Sunday, October 19, 2008
market outlook as of 10/19/2008
Money Market is thrawing; Credit market Remains Weak; Real Economy is Weakening Thawing Credit Market As I have predicted in the previous two blogs, the credit market is improving. The liquidity pump and capital infusion from global central banks is working. Nearly $2 tril global debt gaurantee, banks capital injection, and unlimited dollar funds swap between European and US banks (http://remington-work.blogspot.com/2008/10/fed-flooed-financial-system-with.html) eased the strain in money market. 3 month libor rate has declined from 4.8% as of 10/10/2008 to 4.4% as of 10/17/2008. Fed pumped $125 billions to top nine US banks and another $125 billion will be distributed to the rest banks. In addition, Fed's increased deposit guarantee limit from 100k to 250k prevented the bank run. Furthermore, Fed's Commerical Paper program restored the confidence in money market. As a result, asset backed commercial paper overnight rate dropped from ~6.5% at the end of Sept to ~3.25% as of Oct 17th. I expect more improvement in the coming weeks. The government intervention in banks and money markets also brought unintended consuequence (http://remington-work.blogspot.com/2008/10/crisis-reverberates-in-credit-stock.html): the agency bonds were less favorable than banks bonds; the rate of the term commercial papers shot up because investors shift to asset backed commericla papers. Credit Market remains weeak Corporate bonds market remains week. The IG ML index OAS spread sill traded around 587 bps, where HY ML index OAS spread shot up to ~1600. Two major factors were driving the trend. First, the concern over recession strained the corporate bonds market, which might face more bankruptcies cases down the road. Second, the margin calls of hedge funds might them to sell some bonds, which pushed down bond prices. CDS is yet to be tested in the coming months. The settlement of Lehman bonds and other bankrupted or to be bankrupted bonds might further roil the credit market. I expected the cash corporate bonds market, especially HY, remaind weak for a while. But AAA index market, whose OAS was 399 bps as of 10/17/2008, looked quite attractive. It is a good buying opportunity. Weaker Real Economy Sales at US retailers dropped in September fell by 1.2%, after dropping two months in a row. It is the first time that has happened since comparable records began in 1992. With two thirds of GDP falls into consumer spending, the poor number further reinforced the chance of a negative QoQ GDP in Q3. The concern over global recession might further slash the demand for crude oil. Its future price dropped belowed $70 last week. It might help consumer business by lowering costs, but not strong enought to cancel out the effect brought by weak demand. No surpisingly, housing market was flush further negative news: housing starts in Septmember further dropped and was below expectation; 30 year mortgage fixed rate was above 6.2%, possibily caused by higher agency bonds yields. I expect the economy would be weaker in the coming months and housing market won't touch bottom until the middle of 2009. It means that more layoff down the road and unemployment rate might surpass 6.5% or even 7%. I am growing concerned over the economy in Mass. The credit loss and capital market turmoil turned many funds upside down (http://remington-work.blogspot.com/2008/10/hedge-funds-performance-for-q3-08.html). More funds will close and face redemptions. A lot of funds are based on Mass and some of them, like Fidelity (http://remington-work.blogspot.com/2008/10/fideility-mutual-funds-lag-behind.html) had suffered huge loss in the past year. More layoffs from asset management is inevitable. This might be a drag to Mass economy and housing market. The earning season just started. It is still early early to conclude the profitability of the economy in Q3. I will add more material in the next blogs.