Chicken or Egg?

It is often said the equity or stock market leads the real recovery or recession in the economy. Equities, which have plummeted for a good part of 2008, seem to be on a rebound after the recent rally on Wall Street and in Asia. The latest stimulus package by China also came in at an opportune time, giving a second wind to bargain-hunting investors. In fact, it was even suggested over the weekend that the S&P may be heading for a six-day rally. That might be some truth in that earlier statement that the efficient market has priced in the recovery and, behold, we shall see the glorious days unveiled before our very own eyes soon.

I was also tempted to dip into equities now amid all the heightened hopes. But if I were to ignore the noise, step back and analyse, we are probably only half-way through the trough. There isn't any economic data or business statistics released so far that suggest that we are in recovery mode.

The latest:

• General Motors has been downgraded to a price-target of ZERO. For an industry that drives (pun unintended) U.S. eleventh most populous city (Detroit) and with survival dependent on a bail-out, it doesn't exactly speak of optimism in the economy.
• Fannie Mae and AIG - two financial giants rescued by the U.S. government recently has reported record losses again. For the latter, the terms of the initial rescue has to be amended so that the company has more resuscitation time. It is important to realise the grave consequences of a bankruptcy by the insurer. The Fed has allowed 19 regional banks to fail, permitted Bear Stearns and Lehman Brothers to fail (though the former was technically bought over by JPMorgan) but held on to AIG. It implies that any fall-out would bring about a financial tsunami. If the beleaguered insurer goes, I think I WILL go too.
• Economic data has now consistently surprised on the downside. Market-makers have been pricing in the downturn, bad results but it turned out that the actual results - unemployment, house prices, more layoffs, actual bankruptcy - have been truly, scary outstanding. Closer to home (Singapore), even the esteemed DBS is retrenching while the authorities are probably having cold sweat after the latest from the developer of their pet project.

Even though my JC testimony speaks of a "non-conformist", I do agree with the much-touted view that we have not seen the worst. Bargains are there for the picking and it is ABSOLUTE NONSENSE to discuss previous highs when picking current stocks. Nikkei hits its all-time high about twenty years ago. Even in recent boom and bull periods, it has barely traded above half of that peak. And you would have been a fool if you agreed that Bear Stearns was going for a steal at $10 in March-08 when, a little under a year ago, it was going for $133.

You might not be able to take the mauling.

Insurance - paying the Sky.

Suppose you own a BMW that costs $100k with five years left to drive. As per the rules, you have to buy insurance on the car, which ideally should cost a small percentage of the purchase cost. Then NTUC Insurance quoted $40k per year or $200k over five years. You look around and this seems to be the most "reasonable" price around. Over-the-top? Crazy?

Well, this is exactly the situation in the credit derivatives market for an emerging market name like Argentina or Pakistan. At 4000 basis points, one would have to shell out $400k of insurance (or more appropriately, premium) to cover $1M government debt issued by Argentina or Pakistan. Of course it is different from buying insurance for a beemer, because the market believes that the government is MORE LIKELY to default on payment than you wrapping the beemer around a tree.

Basic differences between an insurance contract and a CDS (credit default swap) contract:
- You don't need to own the underlying to buy a CDS i.e. I can buy protection (pay premium on a CDS contract) on a debt before owning the debt whereas you can't take out insurance on Mr Patel who owns the corner mama-store.
- You don't need to prove that you suffered a loss to "claim" the payout on a defaulted CDS ie if you buy a CDS on a Argentine bond and the government subsequently defaults, you will get a payout from the protection seller whether or not you bought the Argentina government bond. However if you "buang" a car and it miraculously escaped with no scratches or bumps, you won't get a single cent from the insurer.

Having said that, it's amazing how the market is pricing the default swaps now. Two years ago, a CDS on AA-rated Barclays PLC costs 10bp. Today it would cost 125bp for the same protection on AA-rated Barclays PLC. Simplistically it implied that the probability of default has increased 12.5 times. HSBC is a hefty 103bp while Singapore's very own DBS bank is at 180bp.

The all-powerful United States of America comes in at 30+bp. So what do you think of our beloved triple-A rated sunny island?

So the Dow closed down another 200 points lower as I write. The HSI has also been in a free fall, shedding close to 13% as Asia tracked the dismal overnight close on Wall Street last Friday.

My view on this? It is only going to get worse. Any multi-billion-dollar relief package is only short-lived although it appears that the broad market is bottoming out.

The entire global financial crisis must be taken in consideration and in perspective with past and recent down-turns. No one should be surprised by what is happening now (and will happen) given our Economics 101 understanding of the cyclical economy. What goes up must come down. What's surprisingly is the extent of the damage of this fall-out. Three veritable institutions folded in one year, sky-high credit spreads (which I will talk about later) and a seemingly bottomless equity market. I am so blessed to witness all these (future bragging rights. "I was there in London when Lehman Brothers employees were carrying...").

The decoupling theory has failed and will be some time even anyone uses that. Then again, institutional memory is so short that all the CDOs and minibonds and boom-theories will come into play in a few years. Amid this crisis, UK has been hit hard. Real hard. The sterling has fallen faster than gravity in the last ten months. About 20% since the start of the year and in my bounded knowledge, a level unseen against the Singapore dollar for years. I remember changing a small fortune at Change Alley back in February at the rate of £1 for $2.78; I cursed under my breath and told myself I had to change at this pathetic rate just to manage my SGD-denominated transactions. I should have thrown in everything plus the kitchen sink for that rate, given sterling closed at 2.33 last night! Hindsight review makes geniuses out of us.

If I am an Aussie working in the UK, I would be happy, but not when I am a Singaporean with Majullah Singapura running in my blood. I was on instant messaging with another Singaporean friend (Joyce) last Friday.

Me: What to do now? Sterling is sh!t now.
Joyce: Oh, I hope you are not long on sterling.
Me: I am very, VERY long.
Joyce: gosh, I feel your pain. I can really feel it.
Me: Da Jie, what to do?
Joyce: Bite the bullet and change all now. The end has not arrived.

Change?!?!? I am seeing a paper loss of close to six figures. And FX-changing that will crystallise the loss! Another female colleague asked if I have been using some special face-whitening cream after I exited the IM conversation.

It is not a GBP story, but a USD story - from what I read in FX research. The sterling is pounded for the reason that Britain is perceived weaker than a truly battered America. The power of the Treasury and the intricate ties of the American dollar to the world economy ensures that the dollar will not fail. Will not collapse. In times of crisis and heightened risk-aversion, the dollar and yen will appreciate because they are seen as the safest assets (the US government beh toh?).

Gold, which is largely seen as an alternative safe haven to equities, has not been having a good time. In fact, other than government bonds, almost everything from commodities to equities to credit, is going south. Gold lost $100 in a week and was close to testing the sub-$700 after hitting $706.10 this morning.


Flight to safety has seen people dumping stocks, despite the ban on short-selling. Virtually all markets are down as investors flee equities. Even the legendary Warren Buffet, who was calling for red-hot American patriotism, has failed to ignite the market. What's worse - people has been making money running reversal trades and called the bluff on Buffet.

Normalising four stock indices - S&P500, FTSE-100, Nikkei-225 and STI(?!?!?) - it appears that the fall-out has not been as bad in the west as in the east. And for people who are looking for a kill on the stock markets anytime soon, it is wise to read this.

Am I slow or what?

So Friday's release of UK Q3 figures came as no surprise. Perhaps slightly under-estimated on the downside. All the island needs is another contraction in the Q4 to "officially" enter recession. But most has come to realise that UK is already in recession and just waiting for the official numbers to be published in January to confirm an on-going fact is almost a worthless act.

Is the cold numbing my senses and delaying my assessment of the economy? I don't (touch wood) feel any unease about my current job and has been fielding questions from recruiters asking if I am interested in a move elsewhere. The weekly lunch at Sri Nam has not been cancelled. I have also added more ingredients to my daily cooking recipes.

But if I were to take a CLOSER and REAL look, I could already be experiencing the effects of a recession in my life. I may be adding more exotic dishes, but I am cooking/eating at home on most days instead of take-away or dining-in at restaurants. I have started bringing my 3-in-1 Milo sachets to office instead of enjoying the £1.55 mocha and £1-two-slices-of-peanut butter-bread which I DID enjoy on a daily basis. And I have also turned to having fruits for snacks (which is a healthier option than crisps and chocolate). Seeing the lunch crowd in Canary Wharf, it's either more people are exercising in the park to skip lunch or I need a new pair of glasses to see the "missing shoppers/diners".

This morning, for the first time in three years, I went to Billingsgate Market. A fish market just across the road from my place and UK's largest inland fish market. 4kg of haddock for £28, 2 kg of scallops for £12 and more other fishy stuff...

No wonder John Lewis and Waitrose are complaining...

There can only be one president...

But the other can consider an alternative career as a comedian...

Time for an upgrade

Even the clock needs a rest or an upgrade. The counter, which tracks the national debt owed by the U.S. government, has ran out of spaces following the $700 billion bail-out package approved by the U.S. Congress. The authorities better get a bigger clock if this plan is to go through.

Picture from http://blog.wired.com

Raining Cats and Dogs

Judging from the way stocks are plummeting at the moment, it's time to get a good umbrella.

Well, I might need more than an umbrella...

Of soup and salad

Only three days back in London and the distinct differences are showing up. Instead of indecision over lunch choices in Singapore, I had just two options - soup or fish&chips. Knowing how easy it is to put on weight in cold weather, I opted for the safer latter.

Autumn seems to have disappeared in the two weeks I was back in Singapore. It went below 5deg last night. The pounding winds did little to alleviate the already freezing temperature and Xueyan's mood. Other than a rewarding lunch dim sum, we stayed in on Saturday to catch tcs shows (via mobtv - interesting!). And had pak choi, tofu and mushrooms for dinner - Xueyan's style. Marvellous.

With days literally fast becoming nights, it is time to explore and develop the culinary skills.

Get the monkey off my back

Now that the investment banking model is "officially dead", it is time to resolve the murder.

The Treasury's proposal of a massive bail-out for the troubled banks, getting the toxic debt off their books sent equities sky-rocketing on Friday. By now, the shrewd investors would have taken profit with the stock indices lower yesterday and today.

So what are the traps behind the TARP (troubled asset relief programme)? As The Economist points out, it could possibly be another stop-gap measure to stem the avalanche in the financial turmoil. The first liquidity programme extended in March/Apr, then the subsequent bail-out of Freddie Mac and Fannie Mae proved to be short-term stimulus. Taking over the problematic loans and complex structures may save the floundering banks but might not win the credit crisis war.

The underlying loans may prove to be an over-bearing burden on the U.S. government and, for a nation going to the presidential elections in November, the fall-out will lie on the next leader. No wonder Mr Cowboy is all-willing to endorse this plan. He could be digging a big hole for the next fellow (then again, can anyone get worse?).

In my limited but honest opinion (of course governed by bounded rationality), this plan would only serve to prop up the rich and the very rich and the disgusting rich. The banks will survive the crisis, but the normal folks whose very loans underpinned the lending problems do not get a full resolution to their problems.

I should be grateful for this will keep me more secure (like Jade Goody on the gymnastic beam) but I wonder if this is only touching the tip of the iceberg.

Doc's out... come back later

In what was the most eventful week on Wall Street in recent months, I had to go on vacation.

Nope, not a deliberate attempt to escape the late nights in office given the recent upheaval. Nor was it an intended "push-out" by the management. It was mere coincidence. I have to publish a commentary report on the intranet everyday, so unsurprisingly is especially tuned-in to the latest events and news in the financial arena. To which Le Boss said, just as I was about to leave the office for Heathrow - "Take your finger off the pulse for the next two weeks. Come back to discover what had happened. You will have a fresh perspective".

Well, I spent an hour on Bloomberg after my arrival in Singapore on Saturday. So much for going on holidays.

Last Man Standing

I need to correct my earlier "mistake". While JPMorgan is an investment bank, Chase's merger with the securities house meant that there are only two independent broker-dealer firms now.

Goldman Sachs (in the blue corner) and Morgan Stanley (in the red corner).

Funny thing is they are not punching each other silly but suffering blows from the market. Both blue-eyed boys of the investment banking world but now eyed by the other (slightly more stable) banks.

And if the New York Times is correct, the Spice Girls must be singing the right tunes as two U.S. banking giants seek a merger that may leave Goldman standing alone (and hopefully not silly).

Will Treasury Secretary Henry Paulson let Goldman fall? Is John Thain, after selling Merrill Lynch to BoA, returning back to Goldman to do a third miracle? Or will Robert Rubin, ex-Chairman of Citigroup, fancy a prized coup?

By now, you can guess what these gentlemen have in common.

Unrelenting mayhem

Glad that I have my usual 7pm football game on Tuesday to distract me from the turmoil in the market today.

I sneaked out of the office quietly at 645pm - usually I will be among the last to leave at that time but given the financial fiasco, the office was packed. And noisy. And tense. By now, rumours are flying all over the city. Is Barclays buying parts of Lehman? Is the much-feared collapse of AIG the start of a tsunami that will herald a new Great Depression?

No one has a clue but one thing for sure - no one is interested in the collapse of another rival.

Waking up to a different tune now...

With the sudden chain of events, I will not know if there is a P45 laying on the office desk anytime soon.

Only a week more to the pay check. I can wait though. Some will not be getting theirs.

There is always a winner...

... oh yes, did I mention that our very dear and beloved Temasek Holdings made a killing?

Any one-off tax rebate or hardship bonus to ease our pain? After all, they managed the country's reserves. And where did the funding (i.e. reserves) come from?

And there were six...

By now, this should be old news. After all, people trade on the seconds but the fate of many lies uncertain.

The news came in midnight U.S. time. I surfed-read Bloomberg last night before I slept and it was pretty much stale news at that point (which was evening in the U.S). Imagine the shock when I clicked onto Bloomberg in the morning and realised that the veritable financial institution is now history.

Frantic. Dramatic. Shock.

An understatement considering this is the biggest corporate bankruptcy ever. Bear Stearns, Enron and Andersen are now a distant memory. For all that have happened over the last 18 months due to the on-going credit and liquidity crisis, the events over the weekend and last week were of no match. First Freddie Mac and Fannie Mae were rescued by the U.S. government which led to the biggest ever default in the credit derivatives market. Oil plunged below $100, a good $30+ from March, then Lehman was reportedly due to be bailed out by some white knights, which only translated to a wipe-out come 48 hours later.

Goldmans Sach. Morgan Stanley. JP Morgan.Lehman Brothers. Merrill Lynch. Bear Stearns.

The last three have disappeared in a space of less than six months. The fallout could be less dramatic if not for the fact that I am in this very threatened industry. I remember I was only two months away from joining Andersen when the beleaguered audit firm collapsed which left me wondering where to go. Enron, Worldcom and the preceding Afghan war a year ago spelled doom for the many new graduates in my batch. Yet God has it for me to join KPMG which subsequently led me to where I am now.

The Lehman New York office has since become a "new tourist attraction". With staff streaming out of the office on Sunday night and curious bystanders standing by, watching the unfolding of a financial soap opera. How sad must it be for these staff, most of whom have nothing to do with the crisis (traders and senior management should be held responsible), many of whom may have kids and wives, many of whom will find difficulties in securing jobs in the next few months or years. It did not stop at New York; Lehman London HQ is just opposite the Barclays Capital building where I work. And by late morning, the reporters were all on-site to capture the first of many to leave the building. Cabs were streaming in and out to ferry tired and wounded bodies. Cameras and videos captured the dejected faces.

"It's kind of chaotic. The only question remaining is whether we will get this month's pay check."

"The Fed didn't bail us out. That's the right decision. As a taxpayer, rather than a Lehman employee, you shouldn't have to foot the bill for someone else's decision. It's a sad story for me and very many others."

"I had trouble getting here because of the Eurostar fire. When I finally made it I found out I was fired. We are all fired."

Quotes from many despondent staff. I know of a commodity trader in Lehman. Xueyan's ex-boss is there now. The talk at the water-cooler today, of course, revolved around Lehman. My colleague, who joined us a year ago from Lehman, told me his old team is no longer there. Everyone basically packed and went. And most of these bright people, he said, are unlikely to get jobs soon; many of whom are in their late thirties and hold senior/middle-management titles.

Will there be a change in the investment banking models? As we looked at the strike-list, there is something common among the fallen - the lack of a retail business. Not many MONTHS ago, retail banking was seen as unsexy and non-glamorous but it is now this unattractive business which is holding up the likes of UBS, Citigroup, Credit Suisse - banks which have posted similar or bigger losses than the collapsed. Right now Goldman and Morgan Stanley have come under fire (Is it a good thing that JP Morgan has the Chase business to fall back on?).

Perhaps this is what we call the cycle - you always have a trough and peak. And it is our time to witness this tough period. The day will come when the panic will strike me worse. Instead of seeking security in the securities that have now gone worthless, I thank God for His provisions. And if I were to worry about tomorrow, He has assured me - for He holds my future.

"Consider how the lilies grow. They do not labor or spin. Yet I tell you, not even Solomon in all his splendor was dressed like one of these. If that is how God clothes the grass of the field, which is here today, and tomorrow is thrown into the fire, how much more will he clothe you, O you of little faith! And do not set your heart on what you will eat or drink; do not worry about it.

An different voice

Interesting articles and more importantly, an alternative view.

The Online Citizen

Year of Return

Before this year, I have only returned to Singapore twice in over two years. And in this year up to now, I have already gone back twice. And it doesn't stop there - I will be going back again! Managed to squeeze an upcoming trip from 20 Sep to 1 Oct.

This time with a greater sense of purpose. And coming back with my love.

Sister

Given 1) it's Monday bank holiday tomorrow and 2) I have not blogged for some time, I reckon it's due time for an update.

Sister and Xueyan were here beginning August for two weeks, before departing on the Monday just past. It's funny waking up and not seeing my sister and Xueyan. Every morning I will bring my laptop to my sister while she takes in the morning sunshine on the sofa. By that time (7.30am), she would already have had her tea and breakfast and waiting for Ms Wee to get up. We did not get on to much during the ladies' two-weeks in London, except for a weekend trip to Paris and a drive trip to Oxford/Bicester.

I had longed for my sister to come up. While it was great to have my beloved Xueyan here again, I have always wanted someone from the family to come over to London. A 14-hours flight can be a dreadful ordeal and I have been reminded by Xueyan how selfish I can be to ask them (repeatedly) to visit us, just so I can have them experience London (whether they like it or not). I did not take any vacation leave during the two weeks and left the gals to their devices to get on. But dinners are almost always together and I did help myself to some nice food (after endless instant noodles, cereals and pasta before their arrival).

Having family around is terrific and I can't ask for more than their presence. And it blessed my heart to see this message - "Thank you my best bro! I will go again! - on my sister's MSN. While I have been harassing Xueyan to have her siblings and parents over, I have come to realise they too should have a choice. While many would love to have an all-expenses-paid trip to London, not everyone thinks the same (and we thank God for diversity and differences).

On a separate note, I went for cell group on Friday and it was heart-warming to see old friends again (in a CG setting). There has been a lot going on in church in the last few weeks. Now that I am on fire - lets keep it alive at Marsham Street.

What are we doing in Paris? Again...

How do you run the race?

He was widely acknowledged as the greatest strategist in his era. He could call on winds and storms to aid his tactics. His wizardry forms part of his resources. In a time of warlords and feudal chiefs, he built a kingdom for the smallest of them all. He lured "Tiger" generals and was seen without equal by his peers. He was the one who people saw as the hope for the Han unification.

I am a Romance of the Three Kingdom fan - an equivalent to the typical petrol head. Despite incapacitated by my semi-literate Mandarin, I developed a fond interest in this history. I have probably gone through the Chinese DVDs several rounds and can't seem to get bored of the show. While the summer weather tempts many for a run and a day in the park, my unfortunate hamstring got me to stay in for a Saturday of rest. And I drew a disc from the 72 DVDs of the RTK series for a watch. It was the episode that Zhuge Liang died.

Fresh from a failed ambush to kill Sima Yi, Zhuge Liang, who was into his fifth expedition to conquer the Northern empire (Cao Cao's legacy) knew time was not on his side. Coming down with sickness and overwork, Zhuge foresaw his imminent death and began to pass instructions for life after him. I have seen this episode about four times and something got clearer now. On his deathbed, he reminisced about his early life in recluse, the initial battles and struggles and the consequent victories. But one thing was clear to him (and me) now - his time is up. His goal will not be accomplished. The final scene before his death saw him looking at a flag which bores "Conquer the North" to which he said it will not be fulfilled by him.

We can often start so well and carry abundant brilliance compared to our peers. My time in investment banking and audit has exposed me to top talents, some young chaps making Managing Directors before thirty. However life is a marathon and is not judged on how well we do the first 400m. Nor what we have achieved during that short time. As I looked at his moments before the death scene, I asked myself - What will be my final thoughts? Have I been a man after God's heart? Have I lived a life worth living? And when I come before the throne of judgement - will I receive the acclaim and praise from Him, saying "Well done my son"?

No wonder Paul, in his final letter to Timothy, wrote "I have fought the good fight, I have finished the race, I have kept my faith. Now there is in store for me the crown of righteousness, which the Lord, the righteous judge, will award to me on that day - and not only to me, but also to all who have longed for his appearing."

The road ahead is very long, arduous and tough and definitely fraught with trials and temptations. But God has promised to be with us, as our guiding light. While the wrinkles will come, the pressures of work, married life and parenthood pile, yet we can take comfort that "we are hard pressed on every side, but not crushed; perplexed, but not in despair; persecuted, but not abandoned; struck down, but not destroyed."

And in the spirit of the Olympics, and with the sportsman/sportswoman in everyone of us - how would you like to run the race? Do you want to be a Ben Johnson or a Derek Redmond?