Sellside Survey - Optimism for April

A friend of mine asked some generalist pan-Asian and country specialist research sales and sales-traders on the sellside how they thought markets (in general) would do in April:

• UP: 15
• FLAT: 3 (wimps!)
  
• DOWN: 7

(Regional generalists alone similarly positive at 8:0:4)

Not skewed enough, in this statistically pretty insignificant sample, to provide a totally useful contrary indicator, but interesting.

Now, let's see how the best and the brightest do!

Volatility no-smile

OK, so I don't ACTUALLY know how all this works in terms of linking to other blogs etc (especially if, confusingly, the blog is referring to another blog) but I read this morning a good little piece from Barry Ritholtz over at The Big Picture with a comment on global equity market volatility quoting an article (and lifting some neat NYT graphics... BTW am I allowed to put those graphics into my blog too?) from Floyd Norris (though not from his own blog.)

NYT: "In Asia, where markets have long been more volatile than in either Europe or America, the moves were even more startling. The Hang Seng index in Hong Kong gained 10.7 percent on one day, and lost 8.7 percent on another. In India, the Sensex index fell 7.4 percent on its worst day in the quarter, even worse than the 7.2 percent drop in the Shanghai composite in China. But the Chinese index did rise 8.1 percent on its best day."

A surprise for some of his readers, perhaps, that our markets out here have been a wild and frequently rather painful ride!


From my perspective, just looking at the broad Asian (ex-Japan) market index over the last 3 months, the cumulative daily index changes YTD by the end of today will be something like 95%. That seems like a huge amount (though I have yet to get some office flunky to run it over a longer history) - and ignores the wilder intraday swings, far less individual markets, indices and stocks. IN other words... if you'd been smart (!) and on the right side of the regional trade every day this year you could have DOUBLED your money (or more, with leverage) OR been pretty much wiped out.(a little bit more likely...!) Of course, you could've been saved by your friendly neighbourhood prime broker pulling your lines from you before you got there...

So what to do? Stay invested, position neutral(-ish) and play small. Really small.

Agri Aggro: Rice and Pitchforks

Reports yesterday in The Economist and The Christian Science Monitor, and on the front page of The FT today on ongoing shortages and inflation in rice prices, echoing some of my earlier posts about agri-inflation.

FT: "While prices of wheat, corn and other agricultural commodities have surged since late 2006, the increase in rice prices only started in January."

This is just the sort of thing that worries me. With an increasing number of producing countries facing shortages and inflation at home, resulting from farmers' preferring to export at higher prices, more and more will choose to contain anger and dissatisfaction at home by limiting exports. Limiting exports of rice and other agricultural commodities, that is, but greatly increasing exports of man-on-the-street anger and dissatisfaction...

CSM : "Rice farmers here are staying awake in shifts at night to guard their fields from thieves. In Peru, shortages of wheat flour are prompting the military to make bread with potato flour, a native crop. In Egypt, Cameroon, and Burkina Faso food riots have broken out in the past week... Some countries like Vietnam, India, and Pakistan have banned grain exports. On Wednesday, Cambodia’s prime minister ordered a two-month ban on rice exports to neighboring Thailand and Vietnam 'to guarantee food security.' "

So what might be the next steps, broadly? Agri-exporting countries making such restrictions would see their current accounts and growth rates take a hit, possibly weakening their currencies and importing a bit of inflation... and making non-agri exports (if any) more competitive. Meanwhile, importers' domestic inflationary pressures will rise, driven by staples. To offset the possibility of (more) rioting, governments would probably prefer to spend more domestically, weakening fiscal balances and driving up growth, rates and their currencies... and weakening the competitiveness of its other exports. (Or is that projecting out too far?!)

(And let's leave the potential geopolitical/ military ramifications out of the equation for the time being... it's Friday, a wild first quarter is drawing to a close and it would just be far too gloomy to go into.)

I remain bullish on commodities (and canned food & shotguns) and so far, the pre-Easter break de-risking/deleveraging correction seems to be reversing itself mildly. On the other side of the First Quarter end, I expect the resumption of the commodity bull and USD bear to continue in full force.

"Morgan in talks to quintuple Bear Stearns offer"

A lot of excitement in Asia about a report from the NYT (parroted breathlessly by MarketWatch etc) saying that "Under the terms being discussed, JPMorgan would pay $10 a share in stock for Bear, up from its initial offer of $2 a share"... hence the "QUINTUPLE" headlines.

But, without checking anything, it looks like QUINTUPLE is a bit of a stretch - that is just for the equity portion, rather than the whole cost to JP, which would have included an approx. $6bn write-off. So the cost to JP goes from $6bn w/off + $2/sh = $6.25bn to $6bn w/off + $10/sh = $7.25bn (or thereabouts)... which is ~15% higher (and making the effort would seem to be quite Bear-employee-friendly.) A billion bucks, or 15% higher is quite a bit, but it's NOT QUINTUPLE!

Calm down!!

(And THIS, in my view, is why nobody wants to sit on risky positions across (long) weekends these days!)

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Meanwhile, UBS is supposedly just about to raise ~$10bn in fresh capital via a 10% rights issue?!

And on Friday, S&P put LEH and GS on negative watch...?!

An example of high quality broking (verbatim and complete)

INDIANS ROCK :

• 20% of world's gold is used by Indians
• 9 out of 10 diamonds used globally are made in India
• 12% of scientists (36% in NASA) and 38% of doctors in the US are Indians
• 34% of the employees at Microsoft, 28% at IBM, 17% at Intel and 13% at Xerox are also Indians

BUY INDIA...

Landslide in Taiwan! Everybody on the same side!!

From The FT:

Taiwan’s voters gave a resounding victory to Ma Ying-jeou of the opposition Kuomintang party in the island’s presidential election, raising hopes of a reduction in tensions with China. Mr Ma gained 58.45 per cent of the vote. Frank Hsieh from the ruling Democratic Progressive Party won 41.55 per cent.

OK, so now pretty much EVERYBODY is bullish Taiwan, specifically focusing on the domestic (assets, retail), financial and Cross-Straits-Play names, and generally quite bearish on the tech plays (strong NTD, weak US etc.)

• For example, Dickson Ho at MS is saying that "Ma Ying Jeou’s victory in the presidential election will help to re-establish Taiwanese political confidence to their country. We expect the confidence recovery will drive Taiwanese liquidity, either offshore or onshore, back to work (invest or consume in Taiwan). This would be the most important factor to drive a multi-year stock market re-rating."
• Meanwhile, Ken Chen at UBS boils it down to three trends: "(1) a liquidity rally driven by locals, (2) property prices to climb further and (3) higher interest rates & a stronger currency"
• Peter Kurz (Mr Taiwan himself) at Citi notes this morning that this "is not South Korea insofar as the post-election rally would be short-lived for two reasons. Firstly, the economic implications of the change in ruling parties is far greater for Taiwan than it is for Korea given the economic distortions and capital outflow deriving from policies which effectively isolated Taiwan from the Chinese economy. Secondly, Taiwan’s legislative election has already passed and has effectively given the KMT president-elect an unencumbered mandate. Korea’s legislative elections won’t be held until April."

More than just bullish Taiwan, almost everybody seems to be going for a rally now for a few days followed by a brief sell-off, and then a multi-year re-rating. Despite strong relative performance in Asia, I would keep going with the trade for now, but am worryingly inline with the consensus view!!

Raw ingredients for Chocolate Bunnies

Raw materials for chocolate bunnies... Commodity prices are down down down. (Easy measure is the RJ/CRB Index - ticker: CRY.) The RJA in my PA is down too - argh!

Global strategist Jonathan Wilmot of Credit Suisse sees more downside in a recent note:

"The bottom line: we think that de-leveraging has now spread to the commodity complex, and that this will probably see a nearly full retracement of the unprecedented spike in the broad CCI index of commodity prices that took place over the last six to seven months. Gold and oil coming back to around $800 and about $80 are quite possible in that event, with less damage likely in base metals. And even if we are right, that does not necessarily mean that the long-term bull market in commodities is over, especially perhaps for agricultural products."

My view is that the commodity spike was excessive and ripe for profit taking (as was the obverse of that, the Dollar short) and that ahead of a long weekend it makes sense to reduce risk - especially with the lower than expected rate cut implying marginally less near term weakness in the USD. So lock in profits and sell commodities, lock in profits and cover USD shorts and then wait for next week to roll on by before putting the trades back on. Is the USD really going to strengthen that much, (if at all, given the liquidity injections) and have housing and consumer fundamentals really changed so much for the better??

And with Credit Suisse reporting bigger losses and "intentional misconduct" and indicating a tough March (MS, LEH and GS reported results to end-February) the financials aren't really looking SO safe, are they?

"Raw ingredients for a bear squeeze"

The survey is a reminder that even in this difficult environment there exist the raw ingredients for an equity ‘bear squeeze’. Cash levels are high; risk appetite is close to the survey lows; and fund managers continue to believe that stocks offer value both in absolute terms and relative to fixed-income assets. The challenge is to find the catalyst, which is hard against a deteriorating macro backdrop and growing talk of recession.

Merrill Lynch has carried out regular fund manager surveys for many years now, run by David Bowers, who (I think) has been doing it since his Smith New Court days, and I've found them to be quite insightful from time to time. The latest survey is a pretty good one (Link here if you have ML research access) especially in the light of the trough indicator "not yet"s I've been posting in the last couple of days. As summarised for me by a Merrill salestrader:

• Asset allocators' cash positions rose to a record high this month. A net 42% of asset allocators reported that they were overweight cash, up from February's record 41%.
• They have turned wary of both bond and equity asset classes, with net underweight positions of 18% and 23% respectively.
• Within equities, they are neutral on US and eurozone stock markets, remain underweight Japanese and UK equities, and stand by their `love affair' with emerging-market equities.
• Investors' global sector exposure continues to favour pharmaceuticals, telecoms and energy at the expense of financials and consumer discretionary.

Now remember that this is a survey of large, well established, institutional and generally pretty smart FUND MANAGERS (pronounced ma-a-a-a-a-anagers like a sheep... from the ba-a-a-a-a-uyside...) so in aggregate it is, almost by definition, the best indicator of market groupthink you are likely to find. Not always wrong, but if you assume they're not lying (it's not a survey of bankers, after all) then you have to assume that their positioning in the market already reflects all the opinions out there and their current best views and projections, and therefore their survey responses should be largely "priced in."

So should the survey results be taken as contrary indicators? Probably not that simple (unfortunately.) I think the way to use it is to find the inflexion points in the aggregate measures and see if the rest of the sheep/ lemmings will continue to follow the pack. (And also if YOU are thinking with the pa-a-a-a-a-ack.) Will try to check it all out more closely tomorrow (Good Friday, with Korea, Taiwan, Malaysia and some other markets still open.)

Reverse Outsourcing from India to the US

The FT today reports that Wipro plans to boost outsourcing to the US

Wipro plans to open more centres in the US in a continuing trend of “reverse outsourcing”, as Indian information technology outsourcing companies recruit in the US and Europe... Wipro, India’s third-largest information technology outsourcing company, this week said it aimed to hire more than 1,000 people in the US... The recruits for Wipro’s centres in Atlanta and Troy, Michigan, would be trained for three months in India before returning to the US for jobs in software development and project management.

Indian IT outsourcing companies typically train their employees to have specific foreign accents depending on their customer bases (eg US vs UK English)... would the reverse be true for outsourced US employees?! OK, so that's call centres, not IT outsourcing... in fact, this just looks like a more permanent version of the onshoring model in response to currency trends.

But it's a fun thought to have hardened, former auto-workers in Troy, Michigan and bright-lights-big-city-bound rednecks in Atlanta, Georgia speaking Indian English, and smiling sweetly into mirrors at their workstations! (And enjoying extremely-sweet-tea breaks too, of course...)

Morgan Stanley says: not yet a market trough (... Therefore we should...)

Morgan Stanley (which reports tonight) is climbing on the "signposts for a trough" bandwagon with a thoughtful piece with 6 indicators. (Full note linked if you have MS research access.) Their conclusion: Not Yet.

Conclusions: Our six signposts for a market trough are yet to give a strong signal. Whilst the aggressive Fed and depressed sentiment are positive, valuation is still 9-19% above prior trough lows, our economic lead indicators are not yet at recession lows, and credit spreads, while high, are yet to form a peak.


Six Signposts: To determine if we have reached a market trough, we analyse six signposts, including: a) monetary policy, b) credit spreads, c) valuation, d) duration, e) market sentiment, and f) economic lead indicators.

• Ultra-Easy Monetary Policy: The Fed’s ultra-easy monetary policy is very positive for equities. When the real Fed funds rate has turned negative in the past, APxJ equities have on average delivered a 30% return in the following year.

• The Ongoing Blowout in Spreads Is Negative: Credit spreads are at high levels, but do not always peak before equities. Nonetheless, as the credit markets are at the centre of this downturn, signs of stabilisation may be necessary before equity markets trough.

• Valuation Still Above Historical Troughs: Valuations for both APxJ and the US are still 9-19% above average trough levels, a negative.

• Duration: Equity market troughs occur anywhere from one to 12 months into a Fed easing cycle, so we find this an unreliable indicator. That said, we could be 3-6 months away from a trough based on this indicator.

• Sentiment Enters Capitulation: Two of our sentiment indicators have entered the capitulation zone, suggesting a market trough and rebound near-term.

• Economic Lead Indicators Should Deteriorate: Our G6 and the OECD Lead Indicators are well above historical troughs, suggesting further downside if this is an average downturn. However, we expect a shorter and milder downturn than the average.

Everybody, myself included, has been saying beware of the bear rallies... which means it could rally longer than everybody (me included) is expecting. But first, I need to get a handle on apparently conflicting reports that the borrow, in HK at least, is the highest ever relative to free float, versus hedge funds apparently at record low net and gross levels. If both are true, the market is retail dominated and extra squeezable.

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March 11, 2008 - "Bear Stearns is not in trouble" - "Don't be silly"


Ho ho ho... Cramer, eh? Though to be fair, it's really really hard when you're on the spot and in the public spotlight every single trading day!

CDO Rhapsody

Is this the real price?
Is this just fantasy?
Financial landslide
No escape from reality

Open your eyes
And look at your buys and see.
I'm now a poor boy
High-yielding casualty

Because I bought it high, watched it blow. Rating high, value low. Any way
the Fed goes Doesn't really matter to me, to me

Mama - just killed my fund
Quoted CDO's instead
Pulled the trigger, now it's dead
Mama - I had just begun
These CDO's have blown it all away

Mama - oooh
I still wanna buy
I sometimes wish I'd never left Goldman at all.

I see a little silhouette of a Fed
Bernanke! Bernanke! Can you save the whole market?
Monolines and munis - very very frightening to me!
Super senior, super senior
Super senior CDO - magnifico

I'm long of subprime, nobody loves me
He's long of subprime CDO fantasy
Spare the margin call you monstrous PB!
Easy come easy go, will you let me go?
Peloton! No - we will not let you go - let him go! Peloton! We will not let
you go - let him go Peloton! We will not let you go - let me go Will not let
you go - let me go (never) Never let you go - let me go Never let me go
- ooo

No, no, no, no, no, no, no, -
Oh mama mia, mama mia, mama mia let me go S&P had the devil put aside for me
For me, for me, for me

So you think you can fund me and spit in my eye?
And then margin call me and leave me to die. Oh PB - can't do this to me PB
Just gotta get out - just gotta get right outta here

Ooh yeah, ooh yeah
No price really matters
No liquidity
Nothing really matters - no price really matters to me

Any way the Fed goes.....

Picking Bottoms

Everybody wants to be a hero and pick the bottom of a meltdown market, and many great investors are renowned for making killings doing so (and from picking tops too.)

We prefer not to do that, given the way we work, but nonetheless for those of you with itchy fingers, here are some handy technical signs to watch for, from Oppenheimer Chief Market Technician Carter Worth appearing on CNBC (conclusion is not yet) :

1) Persistent Weakness
2) Definitive New Low
3) Must Close On The High Of The Day
4) Massive Volume

(CNBC video here.)

I agree.

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And from a smart broker here in Asia, where yesterday saw HK net sold only 5:4 on their books... quite surprisingly close to balanced, given that the HSI was down 5.2% with the HSCEI (H-share index) down 7.2%. Bottom, therefore, in sight?

Sure, the buying had a large element of short covering to it and the sell pad left a lot to be completed (higher up). Many in the room take the above facts to be very bearish. They say we need to see more puking. We need to see more "bid wanted" screams. And we need to see more aggressive buying from Long Only customers, especially into distressed pricing sessions. I totally agree. Grinding lower. Rallies will tend to be sold. (Edited)

Not another Tiananmen Square, please

Whether I am net short these markets in Asia or not, we do NOT want to see "another Tiananmen Square" in Lhasa (or, obviously, anywhere else, for that matter.)


So back in June 1989 we had student protests against corruption (initially) met with admirable restraint for nearly 2 months before Deng Xiaoping's brutal crackdown and the subsequent global condemnation we all remember... and China, a pariah for so long afterwards, only in recent years becoming rehabilitated (barring Sudan/Darfur) with stellar economic growth under generally more West-friendly leadership.

But the market tells us stock prices acted a bit differently.

In the days before there even was an HSCEI (H-share) index, you can see the hit on the closest thing we then had to a liquid China index, the HSI. Smacked down by a brutal one third in the days following the crackdown... but in about a year, the HSI had more than recovered, returning close to 70% from the lows.

"We got a broker down, we got a broker down" (crackle!)

Bear Stearns Cos looks pretty bad on these charts - Bloomberg's (new-to-me) 1-yr ECCG function tell it all, based on trading up until last Friday's close, and (obviously) before the Fed balance sheet backed $2 "rescue" of Bear Stearns by JP Morgan.





Oh - waitaminute... sorry... I meant to post this one for Bear Stearns, not that one for Lehman Bros. Damn, those charts look similar! (Eek!)



Incidentally: A very smart move in multiple ways by JPM in my view, rather than a mere "shotgun marriage" solemnized by Rev Bernanke... next time a big(ger) bank starts toppling over, Mr Dimon can put his hand up and say to the Fed that he's done his bit, and beefed up understrength areas in his bank in the process. On the (very) cheap, and basically with the crap in the BSC books underwritten by the Fed. Smart. JPM's the financial name to pick up some time in the next 6 months, not C, BAC, WFC, WB, MER, MS, GS etc.

Saturday! Cartwright Stearns

The Ides of March.

Word has it that Cartwright Millingville Bank, headed by CEO Robert K. Merton, will soon launch a bid for Bear Stearns.

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Finally, somebody (other than Paul Krugman) thinks Alan Greenspan is maybe not The Maestro he makes himself out to be. ("Greenspan's Bubbles.") About time, too!

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And for no reason other than that it's Saturday, I would like to offer you cake.. OR DEATH!

"Snapping like twigs"

This little item taken from a market summary in the FT today is scary for hedgefundspace in general, even those of us in the vanilla equity subspace given the risk appetite and cashflow ramifications for investors (including funds of funds) and the markets in general:

“Whereas before non-deposit taking broker/dealers might have been willing to help distressed funds stay afloat to avoid being left with illiquid assets they could not sell at good prices, now they can effectively exchange those assets for Treasuries,” said analysts at BNP Paribas. “With this incentive to support hedge funds facing liquidity problems removed for broker/dealers as well as banks, we may start to see more hedge funds coming under pressure.”

This on top of reports such as this one in the Times... of London... of hedge funds ' “snapping like twigs”, with one failing every day.'

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And then there's the Carlyle Capital situation, in which one of the top names in private equity diversified into MBS through a massively leveraged listed fund (~$32 of debt per $1 of equity) investing in a portfolio comprised entirely of securities issued by Fannie Mae and Freddie Mac... but which nevertheless had price declines closely followed by margin calls from some of the Carlyle Group's formerly favourite bankers... which, at that kind of gearing, inevitably couldn't get paid. So $22bn of quasi Federal paper down the toilet as far as Carlyle Capital shareholders are concerned.

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So any surprise that Gold's over a grand a troy ounce? (And oil ~$110, $ at JPY100 and CHF1...)


Splendid start to the weekend!

HSI Heroes, Pt.2. Cock-a-doodle-doo.

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That's not the sound a Bear makes, is it?!

Bear Stearns CDS, USD 5 year Senior... now available at under 600 points! Act now before... er...

Big Ben to the rescue (... but who's he saving?)

Well, acres of cyber-trees felled in producing views on the latest Helicopter move, but among the better are: comments in the FT under news and editorial comment.

Quite a lot to digest, but as I understand it, with the TSLF he's injected US$200bn into the system to make sure we can all sleep at nights. (But actually, it's more like freeing up liquidity that's already out there, but frozen because no bank trusts any other.)

Hence massive short covering driving markets firmer. (I thought hedge funds were sitting on low net and gross exposure? Long onlies are cashed up as much as they can, we hear, for fear of redemptions - as are, incidentally, funds of funds, for the same reason.)

3 days and USD300bn of "additional liquidity" through more new versions of the discount window later, where are we? Net of everything, the financial system will continue to function so that bank balance sheets can be matched at the end of each day (hopefully) and fire sales of (already written down but still possibly worthless) paper and the subsequent vicious cycle can be avoided.

All well and good, but as I have noted before, those who can't pay won't pay. Mortgages, even at the top of the sliced, diced and, er, securiticed tree are still risky with home values still falling. Besides, mortgage rates are still not coming down fast enough to make any difference. In fact - they're not coming down at all... Once again, those who can pay, do, and will continue to pay the penalty for their own solvency.

On balance, though, another step in the right direction from Mr Bernanke (not just another inter-meeting target rate cut) - but a small step, even at USD200bn.

(I still think the more important development is the coordination with the other major central banks. And the probability of a 50bp cut is no longer zero!)

----------------------



Well, at least the banks at risk are being looked after, right, if you look at the CDS spreads... right? Well, maybe a little bit, but it's hardly back to "normal"... and this is Merrill Lynch's 5yr USD senior, not Bear Stearns'.



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Held my tongue long enough. The cheer on the floor of the NYSE as the Spitzer news broke was distasteful but understandable. He's made a lot of enemies out there, though behind it all seems to have had some sense of where there were abuses to be fixed. US Vice President Number 9 will never be, and from now on his public persona will be as a late night punchline. And a song. (And a T-shirt.)

(On the other hand, Wall Street has lost an ally in Albany working very hard to try and sort out the monolines.)

HSI Heroes!!! (...?)

Time for HEROES to step up (not)

So the non farm payroll change numbers were really really miserable on Friday morning NY-time (Friday evening in front of CNBC, for sad sack me) and the markets were expected to tank (Thank you Mr Pisani) and sure as eggs is eggs... they didn't, and (after a markdown open) began to rise... but then rolled over and despite a brief, late rally, ended up down but not disastrously so.


What gives? Back to short covering, I believe - participants were unwilling to sit on overnight positions, what chance sitting on weekend short positions especially with a Fed prone to emergency (read: panic) decisions? And having increased the Term Auction Facility ("Discount Window Lite" - not an increase in liquidity, just availability) shortly ahead of numbers that sucked, who knows? More bleed to come, in that case, with bear rallies custom made for heroes/zeroes. The prospects aren't great for US equity markets (white line) when NFP monthlies (yellow line) run negative, but Asia (orange line), last time around anyway, was boring but OK.

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Incidentally, if anybody's telling you that the markets are pricing in this or expecting that in terms of Fed rate cuts, they're not necessarily being particularly smart or technically proficient at reading chicken entrails - they just let Bloomberg do the heavy lifting. (I don't use the formula either!) Right now Futures are pricing in a 94% probability of a 75bp rate cut at the March 18 FOMC meeting, up from 68% a week ago... AND it's a virtual 100% certainty (?!) that there will be another 25-50bps at the FOMC at end April too!

NOBODY now seems to be expecting a "mere" 50bp cut on the 18th, which of course means that...

Actually, with the Fed now apparently in "close consultation" with the ECB, BOJ, BOE and others about the inflation stoking weakness of the USD vs inflation vs commodity prices vs the weakness of Europe and Japan in general, maybe 50bps is more likely. (Or at least not a ZERO probability!) Hero time, anyone? Anyone?

Class? Anyone?

Why I wanted to go to the pub on Friday night

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And the following is nothing to do with the markets, but then it is Saturday, after all.



As ever, the comments make it even funnier (most of 'em)

US markets overnight fell, "like..."

This is how the markets performed in the US overnight:



And I don't mean solid, dependable, reliable and tough, with strength of character etc etc... I mean this is how they fell...

Actually, it was probably a bit more like this:



Ah... the financial "Smart Money"...

Asia not in Stagflation (no shit, Sherlock)

I'll paraphrase, because I don't really want to name the American double barreled investment bank which sent this to me this morning:

There is no stagflation in Asia – growth continues to be strong, and inflation is mainly in food.

That was basically it. Brilliant.

---------------------------------

Meanwhile, bullish talk is whizzing around the market that rates are not going to be hiked in China and that the currency will be ramped instead.

More than it already has been since the initial 2% reval 2-1/2 years ago? Since which time it has risen vs the USD at almost 5% pa? (That's a log scale in the pic from Bloomberg, folks.) And that will be enough to cool the economy, keep inflation at bay and keep the pitchforks in the rural... er... pitchforkholders? Gimme a break!

Ben and Wen

So I get up this morning and I hear that Mr Bernanke is suggesting that with yet more pain still to come on the US housing front, perhaps banks should cut the principal portion of the loan instead of just fiddling around with the interest and the tenure (tenor?) - to bring home equity value and loan value closer inline and hopefully limit delinquencies etc (dealing with negative equity by fixing the loan rather than the house price.)

Knocked the markets over in the US (though there was some recovery based on AMBAC bailout rumours... I suspect that this "reason" was as much after the fact and that short covering was in play... participants are not only unwilling to sit on weekend trades, they're unhappy with overnights too) and I thought: more rubbish from Ben... what is he trying to talk up now?

But then a mate pointed out that the loans have all long since been securitized out and are sitting in the investment portfolios of all sorts of people who should know better. And with all the writedowns we've already seen (and will continue to see going forward) effectively writing off expectations for recouping so much of the principal anyway... why not?

(And I am glad that at least somebody is, if belatedly, questioning whether home ownership really is the unreserved positive it's long been made out to be.)
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Meanwhile fellow Fed members Fisher and Mishkin are squaring off against one another on the inflation vs recession issue. "Fisher said inflation readings have not been encouraging and that he believes price pressures can continue to build even in the face of an economic slowdown" while Mishkin feels that faster falling house prices will exacerbate the slowdown via consumption and the financial markets, causing "economic activity to contract further in a perverse cycle."

I think they're both right!

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And the Lex column in today's FT (I remember back when it was literally just one column!) points out that rate cuts push investment dollars out of bonds and equities and into "alternative assets" such as... commodities... which are bound to crash at some point (but from what level down to what level?) but in the meantime continue to stoke inflationary pressures worldwide...

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... Such as in China, for example, where the NPC is currently taking place. In what I believe was the opening speech of the two week babble-fest, Premier Wen said

"I'll take slower growth, dude, I just really don't wanna see anymore price hikes... Keep the pitchforks on the farm, bro'... I'm doin' what I can and I'm gonna stick wit my tight money policy, yo" (or words to that effect.)

Gratitude, Merrill Lynch style

From a bullish note on Merrill by Citi analyst Prashant Bhatia, a couple of weeks before Merrill analyst Guy Moszkowski wiped USD5.2billion off Citi's market value.

"John Thain, Merrill’s new CEO, is the catalyst to unlock the earnings power of
the franchise which would then result in meaningful value creation. In our
view, Merrill will successfully execute on 1) creating a risk management
infrastructure / culture that won’t result in outsized losses, 2) execute on top
line growth initiatives across the major businesses, 3) leverage the untapped
earnings power inherent in Merrill’s franchise by removing silos and building
bridges across the wealth management and institutional businesses."

Citi Cockroach #2 (or is it #3?) Plenty more where that came from...

And now, from my mates over at Merrill Lynch, more cockroaches scurrying around... Knocking the Asian markets down further this afternoon, analyst Guy Moszkowski is slashing his f'casts for Citi.

"Cutting again; big writedowns seem likely
Based on continued deterioration in US residential and commercial mortgage
markets, corporate debt markets, and key investment-banking categories, we are
reducing our Citi estimates for 2008. Our 1Q08E falls to ($1.66) from $0.55; our full-year estimate falls to $0.24 from $2.74. In particular we are forecasting
another very large writedown of Citi’s subprime-related exposures. This is
consistent with our view of the company’s excess-capital-raising exercise,
outlined in our report “Replacement Cost” dated 2/21/08."

Interestingly, this is probably a worse day for the HK/China (ie H shares) market than yesterday, when markets opened sharply down and then stayed there (bothered and bewildered) - and kind of hoping for a short squeeze... Which never came. Tried a squeeze again this morning after a nothing day in the US with a 1+% open, then proceeded to slide 3.2% steadily throughout the day (4.7% for H shares.) Volumes picked up in the afternoon relative to the morning session, maybe as hopes for a rally subsided.


China's NPC is opening tomorrow - maybe a chance for a squeeze again tomorrow? Maybe...

BUT word is that most hedge funds are running very low net and gross exposures... and sitting on a lot of cash. (One fund we know of has double digit billions of USD in cash!) Yes, a lot of the shorts are very concentrated in a short (pun) list of names (eg a third of outstanding shorts in HK are in financials) - but that seems to be the exception.

So squeezability? After a 2 day fall like what we've just suffered? Well, maybe... but I would maintain a low net and not close out too many shorts.

Bear steepening; Steeper commodity prices

So this morning The Economist has waded in with a very interesting article on the steepening yield curve, with a good analysis of the danger of a bear steepening vs a bull steepening (in which both long and short rates fall, but short rates fall by more):

"... the worry is that we could move to a bear steepening, with the gap rising because long-term yields are increasing... If the markets get the idea that the Fed has become lax on inflation, then one would expect long-term yields to rise... Andrew Smithers, of Smithers & Co, a consultancy, points out that for 20 years, financial markets have benefited from falling inflationary expectations. This has allowed nominal interest rates to fall, which has in turn pushed up asset prices... But now inflationary expectations are at best not falling, and may well be rising... as a result 'asset prices need to fall relative to incomes and profit margins will fall as household savings rise'." (Is it OK to quote from papers like this??)

Yuck. And in the same article, at the end, addressing another of my recent (they're all recent!) topics:

"In economists’ jargon, higher commodity prices are a sort of trade shock for consuming countries and, however you spin it, the effect is always bad."

Double Yuck. Expectations appear to be building, though, that it's all gone too far and too fast, and therefore due for a correction. Maybe.

Since I quoted Credit Suisse last week, I thought I would stick with them - not as contrary indicators (!) but with a couple of interesting macro angles:

Kucukalic: "The key question for us is whether a US credit crunch is unfolding. If so, we would expect disinflation/deflation – a negative for commodity prices and exposures. On the other hand, if an investor believes that the credit crunch can be averted (e.g. because of aggressive central bank intervention), then one would expect that investor must also believe in inflation and strength in commodity prices." (Is it OK to quote from BROKERS like this??)

Wilmot: "(W)e are on the vertical part of the supply curve, where inventories tend to be very low and small shocks to either supply or demand can lead to unusually big price swings... Given the size of the recent price spikes across commodities and the disruptions being caused by them, we think it dangerous to assume that commodities are a one-way proposition. Expect more volatility, but some of it could be to the downside as well as the upside."

The Continuous Commodity Futures Price Index (the renamed CRB, I believe) had been in about a 200-250 index range for about 30 years (!) from 1974 to mid-2004... even now we're looking at a compound annual increase in the index of about 3%. So where does a reversion to mean take us... and which mean? Umm... US CPI has averaged 4.2% over the last 30 years (skewed to the '70s) which is oddly enough about where we are now. Okay, so how does a 30 year moving average help with a trading call? Pretty much doesn't on a minute/minute or day/day or week/week basis, but worth bearing in mind.

Some possible long or short direct (rather than indirectly via bread or noodle companies, for example) plays in Asia on higher agricultural prices, from a various brokers - list compiled a few months ago, prices as of today - all off Bloomberg:

(We may or may not have an existing position in some of these names. In fact, I don't even agree with some of these, so really really just FYI.)

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Ah... Gotta love those I-Bankers...

Saturday! "The Jones Nobody Keeps Up With"

In these days of exploding hedge funds (and prop desks) it's nice to note that The Original Hedge Fund, set up in 1949, still exists - though it has long since morphed into a fund of funds (with an early investment in Julian Robertson's Tiger Fund, apparently.)

Here is the classic 1966 article in Fortune by Carol Loomis that brought hedge funds into general public awareness. Four years and hundreds of startups later, she wrote this piece, which seems eerily familiar.

And 40+ years later, here we are!


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And going even further back, here's what Jones wrote just before embarking on his historic venture at the tender age of 48