Sunday, December 7, 2008
market summary and outlook as of 12/07/2008
Capital markets recovered somewhat and danger still ahead Credit Market --Money markets have been stable for the past two weeks. 3M Libor hovered around 2.2%, though remained elevated compared to 1% Fed Fund rate. --CP market have recovered due the term facility set up by government. Many large firms, such as GS and GE, were able to issue CP at reasonable prices, lowering their funding cost. --Mid and long term funding market for high quality firms is thawing. FDICS-backed lowered the funding costs of financial firms. GS is able to raise fund at a yield level slightly higher corresponding T-bonds. Risk preimum for Investment Grade firms have retreated from historic high three weeks. The OAS of AA ML index has retreated from 688 bp to 409 bp. The record high yield, concern over deflation, and uncertainty of future stock market made high quality more attractive to stock. --HY is still trading low due to rising bankruptcies. OAS of BBB ML index traded 11% and BB at 13%. Mortgage Market --Mortgage market is recovering since government planned to buy $500 bil agency MBS and $100 agency bonds. CMBX BBB risk preimum level has retreated from 40% to 36%. Mortgage fundamentals is deteriorating: unemployment and delinquency are in the rise, home price is still falling hard, and inventory is 11 months. But $500 bil will help reduce the inventory and prevent damatic fall in home prices. 30y Mortgage rate is around 5.5%, 5% for new home buyers. Demand for house will pick up. But the root cause, exotic asset, of this crisis is still unrevolved. Exotic assets are still handing in banks' balance sheet, raising the uncertainty of future capital eroson. Government might still need to raise further money to remove this issue. Stock Market SP might not drop below 700 unless something big occur, like the bankruptcy of Auto sector or mortgage market or fall collapse international economics, like UK. US market showed great resilience, even shrugging off record loss in employment. Economy Economic data remains grim. US labor market lost 2.7 mil jobs since December last year. The job loss in Nov 2008 was the worst since 1974. ISM Manufacuturing index reached to 36.2, rivaling the level created in earely 1980s recession. ISM service index also plummeted historic low since 1997 the index was created. Grim economic statistics abound as well. China's purchasing manger index plummedted to historic low since 2005 when the index started. Similar manufacutring measures across UK and Euro zone also spelled out all-time lows. Risk Looming risks might be from mortgage. US credit has increased from ~27 tril in 200 to ~52 tril. Until now, US government planned to raise ~1.7 tril, including stilimulus package. To recapitalize banks and cushion the slack created by private demand, this measure might not enough. I am expcting govenrment to raise at least $500- $1000 bil new fund. opionions --Continue to buy high quality IG bonds for the long term or wait for the next wave of crisis to jump in. --10y Treasury is trading at 2.5%, might stay at this level for a while. --Strong buy for S&P if it drops to 750.