My Diary 485 --- 27Nov2008: The Words of a Song

November 27, 2008 --- The Words of a Song

China is throwing the kitchen sink at the economy with 108bps rate cut and a halving of DD rates, helping banks maintain their margins. I remain negative in the mid-term as I believe such a move indicated WTE 4Q GDP and 2009 economy outlook. Meanwhile, I think China has the biggest deflation risk in the world, given overcapacity and 3yr long tightening monetary policy before 3Q08. But a lower rate is good for fiscal expansion.

In the other side, US Govt has effectively become the world's largest hedge fund, financing at near to zero and buying anything with a ticker (and even some don't). These days volume is next to nothing so any flow can easily drive the price. But I have to say that stocks are reacting less and less to econ data, but reacting violently to earnings and management guidance…Same with Fed QE…same with China rates…same with overnight consumer spending (-1%), durable goods orders (-6.2%) and Chicago PMI (33.8).

I expect a strong rally in CN/HK space today but I stick on my view that with a slight drift lower in volatility, stocks will be chopping more-or-less sideways until year end. A more gradual sell-off is the likely scenario as one sectors at a time gets downgraded, and correlation among sectors declines…Let us enjoy the rally! What to Buy? Property, Banks, Insurance and IPPs, but remember, every rate cut in the previous bear market is a sale, until it ends. Last note, the recent market reminds me of the words of a song: "Wise men say, only fools rush in... but I can't help falling in love with you".

Oversea Markets Review

Since last Friday, stocks prices are up 11.7% in US, 8.5% in EU, and 3.8% in Japan. Elsewhere, UST continued to decline with 2yr dipped 9bp to 1.09% and 10yr slumped 13bp to a record low at 2.98%. (The ten-year yield low during the last business cycle was 3.11%.) The combination of rallying Treasuries and the announcement that the Fed will start purchasing GSE debt and GSE-backed MBS has pushed down US 30-yr FRM rates about 20bp Monday-Tuesday to 5.81%, according to Bankrate. 1MWTI oil climbed $4 to $54/bbl. USD strengthened 1.3% against EUR to $1.289 and 0.3% vs YEN to 95.6.