Trading Diary (March 24, 2009) --- Rally Money Is Dancing

The S&P broke above its 50DMVAG and 800 level to close at 823, capping the best 2wk run since 1938 after seeing the details of the Treasury's PPIP ($1trn potential) and an unexpected rise in existing housing sales (+5.1% in Feb vs. cons -0.9%, prev -5.3%). My feelings is to TAKE PROFIT here and wait for a 10% pullback to decide what to do because 1) bear market trading rule says to "buy the dips and sell the rips" and 2) more and more investors falling over themselves, calling for the rally to continue – where are they over the past two weeks?

It seems to me that the Short-term risk appetite has come back to equities. But other asset classes like USTs, gold and credit are holding back relative to the equities. This is quite interesting to me as the market wants to believe that this credit crisis can end, that the global economic collapse will reverse and that the old paradigm of the new, new business cycle can return perhaps with a few more regulations...Indeed the rally money is dancing now and here are some of my thoughts regarding the TALF and PPIP:

The TALF and PPIP are only working in theory so far and it’s important to note that the actual workings won’t begin until May at least. So the potential impact on the US economy won’t be seen until 3Q09 in all likelihood. I do not think bear should give up as the risks that PPIP won’t work follows three arguments: 1) The $1trn won’t be enough to cover the toxic assets on bank B/S (see my data below). The scheme seems underfunded given the $75-$100bn in equity capital allotted with the rest coming from loans of the private sector. Some even wonder if this is purely a US bailout – the rest of the global banks will still suffer and cause credit troubles. 2) The bid/ask between banks and the investors on toxic assets will remain too wide to deal. If the economy really is turning the corner banks may want to hold the assets. So there is no reason that banks have to really sell unless the price is right. 3) Politics. The market was spooked by Congress and its 90% retroactive tax – making clear that the power of government to take back any profits made from investing in these programs may be a risk.

Local market, The HSI outperformed ytdy but is still a relative underperformer in the region. Sector wise, I look for additional support from commodities, base metals and Oils. Interestingly, implied Vol has been 'bid' on the upside and I think accounts are caught short is one of the reasons. CN side, MOF's Jia Kang says his remark on govnt has prepared a new stimulus package is "MISQUOTED". He clarified that this is only his personal suggestion…Today, HK likely add another 500 as suggested by HKCN ADRs. .

Overseas Market Reviews

Inspired by the announced details of PPIP, overnight US equities soared 7%. The rest of world was also higher: up ~3% in Japan, EU and UK. Globally, equities jumped 4.8% today, +17% over the past two weeks. In comparison, USTs did not move much with 2yr and 10yr both rose 2bp to 0.89% and 2.65% respectively. The 2yr yield is down 6bp over the last two weeks and 10yr is down 21bp. USD was also little changed on balance, rising 1% to YEN97.0, but slipping 0.4% to EUR1.363. The DXY has fallen nearly 5% over the last two weeks. 1MWTI oil ran up nearly $3 to $53.80/bbl—a 16-week high. 

The US PPIP Brief

Ø         The Public-Private Investment Program will use $75B-$100bn from the TARP to provide $500bn in purchasing power for toxic assets.

Ø         The Treasury also noted that the program may double over time to $1trn. Half of the government funds will go to a "Legacy Loans Program".

Ø         Under this program, the Treasury will provide half of the capital used to purchase a pool of loans from banks, with private investors putting up the rest.

Ø         The FDIC will then guarantee financing, up to a maximum of 6x the capital provided.

Ø         The other half of the government funds will go the "Legacy Securities Program",

How much impact will $500bn have?

Here's a sampling of the B/S sizes of just a few banks:

                      Securities         Loans

   Citi                 $988bn          $738bn

   BOA                $468bn          $908bn

   JPM                $840bn          $745bn

   WFC               $233bn          $865bn

   GS                 $748bn          $ 91bn

   MS                 $505bn          $ 39bn

I've merely listed 6 US financial institutions here and the total amount of securities they hold is $3.8tr and the total amount of loans is $3.4trn. Even if one argues that not all the loans are bad, $500bn is still a small drop in the ocean compared to the total securities and loans holdings of $7.2trn for just 6 institutions!