Thursday, September 22, 2011
TMM isn’t sure we’ve seen this ugly a start to the day in Asia since 2008 – or is that Pearl Harbor? Going into the Asian close we see the indices have really taken a spectacular turn for the worst in Asia for a whole host of reasons.
1) Talk of Chinese Regulators Tightening Shadow Lending: Chinese developers kicked off the swan dive with talk of regulators pushing companies to report dealings with Greentown China Holdings which is one of the sketchier China property developer credits out there. While it doesn’t have much high yield out TMM gets to about a 1350 odd spread on their CBs. IG it ain’t. The implication of this is that China is getting concerned about either shadow / trust lending (more tightening) or thinks that some developers are close to failing (real estate market terminal). TMM don’t like the credit or the equity in this space and do not see an easy solution here: either China loosens or a lot of these companies will have big problems. It does not help that SOE developers are rapidly cutting prices on apartments to raise cash in the interim. TMM have learnt that in a crisis, just because your model says something in cheap does not make it cheap if the drivers or the derating are still very much in force. And on that point, we can’t see what could make any of that improve barring a pretty massive Chinese stimulus or a move towards more price driven credit controls (higher rates) since we’re getting to the outer limits of what the real estate sector can take from a credit point of view. Now TMM would like to point out means that when we are at the outer limits of credit the equity may be worth zero. And don’t get TMM started on the solar sector where senior secured offshore high yield for LDK solar now trades with a forty-something bid at some dealers. Suffice to say, for a number of sectors in China its high noon at the OK Corral.
2) Momo Plays Crying For Momommy: Sometimes a picture says a thousand words and this one is a good summary of what happened to 3 big popular themes: rare earth metals (Lynas), “the cloud” (Netflix) and EM macro (Indonesian Stock Exchange). As can be seen, there is nothing so utterly unsafe as a position that is heavily owned. Anyone who says that this isn’t hedge fund deleveraging needs their heads examined.
3) Further Pain in EM FX: TMM aren’t sure whether to include AUD in this but frankly AUD is looking more and more EM in how it trades. Hard to see daylight here until we go a week or two without a global growth downgrade.
4) No news from the EZ that is even vaguely useful, aside from a few platitudes from our dear friend Jurgen. Otherwise known as a "Jurgenought"
Which leads to the question, what Is TMM thinking? Views vary somewhat but what we are seeing is pretty clear here: and equity buyers strike until policy issues get resolved. Some of these are easier (China loosening) and some of them are much harder (dealing with eurostriches). In the interim, we
can’t see much of any way that risk on trades can recover without some kind of a circuit breaker here. In the meantime, we are hoping that this screen gets the attention of regulators and governments - time is running out, and with US short term paper downgrades we are perilously close to a major breakdown in US money markets.