Don´t cry for Argentina. Markets for the week ending 24-Oct

Emerging Markets
The flight of capital out of emerging market economies this week showed how countries with substantial reliance on foreign borrowings are being hit this week just as we think the financial crisis in the developed markets have been rescued.

Lenders to these economies (banks, hedge funds, mutual funds) who are now deleveraging is causing the currencies to collapse and pushing up the cost of borrowing for their respective governments bonds as seen by the widening of sovereign credit spreads.
Iceland, Hungary and Ukraine, all of which are in discussions with the International Monetary Fund on a bailout. South Korea won has fallen 29% in the last three months, and shares have fallen more than 20% this week as wholesale funds that are being withdrawn by international markets.

Argentina's credit spreads (1 yr) has risen from 3000bp end of last week to 4600bp on Thursday as the government moved in to nationalise pension funds.
4600 bps means that it costs $4.6m to protect $10m worth of bonds. To put it into perspective, just prior to Brazil defaulting on their bonds in 2001, their Credit Default Spreads also jumped to 4500 bps.

Pound falls to lowest since 1971

In the UK, the aggregate of corporate, personal and public sector debt - is equivalent to three times the its GDP. With financial services shrinking and the global economy slowing down, onone knows when the debts can be paid down , hence its hardly surprising that the market is driving down the pound.

With a sharp rise in public sector borrowing expected from bailing out the banking sector, a structural trade deficit with huge reliance on financial flows, and falling tax revenues from a slowing economy, the government is insisting on pursuing a Keynesian approach to ramp up government spending so as to avoid a economic downturn, but this is huge gamble that this recession will not last more than 2 years or else it may soon find itself impossible to climb out that huge hole it has dug itself into.

Eric Tan, Madrid.

Why hasn't LIBOR collapsed? Markets for the week ending 17 Oct

Economic Indicators

- The University of Michigan consumer sentiment index declined from 70.3 in September to 57.5 in October, far worst than economists expected, as banks cut back on consumer credit.

- The sharp slide raises the danger than US shoppers weighed down by their fall in house and stock prices last month will retrench and send the economy into a deep recession.

- US housing starts fell again in September, indicating that the sector is far from botttoming out.

Credit Crisis Update:

- UK to fast track public spending in a Keynesian fashion to prop up the economy in the hope that a recovery will be underway before a gapping hole emerges in the UK's public debt in 2 years time.

- South Korea offer $100bn debt guarantee to stabilise it's financial markets.

Why hasn't Libor collapsed?

Given the coordinated intervention by central banks in US and Europe last week and recapitalisation of global banks this week, the question to ask is why hasn't Libor fallen?

a) Libor has decreased slightly over the last few days, but one needs to know that Libor is now in a price discovery stage in an uncharted environment so it's unlikely to decline abruptly back to previous levels.

b) Libor could have been too low for too long with the western economies flushed with Asian liquidity, which is unlikely to return anytime soon, so expect it to be at higher levels for now

c) Unsecured liquidity has yet to return although governments in US and Europe has announced various programs to tackle the problem. The 28 day US dollar funding will only commence next week and there is still no indication of when the 84 day funding will be announced.

The December futures are already starting to suggest that dollar Libor may fall to 2.7% and GBP to fall to 5%. So as the European Co-operative lenders lead the way in unsecured interbank lending this week, we hope to soon see an acceleration of liquidity kick in.

Stock market shakes the world. Markets for the week ending 10-Oct

Markets:

This week in numbers:

London -21.1%

Tokyo -24.3%

New York -22.9%

Brazil -22.5%

Russia -21.12%

India -19.3%

Shanghai -12.78%

As the market is facing redemptions and selling their liquid assets to raise cash, prime brokers are predicting as much as $1000-2000 bn could be withdrawn from the industry by early 2009.

Scenario

200 largest privately sponsored UK final salary pension schemes which accounts for more than half of all UK pension funds, are estimated to have lost 45b since end Aug and employers might be forced to invest more to make up funding levels.

History's lessons

On friday morning's trading, S&P500's fall for the decade was almost identical to its fall for the decade on the same date in 1938. Investors are likely to refrain and withdraw from the markets, however, I subscribe that basic balance sheet methods such as measures based on cash flow multiples and dividend yield which can work out how much a stock is worth if the worst came to the worst, should leave investors with a margin of safety and help set out a clear path to proceed with picking out some attractive bargains. Good Luck!

Warren Buffet at his best business

Warren Buffet effectively sold Goldman and General Electric an insurance policy each against the event that their existing equity would not be enough to meet future losses.
a) Preference shares that pay out ahead of common stock
b) high yield can be treated as the fee on the insurance policy

Is Iceland really a worse bet than Kazakhstan or Lebanon? Markets for the week ending 3-Oct

Debt markets seem to think so as sovereign spreads have soared.
Interestingly, combined assets of the top three (Glitnir, Kaupthing and Landsbanki) are about nine times Iceland's gross domestic product.
Maybe someone will start to notice that this tiny nation is over-banked.

but more seriously, this is an update of the repercussion on the emerging market world post developed world credit crunch:

a)MSCI Emerging Markets Index lost 8.8 percent this week, the most since July 2002.
b) Turkey's benchmark index headed for its biggest decline since March 17, falling 6.6 percent, to 33,671.27 at 9:50 a.m. in the first trading day since Sept. 29.
c) Russia's Micex Index extended its loss this year to 49 percent. Russia suspended trading for two days and pledged more than $150 billion in emergency funding last month as the seizure in capital markets, falling oil prices and a five-day war with Georgia in August drove away investors.
d) India's Sensex index is at its lowest in a year.
e) Commodities, as measured by the Reuters/Jefferies CRB Index of 19 raw materials, have tumbled 9.9 percent this week, the most since at least 1956. The index has slumped 31 percent from a record on July 3.

Economic Indicators
US Payrolls plunged
US PMI indicates significantly faster rate of decline in manufacturing during Sept (lowest since Oct 2001)
Markets are pricing in rate cuts in Europe after dovish comments from ECB this week
VIX (measure of US equity volatility, market's so-called fear guage) remains at historic highs
Money markets still frozen and companies are being shut out of commercial paper market

European Market Commentary
All main European markets closed up on Friday (between 2 to 4 percent) as U.S. House of Reps voted to prevent amendments to the proceedings
Materials and Financials sector outperformed. +4.3% and +3.7% respectively.

Eric Tan, London