Last July, investment banks estimated losses from subprime mortgages would total $100 billion. Within a month it had quickly doubled to $200 billion. By November estimates had risen to $400 billion. Now, even Goldman Sachs has posited $1 trillion (re: American Public Media); is this a back of the envelop estimates or wild guesses?
On April 8th, Morgan Stanley's CEO John Mack announced that we are in "maybe the top of the ninth," regarding the subprime credit collapse.Lehman Brothers' CEO Richard Fuld announced that "the worst is over" a mere couple of weeks after Lehman analysts cut their estimates for banks in 1Q08. Merrill Lynch's CEO joined the "worst is over" crowd a mere month before his firm wrote down another $6 billion and announced it would be cutting 4,000 jobs (re:Global Profit Strategies).
Was the shout "the worst is over" for the financial crisis a shout in the wilderness? 2008 is a volatile year for index traders.
Elsewhere, political leaders were also trying to inject some sanity and to ringfence the contagion through moral suasion, monetary and fiscal policies.
Is the worst really over or are the leading players trying to tranquilize the public and seed calmness in the haemorrhaging marketplace? Or was it "a repricing of risks" as mentioned by President Bush (30/8/07).
Global issues & the Stockmarkets
Most markets enjoyed some rebound after one of the worst sell-down in March 2008. However, it seems more like "sell in May and go away".
Let us visit some issues and reflect on what has gone right or 'awfully' wrong?
i) In a recent speech, Bernake said that the US Fed is unlikely to reduce interest rate further. This was seen as an indication of a strengthening US$. Speculators 'short' oil and 'long' dollar. However, on 6 June 2008, oil prices spiked up triggering off short-covering that resulted in a biggest one-day movement of oil price (US$11) to US$139; in the same day, Dow fell 394 points! Crude oil is around US$130 today.
ii) With spiraling energy and food prices, other factors of production have also become dearer. Is this the result of speculative demand or reality at work? How do you account for the record breaking profits of oil & gas industry; Exxon's profits for the first quarter of 2008 were a whopping 17 percent higher than its huge profits from the previous quarter. (seattlepi.com - 10 June 2008). Is this a result of higher efficiency or profiteering by cartel-like oligopolistic pricing?
iii) Inflation - in a nutshell; the global growth is fueled ceaselessly by consumer-nation, US, and supported by a huge but cheap manufacturing base, China. With increasing demand, China's wealth creation translates into higher per capita income over the years thereby empowering her citizens with higher 'purchasing power', ceteris paribus. With a breakneck multiplier at work, China scour the world and acquire natural resources necessary to sustain her growth as well as to feed demands from within, and the world at large.The cost-push and demand-pull inflation feeds on each other and resulted in a runaway inflation currently blazing the globe without any sight of receding. If one equation is truncated, the impact will be greatly reduced.
iv) Arable land shrinks with modernisation, crop switching and urbanisation thereby reducing food production adding to current woes. Nothing seems to be able to stop run away prices! Biofuel only adds to the woes.
iv) ECB is bent on raising interest rate to battle inflation and Bernake has indicated the Fed is unlikely to cut interest rate. Any increase in interest rate in Japan is likely to raise anxieties of Yen carry trades
v) How bad is the US Subprime mortgage loans? The exact figure is still unknown and the situation is made worse with growing unemployment; the full blown subprime effect is yet to be felt; well, Fannie and Freddie mac is screaming for rescue! A truncation of demand pull inflation will ease the vicious cycle of pressure on prices.
vi) Oil price has been rising over the last few years for a low of US$20 in 2002 to current near US$130. Global Research (2 May 2008) estimates that 60% of oil prices today is due to speculation. Oil should stabilize around US$100.
With cost outstriping income, many around the world are feeling the pinch of rising costs of living and protests and social unrests may become the order of the day. Besides, the rising cost of production will curtail demand, therby easing the pressures on costs/factors of production.
vii) The love-hate relationship of US$ vis-a-vis other currencies lends further uncertainties to the world market. Liquidity squeeze, subprime, rising unemployment and rising energy and food costs will hamper US stocks and dampens consumption leading to a slowdown; a long expected breather.
vi) Social orderThe widening rich-poor gap threatens social order and is potentially a destabilizing factor to market at large. Cost push inflation will eventually lead to slowdown in demand as goods are priced beyond consumers reach. With uncertainties in the financial markets and the evaporation of confidence, the markets will drop to an earthly levels.
There is no prize for guessing the correct number in the indices. But, it looks like its a buy on (extreme) weaknessesand Sell into strength to lock in the profits! Trade the Bear...
The Stockmarket, the Sun & the Moon
In year 2008, the following are interesting dates to watch:
7/2/08 Annular Solar Eclipse
21/2/08 Total Lunar Eclipse
1/8/08 Total Solar Eclipse - a possible BUY chance
16/8/08 Partial Lunar Eclipse
The bull, the bear and the sheep
The bulls are tire; the bears not likeable. And the sheep pay and watch the bulls and bears smearing each other to gain prominence.
2008 makes good trades but holds little for those who are indecisive? Do share your opinions with me.
(THIS IS NOT AN INVESTMENT ADVISE NOR ANY ATTEMPTS TO SWAY DECISIONS. IT SHOULD NOT, AND CANNOT, BE RELIED ON FOR MAKING ANY INVESTMENT DECISIONS. IF IN DOUBT, CONSULT YOUR OWN PROFESSIONALS FOR ADVISES; ITS FOR READING PLEASURE ONLY . ALL ABOVE INFORMATION & CONTENTS ARE WITHOUT PREJUDICE, UNLESS OTHERWISE STATED)