Dow Jones' record-breaking dive

Dow Jones Industrial Average (DJIA) plunged to its biggest single-day dive ever at 777.68 points yesterday (Sept. 29) after the US Congress disapproved the US$700-billion bail-out package to shore up the financial market. It then closed to 10,365.45 points, its lowest in three years.

The stock index decline easily beats the previous record of 721.56 points posted on Sept. 17, 2001, when the market reopens after the 9/11 World Trade tragedy.

The selling was so intense, according to some traders and stockbrokers, as they have witnessed around 3,073 stocks dropping on the Big Board versus only 162 stocks that rose.

On a related happening, the Dow Jones Wilshire 5000 Composite Index recorded for the first time a paper loss of US$1-trillion across the market for the day.

Houses on fire!

After we witnessed the rescue of mortgage couple Freddie Mac and Fannie Mae from the burning marketplace, this week we've seen the demise of the one-and-a-half century old Lehman Brothers investment house, the entry of Bank of America to Merrill Lynch's red hot premises via US$50-billion take-over payment, and the world's largest insurer AIG's US$40-billion dollar restructuring plea to the already Fed up agency.

All of them are victims of a lone market arsonist, known as Mr. Subprime.

Thus, Fireman Ben and his Fed department are now working double time to extinguish the market wildfire and prevent it from further spreading, lest it might reach White House and cause never-before-seen worldwide chaos and panic.

Remembering 9/11

Today, we remember the 9/11 tragedy. Many innocent lives were lost during this fateful day as a terrorist-controlled plane slammed hard into the towering World Trade Center.

But do you know that in spite of the tragedy, there were still some people who managed to rejoice on that fateful moment even if in their hearts they were deeply sorry with what had transpired on that day? No, they are not terrorists nor are they insane. So, guess who? They were traders who were then betting on the wrong side of the market.

I should know for I witnessed some colleagues jumping up and down for joy, cheering on the top of their lungs as they've seen the market suddenly went into their trading direction. Those colleagues of mine were shorting then the USD/JPY pair, and the yen during those periods were bearish versus the greenback.

For no apparent reason, there was a drastic turn of events and we saw the dollar falling on our Reuters chart. In a few moments, the TV screen flashed out a breaking news from Bloomberg that the World Trade Center was bombed. So, it was the reason for the dollar downfall. Such confirmation made those bear dollar traders leaped for joy and cheered the Japanese currency all the more.

On the other hand, I immediately lock in my position. As much as I would want to open up a sell dollar position versus the British pounds for some profit-taking; however, it was hard getting a good deal as spreads are pretty wide and wild! I just tuned in on Bloomberg and watched the mournful event as the plane crash footage was repeatedly being shown.

After an hour or so, our CEO called up an emergency meeting to discuss some market updates. There he revealed that there was a voluntary “gentleman’s agreement” among currency brokers not to profit from the event to help stabilize the value of the dollar. But "it's too late" as I said to myself. Since, I knew for sure that several fund managers, our firm included, had already taken huge positions. (True enough, after three days the value of the dollar had continued its preempted slide.)

After that announcement, he told everybody to go home already as the management decided to halt trading for that day. But before he called for the adjournment of the meeting, he led the closing prayer reciting "The Lord's Prayer", to our surprise, since he usually assigned it to his executive secretary. Perhaps, it is one way of showing that the management had sympathized with the terror victims. That was the common assumption. But it could have been a thanksgiving prayer too. We learned that our company partake a good slice in the big market opportunity that was transpired during that mournful day.

Russian ETF experiencing a record worst downtrend

The Russian stock market is now one of the world's greatest "boom-and-bust" markets.

The country's reserve of crude oil, natural gas, timber, precious metals, and base metals is incredible, which makes the economy sensitive to commodity prices. Russia is also home to great amounts of government and corporate corruption.

These two drivers are clobbering Russian shares right now. Oil has fallen US$40 a barrel in the past two months. Natural gas has fallen 44% in the same period. Gold, silver, nickel, platinum and palladium are all declining. The invasion of Georgia worsens the Russian debacle.

The chart below is a bird's eye view of a very bearish Russian ETF. The Templeton Russia Fund (TRF) is a basket of Russian stocks, which is down 40% since June.

US government rescues Fannie Mae and Freddie Mac

The US government has bailed out mortgage finance companies Fannie Mae and Freddie Mac last Sunday (Sept. 7). The move could be the largest bailout ever by the government to prevent more global financial market turbulence. Both mortgage firms, which guarantee almost 50% of the country's US$12-trillion in outstanding home mortgage debt, have suffered combined losses of about US$14-billion since last year.

On Monday (Sept. 8), the stock market rose on investors' sentiments that the bailout would stabilize the US housing sector and calm the jittery global financial markets. The Dow Jones Industrial Average (DJIA) closed up 289.79 points at 11,510.74 points, or 2.59% higher than previous level. The S&P-500 index finished up 25.48 points at 1,267.79 points, or 2.05% higher than previous. And the NASDAQ composite index ended up 13.88 points at 2,269.76 points, or 0.62% increase.

With this latest development, I will still maintain my wait-and-see stance if I am a long-term investor in the US. Feel the market tone if the bailout issue could really shore up confidence in the mortgage sector. The stock market's positive performance last Monday might just have been a result of speculation by short-term traders.

The kiwi tumbles against the greenback, euro and yen; but rises versus the aussie

The New Zealand dollar has declined against the US dollar from 0.7052 level last Friday (Aug. 29) to 0.6997 level this morning. The 20-day moving average seems to be a strong intermediate resistance for the currency pair.

Likewise, the kiwi eased against the euro and yen; but, was up against the Australian dollar.

The kiwi went down from 0.4780 euro last week to 0.4764 euro during the New Zealand market opening, and was also down to 75.94 yen from 76.85 yen. However, against the aussie, the kiwi was trading at 0.8170 level from 0.8145 level.

Korean won isn't winning

The South Korean won (KRW) is currently Asia's weakest currency, having lost 16% of its value against the US dollar so far. The Bank of Korea is estimated to have spent about US$10-billion defending the won in July of this year. However, some market analysts have hinted last August that the central bank may not anymore intervene aggressively, which spurred speculators into thinking that the government would allow the Korean currency to weaken in order to provide more buffer on its expanding exports.

The market buzz is, thus, capital flight. There have been heavy investment outflows. Foreign investors have sold a net US$23-billion of Korean equities this year.

Last Monday, the won plunged 3% to register a four-year low of KRW1,123.6 versus the greenback. The Korean stock market fell 4.1% to 1,414.43 points, posting its lowest level in 17 months. Bonds also tumbled as the yield on benchmark five-year treasury bonds leaped to its highest level this year at eight basis points to 5.62%. Moreover, consumer inflation hit a seven-year high in May at 4.9% year-on-year.

The situation is like a reminisce of the capital flight seen in the 1997 Asian financial crisis when the won lost half of its value against the US dollar, which had led the country into a full-blown currency crisis.

This blog site is currently undergoing a listing validation in the Pinoy Blog Directory.

Title: Pinoy Blog Directory
URL: http://pinoyweblisting.com
Description: Linking Filipino Blogs & Bloggers.

The Golden Hedge

Aside for being a natural hedge for inflation and currency devaluation, I view physical gold as the ultimate form of wealth insurance. It is very liquid and widely recognized by almost all countries. As an investment vehicle, it's a great diversifier. Gold prices soar when everything slumps.

There is this industry belief that no asset goes to the moon without a few big declines to scare everyone.

The precious metal is on an uptrend since 2001. It trotted from US$250 per ounce to US$450 per ounce in 2005. It doubled in just over two years to breach US$1,000-per-ounce level.

As seen from the chart, there is a short-term decline in the price of gold. And the price could fall even farther and still be in "bull mode".

Euro's rise causes Big Mac in Europe 50% more expensive than in the U.S.

The Economist magazine's Big Mac Index suggests that a McDonald's Big Mac hamburger in Europe is now 50% more expensive than in the United States. This is because of the continuing appreciation of the euro as against the greenback. Currently, the EUR/USD pair trades between the range of 1.5250 and 1.5750.

The Big Mac Index, which is based on the theory of purchasing-power parity (PPP), is a useful gauge of ascertaining which currencies are cheap and which are expensive by simply comparing the price of a McDonald's Big Mac in all the major currencies of the world. The theory goes that countries with similar levels of development should have similarly priced Big Mac hamburgers.

Could the Big Mac in Euroland continue to get even more expensive? Most probably.

The trend is still bullish in favor of the euro. But as the chart suggests, the euro "rubber band" is stretched as far as it's ever been stretched. And we all know that a rubber band returns to its original state once stretching has stopped. Thus, we may expect that the EUR/USD pair will return to its "equilibrium" state of value anytime soon especially so that some European central banks are beginning to worry about inflation.

Just when and how soon is the question.

Aluminum prices hit all-time high

Aluminum hit a succession of all-time price highs this month despite a weak demand. A commodity broker pointed out: "When you hear producers in China are shutting production because demand is weak, that's normally bearish, yet the market saw insane price moves." On July 7, the price climbed to a record peak of US$3,327 per metric ton in the London Metal Exchange (LME), breaking previous high of US$3,260 per metric ton that was recorded about 10 years ago. Then on July 10, it soared to a fresh all-time high at US$3,380 per metric ton. A London-based trader said the July 7 price move must not have been due to Chinese power / production issues, but the move was due to a market exercise. *Download podcast: Power shortages drive aluminum price rises

Liv-ex: The place to trade investment-grade wines

The London International Vintners Exchange (Liv-ex) is the leading exchange for fine wine. Founded in 1999, the exchange runs an internet and phone based information, trading and settlement platform for fine wine merchants. The bulk of Liv-ex transactions are in the best French labels from Bordeaux, Burgundy, Champagne and the Rhone, but not exclusively so. The best names from Italy, Germany, Spain, Portugal and the New World are also traded.

Standard Contract Terms

• All wines priced under bond in London in British pound (₤).
• Delivery within 14 days (en primeur within 90 days of release from chateau).
• Stock in original packaging and in good condition (re-imports from U.S. or Asia must be sold as special contracts).
• Payment is 14 days from month of receipt.
• Credit subject to insured limit.

The Liv-ex Indices

The Liv-ex 100 Fine Wine Index, is touted to be the world's version of the S&P-500. It is widely acknowledged as the fine wine industry’s leading benchmark. The majority of the index consists of Bordeaux wines – a reflection of the overall market – although wines from Burgundy, the Rhone, Champagne and Italy are also included.

On the other hand, the Liv-ex Champagne 25 Index tracks the price of 25 of the world's most sought-after Champagnes.

Current Market Conditions

Currently, the Liv-ex 100 Index and the Liv-ex Champagne 25 Index have risen 8% and 27%, respectively in the 12 months ending in June. That's against a 14.8% drop in the FTSE-100 during the same period.

According to Justin Gibbs, a director of Liv-ex:

"It's a simple case of demand outstripping supply. People are quick to glug Champagne as soon as they buy it".

He also adds:

"While top Bordeaux reds are typically laid down for 20 years, Champagne is ready to drink as soon as it lines store shelves."

Driven by this demand, the price of Champagnes such as Krug, Dom Perignon and Louis Roederer Cristal have soared over the past year, overtaking the big names of Bordeaux as an investment, at least for the time being.

About a year ago, a case of Krug 1996 would have set you back just under US$3,000 on the auction market, but now it's worth US$4,713.40 (₤2,350). Louis Roederer Cristal 1989 is now worth 39.1% more than in 2007, bringing in $6,417.90 per case.

On the other hand, Bordeaux prices skyrocketed from the strong vintage in 2005 and then held steady on the 2006 wines. The 2007 vintage is considered a weak one by market analysts as some interests turned to Champagne instead. Still, it's not enough to lure leading wine funds away from their traditional staple investment of claret (the British term for Bordeaux red wine).

While Champagne valuations may be driven up by consumption, the price of fine Bordeaux red is driven only in part by the scarcity of supply.

Freddie Mac and Fannie Mae in SOS

After the collapse of IndyMac, the US government is now planning to help Freddie Mac and Fannie Mae out of trouble.

The Fed and the US Treasury are willing to lend money and buy shares just to stabilize the two pillars of the American housing market.

Nonetheless, efforts by the government to save the couple seem not enough to boost investors' confidence. Wall Street continues to sag. Shares of Fannie Mae fell 5.1% to US$9.73 per share, while those of Freddie Mac slid 8.3% to US$7.11 per share, both in NYSE trading last Monday (July 14).

From the website of www.slate.com:

As of yesterday's close, Fannie Mae had a market capitalization of about $13 billion and Freddie Mac was worth about $5 billion. Given the massive size of their portfolios and the potential for losses, it's clear they will need to raise sums that may equal or dwarf their current market capitalizations. Given the firms' distressed state, buyers would certainly demand a discount. As J.P. Morgan CEO Jamie Dimon said in his now-famous formulation about Bear Stearns, "Buying a house is not the same as buying a house on fire." Fannie Mae and Freddie Mac are houses on fire. And this mentality leads to a vicious cycle: Investors jump ship because they fear dilution, and the more the stock slips, the more dilute capital-raising becomes.

High trending steel

Almost all finished steel products are currently priced above US$1,000 per metric ton, ex-works basis. Since November 2007, the world export price for hot-rolled band has risen from about US$600 per metric ton to US$1,024 per metrci ton in May 2008 – an increase of more than US$400 per metric ton, or about 71%. Hence, consumers are asking what would be the justification for this current "steelflation".

For sure, steel producers will be citing the continuous price hikes of raw materials that are affecting global businesses. According to World Cost Curve results conducted by Platts, the average cost to produce hot-rolled band including overhead has risen from US$483 per metric ton in the fourth quarter last year to US$673 per metric ton this year.

For instance, in the U.S. market, a semi-finished slab is not cheap as it is priced at about US$850 per short ton. Its conversion from slab to coil is estimated at US$60 to US$70 per short ton. Tolling fee is about US$100 per short ton. That variables alone, excluding mark-ups, have totaled more than a thousand dollar per metric ton for a finished coil product.

It was observed that steel mills have announced spot-market increases on an almost weekly basis – many of those well in excess of US$50 per short ton at a time. The same holds in Europe.

Here are some updates on what is happening in the steel market.

The hot-rolled coil (HRC) in the US market is up 88%, from US$565 per short ton, ex-works Indiana in the fourth quarter of 2007 to nearly US$1,060 per short ton in June 2008. Over the same period, the hot-rolled coil in Europe surged 78%, or Є225/metric ton, ex-works Ruhr to Є705 per metric ton.

Cold-rolled coil in the US market is up 79% since December 2007 to US$1,130 per short ton, ex-works Indiana from US$635 per short ton. In Europe, the cold-rooled coil is up to Є770 per metric ton, ex-works Ruhr in early June 2008 from Є550 per metric ton since December 2008.

The Platts Eastern Mediterranean rebar export price was $630 per metric ton, free-on-board Turkey in December 2007, but it has almost doubled to US$1,200 per metric ton recently. In the U.S. market, domestic rebar is up to roughly US$900 per short ton, ex-works US Southeast mill from about US$600 per short ton in December last year. In Northwest Europe, the Platts price assessment of rebar has swelled nearly Є340 per metric ton to Є780 per metric ton since December 2008.

With regard to imported plates in Europe, their price has risen Є830 per metric ton in early June 2008 from Є655 per metric to, including cost of insurance and freight, Antwerp in December 2007. Domestic plates have also gained nearly 27%, increasing to Є845 per metric ton from Є670 per metric ton over the same time period.

On the other hand, domestic plate prices in the U.S. increased 54% since December 2007, to about US$1,240 per short ton, ex-works Southeast U.S. mill, from US$805 per short ton. Imported plates have gained 47% over the same timeframe to US$1,130 per short ton, including cost of insurance and freight, Houston from US$770 per short ton in December 2007.

Scrap prices have surged too. According to Platts, the A3 grade price is up 99% to US$680 per metric ton, freight-on-board, Black Sea from US$342.50 per metric ton in December 2007.

Another crude peak

Global crude oil prices have doubled in the past year and have risen by almost 50% since the start of 2008. On Monday (June 30), prices breached US$143-per-barrel level to settle at a new peak of US$143.67 per barrel in New York trading.

Oil producers blame speculation, growing demand and high taxation of oil products in consumer countries as the reasons for rising oil prices. However, consumers train their sight on tight supplies, the middle-east crisis and "the cartel", i.e., the OPEC (Organization of Petroleum Exporting Countries), as the culprits.

Due to another round of crude price hikes, the Philippines is set to remove tariffs levied on imported oil to help local consumers and businesses cope up with oil-induced inflation.

Historical NAVPS of Sun Life Prosperity Funds as of June 2008

The Sun Life Prosperity Funds is a family of mutual funds managed by Sun Life Asset Management Corporation (SLAMC), which consists of equity, balanced, bond and money market mutual funds. I have graphed here the historical net asset value per share (NAVPS) of the funds from their inception up to June 2008.

The graph shows significant decline in equity and balanced funds as their stock investment holdings are suffering from some bearish attacks. Ditto with the bond markets. However, the impact on bonds is not that huge. The level of risk is still manageable, since the Philippines is not much affected by the subprime mess.

Meanwhile, it seems that to me that the money market fund has a very good prospect in this time of crisis. As shown in the graph, the fund is poised to pick up. Although, the past several months we have seen failed auctions in Treasury bills (T-bills) brought about by favorable economic conditions, especially in the last couple of years. But with this year's runaway inflation and declining stock market, we could anticipate some activities in the money market sector. Moreover, short-term bonds and credit instruments, such as retail treasury bonds (RTB) and 91-day T-bills, could also be very good bets!

Crude oil breached US$135 per barrel

History is being rewritten every day in the oil markets. The climb in crude prices have marked new record highs in 10 of the last 14 sessions. Yesterday (May 22), crude oil price breached the US$135 per barrel level after a sharp drop in US crude stocks.

The recent rally was not anymore related to the fundamentals of supply and demand according to some market analysts.

Saudi Arabian oil minister Ali Naimi was quoted as saying that the sharp rise in crude oil prices was unexpected and undesirable for either producers and consumers. When asked of his views about the persistent oil price hike, he had enumerated five key factors.

First on his list is the sharp rise in the price of all basic commodities such as metals, agricultural goods and construction materials.

Second, he blamed various disturbances in the financial markets as a result of the US subprime mortgage crisis, which had led to a weakening of the US dollar and low interest rates on dollar deposits, which had led investors to turn to basic commodities as an investment tool.

Third, the geopolitical tensions in some producing countries affect oil production.

The fourth factor is the negative analyses concerning supply and production capacities which say that oil production has peaked and casting doubt as to the availability of additional production capacity.

And the fifth factor is a rise in demand for refined products amid a sharp fall in refining capacity in consuming countries.

Meanwhile, in Wall Street, stocks are falling every time that oil prices hit new record levels. A government report raised investors' concerns about inflation brought about by excessive rise in food and energy prices. Outside of food and energy, prices rose by a faster 0.4 percent as per the government.

In the Philippines, minimum public fares have already increased by 50 centavos from Php7.50 for the first four kilometers to Php8.00. And there are reports that gasoline companies will increase its retail prices on the first week of June.

WESM Operational Results for April 2008

As expected, spot prices in the market for the summer month of April breached the Php3,000-per-megawatt level all the way to test the Php4,000-per-megawatt mark. However, what is perplexing is that spot volume went up despite expectations of higher prices in the Philippine wholesale electricity spot market (WESM).

Was this due to scarcity of bilateral or hedging contracts in the market that's why traders were forced to get their imbalances from the market? Or was this a result of over-contracting by some spot buyers which aim to resell excess energies in the WESM in the hope of gaining some profits on the difference between the contract price vis-a-vis spot market price?

As you can see from the chart, total energy volume passed the 3,500-gigawatt-hour barrier. The figure is currently the all-time peak since WESM inception. Bilateral volume increased in value in terms of number of quantities, whereas spot volume ratio to total energy volume also increased in numbers.

We may expect that the bullish trend will continue next month, unless monsoon rains would come early to provide cooler atmosphere in May.