With the further write-downs of JP Morgan Chase, ("JPMorgan Loses $1.5 Billion Since July" by Reuters, 12 Aug 2008, New York Times) on its mortgage and credit loans, will there be further write downs? Have we reached the end?
JP Morgan Chase's write-downs were partially due to the sale of Merill Lynch's $30.6 billion in risky debt to Lone Star funds for just $6.7 billion. If JP Morgan Chase was pressured to further write-down their investments, other financial institutions would be also pressured, not only by Merill Lynch actions but by JP Morgan Chase's as well. There could be another major round of write-downs which may cause a never-ending cycle of write-downs to occur.
What the financial institutions could do at this point in time, is to take the most conservative valuation and write-down their mortgage investments once and for all. Clear up everything in the balance sheet, get the necessary cash and move on.
They should not write-down slowly which places their stock prices at risk. It only adds jitters to the market and creates lots of uncertainty whenever there is negative news about the mortgage sector.
Uncertainty is something that financial institutions cannot afford at this point in time.
Tuesday, August 12, 2008
Sunday, August 10, 2008
Finding a rallying reason
I was mentioning to a friend last night (08 Aug 2008, 10.20pm Singapore time) that the US market would have a bloodbath throughout the trading session due to the announcement of Fannie Mae's ("Mortgage Giants to Buy Fewer Risky Home Loans" by Charles Duhigg, 08 Aug 2008, New York Times) worse than expected results; something similar to Freddic Mac's annoucement on Wednesday's US trading session ("Freddie Mac’s Big Loss Dims Hopes of Turnaround" by Charles Duhigg, 09 Aug 2008, New York Times) and AIG's announcement on Thursday's trading session ("A.I.G. Posts a Large Loss as Housing Troubles Persist" by Mary Williams Walsh, 06 Aug 2008, New York Times).
However, this was not the case on that eventful Friday trading session in the US market. Oil and commodities prices fell due to lower expected growth from Europe and China which strengthen the dollar as investors poured funds into US stocks, causing the market to rise tremendously. ("Shares Rally as Oil Continues to Fall" by Vikas Bajaj, 08 Aug 2008, New York Times).
Would this mean that US stocks will continue to rally and the lowest point has been reached due to the weakening of the oil and commodity sectors? I doubt it.
The market now has become very sensitive to news and it has come to a point when even the slightest positive news will bring a huge rally without the fundamentals as support. Take the instance of Friday's dramatic rally. Even if growth in Europe and China slows down, does it mean that the US economy will out-grow either of them?
The economic problems in the US are not yet over. The 2 Government Sponsored Enterprises "GSEs", Fannie and Freddie, are in dire straits. Problem in the mortgage lending sector is having a huge spillover effect like in AIG's case. Many financial institutions would be forced to revalue a loss on their existing investments if the mortgage sector fails to pick up.
Other parts of the US market will be affected as well, as falling property and financial stock prices make individuals poorer on paper resulting them in cutting down on their expenditure. The broader economic outlook is still gloomy with lots of uncertainity.
However, this was not the case on that eventful Friday trading session in the US market. Oil and commodities prices fell due to lower expected growth from Europe and China which strengthen the dollar as investors poured funds into US stocks, causing the market to rise tremendously. ("Shares Rally as Oil Continues to Fall" by Vikas Bajaj, 08 Aug 2008, New York Times).
Would this mean that US stocks will continue to rally and the lowest point has been reached due to the weakening of the oil and commodity sectors? I doubt it.
The market now has become very sensitive to news and it has come to a point when even the slightest positive news will bring a huge rally without the fundamentals as support. Take the instance of Friday's dramatic rally. Even if growth in Europe and China slows down, does it mean that the US economy will out-grow either of them?
The economic problems in the US are not yet over. The 2 Government Sponsored Enterprises "GSEs", Fannie and Freddie, are in dire straits. Problem in the mortgage lending sector is having a huge spillover effect like in AIG's case. Many financial institutions would be forced to revalue a loss on their existing investments if the mortgage sector fails to pick up.
Other parts of the US market will be affected as well, as falling property and financial stock prices make individuals poorer on paper resulting them in cutting down on their expenditure. The broader economic outlook is still gloomy with lots of uncertainity.
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