Early Optimism or a Turning Point - 2009
Changing the digits on the calendar from ’08 to ’09 may not have transformed the dire outlook for the global economy, but early signs of 2009 and late 2008 appears to suggest that investors appeared adamant to put the rout of 2008 behind them.
Despite the grim ISM report the S&P 500 Index jumped by 3.2% after the release of the data, propelling many stock market indices to almost two-month highs.
The MSCI World Index (+5.9%), MSCI Emerging Markets Index (+5.3%), Dow Jones Industrial Index (+6.1%), S&P 500 Index (+6.8%), Nasdaq Composite Index (+6.7%) and the Russell 2000 Index (+6.1%) Saudi SE up 7.8%, Dubai 7.9% MSM up 4.% all gained handsomely (albeit on thin volume) during the week straddling New Year’s Day.
Although mercifully the door has been closed on 2008, let’s begin with a recap some of the unprecedented movements experienced in financial markets during the year.
Continue reading - Download a copy of this article by clicking on the file link below.
Stimulating Against Time - 15 Feb 2009
The S&P 500, 2008 earnings had dropped to $29.57.David Rosenberg of Merrill Lynch’s forecast for reported earnings for 2009 is now down to $28. That puts the P/E for the S&P 500 at 30.
He also projects "operating" earnings to be $55 for 2010. Applying a classic recession trough multiple of 12x against a forward EPS estimate of $55 would imply an ultimate low of 666 on the S&P 500, likely by October.
That is a 20% drop from today's close of 829. That is not what you will hear from "sell-side" managers who want you to invest in their mutual funds and long-only management programs.
40% of the earnings for the S&P 500 are from outside the US. It is hard to see how those earnings are not going to be deeply affected.
Continue reading - Download a copy of this article by clicking on the file link below.
Are Firemen Ready? A European Crises - 15 Feb 2009
European banks are at significant risk. Eastern Europe has borrowed an estimated $1.7 trillion, primarily from Western European banks. And much of Eastern Europe is already in a deep recession bordering on depression. A great deal of that $1.7 trillion is at risk, especially the portion that is in Swiss francs.
It is a story that could easily be as big as the US subprime problem.
In Poland, as an example, 60% of mortgages are in Swiss francs. When times are good and currencies are stable, it is nice to have a low-interest Swiss mortgage. And as a requirement for joining the euro currency union, Poland has been required to keep its currency stable against the euro. This gave borrowers comfort that they could borrow at low interest in francs or euros, rather than at much higher local rates.
Can you sense an echo of teaser-rate subprimes here?? Along with the synchronized global recession and large Polish current-account trade deficits, which were three times those of the US in terms of GDP, just to give us some perspective? Of course, if you are not a reserve currency this is going to bring some pressure to bear. And it did. The Polish zloty has basically dropped in half compared to the Swiss franc.
That means for a mortgage holder, the house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe.
Austrian banks have lent $289 billion (230 billion euros) to Eastern Europe. That is 70% of Austrian GDP. Much of it is in Swiss francs they borrowed from Swiss banks. Even a 10% impairment (highly optimistic) would bankrupt the Austrian financial system, says the Austrian finance minister, Joseph Proll.
Continue reading - Download a copy of this article by clicking on the file link below.
MSM Blues – HOW, WHY & WHAT NEXT 2009
MSM decline to begin with was mainly due to a triple whammy of:
1. Liquidity drying up by changes in the reserve requirement CBO ( rightly so to check inflation) which in some estimates suggested that around US $ 500 million was removed from the lending system;
2. Redemption calls by foreign investors which triggered sales by Foreign Institutional Investors in the local bourses.
3. Capitulation in inter bank lending transpired into drying up of local banks financing from foreign banks ($ financing). This was mitigated by local banks by offering attractive deposit rates to lure local investors. Offer of fixed and certain income was to tempting for investors to resist resulting in a switch from uncertain equity returns to certain fixed deposit income.
All the above occurred during the period between June, July & August which traditionally is a holiday period and when most of the local investors are on vacations which meant that local support or buying to an extent was curtailed.
MSM was also affected by Regional Events:
1. first with the real estate market and valuations and corruptions news:
2. and later with some of the regional banks being found to have been exposed to some toxic assets internationally.
Continue reading - Download a copy of this article by clicking on the file link below.
