Sunday, October 5, 2008
market outlook as of 10/05/2008
Long term credit market will be positively impacted by Bailout program --In the long term credit market, private fund is still tight. Most banks are hoarding funds to weather the storm. Hedge funds and private equity might struggle with groing withdraws and higher margin requirements. Also the recent market turmoil might push more hedge funds and private equity into the red. The contribution by Warrent Buffet and a few individual companies are not enough to shore up weakening economy balance sheet. Sovereign wealth funds owners are pinched by the hasty yet losing investments in the past year. They might not rush in until they see the light the tunnel. That said, only government have a deep pocket to replenish weakening economy's capital. Yes, melodram of the TARP program came to an end. Market confidence will be boosted. But the real economy effect won't be imminent and will take months to play out. Ongoing dislocation in short term credit market is expected to return to normalcy --Short term credit markets have been dislocated in the pas two weeks. 3M libor rate edged up to 4.2%, reflecting banks unwillingness to lend out funds. While 3M T-bill yield has been trading close to zero since the collapse of Lehman and bailout of AIG prompted the crazy flight to quality. What has been hurt most is the commerical paper markets. Distrust among money market investors for issuers' fundamental credit forced issuers to raise the rate and shift to overnight issuance. The weekly amout outstanding of commerical papers have creased by 200 bil to 1.6 tril. The World central banks has boosted the availability of liquidity by increasing swap lines and pumping more funds into banks. I believe the liquidity in short term market will be increased and the market will return to normalcy soon. Weakening Economy Fundamental --Yes, the bailout bill is passed. But the economy fundamental is going weaker. Credit crisis has spreaded into two direction, across the Altnatic ocean into the Europe and out of financial market into the real economy. Not just defaults, consumer defaults in credit cards and auto loans are on the rose. Large international companies used to rely on oversea revenue to prop their growth, now had no shelter to shun the brunt of global recession. Unemployment payrolls are also in the ascendancy. Though the unemployment rate in Oct was still holding at 6.1%, I do believe it will surge above 6.5% by the year end as more companies will go bankruptcy. Regional banks and buyout firms with piled debt loads will go down first. The bailout program might contain the destructive power of develerage process, but it could not preven a recession. Any recessions have to end up with enough consolidations and layoffs to save the costs and increase the productivity so that companies can regain their growth. Until now, we have witness the largest bank banktrupcies or nationalizations of this recession, it is hard to believe any large bank will go bankruptcy. --Also another fact complicated this crisis is the credit derivatives. This market has not been seriously tested in the free market since its inception. The pure size and unregulation nature of this market make itself hard to be controlled. The implications of the explosion of this in response to more company banktrucpies is treacherous. Government might have to take extreme ways, e.g invalidating some contracts, to avoid further dragging the economy downward. Stock market --Within this context, the stock market might have months to bottom out due to some aftershocks caused by coming Q3 earning releases and more bankruptcies. The peak-to-trough drop might reach 35%, meaning the YTD drop this year might reach 30%. Bonds --I except high yield credit will continue to deterioate for a while. But some investment grade markets, like AAA, have been punished by market panics and its yields are expected to narrow.