Saturday, November 15, 2008
market outlook as of 11/15/2008
Economy is contracting fast, value investors are touching the bottom Short term credit market As predicted previously, Money market has improved significantly in the past two weeks due to the global central banks' liquidity and capitalisation measures. 3 month LIBOR rate has dropped from ~4.8% to ~2.1%. Commericial Paper market is trending back to normalcy after Fed set up multiple CP programs. ABCP rate has improved from the peak of 5.5% to 1.6%. Still, levels remain elevated compared to 1% Fed fund rate. But I doubt they will improve tremendously in the short run. Long term credit market LT corporate bonds has improved a little for investment grade credits. AAA ML index spread to worst has tightened by nearly 90 bps to 336 bps in the past month. But High yield credits still had trouble rasing capital. HY CCC ML index spread to worst still traded at historical high 21% as defaults rate is in the rise. Securitization market will still have hard time ahead. RMBS market is till in the ditch as the rates of mortgage deqlinquency and foreclose are in the rise and mortgage rate is still hovering round 6%. Higher unemployment will further weigh in the market. CMBS took the hardest hit as Paulson decided to reverse the course of Tarp. CMBS CDX BBB- is trading at 34%, a level never seen before. Consumer related securitzation market, such as Auto loans and credit cards, slowed to a halt as investors shun the market as a whole. But Paulson's revised plan might shore up this market soon. Economy Consumers are cutting back their consumptions at the fastest pace in the past decades. Advance retail sales dropped 0.5% Oct, the largest drop since the measure started in 1992. It has dropped four months in a row, a pattern never seen before. The weakening consumption was further witnessed in the October's worst monthly sale in automobile sales in 25 years. As unemployment rate increased to 6.5%, I expect a further slump in consumption. Manufacturers also had the worst month since 1982. ISM index dropped from 43.5 to 38.9. A number below 50 indicates contraction. What is striking is probably the pace manufacturing activities are worsening. Corporate profits were hammered too. the overal earning YoY in the 3rd quarter plummetted 16.9%. 4 out of 10 sectors had negative profits increase in the 3rd quarter. The sectors with postive earning increase are energy, minerals, industry, IT, and healthcare, healthcare, and consumer staples. Further loss was expected in the 4th quarter. Market Economy foundamental looked grim and seemed warranting a level of 800 or below for S&P 500 index. But stock market showed strong resilence in the past two weeks. It seemed many value investor treated 800 as the bottom of S&P 500. Whenever the index traded dropped close to 800, a hugh rallied was followed. This pattern might not change until further big events shocked the market.