Sunday 18 January 2009
Looks like another financial tsunami is coming - just look at...
The deterioration in economic and corporate data continues. I believe that the market has not fully discounted the extent of this deterioration and when it does this will lead to another big wave of selling - another financial tsunami!
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Looks like another financial tsunami is coming - just look at...
Kevin Scully
14 January 2009
The deterioration in economic and corporate data continues. I believe that the market has not fully discounted the extent of this deterioration and when it does this will lead to another big wave of selling - another financial tsunami!
Over the last few days, I was looking at trade data for December 2008 for China and November 2008 for the US. China reported a 2.8% decline in exports in December up slightly from a 2.2% decline in November. Imports fell sharply by 21.3% up from a 17.9% fall in November 2008. This is worrying as the Chinese economy was supposed to be more resilient and was driven by its own domestic demand. These figures could suggest a slowdown even in China's own domestic consumption because of the sharp decline in external demand for its products. The US November 2008 exports fell 5.7% to US$142.8bn while imports fell an even sharper 12.1% to US$183.2bn. Although this helped narrow the US trade deficit to US$40bn compared to US$57bn in the previous month, the large decline in imports shows the impact of the consumption contraction from the economic downturn in the US.
Let me translate this economic data into what is happening in a normal electronics company operating out of Singapore and with manufacturing operations outside of Singapore. Demand is bad and orders and indicative orders are being cut or cancelled every week/month. Suppliers are now stuck with 2-3 months worth of inventory (which is declining in value) as customers cancel orders. Bank and other supplier credit lines are being cut.....net result plant shutdown for a few weeks with staff going on no pay leave or for those in more serious cash flow distress - 70% staff layoffs. These are expected to accelerate after Chinese New Year. These means the worse is yet to come for manufacturing companies and their bankers.
Just look at HSBC....it was one of two safest banks in the World - the other being Standard Chartered into Q4-2008. Now it’s being hit by exposure to Madoff. I just read a research report from a large US investment bank (don’t know if we can use the word large now) which is lowering FY2008 earnings by 17% and FY2009 earnings by 37%. They have lowered their price target to HK$52 from the current share price of more than HK$70 now and expect the bank to need refinancing of about US$20-30bn. This is their worst case scenario. I am surprised by this downgrade mainly because HSBC was the first to identify sub-prime as a problem and took the hit and exited the market in 2006. They also refused help from the various Central Banks until recently.
If such a highly regarded and conservative entity can see such a sharp turnaround in fortunes - what about less strong and diversified companies. I am not saying that the US investment bank is correct but the almost 360 degree turnaround in fortunes is sobering and if HSBC does go down to just over HK$50 per share - what does mean for the Hang Seng Index ?
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