Risk Free - Equity Risk = Free Equity?

Felix Salmon notes how Moody's is now splitting their sovereign Triple-A ratings into 3 categories... Resistant, Resilient and Vulnerable... and that the US is only in the middle bunch (along with the UK... Some special relationship, eh?!)

So now there's something less risky than risk-free!

Great news for those still using the Equity Risk Premium to justify high stock price valuations... pick your own risk-free rate!

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It's always mystified me that the ERP was seen as the return "required" above the risk free rate historically, and therefore a justification for current or future prices. Isn't it basically a circular argument? Or at best just a tool for relative value trades or reversion-to-mean type calls?

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From "Liar Loans" to "Liar Subsidies"

Big late rally in the markets based on a Reuters report that the government will work towards subsidizing mortgage payments of troubled homeowners before they go delinquent. Touted by bulls as finally addressing (arguably) the real root of the problems.

"Under the evolving plan, sources said homes would undergo a standardized reappraisal and homeowners would face a uniform eligibility test. The administration may also lower the trigger level that decides who would be eligible for relief. Under an existing program, loans are reworked if a borrower is spending more than 38 percent of their gross income on their mortgage." - Reuters

Makes sense - to my mind, even if in negative equity, most homeowners would rather pay up and keep their homes than go delinquent, if at all possible. So that's cool.

BUT all those people who lied about how much they were making? So they would be given those juicy balloon mortgages that all got packaged off? They can start to tell the truth now. meanwhile, everybody else will probably can start to lie about how little they are making... Makes sense, right?!

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Argh - stopped out of EDU before the 23% drop overnight... Looks like I picked a bad day to stop being undisciplined with my stops...

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Yay... Gimme some o' THAT bailout!!!

As reported all over the place, including the FT, the Obama administration is avoiding the word "Bad Bank" and going for "Aggregator Bank" in a public-private partnership. Implying that the risks and rewards will be shared equitably between private investors and the US taxpayer, unlike a bad bank scheme (what we in Asia used to call an AMC, or Asset Management Company in the good old bad old days) in which the taxpayer bears all the cost (bad bank => bad scheme!)

"The exact details of how the private-public partnership will work are not known. One option discussed by policymakers is for the authorities to co-invest alongside private investors in a “bad bank” or “aggregator bank” that would purchase the toxic assets." (FT)

Head fake.

What it is starting to look like is a scheme whereby the US taxpayer limits the downside to the private investor (hedge funds and the like) while handing them all the upside, should there be any. An (almost) free option - especially if the hedge funds get cheap govt financing to buy that stuff in the first place!

If it was possible to properly price the toxic assets with upside potential across a basket of the assets, the hedge funds would already be buying them off the banks... and it would just leave an even bigger (if not terminal) hole in bank balance sheets as the assets would be marked to the sale price (rather than to model or market.)

"Many (probably most, possibly all but a handful) high-profile, large border-crossing universal banks in the north Atlantic region are dead banks walking - zombie banks kept from formal insolvency only through past, present and anticipated future injections of public money. They have indeterminate but possibly large remaining stocks of toxic - hard or impossible to value - assets on their balance sheets which they cannot or will not come clean on." (Willem Buiter in the FT)

It certainly IS necessary to take the toxic crap off the books of banks to help them to start providing credit again. We in Asia know this - because that's what had to happen before our banks got recapitalized in the '90s. (Yes, that's the right order of things - keep up!) But, in my view, that does not entail a bailout of the existing equity holders of those banks, and certainly does not require (OK, almost) free options to be handed out to hedge funds (especially those borrowing at government rates and/or on a non-recourse basis to do so.)


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Here's more on the potential lunacy of marking to market... from Willem Buiter of the FT, again. (Though look at it from the effect on the balance sheet: as the liabilities get written down, the bite on the other side is out of the equity base, which makes sense... but it does also make it sound awfully odd on the P&L.)

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Mark to Make-Up? Fiat Bank!

From today's FT: "The financial sector, down as much as 4.7 per cent soon after the open, rallied as much as 4.1 per cent after speculation swept through trading floors that Washington could suspend mark-to-market accounting requirements for illiquid assets."

If you follow the chain to its logical conclusion, it looks like the SEC is creating fiat money with fiat bank balance sheets.

Bank balance sheets? (That actually balance?) Ya gotta have Faith-a-faith-a-faith-ahhhhhhh!



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So how's the Asian ADR portfolio doing?

Not so good - not losing any money at all, but not making much either. Better than a slap in the face.

Long positions on Marketocracy:

CEO

CHL

CMED

FMCN

FXI

JASO

KTC

LDK

LFC

MR

NPD

PWRD

SCR

SHG

SNP

SOHU

SPIL

TCL

VISN

WX

Short positions on Marketocracy:

CEA

CHA

EDU

IIT

KB

NTES

PTR

SHI

SKM

SNDA

STP

TSL

TSM

YZC

Remember, these are portfolios that are supposed to be viewed combined as a $2m base Long-Short fund. On that basis, mildly up should be compared with Asia ex-Japan at down some 7% or so YTD. Would rather be up more than "mildly" but, it's better than...

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Dirt Bag on Wall Street - who knew?!

From "The Epicurean Dealmaker", linked at left, a great piece on Goldman: The Dirt Bag Chronicles.

"Seriously, now, can we all just agree to put a stake once and for all in this Goldman Sachs reputation-thingy? I have repeatedly shaken my head in wonder over the years at Goldman Sachs' apparently preternatural ability to maintain an absolutely spotless public image while simultaneously soiling itself in full view of everyone in the most miserable and abject manner possible." [more]

Not much for me to add, but to point out that while the halo still shines somewhat brightly against its peers, (peer, I mean... and, to fill some chart space, Citi,) GS is still off some 60% from the start of 2007. Crappy performance, but much much better than Morgan Stanley (and the S&P500) off some 60% with Citi giving up 95% (okay, okay, 94%.)


(So when is it Joisey Governor Jon Corzine's turn? He was, at one point in time, the boss of Paulson, Rubin and Thain. And Jim Cramer. And possibly Erin Burnett...)

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It's OK to be late! Early really IS the new wrong!!

Gosh, those Merrill ("BAS-ML") analysts are being productive, these days. Wonder why?

Nigel SuperQuant Tupper has an interesting piece out... you know how everybody's saying "Early is the New Wrong" (along with "Down 10% is the new Up")?

Well, Nigel now proves that it's OK to be late... Globally, it's better to be late than early. If you invest 4 mos too early, you lose 22%, while those who invest 4 mos late miss only 8% on avg (since 1988).

(For Asia ex-Japan, he writes: "the bounce in performance after a trough (+27%) is about as dramatic as the fall in performance before the trough (-23%), on average. Invest $100, lose 23% ($77), gain 27% ($97.79), and you’re slightly worse off than having waited.")


Well, that'll be a relief for the long only managers out there. (As for the remaining "fast money" guys desperately trying to justify 2/20... )

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Now, the shape of that global chart looks a bit familiar, doesn't it? HSCEI (China H-share index, traded in HK) with an 8 day moving average) below. So we have maybe a month to decide if that end-October trough really was the trough. Looks startlingly like Nigel's above, but about twice the fall to the trough, and, so far, twice (roughly) the rise since then...:
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"Don’t be fooled..."

All seems well in the world, as I return from the CNY break... yes, we're heading into the Year of the Ox, which is basically the same as the Year of the Bull, right? They look the same, more or less, and the character's the same, so we should be set for a cracker, I guess.

Except that apparently, an ox is a castrated bull. Crudely snipped, then all set to toil 24/7 its entire sad, sexless life, and, when too old or weak and no longer of any use to its owners, slaughtered and consumed by those for whom he'd been working. (Sound/feel familiar?)

But all's well in the overnight markets, at least - we have the S&P500 up the last 3 days we've been away, with mega-buck M&A, a storming 52% of companies that've reported coming in ahead of expectations (BTE!), Leading Indicators bottoming and existing home sales on the up-and-up!

Except...

From my new BFF, David Rosenberg of Merrill in his must-read Morning Market Memo:

Don’t be fooled by the home sales data
The resale data for December came in better than expected to be sure at 4.74 million units, a 6.5% bounce from the 4.45 million print in November. But distressed properties accounted for 45% of all sales, according to the National
Association of Realtors, so this is not exactly ‘organic’ activity as much as
investors looking for a deal on foreclosed units – look for these to be put back on
the market at the first hint of revival (or will be converted to rentals). So the sales
activity did indeed help drag the inventory backlog to 9.3 months’ from 11.2
months’ in November, but then again, we know that this data is also undercounted
by as much as 15% as property holdings at the banks are not counted in this data
(i.e. the unsold inventory is still close to 11 months’ supply). Moreover, median
home prices deflated 2.7% in November – the sixth month in a row of decline
during which they have sunk at a record 33.5% annual rate (median home values
are no higher today than they were in December 2002). The YoY trend is -15% so
as you can see, the trend is becoming even more negative.

Don’t be fooled by the leading indicator either
Another case where the devil was in the details. Yes, yes, the LEI managed to
rise 0.3% in December after two months of hefty declines. First, half of the 10
components were negative and three were flat. The real money supply soared
(of course as the CPI deflated) and added 0.99% to the headline, and the steeper
yield curve added 0.22%. So basically, a deflating CPI and a rise in bond yields
is supposedly good for the economic outlook (come again?). So outside of the
curve and real M2, the LEI would have declined 0.9% in December. Very
lopsided. Moreover, we see that the coincident-to-lagging index, which has this
habit of leading the leader, actually dipped for the second month in a row to 91.9
from 92 in November and 92.3 in October.

Hmmm...


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Meanwhile, more (and more) layoffs.
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0.96

"Researchers at Cambridge university have found a strong statistical link between the profitability of male traders at a London bank and the ratio of index to ring fingers on their right hand." - FT

I think they are referring to the length, not number of fingers, though knowing many London based traders myself, maybe...

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Happy New Year, by the way. (My short position in SAY really helped!)

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Year of the Ox, 2009... Is an Ox Year the same as a Bull Year??

In case anybody is wondering, the first day of the next Chinese New Year falls on January 26th 2009. The character (牛) for the ox is, unsurprisingly, the same as that for a bull.


The record for the Dow Industrials during the last century is not all that inspiring, with 5 winning years vs 4 losers, at an average gain for the year of a bit over 5%, but with a mile wide std dev of 21%, so expect something between -15% and +25%??! The next layer of astrology (elements) points to a slightly better outcome - the last Earth Ox (1949) saw a return of 12.8%. (Not statistically significant, methinks?!)

For the HSI, I only have 3 past Ox years to look at, for some reason... 1974: -64%, 1986: +21%, 1997(!): -17%

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Highly recommended...

... taking a week off to ski where there's no (GPRS) Blackberry coverage...

Merry Christmas, all!

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Meanwhile, MBA mortgage applications came in +48% from under +3% the previous week, with over 80% (a record, this decade) coming from refinancing. Yes, just week-on-week numbers, but it does show that actually, with mortgage rates finally coming down, people are - if not rushing out and buying homes at market clearing prices (wherever they may happen to settle,) taking the opportunity to lower household expenses. Gotta be net positive for the still-flat-on-its-back US consumer, and that has to help us out here in Asia... provided, of course, that at least some of those applications actually get approved.


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Bailseverimulus

I don't get it about the auto bailout, particularly the panic in all the Asian markets on Friday at the announcement of its failure to pass in the Senate. Am I missing something? (No, it wouldn't be the first time, I know.)

Yes, they are iconic global symbols of US manufacturing prowess (alongside other such 21st Century global powerhouses such as, er, Boeing and um, Caterpillar, and, er...) and huge employers both themselves and in ancilliary businesses etc (huge-ness of payrolls kind of being one of their problems.)

But they make essentially the wrong products for the market, and do so inefficiently - exacerbated by legacy pension etc issues and rampant, thinly disguised '70s style "Winter of Discontent" unionism so until pretty much all that changes, the problems simply won't go away.

With or without bankruptcy protection, with or without a bailout, the "Big Three" have to cut staff massively, change management (and groupthink) almost totally and renegotiate legacy pension and related liabilities.

Would a bailout rather than Chapter 11 actually change anything? Would a $14bn (or $35bn) bailout encourage creditors (suppliers, banks etc) to continue to lend to the automakers, or would they pull in their horns and limit credit risk? And would it get people who are even reluctant to buy a Toyota or Hyundai or F1-less Honda to fork out a piece of their uncertain finances to pick up any of their crappy cars?

I take the point that another massive blow to the economy at this point would be negative - but not selling cars IS already a huge blow to the economy. Generous severance to employees (and perhaps assuming a chunk of the legacy pension liabilities etc) would be far better use of bailout money and a direct fiscal stimulus, besides easing the way to a restructured and healthier US auto industry.

Either way, the failed bailout in the currently proposed format is no reason for a market pukefest, especially when you KNOW that something along those lines (but tweaked) will get passed somehow sooner rather than later.

I see what happened in Asia on Friday as 1.) simple profit taking after a sharp and generally unexpected run, and 2.) reading too much of the US-centric (and increasingly tabloid-style) financial press.

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Is Mr ZIRP coming to the US?!

So 3 month Treasury yields fell through the floor - one indicator of low risk appetite... with equity markets shooting up... Riiiight...



Or, as my new BFF David Rosenberg of Merrill puts it:

Take my money, please
The US Treasury's most recent four-week bill auction resulted in a yield of 0.0%
as risk aversion continues to dominate the markets. This result follows on the
heels of three auctions yielding 10bp or less. The bid-to-cover was the highest in
more than a year and a half. Demand came from clients rather than the dealer
community, as can be seen in the reported participation, where indirect bidders
accounts for 47% of the auction versus a norm of 30%. Likewise, the hit ratio, or
amount of award to bid for dealers was just 17.4%. This is 10pp lower than
normal. This result, more than any other single data point, highlights the
unsustainability of the equity market rally of recent days, in our view. How can
you expect an economic or earnings recovery if investors would sooner bury the
cash -- or place it with the Treasury at 0.0% -- than "risk" it.

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Short Squeeze? Long Squeeze?

So on Friday we had the Asian markets inexplicably firm, right from the start, despite soggy US overnights. Then that night, really really sh1tty job loss data and company announcements in the US (and multi Euro-rate-cuts, which left Europe unexcited,) was greeted with joy and a size rally (characteristically obnoxious Wall Street behaviour.)

Monday we went charging up in the morning in Asia on long onlies shoving cash at us, not on the weekend's Obama New New Deal infrastructure and jobs proposals, as it was largely ignored at the time, but on the start of China's 3 day We'll-Do-Whatever-It-Takes-Because-We've-Already-Seen-The-Export-Data Conference (the "central economic work conference")... and then we got a turbo boost from not-new-news that Chinese domestic investors will one day, some day, be able to invest in Hong Kong. And then there was the olf chestnut: "It Was Bargain Hunting" (ie "wedonno.") No real evidence of size short covering actually seen by brokers, but many reports (much later in the day) that it must all have been from short covering.

Only after the US powered ahead on Monday that evening, did those shrewd commentators decide that Asia's upswing had all actually been for the Obama New New Deal...

Then a couple more days of bad bad corporate news and slashed guidance in Asia and the US, horrible macro data from China and elsewhere... and continuing strength in the markets, including negative 3 month Treasury yields (briefly)... and here we are, with Long Onlies continuing to drive the bus, and much talk of sector (though not country, yet) rotation.

Meanwhile, all the short covering that was supposed to have been driving the markets (the rise in which was, by snide implication, of low quality), but had really been holding off, seems to be creeping its way back in, alongside some long side activity from the HFs...

• From a hot NY sales-trader last night: "75% of demand coming from HF's - 1/2 of which covering 1/2 adding to position in energy, financials - Seeing dedicated $ being put to work in tech, mats, energy"
  
• From a not-so-hot (looking) salesman in Taipei on Monday: "In terms of exposures, across all long/short funds, the net bias fell from 70 long at the start of the year to 17 end-November... Cash on the sidelines has grown. Light excess cash (5~10% excess cash) fell from 42% end-07 to 34% end-Nov; medium excess cash (10~20%) from 11% to 9% and heavy excess cash (over 20%) ROSE from 47% to 56%."
• From a Korea sales-trader this morning: " THIS IS A LONG SQUEEZE NOT A SHORT SQUEEZE - Foreigners have Net Bought $373mn in Dec MTD... YET Foreign % ownership of KOSPI current 29.12% still lower than Oct 30% lvl as buying cannot keep up with mkt cap rise."

All this alongside waning skepticism about a year end rally. ("But... but... this rally would just set the bar higher for next year... so, why, er, huh? And look how much they're UP from the October lows... it's crazy! I'm not playing - books are closed, bud! But... well, I give it one more day... one more day... Oh crap crap crap - I better cover this and buy some of that...")

I actually do give it another day (then I add to my shorts to trim back my net long position.)

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"Who doesn't know..."

From David Rosenberg at Merrill:

"Who doesn’t know the funds rate is going to zero? Who doesn’t know the government has provided liquidity backstops totaling nearly $8 trillion? Who doesn’t know a massive fiscal stimulus package is coming soon? Who doesn’t know the Fed has quadrupled its balance sheet? Who doesn’t know that money base growth is running at a double digit annual rate? Who doesn’t know the FDIC is going to modify millions of mortgage loans?

"The government intrusion into the real economy and capital market is so well-known, its making the front pages of tabloids. So, how is it then that gold is faltering? Why is copper hitting 3-year lows? Why have platinum futures collapsed 47% this year? Why are Treasuries rallying?

"Because all the government can really do is cushion the blow – it cannot prevent business cycles from taking their course."

Yes, well that's what governments are there for in a slowdown, although most governments are under the impression that a quick return to rapid economic growth is necessarily a good thing - and under the illusion that they are capable of making it happen.

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