Madness in the Markets

OK OK. We have to comment on the stock market. Everyone else is so why not us? If you are reading this blog you probably do know the markets have declined significantly (at least I hope you do!) Yesterday the Taiwan stock market slumped to a four year low! According to Forbes:

Share prices tumbled to close at a four-year low, led by financials, on fears that the bailout program for the US financial sector may not be able to avert a worsening of the economy, dealers said.

Last month's heaviest US job losses in five years outweighed congressional approval of a sweetened 700 bln usd rescue package for stricken financial institutions, they said.

The weighted index closed down 236.53 points or 4.12 pct at 5,505.70, the lowest close since 5,427.75 on Aug 18, 2004.

Yesterday (last night) the Dow Jones index slumped 370 points after a spectacular 800 poin intraday decline. The NASDAQ slumped 4.34% and the S&P500 closed down 3.85%. Yes, its all misery in the markets! What can be expected today? Who knows. These are mad times with sudden declines and fantastic bounces. The market is meant to be efficient, perhaps it is hyper-efficient these days or something more.

Personally I was surprised when people were cheering the US$700 billion bailout. The bailout may provide some relief to the system but the underlying cause of the crisis is still there. The cause being mistrust between banks and between banks and customers. Nobody knows who had got debt and where and if they loan money to someone if they will ever see the money repaid. This toxic debt is everywhere and a banker friend of mine said the toxic debt has seeped out of the mortgage backed debt securities and into other asset classes. Bankers the world over are expecting to see worse to come. When I was in Hong Kong on the weekend, the South China Morning Post had a big article saying HK's top banker predicts HK has still not experienced the worst of it yet. But who really knows what the future holds? (DO we still trust the bankers?)

However, for the companies still competing this meltdown does have incredible significance. Interest rates on loans are soaring and this means debt financing of capital expenditures and other growth endeavours will be increasingly limited. Bloomberg writes:

Almost 100 U.S. corporate treasurers gathered for an emergency conference call yesterday to warn each other that banks are using any excuse to charge more to renew lines of credit.

"Capital is fleeing to safety," said Edward E. Liebert, treasurer of Rohm & Haas Co., who took part in the 90-minute call organized by the National Association of Corporate Treasurers. ``Interbank lending is not free-flowing any more,'' said Liebert, 56, chairman of the Reston,
Virginia-based trade group.

One bank charged a participant in the call 80 basis points to renew a routine $25 million credit line, according to Liebert, who wouldn't identify the speaker or the company. Rohm & Haas, based in Philadelphia and rated BBB by Standard & Poor's, is paying 8 basis points for a $750 million revolving line of credit provided by 13 banks, the treasurer said. A basis point is 0.01 percentage point.

And how does this affect the Taiwan hi-tech industry? Well, Bloomberg continues saying:

The Association of Corporate Treasurers, a London-based group similar to NACT, has advised members to draw down credit lines on a two- to seven-day basis, rather than the one to three months that's typical. This may prevent triggering so-called market-disruption clauses that allow banks to renegotiate terms and raise rates, said John Grout, the association's policy and technical director.

Such a clause was invoked against Taipei-based Hon Hai Precision Industry Co., the world's largest contract-electronics manufacturer, after Lehman Brothers Holdings Inc. declared bankruptcy Sept. 15, the company said. A group of 12 lenders including Bank of Tokyo-Mitsubishi UFJ Ltd. more than doubled the premium they charge Hon Hai for a $1.04 billion loan, according to Bloomberg data.

Hon Hai was unfortunately in the middle of the squeeze and will now have to pay a higher premium. But this has implications for the entire industry here. Many of the tech industries are capital intensive and require large amounts of funds to build factories and develop R&D capabilities. If banks are charging higher premiums and pushing up interest rates, debt financing becomes more expensive. Companies will then probably scale back CAPEX and expansion and development plans leaving them to grow more slowly.

iSuppli highlights how the credit crisis is impacting the DRAM industry as a whole:

Already reeling from a major downturn in business conditions, DRAM suppliers now face another challenge: raising money for servicing debt and for funding capital spending, according to iSuppli Corp.

“Although the epicenter of the credit crisis is in the United States, banks from all over the world are being strained by the U.S. housing market and by the destabilizing impact of bank failures in the nation,” said Nam Hyung Kim, director and chief analyst for iSuppli. “Even with the expected intervention by the U.S. government, this crisis means the cost of capital will rise because cash-strapped banks will be reluctant to take on big, risky ventures. This is a particular challenge for the capital-intensive DRAM manufacturing business. DRAM suppliers that already are facing cash issues soon may not be able to service debts that are coming due soon. Furthermore, DRAM suppliers may encounter problems in trying to finance their capital expenditures.”

Kim warned that some DRAM firms will face serious liquidity issues in the near future, based on the pace of their cash burn and the maturation of their short-term debt.

“Amid weak market conditions and the credit crunch, cash management has become the most critical issue facing DRAM suppliers,” Kim observed. “This will have the impact of reduced capital expenditures among DRAM suppliers in early 2009.”

While some observers have identified DRAM supplier Qimonda AG as being the company most at risk due to the current conditions, iSuppli believes the German firm is on more solid ground than many of its competitors.

“Qimonda actually has a relatively good cash balance and a low debt ratio for potential leverage in the future compared to many other DRAM suppliers,” Kim observed.

The news of the credit crunch is becoming bleaker for everyone and there is not much anyone can do except ride it out.

Forbes: Taipei shares close at four-year low as bad US data overshadows bailout - UPDATE
Bloomberg: Treasurers Try to Keep Credit With `Hardball' Banks
iSuppli: Credit Crisis Crunches DRAM Suppliers