Sunday, October 21, 2007

Watching the signs

1) Global banks are trying to fix their problems in unsold Special Investment Vehicles (SIVs) with new repackaging of damage goods. Total outstanding of the so called ‘toxic’ loans amount to approximately USD 320 billion give or take tens of billions since no one really know the figure. Three top US banks – Citibank, Bank of America and JP Morgan Chase - upon the urging of the US Treasury, will set up a USD 80 billion fund to prevent the forced sale of hard-to-value securities. The funding will be by way of new commercial paper issued by the banks to buy better quality assets from some existing SIVs.

Comment: It is not a government bailout. But the sum is not enough to save the entire market, therefore there will still be a few hundred billions worth of distressed sale of SIVs out there, somewhere. Already a British fund holding a few billions worth of SIVs is in receivership and the receivers have informed the market that the fund will default in its repayments. A valid question remains whether the new commercial paper will be well received or not – since many fixed income investors are skeptical. After all, it is a mere shuffling of papers, with ‘monopoly money’.

2) The recent credit crunch is also hurting the British. UK Reuters reported that many thousands of youths are paying their rent or mortgages with credit cards. Real pain will be felt if credit card holders have to continue to roll their card balances. Card interest rates and cash withdrawal charges are exorbitant, to say the least. If there is no way out, it could be better to default rather than vomit blood or kill yourself. And according to recent news media, more and more people in the US are defaulting on their auto (car) loans and credit cards payments.

Comment: It is a worrying trend. When the public consumer has no savings and no excess money to spend, who will continue to buy products and pay for services? (Think of previous recessions in Malaysia.)

3) With a continual rise in interest rates and the numerous measures taken by the Chinese Government to prevent excessive assets speculation and to dampen inflation, Shenzhen property agents are finding it difficult to sell expensive properties since August. The agents now have to resort to waving cardboard signs at passing motorists trying to entice them to stop to view luxurious apartments costing up to a million dollars. The same housing units had previously sold like hot cakes. Now thirty to forty percent of units remain unsold.

Comment: Property prices have been rising for several years in many countries because of easy credit and hot money. Will property prices around the world see an end to the uptrend, remain stagnant or start falling with the US property market taking the lead?

4) Warren Buffet has recently sold all his investments in a Chinese company for a few fold profits, raising at least three billion dollars of cash for his investment company.

Comment: People do not call him sage of Omaha for nothing. He has foresight. Also remember that the global investment funds are collectively sitting on their trillion of cash.

5) The global and investment banks have yet to come clean. Maybe they do not know what the damage is, what with investments marked-to-model and marked-to-make believe, or are apparently in denial.

Comment: If the banks hold onto these difficult to sell investments too long and have not made sufficient loss provisions, their auditors may qualify the financial statements and quantify the losses. A double whammy, perhaps.

6) Investors in US stock market feeling jittery sold down their stockholdings and shifted money to the short term two year US Bonds on Friday the 19th, the 20th anniversary of the 1987 October crash. The unrelenting sell down was stopped by the closing bell. The Dow Jones index fell 367 points or 2.6%.

Comment: Asian investors will also be jittery when their stock markets reopen on Monday October 22, 2007. Will there be a rebound at the close of trade? It is anyone’s guess. It could be safer to wade into the waters on Tuesday after watching Dow Jones Monday’s performance, unless investors decide to punt.

Meanwhile the big obstacles still remain for the Chinese ninth month.


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