Bao steel came big as it scared the market surprisingly on last week in a strange way: Market fell sharply in its biggest loss in the year by nearly 4%. While so far so good as we saw no strange cash move from this largest steel maker in China, its Stock option will debut next Monday.
Admittedly though the market has been predicting the opening price of this option, nobody could make a good guess. This is such an inefficient market and beyond that there is no reasonalble volatility to apply and no comparable on its peer in China. Its stock price over the year has captured the market's weired performance, so on and so forth. I here chose a US steel maker Nucor Corp (NUE) as a comparable company.
(1)Using a simple binominal approach, its historical low was at CNY3.5 level and high at 7.5. If we lend at 2% risk free rate, by replicating a call option we get its price at CNY0.85. (Delta is 0.75). Here we ignore volatility and other greek letters)
(2)Now let's put forward volatility and go into more complex way. This is a model built on binomy model and the talent of spreadsheet.
S 4.62
K
sigma 0.3/0.6 (per period)
r 0.01519005 (per period compound rate)
div 0.005 (per quarter)
T 1
N 56
h 0.017857143
u 1.041185989
d 0.960964381
p* 0.489979045 This is risk neutral probality.
1-p* 0.510020955
The theoretic value is 0.58 at sigma 30% and 1.026 at Sigma 50%. Dividend is certainly a big thing in the calculation and affect option price by 10 percent is we assume no dividend paid in the coming year.
(3)Again we use the other most popular pricing method, black-schole model,
Black-Scholes Directly in a Excel Sheet
Stock price 4.62 S
Strike price 4.50 X
Years to maturity 1.00 T
Risk-free rate 2.20% r
Volatility 50.0% v
European call value 1.00 call value
European put value 0.79 put value
d1 0.3466
d2 -0.1534
50% volatility is preferred since too many factors affect the market and Shanghai stock market is infamous for its flucturation. Steel industy itself is facing currency revaluation and business cycle, which also has to do with the foreseeable recession next year as many economists worry the sloppy consumer spending.
Going back to basics, as far as underlying stock price of Baosteel, 4.62 is still reasonable even though its trailing P/E 9% is much higher than Nucor. But the punch line might be in china there can forecast more growth while in US Nucor is in a sunset industry. So the stock price of Baosteel can possibly be bullish in short run until one day the government starts to kick off the big metal.
So my personal belief is the option should be priced starting from 0.58, some key numbers are 0.64, 0.85, and 1, the uplimit might be 1.27. However I really tend to believe the market is going to push it higher than that, especially if they believe the whole market is bullish for next year.
Sunday, August 21, 2005
Thursday, August 11, 2005
Deja vu GOOG, etc.
The big star over the week has been Baidu (ticker BIDU)obviously. The search engine had its debut several days ago with a first day gain more than 350%, the largest gains since the tech bubble in the beginning of the century. It certainly gives a surprising push on NASDAQ and ignites new IT imagination. It ends down yesterday back in 100 bucks and to a great extent retrieve its fantasy. It seems that the market is still painfully in recall of its ordeal from 2001. But GOOGLE story is still up there and the perspective on new IT firm and its Chinese background will for sure make up the road for this new comer in Wall Street.
Across the ocean bade careful change the views of Chinese investor as how to value a growing company, especially for technology firms. The equity market reform is in high for 2 weeks and all the stocks with the cap of "G" jumped since last week. The question is fundamental: Will the market recover ultimately as a result of this hard effort for the regulatory body to float state owned shares?
And of course all the change came out the surprising Yuan revaluation on July 20, which served as a catalyst for the big change. We don't know how big the change will for and what it meant for Chinese financial market. But we all know something so important is happening now and it might be for a whole lot of people the best approach to shape their wealth going forward in their life, and probably the way people live.
Across the ocean bade careful change the views of Chinese investor as how to value a growing company, especially for technology firms. The equity market reform is in high for 2 weeks and all the stocks with the cap of "G" jumped since last week. The question is fundamental: Will the market recover ultimately as a result of this hard effort for the regulatory body to float state owned shares?
And of course all the change came out the surprising Yuan revaluation on July 20, which served as a catalyst for the big change. We don't know how big the change will for and what it meant for Chinese financial market. But we all know something so important is happening now and it might be for a whole lot of people the best approach to shape their wealth going forward in their life, and probably the way people live.
Thursday, July 28, 2005
Expectation going forward
Wall street is really excited by the upbeat in the market in the midst of haunting high oil price. The fact comes off the macro as well as micro economy is that everything is too good to be true.Good GDP, good index, good numbers from corporate sectors. Chances are over next several weeks profit-taking could be foreseeable.
Chinese Yuan has pitched a surprise to the whole world as government revalue the currency up by 2%, which drive a series of positive comments. Equity market has also broken ground upon the optimistic consequences from it. Assets quote by Yuan is taking up space as investors envision a sustained grow of China's huge economy. As market's still digesting the stock market reform, reshuffles among stocks are taking place. Citic Securities 600030.SS stoped trading today and will continute to do so. Yangtzi Power 600900.SS and Baosteel 600019.SS are also have some day off. United Telecom 600050.SS and Sinopec 600028.SS dominate the market with trading slightly heavier than a couple of weeks ago.
Thursday, June 30, 2005
Not daybreak yet
Investors are frustrated and disoriented as the regulatory body is desperately selling their plan of reforming the stock market. Their goals going forward are floating non-trading state owned shares, raising more capital for SOE reform and solving the downing pension plans, whatever you make them.
Market takes these measures in mixed ways but overall, if we say, treats negatively. People are concerned that those plans are not adquately meditated and we addressed.
Market takes these measures in mixed ways but overall, if we say, treats negatively. People are concerned that those plans are not adquately meditated and we addressed.
Thursday, May 19, 2005
About to rebound? Chances are no big jokers come in.
Stocks in the fast growing economy inched up slightly over last two days but in a rather leery way. It touched again a new low yestoday with a suprising close at a positive number, thanks on a large extent to Sinopec, which dragged down the index and ended up push it up at the close. Trading was not even moderate as the market took a cautious way on mixed information.
After a three days of "gains", Shanghai composite index is still struggling around 1100 in the market today. My guess is chances are money is flowing into the market after blue chips such as Yangtze Power(600900.SS) and Sinopec(600028.SS)shaked off their negative impacts. Yangtze Power's 400 million locked shares started floating yestoday and Baosteel is losing market attention for its bad seasoning issue.
From the chart we observe, the market is also in critical moments in terms of technical analysis. The price channel are breaking and the market is certainly heading to one direction. Chance is there comes a big bullish engulf in the days ahead. Investors should otherwise be alert of further drop of the index.
US market is having a great week with Dow gained 300 points, partly due to good economic news and falling oil price.
After a three days of "gains", Shanghai composite index is still struggling around 1100 in the market today. My guess is chances are money is flowing into the market after blue chips such as Yangtze Power(600900.SS) and Sinopec(600028.SS)shaked off their negative impacts. Yangtze Power's 400 million locked shares started floating yestoday and Baosteel is losing market attention for its bad seasoning issue.
From the chart we observe, the market is also in critical moments in terms of technical analysis. The price channel are breaking and the market is certainly heading to one direction. Chance is there comes a big bullish engulf in the days ahead. Investors should otherwise be alert of further drop of the index.
US market is having a great week with Dow gained 300 points, partly due to good economic news and falling oil price.
Sunday, May 15, 2005
New Hoax?
I post here an article from International Herald Tribune, where the recent hype of "new reform of ownership structure" was clearly commented, it's not worthwhile to make argument, since I, and maybe you, might always missing the point.
"China's third attempt in six years to promote stock market investment by reducing the government's $260 billion in share holdings failed to stem losses over the past year. Prices may fall further whether the plan succeeds or fails.
Four companies - Hebei Jinniu Energy Resources, Sany Heavy Industry, Shanghai Zi Jiang Enterprise Group and Tsinghua Tongfang - were picked last week for trial sales of the state's shares.
The Shanghai Composite index, tracking the larger of China's two stock exchanges, slid 4.4 percent last week amid concern that the plan would trigger a flood of sales and lower prices. "Nontradable" shares, owned mainly by the government, account for two-thirds of market value in China.
"There will be lots of depression for Chinese investors," said Bich Pham, a fund manager at TAL Global Asset Management in Hong Kong. "Bankers and brokers are always concerned about excess supply" of shares, he said.
The Shanghai Composite and a similar index for the Shenzhen exchange are the worst performers for the past 12 months among 80 global benchmarks tracked by Bloomberg. Shanghai's benchmark has declined 31 percent in dollar terms and Shenzhen's has lost 34 percent.
......
Share prices for Sany Heavy, Zi Jiang and Tsinghua Tongfang surged by the 10 percent regulatory limit on the first day of trading after outlining their plans. Trading in Jinniu Energy resumes Monday after being suspended for introduction of its plan.
The sales are "a turning point" for the Chinese stock market because they will end the government's position of being both watchdog and largest shareholder, Morgan Stanley analysts wrote in a May 9 report.
Sales will also lead to better corporate governance and more shareholder rights at companies once the state no longer has a stake, they wrote.
Each company plans to make payments to investors that would help offset the impact of additional stock on the price of their shares. All four are offering additional shares, and Sany plans to include a cash payment."
At a close of 1100 level, Shanghai composte index was halved since its high in 2001 with average loss of 70 percent for investors. The investors concerns are centering on if the regulatory body is again leading them another dire straits.
"China's third attempt in six years to promote stock market investment by reducing the government's $260 billion in share holdings failed to stem losses over the past year. Prices may fall further whether the plan succeeds or fails.
Four companies - Hebei Jinniu Energy Resources, Sany Heavy Industry, Shanghai Zi Jiang Enterprise Group and Tsinghua Tongfang - were picked last week for trial sales of the state's shares.
The Shanghai Composite index, tracking the larger of China's two stock exchanges, slid 4.4 percent last week amid concern that the plan would trigger a flood of sales and lower prices. "Nontradable" shares, owned mainly by the government, account for two-thirds of market value in China.
"There will be lots of depression for Chinese investors," said Bich Pham, a fund manager at TAL Global Asset Management in Hong Kong. "Bankers and brokers are always concerned about excess supply" of shares, he said.
The Shanghai Composite and a similar index for the Shenzhen exchange are the worst performers for the past 12 months among 80 global benchmarks tracked by Bloomberg. Shanghai's benchmark has declined 31 percent in dollar terms and Shenzhen's has lost 34 percent.
......
Share prices for Sany Heavy, Zi Jiang and Tsinghua Tongfang surged by the 10 percent regulatory limit on the first day of trading after outlining their plans. Trading in Jinniu Energy resumes Monday after being suspended for introduction of its plan.
The sales are "a turning point" for the Chinese stock market because they will end the government's position of being both watchdog and largest shareholder, Morgan Stanley analysts wrote in a May 9 report.
Sales will also lead to better corporate governance and more shareholder rights at companies once the state no longer has a stake, they wrote.
Each company plans to make payments to investors that would help offset the impact of additional stock on the price of their shares. All four are offering additional shares, and Sany plans to include a cash payment."
At a close of 1100 level, Shanghai composte index was halved since its high in 2001 with average loss of 70 percent for investors. The investors concerns are centering on if the regulatory body is again leading them another dire straits.
Saturday, April 23, 2005
Sleepless Night for Chinese Investors
Stocks fell again on Friday, weighed down by inflation concern and apathy of market regulator. I guess this weekend and maybe the week ahead will be some sleepless nights for most investors in China, who buried their wealth in such a "sucking trap". Rational investors would think government will eventually step into the field and stabilize the market or as least sooth the panic. Chances are the regulator sticks to their apathy and thus endanger the social stability.
It's a fun to find that in the business page of the famous internet portal Netease.com, the headline was "Annual Earning Report: St CSRC", CSRS refers to the regulatory body "China Security Regulatory commission", while ST means the listed firms with 3 consecutive years of loss. CSRC is for sure the biggest loser in the market. The sensitive page was soon deleted by internet censor.
Nearly 6 years low, as most stocks went down by 50-80% from its bullish history of 2000, it is a critical point of china financial market. We will witness the painful transfer very soon, but for average investors at large, it will be the tragic time in their life. Best regard to them, the avant-gardes that help lay foundation of a great market.
US market was down again as oil price went up to 55 bucks.
It's a fun to find that in the business page of the famous internet portal Netease.com, the headline was "Annual Earning Report: St CSRC", CSRS refers to the regulatory body "China Security Regulatory commission", while ST means the listed firms with 3 consecutive years of loss. CSRC is for sure the biggest loser in the market. The sensitive page was soon deleted by internet censor.
Nearly 6 years low, as most stocks went down by 50-80% from its bullish history of 2000, it is a critical point of china financial market. We will witness the painful transfer very soon, but for average investors at large, it will be the tragic time in their life. Best regard to them, the avant-gardes that help lay foundation of a great market.
US market was down again as oil price went up to 55 bucks.
Wednesday, April 20, 2005
Dual Dump Again
China market shed another 16 points on Wednesday(1184.19) and approaching its 6 year low again. Investors dumped technology stocks as scandals developed especially today with focus on Juyou Networks(000693.SS). Many blue chips such as Tongfang(600100.SS) and Shanghai Belling(600171.SS) lost 10%.(10% change is the single daily limit of trading) What brought market down in market view lies partly in bad news for additional issue of Pudong Dept Bank(600000.SS). This follows the Baosteel issue just days ago which hit the market on the face. Regulatory inconsistency complicates market sentiment and more upset investors, who have been "cheated"(to some extent that's perfectly true)over the years by regulatory body. Public offering in China is nothing more than deluding investors to donate their wealth for SOEs to squander, so to speak. The most ironically featured joke in world financial market is that CSRC post "investors protection is our top priority" on its website.(http://www.csrc.gov.cn/en/homepage/index_en.jsp) In such a context, regulatory body should take all blames and might be at the agenda for correcting its own deregulation. The bottom line is that the main purpose of such a government agency is nothing but making "capital most efficiently utilized". This is the starting point.
Economic growth driven by fixed investment covers and kind of dominates everything negtive today, but the restructure of capital market is essential. The healthy and competitive economy requires diverting savings to more economic growth driven by consumption through well functioned capital market, which guarantees the most effecient use of fund. This works for all economies.(especially a direction for Chinese economy today)
Back here US market experienced another downturn as CPI picked up in March which brought back inflation concerns. Dow closed at 10012.38.
Economic growth driven by fixed investment covers and kind of dominates everything negtive today, but the restructure of capital market is essential. The healthy and competitive economy requires diverting savings to more economic growth driven by consumption through well functioned capital market, which guarantees the most effecient use of fund. This works for all economies.(especially a direction for Chinese economy today)
Back here US market experienced another downturn as CPI picked up in March which brought back inflation concerns. Dow closed at 10012.38.
Monday, April 18, 2005
Monday trailing in Shanghai
Shanghai index dumped another 20 point to 1197.735. While corporate earnings turn to be new fuel for further weakening of the market, the fallout of Baosteel's new floating is still pulling the string of investor's pocket. Energy sector lost more credits as Yangtzi Power damped quarterly earning expectation. China Unicom stayed flat and Citic Security fell 2.88%.
Saturday, April 16, 2005
Big Sell, and Baosteel Sell
Market witnessed the biggest selloff in wall street on Friday as Dow closed down to 10080.34. Over the week the index was off 3.55 percent and other index also setting fresh low for the year. Stocks has now erase all the gains buildup in the rally started from November last year. The bench mark broke through anything technicians might have said were support points. My guess is next trading day the round number of 10000 will be tested.
Across the ocean chinese market tumbled in the last trading day of the week with Shanghai Composite Index losing 17.37 points. The market sentiment soured over the staged Baosteel's new floating of additional 50bn shares, which turn the investors's mood back to negtive. This translate into another round of distrust to the government's effort to bring the equity market back in "track".
The country's regulatory body - China Securities Regulatory Commission has been malfunctioned. The commssion seems to overlook supposedly the role of enhancing capital efficiency and market oversight. It has turn out to the service provider of state-owned enterprises and their super parent of state assets administration and supervision commission. The best evidence of Baosteel's new issue can be easily spotted by market which many said the new capital raise would further lower the capital use efficiency mesured by RoA or Revenue per units of Assets. This concern is brought up by world analysts when chinese economy is compared to the potential growth of india economy. The latter is said to be more efficient in term of using capital fund.
Another fact that the market hardly notice is the involvement of China International finance corp as Baosteel's underwritter. The payoff of this issue and its related M&A transaction will probably bring CIFC 1.5bn by 7% average underwriting charges using wall street standard. Lobby activity might have been entensive since the market's negtive acceptance when the plan was leaked out last year.
Over next week, Shanghai index will have a high chance of going up on Monday but then it's nobody's guess. For stocks, 600030 and 600050 are still in my watching list.
Across the ocean chinese market tumbled in the last trading day of the week with Shanghai Composite Index losing 17.37 points. The market sentiment soured over the staged Baosteel's new floating of additional 50bn shares, which turn the investors's mood back to negtive. This translate into another round of distrust to the government's effort to bring the equity market back in "track".
The country's regulatory body - China Securities Regulatory Commission has been malfunctioned. The commssion seems to overlook supposedly the role of enhancing capital efficiency and market oversight. It has turn out to the service provider of state-owned enterprises and their super parent of state assets administration and supervision commission. The best evidence of Baosteel's new issue can be easily spotted by market which many said the new capital raise would further lower the capital use efficiency mesured by RoA or Revenue per units of Assets. This concern is brought up by world analysts when chinese economy is compared to the potential growth of india economy. The latter is said to be more efficient in term of using capital fund.
Another fact that the market hardly notice is the involvement of China International finance corp as Baosteel's underwritter. The payoff of this issue and its related M&A transaction will probably bring CIFC 1.5bn by 7% average underwriting charges using wall street standard. Lobby activity might have been entensive since the market's negtive acceptance when the plan was leaked out last year.
Over next week, Shanghai index will have a high chance of going up on Monday but then it's nobody's guess. For stocks, 600030 and 600050 are still in my watching list.
Friday, April 15, 2005
Where To Go? Bear or Bull, or Even Panda~
As oil price had gone up to nearly 60 bucks, it's returned to 50 level with, interestingly, the same trend going on in stock market. Dow has touched the lowest point for the year at 10,278.75 among some not "encouraging" news from corporate earnings. Big player IBM and Apple are in the headlines. Russell 2000 was also down 1.76 percent which tracks small cap companies.
The story recently in China is particularly interesting in that the market has been filled out by a whole lot of information about a pilot program to resolve the non-floating state-owned shares. Trading volumes are high in this week as investors, especial institutional investors are changing their positions. As rumors are developing, stocks with perceptive Reform Test are trading high. Another interesting feature of the market move is old players as Shenzhen Development Bank (000001.SZ) and Changhong (600839.SS) hit a comeback, which might be a hype or not.
Although the direction of equity market is not clear, the foreign currency denominated B-shares index has grown significantly compared to its brother A-shares. I guess one of the reason is that investors perceive the arbitrage opptunities once the floating of non-tradable shares will ultimately bring up the combination of A shares and B shares, the latter is greatly cheaper with the current peg rate with US dollar. The Shanghai composite intex stands at 1223 as market open low in the midst of Baosteel's troublesome seasoned issue and uncertainty of market heading.
Citic Securites (600030.SS) is at the moment traded at 5.12Y, and China Unicome (600050.SS) at 2.71Y.
The story recently in China is particularly interesting in that the market has been filled out by a whole lot of information about a pilot program to resolve the non-floating state-owned shares. Trading volumes are high in this week as investors, especial institutional investors are changing their positions. As rumors are developing, stocks with perceptive Reform Test are trading high. Another interesting feature of the market move is old players as Shenzhen Development Bank (000001.SZ) and Changhong (600839.SS) hit a comeback, which might be a hype or not.
Although the direction of equity market is not clear, the foreign currency denominated B-shares index has grown significantly compared to its brother A-shares. I guess one of the reason is that investors perceive the arbitrage opptunities once the floating of non-tradable shares will ultimately bring up the combination of A shares and B shares, the latter is greatly cheaper with the current peg rate with US dollar. The Shanghai composite intex stands at 1223 as market open low in the midst of Baosteel's troublesome seasoned issue and uncertainty of market heading.
Citic Securites (600030.SS) is at the moment traded at 5.12Y, and China Unicome (600050.SS) at 2.71Y.
Friday, April 01, 2005
Market Suprise not From Wall Street
Dow lost nearly 100 points as the concern of inflation rises and job figure did not meet the forcast. Martet tended to be flat without any suprise.
The suprise came from China where the stock market has been struggling for a couple of years. And it just tested its lowest level in 6 years, which analysts say is supposed to be worse considering newly listed stocks account for more weight.
The market rebound sharply in the afternoon triggered by a rumor from HK news paper. It gains 42 points to 1223.57(Shanghai Index).While no one has confirmed, institution investors began to exploit the opportunity, whether for good or for bad. The rumor said that the high lever financial officials have made up guidelines of how to deal with the State-Owned equity,which is not yet tradable in the market. By allowing these shares to be treated as convertible preferred stocks with maturity of 30 years, the concern of full circulation of these shares could be nearly dimished. Does the market play a big joke on April 1? The puzzle is for sure no easy to solve. Although I don't very much buy into such a plan, my guess of the market's response is a combination of quite a few elements.
Firstly, the market has fallen to a level of strategic participation, for instituation investors and potential takeover planner. I think M&A will be big topic in 2 years or so, which i wish i could talk it later.
Secondly, the revaluation of RMB is a trigger, I found the benefitaries are the major winners of today's market gain. Steel manufacters such as Baosteel and Oil firms as Sinopec led the rebound.
Another reason I would say is it has somthing to do with the macro economic policy. If money withdraws from real estate sectors, it probably will be channeled to equity market, which is acturally attractive to some investors.
The risk is still out there unless the rumor turns out to be true. I guess my suggestion is changing stocks to some IB and Banking sectors(600030.SS etc.) or China Unicom(600050.SS).
The suprise came from China where the stock market has been struggling for a couple of years. And it just tested its lowest level in 6 years, which analysts say is supposed to be worse considering newly listed stocks account for more weight.
The market rebound sharply in the afternoon triggered by a rumor from HK news paper. It gains 42 points to 1223.57(Shanghai Index).While no one has confirmed, institution investors began to exploit the opportunity, whether for good or for bad. The rumor said that the high lever financial officials have made up guidelines of how to deal with the State-Owned equity,which is not yet tradable in the market. By allowing these shares to be treated as convertible preferred stocks with maturity of 30 years, the concern of full circulation of these shares could be nearly dimished. Does the market play a big joke on April 1? The puzzle is for sure no easy to solve. Although I don't very much buy into such a plan, my guess of the market's response is a combination of quite a few elements.
Firstly, the market has fallen to a level of strategic participation, for instituation investors and potential takeover planner. I think M&A will be big topic in 2 years or so, which i wish i could talk it later.
Secondly, the revaluation of RMB is a trigger, I found the benefitaries are the major winners of today's market gain. Steel manufacters such as Baosteel and Oil firms as Sinopec led the rebound.
Another reason I would say is it has somthing to do with the macro economic policy. If money withdraws from real estate sectors, it probably will be channeled to equity market, which is acturally attractive to some investors.
The risk is still out there unless the rumor turns out to be true. I guess my suggestion is changing stocks to some IB and Banking sectors(600030.SS etc.) or China Unicom(600050.SS).
Saturday, March 26, 2005
Terri's Econ Effect
These days the whole country are focusing on Terri's case. No one would bother to come up with the econ implication from the issue. But someone does. It's foxnews-- the well dressed hype tool of republican americans.
I guess what is happening does have an effect in that regards in terms of psycological impact on people's behavial and mindset on insurance or social security aspect. While I would say it is still at very marginal level. We can hardly find any correlation between the market and these kinds of issue although it attracts the attention of the market players.
It raise an intersting topic of guadian right. The issue we watch in my view is not the right for Terri to live for any longer time but that of the guadians to excute their rights. Is her husband in a postion to terminate terri's life from what he understand terri's living will? We see that's exactly the ruling from local as well as federal judges. The government or the Bushes are not in a postion to behave against it in that sense. Well, I hope this crisis will end peacefully without causing damages to the social integrity. But again this is where there is nothing people can do to bring about it.
I guess what is happening does have an effect in that regards in terms of psycological impact on people's behavial and mindset on insurance or social security aspect. While I would say it is still at very marginal level. We can hardly find any correlation between the market and these kinds of issue although it attracts the attention of the market players.
It raise an intersting topic of guadian right. The issue we watch in my view is not the right for Terri to live for any longer time but that of the guadians to excute their rights. Is her husband in a postion to terminate terri's life from what he understand terri's living will? We see that's exactly the ruling from local as well as federal judges. The government or the Bushes are not in a postion to behave against it in that sense. Well, I hope this crisis will end peacefully without causing damages to the social integrity. But again this is where there is nothing people can do to bring about it.
Friday, March 25, 2005
Liquidity Bubbles
Liquidity Bubbles
Just back from New York trip, wonderful - I'd rather say, and decided to make up my travellog next day. But an article from Washingtonpost.com caught my eyes and the important thing is that it makes sense. The liquidity eccess accumulated over years will ultermately set itself in a crisis in anytime soon. Central Bank of China is blamed, Fed is blamed, even the best technology years are blamed for they make the corporate world awash in cash.
"There is an excess of liquidity around, and it is proving very hard to get rid of it," said John Makin of the American Enterprise Institute, using the term preferred by economists.
"The possibility of a liquidity bubble around the world concerns me," Citigroup Chairman Charles Prince told the Financial Times last week.
To some degree, this excess liquidity is what you'd expect as a giant baby boom generation reaches its peak earnings years and begins to save more for retirement.
And surely a good part of the story is the stimulative monetary policies of central banks around the world for most of the period since the Asian financial crisis in 1998. The Bank of Japan has been pumping out cheap money for years in an effort to revive the Japanese economy and slay the deflation dragon. In the United States, the short-term interest rates that the Federal Reserve controls have been below the inflation rate for more than three years.
The biggest culprit of all, however, may by the central bank of China, which, to prevent the appreciation of the Chinese currency, has had its printing presses working overtime to churn out the yuans needed to buy all those dollars earned through exports.
Fed Maestro Alan Greenspan has argued that nobody can really identify a financial bubble until after it has popped, which was one reason the Fed did little to try to prick the stock market bubble in the late 1990s. That sophistry was exposed last month when transcripts of Fed meetings from 1999 were released showing that Fed officials, including Greenspan, were quite aware that they were dealing with a bubble of immense proportions. And it is now belied, as it was then, by any number of objective indicators of the widening gap between the economic and market value of various assets.
The downtown office-building market is also red hot, despite the fact that, nationally, there has been little increase in net rents. Torto said most of the price escalation can be explained only by an expectation that price appreciation will continue at its current pace.
Phil Verleger, the energy expert, brings a similar analysis to the recent run-up in oil prices, which he said is being driven less by fundamentals (supply, demand and the cost of replacing reserves) than it is by the upward pull of futures markets. He said OPEC and its silent partners, the major oil companies, know that they earn the highest profit when oil inventories are lean, and the best way to keep them lean is to keep spot prices higher than futures prices. Now that every hedge fund and college endowment is in the futures market placing bets on higher prices over the next year, spot prices are following suit.
The current bond-market bubble was attested to by no less an authority than Greenspan, when he admitted he was puzzled by long-term interest rates that have failed to respond to the 1.75-percentage-point increase in short rates engineered by the Fed. Greenspan called it a "conundrum." I call it a speculative market driven by irrational exuberance and herd behavior.
A similar story is told by narrowing "spreads" on riskier bonds -- the interest-rate premium that borrowers have to pay over "risk-free" U.S. Treasury bonds. On the junk-bond market, spreads are near historic lows, with many new issues oversubscribed. In the market for emerging-market bonds, spreads that peaked at more than 10 percentage points at the time of the Argentine debt crisis in late 2001 fell to a low of 3.3 percentage points earlier this month.
It is more of a stretch to argue that stock prices have again entered bubble territory. Certainly as a multiple of earnings, today's prices are only slightly above historic averages. But there is a strong sense of deja vu in seeing banks and Wall Street investment houses tripping over one another to provide gobs of money on easy terms to companies and private equity funds engaged in bidding wars for telecom and software firms. And I assign some significance to the fact that Warren Buffett, who correctly identified the last bubble, now has $43 billion sitting in the bank, unable to find acquisitions to make at reasonable prices.
The tendency among economists has been to assume that bubbles happen only when there is too much cheap money around and that responsibility for controlling the money supply and containing bubbles rests with the Fed and other central banks. Adam Posen of the Institute of International Economics did a nice job of knocking down such outdated monetarism in a short, pithy article in a German newspaper last week.
But Posen -- like the Greenspan Fed -- also makes a mistake in concluding from that observation that policymakers need not worry about asset bubbles, largely because they have little long-run impact on what economists call "the real economy." That may once have been true. But this is a world in which billions of dollars earned by Chinese exporters can be recycled into Fannie Mae bonds, lowering U.S. mortgage rates enough to give a couple in Rockville the wherewithal to spend an extra $50,000 for their dream house. It's also a world in which billions of extra petrodollars now quickly make their way into hedge funds and real estate investment trusts that are bidding up the prices of satellite companies, Manhattan real estate and Treasury bonds. In such a world, the old distinctions between financial markets and the "real economy" quickly blur.
I don't know whether this means the Fed was right or wrong this week in not raising interest rates more than a quarter of a point and in sticking to its promise of "measured" increases in the future. What I do know, however, is that it is silly for the Fed to continue to ignore the condition of asset and currency markets when making such decisions and explaining them to the public.
Steve Pearlstein- for Washingtonpost.com
Just back from New York trip, wonderful - I'd rather say, and decided to make up my travellog next day. But an article from Washingtonpost.com caught my eyes and the important thing is that it makes sense. The liquidity eccess accumulated over years will ultermately set itself in a crisis in anytime soon. Central Bank of China is blamed, Fed is blamed, even the best technology years are blamed for they make the corporate world awash in cash.
"There is an excess of liquidity around, and it is proving very hard to get rid of it," said John Makin of the American Enterprise Institute, using the term preferred by economists.
"The possibility of a liquidity bubble around the world concerns me," Citigroup Chairman Charles Prince told the Financial Times last week.
To some degree, this excess liquidity is what you'd expect as a giant baby boom generation reaches its peak earnings years and begins to save more for retirement.
And surely a good part of the story is the stimulative monetary policies of central banks around the world for most of the period since the Asian financial crisis in 1998. The Bank of Japan has been pumping out cheap money for years in an effort to revive the Japanese economy and slay the deflation dragon. In the United States, the short-term interest rates that the Federal Reserve controls have been below the inflation rate for more than three years.
The biggest culprit of all, however, may by the central bank of China, which, to prevent the appreciation of the Chinese currency, has had its printing presses working overtime to churn out the yuans needed to buy all those dollars earned through exports.
Fed Maestro Alan Greenspan has argued that nobody can really identify a financial bubble until after it has popped, which was one reason the Fed did little to try to prick the stock market bubble in the late 1990s. That sophistry was exposed last month when transcripts of Fed meetings from 1999 were released showing that Fed officials, including Greenspan, were quite aware that they were dealing with a bubble of immense proportions. And it is now belied, as it was then, by any number of objective indicators of the widening gap between the economic and market value of various assets.
The downtown office-building market is also red hot, despite the fact that, nationally, there has been little increase in net rents. Torto said most of the price escalation can be explained only by an expectation that price appreciation will continue at its current pace.
Phil Verleger, the energy expert, brings a similar analysis to the recent run-up in oil prices, which he said is being driven less by fundamentals (supply, demand and the cost of replacing reserves) than it is by the upward pull of futures markets. He said OPEC and its silent partners, the major oil companies, know that they earn the highest profit when oil inventories are lean, and the best way to keep them lean is to keep spot prices higher than futures prices. Now that every hedge fund and college endowment is in the futures market placing bets on higher prices over the next year, spot prices are following suit.
The current bond-market bubble was attested to by no less an authority than Greenspan, when he admitted he was puzzled by long-term interest rates that have failed to respond to the 1.75-percentage-point increase in short rates engineered by the Fed. Greenspan called it a "conundrum." I call it a speculative market driven by irrational exuberance and herd behavior.
A similar story is told by narrowing "spreads" on riskier bonds -- the interest-rate premium that borrowers have to pay over "risk-free" U.S. Treasury bonds. On the junk-bond market, spreads are near historic lows, with many new issues oversubscribed. In the market for emerging-market bonds, spreads that peaked at more than 10 percentage points at the time of the Argentine debt crisis in late 2001 fell to a low of 3.3 percentage points earlier this month.
It is more of a stretch to argue that stock prices have again entered bubble territory. Certainly as a multiple of earnings, today's prices are only slightly above historic averages. But there is a strong sense of deja vu in seeing banks and Wall Street investment houses tripping over one another to provide gobs of money on easy terms to companies and private equity funds engaged in bidding wars for telecom and software firms. And I assign some significance to the fact that Warren Buffett, who correctly identified the last bubble, now has $43 billion sitting in the bank, unable to find acquisitions to make at reasonable prices.
The tendency among economists has been to assume that bubbles happen only when there is too much cheap money around and that responsibility for controlling the money supply and containing bubbles rests with the Fed and other central banks. Adam Posen of the Institute of International Economics did a nice job of knocking down such outdated monetarism in a short, pithy article in a German newspaper last week.
But Posen -- like the Greenspan Fed -- also makes a mistake in concluding from that observation that policymakers need not worry about asset bubbles, largely because they have little long-run impact on what economists call "the real economy." That may once have been true. But this is a world in which billions of dollars earned by Chinese exporters can be recycled into Fannie Mae bonds, lowering U.S. mortgage rates enough to give a couple in Rockville the wherewithal to spend an extra $50,000 for their dream house. It's also a world in which billions of extra petrodollars now quickly make their way into hedge funds and real estate investment trusts that are bidding up the prices of satellite companies, Manhattan real estate and Treasury bonds. In such a world, the old distinctions between financial markets and the "real economy" quickly blur.
I don't know whether this means the Fed was right or wrong this week in not raising interest rates more than a quarter of a point and in sticking to its promise of "measured" increases in the future. What I do know, however, is that it is silly for the Fed to continue to ignore the condition of asset and currency markets when making such decisions and explaining them to the public.
Steve Pearlstein- for Washingtonpost.com
Saturday, March 19, 2005
Market amid index reshuffle and oil story
Again oil price set a record high yestoday. The market seems unaffected with the true cause of the heavy trading volume of NYSE is simply the market index readjustment. Kept busy are those fund manager who need make sure they will not come off with tracking error.
The following is sourced from foxnew.com:
"stocks rallied off their session lows late in the day, pulling the Dow and the S&P 500 back to a position of little change at the close.
All three major indexes posted their second straight week of losses. For the week, the Dow fell 1.34 percent, the S&P was down 0.87 percent, and the Nasdaq lost 1.66 percent. The Nasdaq is down 7.7 percent for the year to date.
Trading was heavy, with 2.34 billion shares changing hands on the New York Stock Exchange, way above the 1.46 billion daily average for last year.
The last time that volume on the NYSE exceeded 2 billion shares was December 2004, making Friday the busiest volume day of 2005.
"It's a really choppy day," Larry Peruzzi, senior equity trader at The Boston Company Asset Management, said. "Everybody is guarded ahead of the S&P re-balance. It's going to be a really big deal in the last half hour of trading. Forty billion worth of stocks will be traded on the close."
Four types of March futures and options contracts expired or settled Friday, a quarterly event that usually stirs high volume as investors adjust or exercise their derivative positions.
An unusual event also coincided with the quadruple witching. The S&P is making adjustments to its benchmark S&P 500 affiliated indexes to full float in 2005. Half of that adjustment was set to take place after the market closed Friday. That event increased trading in some of the stocks involved as fund managers rebalanced their portfolios.
The adjustment means that only the shares available to investors are reflected in the index -- not shares held by a control group, founding family or government.
Oil prices climbed higher, with a barrel of light crude settling at a record $56.72, up 32 cents, on the New York Mercantile Exchange (search).
"Even if we were to see a quick pullback in oil, I don't think that'll reverse the trend, and there are still some negative implications for the market," said Chris Johnson, manager of quantitative analysis at Schaeffer's Investment Research in Cincinnati. "I think you'll start to see companies, like the airlines, fessing up to the fact that these oil prices are going to hurt."
Bonds fell along with stocks Friday, with the yield on the 10-year Treasury note climbing to 4.51 percent, up from 4.46 percent late Thursday. The dollar gained ground against most major currencies, while gold prices fell.
"The fact that bonds are falling has the markets a little worried," said Bryan Piskorowski, market analyst at Wachovia Securities. "The past couple times that oil spiked, bonds rose higher and the equity investors took solace in that. Now you've got to wonder if bonds are feeling the effects of inflation as well."
The following is sourced from foxnew.com:
"stocks rallied off their session lows late in the day, pulling the Dow and the S&P 500 back to a position of little change at the close.
All three major indexes posted their second straight week of losses. For the week, the Dow fell 1.34 percent, the S&P was down 0.87 percent, and the Nasdaq lost 1.66 percent. The Nasdaq is down 7.7 percent for the year to date.
Trading was heavy, with 2.34 billion shares changing hands on the New York Stock Exchange, way above the 1.46 billion daily average for last year.
The last time that volume on the NYSE exceeded 2 billion shares was December 2004, making Friday the busiest volume day of 2005.
"It's a really choppy day," Larry Peruzzi, senior equity trader at The Boston Company Asset Management, said. "Everybody is guarded ahead of the S&P re-balance. It's going to be a really big deal in the last half hour of trading. Forty billion worth of stocks will be traded on the close."
Four types of March futures and options contracts expired or settled Friday, a quarterly event that usually stirs high volume as investors adjust or exercise their derivative positions.
An unusual event also coincided with the quadruple witching. The S&P is making adjustments to its benchmark S&P 500 affiliated indexes to full float in 2005. Half of that adjustment was set to take place after the market closed Friday. That event increased trading in some of the stocks involved as fund managers rebalanced their portfolios.
The adjustment means that only the shares available to investors are reflected in the index -- not shares held by a control group, founding family or government.
Oil prices climbed higher, with a barrel of light crude settling at a record $56.72, up 32 cents, on the New York Mercantile Exchange (search).
"Even if we were to see a quick pullback in oil, I don't think that'll reverse the trend, and there are still some negative implications for the market," said Chris Johnson, manager of quantitative analysis at Schaeffer's Investment Research in Cincinnati. "I think you'll start to see companies, like the airlines, fessing up to the fact that these oil prices are going to hurt."
Bonds fell along with stocks Friday, with the yield on the 10-year Treasury note climbing to 4.51 percent, up from 4.46 percent late Thursday. The dollar gained ground against most major currencies, while gold prices fell.
"The fact that bonds are falling has the markets a little worried," said Bryan Piskorowski, market analyst at Wachovia Securities. "The past couple times that oil spiked, bonds rose higher and the equity investors took solace in that. Now you've got to wonder if bonds are feeling the effects of inflation as well."
Wednesday, March 16, 2005
Oil Pirce Hike
Nearly record high as the world is staring at oil price in astonishment. While it is far from a suprise considering demand from China, even the new comer in subcontinent. We had assumed the oil price hike last year as the fallout of Iraq war and speculation in the finanicial market. But the situation now seems to different. The implication in Stock market is a mixed information. It is intepreted as indifferent in the absense of inflation. We all knows that US is a service driven economy today, which is sharply distinguished from the oil crisis in 1970s. The guess in wall street lies in the assumption that Fed will continues raise interest through the year. However, that pose is just a pose, no ones has a clear idea of what's happening in the finanial world. Some thing is happening, beyond all economists' can predict. It seems like it might be some fundemental changes in economics theory.
Thursday, March 10, 2005
Relief of Lenovo IBM 'Or'deal
The pending Lenovo IBM deal is after all resolved without concessions of any kind, according to the management of both IBM side and its chinese conterpart. The deal is approved by the government investment oversight commitee today.
No concession? God knows what it was. Did it seem like it might be a bunch of lawmakers' drama queen prank? Good thing it's over. It is fair to say that this is a game of no losers, but IBM is the big winner, shaking off worst assets, earning 19% stake of the company still in great potential of growth. Beyond that, I Even spot an artical on internet saying the dedicate plan behand the merger is IBM's ambition to gobble this Chinese new player. At the moment what we should focus on is for Lenovo management whether and how to handle the integretion after such a big deal. With its new headquarter in New York, how Lenovo is able to overcome the fierce competetion from those veteran players such as Dell and HP?
Hopefully we will find out soon.
No concession? God knows what it was. Did it seem like it might be a bunch of lawmakers' drama queen prank? Good thing it's over. It is fair to say that this is a game of no losers, but IBM is the big winner, shaking off worst assets, earning 19% stake of the company still in great potential of growth. Beyond that, I Even spot an artical on internet saying the dedicate plan behand the merger is IBM's ambition to gobble this Chinese new player. At the moment what we should focus on is for Lenovo management whether and how to handle the integretion after such a big deal. With its new headquarter in New York, how Lenovo is able to overcome the fierce competetion from those veteran players such as Dell and HP?
Hopefully we will find out soon.
Wednesday, February 16, 2005
starting point in bizbiz
this is a starting point of bizbiz, which is a mirror weblog of bizease.blog.com, my comments on stock markets around the world with concentration on US and China market.
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