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.