What are they waiting for? Markets for the week ending 26-Sep

Market Commentary

- With the market anxiously anticipating when and how the Paulson bailout plan will be decided, news of Wamu's sale to JPMC was almost overshadowed.

- Short term funding is still an issue with 3month $Libor at its highest since 1999.

- w-o-w, SX5E and UKX is 3% and 4.2% lower

- Oil is marginally higher

Economic Indicators

-Latest Data Shows U.S. Housing Sector is Still Far From Bottoming Out

Stabilization in the U.S. housing sector is not yet in sight: Inventories and vacancies are still at a record high and continue to put downward pressure on home prices, which continue to fall translating into trillions of real wealth losses for the engine of the economy: the U.S. consumer -

- New Home Sales (Aug 2008): at 469K, 17-year low and down -67% from the peak of July 2005 (1.389 mn). This is 11.5% below the revised July rate of 520k and is 34.5% below the Aug 2007 estimate of 702K

- US economy grew less than forecasted last quarter

- Personal consumption lower than estimated

How the market is getting around the Financials short sell ban:

A) Naked Shorting Continues in CDS Market: Even as naked short sales are banned around the world, hedge funds can still bet against a company in the unregulated over the counter CDS market without the need to own the underlying bonds in order to place a bet

B) Spread Betting: Fixed-odds betting on financial markets has surged in recent days as traders find ways to get around the ban on short-selling financial stocks.

C) Proxy bets: Shorting real estate, property companies and builders (most asset managers have been added to the list in the second round of banned names)

D) and if you're a large investment bank running an index arbitrage (-futures vs. +cash) desk, you have the capacity to short banks/financials up to the long cash positions

Next week should get more interesting...and in the meantime, let's turn our focus to the Singapore F1!

Eric Tan, London

Fed bailout plan drives rally! Markets for the week ending 19-Sep.

Markets
Spectacular finish for the FTSE100 today as it closed 8.8% higher than yesterday, and posting a record 1 day move.
Globally, stocks surged as the US bailout plan was announced (with further details due next week)
Comment: Confidence to financial institutions have been restored, but the liquidity boosting measures performed in sync by central banks worldwide this week, bear some resemblance to the post Sep-11 measures which fuelled this crisis to begin with.

So, how near are we to the end of this crisis?
Long period of rapid growth, low inflation, low interest rates and macro economic stability bred complacency and increased willingness to take risk.
It seems like an unwinding of excesses may be required to undo the key elements that led to this crisis.
Checklist:
1) Fall of inflated asset prices back to a sustainable level
2) Deleveraging of the private sector
3) Recognition of resulting financial losses
4) Recapitalisation of the financial system

In 2), we should see large buyout deals breaking, and sectors which are traditionally over-geared underperforming as liquidity continues to be a rare commodity
This week, large and highly geared investment banks came under pressure as there was a crash of confidence that they will be able to meet regulatory demands on their capital. They were saved by the Fed's proposal to create a giant government sponsored vehicle to take on toxic assets and ban on short selling.
However, we might soon find the speculators at the door steps of Transport, Autos, Builders, Real Estate...

Other Scenarios
A) Over a longer time frame, much of the flow of funds from the developed world into emerging equities and commodity assets is likely to come home, and the underperformance of emerging versus developed equities, energy, materials and technology, all look likely in a liquidation environment.

Eric Tan, London

Fundamental Investing is failing..Markets for the week ending 12-Sep

Market Commentary
Obviously, with the market's fixatation on Lehman, the consensus is that a LEH deal is likely to happen this weekend (generally expected); leading contenders BofA+JCFlowers+CIC (Chinese Soverign fund)
Financials continue to be the limelight - specifically LEH, WM, AIG

With the deteriorated environment around us ("EM blowing up", "financials blowing up", "AIG stock down", "Merrill stock down") it is hard to feel optimistic.
(Note: only when everyone is bear-ish, is that an indication we are reaching the bottom.. so who's game to join me to plough their money in right now?)

Overall summary of US economic indicators,
A) Pending home sales worsened, initial jobless claims and continuing jobless claims up, unemployment up
B) Import prices, Producer prices fell -> petroleum story
C) Retail sales fell unexpectedly

Key Risks/Scenario
A) Hedge fund losses (see HFRI indices: Relative Value Strategy, -13% worst performing strategy ytd) might have led to another round of deleveraging this week
Another related story: RAB Capital might be winding up their Special Sit fund if they don't get support from investor

B) Emerging market feels the heat. If anyone has been following Russian equities, you might have noticed that RTS fell 22% mtd. or -48% from high in May.
Spreads on Turkey and Russia has been widening.

C) Dollar Strength
Not really a reflection of strength in the US economy, but more so an indication of weakness elsewhere

Interesting Chart:
Short SXEP vs Long SXPP
With China's thirst of materials declining, this trade may start to collaspe as we have already seen this week. SXPP fell 9% this week

Eric Tan, London

SP500 at 25x P/E ? Markets for the week ending 5-Sep-08

Market Commentary
- Wall Street had its steepest decline in more than two months on Thursday, as more signs of weakness in the labour market and increasingly sluggish growth overseas fuelled fears about the ability of the U.S. economy to stage a recovery. Weekly government data showed an unexpected jump in the number of filings for jobless benefits and a decline in non-farm payrolls.
- The president of the European Central Bank, Jean-Claude Trichet, said euro zone data points to weakening growth and slashed forecasts
- Asian stocks fell consecutively for a week setting the biggest weekly decline in a year

Strength in US dollars tied to global FX reserves ?
Trend: rising reserve accumulation appears to be peaking amid increasing signs of global slowdown,
- If growth of global FX reserves has indeed peaked: less reserve diversification away from USD in favour of other major currencies expected
Previously : Inflationary concerns and tight monetary policies kept Asian currencies supported,
- But South Korea, Thailand, Philippines faced with weakening currencies has reduced need for central banks to intervene to stem the rise of their EM currencies
- Russia and Thailand has been dipping into their coffers to support their currencies
- Impact of reduced growth expectations: triggering waves of capital flight from EM currencies

S&P P/Es at 25x ?
A combination of rising prices and falling earnings caused S&P 500 valuations to surge more than 20 percent this quarter, the biggest increase of any major market, making them the most expensive since November 2003. The index's price-earnings ratio rose above 25 three times in the last five decades, data compiled by Bloomberg show. The last was in 2001, during the bear market that followed the bursting of the dot-com bubble. The increase in valuations preceded a plunge that helped erase about half the market value of U.S. companies.

Eric Tan, London

What to do with Babcock and Brown?

B&B specialises in buying assets such as ports and utilities and bundles them into listed and unlisted funds, from which it earns management fees
Macquarie, specialises in infrastructure, real estate and aircraft leasing

As hedge funds woke up to the fact that the entire model is unsustainable and they exacerbated things by short-selling back in June, B&B has seen their market value tumble.
B&B is undergoing a strategic review that seeks to cut the level of its balance sheet leverage and non-strategic assets
Babcock & Brown’s satellite funds have announced writedowns or sold assets at knockdown prices to repay debts

Implications:
A) Reduction in demand for Infrastructure plays which have previously been hoarding headlines for the last few years as Macquarie, B&B, Private Equities and Soverign funds competed with each other to take these companies private on the notion of strong cash flows, etc (cheap funding)

B) Average premium of share price over Regulated Asset Base still at a high of 14-16% for UK water companies which I believe may reduce in the coming quarters

C) Utilities, Infrastructure being traditionally defensive in downturns may see some erosion in their built-in merger premium from the years of cheap and easy credit

D) Until liquidity returns to the market, Private Equity players will be careful about making large acquisition of Infrastructure assets. However, possibility of trade acquisitions by cash rich incumbents is likely to persist and the next test case will be the amount of interest in BAA's divesture of Stanstead and Gatwick airports