Many in the market are expecting that the Federal Reserve will make another rate cut as a reflection of the deteriorating state of the US economy. In a desperate attempt to save an economy in crisis, it is expected that this cut could be as large as 50 to 200 basis points. Although, it is more likely it will be around the 50 - 75 basis points mark.
There is a general feeling with some market watchers that the Fed may take an aggressive approach and shock the economy into action. As President Bush declared, “we’re in challenging times”.
Mark Zandi, a chief economist at Moody’s Economy.com also states that: “The Fed is on high alert — something you don’t see but once every quarter century; maybe, in this case since the Great Depression. This is a very unusual period.”
At the moment, the Fed is fighting multiple battles at once, a housing collapse, a severe credit crunch and a wall street turmoil which feeds on each other creating a vicious circle that may be hard for the Fed to break.
This may not be the end of it - if it does help the economy, it may only be temporary and a rate cut may not be enough to get the economy back on track.
Bear Sterns is a company that was trading at around $170 in February last year is now to be overtaken by JP Morgan at just $2 a share.
The Federal Reserve’s attempt to induce cash in to struggling companies and to avert a financial slowdown did not do much good for Bear Sterns as investors are still and customers still drove the price of Bear Sterns down after the cash infusion was announce.
At the moment, the whole market is not only very cautious but also very volatile.
It will be a matter of the smartest and the less debt ridden company will win in the end.
It is not surprising that the current market is very volatile. Wherever you are, it seems that as soon as you mention the word “debt”, investors and “moms and dads” seems to hide under covers.
One of the current area that is affected mainly is the banking sector. At the moment, let us focus on the Australian Banks in particular.
Whilst margins face an enormous pressure, Australian banks have also benefited from stronger asset growth given the shift towards business growth from the household mortgage sector. However, earnings stress continue because of higher wholesale funding costs, weaker wealth management income and higher impairment costs. Until, the banks can minimise or greatly reduce these costs - Australian banks in particular will get little support from investors.
The US Federal Reserve - struggling to maintain a confidence crisis in the economy, will for the “first time” lend treasuries in exchange for debt that includes mortgage backed securities. They intended to inject up to $200B to increase liquidity in the financial markets and help relieve the pain in credit markets.
Overnight the Australian futures gained up to 175.3 points and the Japanese futures increased around 315 points.
Technical Analysis on Australian Banks:
Let us now look at some technical analysis on the major Australian banks.
Looking at the 10 year chart overview of ANZ bank (ASX: ANZ), it is currently sitting at around $19.67. As a matter of fact, as of this writing - it is sitting at around $20.67. It has bounced back up from the support line at $19.67 and may hover around $20.67 and the resistance level at $23.59.
The next chart shows the 10 year chart overview for Commonwealth Bank (ASX: CBA) as of the 12th March 2008. It is currently sitting at $39.45 and as of this writing is now at $39.75. The latest news from the US may help it fill the gap at $41.45 and if it closes this gap and continue higher, it may consolidate around this price up to $45.00.
The next chart shows the 10 year overview for Macquarie Group (ASX: MQG) as of the 12th March 2008. This is a stock that has been beaten badly due to the global credit crisis. It had reached to around $100 in May 2007 and is now sitting less than 50% at around $44.46. As of this writing, it is currently at $46.99. There is a gap at around $53.59 and it may try to close this gap. Should this occur and go higher, it may consolidate around this price to around $60.00.
This chart shows the overview of National Australia Bank (ASX: NAB) over ten years as of today the 12th March 2008. NAB is currently sitting at around $26.10 and has matched its August 2004 low. As of this writing, it is currently sitting at $27.06. The latest increase in stockmarket activity, may help it trade around $28.00 to $28.50 mark.
This chart shows the 10 year overview of Westpac Banking Corporation (ASX: WBC) as of today the 12th March 2008. It nearly hit its support line at $20.11 and decided to go higher. As of this writing, it is currently sitting at around $21.83. the last candle showing a strong buying signal. The strong buying signal may help it go higher but watch out for the resistance line at $23.37, which also matched its August 2007 low.
It would be interesting to find out what happens especially after the US Federal Reserve’s statement on the injection of up to $200B in the economy to increase the financial liquidity and ease the global credit markets.
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The US Federal Reserve, who is struggling to contain economic confidence in the credit markets will for the “first time” lend treasuries in exchange for debt that includes mortgage backed securities.
In a statement made in Washington, the Federal Reserve, plans to make up to $200B available through weekly auctions. On conditions of anonymity, some officials said that this amount may also be increased - as needed.
The Fed also coordinated the effort with Europe and Canada who also plans to inject up to $45B into their banking systems.
US stocks rallied on optimism that this action will help relieve the condition in the credit markets. As of this writing, the Dow increased 261.90 from previous days closing.
In effect, this shows the Fed’s continuing concern in the credit markets and it is doing as much as it can to help increase liquidity in the financial markets and help relieve some pain in the US mortgage securities.
Terms
The Fed said it will lend Treasuries for 28 day periods in return for debt which includes AAA rated mortgage backed securities sold by Fannie Mae, Freddie Mac (two of the major US mortgage securities firm) and by other banks. It will be held under a new program called, the Term Securities Lending Facility, to so called primary dealers and to the main banks and securities firms that trades directly with the central bank.
This would allow dealers to switch debt that is less liquid for US government securities that are easily tradable. Officials said that asset values will be discounted in exchange for treasuries, though the details are still under construction.
Other Central Banks
In line with the US Federal Reserve, the European Central Bank (ECB) will lend up to $15B for 28 days. The Bank of England will offer $20B three month loans March 18 and hold another auction April 18. The Bank of Canada plans to purchase $4B of securities for 28 days.
The Fed will not make outright purchases for mortgage securities as buying it directly would affect prices.
In laymans terms:
This means that with US Federal Reserve injecting up to $200B with the intention to increase as needed, the ECB injecting up to $15B for 28 days, the Bank of England offering three-month loans and the Bank of Canada who intends to purchase $4B of securities for 28 days - would help increase liquidity and maintain global economic growth.
This has already created a rally in the US markets and Europe. Overnight the Australian index futures increased around 175.3 points and the Japanese futures increased about 315 points.
This may be really good short-term but long-term is it really good for the local and global economy?
In the next post, I will talk about where the Australian banks are at the moment.
The S&P 500 retreats again to it’s lowest level to 1,292.3 since August 2006. This was mainly driven by an all time high in US mortgage foreclosures and the biggest drop in jobs data in five years added to signs of economic weakness.
Here’s what the technical analysis on the S&P looked like last Friday:
On this chart it shows that the S&P have just broken the support line and have just finished the day under at the new “resistance”line at 1,309.5. It will be interesting to see if theS&P will test this previous support line and test last January’s low at 1,253.8.
Have a look at last Friday’s chart for the Nasdaq:
This shows a 10 year chart overview of the Nasdaq 100. It shows the previous top of 2002 and 2006 resistance levels and on a closer look (below), it shows that it is on the current levels and hovering around the support line of 1,706.
The Nasdaq is also hovering on the bear flag formation of 1,706 support level. This chart also shows a “double top” around the December 2007 and early January 2008 level.
**For the new readers, a double top is a major reversal pattern that forms after an extended uptrend. As the name implies it consists of two consecutive highs that is almost equal and some troughs in between.
City Pacific one of Australia’s largest non bank loan providers has been placed in a trading halt after their shares have lost half of their value and is on watch whether they are able to repay the $240M loan due to CBA by the end of March.
According to News.com.au CBA have been talking to City Pacific since December about the repayment of the $240M loan facility. Of this $240M loan, $90M had to be paid by the end of March and the remaining $149.9M due at the end of April. Apart from that, they have another $100K due at the end of May and another $49M to be paid for the purchase of Mariners Cove (located in Southport, Queensland).
The latest news have prompted fears in the market and have joined the ranks of MFS, Centro and RAMS Home Loans - all companies which deals in short term financing.
On City Pacific’s website, it shows that they “have $5B in mortgage assets under advice, comprising over $1B Funds Under Management, a residential loan book of $3B and commercial mortgage assets under management of approximately $1B”.
Their trading halt is approximately due to resume by tomorrow (Thursday 05th Mar 08). It would be interesting to see what happens after this and what their response to the ASX query would be.
There just doesn’t seem to be an end to this subprime mess. I remember a year ago and hardly anyone really knew what it was and what it could do. Nobody saw it as a threat. Nowadays, the thought of subprime make investors head for cover. Like a disease it has spread out and/or it has affected companies not just in the US but also in a global scale (in some way shape or form).
The US Federal Reserve chairman have been battling these credit issues by cutting interest rates. At the same token, it is increasing inflation. So, in order to combat inflation they need to raise their interest rates. Now this is where inflation and rates makes it a double edged sword. The Federal Reserve has to make a decision whether:
- Do they want to fight inflation?
In order to do that, you have to increase the interest rates. If you increase the interest rates, this will put a lot more of home owners, property speculators and (overstretched) investors into foreclosure - driving the economy to a much slower growth >> which decreases demand for goods and services >> and eventually will increase unemployment and increase the cost of living. In the short run, it may not be good for the economy. Not good at all.
However, in the long run - increasing the cost of living would decrease the spending on luxury goods and therefore, would increase the chances for household(s) to save - and save for their future. In the long run, the economy will eventually come back to equilibrium.
- On the other hand, does the Federal Reserve want to keep interest rates low?
By keeping the interest rates low, it is saving some homeowners who were lent money and overstretched themselves on their mortgages. However, keeping interest rates low will just speed up the process of inflation. As some people may find that goods and services are cheap - they end up spending more. As they buy more, it increases demand on goods and services and at the same time it decreases the supply. Hence, prices rise and creates inflation.
Additionally, lowering interest rates drives the value of the US dollar down. Capital and investment tends to flow towards countries with higher yielding currencies. As US exports get cheaper the imports gets expensive for America. This creates a flow on effect on other countries. As imports value increases, it creates a slowdown in demand for imports and slows down production (in exporting countries) for goods and services. Considerably, US is the number one consumer in the world and this will have a huge (if not - it’s already happening) effect on other countries.
There are a whole lot of other things that makes this whole subprime issue a big mess. Lately, the Fed Chairman Ben Bernanke has hinted at another rate cut this month. Let’s see what happens. This will be some interesting times.
I hope this gives you some light on economics. Until then, stay tuned for more posts on subprime… Enjoy your day!
Billionaire investor Warren Buffett, has once again beat the odds in Wall Street. Where most investors are hiding for cover and selling their positions, he is quietly buying up the companies that he believes will stand the test of time.
The Omaha conglomerate - Berkshire Hathaway run by Warren Buffett said the 2007 reports returned a “per share” book value of 11% from the previous year. Berkshire Hathaway has been averaging a 21.1% rate compounded annually since 1964. As an aside a $1,000 invested in 1964 compounded annually at 21.1% rate would be equivalent to $3,760,089.26 in 2007.
So, how does he do it?
Warren researches the financial reports and statements of companies that he’s interested in buying. He lives and breathes financial reports. It was said that he doesn’t care about what the market does as he is interested in the long term and not the short term. When he invests he always sees what the future value of his money is than what it is valued today. So much so, that he often hangs on to his investment - Warren knows that if the business is good and it makes business sense he never ever sells the stock.
There are many other reasons why Warren Buffet doesn’t want to sell his holdings, especially if it makes business sense to do so… but that will have to be for another post.
