market outlook as of 11/01/2008

The credit squeeze is thawing and real economy is deteriorating Short Term Credit market As I expressed in the the previous blog that the Fed's liquidity measure is finally working. By taking CP directly from issuers, Fed become the largest CP investor. As a result, CP rate dropped and issuance volume increased. 30 day financial CP rate has decreased from 4.01% as of 10/09/2008 to 2.04 as of 10/30/2008. The issuance volume in the week of Oct 29th increased $100 bil compared to the previous week. Money market rates are trending towards normalcy. 3 Month Libor rate has decreased from the peak of 4.8% to 3% as of 10/31/2008. Still these levels are still at relatively high, straining the availabiliy of credit. Especially, CP and Libor rates are yet to reflect the newly cut fed rate. It has to improve further to maintain the functioning of credit market. Economy GDP dropped 0.3% in the 3rd driving by weaker consumer consumption. After dropping in two months in row, US advance retail sales declined another 1.2% in Sept, the largest plummet in 3 years. Personal consumption ins the 3rd quater furthe spelled out retrenchment. Consumers cut back on durable and even nondurable goods. Even though it is only half way through third quarte earning season, we already noted that most sectors' earning declined. the average y-o-y earning growth is 10.9%. Only energy, info technology, healthcare, and materials are holding up. As global economy is entering to recession, global commodity and oil prices are in a free fall, these sectors will soon lose their luster. More and more big companies lower their guidance for 2009 and many, like GE, Xerox, American Express, etc, are laying off employees to save cost. Yes, with the government's buttress, financial sector is getting out the ditch, but the real economy is in the ditch now. Nationawide housing market contitue to slide. Surpiringly, Mass housing market price hold up well in four months through August. But the following wave of layoffs across the state lead by Fedility and other buy side financial firms might impact the housing market. Stock Market Spurred by short term credit market improvements, stimulating monetary policy, and higher than forecast GDP growth (-0.3%), stock maket has been trending upward after dropping to hte lowest point in Monday. Still the market is fragible, daily volatility is high, gyrating between positive and negative territory within hours. The week ahead might be mixed. One the positive side, the election result will be disclosed and money market might further improve. On the negative side, more economic indicators, like unemployment rate, will be released and might increase the downside risk to the economy. Furthermore, we are half way through the earnin season. More discouraing earnings might be underway. Bond market Improvements from corporate bonds market was lukewarm. Indices from different coporate bond rating category improved a little, but stil trading at stress levels. CCC and lower tranche is trading 29.5%, higher than the peak of 27.87% as of 09/28/2001, and the implied default rate is around 24.5% assumping 30% recovery rate. This level sounded overshoot and enticing. Currently, the default rate is still approximately 3% and Moody forecast the default rate might go up to 9%. But 7% of high yield market goes to automotive and automotive suppliers. These sectors is going to a crisis. Some of them might be gone in the near future. I would suggest waiting for a while to decide whether it is an attractive deal. International Market Credit crisis is taking a toll on more emerging markets, like South Korean, Hungary, Pakstians, etc. More small economies are borrowing from IMF. Pretty soon, its 200 bil fund will be used up. Even Japan market was hammered despite its lower exposure to US subprime market. Its ongoing increasing currency value raised concern about its exports. Its cross holding resulted in collateral damage. Hedge funds margin calls and redemptions further hurt the stock market. This is not the end of global recession. It is just a beginning. Some countries' economy or stock market will be further hammered. Argentine and Iceland is in the black list for national bankruptcy.