UPDATE

if you have been watching CNBC or Bloomberg for the past month, you probably have heard from 9 out of 10 guests on show saying this is a great time to buy into stocks and you will come out a winner 3-5 years down the road. should so many funds be buying into the market assuming these guests do what they say then why isnt dj rallying. they probably are lying or are sitting on the sidelines watching while preaching [dont do what i do, do as i say].

the market is telling you a different story, funds go straight into t-bonds [read earlier post on tbond yield in this blog] and the dj is going nowhere even after the rate cut of 75 basis points by the fed although it did rally a few hundred points to touch 9000 but didnt manage to stay there.

wall street journal had an article about synthetic cdo that said so many town councils round the world and pension funds are involved in synthetic cdos that any serial bankruptcies of companies listed in the cdos will lead to even more credit crunch for the global economy. there are also mbs on alt A loans [arm - adjustable rate mortgages] that have to reset interest rates in 2009/10 which could accelerate foreclosures of real estate. there are also prime mbs and conventional loans on the banks' balance sheet that will hit the wall if the tbond yield is any guide to bankruptcies.

china is also seeing its foreign reserves contracting. this is the reverse of what happens when its foreign reserves expand which add to the yuan money supply. the shrinkage of such reserves indicate a contraction of yuan money supply which will balance out the effects of any stimulus if the contraction is serious and could be an obstacle to its plan to stimulate the economy.

you have been told what will happen, prepare yourself and see how the final outcome will pan out shortly.

HSBC

This is the most favored bank and listed company here in HK and probably UK/USA for the past year or two since the subprime problems surfaced. But no more illusion should be placed on this bank for the future, why?

A number of factors have changed and its management had been slow in reacting to the current environment, here below are the facts:

• blanket deposit protection in HK - this raises cost of funds as depositors switch to higher rates at smaller banks;
• capital injection by UK authorities - it is one of the few banks that refused to accept capital from the UK govt, depositors may choose a govt sponsored bank over a totally independent one given the seriousness of the current crisis;
  
• fund raising - missed the opportunity to raise funds though a few UK banks raised capital with the current rally;
• faced downgrades on its outlook and possibly its debt as well;
• economies of the key regions where it operates deteriorate sharply which means heavy loan loss provisions on the loans or investments it made are on the horizon when it reports results for Dec08 and Mar09.
• limited avenue for new revenue - the contribution from retail wealth management sector has all but disappeared, now it has to rely on the bread and butter of interest spreads on conventional loans and the fees or interest it charged on below min balances. Given the zero interest rates environment, there is not a lot to earn even from interbank markets.
  

HSBC got herself in a quagmire after current price declines as the costs of raising capital have skyrocketed - capital raised at a lower price will have a more dilutive effect on current shareholders and even more so with the dividend. Any cut in dividend will drive its price even lower so it becomes a vicious circle. If you cut dividend before a rights issue, the dilution becomes even more severe. If you raise capital and do not cut dividend then the cash drain is huge. If you do both at the same time, then the impact is devastating. Look at Standard Chartered, the rights issue price is a discount of 40%+ of the current price before announcement.

HSBC may not have to use such deep discount as enticement for her shareholders, but its future price may be a total disappointment for her fans.

T Bond Yield and the rest

30 year tbond yield dropped below 3% for the first time. this indicates that it is forecasting deflation ahead, whether the recent fed intervention of targeting almost zero for short term rates [0-0.25%] can starve off the deflation is still unknown.

stocks are definitely in a rebound mood for the xmas season, next year may not be so lucky.

what does less than 3% yield mean? it probably forecast the following:

1. a wave of bankruptcies in the year ahead or more;
2. no inflation but deflation setting in - more price declines in commodities including maybe gold;
3. even oil can get much lower than range bound 40-50 if the unemployment is serious;
4. more assets deflation;
5. more fund redemptions pushing stocks even lower;
6. as unemployment rises, foreclosures closely follow, this will lead to
   
7. more equity funding required for financials when losses mount on their risk portfolio of asset backed securities as valuations decline as well as hits to traditional portfolio of mortgages; credit card and unsecured consumer loans not to mention commercial loan defaults due to more bankruptcies of corporations.
   
8. the 3 motor car companies have to shed quite some staff and benefits to break even, in my opinion a cost cutting of 30% or more is required as sales slow.
   

i forecasted zero interest rates policy earlier in my blog that many central banks will, even reluctantly, have to pursue. the current spike in foreign currency exch rates against the usd will put even more pressure on other central banks to follow suit since a rising currency will impede exports, industry of which is already in a fragile state for countries such as uk, italy, germany, china, korea etc.

so brace yourself for a really really tough ride in 2009 and sell most of your stocks into this sucker rally.

UPDATE

The twin w of tse and hsi bottom formation did not materialize, instead hsi formed a double top around 15300 neckline 13200, it will likely hit 11100.

After the state of flux in oct, a lot of the over extended funds have liquidated their positions, the final third leg may take much longer to wind down - likely 6-9 months since the second leg took only three plus months to fall from 23000 to 10600.

gm is the lever that may trigger the next wave of selling [if it files for chapter 11] or any sharp rise of the market once a bailout plan is in shape even it might not have been announced to the public

commodity based currencies such as aud [0.626], nzd [0.543] and cad [1.26] are near their near term lows which indicates a deeper recession, thus dj has the possibiltiy to fall to 6000 depending on how things and data pan out.

TSX N HSI

some readers have asked me to add more canadian contents.

as canada is a small country population wise with a large area, the spread of info on the net is not as easy to locate. readers who have more info such as websites or key indices can comment via the comments icon at the bottom of each blog article so i can broaden the coverage.

tsx
hopefully if it climbs above 10400 and stay above it, it will at least achieve 12300 with resistance at 11900.

hsi
hang seng has a similar pattern trying to form a w bottom neckline around 15300 and achieving min 20000 with resistance around 17000. the qualifying criteria is a high volume pushing the index through 15600 and stay above it.

Country/regions Update and others

USA
After election victory, obama should concentrate in the following areas:

• fiscal stimulus of the magnitude 1-3% of gdp for 2009 and maybe 2010 as well
  
• saving the auto industry from total collapse but avoiding bailouts which are costly to taxpayers, the industry must consolidate and uaw must give in to lower benefits and job protection
• all banks receiving govt support must not spend extravagantly or pay bonuses more than 1-2 years salary and that other employees must also be paid bonuses before management got paid so consumer confidence can rise early in the recovery to boost spending
  
• implement some form of universal health care
• cut wasteful govt spending such as support for farmers or biofuel mandate
• raise some form of duty on gasoline as crude prices fall to conserve oil reserves both locally and overseas
• retreat from iraq to cut military expenditure thus reducing govt deficits to free up resources for other areas.
  

CHINA
The fallout will be bigger than most thought as her citizens are not familiar with capitalist style crashes, many are trying to avoid facing the ultimate consequences by unconventional tactics such as property owners not paying mortgages and arguing that promises made by developers on prospectuses are not met. Most consumers in developed regions know the bank and developer are not one party and any action against one will not have effect on the other, but such consumer behavior hurt banks along the way.
The export sector which comprises many manufacturing concerns had already been hit by slow or reduced orders from us and europe, it will have repercussions throughout the service sector such as logistics, restaurants and leisure industry, banking, insurance etc.
Meeting the min 8% growth next year will be difficult.

EUROPE
UK is the hardest hit followed by a number of countries such as spain and italy. the ecb simply has maintained interest rates way too high for too long and it may get into a deflation spiral.

JAPAN
It may have the safest currency for the moment, but its aging demographics will push it into an everlasting zero or negative growth for a long long while if it does not allow immigration into the country which will boost consumer spending and property demand.

Expect zero interest rates policy by key central banks to fend off depression which inevitably will lead to higher inflation not too soon into the future.

One bright spot that may come is HSI which may climb as high as 20000 if it forms a w bottom with neckline around 15300.

CITIC

The biggest debacle in town.

Many of you would like to know in detail the AUD deal that begins the demise of CITIC PACIFIC - a blue chip company here in HK.

Read the announcement below without the proper indentation as it is extracted from the PDF file:

PROFIT WARNING

This announcement is made by CITIC Pacific Limited pursuant to Rule 13.09 of the Listing Rules.

The Board informs Shareholders and potential investors that:

(1) the Company’s results for the financial year ending 31 December 2008 are expected to be affected by a loss arising from certain leveraged foreign exchange contracts entered into by the Group with a view to minimizing currency exposure of the Company’s iron ore mining project in Australia; and

(2) the liquidity of the Company will be strengthened by CITIC Group, a state owned company in Beijing holding 29% of the Company’s Shares, agreeing to coordinate to arrange a standby loan facility of USD1.5 billion.

Shareholders of the Company and investors should exercise caution when dealing in the Shares of the Company.

At the request of the Company, trading in the Shares of the Company was suspended with effect from 9:30 a.m. on 20 October 2008 pending the release of this announcement. An application has been made by the Company to the Stock Exchange for resumption of trading in the Shares of the Company with effect from 9:30 a.m. on 21 October 2008.

INTRODUCTION

This announcement is made by the Company pursuant to Rule 13.09 of the Listing Rules.

The Board wishes to inform Shareholders and potential investors that:

(1) with a view to minimizing the currency exposure of the iron ore mining project in the Western Australia, the Group entered into various leveraged foreign exchange contracts, including target redemption forward contracts, to obtain AUD and EUR. In addition, with a view to minimizing the currency exposure of Group’s projects (including the iron ore mining project) to fluctuations in RMB, the Group entered into RMB target redemption forward contracts; and
(2) the liquidity of the Company will be strengthened by CITIC Group, a state owned company in Beijing holding 29% of the Company’s Shares, agreeing to coordinate to arrange a standby loan facility of USD 1.5 billion.

THE LEVERAGED FOREIGN EXCHANGE CONTRACTS

The Group has outstanding AUD target redemption forward contracts and daily accrual contracts for AUD. Under the AUD target redemption forward contracts and the daily accrual contracts for AUD, the Group will receive AUD against delivery of USD. The contracts are linked to the AUD : USD exchange rate. The maximum deliverable amount to the Group under all AUD target redemption forward contracts is AUD9.05 billion and is deliverable in monthly instalments up to October 2010. The maximum deliverable amount under the daily accrual contracts for AUD is AUD103.3 million and is deliverable in monthly instalments up to September 2009. The outstanding AUD leveraged foreign exchange contracts have a weighted average strike price of AUD : USD0.87. The remaining maximum aggregate profit under the outstanding AUD target redemption forward contracts is USD51.5 million. Each AUD target redemption forward contract will be knocked out (i.e. the obligation to deliver outstanding AUD instalments to the Group will automatically cease) when the stipulated maximum profit is reached for that contract (which ranges from USD1.5 million to USD7 million).

However, there is no similar knock-out feature for losses.

The Group has outstanding dual currency target redemption forward contracts. Under the dual currency target redemption forward contracts, the Group will receive the weaker of AUD or EUR. The contracts are linked to the EUR : USD and AUD : USD exchange rates. The maximum deliverable amount to the Group under the dual currency target redemption forward contracts is AUD290.7 million or EUR160.4 million and is deliverable in monthly instalments up to July 2010. The outstanding dual currency target redemption forward contracts assuming AUD is the weaker currency have a weighted average strike price of AUD : USD0.87. The outstanding dual currency target redemption forward contracts assuming EUR is the weaker currency have a weighted average strike price of EUR : USD1.44. The remaining maximum aggregate profit under the outstanding dual currency target redemption forward contracts is USD2 million. Each dual currency target redemption forward contract will be knocked out (i.e. the obligation to deliver the outstanding currency to the Group will automatically cease) when the stipulated maximum profit is reached for that contract (which ranges from USD0.8 million to USD1.4 million). However, there is no similar
knock-out feature for losses.

The Group has outstanding RMB target redemption forward contracts. The RMB target redemption forward contracts are settled in USD by reference to the gains or losses against certain predetermined USD : RMB exchange rates and calculated by reference to a notional RMB amount per month. No physical delivery of RMB takes place.

Monthly net settlement under the RMB target redemption forward contracts is to be made up to July 2010. The maximum notional amount under the RMB target redemption forward contracts is RMB10.4 billion. The amount payable in USD (which is the maximum actual exposure of the Group bearing in mind no physical delivery of RMB takes place) is calculated to be not more than USD42.8 million based on an exchange rate of USD : RMB6.84 as at the Latest Practicable Date. The outstanding RMB target redemption forward contracts have a weighted average strike price of USD : RMB6.59. The remaining maximum aggregate profit under the outstanding RMB target redemption forward contracts is RMB7.3 million. Each RMB target redemption forward contract will be knocked out (i.e. the obligation to pay any USD under the RMB target redemption forward contracts will automatically cease) when the stipulated maximum profit to the Company is reached for that contract (which ranges from RMB2.4 million to RMB3.8 million). However, there is no similar knock-out feature for losses.

The Board confirms that to the best of its knowledge and belief after having made all due and careful enquiries, save as disclosed in this announcement and plain vanilla foreign exchange contracts (including simple buy and sell foreign exchange contracts), there are no other foreign exchange derivative products in AUD, EUR, RMB or any other currency entered into by the Group.

Accounting treatment for the outstanding Leveraged Foreign Exchange Contracts

The Leveraged Foreign Exchange Contracts are foreign exchange contracts which do not qualify for hedge accounting. Accordingly the contracts are marked to market at the end of each financial period and the Company will have profit and loss exposure for

(i) foreign exchange movements in these contracts,

(ii) their termination and

(iii) accepting delivery of currencies under such contracts.

Realized loss and mark to market loss

Since becoming aware of the exposure arising from these contracts on 7 September 2008, the Company has terminated some of the then outstanding leveraged foreign exchange contracts at a loss of HK$626.6 million. In addition, the Company has bought and sold AUD foreign exchange forwards to manage its exposure on AUD which resulted in a loss of HK$128.6 million. CITIC HK agreed on 8 September 2008 to share one half of the loss arising from various contracts entered into by the Group between 8 September 2008 and 13 October 2008 only to buy and sell AUD foreign exchange forwards to manage the Group’s exposure to AUD and accordingly CITIC HK has borne a total loss of HK$64.3 million.

In addition, during the period from 1st July, 2008 to the Latest Practicable Date, the Company has taken delivery of AUD308.7 million and EUR42.3 million from

leveraged foreign exchange contracts and performed monthly net settlement in respect of its RMB target redemption forward contracts. The total realized loss incurred from taking delivery of such currencies and net settling the RMB target redemption forward contracts is HK$110.8 million. The Company has also incurred a loss of HK$6 million from selling AUD94.5 million delivered in such period. Accordingly, for the period between 1st July, 2008 to the Latest Practicable Date, an aggregate loss of HK$807.7 million was therefore incurred by the Group (“Realized Loss”) as a result from the above actions. The Realized Loss is non-recurring in nature.

While historically, such losses would have been non-recurring in nature, given the current large open position, it is likely that such losses will become recurring in nature until the excess position is closed out. The termination of the outstanding target redemption forward contracts and daily accrual contracts and the fixing or the taking of deliveries of currencies under such contracts prior to year end may affect the realized loss for the year ending 31 December 2008.

The Group’s result for the financial year ending 31 December 2008 is expected to be affected by the Realized Loss and the mark to market loss using rates on 31 December 2008.

Based on the valuations received on the Latest Practicable Date from the relevant counterparties to the outstanding Leveraged Foreign Exchange Contracts and (a) an exchange rate of AUD : USD0.70; (b) an exchange rate of EUR : USD1.35; (c) an exchange rate of USD : RMB6.84, all as of 10:00 a.m. on the Latest Practicable Date in Hong Kong, the mark to market loss of the outstanding Leveraged Foreign Exchange Contracts is HK$14.7 billion (the “Mark to Market Loss”). The amount of the mark to market loss as at 31 December 2008 will be driven by a number of factors including, among other things, termination of any of the Leveraged Foreign Exchange Contracts, interim fixing and delivery of foreign currencies, changes in the exchange rate, volatility of the currency market, interest rate differential, market liquidity, bid and offer spread and may not be the same as the Mark to Market Loss.

Intentions in relation to the Leveraged Foreign Exchange Contracts

The iron ore project of the Group has a current estimated AUD requirement of AUD1.6 billion for its capital expenditure up to 2010. In addition, it is estimated that the project (which is anticipated to be 25 years) will require at least AUD1 billion for its operating expenditure for each of its full operational years. The total maximum amount deliverable in AUD under the outstanding AUD target redemption forward contracts, daily accrual contracts for AUD and under the dual currency target redemption forward contracts (assuming AUD is the weaker currency) is AUD9.44 billion. Given the AUD needs of the Group, the Group may restructure some of these contracts to provide for longer settlement terms in line with such needs. Accordingly the Group will monitor these positions carefully and terminate contracts and/or restructure contracts and/or take delivery of the AUD as required, in order to mitigate any losses to the Group.

The iron ore project of the Group has a current estimated EUR requirement of EUR85 million for its capital expenditure. The total maximum amount deliverable in EUR under the dual currency target redemption forward contracts (assuming EUR is the weaker currency) is EUR160.4 million. Accordingly the Group will monitor these positions carefully and terminate contracts and/or restructure contracts and/or take delivery of the EUR as required, in order to mitigate any losses to the Group.

The Group does not intend to terminate the RMB target redemption forward contracts.

The total estimated RMB requirements of the Group are approximately RMB10 billion.

CITIC GROUP SUPPORT

CITIC Group, a state owned company in Beijing holding 29% of the Company, has indicated its full support as always to the Company. CITIC Group has agreed to coordinate to arrange a standby loan facility of USD1.5 billion in order to strengthen the liquidity of the Company on normal commercial terms as to interest and security.

PERSONNEL CHANGES

Because of the currency exposure described above, Mr. Leslie Chang Li Hsien, the Group Finance Director and Mr. Chau Chi Yin, the Group Financial Controller, have resigned as Directors with effect from 20 October 2008. Both Mr. Chang and Mr. Chau confirm that they have no disagreement with the Board and there is no matter relating to their resignation that will need to be brought to the attention of the shareholders of the Company.

Mr. Vernon Francis Moore, a Director since 1990, has been appointed as the Group Finance Director on 20 October 2008 responsible for the Group’s finance and internal control. Mr. Moore will also act as the Company’s qualified accountant under the Listing Rules.

GENERAL

The Board believes that the principal business activities of the Group will not be

affected. In addition to the CITIC Group support referred to above, the Group has

substantial long term finance in place for its capital requirements.

Shareholders of the Company and investors should exercise caution when dealing in the Shares of the Company.

7

At the request of the Company, trading in the Shares of the Company was suspended

with effect from 9:30 a.m. on 20 October 2008 pending the release of this

announcement. An application has been made by the Company to the Stock Exchange

for resumption of trading in the Shares of the Company with effect from 9:30 a.m. on 21 October 2008.

DEFINITIONS

In this announcement, unless the context otherwise requires, the following terms have the following meanings:

“AUD” Australian dollars, the lawful currency of Australia

“Board” the board of Directors

“the Company”

CITIC Pacific Limited 中信泰富有限公司, a company incorporated in Hong Kong with limited liability, the Shares of which are listed on the Stock Exchange

“CITIC Group” CITIC Group 中國中信集團公司, a state-owned enterprise

established under the laws of the PRC and the 100% holding company of CITIC HK, the single largest shareholder of the Company holding as at the Latest Practicable Date 29% of the issued Shares

“CITIC HK” CITIC Hong Kong (Holdings) Limited 中信(香港集團)有 限公司, a wholly owned subsidiary of CITIC Group

“Director(s)” the director(s) of the Company

“EUR” Euros, the lawful currency of those member states of the European Union that have adopted such currency

“Group” the Company and its subsidiaries (as defined under the

Listing Rules)

“HK$” Hong Kong dollars, the lawful currency of Hong Kong

“Hong Kong” the Hong Kong Special Administrative Region of the PRC

“Latest Practicable Date” 17 October 2008, being the latest practicable date prior to the date of this announcement for the purpose of ascertaining certain information contained in this announcement

8

“Leveraged Foreign Exchange Contracts” collectively, the outstanding AUD target redemption forward contracts and daily accrual contracts for AUD, the

outstanding dual currency target redemption forward contracts and the outstanding RMB target redemption forward contracts entered into by the Group

“Listing Rules” the Rules Governing the Listing of Securities on the Stock

Exchange

“PRC” the People’s Republic of China

“Realized Loss” the aggregate realized loss of HK$807.7 million incurred by

the Group as at the Latest Practicable Date

“RMB” Renminbi, the lawful currency of PRC

“Shares” ordinary shares of HK$0.40 each in the capital of the Company

“Shareholders” holders of the Shares

“Stock Exchange” The Stock Exchange of Hong Kong Limited

“USD” United States dollars, the lawful currency of the United States

By Order of the Board

CITIC Pacific Limited

Stella Chan Chui Sheung

Company Secretary

Hong Kong, 20 October 2008
The url link
http://www.citicpacific.com/upload/en/20081020-2e.pdf

DJ

Look at this chart, DJ has just fallen 600 point plus and is about or almost surely breaking out to the south of the trendline from the early 90s, it has already broken out a second trend line [from 1994] to the south which makes it very bad.

The lingering support now is 7500.

Hopefully it is not all gloom and doom as the moving averages [in mths] of 10, 20, 50 pointed to a very sharp rebound once it hits a short term low, check the ma on this chart between the years from mid 99 to about 2002 for a similar pattern which might resurface in this downfall, but dont forget that DJ will retry and hit new lows after the sharp rally.

When will this end? It is anybody's guess, but there are clues:

• an exhaustive volume of 2-3 times the 3mth average couple with a sharp fall of at least 500 points or more;
• a spike in LIBOR causing a panic selloff and then rates started to level off and trend lower; without rates trending lower, the fall will continue as it indicates trust is still to be found between FIs or between depositors/FIs.
  
• at least after the year end as banks are scrambling now to get funds ready for year end reporting and write offs;
• a gm/ford filing for chapter 11 bankruptcy, 6-9 months after it the recession may come to a close

The sequence of materialization is not known, 1 and 2 might happen simultaneously or in sequence, any three of the above happening in sequence or simultaneously might hit at least a short term low limiting further fallout for a while.

Further Upheavals

Latest incidents on the credit crunch involve:

• Iceland backing up one of its largest bank - leading to the official currency plunged more than 10% in the past few days;
• Ireland guaranteeing all depositors of her six largest banks;
• Greece also guaranteeing all depositors of her banks leading to big rows with UK & France that this may become predatory practice that will hurt their banks if customers transfer deposits out of British and French system to Greek banks;
• California and Florida state govts unable to raise funds;
• the fixing by Germany's finance ministry to get 35b euro funding [27b govt, 8b from private banks] to HYPO was rejected by the private banks;
• further liquidity problems at Fortis

Europe is heading into financial catastrophe as there are just too many countries involved with no clear cross border recovery plan(s).

Expect both Europe and US central banks to cut interest rates further, even between target meeting dates, to help bolster their banks and stablize the financial sector. Will such cuts help, only if trust between FIs and between depositors/FIs come back.

LB-BK-MA, PDE & FORWARD THINKING

LB-BK-MA
What do you recognize from the symbols above?

Well, this represents the relationship on some of the products

• sold by banks in HK, which are supervised by the Monetary Authority,
• but issued by Lehman Bros or guaranteed by it.

Some of these products don't even mention LB and it had been marketed like high grade bonds, but they are like CDOs or investments in SIV. HSBC had to take on board its balance sheet two SIV when it knows they will fail so as not to let down investors of the two, then why would banks be marketing these products?

There is a lot of victims who have invested knowingly or unknowingly of the risks involved in these packaged products now that LB is bankrupt, therefore we are seeing a lot of grievances from these depositors [now named as investors]. Finger pointing on whose responsibility should it be for such high risk investments as the subprime crisis had been known since early 2007.

We heard a lot of arguments in the media or from the government but without real common sense.

I must emphasize here that this is linked to the next section which you, after reading, would have no more illusion on whose responsibilty it is.

PDE & FORWARD THINKING
You heard of PDF, but what is PDE - PayDayExecutive.

We have too many PDEs at our government as the only thing they look forward is their payday. The reason - because their pay is exorbitant and their post loaded with perks. In many developed countries [we are a very developed city], compensation for political appointments are minimal, just look at Fed chairman's pay vs our head at HKMA, any head of state's pay in Europe. Here in HK, political appointees have pay well in excess of what they are receiving in the private sector before joining the government though a few who are linked to their family business may be paid above their compensation in govt and only a rare few does have compensation above their govt pay.

You can imagine that every day passed by means payday is one day nearer, thus the pressure to think forward on policies benefiting the public is not high on their agenda as their positions bring in not only excessive pay but also unlimited perks like vip channel at the airport, travel by limo with chauffeur, entertainment budget, personal assitants and secretary etc

CONCLUSION
There is no doubt that HKMA should be highly responsible as the memorandum between SFC and HKMA earlier segregates the responsibility of SFC/HKMA that SFC is not responsible to monitor products sold by banks since HKMA would then be responsible. With these Lehman products, did HKMA warn the banks of their responsibilty when selling these products? Probably yes, but the monitoring is not adequate since the subprime crisis surfaces long ago. They have let greedy i-banks packaged low grade products to sell to the HK public. Common sense has been ignored in its supervision.

Did they ever ask a question or issue a guideline like this? - Sell/market only products you are willing to lend a loan with these products as collateral without recourse for low risk profile customers.

SOLUTION - HKMA should pursue legally against these banks on their sales tactics and misrepresentations on behalf of those whose investment behavior in the past have been mainly bank deposits unless they agree to compensate 30-50% of the amount invested of these victims.

GM/FORD

another casual but not final victim of the credit crunch might be GM/FORD. Chrysler has been privatized so it is not easy to gauge when it will fail.

with current market conditions, all hell broke loose and there are reasons for slow sales:

1. consumers' priorities now are to keep the house, put food on the table and get to work, none will induce customers to purchase another car or replace an old one. the decision will only be delayed further and further into the future which hurt car sales. unless car companies offer employee prices to most customers like GM did recently, there is very little incentive to upgrade cars or buy a new one;
   
2. car companies do not lease cars to customers any more as it now costs more to finance a lease and residual value of the car after the lease is much less than previous years;
3. fleet sales will also be hurt due to less business travelers thus car rental companies need not upgrade their fleet as frequent as before.
4. aging is a factor that slows sales. current market turmoil had not been mentioning this factor lately.
   

both charts dont look too good, but GM's looks worse.

the 3 tops chart of GM looks likely to test south of the neckline now at 10 which was already broken on friday's close. since this is only a 3 month chart, it is highly likely that in the next month or so, it will test a low of 6 or even 4 if credit market conditions do not improve.

GM is unlikely to fail like that of aig once past the 10 dollar mark as indicated with ford's price now at 4.8 [it dropped below the 10 dollar mark back in 2005 and even earlier], but a failure will hurt triple the number employed by GM as many suppliers will go bankrupt too.

so watch out the stock price of GM/FORD if you are in the stock market still.

The Latest Market Upheaval

when the fed and a few central banks acted in concert to shore up the credit/stock market and those of aig, fannie and freddie in the past few weeks, we started hearing the stock market should be well and going up another 20% on top of friday's close.

even finance officials in hk such as financial secretary, financial services/treasury secretary have stopped issuing warning that the economy ahead is going south and now is the time to unload stocks to conserve cash, instead they act like cheer leaders forgetting the team they are cheering is down more than 20% from the recent top 23000.

i have even heard on the radio that a prominent finance professor suggested that in order to regulate these i-banks, we must employ similar people, otherwise the government would not understand what the banks are dealing with and how risks can be measured. if this is the kind of professors we have in our universities and they act as advisors to the govt, then we are in big trouble. even the inventors of these instruments themselves cannot accurately measure or estimate the ultimate risks involved, otherwise why they are now in such bad shape, so how can the government offer attractive enough salaries to people who would do the ultimate risk management.

the causes for the financial chaos in the usa are very simple:

• low interest rates for too long - which fanned the fire on all kinds of speculation [properties, stocks, commodities etc], read this blog on greenspan and for pointing this out way back in 2004;
• running out of common sense judgment - the fed and us govt officials have ignored common sense judgment for too long on mortgages with no down payment and interest only mortgages [those that have a low fixed interest rate for a few years and then marked way up after the initial concession period]. why would people have interest in paying for mortgages when the houses they own have no equity or negative equity. in allowing zero down payment, the fed and treasury are setting themselves up for trouble ahead. interest only mortgages can be for small amounts only and not for the purchase of a brand new house, why would the banks or FIs think the borrower can afford higher interest rates a few years down the road not to mention then the payment for the principal will also kick in as well?
• ceo overly compensated, the pay scheme encourages undue risk - all ceos in the usa received compensation according to the stock prices and do not have any claw back should profits fall short in the future, thus everyone maximizes stock prices within their own reign to max out their own compensation with no regard to social concerns or their employees. we are actually going back to the old ages of imperialism of landlords and slaves, only that these days, there are few big landlords around, but ceos in their place, other employees being slaves. ceos already enjoy numerious perks like clubs, first class air travel or private jet, almost unlimited budget for entertainment [tyco ceo use public money on art pieces in his own home]. many people argue that ceos do deserve their compensation, but they are gambling other people's money for their own gain. if people do research on ceo's pay and tie it to the company results on a moving 3 years basis, i have doubts they are highly correlated. they brag more on their pluses but never the minuses so they got compensated whichever way it goes. ceo always talk about team spirit, then why should one person be compensated so much while others sacrifice when the results of the company is not highly correlated to his pay.
  

common sense judgement is always necessary in governing the finance of an economy or companies - the dotcom era that companies can be valued on the number of visitors to a website is pure nonsense if it cannot generate revenue enough in the long run to balance their books, then investors would be throwing good money after bad if these companies get their revenue from investor contributions only and not from traditional sales revenue.

we should look beyond the current market rise and what would be happening to lehman's liquidation process, aig's unwinding or unloading of risky assets which would cause a serious drop in profits for a lot of banks thereby hitting investors eventually not to mention the rise in unemployment [due to bank merger or liquidation] will also impair consumption in the states that will have final effects on producers around the world thus affecting the stock prices of these exporters and banks [absorbing bad loans to these cos] esp in asia.

having said that, we should be unloading stocks not buying more.

HSI CAD GBP

A Stronger Dollar
GBP is heading towards 177, the chart does not have day high/lows ie why you see a different picture. Even with this line chart, 182 is the minimum.
CAD chart is a few days old since I forwarded it to a friend for his reference to short CAD. It has an inverted multi bottom and looks set to clear resistance at 1.07, 1.10 and hit 1.14. Read chart above.

Hang Seng Index
Most readers are familiar with multi tops esp with HSI, read post on HSI early 2008 in this blog.

HSI is now extremely ugly and the chart indicates it will hit 10000 after falling through neckline 21000.

A lot of investment banks are already offering private bank clients derivatives [similar to accumulators] to hedge their own positions [or that of their biggest clients] against its fall although it hasnt broken out of the multi top formed. I suspect there will be a lot of struggling before breaking out to the south. Two reasons - first, the really big/prestigious clients have to hedge their bets with the investment banks and this takes time, second, retail investors think it is cheap now so they will buy on big one day declines limiting the fallout for a while.

This is the first time I question the chart's predictive power as 10000 hasnt been seen for a long while, would it really hit 10000? Other indicators do not point to such lows:

• 50% of 32000 is 16000, 30% [falling 70% from top] of 32000 is 9600 [close to 10000], but
• 17000 and 14000 are strong supports.
• the present rally started from 9000 and rose to 32000, retracing 50% means it will hit 20500, 68% means 17050;
  
• The 10 yr chart tells a different story, it indicates the rising trend is intact, whether the fallout will hit the trend line or stay well clear [above] of it is still to be observed.
  
• The year before 1995, it also formed a multi top and there is no breakout below the neckline by much and started rising again,

so beware.

The few possibilities that 10000 will be hit are - there is a war close to China/HK, a bird flu pandemic or oil price hitting 200 above.

The time frame from the 1 yr chart says it will hit bottom in about 6 months or less after breakout. Even if it does hit 10000, it will be a long and winding road [not likely to be 6 months], there will be many false rallies before that.

Update - Crude Oil, Gold, Currencies

my earlier update on 21 Feb already forecasted the severe drop in gold is coming. the gold price now is even lower than that of 21 feb [about 927], the price rise has all gone and evaporated. as indicated earlier once gold fell, aud will get hit too. aud got a new high but cant really sustain it and it also fell from the high [around 95.5] above 94 to only around 90.

crude has also dropped about 10%, if it does drop even more, the pressure on gold price will be intense.

now also look at shanghai comp index sci, it does point to a possible breakout above 3800 and reach a short term max of at least 4080.

if stocks rose, crude falls, currencies fall [against usd] too, then gold the invesment alternative will fall even faster.

gbp, as indicated earlier in this blog is the weakest, although the short squeeze sent it to 2.10 but fell back to 198, the fall [abt 6%] is even more drastic than that of aud [abt 4%]. euro is the exception as it looks more likely that some governments are behind the purchase which is why it falls much less.

expect this trend of weak gbp, aud and a rather strong euro to continue if and only if the stocks rally does materialize as the sci chart indicates.

UPDATE - GOLD, PLATINUM

my earlier hunch that USD may not fall further turns out to be partly correct at least for now, it may still be true overall, read on.

GBP and Euro are getting no where but AUD rebounded strongly [still it hasnt hit new high]. iron ore prices rose 65% this year on agreement between mining companies and major steel producers which lead to the runup of AUD.

you can now look at the charts above for the outlook of gold and platinum. the shangahi composite index SCI chart serves as guidance on how fast the runup in gold prices will lead to at least a short term peak. the fall will also be drastic.

the sci is about 1000 mid 2005 and hit 2000 nov 2006 [about 17 mths], then it hit 4000 mar07 [just 4 months, incredible breakout], then another 6 months it almost hit 6000. what are all these telling us, shanghai stock market [a closed one] is not as mature as the gold market, so it went crazy once it broke out.

now look at platinum, in about one year it rose from 1200 to 2100 almost 900 and percentage wise 75%. there are shortages, but also speculation, the final 600 rise in only 2 months. this is short squeezing no matter what fundamentals.

gold is also in a similar shape, it is worst. if it once hit 1000 above, it will correct sharply. the contrast with platinum is it is pure financial play since industrial use is not a great demand. the all time low 335 for platinum and 252 for gold happened roughly about the same time. the ratio at that time is 1.32 much less than the current 2 - reasons: platinum has a lot of industrial uses and demand supply is much tighter.

both gold and platinum charts point to excessive speculation and will hit a wall soon, it will then correct sharply which will hit AUD.

UPDATE

A lot of readers ask questions like when will this or that happen. The truth is I dont know. I only interpret the happenings from the chart given the circumstances. Most of the time they are correct and they happened within the time frame I mentioned. However, there are always exceptions like acts of god - a good case in point is the lengthy snow storm in China. It may disrupt certain chart patterns or delay or accelerate the forecasted happenings.

It is important to be patient in order to bear out the truth especially when you are waiting for a pattern formation. Sometimes a multi top chart takes longer than expected to form and break out. Go back in this blog and check out the chart related to HSBC - it first formed a head/shoulder chart with target to hit 132, but it went back straight up and almost retried the old high then formed another multi top chart with target 110. Both targets got hit but each has a very different outlook right after it was hit.

The reasons that I wrote in detail is to tell layman investors to be patient and when you sense something, wait for a pattern to be formed or about to be formed and take the necessary actions instead of trying to be god to foretell all events coming which is impossible.

Now comes the big part.

There are some strange observations recently, thus I sense something is coming along, but not on very solid grounds so you have to watch carefully the charts to be able to tell whether my hunch is correct.

Observations:

• AUD old high is about 94 to USD, given the USD rate cuts and AUD rate increase, why hasnt it reached new high?
• GBP fell a lot from it's recent high of 199 not to mention that the old high above 2 is very far fetch;
  
• EUR has maintained their rates still it didnt reach it's old high after fed rate cuts;
  
• Crude never even retry 95 or above after hitting 100, it rallies on news that weather will get cold in North Amercia shortly;
  
• GOLD is actually falling [hit 918 fell back to 860] before the rate cuts but reached new high of 933 only to fall back to 890, but it managed to ride high again after crude oil resume a rally up towards 92.

What are all these telling us, my hunch "pure hunch" is that the USD money supply is contracting and fast, so every time some +ve news such as rate cuts and fiscal spending like tax rebates are announced, the currencies above or gold or crude oil reacted on the news but cant reach their old highs.

Therefore my predictions are that, oil rally will falter hitting gold along the way and also currencies will fall against the USD before it can rally back up if it will. GBP is the weakest, EUR will rally back up after hitting 130-135 so will AUD.

The charts will take a little bit longer to confirm the above if they ever will.

UPDATE - Hang Seng

for readers who are familiar with this blog, you should have benefited from staying clear of HSBC. read earlier release for HSBC forecasts.

here comes Hang Seng albeit a bit late since the fallout is faster than predicted. Look at the 6 mth chart, this is clearly a multi top chart with neckline at 26000, the minimum magnitude going south would be 20000 [26000-6000], so brace yourself for a rough ride.

the tricky part is the 2 yr chart, if it does reach 20000, bounces up and falls back again breaching the 20000 mark, then a head and shoulder occurs and the chart looks very ugly.
how will recessions wound up hs index:

1. a recession only causes upset of 25-35% from top,
2. a severe one - 40-50%,
3. a major downturn can chop 70-80% off the top [e.g. taiwan, japan and earlier downturn of china stock markets]
   

it would be extremely hard to tell 2nd from 3rd, so bear this in mind when you make your investments around the 20000 mark.

UPDATE - DJ, Subprime

the dow is looking to form a multi top with neckline at 12800, if it falls through it will hit 10800 - a fall of further 16% from this level and that is the minimum. expect a flurry of fiscal spending [sort of direct money printing] announcements and interest rate cuts.

if you look at the volume, it is increasing after the yearend [avoid clashing with yearend window dressing] while index is falling, so the probability of it falling below 12800 is quite high.

both citigroup and merrill have new ceos, they will book the largest provisions possible [ie their capital base can bear] this fourth quarter to avoid further significant losses after they are in town for two or three quarters. such loss announcement might be coupled with further new investors to these two banks as their capital bases may have shrunk further and cannot bear such heavy losses. this will put pressure on hsbc to announce heavy provisions. read my earlier updates and forecast on its price.

if investments made by new investors to citigroup, ML, UBS are locked in with the spot price at the time of announcements, they would have incurred losses now and further going forward. if the investments are convertible bonds or preference shares with convertible options then they are better off.

the subprime mess will take at least 6 years [for the housing market] to reach a bottom. counting from 2006 after its peak, it takes minimum 2012 to get out of the mess. the japs took more than 16 years [1989-2005] to get out of a hole they digged themselves in.