market reports by representatives of each market, followed by panel discussions lead by well known market professionals. This year, the panels will focus on Risk Management and what we can learn from the subprime crisis, and How to Take Advantage of Opportunities in Asia.
Tuesday, February 05, 2008
What If The Fed Gave A Party And Nobody Came?
The thought on the minds of investors since the Fed cut interest rates last week was "Why there isn't a stronger reaction?" The answer of course was that the cut was too late. The Fed waited until it could see the statistics reflect a slow down. By definition, that means that we have already started moving downhill by the time the numbers show up on their radar screen.
Give the Fed full marks for the aggressive cuts, 0.75% the week before (and just one week before the FOMC meeting), and 0.50% last week. It was too late but at least it was not too little. That took courage, and shows the market that the Fed will do whatever is necessary to halt the slide into recession.
Was it necessary to be so aggressive? The answer from those of us in the market day-in and day-out is a resounding "YES!" The market is very good at smelling weakness. Show uncertainty and you are dead. By giving a strong signal that it is willing to act quickly (in between meetings), and aggressively (0.75% is the largest move on record) and then following through with another 0.50% cut, the Fed is saying "don't mess with me!" Hedge funds thinking of trying to exploit the weakness in the market will not want to test the Fed now. That will stabilise the market, and allow something resembling normality to return.
So far, the financials have suffered but the word from Main Street is that profits are still rolling in. As good results start coming in, buyers will return even though financials will be on the sidelines for awhile.
Give the Fed full marks for the aggressive cuts, 0.75% the week before (and just one week before the FOMC meeting), and 0.50% last week. It was too late but at least it was not too little. That took courage, and shows the market that the Fed will do whatever is necessary to halt the slide into recession.
Was it necessary to be so aggressive? The answer from those of us in the market day-in and day-out is a resounding "YES!" The market is very good at smelling weakness. Show uncertainty and you are dead. By giving a strong signal that it is willing to act quickly (in between meetings), and aggressively (0.75% is the largest move on record) and then following through with another 0.50% cut, the Fed is saying "don't mess with me!" Hedge funds thinking of trying to exploit the weakness in the market will not want to test the Fed now. That will stabilise the market, and allow something resembling normality to return.
So far, the financials have suffered but the word from Main Street is that profits are still rolling in. As good results start coming in, buyers will return even though financials will be on the sidelines for awhile.
Wednesday, January 23, 2008
Better Late Than Never!
Hong Kong's Hang Seng Index rose 2,332 points (10.7%) to close at 24,090. The HSI had declined more than 10,000 points from the peak in October 2007 and was in danger of breaching the 21,400 support level, closing 21,757 on 22 January 2008. Since October 2007, the HSI had given up almost all the gains in 2007 which began the year at just over 20,000.
The catalyst was the Fed cutting Fed Funds rate by 0.75% from 4.25% to 3.50%. The Fed Discount rate was cut by the same percentage from 4.75% to 4.00%. The last time the Fed made such a large cut was in August 1982.
The expectation is that the Fed will continue to cut rates aggressively at the meeting next week, perhaps by as much as 0.50%. The Fed is expected to cut rates down to 2.75% by April, and 2.0% by September. How low can it go? The lwest was 1.0% on 25 June 2003.
Will cutting interest rates help? Almost certainly. The problems with providing liquidity to banks through the discount facility is that the banks do not want to borrow. They have sufficient cash. The problem is that they need capital injection because of the book losses they have taken from revaluing the "sub prime loans". By cutting interest rates, the Fed makes it easier for borrowers to keep up their payments. Taken together with the US Government's efforts to negotiate a moratorium on interest vrates re-setting, this will reduce the expected default rate, and allow the banks to start valuing the sub prime based securities at closer to their real value rather than the current "fire sale" levels.
Why didn't the Fed cut by 0.50% in December 2007 instead of the miserly 0.25%? The reason given was that there were still inflation worries, and the Fed wanted to try injecting liquidity directly to banks through the discount facility. That did not really address the problem of pending defaults on sub prime mortgage loans. Only a moratorium on restting interest rates, and a reduction of the rates will achieve the aim of stabilising the market.
The HK market reacted positively to the rate cut. However, we still expect the market to be volatile over the next 6 weeks until the rate cuts take effect. In the short term, we are looking for 27,000 for the near term and up to 34,000 sometime during 2008.
The catalyst was the Fed cutting Fed Funds rate by 0.75% from 4.25% to 3.50%. The Fed Discount rate was cut by the same percentage from 4.75% to 4.00%. The last time the Fed made such a large cut was in August 1982.
The expectation is that the Fed will continue to cut rates aggressively at the meeting next week, perhaps by as much as 0.50%. The Fed is expected to cut rates down to 2.75% by April, and 2.0% by September. How low can it go? The lwest was 1.0% on 25 June 2003.
Will cutting interest rates help? Almost certainly. The problems with providing liquidity to banks through the discount facility is that the banks do not want to borrow. They have sufficient cash. The problem is that they need capital injection because of the book losses they have taken from revaluing the "sub prime loans". By cutting interest rates, the Fed makes it easier for borrowers to keep up their payments. Taken together with the US Government's efforts to negotiate a moratorium on interest vrates re-setting, this will reduce the expected default rate, and allow the banks to start valuing the sub prime based securities at closer to their real value rather than the current "fire sale" levels.
Why didn't the Fed cut by 0.50% in December 2007 instead of the miserly 0.25%? The reason given was that there were still inflation worries, and the Fed wanted to try injecting liquidity directly to banks through the discount facility. That did not really address the problem of pending defaults on sub prime mortgage loans. Only a moratorium on restting interest rates, and a reduction of the rates will achieve the aim of stabilising the market.
The HK market reacted positively to the rate cut. However, we still expect the market to be volatile over the next 6 weeks until the rate cuts take effect. In the short term, we are looking for 27,000 for the near term and up to 34,000 sometime during 2008.
Thursday, January 17, 2008
Will Sub Prime Choke Growth in China
The HK stock market fell over 3,000 points over the past 5 days. Yesterday, 16 January 2008, it fell 1,300 points. The HKEx shares fell from a high of HK$268 to HK$170.
There are 2 main factors at work: concerns over the impact of the sub prime crisis in the US, and tightening of monetary measures by the PRC authorities.
Sub Prime Crisis
The sub prime crisis will take some time to work its’ way through. There is a real problem in that the underlying assets may not be as good as it should be because mortgage originators have been cutting corners and lending to unqualified borrowers. However, the extent of the problems in the financial market is magnified by the fact that there is no market for the CDO’s securitized by mortgages regardless of the quality of the underlying assets.
So far, we have seen financial institutions writing off tens of billions of US$. There have been delinquencies in mortgage payments but not to the extent suggested by the financial markets which have over reacted as usual. Just because Merrill Lynch (US$15 billion) and Citigroup (US$18 billion) have had to write off tens of billions of US$, the market is expecting every bank to have to do the same.
JP Morgan has just announced write-offs of less than US$1.3 billion much less than Merrill or Citigroup.
Tightening in China
The Chinese government announced that the banks reserve ratio will be further tighten to 15% in an attempt to rein in inflation. In a mature economy where the deposit base is stable, increasing the reserve ratio will mean less money can be lent out. But in China where the deposit base is growing at double digits, increasing the reserve ratio will very little impact on banks’ ability to lend.
The current impact is temporary and mostly emotive. When banks in China start announcing their results we will see that they continue to expand their lending.
Impact on Exports to the US.
Some people are concerned that exports to the US will fall because the US economy may go into a recession. In looking at exports, we must remember that only a small component of that is value added in China. The rest are raw material and energy costs. Therefore, we cannot compare the entire value of exports to GDP (which measures value added) as some have done.
Using only value added in China, exports are not a large component of GDP. In fact with the Chinese economy expanding at double digits, any shortfall in exports may be made up for by increased domestic consumption.
Conclusion
The present correction represents an opportunity to buy into the market at attractive levels. I particularly like the Chinese financials, and the HKEx.
There are 2 main factors at work: concerns over the impact of the sub prime crisis in the US, and tightening of monetary measures by the PRC authorities.
Sub Prime Crisis
The sub prime crisis will take some time to work its’ way through. There is a real problem in that the underlying assets may not be as good as it should be because mortgage originators have been cutting corners and lending to unqualified borrowers. However, the extent of the problems in the financial market is magnified by the fact that there is no market for the CDO’s securitized by mortgages regardless of the quality of the underlying assets.
So far, we have seen financial institutions writing off tens of billions of US$. There have been delinquencies in mortgage payments but not to the extent suggested by the financial markets which have over reacted as usual. Just because Merrill Lynch (US$15 billion) and Citigroup (US$18 billion) have had to write off tens of billions of US$, the market is expecting every bank to have to do the same.
JP Morgan has just announced write-offs of less than US$1.3 billion much less than Merrill or Citigroup.
Tightening in China
The Chinese government announced that the banks reserve ratio will be further tighten to 15% in an attempt to rein in inflation. In a mature economy where the deposit base is stable, increasing the reserve ratio will mean less money can be lent out. But in China where the deposit base is growing at double digits, increasing the reserve ratio will very little impact on banks’ ability to lend.
The current impact is temporary and mostly emotive. When banks in China start announcing their results we will see that they continue to expand their lending.
Impact on Exports to the US.
Some people are concerned that exports to the US will fall because the US economy may go into a recession. In looking at exports, we must remember that only a small component of that is value added in China. The rest are raw material and energy costs. Therefore, we cannot compare the entire value of exports to GDP (which measures value added) as some have done.
Using only value added in China, exports are not a large component of GDP. In fact with the Chinese economy expanding at double digits, any shortfall in exports may be made up for by increased domestic consumption.
Conclusion
The present correction represents an opportunity to buy into the market at attractive levels. I particularly like the Chinese financials, and the HKEx.
Thursday, December 20, 2007
The Chinese Are Coming! The Chinese Are Coming!
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.
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.
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
Friday, November 30, 2007
Asian Markets Continues Strength
Asian markets finished mostly higher, as shares rose on expectations of a U.S. interest-rate cut.
Market Indices
Australia All Ordinaries 6593.60 + 1.33%
Bombay Sensex* 19363.19 + 1.89%
Hong Kong Hang Seng 28643.61 + 0.57%
Japan Nikkei 15680.67 + 1.08%
Shanghai Composite 4871.77 - 2.63%
Singapore STI 3521.27 + 1.24%
South Korea Composite 1906.00 + 1.51%
Taiwan Weighted 8586.40 + 1.65%
*Late Trading
Market Indices
Australia All Ordinaries 6593.60 + 1.33%
Bombay Sensex* 19363.19 + 1.89%
Hong Kong Hang Seng 28643.61 + 0.57%
Japan Nikkei 15680.67 + 1.08%
Shanghai Composite 4871.77 - 2.63%
Singapore STI 3521.27 + 1.24%
South Korea Composite 1906.00 + 1.51%
Taiwan Weighted 8586.40 + 1.65%
*Late Trading
Thursday, November 29, 2007
Sub Prime Fatigue Sets In
The US market closed last night up 331 or 2.6% to 13290, a two-day rally of more than 500 points. Wednesday's buying frenzy was sparked by fresh hopes of a Fed rate cut, signs of life in the battered financial sector and plunging oil prices dwon $4 to $90.
The Fed said that the economy looks weak and that housing will not recover until late 2008. One of the Fed governors also said that the Fed must be flexible on interest rates. This is seen as code words that the Fed will cut interest rates aggressively.
All that, and SUB PRIME FATIGUE. It seems that daily one bank or another is setting aside provisions for sub prime based securities. It's gotten to the stage that if you do not announce provisions, the company is immediately suspect. Think about it! If everyone around you are taking US$8 billion provisions, you would be a fool not to take a similar amount even if you don't need it or need a lower number. You can always write it back when the market becomes more sane, and take a big bonus in that year. If you don't take a big enough number now, and come back for more later, your job is on the line.
Asian stocks rallied, tracking an overnight surge on Wall Street amid hopes of another interest-rate cut. Hong Kong and Shanghai both finished more than 4% higher.
Market Indices
Australia All Ordinaries 6507.20 + 1.16%
Bombay Sensex* 19003.26 + 0.34%
Hong Kong Hang Seng 28482.54 + 4.06%
Japan Nikkei 15513.74 + 2.38%
Shanghai Composite 5003.33 + 4.16%
Singapore STI 3478.22 + 3.22%
South Korea Composite 1877.56 + 2.34%
Taiwan Weighted 8447.03 + 2.06%
*Late trading
The Fed said that the economy looks weak and that housing will not recover until late 2008. One of the Fed governors also said that the Fed must be flexible on interest rates. This is seen as code words that the Fed will cut interest rates aggressively.
All that, and SUB PRIME FATIGUE. It seems that daily one bank or another is setting aside provisions for sub prime based securities. It's gotten to the stage that if you do not announce provisions, the company is immediately suspect. Think about it! If everyone around you are taking US$8 billion provisions, you would be a fool not to take a similar amount even if you don't need it or need a lower number. You can always write it back when the market becomes more sane, and take a big bonus in that year. If you don't take a big enough number now, and come back for more later, your job is on the line.
Asian stocks rallied, tracking an overnight surge on Wall Street amid hopes of another interest-rate cut. Hong Kong and Shanghai both finished more than 4% higher.
Market Indices
Australia All Ordinaries 6507.20 + 1.16%
Bombay Sensex* 19003.26 + 0.34%
Hong Kong Hang Seng 28482.54 + 4.06%
Japan Nikkei 15513.74 + 2.38%
Shanghai Composite 5003.33 + 4.16%
Singapore STI 3478.22 + 3.22%
South Korea Composite 1877.56 + 2.34%
Taiwan Weighted 8447.03 + 2.06%
*Late trading
Wednesday, November 28, 2007
Yoyo Market
Asian markets finished mostly lower Wednesday, with oil companies and blue chips weighing on Japan's benchmark index, snapping a three-day winning streak. However, HK finished up slightly after to-ing and fro-ing all day. We expected the index to open higher and it did by about 120. Then it dipped into negative territory, and went back and forth. If not for the weakness in HSBC (#5) we would have finished up higher especially with the US up 215 overnight.
Bank of China (#3988) is still weak after Temasek the Singapore Government investing arm sold 5% of its' holdings. It seems to me that now may be a good time to buy BOC.
Other Mainland companies looking for cornerstone investors may now have second thoughts about the investment horizon of Temasek.
Market Indices
Australia All Ordinaries 6432.80 - 0.94%
Bombay Sensex* 18942.84 - 0.97%
Hong Kong Hang Seng 27371.24 + 0.59%
Japan Nikkei 15153.78 - 0.45%
Shanghai Composite 4803.39 - 1.19%
Singapore STI 3369.72 - 0.09%
South Korea Composite 1834.69 - 1.35%
Taiwan Weighted 8276.26 - 1.19%
*Late trading
Bank of China (#3988) is still weak after Temasek the Singapore Government investing arm sold 5% of its' holdings. It seems to me that now may be a good time to buy BOC.
Other Mainland companies looking for cornerstone investors may now have second thoughts about the investment horizon of Temasek.
Market Indices
Australia All Ordinaries 6432.80 - 0.94%
Bombay Sensex* 18942.84 - 0.97%
Hong Kong Hang Seng 27371.24 + 0.59%
Japan Nikkei 15153.78 - 0.45%
Shanghai Composite 4803.39 - 1.19%
Singapore STI 3369.72 - 0.09%
South Korea Composite 1834.69 - 1.35%
Taiwan Weighted 8276.26 - 1.19%
*Late trading
Tuesday, November 27, 2007
Black Monday Follows Black Friday
In the US, the Friday after Thanksgiving is known as "Black Friday". The market reacted quite well, and HK followed suit yesterday going up more than 1,000. But last night, amid concerns about the fall out from sub prime, credit woes and recession fears, the Dow industrials tumbled roughly 240 points, more than erasing their bounce on Black Friday. The financial sector was particularly hard-hit, with Citigroup sinking 6% to less than $30 a share and Goldman Sachs off 4%. The yield on the 10-year Treasury note plunged to a two-year low.
Asian markets followed the US lead down, though Tokyo and South Korea recovered from early losses to finish higher.
Market Indices
Australia All Ordinaries 6493.60 - 0.61%
Bombay Sensex* 19143.32 - 0.54%
Hong Kong Hang Seng 27210.21 - 1.51%
Japan Nikkei 15222.85 + 0.58%
Shanghai Composite 4861.11 - 1.97%
Singapore STI 3372.64 - 1.34%
South Korea Composite 1859.79 + 0.24%
Taiwan Weighted 8375.76 - 1.79%
*Late trading
Asian markets followed the US lead down, though Tokyo and South Korea recovered from early losses to finish higher.
Market Indices
Australia All Ordinaries 6493.60 - 0.61%
Bombay Sensex* 19143.32 - 0.54%
Hong Kong Hang Seng 27210.21 - 1.51%
Japan Nikkei 15222.85 + 0.58%
Shanghai Composite 4861.11 - 1.97%
Singapore STI 3372.64 - 1.34%
South Korea Composite 1859.79 + 0.24%
Taiwan Weighted 8375.76 - 1.79%
*Late trading
Monday, November 26, 2007
November 26, 2007
Most Asian markets rallied, as investors took heart from rosy U.S. shopping figures. Hong Kong surged 4.1% and Seoul soared 4.7%.
Market Indices
Australia All Ordinaries 6533.20 + 2.20%
Bombay Sensex* 19247.54 + 2.09%
Hong Kong Hang Seng 27626.62 + 4.09%
Japan Nikkei 15135.21 + 1.66%
Shanghai Composite 4958.84 - 1.46%
Singapore STI 3418.58 + 2.79%
South Korea Composite 1855.33 + 4.65%
Taiwan Weighted 8528.33 + 2.23%
*Late trading
Most Asian markets rallied, as investors took heart from rosy U.S. shopping figures. Hong Kong surged 4.1% and Seoul soared 4.7%.
Market Indices
Australia All Ordinaries 6533.20 + 2.20%
Bombay Sensex* 19247.54 + 2.09%
Hong Kong Hang Seng 27626.62 + 4.09%
Japan Nikkei 15135.21 + 1.66%
Shanghai Composite 4958.84 - 1.46%
Singapore STI 3418.58 + 2.79%
South Korea Composite 1855.33 + 4.65%
Taiwan Weighted 8528.33 + 2.23%
*Late trading
Saturday, November 24, 2007
The Thru Train Stops
Trading throughout the week was weak as the double whammy of sub prime problems in the US, and the news that the Chinese government is turning off the illegal funds flow dominated the news.
Apparently, the Shenzhen Branch of the PBOC (people's Bank of China, the Central Bank) instructed the Shenzhen Banks to limit the amount of cash that can be withdrawn by customers to try and stem the flow of illegally remitted funds to HK. The Mainland authorities were concerned that Chinese ccitizens were abandoning the Mainland market for HK where the same shares can be bought at a lower price.
The thru train (where chinese citizens will be allowed to invest directly in the HK market) has now been put back with no date. This is apparently caused by concerns that the Mainland investors are not sophisticated enough to play in the open HK market against foreign hedge funds who will offload shares to them at a high price. Hmm, interesting concept that. They can buy the same shares of dual listed companies in HK at a lower price than in China but we are still worried that they are buying them at too high a price in HK?
I guess since HK is an open market, the hedge funds can take their money and run which is not possible on the Mainland since China is a closed market. However that still leaves the investor with shares that are still cheaper than what they have to pay for them on the Mainland.
Apparently, the Shenzhen Branch of the PBOC (people's Bank of China, the Central Bank) instructed the Shenzhen Banks to limit the amount of cash that can be withdrawn by customers to try and stem the flow of illegally remitted funds to HK. The Mainland authorities were concerned that Chinese ccitizens were abandoning the Mainland market for HK where the same shares can be bought at a lower price.
The thru train (where chinese citizens will be allowed to invest directly in the HK market) has now been put back with no date. This is apparently caused by concerns that the Mainland investors are not sophisticated enough to play in the open HK market against foreign hedge funds who will offload shares to them at a high price. Hmm, interesting concept that. They can buy the same shares of dual listed companies in HK at a lower price than in China but we are still worried that they are buying them at too high a price in HK?
I guess since HK is an open market, the hedge funds can take their money and run which is not possible on the Mainland since China is a closed market. However that still leaves the investor with shares that are still cheaper than what they have to pay for them on the Mainland.
Friday, November 23, 2007
Uncle 4 Strikes Again!
After the yo-yo gyrations of the past few days. yesterday provided some relief as the HK market gained some precious ground. This time, it's because Uncle Four (aka Mr. Lewe Shau Kww) our local "Warren Buffet" told reporters that he thinks the market will still finish the year around 30,000, and he is putting some HK$10 billion into it.
Market Indices
Australia All Ordinaries 6392.40 - 0.04%
Bombay Sensex* 18852.87 + 1.76%
Hong Kong Hang Seng 26498.13 + 1.90%
Japan Nikkei** 14888.77 + 0.34%
Shanghai Composite 5032.13 + 0.96%
Singapore STI 3315.57 + 0.08%
South Korea Composite 1772.88 - 1.45%
Taiwan Weighted 8342.20 - 1.85%
*Late trading
**Closed for holiday
Market Indices
Australia All Ordinaries 6392.40 - 0.04%
Bombay Sensex* 18852.87 + 1.76%
Hong Kong Hang Seng 26498.13 + 1.90%
Japan Nikkei** 14888.77 + 0.34%
Shanghai Composite 5032.13 + 0.96%
Singapore STI 3315.57 + 0.08%
South Korea Composite 1772.88 - 1.45%
Taiwan Weighted 8342.20 - 1.85%
*Late trading
**Closed for holiday
Thursday, November 22, 2007
Crude Oil at US$99 Per Barrel
Asian markets were mostly lower. Hong Kong and Shanghai shares felled on U.S. economic concerns and a broader decline in Chinese markets.
Crude-oil futures broke above $99 a barrel in early trading yesterday, and energy analysts see little to reverse the trends that have sent crude on its record breaking spree.
The weakening U.S. dollar, the currency used to buy and sell oil globally, is helping reinforce the notion that oil prices could remain high. The dollar sank to a new low against the euro yesterday on pessimism about the American economy and speculation the U.S. will cut interest rates again. Combined with strong global energy demand, the market appears willing to bear prices that would have shocked many in months past.
The survey of energy analysts did say, however, that prices would simmer down at the end of 2008, as the world's richest economies begin to slowdown.
Market Indices
Australia All Ordinaries 6395.10 - 0.85%
Bombay Sensex 18526.32 - 0.40%
Hong Kong Hang Seng 26004.92 - 2.30%
Japan Nikkei 14888.77 - 0.34%
Shanghai Composite 4984.16 - 4.41%
Singapore STI 3312.88 - 1.03%
South Korea Composite 1799.02 - 0.44%
Taiwan Weighted 8499.37 + 0.18%
Crude-oil futures broke above $99 a barrel in early trading yesterday, and energy analysts see little to reverse the trends that have sent crude on its record breaking spree.
The weakening U.S. dollar, the currency used to buy and sell oil globally, is helping reinforce the notion that oil prices could remain high. The dollar sank to a new low against the euro yesterday on pessimism about the American economy and speculation the U.S. will cut interest rates again. Combined with strong global energy demand, the market appears willing to bear prices that would have shocked many in months past.
The survey of energy analysts did say, however, that prices would simmer down at the end of 2008, as the world's richest economies begin to slowdown.
Market Indices
Australia All Ordinaries 6395.10 - 0.85%
Bombay Sensex 18526.32 - 0.40%
Hong Kong Hang Seng 26004.92 - 2.30%
Japan Nikkei 14888.77 - 0.34%
Shanghai Composite 4984.16 - 4.41%
Singapore STI 3312.88 - 1.03%
South Korea Composite 1799.02 - 0.44%
Taiwan Weighted 8499.37 + 0.18%
Wednesday, November 21, 2007
It's the US Economy Now, Is It?
Asian stocks fell sharply at concerns that the U.S. economy, the most important export market for many of the region's companies, would continue to weaken.
Market Indices
Australia All Ordinaries 6450.20 - 0.62%
Bombay Sensex * 18602.62 - 3.52%
Hong Kong Hang Seng 26618.19 - 4.15%
Japan Nikkei 14837.66 - 2.46%
Shanghai Composite 5214.22 - 1.50%
Singapore STI 3347.20 - 2.65%
South Korea Composite 1806.99 - 3.49%
Taiwan Weighted 8484.11 - 2.27%
*Intraday
Market Indices
Australia All Ordinaries 6450.20 - 0.62%
Bombay Sensex * 18602.62 - 3.52%
Hong Kong Hang Seng 26618.19 - 4.15%
Japan Nikkei 14837.66 - 2.46%
Shanghai Composite 5214.22 - 1.50%
Singapore STI 3347.20 - 2.65%
South Korea Composite 1806.99 - 3.49%
Taiwan Weighted 8484.11 - 2.27%
*Intraday
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