Charting around Asia

Nothing new, for I, Ostrich

by John Needham, The Daniel Code Report | March 13, 2008

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In the globalized world of international finance, no discussion of the immediate future of Asian markets is complete without a consideration of what ails US markets. Most Asian markets are behaving as fractals of the major US Indices. What is good for US markets is apparently good for Asia. What happens in the world’s economic and fiscal powerhouse reverberates around the world. Tuesday’s jack job in US markets by the Fed was another classic example.

From Reuters: Stocks rallied Tuesday on news that the Federal Reserve, in coordination with central banks worldwide, will lend up to $200 billion to banks in an effort to loosen up tight credit markets. The Dow Jones industrial average (INDU) jumped almost 417 points, its fourth-biggest one-day point gain ever and the biggest one-day point gain since July 2002. In percentage terms, the gain of 3.55% was the best since March 2003. The blue-chip index had ended the previous session at a 17-month low. The broader Standard & Poor's 500 (SPX) index climbed 3.7% after ending the previous session at a 19-month low. It was the biggest one-day percentage gain since May 2002.

Asian indices mirrored Tuesday’s US market move as they gapped on Wednesday’s open to match the spectacular one day rally in US markets. 

The short diagnosis of the US malady which has rapidly infected global markets is that the default operating stance of many US businesses (and they are by no means alone) is based on lashings of credit made available below the real cost of funds. The real cost of funds includes an appropriate risk premium and that has been absent for most of the past decade. The proper assessment of risk involves an appreciation of the probabilities of asset impairment. The realisation that asset prices fluctuate lead to the now forgotten banker’s mantra “We want you to have some skin in the game”; ergo if you want credit to buy an asset you put up the deposit of 10-20% so the first tranche of asset devaluation falls on you the borrower. 

That historic lending paradigm was lost in the scramble for volume and market share as the alchemy of black magic fiscal engineering spawned one of the great hoaxes of the 21st century; the realisation that securitisation, if done with an overtly incorrect credit rating could generate untold wealth for the packagers. This was such a good deal that it had to be leveraged many times over to maximise the output. Demand was insatiable and in the scramble for product to sell, all the obvious flaws in the model including basic assumptions on ever rising prices and default rates were overlooked or ignored. Strangely, anyone over 60 could tell the modelers that all assets including property fluctuate in value. It seems a generational memory went missing in the past 7 years.

The present institutional behavior being played out in this early cycle period is denial. Players became so accustomed to the “new paradigm” of cowboy credit that they can’t meet the realisation it is over! I explained in the last edition of “Charting around Asia” that the problem is not only the massive losses to be realised on the asset securitisation which is currently enjoying the headlines, but the more vexing question of what is going to replace this “no risk” game that has captured so much of the market’s wealth? Faced with an institutional inability to accept that this particular game is not going to bounce, the only alternative being offered is to try to force the game back on track. For most this means adopting the Ostrich pose above in the hope that “normal service” will be resumed.

The Fed comes up with ever easier terms for its dealers to borrow against impaired assets, and the institutional leaders of the mortgage lending market shave the edges of “acceptable” deals with a complete lack of understanding of what is unfolding.

From Market Watch this news on the two giant US government sponsored mortgage originators Fannie Mae and Freddie Mac. As other sources of mortgage loans dry up, these worthies are being pushed by Congress and vested interests to expand their mortgage books to take up the slack, increase their maximum loan levels and maintain that so important affordability factor that caused much of the present discomfort. On the same day that Market Watch reported:

Freddie is allowing a maximum LTV for purchases of 90% on an ARM; Fannie allows 90% only on FRMs.

Its CEO told analysts:

CEO sees U.S. home prices falling further 
Speaking to analysts on a conference call, Freddie Mac CEO estimated that housing prices, from peak to trough, have dropped only a third as far as he thinks they're going to. The McLean, Va.-based company's expecting a peak-to-trough decline of 15% in all.

By my rusty math the CEO is expecting another 10% price drop but is happy to make jumbo loans at 90% of valuation. Ergo after the correction is complete, owner’s equity will be zero! Isn’t that what caused this mess? The ostrich has many imitators.

Asian Markets

Asian markets had a bad day today on news that Carlyle Capital, expects its lenders to seize its assets and cause its likely liquidation. Carlyle Capital is an affiliate of private equity firm Carlyle Group the darling of the leveraged fund business.

CNBC is reporting: Carlyle said it has defaulted on around $16.6 billion of its debt and said the only assets held in its portfolio as of Wednesday were U.S. government agency AAA-rated residential mortgage-backed securities. During the last seven business days the company had received margin calls in excess of $400 million. Carlyle was unable to pay the margin calls, so its lenders had proceeded to foreclose on the mortgage-backed securities collateral. 

There must be more of this story to play. 

Asia/Pacific charts are from www.thedanielcode.com and are available free from that website, so check them out often.

For my readers in Pakistan, my data provider Genesis FT has accessed data for the KSE-100 and will have it available for me when they overcome the backlog in their data section. KSE-100 was down 97 points in late afternoon trading on Bloomberg data.

Australian shares closed down 2.3 percent, erasing nearly all of the previous day's gains. ASX 200 closed at 5135.90 down 122 points on Thursday. Continuing the disconnect between Australia’s property and financial markets, Australia's home-loan approvals rose in January. The number of loans climbed 2.3 per cent from December, the Bureau of Statistics said in Sydney yesterday. The median estimate of 19 economists surveyed was for a 1 per cent gain.

Australian housing affordability finally became the worst on record. Families with an average home loan spent 37.4% of their income on mortgage payments, the highest since this measure was begun 22 years ago yet the punters are still clamouring to buy. I, Ostrich indeed.

Across the ditch in New Zealand the antics of the ostrich too are emulated. During the week one of the four pillars (see my FSO archives) finally risked a peek at the real value of Auckland apartments as Blue Chip Group tried to explain to irate buyers where the rent money from properties it had built, sold and managed on their behalf had gone. Others even less fortunate found their deposits on still to be built apartments were intermingled and likely lost. The first bank mortgagee sale of a Blue Chip apartment purchased 12 months ago for $385,000 returned just 50c in the dollar realizing $180,000. 

Real Estate Institute NZ president Murray Cleland said it was not yet conclusively proven that the housing market had gone into retreat. Ostriches will soon replace the fabled Moa as Kiwis’ favourite bird!

During the week I had the pleasure of holding one of my periodic trading seminar in New Zealand. It is always a pleasure to meet dedicated traders hungry for knowledge. The first thing I tell Aussie traders anxious to make the leap to pro trading is “Don’t trade the SPI; it is the most reactionary market I know”. That is not to say that the Danielcode doesn’t know its quirks intimately. This is what an Aussie trader who was doing my intermediate trading course had to say about last week’s “Charting around Asia” SPI chart:

The Danielcode numbers work so amazingly well on the SPI look at today’s High 5376 and the DC # on your last monthly chart 5373, the latest low on the SPI 5085 and your latest weekly chart DC 5066 & 5033, the previous low on the SPI 5183 and your monthly chart DC 5175 and then the subsequent retracement to 6031 on the SPI and 6035 on the DC. I know I shouldn’t be looking at this BUT...Further more today’s close was 5229 the exact DC# 5229 on the weekly. If you don’t have time to look just believe me!!!! HM, Perth, Australia.

I do Helen; I do. Not bad for a free chart! Help yourselves; with the compliments of Financial Sense and the Danielcode.

Japan's Nikkei 225 was down 427.63 at the close Thursday. Thursday’s price action is not on the chart below. All Asia/Pacific free charts will be updated with my comments at the Danielcode website before the US open on Monday. 

Hong Kong’s Hang Seng index lost 4.79 percent on Thursday. China Railway Construction returned record demand for its $5.5 billion Hong Kong IPO.

 

China’s Shanghai Composite Index lost 98.85 points, or 2.4 percent, to close at 3,971.26 its first close below 4000 since July last. Financial stocks were marked down in particular. Thursday’s price action is not on this chart.

 

South Korea's KOSPI retreated 2.6 percent led by transportation shares, while LG Display dived after Philips sold down a large line of shares. LG closed down 8.82 percent on news Dutch electronics giant Philips sold about $1 billion worth of shares in the South Korean flat screen joint venture. Korean Air was down 8.29 percent. Thursday’s price action is not on this chart. It will be updated with commentary on the weekend.

Crude Oil

Oil is hammering on helped by the diving dollar

Gold and Silver

Comex Gold is mounting another attack on Daniel number resistance at 997.20/999.80. 

Silver took a breather after 7 strong weeks. There are multiple degrees of Danielcode resistance above last week’s high. 

DX

The US Dollar index continues to dive towards 70c where there are 2 degrees of Daniel number sequence support. If 70c doesn’t hold the next major target is 66c. There are more numbers below.

Forex

JPY-HKD is roaring and is at 77.61 before Thursday’s US session begins. 

 

Copyright © 2008 John Needham
Asia Editorial Archive

I invite you to visit the Danielcode Online where all the Asia/Pacific index charts in this column are free. Due to the interest these charts are generating, they will now be updated for you on a weekly basis. 

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John Needham is a Sydney Lawyer and Financial Consultant. He publishes The Danielcode Report and writes occasionally on other markets. He lives with his family in Australia and New Zealand.

“The fox knows many things, but the hedgehog knows one big thing. A Hedgehog Concept is not a goal, intention or strategy to be the best. It is an understanding of what you can be best at. The distinction is absolutely crucial”. ~ Isaiah Berlin, The Hedgehog and the Fox

contact information

John Needham | The Danielcode Report | Taupo, New Zealand | Email | Website

The opinions of FSU contributors do not necessarily reflect those of Financial Sense.